Investing in the new economy
Man and woman analyzing trends
Avoid the next bursting investment bubble

Sign No. 2: easy credit
3 of 8
Sign No. 2: easy credit

One characteristic of nearly all bubbles is the heavy use of leverage "or the use of debt vehicles to fund additional purchases on the expectation that the value will continue to rise and rise," says Rodriguez.

According Mansharamani, three dynamics of easy money can lead to bubbles.

Financial innovation: Financial institutions evolve with the times. When economic conditions are conducive to easy credit and excessive risk, products emerge that enable consumers to borrow too much money. Example: interest-only mortgage loans.

Cheap money: Low interest rates on loans make money cheap. "When I say that money is too cheaply priced, I mean that interest rates are far below where they would naturally occur if you had a freely floating interest rate model rather than one where a central banker sets the interest rates," says Mansharamani.

Moral hazard: When individuals are protected from risk, they behave differently than if they had to live with the consequences. If they can't fail, they take more risks. The same is true of financial institutions and corporations.




Show Bankrate's community sharing policy
          Connect with us

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

Can heirs cash an old trust?

Dear Dr. Don, The youngest of 6 children, I am 48 years old. My father joined the Navy at 22. In Italy, he met his bride and my mother, and returned to the U.S. to raise our family. In 1959, he bought a trust certificate... Read more



Sheyna Steiner

Man loses $100K, learns valuable lesson

Traders can make a tidy profit short selling stocks. But they stand to lose everything. That just happened to one guy.  ... Read more

Partner Center

Connect with us