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

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


 

 

advertisement

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

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

CDs and Investment

Start retirement savings at 24?

Dear Dr. Don, At age 24, I recently started a job working for a corporation. I'm interested in individual retirement accounts. I'd like to look at investing in stocks and bonds and learn more about choosing a 401(k) plan.... Read more

advertisement

Blog

Jean Chatzky

Jean Chatzky: Bad month for the market?

How should you react to headlines that tell you a crash is imminent?  ... Read more

Partner Center
advertisement

Connect with us