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The Empire of ValueA New Foundation for Economics$
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André Orléan

Print publication date: 2014

Print ISBN-13: 9780262026970

Published to MIT Press Scholarship Online: January 2015

DOI: 10.7551/mitpress/9780262026970.001.0001

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Euphoria: 2003 to 2007

Euphoria: 2003 to 2007

(p.241) 8 Euphoria: 2003 to 2007
The Empire of Value

André Orléan

The MIT Press

The subprime mortgage crisis of 2007-2008 is chosen as a case study against which the model of self-referential finance can be tested.. The crisis had its origin in a real-estate bubble that was fed in its turn by a credit bubble. In examining the mechanisms of euphoria—the phenomenon of securitization, the encouragement offered by economists, the underestimation of credit risk, and the difficulty of establishing the existence of a bubble in either case—it becomes clear that the perilous accumulation of risk was a consequence mainly of the procyclical effects of largely deregulated markets. The high degree of leverage in the financial system as a whole suggests the analogy of a compressed spring: once the rise in home prices came to an end, when the compression had reached a maximum, the abandonment of the prevailing valuation convention made an explosive reaction inevitable.

Keywords:   bubbles, credit risk, deregulated markets, euphoria, leverage, securitization, self-referential finance, subprime mortgage crisis, valuation convention

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