Monday, August 08, 2011
Let's say someone puts their stock up as collateral for a loan. And let's say at first, the stock prices go way up. So they can borrow more against it. It's the same thing as the home equity ATM machine syndrome. When stocks drop, the ATM machine goes in reverse and it's looking for deposits, not withdrawals.
When you apply a lot of financial leverage, then money really does appear and disappear.
When you have a stock market bubble or housing market bubble or a tulip bubble, from what I've read, it needs large amounts of debt or it won't really have enough fuel to reach bubble status.
It's bad enough when you have a stock market bubble and you get a false wealth effect. It's much worse when you have a housing bubble because the dollar amounts are much bigger and the impact on lives is very direct. But what happens if you have a bubble where governments get very big and borrow massive amounts of money to keep running? It's the large banks that get hit. But I suspect there's a lot of collateral damage, so to speak.