Financial markets can amplify debt risks from "summary" of House of Debt by Atif Mian,Amir Sufi
The relationship between debt and financial markets is a complex one. One key aspect that cannot be overlooked is how financial markets can act as a magnifier of debt risks. When households or firms take on debt, they are essentially making a bet on their future ability to repay that debt. But this bet is not made in isolation; it is influenced by a variety of factors, one of the most important being the behavior of financial markets. Financial markets play a crucial role in determining the cost of borrowing for households and firms. When financial markets are functioning smoothly, they can provide access to credit at relatively low costs, allowing borrowers to take on more debt. However, when financial markets become unstable or volatile, the cost of borrowing can increase significantly. This can create a vicious cycle where higher bor...
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