Virtuous circle and vicious circle

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Depression expressed as a vicious circle Cycle of depression.jpg
Depression expressed as a vicious circle

A virtuous circle or vicious circle (or cycle) is a complex chain of events that reinforces itself through a feedback loop. [1] A virtuous circle has favorable results, while a vicious circle has detrimental results.

Contents

Both circles are complex chains of events with no tendency toward equilibrium (social, economic, ecological, etc.)—at least in the short run. Both systems of events have feedback loops in which each iteration of the cycle reinforces the previous one (positive feedback). These cycles will continue in the direction of their momentum until an external factor intervenes and breaks the cycle.

A well-known example of a vicious circle in economics is hyperinflation.

Examples

Vicious circles in the subprime mortgage crisis

Vicious cycles in the subprime mortgage crisis Subprime crisis - Foreclosures & Bank Instability.png
Vicious cycles in the subprime mortgage crisis

The contemporary subprime mortgage crisis is a complex group of vicious circles, both in its genesis and in its manifold outcomes, most notably the late 2000s recession. A specific example is the circle related to housing. As housing prices decline, more homeowners go "underwater", when the market value of a home drops below that of the mortgage on it. This provides an incentive to walk away from the home, increasing defaults and foreclosures. This, in turn, lowers housing values further from over-supply, reinforcing the cycle. [2]

The foreclosures reduce the cash flowing into banks and the value of mortgage-backed securities (MBS) widely held by banks. Banks incur losses and require additional funds, also called “recapitalization”. If banks are not capitalized sufficiently to lend, economic activity slows and unemployment increases, which further increase the number of foreclosures.

Economist Nouriel Roubini described the vicious circles within and across the housing market and financial markets during interviews with Charlie Rose in September and October 2008. [3] [4] [5]

Designing ecological virtuous circles

By involving all stakeholders in managing ecological areas, a virtuous circle can be created where improved ecology encourages the actions that maintain and improve the area. [6]

Other

Other examples include the poverty cycle, sharecropping, and the intensification of drought. The recurring surges of the COVID-19 pandemic is a vicious circle on a global scale. [7]

See also

Related Research Articles

Metaphorically, a snowball effect is a process that starts from an initial state of small significance and builds upon itself, becoming larger, and also perhaps potentially dangerous or disastrous, though it might be beneficial instead. This is a cliché in cartoons and modern theatrics and it is also used in psychology.

Positive feedback Destabilising process that occurs in a feedback loop

Positive feedback is a process that occurs in a feedback loop which exacerbates the effects of a small disturbance. That is, the effects of a perturbation on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system in which the results of a change act to reduce or counteract it has negative feedback. Both concepts play an important role in science and engineering, including biology, chemistry, and cybernetics.

Foreclosure Legal process where a lender recoups an unpaid loan by forcing the borrower to sell the collateral

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

Nouriel Roubini American economist

Nouriel Roubini is an Iranian-American economist. He teaches at New York University's Stern School of Business and is chairman of Roubini Macro Associates LLC, an economic consultancy firm.

Household debt Combined debt of all people in a household

Household debt is defined as the combined debt of all people in a household. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.

2000s United States housing bubble Economic bubble

The United States housing bubble was a real estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2011. On December 30, 2008, the Case–Shiller home price index reported its largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.

Causal loop diagram Causal diagram that aids in visualizing how different variables in a system are interrelated

A causal loop diagram (CLD) is a causal diagram that aids in visualizing how different variables in a system are causally interrelated. The diagram consists of a set of words and arrows. Causal loop diagrams are accompanied by a narrative which describes the causally closed situation the CLD describes. Closed loops, or causal feedback loops, in the diagram are very important features of CLDs.

Leverage-point modeling (LPM) is a demonstrated approach for improved planning and spending for operations and support (O&S) activities. LPM is a continuous-event simulation technique that uses the system dynamics approach of model building. Dr. Nathaniel Mass championed the potential of LPM, and adapted it for the Department of Defense (DoD) as a tool for jumping to a higher performance curve as a means of offsetting higher costs and declining budgets. The purpose of LPM is to test policies and investments that improve mission capability for a given level of investment or funding. It is particularly used to evaluate investments in component reliability and parts availability.

Mortgage loan Loan secured using real estate

A mortgage loan or simply mortgage, in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".

The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. Declines in residential investment preceded the Great Recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.

Vicious Cycle may refer to:

Timeline of the 2000s United States housing bubble

Housing prices peaked in early 2005, began declining in 2006.

Causes of the 2000s United States housing bubble

Observers and analysts have attributed the reasons for the 2001–2006 housing bubble and its 2007–10 collapse in the United States to "everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan". Other factors that are named include "Mortgage underwriters, investment banks, rating agencies, and investors", "low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance" Politicians in both the Democratic and Republican political parties have been cited for "pushing to keep derivatives unregulated" and "with rare exceptions" giving Fannie Mae and Freddie Mac "unwavering support".

This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.

Regulatory responses to the subprime crisis addresses various actions taken by governments around the world to address the effects of the subprime mortgage crisis.

This article is a subordinate article to the subprime mortgage crisis. It covers some of the miscellaneous effects of the crisis in more detail, to preserve the flow of the main page.

The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader financial crisis of 2007–08.

A mortgage servicer is a company to which some borrowers pay their mortgage loan payments and which performs other services in connection with mortgages and mortgage-backed securities. The mortgage servicer may be the entity that originated the mortgage, or it may have purchased the mortgage servicing rights from the original mortgage lender. The duties of a mortgage servicer vary, but typically include the acceptance and recording of mortgage payments; calculating variable interest rates on adjustable rate loans; payment of taxes and insurance from borrower escrow accounts; negotiations of workouts and modifications of mortgage upon default; and conducting or supervising the foreclosure process when necessary.

Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and the following recession include lax lending standards contributing to the real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

The Making Home Affordable program of the United States Treasury was launched in 2009 as part of the Troubled Asset Relief Program. The main activity under MHA is the Home Affordable Modification Program.

References

  1. Charles Webel, Johan Galtung (19 March 2012). Handbook of Peace and Conflict Studies. Routledge. ISBN   9780203089163 . Retrieved 19 March 2012.
  2. Feldstein, Martin (18 November 2008). "How to Help People Whose Home Values Are Underwater". Opinion. The Wall Street Journal . Retrieved 2013-09-05.
  3. "Roubini & Panel". Charlie Rose. Retrieved 2013-09-05.
  4. "Rose & Roubini Discussion". Charlierose.com. Archived from the original on 2013-04-01. Retrieved 2013-09-05.
  5. "Rose & Roubini". Charlierose.com. Retrieved 2013-09-05.
  6. Morrison Scott A (March 2016). "Designing virtuous socio-ecological cycles for biodiversity conservation". Biological Conservation. Elsevier. 195: 9–16. doi: 10.1016/j.biocon.2015.12.022 .
  7. "Covid: WHO says it is very worried about Europe surge". BBC News. November 20, 2021.

External sources