The bubbles in the market are due to the decrease in the stock prices. The positive feedbacks should be checked; otherwise, it leads to the high deviation from the fair value causing imitation among market participants and corporate herding. The mispricing effect of hearing leads to a stock market bubble and the market crashes. The rise in interest rate and the emergence of new organizations can cause fall in the stock prices(North and Caes, 2012). The new companies issue more shares in the market that decrease the profit margin of the existing organizations. The investors borrow money to purchase shares during the market bubble. In the situation of rising interest rate, the investors sell the shares to pay the accrued interest. Due to this, the selling of shares leads to a market crash. The decrease in the stock prices affects both the investors and banks. The banks are affected as they lend money to investors and purchase shares.
The price of the properties falls as the properties are purchased with the money borrowed from the bank which can be explained from the example of bank crisis in Japan and the global financial crisis. The companies take a loan from the bank to purchase assets with the view of reselling its future at a valued price. When price of the stock decreases, then the price of assets decreases which affects the expected returns on assets in future (Siegel, 2008). In this circumstance, the older companies suffer losses, and the wealth of the banks is affected, and a further decline in the prices affects the capital of the banks leading to bank crisis. The industries with high debts are not allowed to borrow more funds, and banks ask to pay the loan amount. The speculators and developers sell their assets to repay the loan. The prices fall, assets are sold and the overall value of the assets falls which lead to the bankruptcy. The bank crisis in Japan is caused due to the failure of the Yamaichi Securities.