The causes of the current financial crisis

“The global economic crisis resulting from the combined effect of several factors, some are familiar to previous crises, others are new. It is primarily a crisis of American finance. Caused by excessive household debt in the U.S., deceleration, then the fall of property prices. It was exacerbated by reckless risk-taking financial intermediaries Americans seeking yields unreasonable in the context of deregulation and financial innovation at risk. This crisis is also [...]
THE INTERNATIONAL FINANCIAL CRISIS: THREATS AND CONSTRAINTS
Part1: the causes of the financial crisis
Chapter 1: The emergence of the current financial crisis
Section1: Clarification on the crisis
in a context of deregulation and financial innovation at risk. This crisis is also a crisis of global finance.
The years preceding the crisis, have been characterized by strong global growth and relatively low inflation and stable in most countries. Growth was driven by significant increases in productivity in many countries, which, combined with the increased integration of developing countries into the global economy and a booming trade, also allowing prices to remain relatively stable for several years. The various forms of growth, coupled with weak regulation, eventually resulted in financial institutions, businesses and households over-indebted, a situation that proved untenable. Of consistently low interest rates have prompted investors to try to get higher yields of securities, real estate and commodities, financial instruments and increasingly risky. Asset prices have been pushed up through a wide range of industrial and emerging economies and many developing countries have benefited from high prices of commodities.
A. The subprime, what is it?
In recent years, abundant liquidity, the corresponding weakening of the sensitivity to risk and financial innovations have led to a sharp increase in the distribution of mortgage credit in the United States, especially in the components “subprime” and “Alt A”. This allowed an increase in the proportion of households own their homes (64% in 1995, 69% last year). The subprime lending are made to borrowers for which the ratio of debt to income (D / R) exceeds 55% and / or the LTV of the property (P / V) exceeds 85%. Distribution reached some 150 billion the year earlier this decade, it exceeded 600 billion in 2005 and 2006. These loans accounted for 13% of total outstanding mortgage credit in 2006 (10,000 billion). Appropriations called “Alt A” consist of loans for which the above ratios are not exceeded, but are made to borrowers for which we have only incomplete references. Loans called “jumbo” is a value above the ceiling (417,000 dollars) provided for loans eligible for the Government Sponsored Housing Enterprises (GSEs), Freddie Mac and Fannie Mae. They reach nearly 15% of total outstanding mortgages. All these loans are frequently accompanied by features that make them easily accessible (“affordability products”), and they spread with the loosening of requirements in a context where rising prices made the homeownership more difficult. This is the adjustable rate mortgages (ARM) made up two-thirds of “2 / 28″: These are loans to fixed rate lower than market rates on the first two years (teaser rates) and are processed at the end of this period in variable rate loans. This rate change (reset) a natural consequence of increasing the debt burden for borrowers, resulting in a potential increase in default rates (two-thirds of subprime loans are ARM). The “interest-only loans” includes a deferred (typically 2 or 3 year ARM and the 10-year fixed rates). The “negative amortization loans” allow up to a certain proportion of the loan (15-25%) to capitalize the interest payments, once this proportion reached, the loan becomes a normal loan. Again, the burden of debt it is so much greater.
Speculation has played, loans have tended to be more frequently made based on anticipation of higher house prices rather than on the basis of the ability to properly serve the debt, in anticipation, in case of failure the borrower, as production of the property would cover the repayment of principal, not worth it of course if prices continue. The rise of recent difficulties stems from the thrust faults. The default rate on loans (ARM seizures and arrears over 60 days) rose by 2.6% on the premium segment and 0.5% knew about the Alt-A segment of mid-2005 to 13% and 2.5 % at the end of 2006. The phenomenon is even more pronounced for the generations of the most recent loan, after a year in October 2007 Business cycle 5, the proportion of payment periods over 60 days was 6% for subprime ARM made in 2005 but more than 10 % of those awarded in 2006.
Graph 1 Source: Fitch
Given the characteristics of these loans, the surge in defaults is likely to continue in the coming quarters. In fact, as shown by the statistics of Inside Mortgage Finance, the rate adjustments provided for ARM loans will rise to power in late 2007 and early 2008, before beginning a slight decrease from the fourth quarter of next year . They hit a total of sixty billion in Q1 2007 and a hundred in Q2, but will cover more than $ 120 billion in Q3 and Q4 2007 and Q1 2008 (including about two-thirds for the subprime) . The peak will be reached in Q2 and Q3 2008 with amounts over $ 140 billion, they fall to around $ 70 billion the following quarters.
Graph 2 Source: Fitch
B. The phenomenon of “securitization”
Securitization is a technique that is housed in an ad hoc company a series of loans granted to households for example, then sell the securities of the company to investors for whom this is an investment. They somehow bought the bank’s debts. These products developed by investment banks have been placed outside their balance sheets, as if the banks were only intermediaries. They resold the products of securitization investors, which can be both on Wall Street, as Tokyo or Paris. These financial institutions are saying, I buy a thousand of loans and to reduce the risk, I mix with credits issued in very different regions: Florida, California, Texas … the problem is that neither banks nor rating agencies had considered a drop in real estate throughout. The banks have seized assets of insolvent households and have tried to sell them. The swelling losses caused investor wariness. Nobody knew what was the value of the securities. And transactions have been frozen.
More accurate Securitization is a process that occurs in two stages.
1) In a first step, a bank sells credits arising out of mortgages (or consumer loans, such as the purchase of car) to a body that will turn them into financial stocks. Two parastatals can redeem the claims of U.S. banks “: governments sponsored entities Fannie Mae and Freddie Mac.
2) The latter in turn sell to investors (banks, hedge funds, mutua funds, etc.). These claims turned into mortgage-backed securities, that is to say literally collateralized mortgage loans. These mortgagebacked-securities aggregate a large number of these mortgages. This securitization is at the origin of the secondary market for mortgage debt, which is now in larger volume than the market for treasuries (bills) U.S.!
The isseurs to invest that are sold mortgage-backed-securities affecting the flow of repayments paid by borrowers on loans and support in exchange for aggregate and the risk of non-repayment of loans in proportion to their investment. Securitization can thus dilute the credit risk.
But Credit institutions have abused the system. They have shamelessly sold loans at usurious rates to households with poor credit knowing that the risk could in any way be easily transferred to the market.
Schematically:
Schemes proposed by Mr. Leullier, Mr. and Ms. GOLIAS Triems VIET TONG – trainee teachers PLC2 SES.
C. Of the housing crisis in the global financial crisis.
Nobody anticipated this crisis, yet it has been brewing for several years. The U.S. housing market has experienced a steady increase, and property prices have risen steadily. To compensate for the lack of housing and to the promise of significant benefits related to higher prices, developers have stepped up construction sites. The number of housing has increased significantly. According to some statistics, 4 million homes have been built in recent years in the U.S., while the need was only 2 million. Thus, there are about 2 million empty homes in the United States. And since the supply is greater than demand, so prices have fallen. Those who were unable to guarantee their loan. Banks have therefore increased the interest rates but borrowers who have low incomes or no, were unable to honor their debt. Direct consequences: the end of July 2007, credit institutions have failed.
o Linking the housing crisis and declining stock values.
Bankruptcies of certain credit institutions can not explain the drop in the stock market. In reality, an attempt to limit the risks, most lending institutions had turned these loans into securities on the stock market (securitization: a sophisticated financial technique, which involves the transfer of assets or credits related form structure to third party investors. It gives rise to an issue of securities to capital markets, backed by underlying assets and aggregate per slice).
They found themselves backed securities market without anyone really knowing if he had. The financiers were involved in various funds such securities so that the origin of the titles became blurred. A force to sell and sell and issue debt securities on other debt securities, all became opaque. The rating agencies themselves have said that these investments were not risky. They were deceived.
Some institutions, to overcome their lack of liquidity, had only one solution: to sell their stocks and bonds. Reacting in number and in a short period of time, these banks therefore cause a sharp drop in stock prices: the CAC 40 (Continuous Assisted Quotation) is hit, all European stock markets loosen, followed closely by Asian bourses .
In one week, major stock indexes are experiencing sharp downward correction:
• DAX (Germany): -4.42%
• Dow Jones (USA): -5.95%
• Nasdaq (USA): -6.16%
• FTSE 100 (United States): -8.37%
• CAC 40: -8.42%
• Nikkei (Japan): -10.3%.
_______________________
- Philippe D’Arvisenet; From subprime to the real economy, trends, economic-October 2007 p.5 research.bnpparibas.com
- Philippe D’Arvisenet; From subprime to the real economy, trends, p.5-6 October 2007 economic-research.bnpparibas.com
- Philippe D’Arvisenet; From subprime to the real economy, trends, p.5-6 October 2007 economic-research.bnpparibas.com
- Philippe D’Arvisenet; From subprime to the real economy, trends, October 2007 p.10 economic-research.bnpparibas.com
- Philippe D’Arvisenet; From subprime to the real economy, trends, October 2007 p.10 economic-research.bnpparibas.com
- ELBADAOUI MOUSAPHA and ABDELHAK ELMIKLINI. The impact of financial crisis on Morocco, My Ismail University P31-32/2008-2009
- Montialoux Claire and Gabriel Zucman, understand the subprime crisis, page 14 www.rce-revue.com/files/Subprime3.pdf
- Hedge funds: hedge funds taking paris on the future as opposed to prevailing market trends
- Montialoux Claire and Gabriel Zucman, understand the subprime crisis, page 14 www.rce revue.com/files/Subprime3.pdf
- Memorial High School published by Charles Gide; the financial crisis; Edition January 2009.p 7 http://www.lyc-gide-uzes.ac-montpellier.fr/Pedagogie/Ses/subprimes3.pdf
- Memorial High School published by Charles Gide; the financial crisis; Edition January 2009.p 8 http://www.lyc-gide-uzes.ac-montpellier.fr/Pedagogie/Ses/subprimes3.pdf
- ELBADAOUI MOUSAPHA and ABDELHAK ELMIKLINI. The impact of financial crisis on Morocco, P 31-32; 2008-2009 University My Ismail
ELBADAOUI MOUSAPHA and ABDELHAK ELMIKLINI. The impact of financial crisis on Morocco, P 31-32; 2008-2009 University My Ismail
ELBADAOUI MOUSAPHA and ABDELHAK ELMIKLINI. The impact of financial crisis on Morocco, P 31-32; 2008-2009 University My Ismail
The types of causes of the crisis
The current financial crisis, which some already beginning to describe the most serious since 1929, is the result of an accumulation of factors.
A. The theoretical reasons
a) U.S. economist Milton Friedman, nothing in the economic system is no more important than the quantity of money. From there, he believes that regulating the money supply should not be abandoned in the trial of the authorities of the central institution of issue, understand and there, the central bank – despite their good intentions, “he said These characters will never fit exactly in the money supply needs of the moment.
He says that in this way, the money will adapt to the need for higher wages, stocks and loans on the one hand, and secondly, the maintenance of the increase will keep the economy on the path growth. This is essentially what advocates the Nobel Prize in Economics, listened to the Republican Party USA. It is in the heart of liberalism guided by monetary policies with the blessing of the market. The state has no role to play.