Sunday, January 18, 2009

Financial Crisis of 2008 - 2009

Financial Crisis of 2008 - 2009

The consensus among economists assumed that the financial crisis of 2008 unfolded, directly due to the collapse of the housing bubble in the United States in 2006, which resulted in about October 2007, the so-called crisis of subprime mortgages. The impact of the mortgage crisis began to manifest itself in an extremely serious since the beginning of 2008, getting first to the U.S. financial system, and then to international, resulting in a serious liquidity crisis, and causing, indirectly, other economic phenomena, such as a global food crisis, different stock collapse (like the stock in January 2008 and the global stock market crisis of October 2008) and, overall, an economic crisis at international level.

All analysts agree that the credit crisis started in 2007 is due to subprime mortgages, which is that U.S. banks were high-risk loans to people with poor credit histories.

However, behind the visible and immediate causes that triggered the crisis, the root causes are complex: a banking system without regulation or poorly regulated, especially in the areas of lending and investment, which led to the creation of mortgage virtually vehicles speculative for people without a stable source of income. This, coupled with low interest rates of the monetary authority of the United States for several years offered a space for speculation and over-extension of credit.

Most analysts believe that the primary cause of the financial crisis, chronologically, was the excess global liquidity. Greater liquidity factors are both external and internal. One factor was, at least for the recent period, the very rapid increase of foreign exchange reserves of central banks in emerging countries (especially China) and countries exporting raw materials (especially oil). This increase in reserves was due to significant trade surpluses and high savings rates in these countries, which met high growth rates since 2000. Another factor that also feed the global liquidity was the expansion of credit, because of reduced interest rates by central banks of developed countries, especially the United States. Indeed, the EDF is a monetary policy of low rates, allowing an abundant and cheap credit to alleviate the consequences of the crisis and the dotcom withstand U.S. economic growth Another objective of this policy was to encourage the increase in property prices. Indeed, the increase in property prices has a positive impact on consumption and economic growth, and monetary authorities decided not prevent price increases real estate and eventually the emergence of a housing bubble. The emergence of an excess liquidity was also helped by the development of financial innovations. [6] With this abundantly available liquidity, and set to increase in property prices, banks are giving increasing mortgage loans.

However, there was a breakdown of the financial performance of banks and financial investors. The requirement of excessive profitability and relaxation of conditions for loans, as well as development of financial practices at high risk, have encouraged the financial crisis. Indeed, mortgage loans granted by banks were risky.

After the fall of the stock exchanges in 2000, financial intermediaries (securities firms and commercial banks had to find other investments that offer high performance, because low interest rates, could not have high profit margins for the accounts and deposits. Therefore created mortgage banks with significant benefits (thanks to variable). So the major banks refuse to grant credit to people who did not meet the requirements and equities, encouraged by the monetary policy of the FED. Before 2001, few banks investing in the subprime market, but between 2001 and 2006, the amounts have increased from 94 to 685 million dollars. During this period the quality of the loans are steadily deteriorating and the number of defaults rose, in part because of rising interest rates guideline FED. The fall in housing prices and rising interest rates led to a large number of people unable to pay their mortgages.

At the same time, these mortgages and other loans (bonds or shares) were placed through a process known as securitization, in portfolios called Collateralised Debt Obligations (CDO)

Sold to investors worldwide to diversify risks. These bonds were rated excellent by the specialized agencies in the rating of risk. The same time, banks are finally left the junk bond mutual funds by creating special entities called Conduits subsidiaries. These funds Special bought the junk bonds, which disappeared from the balance sheets of banks. The mortgage loans of banks were sold to hedge funds that seek significant risk because they have higher profitability. These investment funds deregulados borrow using these CDO collateral.

1 comment:

  1. Good and bad financial times are recurring event. Preparing for the worst during best times will have less impacts.
    Banks and financial crisis

    ReplyDelete