Term paper: the subprime crisis:Reasons & Effects

Résumé du document

Since the last few years, a frightening phenomenon concerning subprime is being observed in the United States of America. Some people think that the financial crisis that the whole world is living through is related to the subprime crisis, and some think that it was the beginning of a very slow and long global economic failure. Even if we are concerned every day by the financial crisis in European countries, I will try to focus on the subprime crisis, because I think that it is the real demonstration of the bad performance of the banking system in general. In my paper, I will strive to develop my idea in several parts in order to better understand issues concerning loans in our society in general. I will begin by explaining what are subprime loans, enumerating the different characteristics and how does it works, and finish this part by presenting the subprime crisis. Then I will focus on reasons addressing the subject like the law of 1997, the rise of interest rates, the change of political context and the part and the responsibility of the rating agency. Thereafter, I will finish analyzing its economic effects, effects concerning the banking system and loans in particular. I will conclude by trying to imagine several different scenarios. I picked out this subject because in my opinion, it is a very interesting subject in as much as it shows that even the most powerful country in the world in term of economy, and political influence can be touched and damaged by its own system. In addition, I made this choice because it is a global subject which concerns a lot of financial aspects seen during lectures.

Extraits

[...] One shouldn't also forget the effects on millions of families obliged to leave their accommodation. Part Reasons of the sub prime crisis In this crisis, we could easily identify several reasons for which it shows up: 1. The law of 1977 A law of 1977 facilitated the obtaining of this kind of credit for a poor or insolvent people but the interest rate was increasing, it means a which was supposed to compensate risks taken by the loaner, didn't have the expected effect. [...]

[...] Term paper: the subprime crisis:Reasons & Effects Summary Introduction Part The presentation of subprime crisis o Definition o Characteristics of those sort of credits o How does the subprime market work? o The subprime crisis Part Reasons of the subprime crisis: o The law of 1977 o The rise of interest rates o The real estate's crash o The change of political context o The securitization o The part of responsibility of rating agency Part Effects of the subprime crisis: o Economic effects o Effects concerning the banking system o Effects concerning loans: loss of confidence Conclusion Introduction Since a couple of year in United States of America, we could observe a frightening phenomenon concerning subprime. [...]

[...] The market also had been favored by the legislation of 1977 (Community reinvestment act) which says that credit organisms are obliged to lend money to poor people because otherwise they couldn't loan money. This phenomenon had done ballooned the real estate bubble and aggravated effects of its explosion. All the same, we could notice that when circumstances are positive, the system is working well: The borrower puts his house in mortgage, which is a guarantee, and credits organisms can get a lot of profits. Thanks to this system, the high-risk borrower can buy a house, which would be impossible without this system. [...]

[...] Therefore, it varies in function of the federal fund rate of the central bank of USA. Purposes and guarantees: This kind of credit can be used in different situations. It is usually used when someone or a family wants to acquire an accommodation. It seems to be important to underline that it appears in United States when the real estate market was increasing. By the way, thanks to this context; I mean the rise of prices concerning real estate; this type of credit met a great success and was promoted and broadly adopted by everyone. [...]

[...] It means that there is not cash flow anymore because banks are afraid and receive money from central banks but they keep on accumulating it, so the problem is still growing. We could say that the system is became a liquidity's trap. Effects concerning loans: loss of confidence The most spectacular effect is the loss of confidence of savers towards the banking system. Therefore, they all massively decided to withdraw their savings capital. This fear is due to very bad information about the crisis and products that they have bought. [...]