The sub-prime loans crisis and the recent turbulences in the credit markets (2008)

Résumé du document

The Russian economist Kondratiev has shown, in his theory of the cycles that in the economical life periods of economical recession followed periods of growth, and then followed by another period of growth, in an infinite cycle. The start point of these periods of recession is usually a great crash, or inflation, while the growth period's is defined as being a war, or a violent conflict between countries. If we apply this theory to the evolution of the global economy and the international equilibrium since the end of the Second World War, we can notice that we have seen a great period of growth since 1945 that lasted approximately thirty years. However, since the first oil crash in 1973, we have assisted to the multiplication of smaller or bigger crisis, thus enabling us to think that we are in one of the period of recessions developed by Kondratiev. The most recent one occurred in 2007, with a peak in august 2007, and is called the subprime mortgage loan crisis. This crisis has been described by the economists as a very risky situation, and some use the parallel with the one of 1929, which also started in the United-States and spread fast toward the rest of the world. But how did this crisis work, what were its causes, its effects, and the response that the public policy has developed to reduce its effects.

Extraits

[...] The first second-best measure applied to the subprime crisis is obviously the monetary policy used by the Federal Reserve and the European Central Bank. In order to attenuate the by-effects of the liquidity problems implied by the subprime crisis, both of them have done an expansive monetary policy, injecting in the economy enough liquidity to prevent the financial flows to reduce even more. If we could compare the principle of the financial markets to a car engine, we would say that the liquidity is the oil of the financial markets. [...]

[...] Mortgage is the fact of providing the real estate good that you are about to buy with the credit as a guarantee of the refunding of your loan. Usually, people can get, as a mortgage of the good's value, for the reason that the prices in this market tend to raise, and usually this rise correspond to ten percent considering the length of the loan, which usually goes up to thirty years as an average. Mortgage is very useful for low- income borrowers, because it covers in part the risk taken by the loaners when lending money: indeed, the creditor, if the debtor fails to refund the loan, can take over the good and become proprietary of it, thus enabling him to get a form of refunding, not in a financial aspect, but in a possession aspect. [...]

[...] Thus, the risk that the assets of a bond emitted by a certain financial organism were linked to a mortgage was high and discouraged financial speculators to buy, in order not to lose money when buying them. The bonds that are based on mortgage assets are called asset-backed bonds, and have raised some questions the precedent years. Prem Wasta, in the annual report of Fairfax Financial Holdings (2003) felt very worried of the risk that the asset- backed bonds represented, because they represented a total mass of 3.1 trillion dollars, and would have resulted in an enormous credit crush if they were still used as irresponsibly as they were in 2003. [...]

[...] The subprime loans crisis and the recent turbulences in the credit markets (2008) The Russian economist Kondratiev has shown, in his theory of the cycles, that in the economical life periods of economical recession followed periods of growth, and then followed by another period of growth, in an infinite cycle. The start point of these periods of recession is usually a great crash, or inflation, while the growth period's is defined as being a war, or a violent conflict between countries. [...]

[...] However, it is as risky as the subprime mortgage loan itself, because nobody knows how the situation will turn in several months or years. That is why we can consider it as a temporary measure, providing time to think over better solutions and to set them up. The long-term and first-best solutions are still under development and are raising debates As we have seen in the previous subpart, the second-best solutions are an instantaneous response to one of the issues of the crisis, and they usually concern just a part of the involved actors and not directly the causes of the crisis. [...]