What are the causes and what is the significance of the global financial crisis that began in August 2007?

Résumé du document

The predictions by analysts seems to have dwindled down. This can be observed through the worst hit financial crisis that began in August 2007. The reports depicting the crisis differs in many ways from previous ones. The characteristics of the previous financial downturns were that they always began on emerging markets (Asian crisis of 1997 for instance) and being born to western soil was an unknown concept. Amazingly enough, it is from the United States of America, the wealthiest equity market and country in the world that this crisis started. It thereafter, spread across all the major financial centers in the world. The consequences of this financial crisis have been so grave and are one of the heaviest. The last severe consequence witnessed in the world by the medium of the economic tsunami was towards the end of the Cold War. Till date, the method of wriggling out of this economic storm is a mystery. Therefore, helping the financial markets regain its confidence and dynamism seems to be close to uncertainty. It is an indisputable fact that globalization in financial markets, which is far less regulated than the trade ones, inevitably enlarges any local, regional or national incident into a global incident.

Extraits

[...] As a reaction to those events, when the European markets opened, the rate was higher by more than to the normal rate which was 4%. Therefore, no one took the risk of borrowing to anyone since it was too expensive to do so. The European Central Bank had to intervene therefore in order to ease the credit crunch, by letting banks borrowing a lot of money (over 200 billion dollars in a week) at a rate of 4%. The FED and the Japan Central Bank also got loosen on the credit to other banks. [...]

[...] All the components can be found there to understand the emergence of a financial crisis. Nevertheless a global context progressively built before the actual occurrence of the crisis can be charged with its part of responsibilities. By increasing more and more its fiscal and current accounts deficits, the United States set up a situation of global financial imbalances. Indeed if the subprime crisis clearly triggered the phenomenon, it was previously favoured by too much credits linked with an “excessively accommodative monetary policy”.[1] Consequently asset price bubbles appeared what had already created crises in the past. [...]

[...] As a consequence, the dollar currently cannot be considered like the strongest currency in the international monetary market anymore. The restructuration plans have to get more targeted to achieve the higher consumption and preserve foreign investors' confidence in American assets. To do so, the Federal Reserve multiplies measures: most recently it announced that approximately three hundred billions of dollars would be spent in the next months to buy government. Same, to renew the trust in the housing market it will double the funds invested in mortgage refinancing companies such as Freddie Mac and Fannie Mae (up to 1450 billions of dollars).[6] Dollar has quite sharply decreased; however the aim of the Federal Reserve is currently to protect it from further private speculations and not to raise it back to its previous level. [...]

[...] Nevertheless credit, futures market and merely bank cooperation cannot stop otherwise the whole economy would just collapse and transform the current depression into a financial apocalypse. This eventuality could justify the intervention of central banks, far more intense than the usual involvement authorized by the capital markets currently ruled by the logic of the highest liberalization. Actually, more than filling in the lack of liquidity, central banks became prominent by simply acting in place of the interbank market: by widening the eligible equities and extending the loans' redemption debt, they managed to increase the money supply in circulation.[4] Furthermore, in October of 2008, the three main central banks (Japan, US and Europe) took a concerted decision to lower their intervention rate at the same time. [...]

[...] When big banks like Bear Stearns for example started to go into default, the spread out of the crisis really revealed all its intensity. The main reason for these bankruptcies has to be found in the terms of the contracts. First, everyone was pleased; the borrowers were unaware of the real conditions of the contract, while brokers were able to cash their premiums. But the most interesting point was that the mortgage holders were able to take out these credits from their statements of account. [...]