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.
[...] It began with the bankruptcy of several sub-prime mortgage lenders companies in the worst case, and to a very high loss of their share's value in the best (for instance, the New Century Financial Corporation's share has lost ninety percent of its value). These bankruptcies have then affected the second rank banks that were investors of the mortgage lenders companies, which were unable to refund the second rank banks, thus resulting to more bankruptcies, and firing of thousands of employees of financial companies in august 2007, in order to diminish the by-effect of the crisis. [...]
[...] I The principles, the causes and the effects of the subprime loans crisis The central concepts of the subprime loans crisis The turbulences that occurred on the different financial markets, and especially the credit market, are linked to several concepts and conceptions prevailing in the United-States' credit market. As a very liberal society, the American ideology insists greatly on being proprietary of your estate or house, and considers it as one of the fundamental proof of social and economic achievement. [...]
[...] Indeed, the impact of the sub-prime crisis in the financial markets is, as we said, linked to the loss of trust implied by the spoiled bonds and the domino effect. Two French economists, quoted by the French newspaper Le Monde, Elie Cohen and Augustin Landier, submit two kind of solutions that would help preventing the lack of trust and the domino effect. Elie Cohen affirms that the lack of trust is directly linked to a lack of transparency in the financial markets: the financial actors and agents, because they have not all the information concerning, for instance, the assets of the bond, they won't take the risk to buy some in a crisis time. [...]
[...] If the liquidity isn't enough, or if there isn't enough liquidity, the financial flows will start to get rarer, and more difficulties to proceed to good exchanges will appear on the financial stage, maybe leading, like in 1929, to the cut of most of the financial flows. That's why, on August 9th 2007, the European Central Bank and the Federal Reserve injected respectively 94.8 billion euros and 24 billion dollars to mitigate the liquidity crisis, which has as origins the lack of trust between the banks, which are reluctant to lend liquidity to each other. [...]
[...] 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 second mean is the high demand the hedge funds manifest toward the sub-prime loans rights. Because the hedge funds and investment funds work with low capital and lots of loans, they are very interested in the sub- prime market, for it has a higher interest rate over a longer period than the credits in the prime market. [...]
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