Prehistory and development of the financial crisis of the United States
Development of the US financial crisis
If there is something that we can highlight from the financial crisis we are studying, it is that this was characterized by an overvaluation of financial assets. The origin of the financial crisis, whose outcome began as of 2007, was related to the failures of the US mortgage market. It was in 2008 when the outbreak of the real estate bubble occurred, which we can relate it, as in the rest of the financial crises with a series of stages:
- First, we find the displacement stage. It is at this stage a change in benefit opportunities in some sector of the economy.
- This will lead to the boom, second stage of the bubble, which consists in the displacement of wealth of economic agents towards those sectors whose prices are on the rise.
- Thirdly, in the euphoria stage we can observe a speculative component. That is, economic users want to obtain a greater capital gain, so they buy to later sell.
This translates into a growth in economic activity, caused by an apparent increase in wealth. At the moment in which investors decide. And that is when prices are stabilized and there are doubts in the market, which will unleash in a panic stage since investors will massively sell their assets giving rise to financial bankruptcies and an economic recession until theRestoration of initial balances.
At the end of the 20th and early twenty -first century, immediately before the start of the financial crisis of 2008, there were a series of factors that made the real estate market to American society more attractive since this did not have access to housing in property in property. They were a series of changes in mortgage regulation, policies for interest rates to be low and moral risk problems, which resulted in families to lead to their indebtedness in order to buy active assets and durable consumer goods.
In addition, there were a series of financial innovation processes. In the first place, we can highlight the separation of the commercial banking of the investment, that is, a mortgage banking system without controls was created, parallel to that of commercial banking. This separation would not have been possible without the increase in housing prices and subprime segment.
The operation of this market was that independent agents offered mortgages to a variable interest rate for long periods and sold to majority entities. These subprime mortgages formed very heterogeneous packages and had lower credit quality than standard segment. The packages were divided into sections and their solvency was determined according to the level of over-guarantee and the probability of default, calculated according to the historical delinquency of subprime mortgages. These sections titled in MBS (Mortgage Back Securities) and CDO (Collaterized Debt Oblions) and, it was a rating agency that confirmed credit quality. It was based on mathematical models that evaluated the risk. In this way, the titles whose probability of default was lower, had a qualification by the "AAA" agency. The system would continue to work properly, while the price of the United States housing was growing, since buyers could obtain benefit selling.
Between 2003 and 2007 there is a very considerable increase in the debt of American families and a growing leverage of financial institutions, given the constant increase in the price of housing, and it is in 2004 when it is crossed by the euphoria phase, related to speculationof buyers, as we have mentioned earlier. In 2007, the burst of the bubble occurred in the face of the benefits of investors, and that is why the mortgage funds enter bankrupt and the lenders annulled the financing, which led to the titles to lose up to 90% of theworth.
The United States Banks Association announced that the level of delinquency in the mortgage sector was reaching its peak since the beginning of the 21st century. Much had to do with this the tax increase by the new president of the Federal Reserve -Ben Bernanke- whose objective was to eliminate the leftovers of the liquidity of the system so that inflation was not magnified.
Given these facts, the market is affected by the panic of investors. It is at this time when two of Bear Stearns’ mortgage funds are declared bankrupt, which caused assets that were regularly traded in the market, linked to the subprime segment, they will not be liquid. From that moment the interbank market stops working. To solve this problem, central banks, injected billions. It is then that housing prices begin to lower and interest rates are also reduced, reaching in March 2008 the maximum mortgage drop since 1996.
In the first quarter of 2008 there was an aggravation of the financial crisis, which caused an increase in the unemployment rate in the United States, and the Federal Reserve intervened urgently, decreasing the interest rates of 3% again. In the absence of market reaction, intervention was necessary for the second time, of the markets through a liquidity injection.
To avoid the bankruptcy of JP Morgan, intervention and purchase was necessary. September 2008 was the worst month of the crisis. In the first week, the market began to have serious doubts about the solvency of Freddie Mac and Fannie Mae. Both societies had half of the US mortgage debt. In addition, if it was allowed to go bankrupt. In the second week, Lehman Brothers and Merril Lynch faced major liquidity problems, but only the second was bought by Bank of America. By not intervening Lehman Brothers and not finding any buyer interested in this company, he ended up breaking.
Everyone imagined that a great crisis was going to arrive, everyone less Richard Dick Fuld. Richard was Lehman Brothers’s advisor since 1993. This wanted this bank to be the maximum power of the United States, but this wanted it to happen in 2012. Richard did not want to realize that he was carrying a bank with too many debts, debts that came almost to the total investment they had at that time. Actually, the bank already had too many gaps open for other crises, of which it had managed to move on, but this was the wound that ended with the bleeding of this bank. When Bear Steans fell, it was learned that the next bank was going to be Lehman Brothers, for the simple fact that both banks had very similar assets and debts too. When Lehman Brothers’s advisor noticed that the balance of both banks was similar, he knew that the end of said bank had arrived, but tried until the end saved her. On September 15, 2008, the fourth most important bank in the United States was declared in Banca Rota.
AIG, a company dedicated to the insurance sector, very important in the United States, was very affected by the bankruptcy of Lehman Brothers, and the Fed intervened in its control. In addition, there is a coordinated intervention in the most important banks in the world, and, for example, independent investment banks such as Goldman Sachs and Morgan Stanley (…), they became commercial banks. Given the bankruptcy of Washington Mutual, the treasure intervened. But the crisis was no longer affecting the United States, but had spread worldwide. Example of this expansion would be the case of Belgium, Holland and Luxembourg, which intervened in Fortis, or the purchase by the Santander Bank of Bradford and Bingley. Falls of more than 40% annual stocks are beginning to be reflected and a negative increase in GDP in OECD economies.
How does the economic crisis affect society?
- At the employment level: the economic crisis acts distinctly among the different sexes. The unemployment rate in men is greater than in women, although this should not be so since the employability rate among men is higher than that of women.
- At the political level: we can observe three clearly identifiable effects since the financial crisis began. The first effect is the distrust by the population towards their political representatives, since the rescue of the banks, responsible as we have previously explained, of the crisis, by using the resources obtained through the Public Treasury. This generates a great popular discontent, since citizens needed to make a great effort while the situation was very complicated by the large unemployment rate.
- Worldwide: there was a great growth of populist and extremist movements, especially right -wing ideology. This was due to the fact that they took advantage of the crisis situation to blame the different political ideologies. We observed how in countries such as Sweden, Italy, Austria or Hungary won the nationalist parties and reached positions in the Executive Power. We also see how in countries of Anglo -Saxon origin, there are also nationalist movements. More specifically we can cite the US case, when Trump gave an anti-immigrant speech and facing the political elite;or the United Kingdom, where a referendum was made, for the departure of this country from the European Union, in 2016.
- International scenario: Before the crisis, the international community acted together, but over time these countries began to have differences, for example: within the Eurozone, tensions arose between the different debtor and creditors countries. We can cite for example to Greece and Italy as "losers" countries, where before the crisis they were acting correctly and when this catastrophe happened they receded.
- As for trade, speaking in global terms, it fell after the financial earthquake, so that there is currently a great rising fight between the US and China, although it came from times before the crisis.
In comparison with the year 2007, we find that the prices of home owners%. However, prices in rentals in Spain are 10.6% more expensive than in 2007. But, the increase in the rental price is related to the amount of population living for rent, since it has also increased. This increase in rent can be argued with low salaries compared to the high price of housing, in addition to the high percentage of low quality employment, duration of less than year, unemployment rate, preferences in young people or fiscal reductionsBy lease regime.
Rent prices have reached their maximum boom, since the population prefers to have a house in property rather than living for rent because rental prices have shot so much that the population prefers to pay a mortgage to pay a rent that does notcan be affected by inequality between prices and salaries.
As for housing in property, it has suffered a break this year due to factors such as changes in mortgage law, the great political uncertainty to form government and a possible economic recession that have generated great distrust between buyers and investors of themarket. The sector has suffered great losses despite the decrease in unemployment rate and low interest rates. In addition, excess prices have not helped since they are high regarding the level of salaries.
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