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.
[...] Stock exchange will be better. European stock exchange might take advantage of the weak US growth, being one of the strongest markets for investors. [...]
[...] The market also had been favored by the legislation of 1977 (Community reinvestment act) which says that credit organizations are obliged to lend money to poor people because otherwise they couldn't loan money. This phenomenon had 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 organizatons 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. [...]
[...] In order to limit the effects of the crisis, five central banks announced on the 12nd of December 2007 that they will inject on the monetary market a huge amount of money, almost 44 billions of dollars. When a bank doesn't have enough available money in order to fund credits, it can ask to the central bank to lend it money which is missing. But we have to remember that is use as a last resort. The price of this financing corresponds to the federal fund rate. [...]
[...] But the trust is going to take time to come back, and we could guess that banks are going to continue to suffer increasingly about this crisis and put up bad results. According to a study about the subprime crisis, this phenomenon will cost between 300 and 400 billions of dollars to the financial industry. Moreover we could notice that the injections of liquidities by central banks and the fall of federal fund rates several times was not enough to reestablish the trust between banks which still refuse to lend money between them. [...]
[...] Actually, we apply a kind of “prime” to a borrower when its solvency is under a certain threshold. We could say that its operation is supposed to hedge risks taken by the loaner; it means that if the borrower cannot return the money, it will compensate for risks. We could add that the loaner doesn't take a huge risk insomuch as if the borrower is unable to refund the money, the repayment will be guaranteed by a mortgage concerning properties. By the way, it is the right definition of the classic hypothecary credit. [...]
Online readingwith our online reader
Content validatedby our reading committee