Global Crisis


 The Global Crisis of 2007 that emerged in the housing market of the United States in 2007, which adversely affected the entire US financial system and then other countries’ economies in a short time, and which is considered as one of the biggest crises in the world financial history, is the 21st century’s first financial crisis. In the United States, credit customers are divided into prime and subprime. Customers with high income and clean record are called prime. Customers with low income and not good at a pay off loan are called subprime. Therefore, another name for this crisis is the subprime crisis. When subprime loan borrowers are unable to repay their debts, the values ​​of mortgage-backed securities issued as a result of securitization of receivables from subprime loans decreased. Taking into account possible future losses, the banks stopped lending to each other with the increase of insecurity and the entire credit market started to contract. The presence of investors from all over the world in the high-volume collateralized debt market has brought the crisis to other countries. The crisis, which first appeared in the US housing market, started to affect the economies of all countries in many ways in a short time and turned into a global financial crisis. In parallel with this, many countries have shrunk their economy and serious economic and social problems have emerged.

Causes of the 2007 Subprime Credit Crisis

The Global Crisis of 2007 Problems that started in the US housing market in mid 2007 from enlarged and developed economies to developing countries has gained a global dimension. Causes of the crisis, liquidity abundance and as a result, sloppy loans, excessive securitization, lack of transparency, ineffectiveness of rating agencies, and as the delay of intervention of regulatory and supervisory agencies can be listed. Global financial crisis bank failures in the financial system reflected in the real sector after consolidations and nationalizations has lowered global growth rates, caused inflationary effects caused the requests for regulation to be spoken louder.

In the US, the money related obligation that began with the absence of lodging credits and swelling issues keep on developing. Of the secondary market in housing loans, state control of Freddie Mac and Fannie Mae created for the development of Lehman Brothers. USA Bankruptcy Filed for bankruptcy under Article 11 of the Law, Merrill Lynch was sold to the Bank of America at a very low price and the huge insurance company FED (US Central Bank) to continue AIG operations had to use a significant amount of credit. Britain, Europe and the crisis feeling in developing countries and gaining a global dimension followed by a bailout bill of about 700 billion dollars in the USA. It was approved by passing through the assembly. This financial crisis is similar to the old ones in some ways. For example, in September 1998, the New York FED (US Central Bank New York Unit) to save LTCM, one of the country’s largest hedge funds an initiative involving fourteen major commercial banks and securities companies launched. They acquired 90 percent of LTCM, providing a total of $ 3.6 billion in the capital. However, as a result of the recent mortgage crisis, the USA government’s interest rate cuts, bank merger operations and the latest seizure of mortgage institutions is almost a “intrusive market”. It shows that it has become “normal”.

These developments are the USA and other advanced developing the financial system of economies, developing revisiting the world’s capital movements policies and another mentality of the world financial system and another it will lead to its redesign. In developed countries, and especially in the USA, almost every separate financial institution and the financial instrument has been created for the function. This institution and tools have interrelated and intricate relationships. For example, interest rate derivative many financial markets, from forward swap transactions to floating swaps offers vehicle. In understanding this complex structure of financial instruments there is a major challenge. Changing everyday for ordinary investors it is not possible to follow new and different financial instruments. Especially with a serious transparency problem, especially when it is desired not to be understood common. Another deficiency in transparency is what is called asymmetric information. In this case, information is given to investors, companies and other actors at different speeds and reach in formats. For example, “insider trading” is a kind of asymmetrical information. Even if such information is prevented by legal sanctions, it constitutes a crime. It is very easy to overcome the problem of asymmetric informing. Empirical research reverses between financial crisis and lack of transparency shows that there is a directional relationship. 6 Less financial as transparency increases. The crisis occurs the most important problem with rating agencies is a conflict of interest. In understanding this mind boggling structure of monetary instruments there is a significant test. When this is the case rating agencies’ ability to make objective evaluations it decreases. Banks that design financial institutions for rating agencies and information about the underlying asset as much as the buyers of the instrumentcan be another problem is that rating agencies only is grading the risk. However, the liquidity risk and the risk of changing the rating also needs to be measured. Rating agencies are very effective before the last financial crisis didn’t work. However, after the financial crisis started, credit ratings has been reduced from the third quarter of 2007 to the second quarter of 2008, 1.9 by two major rating agencies over the past year. The rating of trillion-dollar mortgage-backed securities has been reduced.

The Effect of 2007 Subprime Credit Crisis on Global Financial Crisis

      The subprime credit crisis, which started in the USA, has been transformed into a global financial crisis, and investors from all over the world take part in the secured debt market. In the first place, investors in North America, Europe, Australia and Asia were affected by the credit crisis. Crisis; It turned into an economic crisis with the negative impact of firms on their balance sheets and households. The losses caused by the crisis in the world economy are estimated to be 400 billion dollars as of January 2008. In April 2008, the International Monetary Fund (IMF) announced that the total cost could reach $ 945 billion. Three state banks (Bank of China, China Construction Bank and Industrial and Commercial Bank of China) in China, which hold $ 8.8 billion of subprime securities, faced significant losses. Sharp depreciation of the country’s stock exchanges also revealed the extent of The Global Crisis of 2007

Although the world economy is recorded as 65 trillion dollars by the end of 2007 according to purchasing power parity, 14 trillion dollars of the goods and services produced in the same year were produced in the USA with a population exceeding 300 million. The size of the 2007 budget in the USA, which constitutes 21% of the world economy, was 2 trillion 731 billion dollars. The USA alone accounts for about 16% of world imports. It is inevitable that the crisis experienced in a country with such a big weight in the world economy will affect the global markets and country economies.

The contraction of consumption in the USA in 2007 caused the global economy to stagnate. Although the financial crisis started in the developed countries as of the second half of 2007, it also started to affect the developing countries in 2008. Fiscal policies aiming to increase the reserve assets, decrease the public net debt stock and limit the borrowing in foreign currency within the country lie behind the developing countries’ late exposure to the effects of the crisis. With the reflection of the crisis on developing countries, a significant part of these countries experienced depreciation in their stock exchanges, national currency depreciated, risk premiums increased, foreign capital flows and bank borrowings decreased. Global banks and regulatory authorities could not see the risks or take the necessary measures in a timely manner. After the crisis arose, governments began to announce rescue packages. Since the second quarter of 2008, negative growth rates in the economies of developed countries have started to be seen frequently. Economic growth has slowed in 94 of the 116 developing countries in 2008. In this period, international investments decreased, global trade contracted and the credit market shrank.

Results of the Global Financial Crisis

 While the rise in housing prices is one of the causes of the global financial crisis, the fall in housing prices is among the results of this crisis. As some of the housing loans have not returned, the housing market has entered the vicious circle and there have been significant declines in housing prices since the beginning of 2007 in the USA.Due to the reflection of the financial crisis on the real economy, growth rates decreased both in the developed world such as the USA and Europe and in the developing countries.

The global crisis has also affected unemployment rates significantly. Especially in the USA and developed economies, an upward trend is observed the rise in inflation in 2007 and 2008 was not only caused by the financial crisis. In this period, rises in oil and food prices caused a significant inflationary effect. Especially in developing countries, where energy demand is increasing rapidly, inflation rates have increased rapidly from the third quarter of 2009, the exit from the global economic crisis has started to a large extent. Comprehensive fiscal policies and economic measures were effective in the exit from the crisis. Monetary and fiscal policies, which started to be implemented in this period, reduced the risk of the international systemic crisis, enabled the economic contraction to slow down and eased the pressure on the financial markets. The commonly used low interest policy has accelerated global capital movements and positively affected the exchanges. Capital supports and measures to increase aggregate demand constituted the main axis of the measures taken in the same period. In parallel with this, the US economy, which is the locomotive of the world economy, grew by 2.2% in the third quarter of 2009 after shrinking four consecutive quarters. According to the data of the World Trade Organization, the shrinkage in the trade volume left its place to increase as of the second quarter of 2009. Economic performance of developing countries, especially Asian economies, increased the rate of economic recovery in 2009.

Despite all these positive developments, the global economy contracted by 0.8% in 2009. The global economic recovery continued in 2010. While strong economic growth performances have been observed in developing countries, growth rates in developed countries have been relatively weak. Public expenditures of developed countries increased, economic deterioration reduced public revenues. The public debt stock problem in the related countries increased the risks in the financial markets that started to normalize after the crisis. As a result of these developments, the recovery rate of the global economy decreased in the last months of 2010.

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