The problems that started in the US housing market in the middle of 2007 have grown and have gained a global dimension by spreading from developed economies to developing countries. The reasons for the crisis can be listed as the abundance of liquidity and the resulting sloppy credits, excessive securitization, lack of transparency, inadequacy in the effectiveness of rating agencies and the delay in intervention of regulatory and supervisory agencies. The global financial crisis has also been reflected in the real sector after bank insolvencies, consolidations in the financial system, and nationalizations, thereby reducing global growth rates, leading to an inflationary effect, and driving the demand for regulation to be voiced.
Keywords: Global financial crisis, real sector, housing loans, regulations
In the US, the financial problems that started with the insecurity and swolven in housing loans continue to deepen. Freddie Mac and Fannie Mae were created for the development of the secondary market in housing loans. Upon their transfer to state control, the large investment bank Lehman Brothers filed for bankruptcy under article 11 of the US Bankruptcy Act. Merrill Lynch was then sold to the Bank of America at a very low cost. In this context, the giant insurance company had to use a significant amount of credit from the Federal Reserve Bank (FED) to maintain AIG operations. The crisis began to be felt in Britain, Europe and developing countries. The crisis has gained a global dimension over time.
And then the $ 700 billion bailout bill was approved by the US assembly. This financial crisis is in some respects similar to the old and in some respects it carries innovations. For example, the crisis intervention is not new.The shadow of the state in the economy has always been felt. Especially when we look at the Keynesian policies implemented after the 1929 crisis, we can easily feel this until the hedge fund rescue operations in 1998. As a result of the recent mortgage crisis, we see the US government’s series interest rate cuts, bank merger operations, and confiscation of the latest mortgage institutions. This shows that an intrusive market has become almost normal. With these developments, the financial system of the United States and other developed economies has been restructured. In addition, it will lead the world to revise its policies on capital movements and redesign the world financial system with another logic and other realities.
In this paper, my evaluation of the causes of what is happening in the US financial sector and their possible and emerging results will be covered.
Causes of Global Financial Crisis
Lack of Liquidity and Sloppy Credits
Money is the most liquid asset. The fact that the most widely used exchange tool in daily life is money, the need for conversion to serve and trade goods makes the money high. Housing, automobile, bond assets such as cash is difficult to convert. The difference between these assets and their prices on paper is high. To sort the assets in terms of liquidity; checks, government bonds, corporate bonds, stocks, consumer durables and real estate.
From the year 2000 to the end of 2006, the liquidity in the financial market has continuously increased. The transformation of the pre-crisis liquidity into profitable operations has been one of the most important problems facing the banking system. At the beginning of these operations are housing loans. Banks have started to give loans even to people who do not have any business, income or presence. These practices, which are known as NINJA (No income, no job, no asset) loans in the public sector, have led to a rapid increase in the prices of housing, in particular the housing prices.
We can define securitization as a brief pool of cash flows and the production of securities as a financial asset for sale to investors. In the period when liquidity was abundant in the USA, individuals used more than normal loans through securitization. Risk sharing, high return appetite, facilitating banks to fulfill their legal capital requirements, enabling banks to finance new loans without carrying risk or needing more deposits are issues that encourage securitization.
The main reason why securitization is considered as one of the causes of the crisis is that it facilitates the transfer of risk from one institution to another.
For example, a bank issuing mortgage loans securitizes the repayments of loans and sells them partially or completely to an investment bank or a mortgage company. This makes the financial system fragile in the event of a crisis. That is to say, due to the securitization carried out by the bank, the disruption in credit payments implies a loss for both the bank giving the loan and the other financial institutions that buy the securities
Lack of Transparency
In the developed countries and especially in the USA, a separate financial institution and financial instrument has been created for each function which is almost separate from each other. These institutions and tools have interrelated and intricate relations.
There is a significant difficulty in understanding this complex structure of financial instruments. It is not possible for ordinary investors to follow the changing and changing financial instruments that change every day.Especially when it is not to be understood, a serious transparency problem is encountered.Another deficiency in transparency is the so-called asymmetric information. In this case, information reaches investors, firms and other actors at different speeds and in different ways. Empirical research shows that there is an inverse relationship between financial crisis and lack of transparency.As the transparency increases, less financial crisis occurs. In such research, developing countries are often described as less transparent, but ironically, the latest world crisis has emerged as the most developed world in transparency.
My guess is that the definition and criteria of transparency need to be redefined.What kind of assets the banks and brokers have in this crisis is not determined as to what value these assets are, and who are their counterparts.
These problems have made it difficult to calculate and analyze the risk resulting from the bankruptcy of firms such as Lehman Brothers with complex commercial contracts that can be called derivatives.
Conflict of interest is one of the most important problems of rating agencies. The rating agencies that provide notes about banks and other financial institutions are financed by these companies.In this context, the ability of rating agencies to make objective evaluation decreases. On the other hand, rating agencies are not always able to identify the financial problems of firms. Sometimes they may see the problem as partially or very delayed. Banks that design financial institutions for rating institutions
and may not have as much information about the underlying asset as the recipients of the instrument. Another problem is that rating agencies only rate the default risk. In fact, the risk of changing liquidity risk and rating should also be measured. Prior to the recent financial crisis, rating agencies did not work very effectively. However, the credit ratings were reduced after the financial crisis began. From the third quarter of 2007 to the second quarter of 2008, two major rating agencies reduced the rating of $ 1.9 trillion in mortgage-backed securities.
Results of the Global Financial Crisis
The dropping of Housing Prices
When we look at the rise in housing prices, we see that it is one of the reasons for the global financial crisis. The fall in house prices is one of the consequences of this crisis.
As a result of the fact that some of the housing loans did not return, the housing market entered the vicious circle mentioned above, and housing prices have decreased significantly since the beginning of 2007 in the US. The graph below shows the development of housing prices according to the S & P / CaseShiller Index.
Decreases in Growth Rates
As the financial crisis is reflected in the real economy, growth rates in both developed and developing countries such as the USA and Europe have decreased. The following figure shows a downward trend in growth rates in both developed and emerging economies after 2007.
Increases in Unemployment Rates
The global crisis also affected unemployment rates significantly. The upward trend is particularly visible in the US and developed economies.
US financial turmoil also experienced a huge impact on employment in Turkey with the Turkish financial system in crisis olmamıştır.b can expect to take more cautious steps.
The increase in inflation at that time was not only due to the financial crisis. The rise in oil and food prices led to a significant inflationary effect in this period. Inflation rates rose rapidly in developing countries, especially in energy demand.
Regulation and Intervening Approaches
When we look at another result of the financial crisis, we see an increase in demand for regulation, especially in developed economies. New regulations are expected in the field of finance, such as hedge funds.
Turkey’s economy is an integrated economy and Turkey’s economy is seriously affected by this economic crisis. But this effect was not as deep as the European countries. The importance of the socio-economic packages implemented was the fact that the public finance system was sound and the political and economic stability was not compromised. In this period, economic growth was badly affected, unemployment rates and poverty increased. When we look at social policy, it is observed that there is an increase in public social assistance expenditures. In 2010, many action plans were prepared and implemented in the medium-term program, thus achieving the trend of rising market and macroeconomic data before the crisis. Turkey has managed to jump at the slightest way this crisis. A successful result in terms of social policy has been achieved.
- The World Bank Data
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- Data are taken from www.wikipedia.org. And The data on the United States and developed countries in the IMF’s website (www.imf.org), data for Turkey 2009 Year Program.