The US subprime mortgage crisis that broke out in august 2007 was triggered by mortgage delinquencies in the US and has escalated into a global financial crisis. Investor confidence sagged off, and Knightian uncertainty emerged, consequently risk premia increased and liquidity was withdrawn from interbank and credit markets. This financial disturbance and the bankruptcies of some banks and near banks (for example insurance companies, hedge funds) triggered contagiously waves of violent collapses in the financial system. The current financial crisis is adjusting the global growth cycle that was still robust over the past few years, plunging the whole world into the greatest economic crisis since 1929/30. In the following the micro- and macroeconomic causes of this financial crisis will be outlined. Moreover structural and systemic causes, i.e. global imbalances and safe asset imbalances, will be discussed and highlighted in the final synthesis.
Table of Contents
1. Introduction
2. Microeconomic Causes of the Financial Crisis
2.1 Credit User Variable
2.2 Financial Intermediate Variable
2.3 Credit Derivative Variable
2.4 Rating Agency Variable
3. Macroeconomic Causes of the Financial Crisis
3.1 Regulator Variable
3.2 Monetary Policy Variable
3.2.1 Monetary Transmissions and the Monetary Policy Variable
3.2.2 International Financial System and the Monetary Policy Variable
3.2.3 Asset Inflation and the Monetary Policy Variable
3.3 Fiscal Policy Variable
3.4 Global Imbalances Variable
4. Safe Asset Imbalances versus Global Imbalances
5. Conclusion
Objectives and Topics
The primary objective of this work is to provide a comprehensive assessment of the micro- and macroeconomic factors that triggered and fueled the global financial crisis of 2007/2008. The research explores how market participant behavior, regulatory environments, and international economic policies created systemic vulnerabilities.
- Analysis of microeconomic variables including credit user behavior and financial intermediation.
- Examination of macroeconomic drivers such as monetary policy and global financial imbalances.
- Evaluation of the role played by rating agencies and credit derivatives in system fragility.
- Discussion of the "safe asset imbalance" theory as an alternative diagnosis to traditional global imbalance views.
Excerpt from the Book
2.1 Credit User Variable
The subprime bubble in the US and other parts of the world was fueled by historically low interest rates, initiated to soften the massive collapse of the dot.com bubble burst, and backed by poor lending standards and in particular a mania for purchasing houses which mirrors the credit user variable. Mortgage refinancing was applied by some credit user, which used the enlarged real estate value driven by the subprime bubble to refinance their real estates with lower interest rates, and took out additional mortgage against the added value to use the funds for consumption. Latter is one of the reasons why the USA has been one of the first countries in world history with negative saving rates, financed by foreign investors, e.g. China, Japan and oil and commodity producing Countries. During the early 21 century recession, which began in 2001 and was boosted by the September 11, 2001 terrorist attacks, the Americans were asked to invest, declaring “consumerism” as an act of patriotism. The one who linked shopping to patriotism was the former President Bill Clinton, promoting the phrase “get out and shop”. This slogan was based on the idea to stimulate future growth by encouraging consumption in the present.
Summary of Chapters
1. Introduction: Outlines the origins of the US subprime mortgage crisis and its escalation into a global financial crisis, setting the stage for an analysis of the root causes.
2. Microeconomic Causes of the Financial Crisis: Details individual market participant behaviors, including credit users, intermediaries, credit derivatives, and rating agencies, that contributed to system fragility.
3. Macroeconomic Causes of the Financial Crisis: Investigates larger structural and policy-driven factors, such as regulation, monetary and fiscal policies, and global imbalances, that acted as catalysts for the crisis.
4. Safe Asset Imbalances versus Global Imbalances: Compares the traditional "global imbalance" diagnosis with the alternative perspective that a shortage of safe assets was the underlying source of the crisis.
5. Conclusion: Synthesizes the findings, arguing that while imbalances were a major factor, the lack of a rule-based global regulation context and expansionary US policies were critical to the development of the crisis.
Keywords
Subprime crisis, Financial crisis, Global imbalances, Safe asset shortage, Monetary policy, Fiscal policy, Credit derivatives, Securitization, Moral hazard, Mortgage refinancing, Consumerism, Originate and distribute model, Rating agencies, Asset inflation, Liquidity glut
Frequently Asked Questions
What is the core subject of this paper?
The paper examines the microeconomic and macroeconomic causes that triggered the 2007/2008 global financial crisis, tracing its roots from US subprime mortgage delinquencies to global systemic instability.
What are the central themes discussed?
The central themes include credit user behavior, the "originate and distribute" banking model, the impact of expansionary monetary/fiscal policies, and the role of global savings and asset imbalances.
What is the primary research question?
The research seeks to identify whether the crisis was primarily a failure of microeconomic incentives and regulation, or a deeper consequence of global macroeconomic imbalances and safe asset shortages.
Which scientific methodology is applied?
The author employs a descriptive and analytical approach, synthesizing existing economic literature, model theories (such as the prisoner's dilemma in credit chains), and empirical data from global financial indices.
What is covered in the main body of the work?
The main body breaks down the causes into microeconomic variables (like lending standards and rating models) and macroeconomic variables (like interest rate policies and international imbalances), followed by a comparative analysis of crisis diagnosis theories.
Which keywords best characterize this work?
The work is best characterized by terms such as subprime crisis, global imbalances, safe asset shortage, moral hazard, and financial securitization.
What is the significance of the "safe asset imbalance" theory?
This theory suggests that the global crisis was driven by a chronic excess demand for high-quality, safe assets, leading the private sector to create complex derivatives that ultimately proved fragile.
How does the author view the role of central banks?
The author argues that central banks, particularly the Fed, maintained artificially low interest rates that encouraged excessive leverage and contributed to asset inflation and the subprime bubble.
- Quote paper
- Josué Manuel Quintana Díaz (Author), 2010, The Micro- and Macroeconomic Causes of the Financial Crisis, Munich, GRIN Verlag, https://www.grin.com/document/152848
