The financial crisis has, therefore been the result of the inability to pay mortgage loans of thousands of people who had sub-prime loans. Many loans contracted, with payment of only interest or with options of negative amortization, that the change to amortized loans (payment of interest over capital) favored the increase of the payments to be made leaving no possibility of paying to the debtors, for if they had a zero credit history and no capacity for payment, which we already knew beforehand.
The inability to pay put the financial institutions that had granted the mortgages into trouble and drastically lowered the prices of the houses, which further aggravated, if possible, the situation of the lenders who, together with the default portfolio that they accumulated, saw the price of the properties that they had as collateral for the mortgages fall.
How was the casino economy born?
Since 2004, the US Federal Reserve has decided to raise the interest rate to control inflation, and with an interest rate of 1% in 2004, the interest rate was higher than 5% in 2006.
This situation led to an increase in late payments and the level of embargoes due to non-payment. When investors saw that they had taken too much risk and that the market was slowing down, they decided to get rid of their assets, thus giving more wings to the crisis.
That the crisis has spread worldwide is due to collateral-guaranteed debt obligations that circulated to a large number of companies around the world.
The debt obligations collateralized (CDOs) are credit derivatives” structured as a portfolio of assets with fixed income, where price and risk are divided into different sections. Losses are applied in reverse order to the source so that the tranches pay lower interest rates to offset the risk.
These instruments were introduced into the markets, so that, once a bank had given a mortgage loan, it would have the option of being able to sell it on the secondary market.
Pension funds, mutual funds, banks, and insurance companies, bought financial instruments of this type as an investment strategy to generate higher income.
With collateral debt obligations, debt securities backed by collateral or collateral, the payment to the investors who bought it came from the payments made by mortgage debtors. It was attractive to invest in these instruments, as mortgages were backed by Homes whose prices remained on the rise and therefore looked like a safe and profitable investment. With each price increase, the expectation of profit rose, and therefore, more was purchased. The problem came when debtors could no longer pay, and house prices plummeted.
It also created “derivative instruments” of debt obligations with collateral, which granted, the right to obtain a performance that depended on the behavior of the debt obligations, collateral security, but without the guarantee that had CDOs.
These innovative financial instruments were sensitive to the credit risk assessment provided by the risk agencies, which were extremely optimistic about the over qualifications granted as they were mixed with sub-prime mortgages. Once the debtors of the sub-first stopped paying, the banks could not convert into money the collateral-guaranteed debt obligations they had sold.
Consequences of the casino economy
In the current crisis of capital flight, bailouts, … the system fundamentally survives the massive injection of credit. It is massive indebtedness that explains the growing instability of the economic and financial system.
The annual growth of industrialized countries is over 2%. With the exception of some Southeast Asian countries, whose economic alerts are announcing new Mexican-style bankruptcies, the downward trend in their growth rates is continuous and general worldwide.
After the Insolvency and bankruptcy of the third world countries and the fall of the Eastern countries, they have fallen into crisis as powerful economies like Germany and Japan.
Due to the abundant level of debt, one can consider a powder keg with a lit fuse with moderate consumption. This is not a disaster for the country, but also for the entire world economy (reasons not to let the Helene country fall). Japan can be considered the Savings Bank of the planet as it secures 50% of the funding from OECD countries.
Therefore, the casino economy continues to operate without any counter-power having regulatory effects. As we have seen in the last few years, there are many negative consequences in globalization that the speculative economy is making real.
As a result, the policy is becoming less and less autonomous in developing committed projects and programs. The dehumanization of the economy is consolidated in the world that only imports GDP, deficit, and public debt.
The brutal settings that are subjected to the countries such as Greece or Ireland, and a lesser extent, Spain, are going to generate serious social problems, and increase the difficulties for the economic recovery, decline in unemployment and the increase in the collection of taxes. Hard adjustments lead to tension between governments and society, with the risk of plunging Greece and peripheral countries into deflation, which would produce enormous social and political pressures, and this would block Europe’s economic recovery.