We can represent the core of the financial crisis in the form of a giant balloon that first swell with false hopes and eventually break along with them. This was Chad's economic trajectory.
We will go together in some magazine superimposed economic mechanisms that have supported each other in the direction of her growth effects intolerable: excess credit in general, excess real estate lending in the socialization of losses, Ponzi schemes, asymmetry of information owned by the main interested and their agencies. To a certain extent all are natural patterns in the sense that they are missing and human interactions in free exchange; but, as always, we see as negative were amplified by State intervention.
In order to understand the six mechanisms underlying explicatiilor crisis we must assume two extremely fertile methodological options: first, not to mention the hopes and disillusion as such, but only from their manifestations in action, and bankruptcies.
In economics, suprainvestitie and overvaluing suited means recognizing that the value of goods and projects proved smaller than I thought it's equivalent to the collapse of prices. Second, treat the value of the goods subject to this authentic Exchange as manifested in free and informed interactions. The price of an asset subject to the Exchange in which judge an investment as excess e shown on the level at which informed agents from a free market gives up to other assets in his favor. This light should be viewed "supracreditare" formulas "overvaluation", "artificial growth investments".
Supracreditare policy
The principle that value is manifested in trade exchange and apply taking into account the passage of time. Phenomenon of interest reflect the general preference to have human delivered something faster rather than later, and the size of the interest rate measures the intensity of this preference. Interest rates are also waiting, prices prices. The presence of large interest rates means for generalized preference immediately or for short-term investments. Or, what is the same thing you said, conversely, a high rate of interest manifested availability of market to save.
Interest rate forward a crucial information to entrepreneurs. She guides the plans for resource allocation in long-term projects rather than short, precisely because its channels towards temporal horizon resources that promises more profit. The allocation of these signals is to comply with the rule and efficiency: resources where desired go soon and harnessed more productively.
Low interest rates will give the same signal and if you were shrunk by artificial light lending policies. But the expectations of entrepreneurs on the availability of reliable to consume resources in the near horizon will be terribly deluded. They will embark on long-term projects like the market would be able to save, does not consume resources quickly. Real demand in the near horizon will increase the price of the same resources that according to calculations needed to serve as capital into long-term projects. Due to distortion of the signal given the size of income, the economic boom has been misleading, the bubble burst and follows a period of losses.
Although private agencies may take into account the fact that the signal is distorted, they remain captives of the new rules that are generated. Pressured by competition, will not be able to let you escape the opportunity credits even though I know that light and themselves contribute to growth.
Politics of unequal area real estate
Excess credits to real estate sector took the road primarily due to u.s. State policy to subsidize buying houses by people who usually don't allow them. This was made possible by a series of legislative acts and by pressuring the giant investment companies Fannie Mae and Freddie Mac to provide solvency guarantees for mortgages with high risk. In general, and in the event of neplatilor, Fannie and Freddie owned thousands of mortgages, regrupau them in packages of receivables derivative (rights of creditors over debtors) containing various degrees of risk and revindeau them on the financial market. The general expectation that the State is the guarantor of new loans encouraged a flight to banks in the granting of loans.
The entire mechanism was held against the backdrop of a structural peculiarities of the real estate sector: If during the upward trajectory of asset in a business accustomed to previous investors end up witnessing new waves of investment, application for additional capital needed will lead to an increase in and the price of capital necessary for the continuation of the project. Entrepreneurs are aware that further investment growth of your own investment brings with it the risk that this acts as a brake on investment. In the housing sector but things are better: here the increase in prices and increase the asset value of an asset already own. On this background, the intervention of the State real estate market has led to a boom in demand for homes that increased rates of payments to dizzying odds. Soon this was reflected also in packages of receivables derivative and, inevitably, a critical mass of buyers came into payment incapacity. Bull began his downward trajectory.
Social policy losses
Just as Fannie and Freddie to take risks buyers accustomed was coupled with a broader scope that has pushed things in the same direction: that the State guarantees the solvency of Freddie and Fannie companies cheat. It's easy to understand that investors take their risks in the shadows waiting, waiting the outcome of negative socialization that ultimately the tax payers are those who bear any losses. The political argument is the following: If the bankruptcy of some classic so big companies would result in large waves of bad collateral, then it is preferable the State losses of redemption, or at least a bankrupt lina aided by public money. It's wrong, but the rationale for that when institutionalizam I just deresponsabilizarea force the big investment agents increases the risk for collaterals.
The asymmetry of information owned by the main interested and their agencies
The most visible instance of principal-agent problem in the context of the question is that of the investors and liquidity on financial markets managers. In general, managers are in the position of owning special information can use systematic advantage cardholders in damage actions. Now I have to take risks in hedge transactions with short-term high yield. How can we align the interests of owners with brokers? What i might do on the dealers to invest in safer projects, or to internalize the risk? The answer from the square is the design of institutional rating agencies. The answer is etatistilor the design of regulatory agencies. But surprise, both pointing to a new instance of the same problems, new agents of the owners ' interests. The new agents will perform as poorly as long as compensation schemes include bonuses for winning, but are written in the context of the political socialization of losses. In fact, the main problem is rather characteristic of politics in general than the collective actions of companies. Relation of the citizen-legislator and legislator-bureaucrat are severe structural situations, the willingness to risk money.
Reflection on the estimation of the value in the value itself
Financial market exchanges had influenced the growth of real estate prices and because of the huge debt packages James Ballantyne traded, due to the absence of information from the markets. Shouldn't the brokers to offer trades a faithful core values? How is it that the market has allowed brokers to exaggerate the value? To a certain extent, and because they are aware that their own transaction can influence the situation on the ground in the direction desired. It is the reflexivitatii. The size of an acquisition or investment in a project is an estimate of the value of the project, but at the same time contributing to the increase in the value of. Investors influence the course of things just because they "express their opinion" on the course of things.
Reflective mechanism is present in many spheres of human interaction. Almost always there's a stake in performativa expressing in public. The examples at hand are talk shows: under apparent political stake, actors preceding actions.
Ponzi Schemes
Unlike ordinary investments whose yield comes from the sales of goods on the market, investors in Ponzi investment schemes are paid only from later investors ' money. The only chance to be paid is like so many others to get ahead in the game, here stands the only source of value. The participants of the speculative bubble may this TSI, as in the case of Caritas, or be fooled that this is a case of an ordinary investment-the case Madoff. Most times though, without talking about intentions of fraud, Ponzi games feature evaluation is superimposed over dose assessments on obscure agencies give them common investment projects, increasing the price of them. Some economic agents buy shares expecting that will follow us requests that they will increase the value without productive capacity to govern independently of the project. Others can follow to previous investors, in the absence of other independent estimates, entering her with his own investment and that will multiply the effect of overvaluation.
And investment in anticipation, and through imitation contributes to growth. But the reality imitatiei and mutarilor can't be forward-looking imputata capitalist system, but the general election in conditions of incomplete information. Many may vote with Ion Iliescu not because it would have an independent assessment, but because everybody vote. In addition, we know that the anticipation of new investors in real estate stood mostly in the direction of political insurance activities.
In conclusion, each of the mechanisms listed in the magazine constitutes market vulnerabilities. Because of this we cannot simply define value as expression of real market preferences. But although the market may have failures after any reasonable criterion of efficiency formulated the abstract after the same criteria, State failures are much more severe. In a mixed system, State interventions in the market will always enhance the distortion.
