Two investigations Bank of Canada confirms the extent of the credit crisis. Here in the Report on Business a summary of the facts.
I can update a text on the steps and mechanisms leading to the credit crisis to a depressive cycle.
From financial crisis to the structural crisis of financial capitalism
In Canada and Quebec, although our manufacturing sector is in pieces, we do not yet feel the full extent of the shock generated by the crisis, to hear our leaders and their advisers the worst of the economic crisis is behind us not too affected.
De fabula narratur you the process of financial deflation starts here just his work and his foundation are profound. Here are a few lines the steps and mechanisms put in motion and in this crisis1.
1.Il is important to remember that the origin of the crisis in August 2007, is a very special segment and key financial markets, the interbank lending market, the pipe through which all financial and monetary transactions are forced to spend! This sudden collapse of interbank lending continues to be the engine of the adversarial trial that is unfolding before our eyes. In late summer 2007 the interbank credit crisis broke out simultaneously in Europe (Paris and London), United States and Canada when large commercial banks and investment are presented with a fundamental doubt and uncertainty as to the radical value of an asset class in the heart of the recent financial practice, products of "securitization." Take a loan, debt, and make the goods, the movement launched in such a hot potato, this is the basic logic of securitization. Derive from this first metamorphosis of a debt as an asset a series of additional financial assets (the famous products) and finally repack everything into new complex, opaque securities and you have a market that has been known in Canada as the ABCP (asset-backed commercial paper assets).
This market was used by banks and other financial firms to securitize receivables (loans metamorphose into tradable securities) and as an investment vehicle in the short term relatively profitable. When the world loses confidence in the banking market two things happen simultaneously. Despite their strong balance sheets, banks lose their source of funding was the market for securities backed by assets that allowed them to maintain a high level of credit to businesses and individuals in the securitization, the more they do not trust the balance sheets of their counterparts they believe potentially infected with toxic debt, interbank lending dries up too.
2. The interbank credit crunch led banks to restrict credit to businesses and households, despite significant decreases and continuous rates of central banks. Firms respond by reducing or postponing their investments, they make layoffs to reduce their production levels. However, the reduction / deferral of some investment translates into lower production / employment of others.
4. Households lose confidence in the economy, lose income, lose jobs and see a reduction in nominal value of their financial assets and property while maintaining the costs of financing. This has several consequences. The most obvious is a likely drop in consumption caused by the loss of trust that will be added as additional pressure on corporate earnings already in decline. This classic loop we know it. By cons, we know little about the multiplier effect of what will have been the restriction on consumer credit growth. And finally, we have no precise idea of the effect on the banking system, rising bankruptcies and household enterprises and the growth of late payment of debts that will be generated by the weakening of household income. We know that this loop may amplify the credit crunch and banks' thirst for cash.
5. To this we must add the effects of the downturn in the housing market. Inflation in the value of real estate was used as a lever for credit by households, along with the ease with which banks could securitize their portfolios of mortgages - and thus open new loans - fed the expansion of value of these assets. This positive loop, but actually vicious between securitization, expansion of the value of real estate and household use of them as leverage for consumption, turns negative loop in which the weight of household debt combined with stagnant or declining the value of their homes, has a depressive effect on consumption and weakens the banks holding, beyond the risk securitization ultimate default.
6.For conclusion must be added to the analysis of these mechanisms the effect of market dynamics. Unlike the crisis of 1929 or the 1987, stock exchanges, the TSX, the New York Stock Exchange, are not at the forefront of this crisis which originated in the interbank market. Instead, these grants recorded after the fact and amplify these developments. They were strongly shaken by the disappearance of a class of actors structuring: the big investment banks. The slow implosion of values creates a phenomenon that multiplies the effect of the crisis of three interrelated ways. First, households that have significant direct or indirect investments (funds) in stock will see their assets decline in value. The impact of the reverse wealth effect is largely unknown but will be negative. To this we must add the effect more indicative of a possible erosion of the basis of capitalization of listed companies, that can not recapitalize if share prices fall too steeply, especially as these movements can get excited without basic reasons. This can be disastrous for some of them, especially banks, are currently seeking capital and plans to issue new shares. Finally, the commitments of the major companies to the pension benefit plans are likely to act as an additional burden limiting the expansion of their activities.
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