The concern, uncertainty and confusion is already installed in all areas related to financial and economic world. The strong cohesion between global markets means that a crisis in any part of the planet to have immediate influence the economy of any country, first by the financial side and then part of the real economy of all individuals within it.

This article seeks to interpret the origin and effect of this financial crisis, which should be vigilant, since everything is indicating that we are only the tip of an iceberg and probably we find a larger crisis in history. Some people compare it to the depression of 29 ‘and others going further.

Much has been said of China and India entering the global market, as large holders of the progress of the global economy. Structural changes in world trade mutated, causing the relative prices of goods related to technology access and descend by the impact of production mainly China, which led to a great mass of consumers enter the market annually to conform increasingly larger.

This change has been forced to turn more towards approaches aiming at the same U.S. Asia. When we look at the data, the U.S. consumer is responsible for 9.5 trillion of world trade, China is still responsible for 1 trillion in world trade. So if you build a U.S. recession, the numbers speak for themselves. Directly or indirectly, China has a high degree of dependence on the U.S. economy. What happened in the U.S. to be unleashed this wave of uncertainty? The answer is subprime mortgages.

In the seventies in U.S. banks gave mortgages to individuals and once these banks reached a certain percentage of its loan portfolio, banks stopped lending. A government agency (Ginnie Mae) began buying the mortgage portfolio of banks so that they have the money to continue to provide liquid and moving the wheel. With these portfolios were assembled packages of mortgages and securities were issued with the mortgage as security for other investors to fund it, which is nothing else to give credit for having immediate settlement and continue to provide.

In 1998, a U.S. financial innovation that was to generate funds for mortgages to purchase real estate, and came not only from local sources but could be traded through the bag, causing foreign investors to invest in this asset class Financial. One of these instruments are the CDOs (collateralized debt obligations). In other words, foreign investors placed money so he can finance the purchase of property by families or individuals in the U.S..

Initially, these loans were a monopoly of banks, but when competition arrives, they start to seek more profitable alternative investment of real estate, to give more performance to your portfolio. Parallel investors around the world came with large cash flows produced by the Asian boom and rising oil prices, demanded good returns for their investment potential.

That’s where subprime mortgages appear that seek to provide loans to individuals whose income was listed as “risky” to give a traditional loan. With greater risk, the rate they pay is higher than for those individuals who borrow money to qualify for traditional loans. In this way managed to give returns to the liquid funds available to investors around the world.

The logic of investors who bet on this type of investment was as follows “the real estate prices are destined to rise (they have never fallen before), if people get the credit that can not afford it, then sold the houses and I recover the investment. “Everything was based on an erroneous analysis of the future prices of U.S. housing market.

In 2002 the volume of subprime loans accounted for 7% of the mortgage market in 2007 was 12.5%. Any quick observation would conclude that it is below the level represented by these claims, but the stakes in this type of investment were not genuine money a hedge fund or investment bank, but in turn they took debt to invest in subprime mortgages . Investments were $ 100 million for example, 1 million of them with own resources (from an investment bank for example), and 99 others were rendered. Everything under the trust that allegedly suggested the U.S. housing market. This implies that if the price of real estate goes well, the gains are great, but in a context of falling prices, falling 1% of those 100 million, implies that investors lost all their money and that’s where it unfolds on increasingly worse.

The importance is that much of the global financial system encroached into these investments and the fall in house prices in the U.S. gender, as well as abysmal losses and fall of major institutions, a crisis of confidence. Markets also are essentially psychological, in good contexts expectations may be too euphoric and prices grow geometrically, but the worst cases when expectations are negative, falls or adjustments are violent, in a panic. The institutions involved in subprime mortgage investments face a number of problems, investors want their money back and turn the lenders do not want to continue funding them.

Under this crisis of confidence, investors have become more conservative, and have gone so far that has affected lenders solid, stopping the injection of credit required for the normal functioning of an economy. This leads to a recession that threatens the credit card loans and other types of debt, thus generating a vicious circle negative.

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