The crisis that we are experiencing is shocking because of the level of illusion (believing or making people believe in the endless increase in US property prices), naivety (believing in the self-regulation of financial institutions) and the lack of transparency.naivety (believing in the self-regulation of financiers with an extreme appetite for profits), incompetence combined with a high degree of sophistication of the instruments, all of which ultimately leads to a total loss of sight of the notion of risk.

The story seems implausible. In fact, the excesses of finance are the consequence of deep economic imbalances in a globalised economy between countries with different economies.developed countries (mainly the United States) and emerging countries (China in particular) sheltered from the large liquidity resulting from these imbalances. We will try to unravel this web by analysing the causes, the different phases and the conditions for emerging from the crisis.

The environment: financial globalisation

The decade 1990-2000 was marked by a major change that constitutes a new environment affecting the monetary area in particular: the globalisation of financial markets. The process of globalisation of the economies, which has been accelerating rapidly since the 1980s and 1990s, is based on the global financial integration achieved through the gradual formation of a single capital market. It is no doubt difficult to date this new international financial logic precisely. Institutional changes in the 1980s gradually erased the differences between domestic and international markets. In the United States, the growing weight of shareholders and the rise of pension funds capable of mobilising very large sums of money made it possible to build an increasingly "financialised" economy. Following the United States, the world economy has entered, very gradually and without interruption, into a new world, that of global finance.

Financial globalisation is defined by the establishment of a unified money market. The process of globalisation has been based on the revolution in information technology, which is at the heart of modern monetary and financial circuits. Thanks to new technologies, money circulates almost instantaneously. The notions of time and space are thereby erased. The spread of these techniques is gradually extending them to an ever-increasing number of individuals. Their use has grown with the falling cost of information processing and long-distance telecommunications. The rise of the Internet brings a growing number of companies, institutions and individuals into contact with each other.

The technological revolution has enabled the application of information technology to banking and financial market transactions and the electronic flow of money. These process innovations have facilitated financial innovations proper, involving product innovations in the form of new financial assets. The 1980s saw a very rapid development of markets for these products in the United States, and subsequently in all financial centres.

The lifting of capital movement controls and exchange controls contributed to the establishment of international financial integration, hence globalisation. It has also been achieved through two processes:

• deregulation with the lifting of capital movement controls, allowing the transition from a financial system controlled by the official sector to a system dominated by market forces.
• Disintermediation: the action of innovations is reflected in the reduction of the role of financial intermediaries (banks) or, more precisely, in the evolution of their role at the domestic and international levels. Their activities are becoming less of an intermediary between lenders and borrowers and more of a market player. Thus, for example, in the so-called universal French banks, alongside the retail banking department, there is now a finance banking department (BFI). In recent years, the latter has made significant profits; now that the crisis has passed, it is the retail department that provides support to the banks.

Globalisation and financial innovations bring advantages but also risks. The development of markets has led to an increase in the share of market assets (shares, bonds, money market securities) in the wealth of non-financial agents. The volume of cross-border capital flows has grown at a remarkable pace. Globalisation has increased the competitiveness of the international financial system and also its liquidity. It has also facilitated the convergence of the objectives and instruments used by monetary strategies. Refocusing on the ultimate objective of price stability has become a fundamental requirement of financial markets.

However, the rapid movement of capital flows frequently makes them unstable. Indeed, market integration has led to greater fluctuations in the prices of financial assets. The interconnectedness between the different financial centres risks spreading them across the world. Herd movements by market operators can cause prices of movable assets (shares, bonds) to fluctuate from high to low, from bubbles to crashes. These tensions can be amplified by major exchange rate fluctuations. The functioning of financial markets is thus disrupted by high price volatility, which can degenerate into financial crises:

• Asian crisis in 1997-1998: Following the Thai bath, the region's currencies fall against the dollar; recovery plans are put in place under the aegis of the IMF in exchange for a reduction in the exchange rate. 110 billion mobilised from the international financial community; crisis in Russia, which declared a suspension of payments on its short-term debt and devalued the rouble on 15 August 1998. Risk of an international financial and monetary crisis, following the Asian crisis, which was contained thanks to the rescue of the hedge fund LTCM and the cutin interest rates decided by the US central bank, the Fed.
• bursting of the stock market bubble in 2000, which originated in the American markets, stimulated since 1996 by new technologies, and extended to all developed country markets.
• bursting of the debt bubble created in the United States; this bursting is at the root of the current crisis that has spread throughout the world.

The causes of the crisis

The globalised economy has experienced a long period of growth against a backdrop of financial market liberalisation and the global integration of economies including emerging countries and in particular large countries such as China, India and Brazil. However, the growth of the last decade has been fuelled by the excessive indebtedness of the developed countries (especially the United States) obtained thanks to a large and cheap global liquidity. This abundance of liquidity led to exaggerated financial risk-taking with increasing leverage; inflation in the prices of movable and immovable assets was the visible face of the debt bubble that was forming . In this context, the collapse of the real estate market in the United States was only the catalyst for a series of unconscious and denials. A bubble in people's minds had developed; everything had become possible in the total oblivion of risk: Prosperity fueled by low interest rates, budget deficits, rising profit and profitability rates, high interest rates, low interest rates, high interest rates, low interest rates...The crash is always the culmination of bubbles and leads to the crisis that has been developing in several stages since 2007.

The stages of the crisis

A first phase concerned the liquidity of the financial system, a second its very solvency, and the last saw the crisis spread to the real economy.

First phase: the frenetic search for liquidity

This liquidity crisis emerged on 9 August 2007, when the European Central Bank, the ECB, was forced to inject, on a temporary basis, EUR 300 billion into the financial system.300 billion as commercial banks, suddenly becoming aware of their own imprudence, stopped lending to each other on the interbank market where their surpluses and deficits are normally traded. The result was an apparent conundrum: how could illiquidity in the markets occur in a world characterised by enormous liquidity? This question is the result of a lack of understanding of basic concepts, starting with the concept of liquidity. Indeed, a distinction must be made:

• Macroeconomic liquidity, i.e. the amount of monetary assets available in the economy. It is characterised by a certain permanence, or even growth, as in the case of the foreign exchange reserves of emerging countries.
• market liquidity, i.e. the market's capacity to absorb asset sales quickly, without a fall in prices. It may show possible fragility since it depends on confidence in the quality of the assets traded or the counterparties.
• bank liquidity, i.e. the ability of banks to meet their commitments or to be able to unwind or offset their positions. It is increasingly dependent on market liquidity because of their increased use of market financing and the size of their off-balance sheet commitments.

There is no conundrum: a drying-up of market liquidity can occur as a result of a loss of confidence at a time when the overall liquidity of the economy appears to be high. The loss of credibility of one player can lead to a general loss of confidence. A system that is largely disintermediated, with significant market funding, is more fragile than an intermediated system, even if it is subject to the risk of a run on bank deposits.

Who has failed in this new system? All market participants due to a general lack of vigilance, as the notion of risk has virtually disappeared from thought and vocabulary, in the context of high global liquidity and the fascination for the new instruments developed by financial engineering, particularly securitisation. This technique makes it possible to make claims recorded in the assets of an economic agent negotiable on a financial market (e.g. for a bank, real estate loans, which are by definition illiquid since they are granted over the long term, become liquid). Securitisation can concern loans to households (housing, consumer credit, credit cards, cars, student loans, etc.) as well as loans to companies.

This technique, which is not condemnable in itself, has been used in the United States, in particular to decouple real estate credit between the "originator" of a so-called subprime loan (the borrower belonging to low-income populations ) and the final lender. Securitised by banks, subprime mortgages were bundled together with other claims and housed in ad-hoc structures off bank balance sheets. They were thus not subject to the solvency ratio required by international regulations (the so-called Basel 1 Cooke ratio), which allowed banks to make more loans through these operations than they would have been able to do under prudential supervision. The structures put in place at the time of securitisation were able to finance the loans by issuing short-term notes, thus practicing a maturity transformation that is always formidable because holders of short-term paper want to be repaid at maturity, whereas the loans could be made in the medium or long term. As the profitability of these bills has proven to be much higher, in periods of low interest rates, than in the past, the profitability of these bills has been much higher than in periods of high interest rates. that of traditional instruments, many institutions, pension funds, hedge funds...and even banks bought them, eventually placing them with their own clients.

Securitisation went into crisis following the downturn in the US housing market: cumulative price falls, borrower defaults, contamination of the various securitisation tranches, etc. The ad-hoc structures were unable to refinance the maturing paper, causing a frenzied search for liquidity. Many structured products that were considered toxic were no longer able to find takers and lost their value. The mathematical valuation models for these products gave a false impression of liquidity. The value of these instruments collapsed because of the discrepancies between their true prices (when it was possible to read one) and the prices estimated by the models.

Who are the investors, who are the lenders? Banks but also non-banks (for example, in the United States, brokers, subprime sellers). Both have failed to monitor credit risk. Non-regulated institutions, such as US brokers, only aim to collect commissions. For their part, banks with credit risk transfer mechanisms (securitisation) have hadless incentive than in the past to examine such risk. For their part, rating agencies, which are heavily involved in the design of structured products, did not play their normal role of informing bankers. The credit risk was thus not properly assessed by the various players along the securitisation chain, from the initial debtor to the final holder of that risk. When the fire broke out, central banks lowered their key rates to bring down overall interest rates and provided liquidity to banks. But they themselves find themselves in a position of vulnerability: to protect the financial stability of the system, they do not punish the imprudence of some of them (moral alea). Finally, they have no specific means of risk prevention, apart from incantations in lieu of warnings.

Second phase: the solvency crisis

The situation changed in September 2008: the financial system itself was called into question. The liquidity crisis was followed by a solvency crisis in the financial system, which could degenerate into a systemic crisis following three shocks. Submerged under subprime mortgages , Freddie Mac and Fannie Mae, two private agencies but under guarantee from the US government, in charge of facilitating the financing of real estate loans, had to be rescued by the public authorities. It was the same for the large insurer American International Group, AIG. But the most serious of the shocks came with the collapse of the Lehman Brothers bank, causing widespread panic throughout the financial system. The US government did not intervene to prevent it, believing it necessary to set an example to show that not all banks could be exonerated from their bad behaviour. This decision, which was unexpected by the financial community, led to a deepening of the interbank market crisis in the United States, a plunge in the stock markets and the restructuring of the banking sector. For US banks, the decline in their stock market portfolios and the weight of products that could not be valued in the absence of buyers led them to write down their assets. They also reintegrated certain assets because the reputational risk was becoming too great. Finally, there was widespread fear of the credit crunch, a general fear that banks would tighten credit to businesses and households.

In the fall of 2008, the crisis became universal, giving the contemporary situation its specificity: it was the first global financial crisis. In Europe, the contamination of the crisis manifested itself in a brutal way during the stock market black week from 6 to 11 October 2008, with the banks in turn being affected, having themselves participated in the debauchery of dubious financial products. Asia, and generally speaking, the emerging countries seemed to be able to benefit from a decoupling from the West that would even allow them to contribute to its exit from the crisis and its recovery. On the contrary, the crisis is spreading financially, with stock markets collapsing and capital repatriation leading to a rise in the yen.

Faced with the impressive damage caused by the banking crisis, the public authorities are coming to the rescue. The first forms of public aid consisted of interventions on a case-by-case basis, but given the intensity of the contagion, they recognized the need to take a global view. The Eurogroup of 12 October, which was joined by the British Prime Minister, Gordon Brown, defined a general framework for intervention, tailored to national specificities. Extended to the 27 countries of the European Union, this global plan for bank recapitalisation and public guarantees covers an amount of around €1.7 trillion. This is a sum that will probably - fortunately - never be mobilised, but it is an order of magnitude that is given for the plan as a whole, each country being expected to adopt a particular plan in view of its specific characteristics. Governments have used a range of instruments, from guaranteeing bank debt to nationalisation of banks in difficulty. The creation of "defeasance" structures (bad banks) where doubtful productswould be kept until their eventual liquidation is also envisaged.

The plan adopted in France comprises two parts:

• The first is designed to support banks in their role of financing the economy: the aim is to enable the Société de Financement de l'Économie Française, SFEF, to issue government-guaranteed loans. Three issues were launched between November 2008 and January 2009 to help build up bank liquidity in addition to that made available to banks by the ECB.
• The aim of the second component is to strengthen banks' capital by means of a recapitalisation by the government that does not involve the public authorities participating in the management of the banks, but the government benefits from a return on the capital lent. Two recapitalisations of France's main banking groups took place at the end of January 2009, the second of which was conditional on managers waiving their 2008 bonuses.

The second part of the government's action should gradually be implemented, that of financial regulation, in order to prevent past excesses from recurring. To this end, the G20 meeting of 14 and 15 November set out working guidelines for a new meeting in London in April 2009, which should lead to the implementation of financial system reforms. The current crisis, part of the US housing crisis has become financial and global. It calls for a return to a certain degree of regulation, itself to be put in place in a moderate and fairly detailed manner because the sudden return to a re-intermediated economye, overly constrained by the financial strength of banks, would slow down growth which, it must be acknowledged, has been financed in recent years by financial innovations.

At the end of 2008, it was hoped that the banks had suffered the worst and that they would be able, thanks to the massive public interventions granted to many of them, to concentrate on their core business, the financing of the economy. However, 2009 began with the need to carry out a series of partial nationalisations in Germany for the Commerzbank and Dresdner Bank group, for Hypo Real Estate, and with the announcement that Deutsche Bank had lost EUR 5 billion. In the United States, Citigroup is forced to sell off €600 billion of assets; Bank of America is struggling to absorb Morgan Stanley as planned. This second wave of acute banking crisis, following the one in September-October 2008, is all the more worrying as it may continue with the defaults of companies affected by the crisis in the real economy.

Third phase: the spread of the crisis to the real economy

This diffusion is taking place in the wake of the deterioration in business expectations and the decline in household morale, leading to a slowdown in consumption and investment. On the positive side, this situation determines the slowdown in inflation, contributing to the bursting of bubbles in commodity and oil prices.The bubble in commodity and oil prices, which rose from $147 at its peak in July 2008 to $40 at the beginning of January 2009, ruining speculators' hopes of a rise in oil prices but also posing serious problems for Russia. Overall, we are witnessing the development of a recession with the risk of a real depressionist crisis. In the United States, the recession began in the 4th quarter of 2007, ^{followed by} the euro zone in the 3rd quarter of 2008 and ^{particularly by} Germany, which was hit hard by the slowdown in exports. In China, production and exports slowed down, leading to a drop in GDP in ^Q4 2008 compared to Q3. The rise of the yen and the decline in exports also plunged Japan into crisis. The French economy does not yet appear to be in recession, but all leading indicators point to a downturn in activity at least comparable to the 1993 recession.

The collapse of Lehman Brothers and the sudden slowdown in world growth gave rise to fears of the emergence of a deflationary situation characterized not only by falling prices but by a decline in all indicators, production, investment, employment, etc. The threat seemed so serious that an anti-deflationary front was formed throughout the world. It is a matter of fighting against expectations of future price falls, as economic agents postpone their purchasing or investment decisions. It is also necessary to alleviate the liquidity constraint of over-indebted agents, cushioning the fall in asset prices that could aggravate the deterioration of bank balance sheets, leading to a credit freeze and a further fall in activity. Two levers are used in the monetary area and in the fiscal area.

Key rate cuts are intended to encourage consumption at the expense of unattractive savings and to weigh on all medium- and long-term rates in order to stimulate investment decisions. But market dysfunction is so widespread and risk aversion so strong that the monetary policy transmission mechanisms are no longer working. Central banks are constantly cutting rates, with the ECB cutting rates to 2% on 15 January 2009, following the Bank of England, which reduced it to 1.5%; the Fed has even adopted the ZIRP, a zero-rate policy.ro, and the Bank of Japan resigned itself to returning to this policy (key rate at 0.1%) when it had had a very difficult time getting out of it after an experience of this type from 1998 to 2006. Having thus exhausted all its ammunition, the Fed finds itself forced to use a series of unconventional tools to "reflect" the economy: Quantitative Easing . It buys securities that finance not only housing but also car loans, credit cards, student loans, loans to SMEs, etc. These acquisitions (on the assets side of the Fed's balance sheet) are financed by money creation (on the liabilities side). The result is an increase in the central bank's balance sheet and a correlative increase in the excess reserves of the banks, which should encourage them to lend more to businesses and households. However, the banks still need to be able to lend, given the accumulation of their capital constraints, and there must be a demand for credit.

Faced with the difficulties encountered by the use of monetary weapons, the public authorities are resorting massively to budgetary weapons. Estimates of debt raising are dizzying. The Obama plan adds 825 billion in stimulus spending to the pre-existing deficit. The Chinese government, after having launched a restrictive policy against overheating (13% GDP growth in 2007), is also trying to revive itself in the face of falling demand for exports. In the euro zone, all countries are resigning themselves to launching stimulus plans, even Germany with 50 billion euros and France with 26 billion, plans that will put a strain on public finances.

From 2009, 1,000 to 1,500 billion additional net debts of the United States and European countries will come on the market. Is a public debt bubble forming, with the risk of it bursting? At the beginning of 2009, governments can issue mountains of debt on the financial markets at low rates: almost 2% for the US 10-year bond, below 3% for the German rate. Faced with the risk of a global depression, investors are looking for the security of government bonds, with a clear differentiation between issuers: in Europe, Greece and Spain have to pay investors higher interest rates than Germany. The risk of a bond crash (sharp rise in interest rates) emerges as soon as risk aversion decreases, leading savers to other investments. The risk of a bond crash would be all the greater the higher the risk of inflation. The private debt crisis would be followed by the public debt crisis, with the risk of inflation reducing the value of debts. The creditors would pay the bill, especially China. This scenario, which is not necessarily the most likely, as Japan, by monetizing its debt has not succeeded in boosting inflation, cannot be adopted by the ECB because, under the terms of the Maastricht Treaty, it is forbidden to monetize any debt. In principle...

Thinking about how to get out of the crisis means remembering its origins: growth over the last ten years has been fuelled by a false global balance between debt originating mainly from the financial sector and American households and savings mainly from Asia financing it. This balance exploded with the onset of the current financial crisis. The adjustment phase is violent. It will first lead to a new reintermediation with banks that will have to refinance more assets themselves and to their new supervision. But global rebalancing will only take place on the basis of profound changes such as the increase in consumption in China and savings in the United States. To be successful, that is, to bring the economy back to more sustainable global growth, these changes must be the result of cooperative policies between States; the G20 meetings can be the beginning of this process.