Easy Tycoon

Chapter 925 Subprime Mortgage Crisis
There is a well-known phrase in Huaxia called "basic clothing, food, housing and transportation".

In just four words, it vividly explains the four most basic needs in the daily life of ordinary people.

In fact, this term is not only applicable to China, but it is still commonly used around the world.

Don't look at foreigners with yellow hair, white skin and blue eyes, but they still need "basic clothing, food, housing and transportation" in their daily life!
For a natural person, clothing, food and transportation are all easy to talk about, but the only "housing" is definitely a relatively big burden, especially for a family, if there is no fixed place to live , can that house still be called home?

Therefore, since ancient times, not only Chinese people, but even foreigners have attached great importance to living.

This tradition continues to this day and still applies.

Don't think that this world is all about Chinese people who like to buy houses and land, and the same is true for foreigners.Don’t you see those rich foreigners, all of them are not villas, manors or even castles?Even foreigners with no money have to buy an apartment to live in.

Therefore, in foreign countries, since the industrial revolution, especially after entering the [-]th century, the real estate business has become a very important business.In any developed country in the world, the real estate business has become an important part of its economic composition during its development process, and no one can ignore it.

Even in modern times, the real estate business around the world is still a very important part of the economic composition of various countries, and no government of any country can ignore the real estate business.

Take the United States, the largest country in the world, for example, the real estate business is also very important.

The real estate business in the United States is very developed and plays an important role in the national economy.Of course, because the United States is the fourth largest country in the world, its land area is about the same as that of China, but its population is several times smaller than that of China, not even a fraction of China's population, so the real estate economy does not play a role in the economic composition of the United States. Not as important as China is now.

But even so, once the real estate economy in the United States has a crisis, it will inevitably cause turbulence at the basic level of the economy.As the world's largest economy, once the basic economic level of the United States is in turmoil, it will inevitably trigger economic crises of one kind or another, which will affect the whole world.

In fact, since the 60s, the real estate economy in the United States has experienced four "crises". Every time a crisis occurs in the real estate economy, the economy of the entire United States and the world will be turbulent.

According to official data from the United States, in the 1963 years from 2011 to 47, the actual transaction price in the United States increased by nearly 14 times, and in 1963 compared with the peak in 2007, it increased by 16.7 times.During these 47 years, the house prices in the U.S. have increased by an average of 5.9% per year. Generally speaking, the U.S. real estate prices fluctuate continuously, but the general trend is a steady increase.

During these 47 years, the U.S. real estate economy experienced four relatively large fluctuations, the first of which occurred in 1969.

In that year, because of the Vietnam War, the sharp increase in oil prices in Arab countries and the embargo of oil, the fifth economic crisis after World War II broke out in the United States, which led to a rise in housing mortgage interest rates from 7% to 8-11%. Prices fell, and the "first real estate crisis" began.

The housing crisis lasted for about three years. House prices bottomed out in 1972, and then quickly returned to the level before the economic crisis, and began a sharp rise in the first few years.

The second real estate crisis in the United States broke out in 1981.In this year, due to the instability in the Middle East and the sharp rise in oil prices, the U.S. economy suffered severe stagnation and the unemployment rate soared.

In this case, the housing mortgage interest rate quickly increased to 18%, and the primary loan interest rate was as high as 22%.People are full of negative attitudes towards the market, thinking that it will be difficult for housing prices to rise in the past ten years, so the volume of real estate transactions has shrunk sharply.

But in fact, this real estate crisis only lasted for two years, and then the housing prices in the United States returned to the upward track.

As for the third real estate crisis that broke out in the United States, it was in 1991, but compared with the previous two real estate crises that spread across the country, this time the crisis did not spread much, and it only broke out in a few states such as California. .

The third real estate crisis lasted for about two years, and then from 1993, the real estate economy of the United States entered a 14-year boom until the fourth real estate crisis.

Compared with the previous three real estate crises, the real estate crisis that broke out in 2007 almost killed the United States, and not only caused the American economy to suffer heavy losses, but also triggered economic crises around the world.And different from the economic crises triggered by the previous three real estate crises, the global economic crisis triggered by the fourth real estate crisis is much more serious. Not only the US economy has been hit hard, but the economies of many countries in Europe, Asia, and Oceania have also suffered. The global financial crisis triggered by the real estate crisis has caused more consequences than the US stock market crash in 1987, and has even been hailed as the most serious economic crisis after the Great Depression in the US in the 30s!
And the root cause of this US real estate crisis lies in the greed of those investors!

In the late 70s and early 80s, the stagflation crisis broke out in the United States, which not only led to the second real estate crisis in the United States, but also affected the financial world around the world.

Against such an economic background, a set of trends of thought that revive traditional liberal ideals and reduce government intervention in the economy and society as the main economic policy goals began to spread in the United States.This trend of thought is called "neoliberalism".

The neo-liberal economic policy is popular in the United States, and its core content is to reduce government intervention in the financial and labor markets, crack down on trade unions, and implement economic policies that promote consumption and drive high growth through high consumption.

Under this kind of economic policy, the U.S. government began to encourage the common people to live beyond their means and consume crazily in order to promote rapid economic growth.At the same time, another important content of this economic policy is deregulation, including financial control.

Therefore, since the Reagan administration came to power in the early 80s, the United States has been formulating and amending laws to relax restrictions on the financial industry and promote financial liberalization and so-called financial innovation.For example, in 1982, the U.S. Congress passed the Garn-Saint-Germain Thrift Institution Act, which gave thrift institutions a similar business scope to banks, but was not regulated by the Federal Reserve.Under the law, thrifts can buy commercial paper and corporate bonds, make commercial mortgages and consumer loans, and even buy junk bonds.

Later, the U.S. government successively introduced more similar laws, the purpose of which is to eliminate the barriers between the banking industry and securities, insurance and other investment industries, thereby opening up the so-called financial innovation and financial speculation in the financial market. Door.

Against the background of the above-mentioned legal reforms, the speculative atmosphere on Wall Street in the United States has become increasingly strong.Especially since the 90s, with the Federal Reserve’s interest rate continuously lowered, asset securitization and financial derivative product innovation have been accelerating, coupled with the pervasive luxury consumption culture and blind optimism for future prosperity, the borrowing of ordinary people has advanced consumption is possible.

Under such circumstances, the real estate economy in the United States has begun to pick up again, and the real estate market is getting hotter and hotter. Even the bursting of the Internet bubble and the 911 incident at the beginning of the new century did not stop the hotness of the real estate market in the United States.

As the saying goes, capital is like a shark, as long as there is a slight smell of blood, capital will chase after it immediately.

The booming real estate market in the United States has naturally triggered the pursuit of capital.

However, before the new century, those capitals that lacked supervision were a little more honest, but after the new century, especially after the September 911 incident, these capitals from Wall Street began to become unscrupulous.

Everyone knows that loans are a very common thing in the United States. Consumption in advance and living beyond their means are very common things in the consumption concept of the American people.

Moreover, in the United States, except for the super rich, the ordinary middle class and most ordinary people rarely pay the full price when buying a house. They usually buy real estate through loans.

But again, unemployment and reemployment in the United States is a very common phenomenon.These people whose income is not stable or even have no income at all are defined as subprime credit loan borrowers, referred to as subprime loan borrowers, because their credit ratings do not meet the standard for buying a house.

Subprime mortgage is a high-risk, high-yield industry, which refers to the loans provided by some lenders to borrowers with poor credit and low income.

The difference from standard mortgage loans in the traditional sense is that subprime mortgage loans do not have high requirements on the credit history and repayment ability of the borrower, and the loan interest rate is correspondingly much higher than that of ordinary mortgage loans.Those who have been rejected by banks for prime mortgage loans due to poor credit history or weak repayment ability will apply for subprime mortgages to buy houses.

The U.S. subprime mortgage market usually adopts a combination of fixed-rate and floating-rate repayment methods, that is, home buyers repay the loan at a fixed rate for the first few years after purchasing a house, and repay the loan at a floating rate thereafter.

In the five years before 2006, due to the continuous prosperity of the US housing market and the low level of US interest rates in previous years, the US subprime mortgage market developed rapidly.

Under such circumstances, many financial derivatives related to subprime loans have appeared one after another. Among them, the most famous financial derivatives are "Certified Debt Obligation", referred to as CDO, and "Credit Default Swap", referred to as CDS.

In the real estate lending market, in order to share risks and benefits, lending companies find investment banks, and the investment banks bond them out, creating a "secured debt certificate"—CDO.

In order to earn huge profits, many investment banks use 20-30 times leverage.For example, Zhangsan Investment Bank has its own assets of 30 billion U.S. dollars, and uses 30 times leverage operation, that is, borrows 30 billion U.S. dollars of funds for investment with 900 billion U.S. dollars of assets as collateral. If the investment profit is 5%, then Zhang San The three investment banks earned a profit of 45 billion U.S. dollars, which is a 150% profit compared to their own assets.

However, leverage operation is risky. According to the normal operation method, Zhangsan Investment Bank should not carry out such risky operation, but it can’t hold back that such operation can obtain high profits, so someone came up with a way to use leveraged investment as insurance. This insurance is a "credit default swap" - CDS.

The specific process of CDS generation is as follows: Zhang San’s investment bank finds Li Si, who may be another investment bank or insurance company.Zhang San insures the leverage operation and pays Li Si an insurance premium of US$5000 million per year, a total of US$5 million for ten consecutive years.If the CDO does not default, in addition to the insurance premium of 5 million US dollars, Zhang San can still earn 40 billion US dollars, and if the CDO defaults, anyway, Li Si will pay for it.

This is a credit default swap!
In fact, CDS is essentially a kind of insurance—Party A pays the premium, and if the underlying asset defaults, Party B will compensate for the loss.It's just that if it is named after "insurance", it will be subject to strict supervision for insurance products, so the name "financial innovation" is changed to "swap".

The original intention of CDS is to share the risk. Originally, the risk of default was only borne by the loan issuer. Now, through the creation of financial products, various investors can share the risk together while obtaining income.

The profit-seeking motive soon gave birth to the art of speculation. In order to meet the demand, Wall Street developed a series of financial derivatives such as CDX and CDXIG, and the insurance targets became a package of CDS and indexes.

As housing prices have been rising, risks have not evolved into losses, premiums are getting lower and lower, and the scale is getting bigger and bigger
Everyone knows that the speculators on Wall Street are the most greedy guys in the world. How can these speculators hold back when they see that they can make huge profits?

Still take Zhang San and Li Si just now as an analogy.

For Zhang San, this is a sure-fire investment.But Li Si is not an idiot either. Through statistical analysis, the default rate in a prosperous market is less than 1%.So, if I, Li Si, do 100 such insurances in a row, then I can get a total of 500 billion US dollars in insurance benefits. If one of them defaults, the compensation amount will be no more than 50 billion US dollars, and my **** sister can still earn 450 billion US dollars. nah!

What a deal!So most of the "Jackson" and "Lisi" on Wall Street and the "Jackson" and "Lisi" from all over the world-these Zhang San and "Lisi" are all over Europe, America, Japan and many countries in Oceania!During the more than ten years of growth in housing prices in the United States, they are enjoying an unprecedented wealth carnival.

However, if the real estate market in the United States has always been so hot, no matter whether it is CDS or other CDX and CDXIG, they will bring huge profits to these speculators. One day, once the market declines, these speculators will inevitably pay a huge price for their madness.

No matter how hot the real estate market in the United States is, the rise in housing prices must be limited.Once the house price rises to the point where it can no longer rise, there will be no one to buy these financial derivatives immediately.

尤其是美联储在2004年到2006年6月之间的两年时间内，连续17次提息，将联邦基金利率从1%提升到5．25%。

The sharp rise in interest rates has increased the mortgage repayment burden of home buyers, and the real estate market in the United States, which has been booming for more than ten years, has finally reached its peak irresistibly
As the lyrics of one song goes, "spit out what I eat, give me what I take back".

As a result, an economic collapse triggered by subprime mortgage loans began. Later generations called this economic collapse the "subprime mortgage crisis"!
PS: Bow down and thank you for the 500 tip from "The first kiss was given to my hand".The [-]-character chapter is here!

(End of this chapter)