Time flies by quickly, and 10 years have passed since the thrilling subprime mortgage crisis in 2008. During the crisis, Lehman Brothers went bankrupt, Merrill Lynch merged into Bank of America, and Freddie Mac and Fannie Mae were taken over by the government. Tens of millions of people were suddenly left with nothing and heavily in debt.
The ten years before that crisis was a financial crisis that swept half of Asia. Millions of people throughout Southeast Asia were unemployed, countless people were displaced, and they were under great pressure.
Looking back on the past, we are full of ups and downs but also rich and fruitful. The road to the future is long and arduous, and crises are looming. At present, the Federal Reserve is raising interest rates, the United States has restarted the global capital return button, Venezuela is experiencing inflation, and the Turkish currency is almost collapsing. In the context of globalization, economic crises caused by various factors are actually not far away from us.
1. Counting the beginning and end of the financial crisis
1. The U.S. subprime mortgage crisis
Regarding this crisis, then-Federal Reserve Chairman Ben Bernanke reflected in his memoirs that the rapid rise in housing prices was the main cause of the subprime mortgage crisis, and the real estate industry The bursting of the bubble was the trigger for this crisis.
The scene at that time was described in the American documentary film "The Big Short": The suburbs of the city were full of vacant houses, desolate and desolate, with only the solitary payment bills and messy rooms, telling the past of this place.
01. Background of the U.S. subprime mortgage crisis
Home Ownership Program
Home ownership was once an important manifestation of the “American Dream”. In order to solve the housing problem of low-income people, the U.S. government implemented the "Home Ownership Plan" and passed bills such as the "Equal Credit Opportunity Act" to significantly reduce housing down payment ratios and loan interest rates, helping thousands of Americans own their own homes. housing.
Innovation in housing finance
At this time, with the innovation of financial instruments, housing mortgage loan securitization appeared. Loan originators resell these housing loans to others through securitization, which can transfer risks and regain liquidity. Eventually, a risk-dispersed and complex chain of "commercial banks-brokerage institutions-mortgage institutions-securities institutions-investors" was formed.
In this chain, commercial banks package the housing mortgage loans they hold through credit upgrades and sell them to investors in various places in a securitized manner. The quality of the loan no longer matters, and the risk is passed on to others. Moreover, with the expectation that housing prices will rise forever, the yield on subprime mortgages is also very high, making them very popular among market investors.
Financial derivatives have created a large number of so-called "safe" assets for financial institutions, and have also brought very good income to Wall Street . When almost everyone is crazy about it, risks also come.
Loose monetary policy
At that time, the United States had a very loose monetary environment. In early 2001, the Federal Reserve cut interest rates 13 times in a row. Before the crisis in 2007, the federal funds rate dropped to about 1%, a record low in the past 40 years. During this period, financial innovation and rapid real estate development supported U.S. economic growth, and rising home values supported rising consumer demand.
Loose regulatory environment
At that time, some financial institutions that were not supported by deposits had been outside the supervision of US federal agencies for a long time and could issue such loans to consumers without restriction. As for the fact that disorderly expansion of credit under low interest rates is pushing up housing prices, bank regulators also like to hear about it because it is in their interests. Most economists also believe that rising home prices are reasonable, and that if home prices fall, the Fed's interest rate cuts can offset the impact on the economy. U.S. federal regulatory agencies were also influenced by these views, or were obstructed by interest groups, allowing the disorderly development of subprime loans and reacting slowly and laggingly to these risks.
What will happen if house prices fall and a large number of homeowners default? In the expectation of rising housing prices, almost no one has deduced this. However, this situation has become a reality.
02. The trigger of the subprime mortgage crisis
From 2004 to 2006, the US federal government entered an interest rate hike cycle. After 17 interest rate hikes, the federal funds rate was raised from less than 1% to 5.24%.
2001 to present US federal funds rate
Data source: Wind, comprehensively compiled by China Index Research Institute
After the loan interest rate increased significantly, the repayment pressure of subprime borrowers increased significantly, and these people have poor repayment ability, and loan defaults occurred in large numbers . At the same time, the increase in interest rates has also led to a decline in the profitability of the real estate market and housing prices have begun to fall.
Changes in housing price index in 20 large and medium-sized cities in the United States S&P/CS
Data source: Wind, comprehensively compiled by China Index Research Institute
Between 2006 and 2009, housing prices plummeted by more than 30%. Lenders abandoned their properties one after another and defaulted on their properties. Countless houses were abandoned because they were unclaimed, and the real estate bubble burst.
After this crisis, the U.S. economic growth rate dropped sharply, countless banks went bankrupt, companies closed down, tens of millions of people lost their homes during this crisis, and the unemployment rate hit a record high.
Since the 21st century, financial innovation has been an important driving force for the U.S. economy to regain prosperity. However, the disorderly expansion of financial derivatives due to the lack of supervision is also an important reason for the eventual bursting of the real estate bubble.
2. Internet bubble burst
01. Background of the Internet bubble
The rise of information technology at the end of the 20th century gave birth to the rapid development of the Internet. In the early days, the Internet as a medium attracted the attention of millions of people around the world with its advantages of low cost of transmission, immediacy of information and global business exchanges. Thousands of Internet companies emerged in response to the situation, and a large amount of venture capital poured in. The rapid development of Internet technology has brought huge returns to investors.
Those investors who were afraid of missing the opportunity to get on the bus rushed to become the promoters of the bubble.
However, many Internet companies have neither a fixed profit model nor technical and resource advantages. They have become the darlings of the capital market for a while just based on the gimmicks related to the Internet. Countless multi-millionaires were created as a result, and the entire industry was flourishing. After the
boom, the bubble began to burst.
02. The trigger for the bubble burst
Since 2000, the Federal Reserve has continued to raise interest rates, liquidity has decreased, capital costs have increased significantly, and capital has begun to withdraw from Nasdaq. After those Internet companies that had not yet achieved profitability ran out of funds, they closed down or were merged and acquired one after another. The stock market plummeted, mourning was everywhere, and the Internet bubble burst.
Internet technology was an important growth point for the U.S. economy at the end of the 20th century. However, when the excessive prosperity of the Internet caused practitioners to lose the motivation to innovate and develop, crisis also ensued.
The rapid development of information technology has led to the upgrading of the traditional industrial structure in the United States. However, excessive prosperity and widespread speculation also caused the bubble to expand until it burst, and the U.S. economy temporarily fell into a downturn.
Trend of the U.S. Nasdaq Index from 1991 to the present
Data source: Wind, comprehensively compiled by China Index Research Institute
3. Asian Financial Crisis
01. Background of the Asian Financial Crisis
The Asian Financial Crisis began in Thailand, and then swept Indonesia , Malaysia , Philippines , Singapore and other countries, wherever they go, the currency has depreciated sharply, the stock market has plummeted, a large number of companies have closed down, countless workers have lost their jobs, and the economy has fallen into a long-term downturn. Before the
crisis broke out, Southeast Asian countries relied on their low labor cost advantages to undertake the transfer of industries from the United States, Europe, Japan and South Korea, and achieved rapid economic development, known as the "Asian Miracle." However, this crisis has plunged all countries into a quagmire, and the economy has been hesitant for a long time. So how did this crisis arise?
02. Roots of the Asian Financial Crisis
(1) Before the crisis, Thailand implemented an exchange rate system pegged to the U.S. dollar. Its economy developed rapidly and its finances were highly liberalized, attracting a large influx of foreign capital. Capital initially invested in entities, then gradually turned to the stock market, Bubbles are gradually forming in various assets such as the property market.
(2) After the appreciation of the US dollar in 1995, the Thai baht strengthened, exports declined, and the current account deficit expanded sharply.When the scale of debt exceeds the scale of foreign exchange, the fragility of the financial system is exposed to the guns of institutional short sellers under the pressure of depreciation of the Thai baht.
(3) Soros and other international financial speculators rushed to sell the Thai baht. Thailand's foreign exchange reserves were quickly exhausted, the Thai baht depreciated, the stock market, bonds, and property markets all fell, and the financial market collapsed, which spread to the Philippines, Malaysia, In many Southeast Asian countries, including Singapore, decades of economic growth have almost come to naught.
The financial crisis that occurred in 1997 was actually a currency crisis. The unsustainable fiscal deficit and linked exchange rate are the root causes of this crisis.
Currency crisis transmission chart
Data source: Comprehensive collection by China Index Research Institute
1996.4-1999.12 Nominal effective exchange rate (broad sense) of the four Asian countries
Data source: Wind, Comprehensive collection by China Index Research Institute
IV. United States Black Monday
01 .Causes of the stock market crash
In the 1980s, the Reagan administration implemented a large-scale tax cut plan. The U.S. economy, dragged down by the Vietnam War and the oil crisis, also began to move from recession to prosperity, with inflation and unemployment falling to new lows. Stimulated by high interest rates and a strong dollar, a large amount of capital poured into the United States, and the stock market was even more prosperous. At the same time, the post-war "baby boom" generation entered adulthood, creating a huge demand for housing and real estate speculation.
However, dangers began to emerge under the appearance of prosperity:
(1) Since the 1980s, the U.S. economic growth has begun to slow down, investment in production needs has been insufficient, a large amount of capital has flowed into the securities market, stock market speculation has been rampant, and bubbles have continued to expand.
(2) In 1987, the Federal Reserve raised interest rates and entered an interest rate hike cycle, and the stock market was also affected by the tightening of credit.
On October 19, 1987, the Dow Jones Index in the United States fell sharply, plunging more than 500 points in just one day, a drop of more than 20%. This day is also known as "Black Monday." After credit continued to tighten, real estate investment suddenly cooled, housing prices fell sharply, and the real estate bubble burst.
U.S. Dow Jones Index trend
Data source: Wind, comprehensively compiled by China Index Research Institute
U.S. House Price Index (year-on-year)
Data source: Wind, comprehensively compiled by China Index Research Institute
02. U.S. government response strategy
(1) Federal Reserve Publicly announce a bailout, lower the federal funds rate, expand money supply, increase market liquidity, and boost the economy to restore market confidence.
(2) In order to ensure the stability of the banking system, a federal insurance system is established so that people do not have to worry about bank failure and losing everything.
Under excessive prosperity, the divergence between stock prices, housing prices and economic fundamentals was the most important factor leading to the 1987 U.S. stock market crash.
5. The United States The Great Depression
01. Background of the Great Depression
(1) At the beginning of the 20th century, industrialization developed rapidly, urbanization rose, and a large number of residents poured into the city, injecting a large amount of labor into the development of industrial electrification; the automobile industry developed rapidly, radios, New products such as radios emerged.
(2) At that time, the United States implemented a loose monetary policy and a low tax policy. The money supply increased by 62% between 1921 and 1929. Credit expansion boosted the people's purchasing power; the stock and real estate markets were highly prosperous, and consumption and investment grew rapidly. .
(3) Under the surface of economic prosperity, the gap between the rich and the poor in the United States is widening. According to statistics from American economist Copeland, the per capita income in the United States only increased by 9% from 1920 to 1929, but the richest 1% achieved 75% of the income. increase. With the advancement of technology, labor efficiency has increased significantly, and the unemployment rate has remained high. By 1933, more than 25% of people were unemployed.
(4) Influenced by Adam Smith 's "invisible hand" theory, decision-makers insist on adhering to the concept of "small government" and play the role of "night watchman", believing that economic activities are mainly regulated by the market. When a crisis occurred, no timely and effective measures were taken to respond.
02. In 1929, the U.S. stock market plummeted, and the Great Depression began.
(1) Both the stock market and real estate fell, a large number of companies went bankrupt, the unemployment rate increased significantly, the middle class went bankrupt, and social consumption demand decreased significantly.
(2) Consumer demand has been significantly reduced, factory production capacity is severely overcapacity, which has led to more bankruptcies, more workers being unemployed, and the US economy has collapsed.
03. Roosevelt’s New Deal
established a social security system and improved consumption capacity . Roosevelt's New Deal adopted the "Keynesian ism" concept that advocated government intervention, established a basic social welfare system, narrowed the gap between rich and poor, and increased society's basic consumption needs. The implementation of the "relief for work" policy provided job opportunities for aid recipients, and social consumption gradually recovered. It finally solved the problem of imbalance between supply and demand under the market recession and allowed the economy to resume growth.
Keynesian supply and demand driven theory believes that the main cause of the Great Depression was the lack of effective demand, which led to a decline in investment and consumption. Technological progress, industrial upgrading, and rapid economic development have not simultaneously increased residents' income and social employment to corresponding levels, resulting in insufficient basic demand, which is the root cause of this crisis.
2 How much do you know about gray rhinos? What are the signs before the crisis?
From the Great Depression, Black Monday, the Asian Financial Crisis, the Internet Bubble Crisis to the Subprime Mortgage Crisis, every industrial cycle starts with technological progress and industrial transformation. It has experienced economic recovery, rapid development, excessive industry prosperity, and the beginning of bubbles. appeared, and eventually various crises caused by overcapacity, stock market bubbles, currency crises, technology bubbles, real estate bubbles, etc. appeared.
Technological innovation, scientific and technological progress, and industry transformation and upgrading are all the foundation for rapid economic development. However, when prosperity induces continued capital speculation, leading to the loss of the driving force for innovation and progress, and once policies or the external environment change, crises will follow.
Prosperity before the crisis often has the following characteristics
Economic overheating
Inflation
2001-2017 U.S. GDP growth rate
Data source: Wind, comprehensively compiled by China Index Research Institute
Before the outbreak of the subprime mortgage crisis, under loose monetary policy, The U.S. economy is booming like never before. From 2005 to 2007, the average GDP growth rate was above 6.0%.
At this time, the US market bubble continued to expand, and the CPI index climbed from 2.0 in 2007 to 5.4 before the crisis.
2001-August 2018 U.S. CPI Index
Data source: Wind, comprehensively compiled by China Index Research Institute
Speculation is rampant, leverage is high
Before "Black Monday" and the Internet bubble burst, the U.S. economy experienced years of prosperity and the unemployment rate are at historically low levels. The stock market is booming, market speculation is rampant, and market sentiment is high.
Before the outbreak of the subprime mortgage crisis, real estate investment enthusiasm was high and market speculation was prevalent. The leverage ratio of the residential sector reached 97.3%, which was the peak in the United States in modern times. The leverage of the residential sector has reached the limit it can bear. When the entire household income cannot cover the mortgage payment and housing prices fall, the real estate bubble naturally bursts and is transmitted to the real economic sector through a series of chain reactions, triggering a financial crisis.
1965 - U.S. household sector leverage ratio in 2017
Data source: Wind, comprehensively compiled by China Index Research Institute
Irrational changes in monetary policy
U.S. federal funds interest rate
Data source: Wind, comprehensively compiled by China Index Research Institute
Between 2001 and 2004, The Federal Reserve has cut the federal funds rate 13 times in a row, from 6.67% to below 1%. Stimulated by loose monetary policies, a large amount of money poured into the real estate market, causing real estate prices to rise. The rise in housing prices has further led to an increase in speculative demand. Credit expansion and market speculation have reinforced each other, and the real estate market has entered an unprecedented bull market.
However, when the real estate bubble surged and inflationary pressure intensified, the Federal Reserve had no choice but to continuously raise the federal funds rate. The federal funds rate also increased from 0.98% to 5.24% before the subprime mortgage crisis, which finally punctured the real estate bubble.
Serious deficits, exchange rate depreciation
Countries in currency crises usually have the following characteristics:
(1) There are bubbles in the market, which is the basis for Thailand's exchange rate depreciation. Data from Trading Economics shows that before the Asian financial crisis broke out in 1997, Thailand's inflation rate exceeded 10%.
(2) The domestic deficit is serious due to the trade deficit, and the ability to protect the exchange rate is insufficient. Before the crisis, Thailand's external debt reached a historical peak.
As a result, due to internal and external difficulties, and attacks from currency speculators, the currencies of Thailand, Indonesia, the Philippines, Malaysia and other countries have devalued one after another. The bubbles in the stock market, property market, and bond market have burst, and the economy has fallen into a long-term downturn.
Thailand’s economic growth and debt situation from 1970 to 2016
Data source: Wind, comprehensively compiled by China Index Research Institute
Thailand’s nominal effective exchange rate (broad sense) from 1970.4 to 1999.12
Data source: Wind, comprehensively compiled by China Index Research Institute
Income Low, insufficient demand
During the Great Recession, both the per capita disposable income of residents and the proportion of residents' savings in income were at historically low levels. During the same period, industrialization in the United States was developing rapidly, unemployment remained high, domestic demand was weak, and production capacity was overcapacity. Eventually, the Great Depression hit.
Income of U.S. residents from 1929 to 1949
Data source: Wind, comprehensively compiled by China Index Research Institute
Income of U.S. residents from 1929 to the present
Data source: Wind, comprehensively compiled by China Index Research Institute
Excessive economic prosperity and financial crisis go hand in hand
Looking back at history, every industrial cycle and excessive economic prosperity are almost always accompanied by a cycle from prosperity to crisis.
The 1920s before the Great Depression was America's golden age. The rapid development of industrialization has attracted a large number of immigrants into the city, and a large number of cities have continued to grow in size, with countless skyscrapers rising from the ground. The rapid development of the automobile industry is an important symbol of this period. Ford Company established an assembly line, which significantly reduced the price of cars, and cars also moved from luxury goods to mass households. On the eve of the Great Recession, annual U.S. car sales peaked. Under the cover of high economic prosperity, the polarization between rich and poor and high unemployment rate are also very common.
Before the Internet bubble burst, under the Reagan administration's "New Economic Revitalization Plan", the high-tech industry developed rapidly, and the U.S. economy entered the fast lane of a new round of development. Microsoft , Apple, Google represented the rapid development of high-tech industries. rise. Countless investors poured in and a large number of Internet companies were created, which also triggered a boom in U.S. technology stocks. At this time, countless Internet companies established under the coercion of capital have become tools for market arbitrage.
Since the 21st century, innovation in financial instruments has brought new blood to the development of the U.S. economy. Real estate has developed rapidly, and the U.S. economy has recovered from the downturn caused by the bursting of the Internet bubble. However, the disorderly expansion of financial derivatives has also triggered the expansion and bursting of the real estate bubble, and ultimately triggered a new crisis.
三 How to understand the subtleties and plan ahead
In the past hundred years, after studying the financial crises, we found that the triggers of the crisis are nothing more than the following:
(1) Under the loose monetary policy, the economy develops at a high speed, the market is over-prosperous, and the stock and property markets Speculation is rampant and bubbles are inflating. If monetary policy continues to be tightened, it will trigger a crisis.
(2) Economic growth is declining, market bubbles are serious, deficits are increasing sharply, and capital outflows are accelerating, which can easily lead to currency depreciation and trigger a financial crisis.
(3) The gap between the rich and the poor is too large, residents’ income is low or the leverage ratio is too high, and the market demand is insufficient, which are also important reasons for the crisis.
Know the subtleties and be alert to potential risks
01. The impact of the Sino-US trade war
Since 2018, the Sino-US trade war has been one of the biggest uncertainties facing the Chinese economy. In the long term, the trade war has increased the risk of uncertainty in China's economy, which may lead to a decline in exports, the relocation of foreign manufacturing industries, and capital outflows in the future. This will put certain pressure on my country's industrial upgrading and high-quality economic development.Therefore, we must be alert to the possibility of the trade war expanding to other areas, as well as the financial system risks that may be caused by RMB depreciation and domestic asset bubbles.
02. The Federal Reserve raises interest rates and capital outflows
Since 2018, the Federal Reserve has continued to raise interest rates and the U.S. dollar index has strengthened, resulting in domestic capital outflows and the RMB facing greater depreciation pressure. Although China has sufficient foreign exchange reserves, given the impact of the Sino-US trade war, the export prospects are highly uncertain, and we still need to be vigilant in the future.
03. There is great downward pressure on the economy and the macro-leverage ratio is too high.
In the first to third quarters of 2018, China's GDP growth rates were 6.8%, 6.7% and 6.5% respectively, and the growth rate slowed down further. Fixed asset investment and consumption, the troika that drives the economy, have both seen a significant decline. Exports have been affected by the Sino-US trade war and are also facing certain pressures.
The excessive macro-leverage ratio is a major challenge facing our country's economy. Although, China’s residential sector leverage ratio is far below the EU’s 60% warning line. However, the leverage ratio of the non-financial sector is much higher than that of developed countries such as the United States and Japan during the same period, and the risks are greater.
Leverage ratio of China's residential sector and non-financial sector from 2006 to present
Prepare for a rainy day and consolidate the economic foundation
Macro-prudential supervision and build a strong firewall
After the U.S. subprime mortgage crisis put out the fire of the crisis, the Federal Reserve proposed macro-prudential supervision principles, that is, key points Discover and eliminate risk factors that are widespread but not obvious in individual institutions. In addition, the U.S. Department of the Treasury proposed to establish an independent financial regulatory commission to protect the legitimate rights and interests of financial consumers. In 2010, when my country was facing excess liquidity and large asset bubbles, it proposed the principle of strengthening the cooperation between monetary policy and macro-prudential supervision. At present, the central government also proposes to continuously innovate macro-control ideas and methods based on actual conditions, strike a balance between risk prevention and stabilizing growth, and more specifically solve problems in the development of the real economy and promote high-quality economic development.
Balanced development and consumption upgrade
At present, my country's regional imbalances, the gap between rich and poor are widening, the leverage ratio of the residential sector is rising, and domestic consumption growth is slowing down. These are risks that we must be wary of. On the one hand, through balanced development, we must reduce the gap between rich and poor, increase residents' income, further improve the social welfare security system, enhance residents' sense of security in consumption, and cultivate society's desire for consumption; on the other hand, through technological innovation, consumption upgrades, and reduction of consumption Cost, tap consumption potential, cultivate new economic growth points, and achieve good and fast development. This is also the only way for us to cross the risk threshold in the future.
Deepening reform, One Belt and One Road
Looking back on the past experience of the United States, there is a critical period for the transformation of new and old driving forces, economic growth slows down, and when asset bubbles are large, financial risks are more likely to occur. Only by achieving economic development can we cross the cycle and cross the crisis.
Faced with the uncertainty of the Sino-US trade war, my country has implemented a new round of reform and opening up internally, reduced institutional costs, improved the business environment, and continued to expand the development of manufacturing and service industries; externally, it has promoted the "One Belt, One Road" initiative and deepened Trade results with countries in Europe, Asia, and Africa. Tesla is building a factory in China, BMW is increasing investment in China, the National Import Expo is being held in Shanghai, the integration of Guangdong, Hong Kong and Macao is accelerating, and the reform of the free trade zone is further deepening, etc., all will continue to promote high-quality development in my country.
Technological innovation, talent training
China must accelerate technological innovation in key areas, increase support for high-tech industries, strengthen the protection of intellectual property rights, and improve the efficiency of technology transformation into application fields. Technological innovation and talent are the key. It is necessary to further improve the talent training system and increase funding for innovative technology talents in the fields of basic research, scientific and technological achievement transformation, and entrepreneurship; encourage teachers and students at schools to study and exchange abroad, increase the introduction of innovative technology talents, and promote the development of key science and technology talents. Create a talent echelon with international core competitiveness in the field, thereby laying a solid foundation for our technological innovation, industrial transformation and development, and rapid economic development.
