On October 9, 2007, the standard broke through the 2500 index, reaching 1,565.15 points and hitting a record high at that time. Two months later, the stock market fell into violent fluctuations and then the stock market fell into violent fluctuations. In March 2008, the fifth largest investor in the United States, Bear Stearns was forced to accept the acquisition of JPMorgan Chase . On September 15, 2008, the fourth largest investment bank in the United States, Lehman Brothers announced bankruptcy, and a financial crisis that swept the world officially kicked off. Then the China Shanghai Composite Index plummeted from 6,124.04 points to 1,664.93 points. From 2008 to 2009, China, Europe, the United States and most countries experienced a serious decline in the growth rate of GDP, or even negative growth. The real economy, finance, and employment markets were wailing. The world experienced the most serious crisis since 1929. So what are the causes and effects of this extremely destructive financial tsunami and the response measures of various countries?
The financial crisis is a very complex and comprehensive event. Although it can be clearly defined in the United States, it is hard to say that it is caused by a single cause, but it is the result of multiple reasons being mixed together and intertwined and strengthened.
In this article, we will focus on three reasons for the occurrence of the financial crisis.
The first and most famous one, stimulates loans and toxic financial innovation. As the name suggests, "stimulating loans" refers to loans with a level of less than normal loans. This kind of loan is generally issued to individuals and companies with low income or poor credit qualifications but with loan needs. Due to the overall poor qualifications, banks generally charge higher interest rates for this kind of loan,
, and most of the interest rates for stimulating loans are floating and will continue to change according to market interest rates. Since the 1990s, due to the passage of laws such as the Federal Housing Enterprise Safety and Stability Act, enterprises supported by the US government, led by Fannie Mae, Freddie Mae, have begun to provide loans to more middle- and low-income earners, and loans with ultra-low down payment rates have become more and more popular. By the beginning of this century,
Due to the collapse of the Internet bubble and the impact of the 9/11 incident, the US economy fell into a recession. In order to stimulate the economy, the United States passed a series of bills and policies led by the American Dream Down Payment Act, reducing the down payment ratio and loan interest rates for middle- and low-income earners' families and requiring Freddie Mae and Fanglimei to purchase more housing mortgage loans for middle- and local income earners. It just so happened that these two bills were passed by Bush Sr. 1. Bush Jr. . The ruling philosophy of the father and son is in line with each other. Under the wind of policy, many financial institutions have set the idea of low-income home buyers. They convinced these people to apply for loans that may have low initial interest rates but will gradually rise sharply, for buying houses or even just daily consumption. The balance of housing mortgage loans in the United States, including stimulus loan disaster, soared from US$4.8 trillion in 2000 to US$9.8 trillion in 2006, more than doubled, and stimulus loans increased from almost negligible in 2000 to US$1.4 trillion in 2005.
In 2006, about 20% of mortgage loans were stimulating loans. We can see that
not only stimulates loans, normal housing mortgage loans are also growing significantly. Why is this?
Due to policy support and economic strengthening, the housing prices in the United States have risen since 2001
, so housing prices are expected to rise rapidly. Therefore, many people think that even if I can’t afford to pay the loan in the future, as long as the housing prices rise, I will still make a profit by selling the house. Therefore, from the middle class to the poor, they have taken loans to buy houses.
. If more people buy houses with loans will further stimulate housing prices. The two strengthen each other. It is already a big problem to stimulate loans, which originally accounted for 20% of the total mortgage loan amount, because the international community generally uses the 2% non-performing loan rate as a warning line. To put it simply,
means that if banks have more than 2% of loans that cannot be recovered, they face considerable risks.
When the economic situation and housing prices are going well, everyone is happy, but once there is any disturbance, these extremely high default rates of stimulating loans will be unbearable to banks.What's worse is that huge stimulus loans have led to another huge financial market. Wall Street In order to further tap the profit potential of the stimulus loan market, financial institutions packaged stimulus loans and other risky assets into guaranteed debt certificates, which is commonly called CDO (Collateralized Debt Obligation)
In a word, CDO is a nesting doll product that stimulates loans. Financial institutions turn the debt rights of stimulus loans into bonds and sell them to investors.
Investors bought these CDOs Later, they actually became the creditors of these packaged stimulus loans. In the future, those who borrow stimulus loans will repay the money to these investors and have nothing to do with the bank. Generally, banks will package stimulus loans into different graded CDO products according to different default rates and sell them to different investors. Banks are happy to pass on the risks of stimulus loans and earn intermediary fees. Therefore, on the one hand, they use immoral and even illegal means to deceive low- and middle-income earners to apply for stimulus loans. On the other hand, they deceive investors into concealing the default risk of CDO products based on stimulus loans through a very complex grading system and unintentional underestimation. From 2004 to 2007, a total of more than US$1.4 million CDOs have been issued and become a super custom bomb in the financial market. There are probably many friends who know stimulus loans and CDOs, but they know stimulus loans. CDS may be slightly less likely.
CDS It refers to the essentially a kind of insurance. In fact, CDS is an insurance sold by insurance companies and financial institutions to investors or companies who are worried that the bonds they hold have default risks. As long as you pay a certain bond to buy insurance financial institutions or insurance institutions, you promise to pay you money when the product defaults or the debt rating is downgraded. However, CDS is different from traditional insurance.
1. Due to legal loopholes, CDS issuance is not regulated by the insurance regulatory authorities, and it can be issued by many financial institutions that are not insured companies. Therefore, CDO has the basis for being issued over-issued
2. It is also the most important point. You can buy insurance for bonds you do not hold, and there is often almost no upper limit. That is to say, you can buy a bond worth $1 million worth of $5 million with a guaranteed amount of more than $5 million when there is a problem with the bond, the bank or insurance institution may have to pay you up to $5 million.
Generally speaking, you can only insure it if you hold something, but CDS has no such limitation because of this characteristic.It gradually alienated from insurance to risk gambling agreement for sale CDS institutions bet on protected financial assets that will not have problems so that they can always earn protection fees for free. Investors who buy CDS bet on these bonds will have problems, not high premiums, and bet on huge compensation after the risk outbreak. For these people and institutions, I only have one word to describe gambling monsters. CDS scale is not large in the 1990s, and the types of products that are insured have varying. After 2002, due to the rise of stimulus loans, high-risk loans such as stimulus loans have gradually become important insured subjects. The default rate of stimulus loans is extremely high, especially once house prices start to fall, there will be a large-scale explosion. However, these financial institutions make money and make money. The total amount of CDS soars. A large number of financial institutions sold sky-high CDS insurance policies. In 2003, the United States GDP was about 11 trillion US dollars in the same year. The CDS market size reached US$3.5 trillion. Before the full outbreak of the financial crisis, the total CDS market size in 2007 actually reached US$62 trillion in 2007, which was more than 4 times the GDP of the United States that year. I was also very shocked when I first learned a number. Although I didn’t find the number based on high-risk CDS such as stimulus loans, it is definitely an astronomical figure. In short, as long as CDS and CDO have problems with stimulus loans, these products will all explode. So what problems occurred in the entire stimulus loan market in 2007? 1. The
html we mentioned earlier to stimulate loans will generally have interest discounts in the past few years. In 2007, the interest will rise. Many interest discounts have expired. Some low-income people have encountered difficulties in repaying loans. 2. Since the second quarter of 2007, the changes in housing prices in the United States have turned from positive to negative. Many stimulus lenders do not want to continue repaying loans for a depreciated property. The default rate of stimulating loans has begun to rise.3, 40% of the new housing loans in 2007 were lower than 3%, which means that a considerable number of people bought a house with almost zero down payment. This means that the bubble in the real estate market is already very large. Ordinary people want to come in and make money with nothing. Fantasy of repaying loans entirely based on rising housing prices. Secondly, for loans with ultra-low down payment rates, banks have to bear almost all the risks as long as they provide loans.
4, which is mentioned earlier, the scale of stimulus loans has reached the trillion-dollar level and has a profound impact on the CDO market, which is also at the trillion-dollar level and is likely to reach the 10 trillion-dollar level. CDS, an important part of the US financial system , has been shaky. In addition to the serious quality problems, the stimulus of loans and the financial derivatives generated on this basis, another important reason for the financial crisis is the monetary policy of the US Central Bank. Feder Unwise monetary policy has fueled the expansion of the huge financial bubble before 2007 and made it difficult for the bubble to slowly eliminate but directly rupture. In 2001, the US economy fell into a recession due to the bursting of the Internet bubble and the blow of 9/11. In order to alleviate the downward pressure on the economy, the Federal Reserve started a cycle of interest rate cuts in early 2001. Simply put, it is to start the printing machine, , to spread money to the market to stimulate the economy. The basic interest rate in the United States has dropped from more than 6% in early 2001 to 1% from 2003 to early 2004. Why does a rate cut mean that it should exceed or stimulate the economy? Because the important means of the Federal Reserve to reduce the underlying interest rate is to purchase assets led by US Treasury bonds in the market. The Federal Reserve, as , central bank, , purchased assets is printed out out of thin air. When these money that appears out of thin air is used to purchase assets, the money in the financial market becomes more and more. The interest rate is the price of funds. When there is too much capital, the price will naturally drop, that is, the interest rate will drop, and the interest cost of loans will decrease. When there is too much money in the market, the interest rate will drop, and various loan behaviors will become more and more. When most people's funds can be met through loans, various investment behaviors will increase economic pressure and alleviate them. The lower the base interest rate, the more money there is in society, the higher the interest rate, the more nervous the money it is. Although the means of lowering interest rates are different, the purpose of interest rate cuts is basically to stimulate the economy to print money and release money on the market. Otherwise, hike rate means that when the economy is overheated, the central bank hopes to tighten the money supply and allow the economy to cool properly to prevent the bubble from experiencing dangers and development.The idea was correct, but if we compare the economic crisis in the United States from 1990 to 1991, we can find that the crisis in the 1990s was more serious. The United States' GDP even showed negative growth for several quarters. However, the Federal Reserve only lowered interest rates to 3%, and relatively speaking, the monetary easing was relatively restrained. The US crisis in 2001 was not as deep as that of the Federal Reserve, but lowered interest rates to 1%, reflecting the money supply. 2 That is, the total amount of cash circulating outside the banking system plus the total amount of current deposits and fixed deposits increased from less than $5 trillion in 2001 to more than $6.5 trillion in the second half of 2005. The increase in the money supply exceeded 30% in more than four years. Although the growth rate of money supply is not low, it is still not the whole picture of the United States' crazy printing of money. In addition to the total amount of money, there is also a factor that affects the market's willingness to lend. That is to say, if the central printing uses a lot of money to flow into the hands of commercial banks through various channels, but as a result, due to the economic downturn, lack of investment opportunities, etc., the bank's money continues to be on the account. If you can't move, there is no big difference between this money itself. When this situation occurs, we can say that the currency flow rate is very low, and non-flowing currency has no practical significance. For example, when the United States fought , Iraq , the very advanced transportation system, 100,000 US troops could play the role of 1 million people. The inefficient transportation system of the Iraqi army could not provide bonuses to the military's combat effectiveness and often could not quickly reach the designated army, but instead reduced the combat effectiveness of the army. At some point, the army could only be beaten on the spot and could not play any role. The real estate market we mentioned earlier has created a lot of bubbles in the Fed's release. House prices soared. Banks feel that they can collect loans back, so they have increased significantly. It can be said that in the most prosperous period, banks can basically bring out as much as they can, which greatly accelerated the speed of currency flow. The growth of money in the market is actually significantly higher than the growth rate of currency. Just like the United States not only recruits soldiers but also equips American soldiers with a large number of state-of-the-art transport aircraft and transportation helicopters, etc., so that every dollar can play an excess role. In this case, A huge bubble gradually expanded to an uncontrollable level, but in 2004, especially after 2005, the Federal Reserve's sharp price and interest rate and tightening of money supply made the US market increasingly tight. In 2007 and 2008, due to economic fluctuations, the obvious high valuation of real estate valuations and insufficient central bank money supply, the US real estate market was depressed, and housing prices continued to fall, and the decline in housing prices caused a decrease in mortgage loans. Soon the money supply decreased, the currency flow rate also decreased. The US military not only reduced, but also began to fall. In other words, economic prosperity and economic depression, or economic bubbles and economic crises have a tendency to strengthen themselves when the better is better. Not only is the money more, but the flow rate of money is fast, but after passing a critical point, it will become worse when the money is worse, so the money will be lying on the account and staying motionless, especially since the second half of 2008, liquidity in the US financial market has dropped sharply. The original meaning of liquidity refers to the ability of an asset to cash at a suitable price. You can understand it as an indicator that reflects how much money is in the market, because the more money is flowing in the market, the more frequent transactions are
, the easier it is to transfer various assets. That is to say, partly because of the central bank's unreasonable monetary policy, the United States printed too much money from 2001 to 2004, causing the financial bubble to blow up. However, in 2007, especially in 2008, due to the previous traffic police's monetary policy and decline in housing prices, including people's pessimistic expectations for the future and the reduction in investment activities, the United States fell into a dilemma of lack of liquidity. Various financial institutions have begun to look for cash, and once bad news comes up with giants like Bear Stearns into crisis, everyone will next expectation for the future, further sell their assets, prevent asset depreciation, and adopt a strategy of cash as king. When the market is full of people selling assets and no one buys assets, the liquidity of the entire market will further decline and the whole world will not be found, and the panic in the market will continue to ferment.In the face of low liquidity, the bubble will burst at any time, and the covered financial problems will gradually be exposed.
After talking about most of the Fed's mistakes,
We want to talk about the basic reasons why the 2008 financial crisis will definitely break out. The Fed's policy direction is not wrong. When the economy is bad, it will be released, and when the economy recovers, it will be tightened again. However, the degree and timing of the easing and tightening are inappropriate, which aggravates the crisis to a certain extent. But this is not a fundamental factor. Let’s look at the two pictures first.
The first picture is the proportion of US private debt to GDP . The second picture is the proportion of US government debt to US GDP. It can be seen that this proportion has increased significantly between 2,000 and 2,008. This is the ratio of debt to GDP rather than absolute value. The US GDP has been growing during this period, especially from 2003 to 2006.
This means that US debt is definitely worthy of great inflation. By 2008, the proportion of total US debt had reached about three times that of GDP, which means that most people's cash flow is under great pressure to repay principal and negative interest. Once asset prices fall in the market, liquidity will decline, a large number of transactions will default.
2008 financial crisis is also called the debt crisis, and there will be European debt crisis and so on in the future. It sounds like debt is terrible, but in the early stage of economic cycle , due to the positive trend of the economy, various investment opportunities emerge, whether it is buying a house or investing in factories, it seems to be profitable, so people borrow a lot of debts, and more investment in
will bring further rise in asset prices and rising housing prices. Therefore, a large amount of credit will strengthen the economic prosperity, but assets and housing prices will not be separated from the level of productivity, and the profit margin will not rise and fall. However, continuous loan investment will bring increasingly greater debt repayment costs to the entire society. When a certain critical point reaches a point, more and more defaults will occur, and the debt crisis will break out. People will keep reducing loans and investments, followed by painful deleveraging and bailouts from the government and central banks, and then there is a new economic cycle. As for what deleveraging is, we will explain in detail later. Whether in the late 1980s or the United States after 2001, the economy from depression or lukewarm to prosperity, the central bank's excessive interest rate cuts have led to low borrowing costs, which has promoted excessive debt investment from private to government, especially investment in financial assets. This caused a surge in the stock market and bond market in the early stage, and promoted people to make progress in borrowing and investment. As a result, when more investments create less and less returns, people cannot repay their debts. At this time, people will sell assets to cash out and repay. When large-scale selling occurs,
financial market will collapse. Take Lehman Brothers as an example. In 2007, 65% of Lehman Brothers' US$45 billion revenue came from interest on holding securities or profits from trading securities. However, most of Lehman Brothers' financial assets are purchased by financing money. In addition to the conventional financing methods, Lehman , there are two financing methods. One is called short-term repurchase agreement . The other is called repurchase 105. They are all acrobatic gameplay. The essence of these financing methods is ultra-short-term loans. Because these transactions are particularly short-term, and even overnight, Lehman Brothers can avoid general financing supervision. Lehman and other investors have made this ultra-short-term loan actually a medium- and long-term loan by repetitioning ultra-short-term repurchase transaction. In the first quarter of 2008, Lehman Brothers borrowed more than $200 billion through a short-term repurchase agreement and used this money to buy various assets, including stimulus loans. However, from the second half of 2007 to 2008, due to the sharp fluctuations in the market, Lehman held more than $100 billion of assets. Not only did they dive into and also could not sell them significantly, Lehman fell into a dilemma of insolvency, and finally went bankrupt. The fundamental reason for Lehman Brothers' bankruptcy is that the ever-inflating debts did not bring enough profits. Instead, when the financial environment deteriorates, the debt cannot be repaid. The last behemoth collapsed. In this article, we talked about three important reasons that led to the 2008 financial crisis, but they were not all.
Let’s briefly review it.
The first is to borrow your own loans and toxic financial innovations
such as CDS.
The second is the Fed's monetary policy mistake
promoted the expansion and hard landing of the bubble.
The third reason
is that income cannot keep up with the increase in debt
Once the investment shows a large-scale explosion
or the yield drops sharply, a large number of investors and companies will be unable to repay the debt.
So they jumped to the property price to sell assets to repay debt
caused the market to fall into another vicious cycle
Finally, the financial market collapsed completely.
https://www.ceicdata.com Hong Kong Huanya Economic Data Co., Ltd.
https://data.worldbank.org.cn World Bank official website
https://tradingeconomics.com/ Global Economic Indicators Data Network
This article reference:
"Debt Crisis" Ray Dalio
"Crazy Money: Morgan's Crazy Dream and the Past and Present Life of Financial Derivatives" Jillian Tetti
"Artificially Created Vulnerability: The Political Roots of Banking Crisis and Credit Scarcity" Charles ·Kelomiris; Stephen Harber
"Global response to the financial crisis: Measures and experience (Blue Book of Crisis Management)" China Crisis Management Research Center
"The Essence of Finance: Four Lectures on the Federal Reserve of Bernanke" ben·Bernanke
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