Understand economics from scratch

Chapter 38 How to Gain Insight into the General Economic Trend from Financial News—Economics You Need to Learn to Understand Financial News (4)
The emergence of the subprime mortgage crisis is due to problems in the third level of the subprime loan market.The subprime loan market is geared toward people with little proof of income and heavy debt, allowing lenders to buy a home without money, without proof of funds.On the surface, it seems that the loan banks are doing good deeds, so that those low-income families can have houses to live in.In fact, we must not forget that any company is profit-seeking, and banks are no exception.These banks are all offering no-principal loans, 3-year, 5-year, 7-year adjustable interest rate loans, selective adjustable interest rate loans and other loan methods.And these loans have a common feature, that is, in the first few years of repayment, the monthly mortgage payment is very low and fixed, but after a certain period of time, the repayment pressure suddenly increases.The dangers of doing this are obvious.But because banks have extremely strong expectations of rising asset prices, and the profit margins in doing so are large, they take great risks in providing loans to low-income earners.

After the bank brought loans to low-income families, in order to transfer risks and return funds as soon as possible, it securitized the subprime loans on the basis of housing mortgages and issued these loans into bonds, namely Subprime Bonds (MBS).Correspondingly, the interest rate of such subprime bonds is also higher than that of ordinary bonds.Because of the high interest rates, many international investment institutions, including investment banks and hedge funds, have bought subprime loans one after another.

Investment banks, on the other hand, are more innovative, re-securitizing subprime debt, designing subprime mortgage-backed securities (CDOs), and selling them to insurance companies and hedge funds around the world.Insurance companies and hedge funds resold these subprime mortgage securities again, and in the end, the risk had spread to financial institutions around the world.

If housing prices can continue to rise, such a chain of interests can remain normal.However, there has never been an asset price that only rises but never falls. When the economy enters stagflation and inflation is rampant, asset prices will inevitably fall.Since 2006, the U.S. real estate market began to decline, housing prices began to fall, and the dominoes of subprime mortgages collapsed. Countless families were unable to repay their loans. Not immune, Citigroup, Merrill Lynch, UBS, Morgan Stanley and other well-known investment banks also broke huge losses.This is the subprime mortgage crisis sweeping the world.

As the Chinese economy is more and more closely linked with the world economy, the impact of the subprime mortgage crisis on the Chinese economy is also very significant.Although the scale of Chinese financial institutions holding US subprime mortgage financial products is limited, the indirect impact of the subprime mortgage crisis cannot be ignored.

First, the subprime mortgage crisis caused a drop in demand for US imports, and the sharp depreciation of the US dollar as a result of the US government's response to the crisis has seriously deteriorated the external environment for China's export industry.Statistics show that in the first half of 2008, the growth rate of China's exports slowed down by 5.7 percentage points compared with the same period last year. Among them, the export value of textiles and clothing was converted into RMB, and the growth rate dropped by 11.6 percentage points; There are 6.7 small and medium-sized enterprises above designated size in the country that are losing money.

Secondly, because the Fed has entered a cycle of cutting interest rates, and the Chinese central bank has to implement a tight monetary policy under the pressure of inflation, it has intensified the expectation of the appreciation of the renminbi relative to the US dollar, attracting a large amount of international hot money to flow into China for arbitrage.On the one hand, the influx of a large amount of hot money caused the rapid growth of foreign exchange reserves (in the first half of 2008, my country’s foreign exchange reserves increased by 2806 billion US dollars, with a total of 1.8 trillion US dollars), which strengthened the expectation of RMB appreciation; situation, driving up inflation and asset prices.

Thirdly, the outbreak of the subprime mortgage crisis has changed the risk preference of global investors, promoted the revaluation of financial products on a global scale, and increased the volatility of the financial market. one of the reasons.

Finally, the depreciation of the US dollar has pushed up the prices of global energy and primary products, which will be transmitted to my country's CPI (peaked at 2007% in February 10).

China's housing prices, there is a house to have a home
"There are tens of thousands of mansions in Ande, which shelters the poor and the poor in the world, and is as safe as a mountain!" This is Du Fu's eternal swan song - "The Thatched House Is Broken by the Autumn Wind".In the late winter of 759 AD, in order to avoid the Anshi Rebellion, Du Fu went into exile in Chengdu.In the spring of the following year, with the help of friends, a hut was built beside the beautiful Huanhua River.The poet was very happy, and lived here for 4 years, leaving more than 240 poems.Unexpectedly, in the late autumn, when the wind and rain blew heavily, the house was broken and rain leaked, Du Fu couldn't sleep at night, so he wrote this famous work.The poet is extremely poor, but in his poems, he still shows his heart for the people of the world even though he is in a difficult situation.What Du Fu didn't expect was that his poem of self-inflicted poverty is still a true portrayal of our hearts in modern times more than 1000 years later.

"Food is the first priority for the people, and housing is the first priority for the family."Housing is a basic living need.Today, the housing problem is still a serious topic of common concern to the Chinese people.Especially since the beginning of the 21st century, people have paid more and more attention to the reform of real estate, to the extent that there are no exceptions in the streets and alleys.

In September 1978, the Urban Housing Construction Conference was held in Beijing. Comrade Deng Xiaoping, the chief architect of the reform and opening up, said: "Can we solve the housing problem with a wider approach, such as allowing private construction or private construction with public assistance, installment payments, and private The money is mobilized, and the country solves the materials, and there is a lot of potential in this regard.”

After the Third Plenary Session of the Eleventh Central Committee of the Party, Comrade Deng Xiaoping once again said regarding the housing problem: "Individual urban residents can buy houses or build them themselves. Not only new houses can be sold, but old houses can also be sold. They can pay in one lump sum, and It can be paid in installments and paid off in 10 or 15 years. After the house is sold, the rent may have to be adjusted, and the rent must be adjusted in conjunction with the housing price to make people consider buying a house cost-effective, and subsidies should be given to low-wage workers.”

In 1997, China's housing reform officially started.The State Council proposed to establish a "multi-level housing supply system based on affordable housing", thus ending decades of welfare housing allocation.Immediately afterwards, many factory workers paid for their rented flats.China has thus entered the era of "housing privatization" rapidly.Roughly in 2000, China's real estate market began to enter the stage of "marketization and privatization", and housing prices also embarked on a rapid rise.However, at this time, affordable housing did not become the main body of the urban housing market in accordance with the requirements of the State Council.This has led to a deeper and deeper contradiction between low income and high housing prices, and too many ordinary people have fallen into a situation where they can only watch but not buy.

There is a point of view that the rise in housing prices comes down to the rigid demand for housing.From Marshall's "Principles of Economics" to Samuelson, Stiglitz's "Economics" and economics textbooks compiled by Chinese authoritative scholars, the term "rigid demand" cannot be found.Obviously, this is the unique contribution of Chinese "economists" to modern economics.What is the rigid demand? To give a simple example, more than 2 million farmers in China will become urban residents in the future. They need houses. This is a rigid demand.Because of the existence of rigid demand, China's housing prices will definitely rise in the long run.Anyone with a little basic knowledge of economics knows that the demand mentioned in economics is not only effective demand and real demand, but also the demand within a certain period of time under the "budget constraint".However, when our economists talk about rigid demand, they completely forget the concept of demand in economics. They only talk about demand, not the income of residents, or the demand within a certain period of time.

High housing prices directly affect people's lives.The simplest and most intuitive phenomenon is that male colleges should marry and female colleges should marry, but how many loves die because of housing prices?Although there is no direct relationship between the two, it is undeniable that no matter when you get married, you must have a place to live.There is a long-standing tradition in China. The common people say "build a house and marry a wife". In modern cities, this has evolved into "want to buy a house and get married".However, the price of a house is an astronomical figure for most young people.Furthermore, in addition to housing, people's life also includes children's schooling and the health of the elderly, both of which require a lot of reserves, and it is impossible for people to save all their money in the house.Under such circumstances, it is not difficult to understand people's desire for affordable housing.

Social security housing refers to housing that is invested, built or purchased by the government, with limited construction standards, supply objects, sales prices or rent standards, and housing that has a security nature and a specific purpose.Compared with commercial housing on the market, affordable housing is fundamentally different in that one is for public welfare and the other is for profit.For ordinary people, the biggest feature of affordable housing is of course cheap and affordable.

In fact, in the housing reform more than ten years ago, affordable housing has been designated as the protagonist, but due to various reasons, it has always stood on the edge of the big stage of China's real estate.Now, indemnificatory housing, which has played a supporting role in China's real estate market for more than ten years, has finally waited for the moment to "change roles".

In May 2006, the State Council promulgated the "Regulations of the People's Republic of China on the Administration of Surveying and Mapping Achievements (Revised Draft)", proposing six outlines for real estate regulation and specifying the focus on the development of low- and medium-priced, small and medium-sized ordinary commodity housing, affordable housing and low-rent housing. On August 5, 2007, the State Council issued "Several Opinions on Solving Housing Difficulties of Urban Low-income Families", clearly proposing "further establishing and improving the urban low-rent housing system", "improving and standardizing the affordable housing system" and "gradually improving other Living Conditions of Housing Difficult Groups".Entering 8, local governments have further intensified their efforts to promote the construction of affordable housing.This shows that ordinary people who cannot afford commercial housing are expected to use affordable housing to meet their basic living needs and realize their dreams of housing that are not luxurious.I believe that with the promotion of affordable housing, the dream of "thousands of mansions where the people are all happy" will be getting closer and closer to us.

Expansion of domestic demand, is consumption a contribution?
Uncle Wang is a senior manager of a foreign company with a good income and a prosperous family life.But he often gets angry because of the money spent by two people: one is his father, Uncle Wang, and the other is his son, Wang Xiaobao.This anger is not because of anything else, but because of the father's excessive frugality and the son's excessive consumption.

Uncle Wang's father, Uncle Wang, is a very frugal person.Although he is seventy years old, his habit of thrift has not changed.In order to save some electricity bills, Uncle Wang never turns on the lights when watching TV. Since the installation of the air conditioner, he would have been reluctant to turn it on if Uncle Wang hadn't gone to him to turn it on for a while.When Uncle Wang said a few words because of this, Uncle Wang always said: "We live on the second floor, which is so shady and cool. If we turn on the air conditioner again, not to mention the waste of electricity, the cold is unbearable." In order to prevent mosquitoes from biting him , Uncle Wang specially bought a box of mosquito coils for his father and asked him to remember to light it before going to bed at night.But Uncle Wang always said: "It doesn't matter if you don't light it. In the past, in the countryside, someone lit mosquito coils. When people doze off, they will naturally fall asleep. Such an adult still cares about mosquito bites." In order to get a free haircut, Uncle Wang can come from the west of the city. Walk to the east of the city to find a voluntary haircut stand.In order to save money, Uncle Wang not only insists on steaming steamed buns by himself, but also seldom buys vegetables. He often picks up some vegetables while shopping in the vegetable market.When Uncle Wang celebrated his birthday, Uncle Wang talked about going to a restaurant for a meal, but Uncle Wang said: "It's better to eat at my own home, cut the meat, and make some noodles, which is much better than going to a restaurant."

In stark contrast to Uncle Wang is Uncle Wang's son Wang Xiaobao.In order to play games, he forced his mother to buy him a good computer, and once he bought the game discs, there were several discs.If he wanted to play the guitar, he asked his mother to buy a guitar, and even hired a teacher to teach him.In summer, Wang Xiaobao turns on the air conditioner as soon as he enters the door, and the better ice cream in the refrigerator is prepared for him.In the morning, he would drink mutton soup that cost two or three yuan a bowl.At noon and evening, he would not move his chopsticks if there was no meat on the dinner table.Not counting that, Wang Xiaobao always asked Uncle Wang to take him to a restaurant for a meal on weekends.In this regard, Uncle Wang did not say less about his son, but Wang Xiaobao was eloquent: "Consumption is now advocated, and national leaders say that we need to expand domestic demand. We should respond to the party's call and make more contributions to society. Moreover, the income of you and my mother You shouldn't care about the expense."

Uncle Wang is very contradictory. He often blames his father for his excessive frugality, but he is angry at his son for his excessive consumption, but he has nothing to do.

In fact, Uncle Wang encountered an economic problem here—the paradox of thrift.

In the 18th century, Dr. Mandeville of the Netherlands told an interesting story in the book "The Fable of the Bees".A swarm of bees spends a lot of money in pursuit of a luxurious life, and the colony quickly prospers.Later, because this group of bees changed their habits, gave up their luxurious life, and advocated frugality, the result was the decline of the entire bee group.

The story of the bees tells the logic of frugality, which is called the paradox of frugality in economics.In the history of western economic theory, the paradox of frugality once confused many economists, but the economist Keynes saw the positive effect of stimulating consumption and increasing aggregate demand on economic development from the story. Inspired by this, he further argued The thrift paradox.

Keynes was the most influential economist in the 20th century. He made great contributions to Western economics throughout his life and was once hailed as the "savior" of capitalism and the "father of post-war prosperity".The paradox of thrift is one of his earliest theories, also known as the paradox of thrift and the contradiction of thrift.

How to interpret this paradox?We all know that frugality is a virtue and the most common way for individuals to accumulate wealth.If a family manages frugally, reduces waste, and saves more, the family can often become rich.But, according to Keynes's theory that aggregate demand determines national income, thrift is not good for economic growth.In fact, there is a contradiction here: the more frugal the public is, the more they reduce consumption and increase savings, which often leads to a reduction in social income.Because people's income usually has two uses—consumption and savings, and consumption and savings change in opposite directions, that is, if consumption increases, savings will decrease, and if consumption decreases, savings will increase.Therefore, savings and national income change in opposite directions. When savings increase, national income decreases, and when savings decrease, national income increases.According to this view, increasing consumption and reducing savings will lead to an increase in national income by increasing aggregate demand, which will promote economic prosperity; otherwise, it will lead to economic depression.From this, we can draw a deduction that contains a logical contradiction: restraining consumption and increasing savings will increase personal wealth, which is a good thing for individuals, but it will be a bad thing for the development of the entire national economy because it will reduce national income and cause depression.

The paradox of frugality tells us that frugality reduces spending, forcing manufacturers to cut output and lay off workers, thereby reducing income and ultimately saving.Saving paves the way for individuals to get rich, but if the whole country saves more, it will make the whole society depressed and impoverished.In other words, when resources are not fully utilized and the economy has not reached its potential output, only when every member of society consumes as much as possible can the entire economy get out of the trough and move towards a stage of more full employment and economic prosperity.

Keynes also explained that the increase in GDP caused by the increase in demand must be higher than the original increase in demand.This is called the multiplier effect.For example, demand has increased by 1 million yuan, but the final increase in GDP must be greater than 1 million yuan.This is because various items are complementary and all sectors of the national economy are related.For example, the rich spent 1 million yuan to buy a villa, and the GDP increased by 1 million yuan.Living in the villa must have a car, and buying a car cost another 1000 million yuan.To buy a car, you need to buy gasoline, buy insurance, and buy various services (use of highways, maintenance, etc.) and another 1000 million yuan.These expenditures alone have reached 1.2 million yuan.The 1000 million yuan used to buy villas drove the construction, decoration and other industries. People in these sectors increased their income and consumption.The 1 million yuan spent on buying cars and related goods and labor services has also led to an increase in the income and consumption of people in these industries.Housing and automobiles have driven steel, cement, machinery and other industries.Driven by this round after round, the increase in the GDP of the entire economy must not exceed the original [-] million yuan for buying villas.In the process, the economy develops, and everyone—whether wealthy as shareholders and executives, middle-income earners as managers and technicians, and low-income workers—benefits.

(End of this chapter)