Understanding Finance from scratch

Chapter 35: The Financial Crisis No One Can Escape—Know a little about the truth about the financial crisis every day (2)
Under the arrangement of subprime loans, the down payment amount of the borrower to buy a house can be lower than 20%, or even reduced to zero down payment, and the interest is also very favorable. In the first 2 to 3 years, only a very low interest rate needs to be paid. Or go interest-free for the first few months and pay floating interest on the loan in subsequent years.Under such preferential policies, most low-income earners have housing, which guarantees the goal of home ownership advocated by the US government and also meets the political needs of the US government.As housing prices continue to rise, low-income earners think that they can repay the loan interest through the appreciation of the house.For lending institutions, the interest rate level of subprime loans is higher than that of ordinary loans, which can compensate for the greater risk borne by mortgage institutions.As the real estate market continues to prosper and property prices continue to rise, even if the borrower cannot repay the loan, the mortgage institution can still sell the collateral, that is, the real estate to obtain income.It was under the guidance of this seemingly safe strategy that mortgage institutions issued a large number of subprime loans. During the subsequent boom and development of the real estate market, this strategy worked well. Successfully recovered the loan.

To make matters worse, in the face of the booming real estate market, investment banks, hedge funds and other financial institutions on Wall Street also want to get a share of the subprime loan business.Unlike commercial banks, investment banks do not carry out the business of taking deposits and issuing loans. Their business activities are mainly securities brokerage, securities underwriting in the primary market and securities trading in the secondary market. The asset securitization technology that became popular in the 20s provided an effective way for investment banks to enter the subprime mortgage market.They bought the securitized bonds of subprime loans from Fannie Mae, Freddie Mac and other big banks, and then issued new bonds based on them. Some of them were held by themselves, and some of them were sold to investors to obtain income from the bid-ask spread.These bonds derived from subprime loans, including those issued by the two companies, commercial banks and investment banks, are called subordinated debts.In this way, the subprime loan market further expanded, not only including the subprime loan itself, but also other derivative products related to the subprime loan in the market.

Finally, the U.S. housing market began to falter, with house prices falling and buyers struggling to sell their homes or obtain financing through mortgages.Since the loans could not be recovered on time, lending institutions, investment banks and hedge funds that bought subprime bonds began to suffer large losses.On August 2007, 8, Bear Stearns stated that the U.S. credit market was in its worst state in 2 years. European and American stock markets began to plummet across the board.

So, what impact did the subprime mortgage crisis have on the US economy?

The impact of the subprime mortgage crisis on the US economy is greater than that of the last Internet crisis.Since the Internet industry is not a core industry that affects the national economy and people's livelihood, the bursting of the Internet bubble has less impact on the real economy.The subprime mortgage crisis inevitably spread to the real economy because it involved the financial industry in the United States.

A halt in home price gains and a buildup in existing-home inventory will make builders reluctant to start new work and lay off workers when existing work is finished.Affected by the construction-in-progress construction period, this phenomenon will lag behind the weak housing prices by 3 to 6 months.As the unemployment rate rises, American residents have lower expectations for future income, and orders for durable goods will decline significantly.The decline in durable goods orders will affect upstream and downstream enterprises and trigger a further decline in non-agricultural employment.

Weakness in demand for durable goods was accompanied by weakness in demand for services.The U.S. service industry is not only the main sector that contributes to GDP, but also the sector that creates the most employment from marginal capital.Poor employment data in the service industry will further reduce the income of US residents.

The depletion of inventories (subprime asset write-downs) in the financial sector hit by subprime mortgages created an urgent need for financing, which absorbed a lot of monetary capital in the economy.These capitals, which could have been invested in other industries to generate new jobs, are now being used to cover shortfalls in financial sector assets.This has greatly reduced the ability of the US economy to create jobs, and the number of unemployed people has continued to rise.

Looking back at Japan's financial crisis
In the late 20s, Japan's stock and land markets were frantic.In the four years from the end of 80 to the end of 1985, the total market value of Japanese stocks tripled.Land prices have also doubled one after another. By 1989, the total market value of Japanese land was 4 times that of the United States. You must know that the land area of ​​the United States is 3 times that of Japan!The myth of getting rich overnight is constantly being staged in the two markets. Envious people are constantly pouring into the market, and many companies have no intention of doing business, and have started to speculate in stocks and land. The whole society is crazy about it.

Happiness comes too fast.While people were still intoxicated, since 1990, the two markets quickly collapsed, stock prices and land prices plummeted like free fall, and the wealth of many people became a passing cloud in the blink of an eye. Tens of thousands of companies Quickly closed down.Economic prosperity is like a flash in the pan, and people vividly call it "bubble economy".

So, how did Japan's economic bubble come about and how did it burst?

The 20s was the golden age of Japan’s economic development. Not only low-end products had strong international competitiveness, but even industries such as steel, motorcycles, home appliances, and automobiles were extremely competitive in the world because of their high quality and low price. competitiveness and is still expanding its share of world trade.But a sudden economic crisis ruined it all.

After the Second World War, the Japanese economy began to recover slowly, and the opportunity for economic development was the Korean War in 1950. This war made Japan the strategic rear of the so-called United Nations Army, and a large number of strategic resources were continuously shipped to Japan. Materials that cost too much to transport are produced locally in Japan. In this way, the machines of the Japanese economy are running day and night. For example, Mitsubishi Heavy Industries, a familiar electrical appliance manufacturer, produced tanks and cannons back then. these production lines.

At the same time, Japan's consumer market is booming.Soldiers from various countries eat, drink and play in Japan, which also drives the huge local consumption demand. As a result, the Japanese economy is booming. By the 20s, the vitality of the Japanese economy had basically recovered and developed rapidly; by the 60s , Japan's economy has developed to a very high stage, a stage where it can challenge the United States and compete with the United States for hegemony. Japan poses a threat to the dominance of the United States.At that time, Japan's GDP reached half of that of the United States, which was unprecedented in history, and the flamboyant Japanese began to buy everywhere, such as buying Hollywood and the Rockefeller Empire State Building. You must know that the symbol of American capitalism at that time was not The World Trade Center that fell in the "20 Incident" was the Rockefeller Empire State Building, a landmark building on Wall Street.The Japanese firmly believe that surpassing the United States is within reach.The U.S. trade deficit reached a record $80 billion, and the U.S. felt a strong economic threat from Japan.This made the Americans exclaim that Japan wants to buy the entire United States peacefully.

During this period, the trade surplus between Japan and the United States increased, while the United States was worried and restless in the face of the growing trade deficit.Anxious Americans hope to increase exports and reduce imports through the depreciation of the dollar, so as to achieve trade balance.So the United States took advantage of its ability to control Japan (after the Second World War, Japan, as a defeated country, was controlled militarily and politically by the United States, and indirectly controlled the economy) to formulate a perfect Actions to hit the Japanese economy.

At that time, the demand for depreciation of the dollar against the yen was reasonable, so under strong pressure from the United States, in September 1985, U.S. Treasury Secretary James Baker, Japanese Finance Minister Akira Takeshita, and former Federal German Finance Minister Gerhardt Stodenberg, French Finance Minister Pierre Bergberg, British Finance Minister Nigel Lawson and other finance ministers from five developed industrial countries and the governors of the five central banks held a meeting at the Plaza Hotel in New York and reached five The Chinese government jointly intervened in the foreign exchange market to orderly lower the US dollar against major currencies in order to solve the huge US trade deficit.This is the famous "Plaza Accord". After the "Plaza Agreement", the exchange rate of the yen against the U.S. dollar dropped from 9 yen to 3 yen within three months, and then to 263 yen in 200 and 1986 yen in 152.

The Japanese only saw the trade balance, but they did not expect that the continuous appreciation of the yen has brought about a by-product. A large amount of international capital flows into Japan, and the appreciation of the yen is expected.After hot money entered Japan, according to the characteristics of stable profits and easy realization of hot money, it entered Japanese stocks, real estate, real enterprises (mainly in the form of gambling), and antiques and cultural relics respectively, which led to a sharp rise in Japanese real estate and stock markets, and the asset bubble began Get serious.

This is only the first step. Next, the U.S. government asked the Japanese government to automatically restrict exports—after the signing of the Japan-U.S. "Market Order Maintenance Agreement" in 1989, Japan was forced to take automatic restrictions on exports to the U.S. Calm down.

At the same time, the United States restricts and cracks down on Japanese export companies through various means. An agreement was reached in 1985 to ban nine Japanese steel products from entering the US market.

At this time, the Japanese economy finally had problems. What should we do?The United States suggested that Japan stimulate economic development by expanding domestic demand, so Japan began to lower interest rates and increase domestic construction.In order to stimulate domestic demand, the Japanese government has significantly lowered interest rates and given many preferential policies to the real estate industry.A large amount of hot money poured into real estate and stocks and began to drive up Japanese house prices, and stocks continued to rise; Japanese companies also poured in a large amount because of the decline in corporate profits and the profitability of real estate and stock markets.Under the situation of falling interest rates on saving money and rising housing prices, Japanese people who once despised the virtual economy have unprecedented investment desires (more than half of Japanese households have joined the stock market), and financial management has become a fashion in Japan.As a result, stock and housing prices rose in a straight line, and Japanese land prices also soared.

On Monday, October 1987, 10, the U.S. stock market suffered the largest plunge in history at the time.In order to maintain the attractiveness of the U.S. market and avoid falling into crisis, the U.S. government asked Japan to continue to maintain low interest rates and loose financial policies, and Japan allowed the bubble to inflate.

After that, a large number of American financial circles sneaked into Japan to earn profits from the appreciation of the yen and use financial leverage to gamble.

The rise in the stock market and housing market forced the Bank of Japan to implement macro-control and had to implement a monetary tightening policy. The interest rate of the yen rose to 6%, and a large amount of hot money began to withdraw from the Japanese stock market and housing market. The Japanese stock market and housing market fell accordingly.In 1997, the Japanese stock market had begun to fall from more than 40000 points, entering the stage of economic depression.Since 1990, the Japanese stock market has been in a long bear market since its peak.However, even though it has fallen for 7 years at this time, the average price-earnings ratio of the Japanese stock market still reaches an astonishing 150 times.Compared with the average price-earnings ratio of 2008 times when the Chinese stock market was 6124 points in 70, it is more than 2 times more.The decline in the stock market has bankrupted a large number of middle classes in Japan, while the decline in real estate has bankrupted the Japanese bourgeoisie.

In 1991, the Japanese economy officially entered a collapse, and it was not until 2003 that it began to bottom out under the strong drive of the Chinese economy. This period of time was called the "lost 10 years" by the Japanese. (In fact, the total time span is far more than 10 years.)
America's Bubble Economy

18世纪末，22岁的时候就被选为下院议员的亨利·桑顿注意到，无论哪个时期，在过了几年相对繁荣的好日子之后，经历一场恐慌似乎都是不可避免的。回顾他所处的那个世纪的历史，他看到英格兰经历了以下年份的经济危机：1702年、1705年、1711—1712年、1715—1716年、1718—1721年、1726—1727年、1729年、1734年、1739—1741年、1744—1745年、1747年、1752—1755年、1762年、1765—1769年、1773—1774年、1778—1781年、1784年和1788—1791年。在这18次经济危机中，每一次都是经济自我复苏，而且多数时候经济在复苏后都会上升到更高水平的稳定状态。但是，每一次复苏都只有几年时间，随后又会发生新的危机，并再次摧毁经济。

What Henry Thornton discovered is the so-called business cycle, the economic crisis is the trough stage of the economic cycle, and the economic prosperity is the peak stage of the economic cycle.

So how does the business cycle change?How should ordinary people respond to economic cycles?
The economic cycle is also called the business cycle, business cycle, and business cycle. It refers to a phenomenon in which economic expansion and economic contraction alternate and recursively occur periodically during economic operation. It is a combination of gross national output, total income and total employment. fluctuations.The economic crisis that everyone hates is closely related to the fluctuation of the economic cycle.

说到经济周期，表现最典型的就是美国。1783年，美国建国后，分别于1825年、1837年、1847年、1857年、1866年、1873年、1882年、1890年、1900年、1907年、1920—1921年、1929—1933年、1937—1938年、1948—1949年、1957—1958年、1969—1970年、1974—1975年、1980—1982年、1990—1991年多次发生过经济危机。而其中又以1857年和1929—1933年美国经济危机对世界经济影响最大。我们就主要说一下这两次经济危机。

The economic crisis of 1857 was the first universal overproduction crisis with worldwide characteristics in the history of capitalism.This crisis is also the first that started in the United States rather than in the United Kingdom.Because Britain had made a large investment in the construction of American railways, the bankruptcy of American railway speculation also caused a great shock to Britain. After the end of the economic crisis in 1847, the most important feature of the cyclical upsurge that began in 1850 was the sharp expansion of world trade. In the 19s, the average annual growth rate of world trade doubled that of the previous 50 years.The development of the machine industry, the revolution in transportation, the involvement of new nations and sectors in the international circulation of commodities, and the discovery of gold in California and Australia all contributed to the rapid expansion of world markets.

From 1848 to 1858, the United States built about 33000 kilometers of railways, more than the sum of the railways built in other countries.During the construction boom in the 40s, Britain only laid 8000 kilometers of railways.The vigorous development of the American railway industry should lead to the great development of its metallurgical industry, but the actual situation is not like this.Moreover, during this period, the production of pig iron in the United States stagnated for a long time, and the growth rate of the cotton textile industry was not fast.At the same time, imports of railroad tracks, pig iron, locomotives, cotton cloth, and other British manufactured goods grew rapidly, flooding the American market with British products and hindering the development of important industrial sectors at the time, such as American metallurgy and cotton textiles.

With the outbreak of the crisis, a large number of banks, financial companies and industrial enterprises in the United States closed down.In 1857 alone, nearly 5000 businesses went bankrupt.The overproduction of grain, the decline of grain price and grain export, and the fierce competition of British industrial products contributed to the deepening of the economic crisis in the United States.In turn, the UK's economic development has also been hit by the US economic crisis.The bankruptcies of American banks, railways, and commercial companies that were financed by the British also caused a sharp depreciation of the securities held by British investors.

In the autumn of 1857, a currency crisis broke out in the United States, and the entire banking system was paralyzed. The currency crisis in the United States reached its peak in mid-October. At that time, 10 of the 63 banks in New York stopped paying, and the discount rate exceeded 62%. The stock market fell by 60% to 20%, and the stocks of many railway companies fell by more than 50%.The economic crisis in the United States quickly spread to Britain and continental Europe, triggering wave after wave of bankruptcies.

The economic crisis in 1857 spread widely, and after that, the "Civil War" broke out in the United States.Afterwards, the eradication of slavery, the implementation of the Homestead Law, and the development of heavy industry created very favorable conditions for the accelerated development of American capitalism.

On February 1864, 2, the Federal Congress passed the "National Banking System Act", which made a unified currency appear for the first time in the history of the United States, and initially established an integrated financial system. Banks lead to currency confusion, lack of protection for savings, bad credit, and unstable funds.

(End of this chapter)