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Chapter 39 Financial Crisis: A Game of Human Nature (1)
Rise and Fall of Great Powers and Financial Changes
After the outbreak of the subprime mortgage crisis in the United States, the American "Newsweek" published a statement saying: "The United States in the 21st century must adjust itself in order to adapt to its relatively ordinary position in the world structure, just like the United Kingdom in the 20th century after the collapse of its empire."

The "Washington Post" directly compared Bush Jr. to the US President Herbert Hoover during the Great Depression, and they both happened to be Republicans.The financial crisis has made Americans more anxious than ever. Many people think that their proud global leadership is being lost step by step.In an article published in the Financial Times on August 2008, 8, Jagdish Bhagwati, a professor at Columbia University in the United States and a senior fellow on international economic issues at the American Institute of Foreign Affairs, bluntly stated that the United States has become a "self-interested "hegemonic country.He described the United States as a classic case of "the debilitating giant syndrome."

The impact of the financial crisis on the United States can be seen.As a result, the United States may be in a relatively ordinary position in the world structure, and the US hegemony is no longer. This is undoubtedly the most appropriate interpretation of the financial changes and the rise and fall of great powers.The strength of the United States has undoubtedly been weakened by the financial crisis.This is firstly manifested in the United States' control over the global capital market.A large number of U.S. investment banks, hedge funds, and private equity funds have been severely hit. The collapse of these investment institutions has made U.S. financial products lose their purchase guarantee, resulting in a severe credit crunch.And the resulting collapse of corporate entities has an impact on the economic strength of the United States that cannot be underestimated.

More serious than this is the weakening of US soft power.As Newsweek and the Washington Post suggest, public trust in the United States is already waning.The attractiveness of the US economic and social model in the international community has been greatly reduced.The national credibility of the United States has also been threatened.All this is because of the huge financial problems in the United States.

The rise and fall of a country is closely related to finance.In the period when the U.S. financial industry was once developed, the U.S. has always maintained its status as a world superpower.At the same time, Western countries with relatively developed financial industries are also in a favorable position in the world pattern.The financial systems of western developed countries are generally highly perfect and can provide supporting financial services for their economic development.This is one of the important reasons why Western economies continue to develop. As the saying goes, a strong financial country is a strong country.The degree of financial development of a country also requires strong national strength as a support.Why Western capital markets are more developed than emerging markets is closely related to the degree of economic development of the country.

German writers Peter Martin and Bruno explained to the world with a book "The War of Capital": Capital is the driving force behind the development of world history. "If there were no money and the speculation that went with it, history would certainly show another picture."

The trajectory of history has proved that the strength of a country's financial strength has largely affected the country's position on the world political map.Every economically powerful country must have a well-developed banking industry or capital market as support.If you want to become an economic power, you must become a financial power.On the road to a financial power, countries take different paths.The United States has a well-developed capital market, but its banking system is relatively weak; the British banking system and capital market are relatively developed; European countries have relatively developed banking and insurance systems, but their capital markets are relatively weak.

After going through different historical paths, China is facing a more complicated situation.That is, the financial system is becoming more and more comprehensive, and the modern financial system increasingly needs comprehensive strength. No single aspect is enough to cope with the situation of economic globalization and market integration.In order to adapt to this situation, the international capital market is constantly reforming.China is on the path of becoming an economically prosperous country, and the financial industry should adjust itself to adapt to the world trend.

Unforgettable Memories - "The Great Depression"

Today, many old Americans who have experienced the history of 1929-1932 are unwilling to recall that painful memory.

In 1929, an unprecedented economic crisis broke out in western capitalist countries. The purchasing power of the people was insufficient, and the products produced by enterprises were seriously surplus, and a large amount of grain and milk were dumped into the ocean.The economic crisis led to a severe decline in production in the major capitalist countries in 1930.Misfortunes never come singly. In 1930, the United States suffered from a very serious natural disaster. The Great Famine in 1930 caused at least 800 million people to starve to death in the United States, accounting for about 7% of the total population.

According to the "Happiness" magazine in September 1932, it was estimated that there were 9 million adults, men, women and children in the United States in 1932, and about 3400% of the total population of the country could not make ends meet (28 million rural households were not included), wandering The population is 1100 million.In New York alone in 200, there were more than 1931 recorded cases of starving to death on the streets.Children born during this period were short in stature, known as the "depressed generation".There are 20000 million children out of school in the United States, and girls risk pregnancy for 330 cents a time to prostitute on the street in order to support their families.Due to long-term malnutrition, when the United States participated in World War II and needed to replenish a large number of soldiers, 10% were eliminated due to unqualified physical fitness!

The people were in dire straits, so President Hoover at the time was considered the worst president in the United States.

The tragedy of that time is deeply imprinted in people's minds.Since then, people have used the "Great Depression" to refer to that period of history. The "Great Depression" refers to the global economic recession between 1929 and 1932.

The Great Depression of 1929 was more profound than any recession in history.This recession started with falling agricultural prices.This happened first in the price of lumber (1928), mainly due to competition from Soviet lumber, but the bigger disaster came in 1929, when the overproduction of wheat in Canada forced the United States to drive down the price of the basic grain from all agricultural origins. price.Whether in Europe, America or Australia, the agricultural recession was further exacerbated by the great financial collapse, especially in the United States, a speculative fever led to a large amount of funds being withdrawn from Europe, followed by a panicked Wall Street stock market in October 1929 plummeted. In 10 French bankers called in loans to Austrian banks, but this was not enough to repay the debt.

The catastrophe bankrupted the system in many countries in Central and Eastern Europe: it led German bankers to defer foreign debt payments in order to protect themselves, and it also endangered British bankers who had large investments in Germany.The shortage of capital brought about a sharp drop in exports and domestic consumption in all industrialized countries.The absence of a market will necessarily lead to closing of factories, less cargo and less cargo to be transported, ultimately jeopardizing the shipping and shipbuilding industries.In all countries, the consequence of the recession was mass unemployment: 1370 million in the US, 560 million in Germany, and 280 million in the UK (the largest figure in 1932).The Great Depression also had a major impact on Latin America, depriving a region almost completely dominated by European and American bankers and merchant entrepreneurs from foreign capital and commodity exports.It is estimated that the world lost $2500 billion in money during the Great Depression.

Regarding the causes of the Great Depression, Friedman, a famous American economist, believes that the Federal Reserve bears an inescapable major policy responsibility for the Great Depression.During the Great Depression, when some bank failures were very likely to set off a chain reaction, the Fed should have intervened in time to restore public confidence.However, the Federal Reserve acquiesced in the failure of the bank and did not take any strong action, which finally led to a near-complete collapse of the financial system, and a vicious cycle of failure-run-collapse occurred.Due to the increase in the cash-to-deposit ratio and the reserve-to-deposit ratio, the money multiplier is reduced, thus sharply shrinking the money stock.Therefore, Friedman believed that the emergence of the Great Depression was directly related to the policy of the Federal Reserve, so the adjustment of monetary policy should be used to solve the problem of the Great Depression.This later became the mainstream explanation for the Great Depression.

Financial Crisis: The Persevering "Haze"

Before the 2008 financial crisis, there had been six global financial crises in world history.

The first was the tulip mania of 1637.As mentioned above, in the Netherlands in the 17th century, tulips, a flower with no major use value, were wildly speculated as investment objects.It is now widely accepted that this was the first ever speculative bubble in modern financial history.

The second time is also mentioned in the previous article, that is, the South China Sea bubble in 1720.This incident cast a huge shadow over the entire London financial industry.The third was the Panic of 1837. In 1837, the economic panic in the United States caused the contraction of the banking industry. Due to the lack of sufficient precious metals, the banks were unable to honor the currency issued and had to be postponed again and again.The economic depression brought on by this panic lasted until 1843.

Then came the banking crisis of 1907. In October 1907, the U.S. banking crisis broke out. About half of New York’s bank loans were pledged by high-interest return trust investment companies as collateral for high-risk stocks and bonds, and the entire financial market fell into a state of extreme speculation.Shortly thereafter, as Jacob Schiff declared at the New York Chamber of Commerce: "Unless we have a central bank sufficient to control credit resources, we will experience a financial crisis of unprecedented and far-reaching magnitude." The banking crisis erupted.

The Great Crash of 1929 was the most dire moment in the history of the entire United States.

The last worldwide financial crisis was the "Black Monday" not long ago. On a Monday morning in 1987, Wall Street crashed due to deteriorating economic expectations and growing tensions in the Middle East.The S&P index fell by 20%, and a rich man jumped to his death that day, causing countless people to panic.Greenspan later used interest rate leverage to save the crisis, and it didn't last long.

Why does the financial turmoil linger?
Financial crisis, also known as financial storm, refers to a country or several countries and regions of all or most of the financial indicators (such as: short-term interest rates, monetary assets, securities, real estate, land prices, the number of commercial bankruptcies and the number of bankruptcies of financial institutions) Sharp, brief and super-periodic exacerbations.

Financial crisis can be divided into currency crisis, debt crisis, banking crisis, subprime mortgage crisis and other types.The financial crisis in recent years has increasingly shown some kind of mixed form of crisis.

The financial turmoil is based on people's more pessimistic expectations of the economic future. The currency value of the entire region has experienced a large depreciation, the economic aggregate and economic scale have suffered large losses, and economic growth has been hit.It is often accompanied by a large number of business closures, an increase in the unemployment rate, a general economic depression in the society, and sometimes even social turmoil or national political turmoil.

The Wall Street turmoil caused by the US subprime mortgage crisis in 2006 had completely evolved into a global financial crisis by 2008.The rapid development of this process, the large number, and the huge impact can be said to be unexpected by people.Generally speaking, it can be divided into three stages: the first is the debt crisis, which is caused by people who have borrowed housing loans and cannot repay the principal and interest on time.The second stage is the crisis of liquidity.Due to the debt crisis of these financial institutions, some relevant financial institutions cannot have sufficient liquidity in time to meet the requirements of creditors for liquidation.The third stage is credit crisis.That is to say, people have doubts about financial activities based on credit, causing such a crisis.

Japan's Bubble Economy——The Expansion and Burst of a Bubble

Japan's bubble economy has always been a hot topic among economists around the world. The bubble economy has dragged Japan's economy into a long-term recession for ten years.In recent years, after a long period of zero interest rates, Japan's economy has finally picked up.

On September 1985, 9, the world's five major economic powers (the United States, Japan, West Germany, the United Kingdom and France) reached the "Plaza Agreement" at the Plaza Hotel in New York.At that time, the high exchange rate of the US dollar caused a large trade deficit. For this reason, the United States, which was in trouble, issued a joint statement with the other four countries, announcing their intervention in the exchange rate market.Since then, the yen has appreciated rapidly.The exchange rate at that time rose from around 22 yen to the dollar to 1 yen to the dollar a year later.Due to the drastic changes in the exchange rate, the assets composed of US treasury bonds suffered book losses, so a large amount of funds entered the Japanese domestic market in order to avoid exchange rate risks.At that time, in order to subsidize the export industry hit by the appreciation of the yen, the Japanese government began to implement a financial relaxation policy, which created excess circulating funds.triggered a huge investment bubble.

日本泡沫经济是日本在20世纪80年代后期到90年代初期出现的一种经济现象。一般是指1986年12月到1991年2月之间的4年零3个月的这段时期。这是日本战后仅次于60年代后期的经济高速发展之后的第二次大发展时期。

This wave of economic development was supported by a lot of speculative activities, so as the bubble burst in the early 90s, the Japanese economy suffered a major setback, and then entered the Great Depression.

From 1985 to 1986, with the rapid appreciation of the yen, although the international competitiveness of Japanese companies declined, the domestic speculative atmosphere remained strong. In 1987, speculation spread to all industries. At that time, the optimistic view was that as long as the demand for land was high, the economy would not decline, and the market encouraged people to keep buying stocks, claiming that stocks would never lose value.

In 1989, Japan's bubble economy reached its peak.At that time, Japan's various economic indicators reached an unprecedented high level, but because the rise in asset prices could not be supported by industries, the bubble economy began to decline.

(End of this chapter)