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Chapter 40 Financial Crisis: A Game of Human Nature (2)
In March 1990, the Ministry of Finance of Japan issued the "Regulations on the Control of Land-related Financing" to control the total amount of land finance. This artificially slammed the brakes led to the accelerated slide of the bubble economy that was already heading for a natural decline, and led to the support of the Japanese economy. The long-term credit system at the heart of the economy is collapsing.Since then, the Bank of Japan has also adopted a policy of financial tightening, which further led to the bursting of the bubble.As land prices have also fallen sharply, loans secured by land have also become extremely risky.At that time, the non-performing loans of major Japanese banks were exposed one after another, which dealt a serious blow to Japanese finance.

On December 1989, 12, the Nikkei average stock price reached the highest point of 29 points, and then began to fall. Land prices also began to fall around 38915.87, and the bubble economy began to officially burst.By March 1991, the average Nikkei stock price fell below 1992 points, only reaching half of the highest point in 3. In August, it fell further to around 2 points.A large number of book assets disappeared in just one or two years.

Undoubtedly, the reasons for the formation and bursting of Japan's bubble economy are complex, including various factors such as system, structure and policy.However, the boom and bust brought about by the bubble ratio experienced by the Japanese economy also gives us some enlightenment.The government must comprehensively use fiscal policy and monetary policy to avoid false prosperity caused by people's irrational speculation.

How the American Financial Crisis Produced

The U.S. financial crisis that broke out in 2008 was like a storm. Wherever it passed, the country's economy slowed down, people's income fell, and voices of unemployment and layoffs arose.Even in China, we ordinary people are feeling the chills.What exactly triggered the global financial crisis? "An embankment of a thousand miles is destroyed by an ant's nest." The cause of today's global financial crisis is nothing more than the inconspicuous subprime mortgage crisis.

At the beginning of 2007, a "financial hurricane" blew up on the other side of the Atlantic Ocean. The lending institutions represented by the famous American housing mortgage loan company, the investment bank represented by Merrill Lynch, and the financial supermarket represented by Citigroup became the main players in this crisis. In the direct eye of the "financial hurricane", at the same time, large and small hedge funds and overseas investors have all been affected by the hurricane.The news of huge losses exposed by many financial institutions became hot news in American society for a while.Most people in the United States thought that this was just a small cold in American finance. Until the second half of 2007, reports and comments about the financial crisis gradually subsided, and people seemed to have returned to a peaceful life. People had temporarily forgotten about the subprime mortgage incident.

However, at the beginning of 2008, reports on the subprime mortgage crisis once again became the focus of media attention, and the continuous emergence of bad news reminded people that the subprime mortgage crisis was not only not over, but was developing in a deeper direction.This is not a cold, but a real crisis. From the virtual economy to the real economy, people's lives have been affected. Bankruptcy, bankruptcy, layoffs, salary cuts, bad news one after another, nerves all over the world Then it tensed up.

What the hell is going on in America?How did the crisis come so quickly?What's next?Along with a series of serial events such as economic downturn, job loss and income reduction, people feel that a new crisis has come around.To understand the ins and outs of this crisis, we must first understand what the "subprime mortgage crisis" is.

There used to be such a story, to the effect that there was a Chinese old lady and an American old lady. The Chinese old lady had saved all her life and lived in a new house when she was dying. The wife took out the loan first and moved into a new house, and the loan was repaid at the end of her life, so she lived in the new house for the rest of her life.The moral of this economic story is obvious. Praise the old American lady for her consumption in advance and overdraft consumption. However, the wife was stubborn and only realized her dream of housing before she died.

In the United States, most people advocate early consumption, especially in terms of housing. The system of "buying a house with a loan" is a very good financial system.Generally, it requires the borrower to pay at least 20% of the down payment, which shows the responsibility of the lender; secondly, the total amount of the loan cannot exceed 4 times the annual income of the borrower, that is to say, for a family with an annual income of 10 yuan, the bank can borrow at most Give you 40 yuan to buy a house.This is the most basic financial product. This product enables many young couples who could not afford a house to own a house of their own, realizing their "American Dream" and activating the related economy at the same time.Under this system, the responsibilities and risks of the bank and the borrower are very clear: the borrower knows that if they fail to pay the monthly loan, they may lose the property and the 20% down payment; It will be closed by the government and its business qualification will be cancelled.Under the balance of responsibility and risk, social activities run smoothly.

But the problem is, not every American can qualify for a loan to buy a house.At this time, the Americans used their own wisdom to innovate the "subprime debt".The "subprime" (sub-prime) and "prime" (Prime) in the US mortgage loan market are divided by the credit conditions of the borrowers.According to the level of credit, lending institutions treat borrowers differently, thus forming a two-level market.People with low credit cannot apply for preferential grades and can only seek loans in the secondary market.The service objects of the two levels of the market are home buyers with loans, but the loan interest rate in the secondary market is usually 2% to 3% higher than that of the preferential level loan.Subprime mortgages are popular in areas with high concentrations of minorities and underdeveloped economies because they lend to borrowers who discriminate against or do not meet the standards of the mortgage market.From this point of view, it should be said that the starting point of the US subprime mortgage loan is good. In the first 0 years, the moderate issuance of this financial product also achieved remarkable results. From 994 to 2006, the home ownership rate in the United States increased from 64% to 69%, and more than 900 million families owned their own houses during this period, which is largely due to subprime mortgages.

In 1980, the U.S. Congress passed the Deregulation of Depository Institutions and Currency Control Act to encourage mortgage institutions to issue mortgage loans to low-income families.The law abolishes the traditional upper limit on mortgage interest rates, allowing mortgage institutions to lend to low-income people at high interest rates and high rates to compensate for the lending risks of mortgage institutions.Minorities make up more than half of those who have used subprime mortgages to obtain housing, and most of them are low-income people with poor credit histories.Therefore, subprime mortgages are highly risky.Compared with the 6% to 8% interest rate of ordinary mortgage loans, the interest rate of subprime mortgages may be as high as 0% to 2%. In this way, borrowers with little money and poor credit bear high interest rates, and lenders with high interest rates bear high Risk, the former has a house to live in, and the latter makes a lot of money.

So, how did the "subprime mortgage crisis" come about?In layman's terms, "subprime mortgage" is to create a market for those who are not eligible to apply for housing loans, so that these people with insufficient credit or bad loan records can also apply for loans.These subprime loans need to be applied through intermediary agencies, and intermediary agencies should have taken care of the first hurdle.However, in order to win more business, intermediary agencies began to violate regulations, make fakes, and provide fake data and fake income certificates.The bank sees a good past credit history and lends money to these applicants, and then the bank turns those loans into bonds and sells them to Freddie Mac and Fannie Mae, and Freddie Mac and Fannie Mae split the bonds Bonds with a smaller face value are sold to ordinary investors.

In this way, people who can't even provide proof of income can take out loans, deceive the bank through the packaging of intermediaries, and the bank then sells the bonds to Freddie Mac and Fannie Mae, and Freddie Mac and Fannie Mae don't know Next, it will be divided into bonds with smaller face values ​​and sold to the world, including companies such as AIG.Finally, one day, the borrowers of these subprime debts began to be unable to repay the interest. If the bank cannot get the interest, it cannot cash it to Freddie Mac and Fannie Mae. If Freddie Mac and Fannie Mae cannot get the money, they cannot give The general public, thus triggering a series of economic collapses.

Just like this, a crisis that originally involved only a single region and a single financial product has evolved into a global financial storm through the butterfly effect.

How a crisis caused an economic contraction
A financial crisis seems to come in a whirlwind, but in fact, many signs have already shown the information during its formation period, but people often either fail to discover it, or are unable to reverse it when they discover it.After the warning of economic recession, the interest rate, capital market and many responses from the financial sector also accelerated the arrival of the financial crisis.These factors make the outbreak of the financial crisis appear to be a vicious gesture that makes people discolored.The financial crisis caused economic contraction from these aspects.

rise in interest rates

It is understandable that the individuals and businesses involved in the riskiest investments are precisely those willing to pay the highest interest rates.If the increase in the demand for credit funds or the reduction in the money supply causes interest rates to climb to a high enough level, projects with low credit risk will not be willing to borrow, and only those projects with higher risks will still be willing to borrow.As a result, the adverse selection problem increases, making lenders unwilling to grant loans.The massive reduction in lending led to a sharp contraction in investment and overall economic activity.

Uncertain increase
Sudden increases in financial market uncertainty due to major financial or non-financial corporate bankruptcy, economic recession, or stock market volatility make it difficult for lenders to discern the quality of credit assets.The reduced ability of lenders to solve the adverse selection problem makes them reluctant to make loans, leading to a decline in lending, investment, and overall economic activity.

Balance Sheet Effects in Asset Markets
Since the stock price is an important indicator to measure the net worth of a company, the decline in the stock market means that the net worth of the company will decrease, which will weaken the willingness of lenders to lend. Due to the reduction in the retention of lenders facing adverse selection, loans will shrink and lend, thus causing A decline in investment and aggregate output.In addition, the reduction of corporate net worth caused by the decline in the stock market increases the incentives for borrowing companies to participate in high-risk investment funds, so even if the investment fails, they suffer little loss. shrinkage.

banking sector
As we all know, banks play a very important role in the financial market.The state of a bank's balance sheet has a significant impact on bank lending.If a bank's balance sheet deteriorates, causing a sharp contraction in capital, fewer resources are available for lending, and bank lending falls.The reduction in lending leads to a drop in investment spending, which slows economic activity.

government fiscal imbalance
Imbalances in government finances can also raise public concerns about government bond defaults.If the government's finances are in trouble, the government will find it difficult to sell government bonds to the public, so the government will force the banks to buy them.Thereby deteriorating the balance sheet of banks, leading to a contraction in lending and economic activity.

The silent "anti-hot money war"

In the U.S. government in 1848, professional circus clown Dan Rice used the music of band floats to attract public attention when campaigning for Zachary Taylor.This move succeeded in Taylor's publicity, and more and more politicians voted for Taylor in pursuit of interests.By the time William Jennings Bryan ran for President of the United States in 1900, band floats had become an integral part of his campaign.As a result, a term has emerged in the academic circle: the herd effect - also known as the "band float effect". The "herd effect" has also been fulfilled among civilians. During the presidential election, people participating in the parade can easily enjoy the music in the parade as long as they jump on the floats carrying the band, without having to walk. Therefore, jumping on the floats represents "entered the mainstream".As a result, more and more people jumped on the float.This effect is called the "hot money herd effect" in the capital market, which refers to a typical "abnormal situation" of "arbitrage speculative nature": affected by the herd effect, when the number of people buying a commodity increases, people's interest in Its preference will also increase.This relationship affects the phenomena explained by the theory of supply and demand, which assumes that consumers will only buy things based on price and their own personal preferences.For example, in the stock market, if many people are buying a certain stock, more and more people will buy it.Therefore, in the securities trading market, the herd effect can make a security rise to an unreasonable level in a short period of time.The capital that promotes the sharp rise of securities in the short term is speculative short-term capital, that is, hot money.

A flock of sheep is a very disorganized organization, and they usually rush left and right blindly when they are together, but once a head sheep moves, the other sheep will rush forward without thinking, completely ignoring the wolves and other sheep that may be nearby. Better grass in the distance This is the "herd effect".Herd effect is a metaphor that people have a herd mentality, which can easily lead to blind obedience, and blind obedience often leads to deception or failure.Animals are like this, and humans are not necessarily wiser.Research by social psychologists has found that the most important factor affecting conformity is the number of people holding a certain opinion, not the opinion itself.A large number of people is persuasive in itself, and few people will insist on their different opinions when they are unanimous.Hot money is rampant in people's psychology.Driven by hot money, more and more people rush forward without hesitation.Once the bubble burst, people discovered that in the frenzied market atmosphere, only the leaders made profits, and the rest of the followers became victims.

(End of this chapter)