subprime crisis

In plain language, fishing for dry goods!

The subprime crisis, to put it simply, means borrowing money that cannot be repaid.

I can explain in the simplest terms that subprime loans are inferior loans, which are loans that poor people cannot repay.

The subprime mortgage crisis is an experience of the bursting of a foam, which dates back to the bursting of the foam in US technology stocks, and then the real estate boom began.

Debt is a particularly unstable factor in the entire economy. Finally, to solve the problem, the government can only divest debt, which has the greatest impact on the poor.

Keywords: mortgage, foam, instability, poor

Firstly, let's talk about subprime loans, MBS, and CDO.

I previously explained subprime loans as relatively low-quality loans, and then a netizen argued with me, suspecting that I lacked education. I have nothing to say. I write these articles mainly to help even the most uneducated people understand what they are saying. Are the specific terms boring? As the saying goes, substance is more important than form. As long as everyone can understand and comprehend the underlying logic, I think it's possible.

Firstly, let me explain what banks do. Banks, of course, borrow money to repay it. This is a two-way trader of funds. Actually, it's not that high. Look at these people who wear suits and go in and out of high-end office buildings all day long. Actually, it's not much different from the unscrupulous merchants on the street, just selling for money.

What are the characteristics of banks? The characteristic of a bank is that it is so poor that it does not love the rich and likes to lend money to them. Why? Because poor people cannot love the rich, if you have one million, would you lend it to the rich or the poor? You will also lend to wealthy people because their repayment ability is stronger. More stable.

When you think about bank loans, it's actually typing an electronic symbol. So if you borrow one billion, if you borrow one million, the cost of labor and human resources is about the same. Of course, he is willing to lend to richer people.

With the continuous development of the economy and the continuous rise of housing prices, banks are becoming more and more dissatisfied with lending money to the rich and gradually repaying their loans.

Take a look at our China. In our country, most people find it difficult to repay their mortgage, but even if they feel uncomfortable, they will still repay it. Moreover, if many people buy a house they like and are very happy, they always feel like they have a nest. I said this is actually a norm. No one is very young and can buy a good house on their own. Everyone is feeling uncomfortable, but despite the discomfort, as long as the loan can be repaid and the future cash flow can be sustained, there is no problem.

Many people think I am a real estate speculator, but I still want to say that you should do your best to buy a house. For example, if you have already spent 70% of your income, don't buy it. Save money to increase your workforce. If this number is reduced to half, it can be considered. If your expenses only account for 30% of your income, I think you can consider buying a house. Of course, nothing is 100% safe.

To get back to the point, at the beginning, Americans lent money to the wealthy, middle class, and those with stable incomes. Of course, there is no problem for these people to repay their mortgage loans. Then the banks became increasingly dissatisfied, coupled with restrictions and less strict regulation, so they gave money to the people, then to the poor, and even to cats and dogs.

His financial industry is so developed that as long as you want to buy a house, I can provide you with any kind of loan to buy a house. As for whether it can be returned? don't worry. Why? Because housing prices are rising, as long as they are rising, there is no problem. When the housing price rises, it can be monetized through various financial operations, or it can be sold directly to make a big profit.

Many poor people, ordinary people, and even a dog want to buy a house. So what about these loans? Isn't it foolish for banks to be so risky? Banks are certainly not foolish.

Banks package them into an asset called MBS, which is mortgage securitization. What'd you mean by that? Simply put, if you collect 100 junk loans together, then find a group of economists, financial economists, and do some calculus formulas, and then package them, you will feel envious.

Then these MBs are amplified by 20 times using financial leverage derivatives to create CDOs, collateralized debt obligations, which is even more impressive. If loans are compared to bullets, then Mbs are grenades and CDOs are nuclear bombs, which is probably their power.

Attention, even fools know that this game won't last long. There is only one way, which is the rise in housing prices. As long as housing prices continue to rise, anything can be solved.

Second, the real estate boom, the foam is slowly blowing.

Why are housing prices rising in the United States? For many years, the Chinese people have been accustomed to the continuous 20-year rise in housing prices. They always believe that Chinese people have no bottom line, Chinese people like houses, while Americans have a bottom line. Americans are not bastards, Americans are good people, and Americans don't love houses. Actually, this is purely your imagination.

Not to mention the distance, just look at this epidemic. The housing prices in the United States are also soaring. What about? The United States is also a group of bastards. The United States is highly divided and the wealth gap is even greater. Its powerful people may be a bunch of elites, and there are pigs at the bottom. Do you think wearing masks has any impact on the epidemic? This matter still needs to be debated for half a day. Who are these people?

Let's talk about real estate in the United States. As is well known, the core asset of the United States is actually its stocks, and its direct financing scale is very large. In this epidemic, we can see that stocks first fell, and then the Federal Reserve forced stocks to rise again.

But in fact, Americans also love houses very much. As early as early as the beginning of 2000, the foam of American technology stocks burst, and the stock market suffered a lot. At this point, people feel that trading stocks is boring, so they look at houses again.

Of course, buying a house does not require full payment. At that time, their down payment in the United States was not as high as our current 34% to 50%. At that time, it was purely zero down payment. You can buy it as long as you have enough cash flow to repay my future mortgage, that's no problem. Meanwhile, the United States also has a highly developed financial industry. In short, it's pushing this thing back and forth with various operations. Blow the bubbles bigger and bigger.

Since the beginning of 2000, the US real estate market has experienced a continuous bull market for 7-8 years. I previously mentioned in an article that human nature is like this. If this thing keeps rising, it will make people feel very arrogant and conceited. It is caused by their own abilities, and it will continue to rise in the future. This is human nature. You are tall, you think you will be taller. You are powerless. Think about it. If you find a stable job after graduation, with an annual salary increase of 10% until your twenties, do you also feel stingy, daring to borrow money, dare to flirt with girls, and dare to do anything?

The housing prices are the same, even for the poorest person, even for a dog, even for an animal, as long as they want to buy a house. Bank intermediaries will provide him with various financial tools, and you can buy a house. What if you don't have cash? You can mortgage the previously purchased house to achieve securitization. As long as housing prices continue to rise, all problems can be solved.

As the saying goes, the prerequisite for playing this game is that housing prices need to rise. What if housing prices don't rise? Then a crisis will arise. I will say next.

Thirdly, the root cause of the debt problem is the unstable factors in the economy.

As the saying goes, human nature always overestimates and underestimates itself at times. The economy can be prosperous or depressed, and so can housing prices. It's impossible to keep going to heaven. One day, he may not go up, but he will go down. This is the law, there is no way.

Buying a house requires a loan, while buying a house requires debt. I have previously stated that debt is an unstable mechanism in the economy. This is not like buying milk and cola. The price is very high, and people don't want to buy it, so they pull the price back. You may be borrowing more and more debt, and asset prices may be rising. Let me explain in detail below.

For example, this type of subprime loan is a high-risk debt. When he loses supervision, many people will want to borrow money.

Think about it. Before, everyone was two dogs and three dogs. Er Gou earns money through loans, and housing prices continue to rise. Three dogs can't sit still at home. Why did they play with mud when they were children? Now you're just trying to cheat with nothing, buying a house will make you rich.

At this point, people will take out a loan, package it up and sell it through the financial system, and then use various unreliable rating agencies to form a 3a rated bond. How can ordinary people understand so many calculus formulas? They can only recognize it.

Because of inertia, because you want to buy more, because of the characteristics of assets, I say assets are getting higher and higher. Are you buying assets to consume them? Are you buying assets because you have great vision? number

You just see it rising, you think it will rise in the future, but you want to bid higher. When everyone thinks so, this price may just continue, which is a positive feedback and self reinforcing mechanism.

But prices cannot be infinitely high, and financial instruments cannot be used indefinitely. You must repay the interest on the money you borrowed. One day, due to various reasons, the price may suddenly not go up and be locked in. This is the so-called Minsky moment, where liquidity is locked in.

What will happen at this moment? Think about it. You just started borrowing a lot of debt. When these debts mature, they must be repaid with principal and interest. At this time, housing prices are too high and liquidity is locked in, making it difficult to sell. What should I do at this moment? You have to lower the price to buy it.

But you're just a loser, 100 losers, 1000 losers, 10000 losers, you've gathered a bunch of MB. In addition, the unrestrained amplification of this power by financial derivatives CDOs has been hijacked by the entire society.

At this point, the entire society cannot afford to repay its debts. I say finance is nothing more than borrowing money and repaying it, borrowing money is easy. When will you repay the money? If you don't pay, you have to sell the assets at a low price. At this time, housing prices will accelerate their decline. As you can see, real estate prices often fall very quickly, and competitive sales often occur when asset prices fall. Then the more it sells, the less it sells, and the more it falls, the less people buy. Finally, the price may fall below the sky.

At this point, the entire society is in debt and has no money to repay it. The collateral is no longer valuable, and new loans cannot be obtained. If there is no new money, the old money has been paid off, and there is still a pile of debt in society, the whole society will enter a liquidity lock, known as severe deflation and depression.

Who is most affected in this state? Actually very poor. Think about the shrinking assets of the rich, who still have money, but what about the poor?

Generally, banks will lend money to businesses or individuals to purchase assets. If asset prices fall, the value of the bank's collateral will not reach its original amount. If banks want to make up for the money gap, they must lend to enterprises. If a company takes out a loan, it will go bankrupt. When a company goes bankrupt, people have no income, and without income, people have no ability to repay debts. This is a downward vicious cycle, where the poor will be directly unemployed, so the impact on the poor will be greater.

This brings us back to the old question. What should we do at this point? Only the government can relieve debt. I have said that the debt mechanism is an unstable mechanism in modern market economy. It cannot be brought back to its starting point through balanced price adjustments. Only through external means can debts be stripped or cancelled, and the economy can resume operation.

Another article about this issue. I have written an article before. If you are interested, you can always check the updates of my article. I will write in detail later. Every time I write such a question, I hope to bring some new knowledge to everyone and gradually understand the entire logic of economic operation.

Conclusion. Subprime loans are relatively subprime loans in real estate mortgages, sold to the poor. This type of loan is packaged as real estate bond MBS, and its power is amplified dozens of times through financial derivatives. This has a significant impact on the entire economy.

To play this game, one must have prosperous real estate and rising housing prices. It seems that everyone's life will be beautiful. Since the bursting of the technology stock foam, the United States has experienced a 7-year bull market in real estate. This bull market makes people full of good expectations for the future, so they dare to borrow money, and then they dare to constantly relax financial supervision, resulting in the following foam.

Fundamentally, this is an unstable mechanism of the market economy itself, which is the mechanism of debt assets. This kind of thing will get higher if it gets taller, and everyone will go crazy. Later, when housing prices fell, asset prices plummeted, and the whole society became short of money and in debt. Only when the government divests its debt can the economy operate again.