What the U.S. 2008 "financial storm" looked like – how it started (1)

As the world's largest economy, innovation and development have always been respected by American society. The financial crisis that affected the world in 2008 was a financial panic that can go down in history. The financial crisis was later described as a "financial storm" and "financial catastrophe".

In general, financial crises rarely go out of control, meaning that financial catastrophe rarely occurs. Often, financial crises are ignited by the chaos in financial markets themselves. It will eventually destroy the financial system and other sectors of the economy, causing great damage and losses to the economy.

The flashpoint came in September 2008 when U.S. real estate mortgage giants Fannie Mae and Freddie Mac suddenly nationalized, the largest and most surprising government intervention in financial markets since the Great Depression.

Lehman Brothers, a respected investment bank, collapsed, the largest bankruptcy in U.S. history. The bankruptcy of the century-old investment bank Lehman was a critical point in the whole crisis. The crisis directly led to the bankruptcy of the once-prosperous Wall Street investment banks, and eventually "Wall Street investment bank" became a historical term.

Brokerage firm Merrill Lynch plunged into the arms of Bank of America.

The government provided an $85 billion bailout for insurance company AIG.

The Washington Mutual Bank Failure and the Associated Bank Failure Case are the two largest federally insured bank failures in U.S. history.

On October 3, 2008, Bush signed a $700 billion financial bailout package.

For the first time ever, the U.S. government has guaranteed money market funds worth more than $3 trillion. It also supports $1 trillion worth of commercial paper.

After a series of very aggressive financial interventions, the US was still losing 750,000 jobs a month, and the economy was shrinking at an annual rate of 8%, with the S&P falling more than 50% from its peak by mid-October 2008. The Dow fell 40%. The contraction, known as the Great Recession, ended in June 2009. The 2008 U.S. crisis slammed into global credit markets, disrupted the international financial system, and plunged the U.S. economy into its worst recession since the 2030s.

Looking back in hindsight, the 2008 financial crisis continued the pattern inherent in previous financial crises in history, manifested first by fanaticism, followed by panic, and finally collapse.

The crisis began with a credit frenzy that manifested itself in a credit boom during periods of overconfidence.

In the political context of the time, the two major parties in the United States, Republicans and Democrats, agreed that homeownership was essential to the "American dream". The mortgage boom has spread this dream to more Americans than ever before and has gained popularity as a result, which has also pushed the U.S. homeownership rate to a record 69%. Subprime loans are particularly commended for democratizing credit and benefiting low-income households, especially those minorities excluded from this dream.

Overly optimistic attitudes in the housing market became the driving force behind the credit boom. Rising house prices have contributed to accommodative credit conditions, which in turn have driven house prices up further. The widespread assumption that borrowers can buy homes far beyond their ability to afford without significant risk is that they can always refinance or sell securities for a profit if they encounter repayment difficulties, an optimistic assumption that has been correct for many years.

Many lenders approve all loan applications, which are nearly the full amount of the total home payment, regardless of the borrower's credit history, whether they have a job, whether they provide verifiable proof of income, and their genuine willingness to make monthly payments. This is why there are "ninja loans", which are lenders who have no income, no job, and no fixed assets; There are also scammer loans, lending to people who inflate their annual salaries or lie about their assets. Anyone who signs the dotted line can get a variable rate loan with an attractive interest rate that spikes after two or three years. Since 2004, a full half of the subprime mortgage securities entering the system have been undocumented or incomplete, and 30 per cent are interest-only loans, lending to those who have no prospect of repaying the principal. These mortgage-backed securities eventually triggered the crisis.

On the eve of the crisis, from 2001 to 2007, mortgage debt per American household soared 63 percent, much faster than household incomes were growing. U.S. real estate accounts for 20% of global wealth. In 2006, one-third of new mortgages issued in the United States were for second, third and even fourth homes. In Florida, Arizona and California, where the figure is as high as 45 percent, house flipping has become a national movement.

In 20007, U.S. consumers bought about 16 percent of global output. U.S. home prices have nearly doubled in a decade, with 70 percent of American households owning their own homes, totaling more than 80 million. Boost household wealth by $6.5 trillion.

By the summer of 2007, a total of $5.213 trillion in private asset-backed securities had been issued, namely mortgage-backed appraisals, credit cards, student loans, and auto loans generated from non-traditional mortgages. The most dangerous part of these mortgages is mortgage-backed securities for subprime mortgages. It reached 1.3 trillion.

Of that amount, $1.173 trillion is held by banks, which conduct off-balance sheet financing by issuing asset-backed commercial paper. As a result, asset-backed commercial bank notes have become the largest short-term money market instrument for investors seeking investment products that mature within three months, and the market size of asset-backed commercial paper even exceeds the short-term U.S. Treasury bonds issued by the U.S. government to manage its cash flow.

At that time, 35% of all profits realized in the United States came from the financial sector, and the dividends paid by the top of the financial sector were dazzling. Wall Street firms adopt the rule that, after deducting interest costs, half of net income is retained for employee compensation and the other half is paid to shareholders. Dividends in 2007 amounted to $66 billion. For executives, that means tens of millions of dollars each. Lehman's first executive officer, from 2000 to 2008, received a total of $4.848 in compensation and dividends.

The boom years overconfident the financial system, with financial firms taking on too much leverage, much of it in the form of highly liquid short-term debt. The Fed, which gathered the world's top economic elites at the time, did not realize that the refinancing boom had triggered structural changes in the mortgage machine.

Since 2004, the Fed has raised interest rates in 17 small increments, from 1% in June 2004 to 5.25% in June 2006. This is fine-tuning, not a shocking move, as the mortgage boom continues, global demand for U.S. safe assets, and the expansion of shadow banking continues. In the spring of 2006, it was discovered that long-term interest rates were lower than the short-term rates set by the Federal Reserve, which was a red flag. This means that the bank financing model - borrowing for short and lending long - is no longer reasonable.

In 2007, the annual interest rate on variable-rate mortgages, favored by low-income borrowers in the United States, was adjusted from 7%-8% to 10%-10.5%. From August 2006 to August 2009, $738 billion will experience repayment shocks. As interest payments increase, a wave of defaults is largely inevitable. Once the wave of defaults begins, then it is only a matter of time before house prices stop rising and the market turns.

In fact, there is a built-in automatic tightening timer in the mechanism of subprime mortgages. Unless house prices continue to rise at a record pace, this timer will turn in relentlessly and stop the boom.

No one realized the crisis was coming, and the Association of American Real Estate Developers made the first economic experts, in their book Why the Real Estate Boom Doesn't Collapse, betting that real estate would continue to boom.

Even Larry Kudlow, editor of National Review, a conservative pundit, scolded all the fools who expected house prices to collapse in Las Vegas or Naples, Florida, just wanted to bring down consumers, the rest of the economy, and the stock market.

Citi's first executive said, "As long as the dance music continues, you have to go to the dance floor and keep dancing." ”

Ragraman Rajan, the first economist at the International Monetary Fund at the time, was seen as an outlier in his paper "Has Financial Development Made the World More Dangerous?" The fear is that the dramatic expansion of modern financial intermediaries is creating a new and dangerous risk appetite. Larry Summers (former Treasury Secretary) claimed that he found the paper's underlying premise a bit Luddist and largely misleading. At the time, as Rajan emphasized risk, it would be limited. It's like giving up traveling by plane for fear of crashing.