There is a good word in China, called "food, clothing, housing and transportation".

Just four short words explain the four most basic needs of ordinary people in their daily lives.

In fact, this word is not only applicable to China, but also to the whole world, this word is still common.

Although foreigners have yellow hair, white skin and blue eyes, they still need "food, clothing, housing and transportation" in their daily lives!

For a natural person, it is easy to say about clothing, food and business, but this "living" is definitely a relatively large burden, especially for a family. If there is no fixed place to live, can the family still be called home?

Therefore, since ancient times, not only Chinese people, but even foreigners have attached great importance to living.

This tradition continues to this day and is still applicable.

Don’t think that the only world is Chinese people who like to buy houses and land, as is the same for foreigners. Haven’t you seen those rich foreigners, either villas, manors or even castles? Even foreigners who don’t have to buy an apartment to live in.

Therefore, abroad, since the Industrial Revolution, especially after the 20th century, the real estate business has become a very important business. In the development process of any developed country in the world, real estate business has become an important part of its economic composition, and no one can ignore it.

Even in modern times, real estate business around the world is still a very important part of the economic composition of various countries, and no government of any country cannot ignore real estate business.

Take the United States, the world's largest country, for example, real estate business is also very important.

The United States has a very developed real estate business and occupies an important position in the national economy. Of course, because the United States is the fourth largest country in the world, its land area is similar to that of China, but its population is several times smaller than that of China, and it is not even as good as the fraction of China's population. Therefore, the real estate economy is not as important as China in the current economic composition of the United States.

But even so, once the US real estate economy encounters a crisis, it will inevitably cause turmoil at the basic level of the economy. As the world's largest economy, once the US economic basic level is turbulent, it will inevitably trigger economic crises of one kind and another, which will affect the whole world.

In fact, since the 1960s, the US real estate economy has experienced four "crisis". Every time there is a crisis in the real estate economy, the economy of the entire United States and even the world will be turbulent.

According to data provided by the US official, from 1963 to 2011, the actual transaction housing prices in the United States rose by nearly 14 times, and in 1963 it rose by 16.7 times compared with the peak in 2007. During these 47 years, the average annual price of the US housing prices rose by 5.9%. In general, the US real estate prices fluctuated slightly, while the general trend rose steadily.

During these 47 years, the US real estate economy has experienced four relatively large fluctuations, the first time in 1969.

In that year, due to the Vietnam War, Arab countries significantly raised oil prices and embargoed oil, the fifth economic crisis broke out in the United States after World War II, causing housing mortgage interest rates to rise from 7% to 8-11%, and the prices of real estate market fell, so the "first real estate crisis" began.

The property crisis lasted for about three years, with house prices bottoming out in 1972 and soon returning to pre-economic levels, and began a sharp rise that began several years.

The second real estate crisis in the United States broke out in 1981. In this year, due to the instability in the Middle East and the sharp rise in oil prices, the US economy led to severe stagflation and a sharp increase in unemployment.

Under this circumstance, the interest rate of housing mortgage loans quickly rose to 18%, and the interest rate of first-tier lending is as high as 22%. People are full of negative attitudes towards the market, believing that housing prices have been difficult to rebound in the past decade, so the volume of real estate transactions has shrunk significantly.

But in fact, the real estate crisis lasted only two years, and then the U.S. housing prices returned to an upward track.

As for the third real estate crisis in the United States, it was in 1991. However, compared with the previous two real estate crises that affected the whole country, the crisis has not affected much, and it only broke out in a few limited states such as California.

The third real estate crisis lasted for about two years. Then, starting from 1993, the US real estate economy entered a fourteen-year boom period until the arrival of the fourth real estate crisis.

Compared with the first three real estate crises, the real estate crisis that broke out in 2007 almost killed the United States, and not only caused the US economy to suffer a severe blow, but also triggered an economic crisis around the world. And unlike the economic crisis triggered by the first three real estate crises, the global economic crisis triggered by the fourth real estate crises is much more serious. Not only did the US economy suffer a severe blow, but the economies of many countries in Europe, Asia, and Oceania also suffered. The global financial crisis caused by this real estate crisis caused more evil consequences than the US stock market crash in 1987, and is even known as the second most serious economic crisis after the Great Depression in the 1930s!

The root cause of this US real estate crisis is the greed of those investors!

In the late 1970s and early 1980s, the stagflation crisis broke out in the United States, which not only led to the second real estate crisis in the United States, but also affected finance around the world.

In this economic context, a set of thoughts that revive traditional liberal ideals and reduce government intervention in the economy and society as the main economic policy goal began to spread in the United States. This set of thoughts is called "neoliberalism".

Neoliberal economic policies are popular in the United States. The core content is to reduce government intervention in finance, labor and other markets, crack down on trade unions, promote economic policies that promote consumption, and use high consumption to drive high growth.

Under this economic policy, the US government began to encourage the people to eat food and consume wildly to promote rapid economic growth. At the same time, another important part of this economic policy is to lift the regulation, including financial controls.

Therefore, since the Reagan administration came to power in the early 1980s, the United States has been formulating and amending laws to relax restrictions on the financial industry and promoting financial liberalization and so-called financial innovation. For example, in 1982, the U.S. Congress passed the Garne-St. Germain Savings Agency Act, giving savings institutions a similar business scope to banks, but not subject to the Federal Reserve. Under this law, savings institutions can purchase commercial paper and corporate bonds, issue commercial mortgage loans and consumer loans, and even purchase junk bonds.

Later, the US government successively introduced more similar laws, with the purpose of eliminating barriers between the banking industry and investment industries such as securities and insurance, thereby opening a convenient door for the so-called financial innovation, financial speculation, etc. in the financial market.

Under the background of the above legal reform, the speculative atmosphere on Wall Street in the United States is becoming increasingly strong. Especially since the 1990s, as the Federal Reserve's interest rates continue to decline, the pace of innovation in asset securitization and financial derivatives has accelerated. Coupled with the luxury consumption culture that permeates the whole society and the blind optimism about future prosperity, it provides the possibility for ordinary people to advance their lending and consumption.

In this case, the US real estate economy began to recover again, and the real estate market was becoming more and more popular. Even the bursting of the Internet bubble and the 9/11 incident at the beginning of the new century did not stop the US real estate market from booming.

As the saying goes, capital is like a shark. As long as there is a slight smell of blood, capital will chase it as soon as possible.

The booming real estate market in the United States naturally triggered the pursuit of capital.

However, before the new century, those capitals that lack regulation were a little more honest. After the new century, especially after the 9/11 incident, these capitals from Wall Street began to become unscrupulous.

Everyone knows that loans are a very common thing in the United States. It is very common to consume in advance and eat food for the first time in the United States.

Moreover, in the United States, except for those super rich people, the ordinary middle class and most ordinary people rarely pay the full payment when buying a house. They usually buy real estate through loans.

But similarly, unemployment and reemployment are very common phenomena in the United States. People whose income is not stable or even have no income at all, are defined as subprime credit lenders, referred to as subprime lenders because their credit rating does not meet the standards.

Subprime mortgages are a high-risk, high-yield industry, referring to loans provided by some lenders to borrowers with poor credit and low income.

The difference from the traditional standard mortgage loan is that subprime mortgage loans do not require high credit records and repayment ability, and the loan interest rate is correspondingly much higher than that of general mortgage loans. Those who are refused to provide high-quality mortgage loans by banks due to poor credit records or weak repayment ability will apply for subprime mortgage loans to purchase housing.

The US subprime mortgage market usually adopts a combination of fixed interest rates and floating interest rates, that is, home buyers repay loans at fixed interest rates in the first few years after purchasing the house, and then repay loans at floating interest rates.

In the five years before 2006, the subprime mortgage market in the United States developed rapidly due to the continued prosperity of the U.S. housing market and the low interest rates in the previous years.

Under such circumstances, many financial derivatives about subprime loans have appeared one after another. Among them, the most famous financial derivatives are "guaranteed debt certificates", referred to as CDO, and "credit default exchange", referred to as CDS.

In the real estate lending market, in order to share risks and share returns, loan companies find investment banks, and the investment banks securitize them, resulting in "guaranteed debt certificates" - CDO.

In order to make huge profits, many investment banks use leverage operations of 20-30 times. For example, there is a Zhang San investment bank whose own assets are US$3 billion, which uses 30 times leverage operations, that is, using US$3 billion of assets as collateral to borrow US$90 billion of funds for investment. If the investment profit is 5%, then Zhang San investment bank will obtain US$4.5 billion of profits, which is a 150% huge profit compared to its own assets.

However, the risk of leverage operation is high. According to normal operation methods, Zhang San Investment Bank should not perform such risky operations, but it cannot withstand such operations to obtain high profits. So someone came up with a way to use leverage investment for insurance. This type of insurance is "credit default exchange" - CDS.

The specific process of CDS is as follows: Zhang San Investment Bank found Li Si, who may be another investment bank or insurance company. Zhang San does insurance for leverage operations and pays Li Si $50 million in insurance premiums every year, a total of $500 million for ten consecutive years. If the CDO does not default, in addition to the $500 million insurance premium, Zhang San can also make $4 billion. If the CDO defaults, Li Si will pay anyway.

This is credit default exchange!

In fact, CDS is essentially an insurance - Party A pays premiums, and if the target asset defaults, Party B compensates for losses. However, if it is named after "insurance", it will be subject to strict supervision of insurance products, so the name "financial innovation" is regarded as "swap".

The original intention of CDS is to share risks - originally the risk of default was only borne by the loan issuer, but now through the created financial products, investors of all kinds share risks while obtaining returns.

The motivation for profit-seeking quickly gave birth to the art of speculation. In order to cater to demand, Wall Street developed a series of financial derivatives such as CDX, CDXIG, etc., and the insurance targets became a package of CDS and indexes.

As housing prices keep rising, risks have not evolved into losses, premiums are getting lower and larger...

Everyone knows that the speculators on Wall Street are the most greedy guys in the world. How can these speculators still bear it if they can make huge profits in this way?

Let’s use Zhang San and Li Si just now as an analogy.

For Zhang San, this is a sure profitable investment. But Li Si is not a fool. Through statistical analysis, they have less than 1% of the default in the prosperous market. So, if I, Li Si, do 100 such insurances in a row, then I can get a total of 50 billion US dollars in insurance. If one of them defaults, the compensation amount will be at most 5 billion US dollars, and my sister can still make 45 billion US dollars!

What a good deal! So most of the "Zhang San" and "Li Si" on Wall Street, as well as "Zhang San" and "Li Si" from all over the world - these Zhang San and Li Si are spread across many countries in Europe, America, Japan and Oceania! As the US housing prices have increased for more than ten years, they enjoy an unprecedented wealth carnival.

However, if the US real estate market has been so hot, no matter CDS or other CDXs, CDXIGs can bring huge profits to these speculators, but things will turn back. No matter how popular the market is, it will eventually decline or adjust. Once the market declines, then these speculators will inevitably pay a huge price for their madness.

No matter how hot the real estate market in the United States is, the rise in housing prices will inevitably be limited. Once housing prices rise to the point where they cannot rise again, no one will take over these financial derivatives immediately.

In particular, the Federal Reserve raised interest rates 17 consecutive times in the two years between 2004 and June 2006, increasing the federal funds rate from 1% to 5.25%.

The sharp rise in interest rates has increased the burden of repaying home buyers. The real estate market, which has been popular in the United States for more than ten years, has finally risen irresistibly...

As the lyrics of a song say, "I ate mine and spit it out, and I took mine and returned it back."

So, a major economic collapse led by subprime mortgage loans began, and later generations called this major economic collapse a "subprime mortgage crisis"!
Chapter completed!