American mortgage crisis 2007-2008 - the collapse of the real estate market, as well as all valuable papers associated with it. In terms of its destructive scale, it is compared to the Great Depression of the thirties of the last century. The United States of America is a state from financial activities on which stability throughout the capitalist world depends. Therefore, the mortgage crisis in the United States became the first link in the collapse of the global economy. And our country did not stand aside. Russia also suffered from the global crisis. The causes of the mortgage crisis in the United States, as well as its consequences for the global economy, will be discussed in detail in this article. But first, a little about the concept from the point of view of economic theory.
Concept
The 2008 mortgage crisis in the USA - the collapse of the real estate market due to an increase in delinquencies and non-payments on high-risk mortgage loans. It was accompanied by a massive seizure of real estate in favor of banks and credit organizations. Many prominent economists call this crisis the “scam of the century.” Since the Great Depression, American securities have not depreciated at such a rapid rate, which led to a severe drop in stock exchange activity.
The mortgage crisis in the United States led to massive bankruptcy of the world's largest investment banks and insurance companies. Consequently, this was the beginning of the end of the neo-capitalist system of the world, which was formed by the twenty-first century. The consequences of this event have not been overcome to this day, and Russia cannot return to pre-crisis levels at all. economic development. Therefore, it is fair to note the fact that the mortgage crisis in the United States of 2008 ended the era of world classical capitalism in the form in which it existed before. The whole world has realized that bankers, traders and stockbrokers are unable to self-regulate without government intervention.
Similarities with the Great Depression
If you compare the 2008 US subprime crisis and the Great Depression, you can find two similarities between the two shocks:
- Excessive speculative activities in the stock exchange and banking sectors. In fact, it turned out that the entire financial sector served exclusively the game on the stock exchange, i.e. all market participants were interested not in the development of real sectors of the economy, but in the development of “virtual spheres” that were divorced from the real state of affairs in the economy.
- Late reaction of government and regulatory authorities to crisis events. There are theories that for one reason or another this happened on purpose. For the sake of personal interest, financial regulators and supervisory authorities turned a blind eye to obvious signs of an unhealthy situation in the market and did not take any measures to correct the economic course.
Warren Buffett on the crisis
The world's largest investor Warren Buffett called the 2008 US mortgage crisis the biggest speculative market bubble he had ever seen. He stated this in 2011 while testifying at the Commission to Investigate the Causes of the Crisis. In response to questions from the Commission, he stated that all of America and the whole world had convinced themselves that the rise in real estate prices would continue forever and there would never be a fall. This state of euphoria and mass psychosis defies any logical explanation. Last time The world's largest bankers and financial magnates were in this state during the tulip mania in the Netherlands in the 17th century.
Causes of the 2008 US mortgage crisis
Why is one of the most stable, honest and open economies the world has turned into financial pyramid? There are many theories. Bankers blame the state for this, which did not provide a regulatory policy. Government officials blame traders and brokers for artificially inflating the bubble. Perhaps both are right, but in addition to these, almost every study about the mortgage crisis also mentions the following reasons:
- Growth of foreign investment in the American economy.
- Change in legislative regulation banking system.
Let us describe each of these points in more detail.
Growth of external investments
From 2002 to 2005, a huge flow of money poured into the American economy. It was associated with the largest hydrocarbon price boom. All oil and gas exporters received huge windfall profits, which had to be placed in a “safe haven” for preservation. In addition to oil and gas exporters, rapidly developing countries in Asia were pursuing similar goals. First of all, China.
The impact of external investment on the crisis
The growth of foreign investment, according to many well-known economists, provoked the mortgage crisis. However, how can these two phenomena be connected? They defy any logical explanation. However, prominent US economists have put forward two theories:
- At the end of 2004, the US deficit balance was about 6% of GDP. It follows that Americans consumed more than they produced. But this is not the main thing: Americans spent more than they earned. With a huge influx of money from other countries, this balance is brought into balance. This theory was supported by Federal Reserve Chairman Ben Bernanke. He even proposed scattering dollars directly from a helicopter, since there was an excess of them in the American economy. In fact, the Americans blamed for inflating the global crisis not on their own traders, who artificially inflated the “bubble”, not on their own citizens, who, not having enough income, took out several expensive mansions for mortgages, but on third countries that placed their money in the American economy .
- The second theory is based on purposeful attraction foreign capital due to high consumption in the USA. When exports fall, they must be satisfied by loans from foreign producers.
The difference between the first theory and the second lies only in the root cause. According to the first, the mortgage crisis was provoked as a result of massive overconsumption, which was caused by the attraction of foreign capital. According to the second, the attraction of investment, on the contrary, was caused by high excessive consumption. That is, in any case, third countries are to blame for placing their cash reserves in the American economy. While pensioners in Nigeria or Russia were severely limited in their income in their countries, at this time millions of Americans took out on credit from the reserves of these very countries everything they wanted: expensive cars, diamonds, cottages. At the same time, some did not even have stable jobs.
By the mid-2000s, the United States had huge available funds. Investors were not satisfied low percentage on treasury bonds. We needed a new product that would be much more profitable, but at the same time reliable. Real estate became such a commodity.
Changes in legislative regulation of the banking system
The mortgage crisis in America might not have happened if not for the second reason - changes in legislation in banking sector. The fact is that Americans have learned the lessons of the Great Depression very well. It was caused by commercial banks, which used depositors' money to purchase securities on the stock exchange. Then they were constantly growing in price, so banks attracted all available funds for this. Naturally, when prices went down, “budget holes” formed. Banks actually lost all depositors' funds on the stock exchange. The situation is reminiscent of modern mutual funds investment funds. Investors invest money knowing that companies will invest their money in a variety of stocks. That is, investors know in advance that there is a risk of losing everything, but the profit on such financial transactions higher. The situation with deposits is somewhat different: people open them in order to preserve their funds to the detriment of possible benefits.
After Black Thursday, the Glass-Steagall Act was passed in the fall of 1929 to prevent the arbitrariness of bankers. According to it, there was a clear division of banks into commercial and investment. Now people clearly knew that commercial banks were prohibited from trading securities in any way. In addition, it was introduced compulsory insurance deposits in case of bank failure. Something like this was introduced Russian government after the crisis broke out in our country. But we'll talk about this a little later.
So, the crisis mortgage lending might not have come if the Glass-Steagall Act had not been decided to be repealed. The fact is that the amount of free capital in the US market was enormous. According to various estimates, it ranged from 50 to 70 trillion dollars. Investment banks were simply unable to absorb these amounts, and many of the funds ended up in commercial banks. The latter were at a disadvantage: investment banks made a profit by investing in mortgage debt securities; since 1982, mortgage loans began to be issued by others commercial organizations that do not have the status of federal banks.
Commercial financial institutions began lobbying for the law, which was called the Gramm-Leach-Bliley, or Modernization Act. Restrictions on commercial banks were lifted after the Great Depression. Now banks had the right to create commercial holding companies, which could simultaneously conduct commercial, investment, and insurance activities. That is, actually accept deposits, invest them in high-risk instruments and at the same time insure themselves. The scheme, ingenious in its simplicity, gave complete carte blanche to the banks.
This alone could inevitably lead to devastating consequences for the global economy. But that was not all: at the same time, the rights of government regulators and supervisory authorities were limited. In fact, the 2008 mortgage crisis was predetermined by these actions, since under these conditions, according to the Nash equilibrium theory, everyone will extract the maximum short-term profit without thinking about the long-term consequences.
Subprime lending
Allowing commercial banks to invest in mortgage-backed securities, coupled with restrictions from state regulatory organizations, is not so bad. The situation was aggravated by the greed of bankers. The fact is that in order for a mortgage to be approved, the borrower should have spent no more than 6-8% of his total income to cover the mortgage. We agree that the percentage is quite acceptable. It does not put much pressure on the personal budget. However, the problem for bankers was that too few borrowers, from their point of view, met such conditions. It was decided to lower the level of mandatory requirements. Such loans are called substandard, that is, translated into normal language, non-standard or abnormal.
Types of Subprime Loans
The whole cynicism of American bankers was that several types of substandard loans were introduced:
- With a floating interest rate. He assumed for a long time to pay only the basic interest, and not the principal amount. A similar scheme, by the way, operates in Russia today.
- Client's choice of payment option. The concept of this loan is simply amazing in its ingenuity: the borrower himself chooses the amount of the monthly installment, and the unpaid interest can be added to the principal debt. Almost 10 percent of all mortgage loans was concluded in this way. Under this scheme, any unemployed person could take out a mortgage on a huge villa on the seashore for several million dollars, paying only a few hundred dollars a month. And such cases were not uncommon.
- Possibility of repaying most of the debt at the end of the term. Naturally, at the end of the term, not everyone had the required amount, etc.
Just these three mortgage lending schemes can shock any economist. But the flywheel began to spin, and ingenuity only gained momentum. The apotheosis of the entire system was loans without assets and income. That is, virtually any unemployed homeless person, Texas immigrant, single mother with many children living on benefits and barely making ends meet could get absolutely any real estate as a mortgage. These loans were called “junk”, since the banks themselves understood that no one would pay their obligations, but their interest was not in repayment, but in issuing: for each mortgage loan, debt paper was sold, which was simply swept away on the stock exchange by “hungry” investors." The banks that issued the loans made a profit from them, and not from the return of mortgages. To understand this, you need to know the interest rate on Treasury bonds - on average 0.5-1% per year and the interest rate on loans - 3-4% per year. Consequently, from the mortgage, securities were actually created - derivatives that were quoted on the markets. No one could even imagine a huge scam involving the issuance of “junk” loans.
Speculation on derivatives - the final apotheosis of mortgage lending
The culmination of this whole system was the behavior stock speculators. Derivatives - completely non-performing mortgage loans elevated to the rank of securities - seemed to speculators to be an endless source of profit. It turned out that derivatives turned into completely separate securities that began to live their own lives. Tulip mania of the 17th century, in the literal and figurative sense of the word, turned out to be nothing compared to the scam of 2008. In the 17th century, they at least traded flowers on the stock exchanges, which were still real objects. Derivatives are debts that no one can ever pay back, but at the same time these debts have enormous value on the exchanges. Further, as they say, more. To secure derivatives, new securities were created - CDOs, and new ones were issued against them - CDOs on CDOs.
Why was such a gigantic scam of the century possible?
There were several reasons why mortgage debts were turned into a gigantic scam:
- Several took part in it economic entities: commercial and investment banks, stock brokers, large hedge funds, leading rating agencies, Insurance companies. Previously, each of them was engaged in his own business, and they rarely intersected for such purposes. The result was a kind of stereotype of mutual guarantee, but in practice everyone squeezed maximum profit out of it, without thinking about the consequences.
- Mortgage papers became securities. No one had experience working with them, did not know how to assess risks, strategies, etc.
- Blatant collusion between banks, large hedge funds and leading rating agencies. The latter, experiencing competition in the market, turned a blind eye to everything so that clients would not go to competitors. In practice, the Nash equilibrium theory worked, according to which each company, not trusting the integrity of its competitor, participated in a conspiracy.
Consequences
The consequences of the mortgage crisis in the United States were severe. The entire global financial system suffered. Over the past quarter century, humanity has not doubted the effectiveness of the capitalist system. Many countries declared default, and many of the largest insurance companies and international banks went bankrupt. Among them are the world famous Lehman Brothers and Bear Stearns. Many have announced mergers. Private savings and savings of US citizens have decreased. The crisis affected all areas of the US economy, which led to a global crisis.
About a million Americans were unable to service their loans. They were forced to leave their housing to the bank. Huge real estate funds have been released onto the market. Entire streets and neighborhoods literally “died out” after the crisis. About 100 thousand families were forced to leave their homes. Naturally, real estate prices dropped sharply. Then the construction sector of the economy suffered, it affected mechanical engineering, etc. The domino principle spread to all areas.
Consequences for our country
The mortgage crisis in Russia in 2008 was an echo of the above events. Of course, we did not have such large-scale consequences as in the United States. Our banks are interested in repaying the loan, and not in selling mortgage-backed securities. Dumping of real estate prices turned out to be disastrous for Russia, as free investors began to buy significantly cheaper housing in the United States. Mortgage loans were under threat during the crisis in Russia because the American crisis hit the financial sector of our country more than real estate.
In our country, the real mortgage crisis occurred due to a sharp devaluation national currency in 2014. As a result, the loan cost foreign currency mortgages increased several times. In fact, borrowers lost up to 15 years of mortgage payments in one year. And the state is not going to help the affected citizens, since at one time it warned them that they needed to take out a mortgage in the currency in which they received their wages.
US mortgage crisis 2007–2008 – collapse of the real estate market and related derivative securities. In terms of the level of decline, the crisis is compared to the “Great Depression” of the 30s of the last century; only financial intervention and strict regulatory measures by the federal authorities prevented the final collapse of the banking system.
Mortgage crisis in the USA 2007-2008 subprime mortgage crisis) - the collapse of the real estate market due to a sharp increase in delinquencies/non-payments on high-risk mortgage loans and massive alienation of real estate in favor of creditors. Depreciated mortgage-backed securities led to the strongest drop in stock exchange activity since the Great Depression, mass bankruptcy of investment banks and insurance companies around the world, which led to the beginning of a global crisis, the consequences of which have not been overcome to this day.
If we compare the mortgage crisis with the collapse of the American economy in the period 1929-1939, then two common features are clearly visible:
- speculative actions in the banking and stock exchange sectors;
- belated reaction of state regulatory authorities to the growth of crisis phenomena in the economy.
In 2011 One of the world's largest investors, Warren Buffett, testifying before the Commission of Inquiry into the Causes of the Crisis, said that “this was the largest speculative market bubble I have ever seen. All of America has convinced itself that the rise in real estate prices will continue forever and will never fall.”
Causes of crisis phenomena
There are many theories about how and why the real estate market has turned from a “safe haven” into a source of fraudulent speculation, depending on who the author is: bankers see this solely as regulatory failures, and government officials blame the private sector for inflating the “bubble.” arrived. But there are reasons for the mortgage crisis in the United States that are mentioned in almost all studies, namely:
Growth of foreign investment in the US economy
In the period from 2002 to 2005, there was a sharp increase in foreign capital and working capital injections, primarily from oil exporting countries and quickly developing countries Asia, primarily China. There are two theories to explain this fact:
- At the end of 2004, the US balance of payments deficit was 5.8% of GDP due to the excess of imports of goods and services over exports. In this case, the trade balance is most quickly brought into balance precisely by the influx of external capital. The point of view that it was excess global capital that provoked the mortgage crisis was defended by then Fed Chairman Ben Bernanke.
- Capital was raised precisely high level consumption in the United States, which, when exports fall, must be satisfied by “loans” from a foreign manufacturer or investor.
Regardless of which of the two theories is correct, by 2005-2006 there was a huge amount of free capital in the United States. It was necessary to find a more profitable one, but at the same time reliable investment than simply buying Treasury bonds.
Real estate seemed a logical choice in this situation, especially since for several decades one of the main directions of American domestic policy was to increase the number of private homeowners. In 1995, the two largest American mortgage agencies, Fannie Mae and Freddie Mae, received tax breaks to stimulate loans for borrowers with low level income, and by this time the market was already ready to accept additional financial injections.
Changes in legislative regulation of the banking system
Commercial banks were active participants in the constant inflation of securities prices during the Depression, using depositors' money for this, which ultimately led to the Black Tuesday stock market crash. To prevent similar situations In the future, in the fall of 1929, the Glass-Steagall Act was passed, clearly dividing banks into commercial and investment. Commercial banks were prohibited from trading in securities, including through branches or affiliated companies, and mandatory insurance of deposits was introduced.
The volume of free capital in the US market was huge (according to various estimates from $50 to $70 trillion), which made it impossible to place it between investment banks operating at that time and their clients. Commercial banks also wanted their share of the profits, especially after the passage of the Alternative Mortgage Transaction Parity Act (AMTPA) in 1982, which allowed the issuance of mortgage loans credit organizations not being federal banks.
A decades-long lobbying campaign by major banking players led to the Gram-Leach-Bliley Act, or Modernization Act, which repealed the Glass-Steagall Act and thus changed the entire banking system. Banks were able to create financial holding companies that could simultaneously engage in commercial, investment and insurance activities. At the same time, the rights of government regulators and supervisory authorities were significantly limited.
Subprime lending
For US banking practice, 6-8% of the total mortgage portfolio has traditionally been considered an acceptable level of high-risk loans. But to cover the beginning of the construction boom, such a percentage of unreliable borrowers turned out to be too low and banks began to gradually reduce mandatory requirements. Such loans are called substandard and many modifications have been developed:
- with floating interest rate(interest-only mortgage) - during a certain initial period of the loan, only interest is paid, and not the principal amount of the debt. By the beginning of the crisis, more than 90% of loans had a floating rate;
- client choice of payment option(“payment option” loan) - you can choose the size of the monthly installment, while the unpaid interest could be added to the principal amount of the loan. Almost every tenth loan in the period 2005-2006 was structured in this way;
- the possibility of repaying most of the debt at the end of the contract (balloon-payment mortgage) and other options.
The apotheosis of the fight for a client at any cost was loans with the presence of assets (funds in a bank account), but without regular income (income, verified assets, NIVA), and loans without any assets or income at all (no income, no assets, NINA).
Risky securitization and manipulation of ratings
Banks were well aware that the probability of non-repayment of issued loans was excessively high, and therefore they tried to minimize the level of risk. For this purpose, the mechanism of securitization is usually used, when several mortgage loans or other financial instruments are combined into one derivative security (derivative), which is then sold to a third-party investor.
Due to the fact that the derivative includes several low-risk assets, their value will never fall to zero or it will be possible to use a guarantee in case of default, as government mortgage agencies did in the early 80s of the last century, when only a modern securitization model was developed.
Mortgage-Backed Securitie (MBS) and secured securities issued on their basis debentures(Collateralized debt obligations, CDO) have the most bizarre forms: a package of risky loans is “diluted” with a small number of reliable ones to increase their rating, MBS are issued, consisting only of “toxic” loans. Synthetic CDOs are emerging, which are derivatives of another CDO. All this mass of new papers, to sort them out to a simple investor almost impossible, is thrown into the stock market to generate additional income.
Speculative private, insurance and stock investments
The mortgage crisis in the United States could never have reached such proportions without the support of stock market speculators, who saw in MBS and CDO securities a source of what seemed to them to be endless profits. The natural collapse was provoked by the following three main factors:
- Mortgage papers ceased to be associated with specific real estate objects and began to live their own separate “life”. Endless issues and the emergence of new options, such as “CDO on CDO,” only encouraged traders to continue speculation, and no one was interested in the statistics of an increase in the actual number of defaulters.
- The same forecasting and analysis models were applied to mortgage-backed securities as for ordinary stocks and futures, although these are radically different instruments. Exchange valuation methods mortgage risks were not yet developed, the papers did not have a long historical period sufficient for testing trading strategies and hypotheses.
- In order to squeeze out maximum income, banks and large hedge funds colluded with the leading rating agencies Standard & Poor’s and Moody’s, which, as the Commission of Investigation subsequently revealed, deliberately overstated investment attractiveness even the most “junk” bonds and mortgages. In fact, these agencies did not evaluate the securities at all - they simply put on the securities the price offered by the issuers.
The imperfections of current legislation allowed banks to increase the volume of derivative securities, nominally complying with the requirements for the ratio of equity and borrowed capital. Using various off-balance sheet schemes, huge sums were transferred to hedge funds and other non-state credit organizations, that is, a “shadow” banking system was actually created. Before the mortgage crisis began in the United States, net profit financial sector accounted for almost 27% of GDP produced and most of these funds remained off the balance sheet. Thus, even the process of maintaining current activities and the liquidity of leading banks began to directly depend on the situation on the real estate market.
Ordinary citizens also joined the race - historically, the growth in real estate prices was close to the inflation rate, but in 2000-2006 real estate showed almost double growth. A house is no longer a long-term, low-return investment. Even borrowers who met all the conditions Federal programs, began to prefer subprime loans to obtain a secondary mortgage loan at a rising cost. That is, when additional credit limit the borrower could either take out another mortgage loan, or spend this amount on consumption, or simply receive this amount in cash from the bank. If we add to this a sharp increase in consumption levels, a reduction in personal savings and real wages- the mortgage collapse has become inevitable.
Consequences of the crisis
Despite all the measures to restructure the mortgages of insolvent borrowers, by mid-2011 complete alienation over a million residential properties with almost complete absence of market activity. By 2014, the share of loans for which payments were not made dropped to 8%, but negative processes could not be completely abandoned.
Implications for the US economy:
- Of the five largest US mortgage banks, Lehman Brothers (inability to cover credit swaps) and Bear Stearns (losses of subsidiary hedge funds) went bankrupt, Merrill Lynch and Bank of America merged, and Goldman Sachs and Morgan Stanley ceased investment activity in exchange for support from the Fed.
- The value of production assets decreased by more than 20% during the period June 2007-November 2008.
- The leading stock index S&P500 fell by more than 45% in November 2008 compared to the same period the previous year.
- The real estate market has lost more than $5 trillion since its all-time high in 2006. and still shows no growth;
- Private savings and pension savings US citizens decreased by $2.5 billion, and taking into account the alienation of property and forced collections, the total amount of personal losses is almost $8 trillion;
- The crisis has affected all sectors of the economy, especially the automotive industry and the service sector.
Measures to overcome the consequences of the crisis
An investigation into the causes of the 2008 mortgage crisis in the United States showed that active action government agencies began only in September, although the first signs of instability financial system appeared already in the second half of 2007 and the time to mitigate the consequences was lost. Moreover, none of the financial organizations“stimulating” the development of the crisis and speculating on its consequences, not a single claim was filed for administrative or criminal liability.
Government actions
Buying out problematic substandard assets from banks and insurance companies at the expense of the US budget was the only way to quickly maintain liquidity and avoid the final stagnation of the economy and the bankruptcy of a company like Lehman Brothers. In August 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA) or the “Paulson Plan” after the then Secretary of the Treasury. The total amount of injections into the private sector along with tax benefits amounted to $700 billion, which were not returned. That is, in fact, banks covered their risky actions at the expense of taxpayers.
Borrowers received a refund of part of the property taxes paid, but this did not lead to a significant improvement in the situation. In addition, it was implemented Government program providing individual monetary assistance to insolvent homeowners, as well as assistance in reaching an agreement with largest banks and credit mortgage agencies Fannie Mae and Freddie Mac on introducing a moratorium on foreclosures and increasing refinancing programs.
Actions of the US Federal Reserve
Together with the central banks of leading countries in Europe and Asia, a reduction was carried out interest rates, which only confirms the global nature of the crisis. The positive effect of this step was minimal.
Issuance carried out short-term loans at a reduced rate for banks controlled by the Federal Reserve, and an additional (to Paulson’s plan) repurchase of problematic mortgage securities was also implemented.
Constant control of the guaranteed dollar collateral of international currency swaps of the ECB banks, the Banks of England and Switzerland has been implemented.
Provision program provided targeted loans, including non-bank credit institutions, for the issuance of mortgage-backed securities (Term Asset-Backed Securities Loan Facility, TALF).
Implications for the global economy:
The peak number of evictions for non-payment of mortgages occurred in 2009-2010. The failure to repay subprime loans and related securities has led to huge losses worldwide. banking system: only the largest (as of 2008) world bank HSBS lost more than $10.5 billion. If in April 2008 the IMF estimated the total global losses from the mortgage crisis in the United States at approximately $1 trillion, then a year later it revised this value to $4 trillion.
US expenses to overcome the consequences of the crisis at the end of 2009 were estimated at $11 trillion, but approximately 50% of them should be assessed not as direct expenses, but as investments, loan guarantees, buybacks financial assets(mortgage and commercial paper secured by collateral), including in order to increase market liquidity.
The echo of the crisis is still felt today. The collapse of the American stock market led to panic among investors and reorientation cash flows into less risky assets, in particular, commodity futures, which gave rise to the global food crisis and rising oil prices.
The financial crisis of 2007-2008 is financial crisis, which manifested itself in 2007-2008 in the form of the mortgage crisis, bank bankruptcy and falling stock prices, which became the first stage of the global economic crisis 2008-2012 (sometimes called the "Great Recession").
The initial stage of the global financial and economic crisis was the mortgage crisis in the United States, the first signs of which appeared in 2006 in the form of a decrease in the number of home sales, and by the spring of 2007 developed into a crisis of subprime lending. Quite quickly, reliable borrowers also felt problems with lending. In the summer of 2007, the mortgage crisis began to develop into a financial crisis and affect not only the United States. Bankruptcies of large banks began, banks were bailed out by national governments. Particularly noteworthy is the bankruptcy of Lehman Brothers on September 15, 2008. Stock market prices fell sharply during 2008 and early 2009. The opportunities for companies to obtain capital when placing securities have been significantly reduced. In 2008, the crisis became global and began to manifest itself in a widespread decline in production volumes, a decline in demand and prices for raw materials, and an increase in unemployment.
2007 US mortgage crisis
The immediate precursor to the general financial and banking crisis in the United States was the subprime mortgage crisis in 2007, that is, mortgage lending to people with low incomes and poor credit history. From 2001 to 2005, the value of real estate directly owned by households increased by $10 trillion; during the crisis, Americans lost about $6 trillion in the value of their real estate.
George Soros in “Die Welt” of October 14, 2008 defined the role of the “mortgage soap bubble” as “merely the trigger that led to the bursting of a larger bubble.”
Subsequently, the financial crisis in the United States became the detonator of the global crisis. According to analysts, American investment structures facing problems in domestic market, began to dump their foreign funds, which caused an outflow Money from the markets of new developing countries. As a result, the whole world began to suffer from the crisis that arose in the United States. On January 13, 2010, a commission created by the US Congress to investigate the causes of the crisis began its work.
Innovation in the financial market
A significant factor in the emergence of the credit crisis in the United States, according to a number of experts, was the widespread use of derivative financial instruments since the early 1990s and the desire to increase profitability by increasing risks. At the same time, there is no analysis that would show that it was derivatives that brought the crisis closer, and that the crisis in construction would not have occurred even earlier if derivatives had not contributed to the expansion of effective demand for real estate and expensive goods.
“In the United States, economic growth was mainly observed outside real sector. On the eve of the crisis, up to 40% of corporate profits came from the financial sector, where everything was inflated, 40% of investments came from real estate - and all of this was invested in a bubble.” Joseph Stiglitz, Vedomosti
Stock market crash
On October 31, 2007, many world stock market indices reached a peak, after which a decline began: from that day to October 3, 2008, when the US House of Representatives passed the Paulson plan on the second attempt:
- the S&P 500 fell 30%;
- MSCI World index showing market dynamics developed countries, fell by 32.3%;
- MSCI Emerging Markets index - by 40.5%.
Unlike the previous collapse in 2000-2002, which was caused by the collapse of stock market technology companies and was limited to US markets, the collapse of 2007-2008 affected all countries and was caused by events outside the stock market - the boom and then collapse in the credit and housing sectors, and later in the commodity markets: shares of Western banks began to fall first , and since July 2008, when oil began to rapidly fall in price, shares of commodity companies in developing countries.
The banking week of October 6-10, 2008 brought a historically maximum drop in indices on US trading floors: the Dow Jones Industrial Average fell to 7882.51 and closed at 8451.19. The Financial Times compared the stock market crash on Friday, October 10, 2008, to October 10, 1938: "In Friday morning trading, the S&P 500's decade-long decline was nearly identical to its decade-long decline on the same date in 1938."
The stock market crash in October 2008 was a record for the US market over the past 20 years, and for the Japanese market in its entire history.
The collapse of the largest US investment banks
Evening bustle near the Lehman Brothers headquarters building on September 15, 2008,
when the bank filed for bankruptcy in New York court.
Summary table of American bank failures
A crowd of waiting depositors outside a Northern Rock bank branch on September 15, 2007.
Clients were withdrawing savings from their accounts in droves.
In August 2007, Bear Stearns was at the center of the subprime mortgage crisis. At that time it was the fifth largest investment bank USA. As a result, two hedge funds under his management lost almost all of their clients' money ($1.6 billion) on investments in mortgage bonds, which caused panic in the stock market. On March 14, 2008, the company announced that it needed urgent financing to meet payment obligations due to the ongoing credit crisis in the country. The US Federal Reserve and JPMorgan Chase have agreed to provide additional funding. Immediately after this news, the bank's shares fell by 47%.
On September 15, 2008, the bank declared bankruptcy Lehman Brothers- one of the largest banks in the USA.
Deputy Head of the National Bank of Ukraine Savchenko A.V. noted that “Lehman Brothers... was the strongest player in the credit default swap market. Having lost insurance for their investments, American investors hastily began to close positions in emerging markets and flee to the dollar.”
The bankruptcy of Lehman Brothers led to doubts about the possibility of payments by insurance companies insuring against the risks of bankruptcy of the credited (CDS), which led to a crisis of the CDS instrument itself and a sharp increase in insurance risks, resulting in a crisis of confidence between banks and a sharp increase in lending rates, which had a particularly strong impact in emerging credit markets, including Ukraine and Russia.
The LIBOR-OIS spread (showing the difference between the LIBOR rate and the futures on the official rate of the Central Bank - evidence of the availability of money in the interbank market) at the end of September 2008 exceeded 200 basis points for dollar loans, and at the beginning of October - 250.
“Five leading US investment banks ceased to exist in their previous capacity: Bear Stearns was resold, Lehman Brothers went bankrupt, Merrill Lynch was resold, Goldman Sachs and Morgan Stanley changed their name, ceased to be investment banks due to special risks and the need to receive additional support from the Federal reserve system."
Economists' views on the 2008 financial crisis
On October 13, 2008, The Times wrote that the world would gradually move away from a unipolar global currency system based on the dollar. Referring to People's Daily, the newspaper cited the opinion of Chinese economist Shi Jianxun, who called for “diversification of the monetary and financial system and fair financial order, which will not depend on the United States."
American financier George Soros, in Die Welt on October 14, 2008, predicted the relative weakening of the economy and the decline of the United States and the rise of China: “While we were accumulating debts, they [the Chinese] were saving and accumulating wealth. The Chinese will own most of the world over time as they convert their dollar reserves and US holdings into real assets. This will change the balance of power. The power shift to Asia will come as a result of America's sins over the past 25 years."
According to Francis Fukuyama (November 2008): “This is not the end of capitalism. I think this is the end of Reaganism. Reagan had several ideas, one of which was to cut taxes, but leave spending at the same level: it was believed that this would lead to economic growth. And it did, but it also gave rise to many problems. Another idea was deregulation, including deregulation financial markets... I think there is very little chance that the United States will lose its position as a global economic leader.”
Some Russian economists (Mikhail Khazin, Mikhail Leontyev) and film directors note that one of the options for solving economic crises is World War. Some economists suggest that the United States may be indirectly interested in starting a third world war, which will consider a new world war as an effective way out of the global financial crisis of the late 2000s, according to the scenario that worked during the Second World War as a way out of the great depression. However, most economists (including Mikhail Khazin) believe that now a world war is not beneficial to anyone.
Turning the financial crisis into a global recession
Economic survey of the Organization published on 13 November 2008 economic cooperation and Development (OECD) stated that the developed economies of the world have entered a recession. International rating agency Fitch Ratings believed the recession would be the worst since World War II and the first developed world enters it synchronously.
Thus, the financial crisis of 2007-2008 turned out to be the first stage of the global economic crisis of 2008-2012.
