The mortgage crisis in the United States was the beginning of the financial and economic crisis around the world, and affected almost every country. What caused the collapse? What were its real consequences? Let's take a closer look at the answers to these and some other questions.
The mortgage crisis in the US is the collapse of the economy and the real estate market, which manifested itself in the form of a sharp increase in defaults on high-risk mortgage loans. Accompanied by the seizure of residential and commercial real estate creditors (banks and credit organizations).
In terms of the level of fall, the mortgage crisis is compared with the Great American Depression of the 30s. Indeed, there are similar features: excessive speculation on the stock exchange and the lack of an appropriate reaction from the controlling and government agencies power on the existing facts of crisis phenomena.
The essence of the crisis in general terms is as follows:
- The rise in prices for apartments and houses significantly exceeded the level of inflation in the country, which led to the emergence of artificial demand (in the United States there was a "housing boom").
- This boom was financed with the help of "cheap money" or mortgages with minimal interest rates, as well as through the execution of secondary mortgage loans (a second loan against an already mortgaged property).
- The economy turned on the mechanism of uncontrolled growth in housing prices and sales volume, which was the key reason for the "bubble inflation" in the real estate market.
As a result, the market became oversaturated and, as a result, real estate prices began to fall. As a result, American banks have raised rates on existing mortgage loans with floating interest. These conditions have led to the impossibility of fulfilling their obligations to creditors by a significant proportion of borrowers (especially those in the zone of increased risks). Clients became debtors, and property was put up for auction at a cost below the initial one.
In September 2008, house prices fell by more than 20%.
Conclusion: All these factors led to a series of the largest bankruptcies in the history of banks, insurance, investment and other financial institutions in the United States and caused a global recession in the world economy.
Chronology of events
In the time frame, the US mortgage crisis of 2008 did not come on a single day or even a single year. Chronologically, the events leading up to it can be presented as follows:
- 1999 - 2006
During this period, the American real estate market experienced an unprecedented rise in construction. In fact, in 7 years, prices have skyrocketed by almost 7 times. Also during the Bush presidency, a number of legislative measures were passed to provide tax incentives and jobs in construction corporations. The tax on income from the sale of housing was reduced, which also contributed to the growth in demand for new construction.
The steady growth of the real estate market was accompanied by an increase in the volume of non-standard mortgage loans or subprime loans, when the bar for mandatory requirements for borrowers was significantly reduced. That is, loans were received by persons with a high level of risk, already having a negative credit history. The greed of the bankers, who sought to increase their income in any way, is to blame here.
In addition, the real estate market at its peak attracted investors and speculators, main goal which was to maximize profits. Asian and Western capital poured into America, whose investors invested in relatively safe instruments - securities secured by real estate (CDO).
- 2006 (mid).
In mid-2006, the growth of the real estate market stopped, there was a glut. More and more borrowers were unable to service their mortgage loans. By the end of 2006, this figure was about 10% of the total number of loans issued for the purchase of housing. It was impossible to achieve refinancing of loans - banks no longer issued cheap loans. Began mass expropriation of mortgaged housing by banks.
- 2007 - 2008
In 2007, the mortgage bubble burst. The fall in real estate prices became critical, which was the result of a long chain of bankruptcies of the largest US banks, hedge funds, insurance and investment companies that lost huge sums. In 2007, about 25 banks declared their bankruptcy. The CDO market also collapsed.
All subsequent events are already facts of the beginning of a general economic crisis in the United States, which then spread throughout the world due to the inherent globalization.
Causes of the US mortgage crisis
Reasons for growth mortgage crisis in the USA, you can list a lot. However, many experts agree that the main ones are the growth of foreign investment in the economy and changes in legislative regulation. banking system. Let's consider them in more detail.
Growth of foreign investments and their impact
Period 2002-2005 characterized by a sharp increase in foreign investment, mainly due to China. This is due to the rise in prices for oil and related hydrocarbons. There are 2 theories here explaining the connection between the impact of external investment on the crisis:
- According to 2004 data, America's balance of payments deficit was about 6% of GDP, that is, Americans consumed more than they produced, and at the same time they spent more than they earned. The logical way to balance this balance is to attract outside investment.
- Attracting external capital was carried out by increasing the level of consumption in the United States. If exports fall, then investments can be attracted with the help of loans from foreign producers.
The first theory is based on the proposition that due to exorbitant mass consumption, foreign investment poured into the country and gave rise to a mortgage crisis. The second says that foreign capital appeared and reached such proportions due to excessive consumption.
Conclusion: Both theories blame the US subprime crisis on third countries, not internal causes and actions of authorities and control.
Changes in the legislative regulation of the banking system
Back in 1982, the law “On Parity in Alternative Mortgage Lending” was passed, which allowed creditors who were not related to federal banks, issue a mortgage with a floating rate.
During this period, new types of mortgage loans appeared: with floating interest, with the ability to choose the size of the monthly payment, with debt repayment at the end of the loan term large sum, with the payment of only interest at the beginning of the loan period, etc. All of them have gradually replaced conventional mortgages with a fixed interest rate and installments.
The use of new types of mortgages has led to their abuse due to the lack of appropriate legal regulation.
Subsequently, the banks lobbied for a law dubbed the Gremm-Leach-Bliley or the Modernization Act, which gave them the right to create commercial holdings and simultaneously engage in investment, commercial and insurance activities.
In practice, banks attracted funds from the population and immediately invested them in instruments with increased risk, while insuring themselves. Almost complete freedom of action was given.
Subprime lending, its types and impact
The construction boom in the US and the steady rise in housing prices have created huge competition between banks. Among the key tools in the fight for customers and increase in lending they use lower interest rates and the issuance of subprime loans.
Subprime lending provides for a significant reduction in requirements for potential borrowers. Loans began to be issued to clients from high-risk groups. In addition, the client could choose the most appropriate method of settlement with the bank:
- a loan with a floating interest rate (the rate is fixed for the first few years, and then the bank has the right to increase it);
- the choice of a specific payment option (for example, the borrower himself could set a feasible amount for monthly payment with the subsequent transfer of unpaid interest to the body of the loan);
- payment of most of the debt to the bank at the end of the loan period.
That is, in fact, any American without income and any assets could mortgage expensive real estate, the value of which is not comparable to his creditworthiness. Banks themselves called such loans "junk", as everyone understood that they would not be returned. The main task was to issue them, because banks received huge profits from the sale of debt securities.
Speculation in derivatives
Due to the sharp increase in mortgage lending a new securitization or risk-removal mechanism for the non-repayment of such loans, or simply their financing, was formed. The bottom line is to turn debt into securities or derivatives.
Swaps were the most widespread among derivatives in the US during the beginning of the mortgage crisis. The turnover of trade in such instruments was colossal - according to the data for the summer of 2008 alone, the volume of transactions was about 600 trillion US dollars.
The derivatives themselves were backed by new securities, while others were issued against them. Thus, the creation of derivatives, synthetic securities, the endless emission, their growth exponentially provoked a natural collapse - the bubble, which had absolutely nothing under it, burst.
In order to maximize profits, the largest hedge funds and investment companies colluded with leading rating agencies, which deliberately assigned inflated ratings and investment attractiveness even "junk" securities.
What are its consequences and impact on the global economy
Mortgage crisis in the US 2007-2008. became the flywheel of further economic events that affected the entire world economy. The key implications for America were:
- alienation and auctioning of more than 1 million real estate objects that acted as collateral under mortgage agreements (by mid-2011);
- bankruptcy and huge losses of the largest banks in the country, hedge funds, insurance and investment companies (bankruptcy of Lehman Brothers, Bear Stearns, Bank of America purchase of investment bank Merrill Lynch, termination investment activity giants Goldman Sachs and Morgan Stanley);
- decrease in the cost of production assets by more than 20% (2007-2008);
- losses of the real estate market, according to approximate estimates, amounted to more than $ 5 trillion (the market is not growing to this day);
- decrease pension savings and personal savings of Americans in total amount over $8 trillion.
The crisis worked like a domino and dragged along the construction sector, mechanical engineering, the service sector, etc.
Thousands of families were no longer able to service their mortgages and left their homes to the banks. Entire streets and neighborhoods have died out.
Consequences for Russia
Our country has not experienced such large-scale consequences as in the United States. However, the crisis still touched Russia. The main blow fell not on the sphere of mortgage lending, which at that time was at the stage of its development, but mainly on the financial sector.
Many leading banks found themselves in a depressing position and turned to the state for help. Among them are Svyaz-bank, VTB, KIT-Finance and others.
Capitalization largest companies fell in the fall of 2008 by ¾, and gold and foreign exchange reserves by 25%. Banks again faced distrust of the population and an outflow of deposits. The flight of depositors was an additional incentive for a significant decline in financial stability many banks in the Russian Federation and their bankruptcy.
Also, the financial crisis provoked a natural decline in prices for oil and related products. Serious problems have arisen in attracting investment in this sector and completing projects that have already begun.
The growth rate of the Russian economy has significantly decreased - by about 4 p.p. for 9 months of 2008 compared to the same period last year.
There was a recession in almost all sectors of the economy.
Conclusions on the results of the crisis for the global economy and the Russian economy
After some time, we can draw the main conclusions from the results of the global and Russian crisis of 2008:
- The subprime crisis in the United States and the economic recession that followed around the world is the result of human action. It was the people who ignored the danger signals, did not take into account the risks and pursued windfall profits. State and financial regulators also did not take proper action, but only contributed to the formation of a low-quality mortgage portfolio and inflation of the derivatives market.
- The crisis has revealed weaknesses and holes in the legislation of many countries. Many projects for housing and tax reforms and incentives are still in the development and negotiation stage.
- Active actions by US government agencies were taken only in September 2008, when the crisis was already in full swing. Time to soften negative consequences was missed. The Government's expenditures to overcome the consequences of the crisis, as of the end of 2009, are estimated at $11 trillion.
As for the situation in Russia, despite global integration, it is unique. Our crisis began with the crisis of the private sector, which was provoked by excessive borrowing in shock conditions, namely, from the outflow of capital, foreign trade and a significant tightening of external lending conditions.
The complete dependence of the Russian Federation on the prices of oil and other hydrocarbons during their fall and the volume of exports led to the strongest impact of the global crisis on our country. The key measures taken by the Russian Government to overcome the crisis were aimed at strengthening the financial system, including injections into the capital of the banking system and the provision of liquidity in the form of subordinated loans.
The policy of the Central Bank became tougher, starting from 2009, massive purges began in banking sector for the non-compliance of credit and financial institutions with the declared indicators and the quality of the policy pursued.
The mortgage crisis in the US in 2008 led to the collapse of the real estate market, a collapse stock market and became the beginning of a general economic recession. Bankruptcy of the largest banks, investment companies and hedge funds, a sharp decline in wealth general population, the withdrawal of a million objects of collateral real estate, as well as the penetration of the crisis into all sectors of the economy were its key consequences.
There are many reasons for this, but the main two are the sharp increase in foreign investment in the American economy and legislative acts that contributed to the inflation of the speculative bubble. All this led to the fact that at one point he burst.
We are waiting for your questions. Write in the comments how you were affected by the American mortgage crisis? What do you think about a possible mortgage crisis in Russia in connection with the total reduction in rates and the construction boom?
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In 2008, the crisis swept the whole world. The beginning of the world financial problems started with a stock market crash. In the railing from January 21 to 22, chaos reigned on all exchanges. Not only stock prices collapsed, but also stocks of companies that were doing well. Even such large corporations as Russia's Gazprom suffered losses. Shortly after the fall of shares in the world oil market, oil began to fall in price. A period of instability began in the stock markets, which left a significant imprint on commodity markets. Despite the attempts of economists to justify the situation (they publicly announced the adjustment in stock prices), on January 28, the whole world had the opportunity to watch another stock market crash.
How did the crisis start?
In 2008, the crisis did not begin on January 21 with a fall in stocks, but on January 15. Banking group Citigroup recorded a reduction in profits, which was the main impetus for a decrease in the value of shares on the New York Stock Exchange. The following events took place:
The Dow Jones fell 2.2%.
Standard & Poor's - by 2.51%.
Nasdaq Composite - by 2.45%.
Only 6 days later, the consequences of price changes manifested themselves on the stock exchange and left their mark on the situation around the world. Most of the currency market players finally saw that in reality, many companies do not feel very good. Behind high capitalization rates, behind the high cost of shares, chronic losses are hidden. Many economic experts predicted a crisis in 2008 back in 2007. There were suggestions that two years later Russia would face hard times due to the fact that the resources of the domestic market would never be exhausted. For the global economy, the downturn was predicted earlier.
Messengers of world problems in 2008 and developments
The global crisis of 2008, although it began with a fall stock exchanges, but there were many prerequisites for its appearance. The fall in stocks was only a warning signal of a dynamically changing situation. Overproduction of commodities and a significant accumulation of capital were recorded in the world. Exchange instability testified that there were certain problems with the sale of goods. The next damaged link in the world economy was the sphere of production. The global economic changes brought about by the 2008 crisis had a significant impact on the lives of ordinary people.
The global economy was characterized by a situation where the possibilities and prospects of the markets were completely exhausted. Despite the ability to expand production and the availability of free funds, generating income has become very problematic. As early as 2007, working class incomes could be seen falling in countries such as the US and the UK. The contraction of the markets could hardly be contained by an increase in both consumer and mortgage lending. The situation escalated when it became obvious that the population was unable to pay even the interest on loans.
The first global crisis in human history
In the period from 2008 to 2009, most of the countries of the world faced with what led to the receipt of the phenomenon of the status of "global". The crisis of 2008, which was remembered for a long time, affected not only the capitalist countries, but also the economies of the post-socialist states. The last regression in the world until 2008 on such a large scale occurred in 1929-1933. At that time, things were going so badly that cardboard-box villages grew up around large American cities, since most of the population, due to unemployment, could not provide for themselves. living wage. The specifics of the development of each individual country of the world determined the consequences of the phenomenon for each people.
The close coexistence of the economies of the countries of the world, the dependence of most states on the dollar, as well as the global role of the United States in the world market as a consumer, has led to the fact that America's internal problems have been "reprinted" on the life of almost all countries. Only China and Japan remained outside the influence of the "economic giant". The crisis was not like a bolt from the blue. The situation blossomed gradually and systematically. A possible collapse of the economy was indicated by strong uptrends. In addition, the United States during 2007 managed to omit interest rate by 4.75%. This is an uncharacteristic phenomenon for a period of stability, which did not go unnoticed by fundamentalist speculators. It is worth saying that the fact that the reactions to foreign exchange market there was no such thing as a rate cut in America. What happened on the eve of the crisis is just one of the standard initial stages of the phenomenon. States already have problems during this period, but they are hidden and do not make themselves felt clearly. As soon as the screen was moved and the world saw the actual state of affairs, panic began. There was nothing to hide, which led to the collapse of the economy in most states.
The financial crisis of 2008 around the world
The main characteristics of the crisis and its consequences are common to every state in the world. At the same time, there are also important differences that are characteristic of each country. For example, in 9 out of 25 countries of the world, a sharp increase in GDP was recorded. In China, the figure rose by 8.7%, and in India - by 1.7%. If we consider the post-Soviet countries, the GDP remained at the same level in Azerbaijan and Belarus, Kazakhstan and Kyrgyzstan. The World Bank emphasized that the 2008 crisis led to a general fall in GDP in 2009 by 2.2% worldwide. For developed countries this figure was 3.3%. In developing countries and countries with emerging markets, there was not a decline, but an increase, albeit a small one, of only 1.2%.
The depth of the decline in GDP differed significantly depending on the country. The biggest blow fell on Ukraine (the fall was 15.2%) and Russia (7.9%). This has led to a decrease in the overall competitiveness of countries in the world market. Ukraine and Russia, which relied on the self-regulating forces of the market, suffered more severe consequences of a socio-economic nature. The states that chose to maintain either command or strong positions in the economy endured the "economic chaos" easily. These are China and India, Brazil and Belarus, Poland. Although the crisis of 2008 left a certain imprint on each of the countries of the world, everywhere it had its own strength and individual structure.
World in Russia: the beginning
The causes of the 2008 crisis for Russia were not only external, but also internal. To knock out the ground from under the feet of the great state was the decline in the cost of oil and metals. It wasn't just these industries that were hit. The situation worsened significantly due to the low liquidity of the country's money supply. The problem started back in 2007, between September and October. This was a clear signal that the money in Russian banks had almost run out. Demand among citizens for loans many times exceeded the available supply. The crisis in Russia was marked by the fact that domestic financial institutions began to borrow funds abroad at interest. Wherein Central bank Russia offered a rate of 10% on refinancing. As early as August 1, 2008, the country's external debt amounted to $527 billion. With the onset of the global crisis, in the autumn of that year, Western states stopped financing Russia due to the situation.
The main problem of Russia is the liquidity of money
For Russia, it was the liquidity of the money supply that shaped the crisis of 2008. General reasons, such as falling stocks, were secondary. Despite the annual growth of the ruble money supply for 10 years by 35-60%, the currency has not strengthened. When the global crisis of 2008 was just about to emerge, leading Western countries formed a certain state of affairs. So, 100 c.u. The GDP of each state corresponded to at least 250-300 USD. bank assets. In other words, the total assets of banks were 2.5-3 times higher than the total values of the GDP of states. 3 to 1 ratio makes financial structure each of the states is stable in relation not only to external changes, but also to internal ones. In Russia, when the financial crisis of 2008 began, there were no more than 70-80 rubles of assets per 100 rubles of GDP. This is about 20-30% less than money supply GDP. This led to the loss of liquidity in almost the entire banking system in the state, banks stopped lending. A small glitch in the functioning of the world economy had a detrimental effect on the life of the country as a whole. The situation in the country, brought about by the 2008 crisis, is fraught with repetition until the liquidity problem national currency will not be completely eradicated.
The Central Bank of Russia itself caused the crisis
The crisis of 2008 in Russia took place largely due to internal factors. External influence only increased the regression in the country. At the moment when the Central Bank of the Russian Federation decided to raise the interest rate, the level of production dropped sharply. The number of defaults in the real sector, even before the 2008 crisis manifested itself, varied within 2%. At the end of 2008, the Central Bank increases the refinancing rate to 13%. The plan was to balance supply and demand. In fact, this led to an increase in the cost of loans for small, medium and private businesses (18-24%). Loans became unsustainable. The number of defaults increased by 3 times due to the inability of citizens to repay their debts to banks. By the autumn of 2009, the percentage of defaults in the country had risen to 10. The result of the decision on the interest rate was a sharp reduction in production volumes and the shutdown of a large number of enterprises throughout the state. The causes of the 2008 crisis, which the country created to a greater extent on its own, led to the collapse of the economy of a developing state with a high consumer demand and high economic indicators. It would have been possible to avoid the consequences of world chaos by injecting funds into reliable banks by the financial bloc of the state. The collapse of the stock market did not have such a significant impact on the state, since the economy of companies has little to do with trading on the stock market, and 70% of the shares are owned by foreign investors.
Causes of the global crisis of a global nature
In 2008-2009, the crisis covered almost all branches of government activity, especially oil and those that were directly related to industrial resources. A trend that had been growing successfully since 2000 was brought to naught. Prices for agro-industrial goods and "black gold" grew. The cost of one barrel of oil peaked in July and stopped at $147. More than this cost, the price of fuel has never risen. With the rise in oil prices, gold prices have risen, which has already formed investors' suspicions of an unfavorable outcome of the situation.
For 3 months, the cost of oil fell to $61. From October to November, there was another $10 price drop. The fall in the cost of fuel was the root cause of the decline in indices and consumption levels. In the same period, the mortgage crisis began in the United States. Banks gave people funds to buy housing in the amount of 130% of their value. As a result of declining living standards, borrowers were unable to repay their debts, and mortgaged property did not cover the debt. The deposits of US citizens simply melted before our eyes. The consequences of the 2008 crisis left their mark on most Americans.
What was the last drop?
In addition to the events described above, the situation was affected by some phenomena that took place in the world in the pre-crisis period. For example, we can recall the misuse of funds by a full-time trader of one of the largest French banks Societe Generale. Jerome Carviel not only systematically ruined the company, he clearly showed the public all the shortcomings in the work of the largest financial organization. The situation clearly demonstrated how freely staff traders can dispose of the funds of the firms that hired them. This stimulated the 2008 crisis. Many people associate the reasons for the formation of the situation with the financial pyramid of Bernard Madoff, which strengthened the negative trend of the global stock index.
The global financial crisis of 2008 was exacerbated by agflation. This is a sharp rise in prices for agro-industrial products. The FAO Price Index has been systematically increasing against the backdrop of a global stock market decline. The index peaked in 2011. Companies around the world, in an attempt to somehow improve their own state of affairs, began to agree to very risky transactions, which ultimately brought great losses. We can say about the reduction in the volume of purchases of goods from the automotive industry. Demand fell by 16%. In America, the figure was - 26%, which led to a decrease in demand for products of metallurgy and other related industries.
The last step on the road to chaos was the rise in the LIBOR rate in America. The event took place in connection with the depreciation of the dollar in the period from 2002 to 2008. The problem is that in the heyday of the economy and with its development at an incredibly fast pace, it would not be out of place to think about an alternative to the dollar.
Consequences of the 2008 crisis for the global economy
The world economy is subject to ups and downs from time to time. Occur in the history of events that change direction economic life. The financial crisis of 2008 completely turned the world economy upside down. Looking at the situation globally, world economy after the chaos became more uniform. Wages in the industrialized countries, which were lowered during the depression, have almost fully recovered. This made it possible in its time to rehabilitate the development of world industry in the capitalist states. A significant rise has been seen in countries that are just starting to develop. For them, the global depression was a unique opportunity to realize their potential in the world market. Not directly dependent on the stock exchanges and the dollar, the underdeveloped states did not have to deal with the situation. They directed their forces to their own development and prosperity.
The centers of accumulation remained in the US, the EU and the UK, which led to an industrial boom. The technological component began to improve, which continues today. Many countries have revised their policies, which has made it possible to build a reliable economy for the future. For some states, the crisis had very impressive positive effects. For example, countries that had cut off external funding due to the situation in the world got the opportunity to rehabilitate domestic economic activity. Left without material supplies from outside, the government had to pour the rest of the budget into domestic sectors, without which it is impossible to ensure the minimum comfort of the standard of living of citizens. Thus, the directions of the economy, which previously remained outside the zone of influence, have changed today.
How the situation will develop in 2015 remains a mystery. Some economists are convinced that the current situation in the world is a kind of echo of the 2008 crisis, one of the colorful, but blossoming in all its glory, consequences of the global depression. The situation is reminiscent of the 2008 crisis. The reasons agree:
- falling cost of a barrel of oil;
- overproduction;
- an increase in the level of unemployment in the world;
- a catastrophic decline in ruble liquidity;
- an extraordinary fall with gaps in the Dow Jones and S&P.
The global crisis of 2008 is outwardly similar to the crisis of 1997-1998, which affected developing countries and spared the developed countries West. In both cases, the crisis was financial, reflecting the dominance of finance over the economy, which arose under the influence of globalization. But there are significant differences in the current crisis.
Main reasons financial crisis 2008 became:
Bankruptcy of US mortgage banks;
Violation of the proportions that characterize the structure of money that has developed in recent decades, i.e. the ratio of full and "quasi" money;
Promiscuousness in issuing loans (it was assumed that houses and apartments would continue to grow in price, and a client who, for some reason, could not pay, would sell his house, return the loan to the bank, and even earn on the rise in housing prices);
The collapse of the mortgage pyramid, built under the leadership of the former head of the US Federal Reserve, Alan Greenspan;
The triumph of the market economy in the mid-1980s, which set in motion the forces that spawned in Asia in 1997-1999. the financial crash that hit the US in August 2007, the final effects of which are not yet being fully felt;
The irresponsible behavior of investors who took on huge credit debts, in order to “break” huge profits on mortgages and securities, as well as collateral of dubious quality;
Artificial attraction of loans and mortgage loans. Consequences of additional debt-servicing burden coupled with relative stagnation wages and negative personal savings are close to destructive. This is a classic case of the "wealth effect" in reverse;
Inflation launched by the US government to finance military operations in Iraq and the direct and indirect costs associated with it. By different sources the amount already spent is estimated at 700 billion to 2 trillion. dollars.
current crisis processes, will seriously affect those countries that are geographically or structurally closest to America and deeply integrated into its system. But this does not mean that other states will remain unscathed.
Experts identify the following consequences of the 2008 crisis in the world:
The depreciation of the US dollar by more than 30% and the growth of world prices for raw materials, fuel, food by more than 30% as a result of dollar inflation, which is carried out by the US government to finance the war in Iraq, financing it at the expense of its population and the population of other countries the world, since the US dollar is the main world currency, the main means of payment and accumulation;
The depreciation of US Treasury bonds, as well as the dollar, which has long been unsecured;
The global financial crisis swept the entire hedge fund and investment banking industry off the face of the earth. It was these institutions that were the key foreign portfolio investors, which made it possible to warm up the national stock and bond market;
Approximately 2.8 trillion. dol - the volume of losses of the world economy from the credit crisis;
Bankruptcy of several U-Right retailer companies, main reason what became the inability to pay off loans taken to expand the business;
Poor global leadership, manifestation of the threat of nuclear and biological war, greed, religious intolerance.
The complete collapse of the international financial system, as predicted by skeptical experts, will occur in 2011, it is at this time that states will finally fall into depression, and only then a new economic recovery will begin.
The crisis will affect Ukraine more seriously, the reason for this is that our state lags behind the main global trends. The consequences of the financial crisis for Ukraine are the following:
Difficulty of access of Ukrainian banks to financial resources in international markets;
Depreciation of the national currency;
Increase in gross debt, trade deficit;
Falling world prices for metals, high inflation, a sharp decline in oil prices on international markets;
Active withdrawal of capital from the Ukrainian market;
Limited access to international markets capital;
The impossibility of obtaining a loan in domestic banks, in connection with which large Ukrainian enterprises will be forced to look for other cash(semi-compulsory sale of shares or bonds to the public);
Decline in production by 0.5% (October 2008). The strongest decline was recorded in the key export sectors: chemical (-12.8%) and metallurgy (-8.6%) .
One way to improve economic condition countries in times of crisis is to cooperate with the International Monetary Fund. To meet the requirements of the IMF, Ukraine must adopt a package of anti-crisis measures - the bill "Minimizing the impact of the financial crisis on the economy of Ukraine." Ukraine's cooperation with the IMF has both positive and negative sides.
TO positive aspects include the following: reduction of imports by 30%, provision of 16.5 billion USD in tranches (approximately 2 billion USD per quarter), approval of next year's budget with a surplus, prevention of possible bankruptcies of Ukrainian banks.
The negative aspects of cooperation with the IMF include: public debt And budget deficit, Ukraine's renunciation of economic sovereignty, raising taxes, including transport, preventing the growth real income, tightening fiscal policy, raising energy prices for all consumers to the level of real ones, tightening the conditions for collecting debts of the population and enterprises, resuming the Soviet-style deficit, canceling the currency corridor, free market exchange rate formation, introducing an inflation targeting policy (the Central Bank outlines a desirable inflation rate of 17% in 2009, if inflation exceeds this level, the bank raises lending rates, and if inflation is not high enough, it lowers them).
All key decisions in the next three years, from the development and implementation of the budget and ending with the setting of energy prices, Ukraine will take only after they are agreed with the IMF.
Forecasts of economic development contain many positive trends. The IMF predicts a gradual recovery of business in the country, but, on the other hand, modest reductions in inflation and consumption growth will increase competition in Ukraine.
In 2011, an improvement in the situation on world markets will help capital return to domestic market. According to ICPI forecasts, the NBU will again start buying foreign currency for reserves in order to keep the hryvnia exchange rate against the dollar at the level of 5.57, the country will come to such a stable ratio after three years of the crisis period.
Literature: Gorodchuk Ya. You who lived.//Business. - 2008. - No. 43. - S. 14-16. Lavrinenko. I. The end of the sovereign economy.//Expert. - 2008. - No. 43. - S. 17-22.
American mortgage crisis of 2007-2008 - the collapse of the real estate market, as well as all the securities associated with it. In its destructive scale, it is compared with the Great Depression of the thirties of the last century. The United States of America is a state 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 analyzed in detail in this article. But first, a little about the concept from the point of view of economic theory.
concept
The mortgage crisis of 2008 in the United States is a 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 the strongest drop in stock exchange activity.
The mortgage crisis in the US 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 at all return to pre-crisis indicators of economic development. Therefore, it is fair to note the fact that the 2008 mortgage crisis in the United States ended the era of world classical capitalism in the form in which it was before. The whole world has understood that bankers, traders and stockbrokers are not capable of self-regulation without state intervention.
Similarities with the Great Depression
If we compare the US subprime crisis of 2008 and the Great Depression, there are two similarities between the two shocks:
- Excessive speculative activities in the 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 are not interested in the development real sectors economy, but in the development of "virtual spheres", which were divorced from the real state of affairs in the economy.
- Belated reaction of state and regulatory authorities to crisis phenomena. There are theories that for one reason or another, this happened purposefully. For the sake of self-interest, financial regulators and supervisory authorities turned a blind eye to obvious traces of an unhealthy market situation 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 mortgage crisis in the US the biggest speculative market bubble he has ever seen. He stated this in 2011 during his testimony before the Commission of Inquiry into the Causes of the Crisis. When asked by the Commission, he stated that all of America and the whole world convinced themselves that the rise in real estate prices would continue forever and there would never be a fall. Such a state of euphoria and mass psychosis defies any logical explanation. The last time the world's largest bankers and financial magnates were in this state was 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 this on the state, which did not provide regulatory policy. Government officials are shifting the blame for artificially inflating the "bubble" to traders and brokers. Perhaps both are right, but in addition to these, almost every study on the mortgage crisis also mentions the following reasons:
- The growth of foreign investment in the American economy.
- Change in legislative regulation banking system.
Let's describe each of these points in more detail.
Growth of foreign investments
From 2002 to 2005, a huge influx of money poured into the American economy. He was associated with the largest price boom for hydrocarbons. All oil and gas exporters received huge windfall profits, which had to be placed in a "safe haven" for conservation. In addition to oil and gas exporters, the rapidly developing countries of Asia have been striving for similar goals. First of all, China.
Impact of foreign 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 related? They defy any logical explanation. However, prominent US economists have advanced 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 offered to scatter dollars directly from a helicopter, since there was an excess of them in the American economy. In fact, the Americans blamed not their own traders, who artificially inflated the "bubble", not their own citizens, who, not having enough income, took on several expensive mansions in mortgages, but third countries that placed their money in the American economy .
- The second theory is based on purposeful attraction foreign capital due to the high level of consumption in the USA. When exports fall, it must be satisfied with loans from a foreign producer.
The difference between the first theory and the second lies only in the root cause. According to the first one, the mortgage crisis was provoked as a result of massive overconsumption, which was caused by the attraction of foreign capital. According to the second, attracting investment, on the contrary, was caused by high excessive consumption. That is, in any case, third countries are to blame, which placed their cash reserves in the American economy. While pensioners in Nigeria or Russia were severely limited in their incomes in their countries, at that time millions of Americans took on credit from the reserves of these same countries whatever they wanted: expensive cars, diamonds, cottages. At the same time, some did not even have a stable job.
By the mid-2000s, the United States had huge free funds. Investors were not satisfied low interest on treasury bonds. We needed a new product that would be much more profitable, but at the same time reliable. Real estate has become such a commodity.
Changes in the legislative regulation of the banking system
The mortgage crisis in America, perhaps, would not have happened if it were not for the second reason - changes in legislation in the banking sector. The fact is that Americans learned the lessons of the Great Depression very well. It was caused by commercial banks that used depositors' money to buy securities on the stock exchange. Then they were growing in price all the time, so banks attracted all available funds for this. Naturally, when prices went down, “budget holes” formed. Banks actually lowered all the funds of depositors on the stock exchange. The situation is reminiscent of modern shares investment funds. Investors invest money knowing that companies will invest their money in various stocks. That is, investors know in advance that there is a risk of losing everything, but the profit on such financial transactions above. The situation with deposits is somewhat different: people open them for the sake of saving their funds at the expense of possible benefits.
After Black Thursday, in the fall of 1929, the Glass-Steagall Act was passed to prevent the arbitrariness of bankers. According to him, there was a clear division of banks into commercial and investment. Now people clearly knew that commercial banks trading in securities in any way is prohibited. In addition, introduced compulsory insurance deposits in case of bank failure. Something similar entered Russian government after the crisis broke out in our country. But we will talk about this a little later.
So, the mortgage lending crisis might not have come if the Glass-Steagall law had not been decided to be canceled. The fact is that the amount of free capital in the US market was huge. 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-backed debt securities, since 1982, mortgage loans began to issue other commercial organizations which do not have the status of federal banks.
Commercial financial institutions began lobbying for a bill 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 holdings, which could simultaneously conduct commercial, investment, and insurance activity. That is, to actually accept deposits, invest them in high-risk instruments and at the same time insure themselves. The scheme, ingenious in its simplicity, opened up a complete carte blanche for the banks.
This alone could inevitably lead to devastating consequences for the world economy. But that was not all: at the same time, the rights of state regulators and regulatory bodies were limited. In fact, the mortgage crisis of 2008 was a foregone conclusion by these actions, since under these conditions, according to the Nash equilibrium theory, everyone will extract the maximum momentary profit, without thinking about long-term consequences.
Subprime lending
Allowing commercial banks to invest in mortgage-backed securities, coupled with the restrictions of state controlling organizations, is not so bad. The situation was aggravated by the greed of the bankers. The fact is that in order to approve a mortgage, the borrower should have spent no more than 6-8% of the total income to cover the mortgage. We agree that the percentage is quite acceptable. He does not exert special pressure on the personal budget. However, the problem for the bankers was that too few borrowers meet such conditions, from their point of view. It was decided to lower the bar of mandatory requirements. Such loans are called substandard, i.e., translated into normal language, non-standard or abnormal.
Types of subprime loans
The whole cynicism of the American bankers was that several types of subprime 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.
- Customer's choice of payment option. The concept of this loan is simply amazing ingenuity: the borrower himself chooses the amount of the monthly installment, and unpaid interest can be added to the principal debt. Nearly 10 percent of all mortgages were negotiated in this way. Under this scheme, any unemployed person could mortgage a huge villa on the seafront for several million dollars, paying only a few hundred dollars a month. And such cases were not uncommon.
- Possibility to repay most of the debt at the end of the term. Naturally, at the end of the term, not everyone had the necessary amount in their hands, etc.
These three mortgage lending schemes alone would shock any economist. But the flywheel turned, and ingenuity only gained momentum. The apotheosis of the entire system was loans without assets and income. That is, in fact, any unemployed homeless person, a Texas migrant, a single mother with many children, living on welfare and barely making ends meet, could mortgage absolutely any property. These loans were called "junk" loans, since the banks themselves understood that no one would pay their obligations, but their interest was not in the return, but in the issuance: for each mortgage loan, a debt paper was sold, which was simply swept away on the stock exchange by "hungry investors." The banks that issued the loan 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 - an average of 0.5-1% per year and the interest rate on loans - 3-4% per year. Consequently, securities were actually created from the mortgage - derivatives that were quoted on the markets. A grandiose scam with the issuance of "junk" loans, no one could even imagine.
Speculation in derivatives - the final apotheosis of mortgage lending
The culmination of this whole system was the behavior stock speculators. Derivatives - absolutely irrevocable mortgages elevated to the rank of securities - seemed to speculators an endless source of profit. It so happened that derivatives turned into absolutely separate securities, which began to take on a life of their own. The tulip mania of the 17th century, in the literal and figurative sense of the word, turned out to be flowers compared to the 2008 scam. In the 17th century, at least they traded flowers on the stock exchanges, which are still a real thing. Derivatives are debts that no one will ever be able to repay, but at the same time, these debts have a huge value on the exchanges. Further, as they say, more. Under the security of derivatives, new securities were created - CDO, under them new ones were issued - CDO on CDO.
Why was such a gigantic scam of the century possible?
There were several reasons why mortgage debts were inflated into a gigantic scam in scale:
- It was attended by several 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 crossed paths for such purposes. It turned out to be a certain stereotype of a mutual guarantee, but in practice everyone squeezed the maximum profit out of this, without thinking about the consequences.
- Mortgage papers have become securities. Nobody had experience with them, didn't know how to assess risks, strategies, etc.
- Blatant collusion of banks, major hedge funds and leading rating agencies. The latter, experiencing competition in the market, turned a blind eye to everything, so long as customers did not go to competitors. In practice, the Nash equilibrium theory worked, according to which each company, not trusting the honesty of a competitor, participated in collusion.
Consequences
The consequences of the mortgage crisis in the US were severe. The entire global financial system suffered. Humanity over the past quarter of a century has had no doubts about the effectiveness of the capitalist system. Many countries defaulted, and many major insurance companies and international banks were ruined. Among them are the world famous Lehman Brothers and Bear Stearns. Many have announced a merger. Decreased private savings and savings of US citizens. The crisis affected all areas of the US economy, which led to a global crisis.
About a million Americans were unable to service loans. They were forced to leave their homes to the bank. Huge real estate funds were thrown into the market. Entire streets and quarters literally “died out” after the crisis. About 100 thousand families were forced to leave their homes. Naturally, real estate prices have plummeted. Further, the construction sector of the economy suffered, it pulled 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 the return of the loan, and not in the sale of mortgage-backed securities. Dumping real estate prices turned out to be disastrous for Russia, as free investors began to buy significantly cheaper housing in the United States. Mortgage during the crisis in Russia was under threat because the American crisis hit more on the financial sector of our country than on real estate.
In our country, a real mortgage crisis occurred due to a sharp devaluation of the national currency in 2014. As a result, the cost of credit 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, because at one time it warned them that you need to take out a mortgage in the currency in which you receive wages.
He ended with the words that the end of this year will be "fun". In this material I will talk about the nature of the origin of the crisis in the United States and the financial world order. Draw your own conclusions.
In order to understand that the crisis in Russia is different from the crisis in the US, let's try to understand the essence of the 2008 crisis. in USA
The United States is 20% of the world economy, 20% of world GDP is a lot. However, Americans throughout the country consume even more - about 40%. Given that the dollar is a world and international currency, and the US Federal Reserve is in charge of issuing the dollar. The Fed is the Federal Reserve System, an analogue of our central bank.
But, as with everything, there are nuances. Few people know that the Fed is a private organization, with private capital, having the status joint-stock company. The Fed includes the United States Reserve Banks and many smaller commercial banks.
Legislatively, the Fed has independence from the United States. In its decisions, the FRS is absolutely free, since the decisions of the FRS are not approved by anyone: neither the President of the United States, nor representatives of the legislative or executive authorities. Nobody.
In contrast, the Fed can only act within the authority granted to the Fed by Congress. Theoretically, Congress could limit the Fed's decision-making power on US monetary policy. But this is only theoretical.
Thus, as it is not difficult to guess, the one who manages the FRS and controls the Congress (this may be one person, and may be a group) holds the whole world in one place, since all transactions in the world on world exchanges in mostly carried out in dollars. This means that almost the entire world, whether it likes it or not, depends on the rate of unbacked gold, a masterpiece of American printing depicting the presidents of the new world.
Why the whole world depends on the US dollar
Let's assume that the dollar is the world's currency. We will not look for reasons for this. This is a given, and let historians figure out the reasons.
And just like any currency, the dollar must be backed by something, such as gold. Until 1971, the US dollar was backed by a gold reserve, but after that the dollar was decoupled from gold and the US Federal Reserve got the opportunity to issue its currency in unlimited quantities.
The reason for the decoupling from gold was the crisis of overproduction in the United States of America in the 70s of the last century. In general, the amount of money should correspond to the number of offers on the market. The number of proposals is constantly growing due to scientific and technological progress, the discovery of new materials, etc. America, being a typically capitalist country, issued monthly money issues.
And the moment came when there was nowhere to put the manufactured products. The dollar default was declared and this currency was untied from the gold reserve.
However, the issue of the dollar in unlimited quantities made it possible to build the American currency into the economies of almost all countries of the world. The economy of the United States of America was considered unshakable, and the dollar played the role of a reserve currency. To some extent, this is justified - the currency of the state with the strongest economy can indeed carry certain economic guarantees.
Thus, using the dollar as a guarantee, almost the entire world economy has financially supported and is supporting America. This allows Americans to live beyond their means; as I wrote above - to give 20% of world GDP, and consume 40%.
It would be fair if the countries holding $ , took part in the decision of the Fed to issue the American national currency, since such states support the US economy with their national economies. However, this does not happen. Of course, you can figure it out and find out the true reasons, but that will be a completely different story ...
How Americans live beyond their means: process and consequences. Or why the mortgage bubble burst
With conditionally unlimited issuance, the number of dollars in the United States increased. This means that cheap money has appeared and the standard of living has risen. Not a bad achievement - the whole world works for one country, and this country accepts those wealth given by the world economy.
After all, if you need to invest a certain amount of money in the country's economy, then the output should be at least the same amount, and for good - more. But, as I pointed out, dollars were no longer backed by gold. Why?
Because the world currency must be backed by the world economy, i.e. the economies of those countries that use the dollar as a reserve currency. This means that other countries work for this green currency - they give their goods, minerals, products to America for plain paper with watermarks and several grams of paint. Those. paper that is not backed by the assets of the state that issued it.
Under such conditions, the issue of the dollar can be brought to conditional infinity, since the dollar is no longer limited by the security of its country: gold, GDP, etc. But if the volume of printed dollars exceeds the volume of world assets, it happens the crisis.
But back to the citadel of democracy. With the rising standard of living in America, new financial mechanisms have appeared. One such mechanism was investing in real estate. The prices for the American real estate grew with enviable stability. It is explainable. This happens all over the world. The faster the price rises, the more demand rises.
In the presence of cheap money in America, they began to issue "bad" loans secured by this real estate. Those. loans became cheap and they began to be given to everyone, even to those who had not been allowed close to loans before.
The logic of the bankers is understandable. As long as the borrower pays, it's good. Stops paying - take property. And taking into account the guaranteed growth of its value, the bank will in any case be in the black - the money paid on the loan is not returned to the borrower, and the house is sold at market value, which grows very significantly from the date of issue of the mortgage. It is obvious that the proceeds from the sale of real estate go entirely to the bank.
Thus, in America, a bubble of unsecured mortgages was massively formed. Further, according to the law of the genre, the market always saturates. It happens all the time and in everything. When there is a rapid growth, sooner or later the market will be saturated and then it will turn out that the product is too overpriced.
This is what happened in the USA. When the market was saturated, the next generation of buyers stopped buying property. Banks, taking collateral real estate, could not return even half of the cost of loans issued. It was almost a crisis, there were still not great hopes, but all in vain.
Due to the relatively high standard of living and the mass nature of "bad" loans, a panic began in the US real estate market. A lot of companies involved in issuing "bad" loans have already begun to dump this illiquid asset, as a result of which real estate prices literally collapsed. This is how the US mortgage bubble burst. Many people have suffered financially, not only in America, but also far beyond its borders. Yes, people got hurt largest banks with a worldwide reputation and a rich history. So in the United States, the mortgage "madness" sadly ended.
For the sake of objectivity, it should be said that the US government took anti-crisis measures, including the state was going to buy out "bad debts", as a result, it seems, it gave banks 700 billion for consumer lending.
At the same time, investors did not leave the country; they believed in anti-crisis measures and believed that the US economy would recover. And so it happened. Already in 2010 the United States economy began to grow slightly.
The mortgage crisis in America has affected almost all countries, including Russia, because. the world's strongest economy, the economy of the United States of America, is the producer of the world's reserve currency. Russia is very integrated into the world economy and such shocks have a negative impact on the Russian economy as well.
Thus, as long as the world will be the dominant currency $ everything that happens in the United States will affect the rest of the world in one way or another.
Whether this is good or bad, let everyone decide for himself.
My next article will be about Russia. In order for readers to understand where the “legs grow from”, it is necessary to understand the financial world order, which I very briefly outlined in this material.
Because the events on financial markets change very quickly, then I will try and keep within more than once a week, but more often.
With a review article about economic crisis in Russia, can be found by clicking on the link below.
