In this economic context, a trend of thought that aims to revive traditional liberal ideals and reduce government intervention in the economy and society as its main economic policy goal began to spread in the United States. This trend of thought is called "neoliberalism."
Neoliberal economic policies are prevalent in the United States. Their core content is to reduce government intervention in financial, labor and other markets, crack down on trade unions, and implement economic policies that promote consumption and drive high growth through high consumption.
Under this economic policy, the US government began to encourage people to spend more than they should have in the current year to promote rapid economic growth. At the same time, another important part of this economic policy was to remove regulations, including financial regulations.
Therefore, since the Reagan administration came to power in the early 1980s, the United States has been promoting financial liberalization and so-called financial innovation by enacting and amending laws to relax restrictions on the financial industry. For example, in 1982, the U.S. Congress passed the Garn-St. Germain Thrift Institutions Act, which gave thrifts similar business scope to banks, but was not subject to the regulation of the Federal Reserve. According to the law, thrifts can purchase commercial paper and corporate bonds, issue commercial mortgages and consumer loans, and even purchase junk bonds.
Later, the US government introduced more similar laws with the aim of eliminating the barriers between the banking industry and investment industries such as securities and insurance, thereby opening the door to so-called financial innovation and financial speculation in the financial market.
Against the backdrop of the above legal reforms, the speculative atmosphere on Wall Street has become increasingly intense. Especially since the 1990s, as the Federal Reserve's interest rates have continued to fall, the pace of asset securitization and financial derivative product innovation has continued to accelerate, coupled with the extravagant consumption culture that permeates the entire society and blind optimism about future prosperity, it has become possible for ordinary people to borrow money and consume ahead of time.
And in this situation, the real estate economy of the United States began to pick up again, and the real estate market became more and more hot. Even the bursting of the Internet bubble and the 9/11 incident at the beginning of the new century did not stop the hot real estate market in the United States.
As the saying goes, capital is like a shark. As long as there is the slightest smell of blood, capital will chase after it at the first opportunity.
The booming real estate market in the United States naturally triggered the pursuit of capital.
However, before the new century, those unregulated capitals were relatively honest. But after the new century, especially after the 9/11 incident, these capitals from Wall Street began to become unscrupulous.
Everyone knows that taking out loans is a very common thing in the United States, and pre-consumption and living beyond one's means are very common in the consumption concepts of the American people.
Moreover, in the United States, except for the super-rich, ordinary middle-class people and most ordinary people rarely pay the full amount when buying a house. They usually buy properties through loans.
But at the same time, unemployment and re-employment are very common in the United States. These people with unstable income or even no income are defined as subprime borrowers, or subprime borrowers for short, because their credit rating does not meet the standards for buying a house.
Subprime mortgages are a high-risk, high-return industry that refers to loans provided by some lenders to borrowers with poor credit and low income.
The difference between subprime mortgages and standard mortgages in the traditional sense is that they do not require high credit records and repayment ability of borrowers, and the loan interest rate is correspondingly much higher than that of general mortgages. Those who are rejected by banks for high-quality mortgages due to poor credit records or weak repayment ability will apply for subprime mortgages to buy houses.
The U.S. subprime mortgage market usually adopts a repayment method that combines fixed and floating interest rates, that is, home buyers repay the loan at a fixed rate in the first few years after buying a house, and then repay the loan at a floating rate.
In the five years before 2006, the U.S. subprime mortgage market developed rapidly due to the continued prosperity of the U.S. housing market and the low interest rate level in the United States in previous years.
Under such circumstances, many financial derivatives related to subprime loans came onto the market. Among them, the most famous financial derivatives are "collateralized debt obligations", abbreviated as CDO, and "credit default swaps", abbreviated as CDS.
In the real estate loan market, in order to share risks and profits, lending companies turn to investment banks, which then securitize them to create "collateralized debt obligations" - CDO.
In order to earn huge profits, many investment banks use 20-30 times leverage. For example, if Zhang San Investment Bank has $3 billion in assets and uses 30 times leverage, that is, it uses $3 billion in assets as collateral to borrow $90 billion for investment. If the investment earns 5%, then Zhang San Investment Bank will earn $4.5 billion in profit, which is a 150% profit relative to its own assets.
However, leveraged operations are high-risk. According to normal operating methods, Zhang San Investment Bank should not conduct such risky operations. However, such operations can bring high profits, so someone came up with a way to use leveraged investments for insurance. This type of insurance is "credit default swap" - CDS.
The specific process of CDS is as follows: Zhang San's investment bank finds Li Si, who may be another investment bank or insurance company. Zhang San insures the leveraged operation and pays Li Si $50 million in insurance premiums every year, for a total of $500 million for ten consecutive years. If the CDO does not default, in addition to the $500 million insurance premium, Zhang San can still earn $4 billion, and if the CDO defaults, Li Si will pay for it anyway.
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