The original idea of inferior products was to let the lower-class people in America have houses to live in. These ordinary people have low credit ratings and can only give them subprime loans with higher interest rates.
This idea is completely beneficial to the people in the case of rising real estate market, because you can own a house through mortgage loans, and the house price is rising, so you can return it later.
For banks, in order to maintain the liquidity of assets, they use these mortgages as collateral to collectively issue mortgage-backed securities, which is the process of mortgage securitization. These securities are sold to other financial institutions or investment institutions or investors, and many banks in China, including China Construction Bank and China Industrial and Commercial Bank, have purchased these subordinated bonds. Because the interest rate of subordinated debt is high, the yield is higher than that of ordinary bonds. These benefits come from the monthly repayment of the mortgagor.
Once the real estate price falls, the total value of the house is lower than the mortgage payment, and the risk of default by ordinary people is greatly increased, which leads to many people defaulting, the bank mortgage payment loses the repayment cash flow, the capital chain is broken, and the house value is not enough to repay the bonds, which makes the bank or these mortgage payment institutions have a liquidity crisis.
With the expansion of the problem, many banking institutions have closed down, and the relevant institutions holding these institutional bonds have also encountered a crisis. The main institutions engaged in mortgage loans in the United States are Freddie Mac and Fannie Mae. After this problem appeared, the US government had to come out to rescue the market and bought these two institutions. Merrill Lynch Group was also bought, and Lehman Brothers closed down because of the subprime mortgage crisis. However, the government did not save this investment bank that has existed for 150 years.
Triggering a global crisis: on the one hand, many foreign institutions hold a large number of American subprime debts, which are greatly affected after the crisis and have a liquidity crisis. China Construction Bank holds about $200 million in subordinated debt, but it is not serious, accounting for only a few thousandths of its total profit. Industry and commerce also hold a large number of bonds, and relevant data can be found online.
On the other hand, after the financial crisis, people's confidence was hit and they were unwilling to spend, which led to the reduction of total demand and the difficulty of the whole economy. At the same time, many products in America are imported. For example, China is a big exporter to the United States, and one third of China's GDP is exported. Due to the impact of the domestic financial crisis in the United States, China's exports have also been greatly affected, which has led to problems in many export-dependent coastal enterprises in China, and large-scale layoffs have begun, resulting in an increase in the number of unemployed people. China's economic operation has also been affected. Other countries have similar problems.