What happened in the previous video? In 1995, we had some neighbors They all bought houses cautiously and their own funds accounted for 20% Bought it for 100,000 Frankly speaking, there were probably a lot of people at that time Want to buy a house but many people can’t raise money This happens for a reason Because you have to prove that you are eligible to raise funds Anyway, after 10 years, raising money has become easy As the price of houses has been showing a dynamic increase People ignore the existence of risk People are willing to lend money to more people Just need to contact some other banks Can do it In 2005, when the bubble reached its peak Someone bought the first house for 1 million Useless own funds rely on subprime loans to obtain funds Then his house was sealed up a year later The house was also auctioned off with only 300,000 Since they bought that house for 1 million So far, the auction proceeds are only 300,000.
Let’s assume Experienced – just say it was a few years I assume it is in 2008 Then the house was sealed in 2008 Then the auction proceeds are 300,000 All these people during this period All borrowed a 500,000 home equity loan, right? So they all have 500,000 home equity loan debts And the original 80,000 loan If they only paid interest in the past, they would have a total debt of 580,000 Otherwise maybe the debt is less Let's roughly estimate it to be 500,000 At first in 2008 they would say You also know that this is only temporary, that's just a big sale price These auctions did not reflect the actual market situation So we just need to wait for the development of the situation and wait for the house price to rise Because this is not a real deal But we say 2009 is here The owner of the second house may be in another city Got a job and moved out of here May be fired Can't pay the mortgage They are going to sell the house They want to sell at a higher price It’s no coincidence that they all want to sell for 600,000 No one answered No one is fighting Because many people think On the basis of repaying the loan after selling the house How much can I earn But no one wants to buy their house At a certain moment they gave up the idea They found the bank again and said the bank Can I sell at a loss? If the house price is too low I won't owe you any debts after I receive the money But at that time the bank still had confidence in the situation They probably say no Selling at a loss occurs when you sell something for less than When you owe debts Selling at a loss is like the guy who owns this second house Suppose he has a mortgage of 500,000 If he wants to sell the house for 480,000 yuan The bank also agreed that 480,000 is all he has to repay This is selling at a loss, right? But if the bank doesn’t agree to let you sell it– Otherwise we will seize – you must pay the debt Otherwise we will seal your house You also know that of course this guy would say I have nothing left anyway I just lost my job The key to the house is here, go and seal it The bank responded that I would seize it A few months later the bank realized this was a bad decision Because now when they auction this house They can’t actually get back 580,000 Even 480,000 won't get back the auction proceeds only 250,000 These sounds like an extreme example The situations I described What happened in Modesto Stockton California Things are no different in Miami and parts of Nevada In short, its auction price is 250,000 Now everyone in the neighborhood is panicking Because the owner of the second house Hard work I also failed to sell the house and tried to negotiate with the bank to sell at a loss And didn’t get permission to auction the house The auction price received is much lower than the price of the first house Only 250,000 So now everyone will say what am I doing? Part-time three jobs to repay the 500,000 mortgage The house may be worth 250,000 If someone thinks about it rationally In fact, 250,000 is not a crazy low price They bought it for 100,000 Maybe you will consider the adjustment of GDP growth or inflation That 100,000 may be worth 150,000 or even 200,000 in 2009 So 250,000 is actually not an absurd price All these people would say Why do I continue to work so hard Why do you want to be a house slave? I just need to return these keys to the bank This is the so-called jingle mail So you gave the key to the bank Suppose this guy gave the key to the bank The bank thought their loan was very cautious I think the owner of the third house Will give the key to the bank Instead of continuing to repay the mortgage The bank will say oh now this house is mine Then the auction only got 250,000 So what happened to the bank? The bank lent a loan of 500,000 and recovered 250,000 At the same time this guy also lost Initially invested in this house's own funds The owner of the third house no longer owns this house So how much wealth does each individual lose? 500,000 cash capital outflow from the bank Cash capital can be used to invest in the construction of factories Planting crops and investing in research and development May develop new materials or new technologies Really 500,000 cash capital Now they got a house and auctioned it off Recovered 250,000, right? They lost 250,000 How much did the previous owner of this person's house lose? After making this transaction They actually lost them in this house Original own funds invested How much of this house belongs to own funds? We assume that before trading They invested 20,000 of their own funds, right? That means losing 20,000 of its own capital Frankly speaking, they won’t take that 100,000 house Sold for 250,000 We know that even in the so-called extremely depressed real estate market They can still sell for 250,000 So let’s see if they have 80,000 loans 250,000 assets, their own capital is 250,000 minus 80,000 Is 170,000 So they lost 170,000 of their own capital If i'm not wrong I think you should know the main points They enriched their own capital through the appreciation of real estate It’s just that the house price has not changed from 100,000 to 1 million.
But changed from 100,000 to 250,000 So their own capital is 20,000 plus 150,000 150,000 is the result of the appreciation of housing assets If they didn’t make a home equity loan They will not lose 170,000 funds So the loss of these homeowners is 170,000 After conducting the home equity loan business What is the total loss of the two parts? 420,000 in total 420,000 capital disappeared It disappeared from the economy Where did it go? At a certain moment it still exists, it must go to a certain place It was consumed It was spent on hardwood floors with these granite countertops And going on vacation is pure consumption You would say that perhaps these consumptions can play a role in investment Can increase productivity but to a large extent These are just pure consumption Like hardwood floors plus two bathrooms Granite countertops do have some value But their value is definitely not as good as The value of the cash capital spent on them These assets are devalued, they are all luxury goods They may only match those who spend money to decorate Appetite In short, the main point of this video is When experiencing an asset bubble, it is like a real estate bubble People will ignore the risk People’s psychology is that asset prices will only rise At that time people also began to have an idea of inflation Asset prices rise and then begin to borrow money to overcome inflation Make full use of leverage to offset inflation This will lead to improper distribution of wealth and funds In essence, many financial resources have been destroyed Those financial resources could have been used to build factories Build schools, repair roads, etc.
People used to decorate granite countertops for vacation And at Sonoma Man Marcus Shopping for satisfaction, etc. All these are basically just consumption Destroyed wealth So it disappeared I emphasize this point because Now the government thinks it can be avoided through legislation Destruction of actual wealth The government also believes that if somehow from the bank Bought this 500,000 loan asset Then if it is held long enough, perhaps its assets– That house has been sealed There will be no loan assets anymore and replaced by houses So the government might say If we buy this house and hold it long enough Maybe its price will rise to 1 million So that the government can recover 1 million If our population grows fast One day it will become a valuable asset Or assets that are in high demand If its price doesn’t rise again, it’s just one A house in a remote area no one finds it useful Or similar to this area Became the entire place near the illegal construction area Have to be broken into open spaces Who knows? The main thing is that for some reason Once things get worse, it can intervene Without letting people realize that they destroyed wealth I call it passing legislation to resist reality Reality is hard to make a difference Whether you want to pass legislation to save Give a speech to save Or imagine a world that does not conform to the laws of nature This is the crux of the problem Despite this view, I don’t want to be a defeatist they think There is no solution to this credit crisis especially The banking crisis we are dealing with In the next video I will introduce a preliminary plan Actually it is a friend of mine in business school Proposed If you think credit is tightening And will be the key words Then this plan is very meaningful