What Is a Subprime Meltdown?

In the two years ending June 2006, the US Federal Reserve raised interest rates 17 times in a row, raising the federal funds rate from 1% to 5.25%. The sharp rise in interest rates has increased the burden of repayment on home buyers. Moreover, since the second quarter of 2005, the US housing market has begun to cool significantly. As home prices fall, it is difficult for home buyers to sell their homes or obtain financing through mortgages. Affected by this, many borrowers in the subprime mortgage market are unable to repay their loans on schedule, and the crisis in the subprime mortgage market has begun to emerge and is becoming more and more intensive.

Subprime crisis

Since the subprime mortgage crisis broke out in August 2007, it has caused great impact and damage to the international financial order, caused a strong credit crunch effect in financial markets, and exposed the systemic financial risks accumulated by the international financial system for a long time. The financial crisis triggered by the subprime mortgage crisis is the worst financial crisis since the Great Depression of the United States in the 1930s. The subprime mortgage crisis, which originated in the United States, is spreading across the globe. The global financial system has been greatly affected, and the crisis has hit the real economy. China has also been affected by the subprime crisis.

Excessive innovation of financial instruments, distorted interests of credit rating agencies, and deregulation of monetary policy are the main reasons for the US subprime mortgage crisis. The response measures taken by the US government, including large capital injections, continuous interest rate cuts, and direct intervention, have achieved some results, but the problem has not been fundamentally resolved. The enlightenment that this brings us is: financial regulation and control policies must conform to the economic situation and comply with the cyclical fluctuation law; financial innovation and financial system innovation should be promoted on the basis of strengthening financial supervision and improving risk prevention mechanisms; seizing favorable opportunities , Encourage overseas asset mergers and acquisitions, optimize overseas asset structure, and diversify overseas asset risks.