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Financial fragility and the United States on the Financial Crisis: Reflections on Theory and Practice

Abstract: In essence, the U.S. financial The outbreak of the crisis vulnerability of the financial structure and financial results of disorder within the system. As a credit crisis, moral crisis, the U.S. financial crisis to demonstrate its financial crisis. The crisis caused a huge impact on national economies, a profound lesson, to be learned. Should fully understand the essential characteristics of the financial crisis, and to take effective preventive measures to maintain domestic financial markets and the real estate market stable. This paper from China Union [link widoczny dla zalogowanych] collected. Began in early 2007 by the U.S. subprime mortgage crisis triggered by the global financial crisis is spreading rapidly worldwide and continues to deteriorate. Excessive financial innovation, lack of credit control the spread of moral hazard and further exacerbated the vulnerability of the U.S. financial system and the instability of the financial crisis led to three main reasons. I. Review of financial fragility theory of financial fragility means financial system structure is the risk of non-equilibrium result in the accumulation, the loss of some or all of the financial system function of the financial status (Wu Zhiwen, 2002). Theory of financial fragility of the financial system itself is unstable,[link widoczny dla zalogowanych], with the inherent vulnerabilities of the financial risk is widespread, the financial crisis is inevitable. More influential early theory of the financial crisis Fisher (1933) debt deflation theory and Minsky A (1982) hypothesis that financial system instability. Fisher held that the vulnerability of the financial system is closely related to the repayment of debt, the real economy sector, the economic downturn caused by excessive debt and debt repayment. The debt settlement will lead to the contraction of the currency and the turnover rate of decline. These changes would lead to lower prices, reduced output, the weakening of market confidence, the number of bank failures and rising unemployment. Therefore, Fisher held that the vulnerability of the financial system is derived from the deterioration of economic fundamentals. Minsky instability of the financial system for the analysis is based on boom and bust of capitalism based on the long-wave theory. He pointed out that economic prosperity is planted the seeds of the financial turmoil. His basic point is that the real economy there are three types of funding, that is, crediting of financing (investment rate of return greater than the lending rate, the project is greater than the cash inflow of cash flow debt service), speculative finance (investment projects yield large in lending rates,[link widoczny dla zalogowanych], the project cash flows is less than the cash flow debt service) and Three funding cycles in the economy in different proportion in different periods: period of economic prosperity, a substantial proportion of the latter two increased funding, financial risk increases. With the expansion of loan demand, market interest rates, corporate profits decline, market sentiment changed from optimism to anxiety and further spread of the panic, business failures, a sharp contraction of bank loans, leading to the rapid decline in asset prices and overall financial crisis. Thus the financial system is inherently unstable, the economic development cycle and the economic crisis than by external shocks or result in failure of macroeconomic policy, but the only way of economic self-development. 20 century,[link widoczny dla zalogowanych], 70 years after the financial crisis becoming more and more frequent, and often independent of the actual form of the economic crisis generated. On this basis, the financial crisis theory are becoming more mature (Weibo, 2006), and the formation of three generations of currency crisis more mature theory. The first generation of theory by Paul Krugman (P. Krugman, 1979) first proposed by Robert Tefal Ladd et al (R. Flood and P. Garber, 1985) to improve and develop, that the macroeconomic policy and the exchange rate regime and a lack of coordination between the unlimited expansion of domestic credit led to the root causes of the financial crisis. The second generation of theory to get dirty Phil Rees Aobo Manchester (M. Obsffeld, 1994), represented mainly the introduction of the expected factors, the dynamic between the government and the private game analysis, that the government expected the private sector made reaction as a key factor in the crisis. Theory of the formation of the third generation in 1997 after the Asian financial crisis. Many scholars beyond the traditional scope of macroeconomic analysis, starting from the financial intermediation, asymmetric information analysis of the financial crisis. McKinnon and the characters are representative of Krugman et al. Which Krugman (1998) moral hazard model, emphasizing the moral hazard of financial intermediaries in the investment subsequently led to the formation of excessive risk of asset bubbles in the central role played by that first led to excessive risk of moral hazard, leading to financial system collapse. Second, characteristics and evolution of the U.S. financial crisis, financial system fragility of the financial crisis theory reveal different aspects of the mechanism of the formation of various types of financial crisis, but also for us to understand and analyze the the vulnerability of the global financial crisis provides a theoretical basis features. However, due to the complexity of the financial crisis, triggered the financial crisis, emerging new factors, the financial crisis also presents new features. Global financial crisis has engulfed the first caused by the subprime mortgage crisis. Refers the U.S. subprime mortgage crisis subprime mortgage borrower defaults increase, thereby affecting the subprime-related financial asset prices fell sharply due to global financial market turmoil and liquidity crisis. Source from the production point of view, in fact it is the inherent instability of the financial system, especially financial abuse of innovative tools, such as credit and lack of supervision caused by a currency crisis, credit crisis and moral crisis, the crisis spread through the , has evolved into a systemic financial crisis (ie the financial markets can no longer effectively perform their functions, and thus tends to collapse and the real economy may have significant adverse effects of state) and the global financial crisis. (A) the nature of the subprime crisis is the credit crisis and moral crisis According to the theory of financial crisis, the U.S. financial crisis in the financial structure and financial system fragility of the results of the internal disorder . Minsky (1982) that the financial crisis is an inherent feature of the capitalist system, it is with this system of capitalist economic cycle. Because the inherent instability of the financial system, leading to financial crisis appeared again and again. Periodic emergence of new opportunities for profit always leads to optimistic expectations, and to promote excessive credit expansion. On the other hand, due to competitive pressures, in order to keep customers and markets, banks often make imprudent lending decisions. Krugman (1998) that because the government banks and financial institutions, and poor supervision implicit guarantee, banks and financial institutions make serious moral hazard problem. According to Marx's analysis, the virtual capital market over-expansion and excessive growth of bank credit, the extraordinary development of the financial system that is independent of the monetary and financial crisis, the foundation and conditions. The theory is the best the U.S. financial crisis mapping on this cause of the financial crisis has a strong explanatory power and applicability. In essence, the United States, investors worried that the subprime mortgage crisis is the risk arising from asset price bubbles out of the credit crisis, which originated from the sub-prime risk and financial derivative products with proliferation of channels. It is derived from the U.S. subprime crisis on excessive use of financial derivatives resulting in the excessive expansion of the mortgage market and the excessive growth of bank credit arising. For poor credit history as a major, proof of income, loss, liabilities, customers with heavy high-risk, high-yield loans, the rapid expansion of the subprime mortgage market in recent years, the rapid market expansion in the short term. However, as the Fed continued to raise the benchmark interest rate, real estate prices tend to decline, subprime mortgage lenders mental decline is expected a large number of non-compliance with solvency, and its risk of default by the sub-prime rapid amplification of derivative products, has shaken the confidence of the market, banks financing conditions have tightened, lending institutions, fund companies and other financial chain began to break, resulting in fragile financial markets out of control, the crisis finally broke out. Even more surprising is, the usual sound system, the market improved, the operation of known standards and credit quality of U.S. financial markets, precisely in the supervision and credit to be a big problem, the housing market and all aspects of the mortgage market is full of fraud and greed, banks and financial institutions lost the basic objectivity and impartiality. Of (Richard Bitner, 2008). Brokers from lending to finance companies, from investment banks to credit rating agencies, from builders to real estate forgery, concealment of information, control and modify the loan documents, tampering with credit, income magnification to assess the operation of adding water and other disordered , chaos; reduce the loan approval standards,[link widoczny dla zalogowanych], greed, financial innovation and the use of excess liquidity, the crazy market expansion, after each pass the buck, shift the risk and so on, all this is exacerbated by the disorder within the financial system , so that the entire Wall Street plunged into an unprecedented credit crisis and moral risk. (B) the rapid transmission of financial crises, integrity and global on the crisis in the that the crisis is On the whole crisis in the The financial channels as an example. As in the U.S. mortgage market and investors numerous, complex structure, the interests of hook joint, interrelated to form a long mortgage Lack of risk control in the conditions, once a link in the chain, it will indeed affect the whole body, causing a domino effect. We see in this crisis, a high degree of market-oriented interface between the financial system the risk of the formation of a specific pathway: the low interest rate environment of rapid credit expansion under a loose housing loan approval criteria of a falling house prices, interest rates continued to a solvency crisis occurs; mortgage loan securitization and derivatives, the rapid development, especially hedge funds, the leverage effect of a high proportion, increasing with the sub-prime related financial asset prices and the impact of infectious risk, magnified times class mortgage risk. The degree of international integration of financial markets, the deepening financial turmoil has accelerated from one country to another of the speed. This far from the real economy, the proliferation of financial derivatives and false prosperity, and finally led to the outbreak of the subprime mortgage crisis, and eventually evolved into a global financial storm: excellent from the subprime lending field to field,[link widoczny dla zalogowanych], from the mortgage market to the entire financial market, from the virtual economy to the real economy from the global financial and other U.S. financial, are all experiencing the baptism of the financial crisis and challenge. The past six months, once-powerful Wall Street financial giants have fallen one by one, the speed of a tragic loss, it is shocking. Different from traditional financial crisis is that the spread of the financial crisis also showed a significant have the same cultural background that is asked to pass the country.) In addition to the United States, Europe, Japan, Latin America, Asia and other regional economies in emerging market economies have also been impacted to varying degrees, and even some countries face the risk of national bankruptcy. This reflects the integrity of the global financial crisis, becoming more and more obvious, so this sub-prime crisis spread gradually evolved into a global systemic financial crisis. (C) deal with the financial crisis, government-led and coherence the crisis, the countries around the world to strengthen financial sector regulation and intervention has a certain inevitability ;, it is against the free market system is imperfect, the only way. As the crisis has spread to a wide range of influence of deep, long duration and other characteristics, in order to safeguard the world financial markets and global economic stability, the U.S. government and governments around the world had to take a series of large-scale rescue plan and measures: take over the never seen before. And the world together, joint action is unprecedented. Countries to strengthen the global financial turmoil following the case of government intervention, it shows that the crisis in the rescue of the Government's leading role and coherence; the other hand, is precisely reflected the fragility of the international financial system of defects and deficiencies, it is these countries, the international financial system to reduce the impact of imperfect inevitable choice made (Liu Lifeng, 2000). Three stabilize our financial market system, the prevention of financial crisis, the reality of thinking is no doubt that the United States with the financial crisis to the global shift in the nature of the national economy to the enormous impact and challenges . As China continues to implement more stringent capital controls, the subprime crisis through financial channels, the direct impact on the Chinese economy and short-term impact limited. However, in economic and financial globalization, China and the United States and the world economy ever closer question, therefore, in the long run, the financial crisis impact on our economy should not be underestimated, from the present situation , the financial crisis on China's economic and financial impact is gradually becoming apparent.