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Causes and countermeasures of the global credit crisis英国留

时间:2015-10-17 来源:未知 编辑:梦想论文 阅读:
1. Introduction:
The outbreak of the subprime mortgage crisis in 2007 has led to the global economic recession. Some people think that the proliferation of complex financial derivatives were to blame for this crisis and others ascribe the crisis to banks’ lending too much money to the poor. This article will explore the major cause of the crisis, that is, mortgage-backed securities, combined with the financial instability hypothesis and the Black Swan theory. Then it will further evaluate the current policies and measuresin response to the crisis.


1 引言

2007的次级抵押贷款危机爆发导致了全球的经济衰退的。有些人认为,复杂的金融衍生品的扩散是这场危机的主要原因,金融危机的爆发主要源于其他银行将过多的钱贷款给穷人。本文将探讨的这场危机的主要原因,结合金融不稳定假说和“黑天鹅”理论分析抵押贷款支持证券。然后,它将进一步评估当前的政策和应对金融危机的措施。


2.MBS : key to the global financial crisis
we can explain the mortgage-backed securities(MBS) by a simple example. As the interest rates kept low for long, house owners mortgaged their property to the bank to obtain funds for real estate speculation. The banks packaged the loans into securities and sold them to other banks or insurance companies. These mortgage-backed securities had changed hands many times and eventually a bank bought the securities at a high price. Most of these banks used leverage to increase the expected benefits, but at the same time the risk multiplied. All participants would gain from the rising real estate prices, but the prices would not rise forever. Someday when the house prices started to fall, nearly all the banks involved were facing bankruptcy. Thus, the credit crisis erupted. We can use the financial instability hypothesis to understand this example. In the hypothesis, Minsky(1992) believed that financial capitalism itself is inherently unstable, and the financial crises and their harm to the economy were inevitable. Minsky defined three types of finance, that is , the hedge finance, speculative finance and ponzi finance. In the rising phase of the business cycle, operating cash flow keeps growing while financing requirements are eased and interest rate is low. However, once the economy steps into stagnation, it will be very difficult to maintain operation by borrowing liquidity. At this point, hedge firms(with sufficient cash flow) may change into speculative firms and ponzi firms and the original ponzi firms will have to pay the debt by selling assets. The rapid spread of default and distrust will lead to bankruptcy of individuals and banks. In the end, the credit crisis broke out. The mortgage-backed securities badly beat the financial system for three aspects: firstly, low interest rates led to credit abuse and people satisfied their long-term capital expenditure needs through short-term liabilities, and the banks issued too many loans. The research of Douglas and Raghuram (2009) shows that causes of the crisis is mainly because that the U.S. financial sector misallocated resources to real estate. Secondly, the banks created the mortgage-backed securities to enhance the liquidity of the loans. But the default risk is amplified by high leverage embedded in this complex derivatives instruments. Thirdly, the asset price bubble burst ,especially the deepening housing corrections, had resulted in the depreciation of subprime bonds and bankruptcy of many banks and , what’s worse , the recession of economy.

low for the first part of the decade. This low interest rate environment has spurred increases in mortgage financing and substantial increases in house prices.( Crouhy Michel G. et al, 2008) It is showed in figure 1. The investors borrowed money to invest in the real estate. We can see from figure 1 that private credit grew rapidly before 2007. The banks sold the loans to other banks as mortgage-backed securities, or subprime bonds. They committed to pay back the bonds with the cash flow from the investors. What’s more, the banks made use of leverage to multiply the benefit in this deal. But at the same time the default risk was largely increased. When the house price started to fall, which is showed in figure 2,the realty trading became difficult and the investors could pay the debt. As a result, the banks suffered from the mortgage-backed securities they had issued. The prices of Mortgage-backed securities (MBS), Collateralized Debt Obligation (CDO) and other financial derivatives plummeted. Banks and other financial institutions had to reduce the risk by "deleveraging", or sold the risky assets, or attracted new equity investment to rebuild capital. The main problem was liquidity emergency. Most banks raised standards for residential mortgage loans, consumer loans and business loans in the crisis ,which led to credit crunch ,and credit crunch resulted in economy recession.


But maybe we can have a different explanation for the crisis using the “Black Swan” theory. “Black Swan " refers to the unpredictable events rarely happens, but its huge impact may change everything. Taleb(2007) summarize the triplet: rarity, extreme impact, and retrospective (though not prospective) predictability. A small number of Black Swans explain almost everything in our world. And the black swan theory also explains part of the credit crisis. Taylor &Williams (2008) found the phenomena of black swan in the monetary market. The break out of the crisis may totally ascribe to unexpected random events, and is not for any reason people try to find out. But for the policymakers , all they can do is how to reduce the losses caused by the crisis.


As laid out in the October 2008 Global Financial Stability Report (IMF, 2008b), policymakers around the world today face the imperative of stabilizing global financial markets, while nursing their economies through a global downturn and tight credit and ensuring that the recent rise in inflation is reversed. U.S. fiscal stimulus and public support for the housing and financial sectors have been justified to alleviate the current slowdown and to stabilize markets.(IMF, 2008a) Besides , the Fed's monetary policy has improved the economic environment. The Fed changed the banking system's reserve fund through the sale of treasury bills, thus affecting short-term interest rates and the credit situation. To deal with the phenomenon of credit crunch, the Fed created the Term Auction Facility (TAF). It is a credit instrument, which is used to allow financial institutions to attain short-term funds in an auction interest rate , and the period of funding is 28 days or 84 days. Thus the bank can get funded from the central bank and at the same time protect itself from negative reputation of capital shortage. The Fed also created the Term Securities Lending Facility(TSLF), which is to relieve the financing dilemma faced by the investors of MBS through the exchange of collateral. The fed provided Treasury bonds, which are worth 2000 billion dollars to the primary dealers , thus to provide financing facilities for the MBS market. The Fed also injected liquidity to the market through intervention to the commercial paper market. From the point of my view, the Federal Reserve took action in the sub-prime crisis quickly, which was very timely to restore market confidence and stabilization of the credit market. At least , until the end of December 2008, news of bankruptcy of financial institutions had decreased. The action took by the Fed would play a significant role in the goal of investment & consumption recover , full employment achievement and economic growth.


3. Conclusions
We have researched the most possible direct cause of the global credit crisis, mortgaged-backed securities , in the framework of the financial instability hypothesis.
And we evaluate the monetary policies of the Fed. We can make a conclusion that the Fed’s policies would effectively alleviate the liquidity crisis.


References

Crouhy, Michel G., Robert A. Jarrow, and Stuart M. Turnbull (2008). ‘The Subprime Credit Crisis of 07.’ Working paper (9 July).

Douglas W. Diamond and Raghuram G. Rajan (2009)‘The Credit Crisis: Conjectures about Causes and Remedies’ American Economic Review. Vol. 99, No. 2, pp.606-610

Hyman P. Minsky , The Financial Instability Hypothesis , Working Paper No. 74 of The Levy Economics Institute, May 1992.

International Monetary Fund (IMF), 2008a, Global Prospects and Policies (Washington, February).

International Monetary Fund (IMF), 2008b, Global Financial Stability Report: Financial Stress and Deleveraging—Macrofinancial Implications and Policy (Washington, October).

Taylor, John B. and John C. Williams, “A Black Swan in the Money Market,” unpublished manuscript, Department of Economics, Stanford University, February 2008.

Taleb. Nassim Nicholas (2007) ‘The Black Swan: The Impact of the Highly Improbable’ .New York: Random House Inc

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