From Excess Liquidity To A Liquidity Crunch

In recent years, Liquidity has become a hot issue in the economic circles. The liquidity characteristics of this financial crisis had made us profoundly aware the excess liquidity and crunch of liquidity could be quickly reversed, and diffused among financial institutions and markets, and also can be transmitted and spread internationally through channels like international trade, asset prices and etc, therefore, caused negative impacts to financial system and real economy. By means of analysis and summary about the liquidity concepts, relevant theories, measuring methods and the effects, this thesis attempts to carry on theoretical analysis and empirical research from the US, global and China perspectives differently, and tries to explore the reverse mechanism from excess to crunch and the transmission process.In this paper, the concepts of liquidity, theories, measuring, effects, reverse, transmissions and risk preventions were systemically analyzed through theoretical and practical perspectives. The main structure of this paper consists of two parts: theoretical analysis was mainly conducted in the first part, which including chapter 1 and 2, in this part the analysis was focusing on the connotation of liquidity, the supply and demand theory, the measuring methods, as well as micro-and macro-economic effects, and then proposed that the periodic reversal of liquidity was the concrete manifestation of the financial crisis; the second part, including the chapter 4,5,6 and 7, which cases analysis were made mainly in this part. Combined with the financial crisis, as well as from the US, developed-new emerging economies and China three different perspectives, it further analyzed the specific performance of liquidity reversal from excess to crunch, transmission processes and responding measures.The connotation of liquidity can be understood from two aspects of the macro-micro and broad-narrow, as well as on three levels of the monetary liquidity, the banking and financial market liquidity. Liquidity supply and demand can be analyzed combined with traditional economics money supply and demand theory, but the financial innovation had brought changes to the liquidity supply and demand. The measuring methods of liquidity mainly includes: the measuring methods based on the supply and demand theory, Marshall K value and the excess money growth rate, monetarism liquidity measuring methods and etc, at the micro level, market liquidity was mainly reflected by short-term money market interest rates, stock market index yield variance and other indicators. In this paper, the above methods were used in the cases analysis, to measure liquidity of the United States, China and some developed countries and new emerging economies. Regarding the liquidity effects on the micro and macro economy, by means of expansion of money quantity theory channel which including assets transactions, credit channel, interest rate channel and money policy expectation channel, liquidity excess or crunch may have effects on micro economy through financial institution, assets and real estate market, enterprise entity and so on. By means of wealth effect, Tobin Q Effect, credit and other channels, liquidity have effects on macro economy through economic growth, inflation (deflation), balance of payments and etc. Every financial crisis and economic crisis comes along with the liquidity reverse: from excess to crunch and the liquidity reversal has also become a periodic law.From the perspective of US where crisis originated, the specific performance and reasons of liquidity from excess to crunch, as well as the liquidity spread process among the financial institutions and markets were detailed discussed and analyzed. Liquidity relief measures has made the currency liquidity of US showing a sharp rise, which did not happened before, but the liquidity reversal occurred in financial institutions and financial market liquidity was extremely prominent. The reason of liquidity reversal includes currency policy sharp fluctuations and other macro-economy factors, and the micro economy factors such as financial institutions rapid expansion and contraction on highly leverage ratio are also included. During the crisis, through financial institution deleveraging mechanism, asset prices and financial market linkage mechanism, risk re-evaluation and market expectations, financial institutions liquidity hoarding and liquidity crunch transmission mechanism, the reversal spread among financial institutions and different financial markets. From the analysis of micro-finance market liquidity, it can be found that at the end of July 2007, the relevant structure of liquidity variables in different markets had sudden and significant change, during the crisis, the measurement index to the lack of liquidity in market and bank financing were closely intertwined. The specific spread process is: mortgage bond market→money market→capital market→credit markets→real economy.In the context of economic globalization, the US liquidity excess and reversal were transmitted to other countries through channels like the financial assets, foreign trade, capital flows and psychological expectation, the liquidity international conduction shows the characteristics of current center-outside international monetary system. From the micro and macro perspectives, the empirical analysis were made to the transmission process of US liquidity changes between the Euro zone, Britain, Canada and other developed countries, as well as Russia, Brazil, Mexico and other emerging economies, and the result shows the US liquidity changes not only impacted the micro-finance market, financial institutions seriously, but also impacted certain macroeconomic indicators of these countries. From the U.S. credit and capital market liquidity crunch influences on the Europe, Asia and other countries, the financial institutions and markets in major developed countries of Europe and the United States are varying degree impacted and the real economy fallen into recession; although some financial institutions and markets in new emerging economies were impacted to certain extent, especially middle and east Europe countries which highly depended on foreign debt in recent years, the impact were much less than developed countries, on the other side, the real economy in the new emerging economies has been went through serious impact which lead to the ease of inflation pressure and economic growth slow down significantly.From the China's perspective, the analysis was focusing on impact to Chinese real economy caused by the global and U.S liquidity and real economy changes. China's currency liquidity, bank liquidity and market liquidity had also experienced the process from excess to crunch. The currency liquidity crunch was more frequently caused by monetary police, so the banking system and financial market liquidity were impacted but little affected. However, the global and US liquidity changes in the real economy has brought great impacts to the China's real economy. Through the VAR shock model, an empirical analysis is made on the global and US liquidity, output and price changes, and further more their impacts and transmission to China's economic indicators, such as GDP, price levels, M1, the real effective exchange rate, trade balance and the stock index. The export growth slowed down caused by the consuming demand decline of US and some Europe countries has led to the domestic asset prices decline, foreign trade growth rate dropped sharply, therefore, the pressure faced by manufacturing industry would have to be transmitted along with the industrial chain, adding the downward pressure to China's economy.Through the specific analysis to the relevant measures in responding to the liquidity reversal in the global financial crisis taken by the US, Britain and the EU which representing the developed countries, as well as the Golden BRIC countries which representing new emerging economies and developing countries, it was detailed described in the paper that the effective measures responding to the reverse risk and the main inspiration and methods for the following liquidity management.