| In August 2008,the record mortgage crisis in US brought out global recession. Up to today, the global economy has not stepped completety out of the shadows, damaging the economy heavily. Despite the economic fluctuation has always been a major concern of macroeconomics, the financial crisis issue has once again become a hot topic of concern to theorists. However, the theory of interpretation to the financial crisis has not yet formed. Therefore, it is significant for economic field to solve this worldwide problem, on which the paper focuses and discusses the theory of the financial crisis.The economic globalization has made the dependence of economic development among different countries deeper and deeper, the interleaving net formed. However, effective governance mechanism has not formed in the huge Economic system. The global system of financy, monetary and trade have entered into a disorder state; the international financial system has lacked effective supervision and Hedge mechanism. The Wall Street in New York occupies an important positon in global distribution of financial resources, but Wall Street do not subject to the supervision and balance of the multilateral mechanism which attract the vulnerability of fiancial system. In addition, the existiong International Currency System could not restrict the US dollar effectively. After Bretton Woods system fallen apart, Main Countries’monetary disconnected with gold. From now on, the gold substituted by the US dollar, became into the foundation of the International Currency system. Since the Bretton Woods system of monetary management collapsed in 1979, most major national currencies were decoupled from gold but the US dollar instead. From then on, it becomes a cornerstone of the international monetary system. The collapse of the Bretton Woods system brought comedown of the automatical regulation which had avoided the trade sustainable imbalance. The import of the United States of America would not be financed with the gold, but dealt with the major trading partners with their own printed currency transporting. The IMF reform and SDR’s function remained at a standstill for long periods, so international community cannot establish "dollar discipline", neither can it conduct effective supervision. As a result, the dollars must be oversupplied in worldwide. Henceforth, the trade unbalanced scale on a large scale emerged an unprecedented growth between the US and other countries. The current account deficit of US expanded rapidly, and the trade surplus countries also agglomerated massively dollar-based foreign exchange reserves primarily. When these foreign exchange reserves entered the financial system of the surplus countries, it was opened on the shut-off valve of credit. A massive expansion of credit caused the phenomenon that excessive investment by surplus countries, and over expansion to properties price. However, it was impossible for credit to grow rapidly without limits. When credit recession the bubble would be burst, and then triggering a financial crisis. The financial crisis sufferer such as Japan from the end 1980s to the early 1990s, Mexico in December 1994, Southeast Asian in 1997, Brazil in 1999,Argentina in 2002 and so on, because of US dollar spread unchecked.In addition, how do the surplus countries handle these massive foreign exchange reserves? They invest those dollars again in the United States to buy the dollar-denominated assets, such as U.S. stocks, corporate bonds and U.S. bonds, etc., such a huge flow of capital has also caused the domestic economic overheating and assets price bubble phenomenon in the U.S., which pushed up assets prices to an unsustainable level, so the bubbles burst. The U.S. subprime mortgage crisis is the best example of this process. So the credit expansion is the fundamental cause of the formation of the asset price bubble, and the credit crunch which cannot support bubbles continuing to expand is the direct cause of the financial crisis.All in all, if we do not change the case of the international monetary system which the dollar led, and some of factors mentioned above continue to exist, the crisis will be repeated. For China, which joined the WTO have the trade surplus, large foreign exchange reserves, and rising asset prices as common problems over the last few years, so there are also hidden dangers of the financial crisis in our country. It is necessary to analyze the formation mechanism of the financial crisis systematically for China’s policy makers to develop guidelines for appropriate macroeconomic policies, and make some policy recommendations to prevent such vicious financial crisis to occur, which can clear the way for the stable operation of the economy in China. It is the purpose of this paper to analyze the current situation on China’s macro-economy, and identify the cause of the excessive increase in assets prices, then present some policy recommendations.This paper is divided into seven sections. Chapter 1 is the introduction, it contains the main topic of the article,the review of domestic and foreign research status, the research ideas and the frame structure of the paper, it also contains the findings and the shortcomings of the paper. At the end of this section, it makes a brief introduction to the content of the paper.Chapter 2, We mainly present that the direct cause of the financial crisis is asset price bubbles expansion and collapse. This section firstly defines asset and asset price bubbles, then uses the efficient market theory, the present value model of asset returns and the consumption of capital assets pricing model to obtain a general formula of asset pricing, which determines the fundamental value of the assets. Meanwhile, with the behavioral finance theory and the noise trader model we demonstrate that the asset price bubble problem does exist. Then we review several of the largest financial crisis since the 20th century, and summarize that the typical characteristics of a vicious financial crisis are that the crisiscountries are experiencing varying degrees of asset price bubbles formation, expansion and rupture, and the bursting of the bubble directly triggers a financial crisis.Chapter 3, we analyze the formation mechanism of asset price bubbles. There are many factors which affect the formation of asset price bubbles, not only micro-level factors such as expectation and asymmetric information, expectation and the existence of asymmetric information on the assets will affect investors’expectation on cash flow, thereby affect the evaluation of the value of assets, and ultimately affect investors’trading behavior. These factors alsoinclude macro-level factors, for example, the collapse of the Bretton Woods System opens the door of global credit creation; The advance in the process of financial liberalization relaxes financial regulation of the countries, and increases competition among banks so that banks tend to engage in more high-risk business, which exacerbating the vulnerability of the financial system. The financial liberalization also enables the free flow of transnational capital, making a lot of hot money inflow into the countries which are undergoing rapid economic growth and promoting the expansion of asset price bubbles. The bank credit expands excessively and money supply increases, so the currency market has excessive liquidity which causes the bubble formation and expansion. Finally, by analyzing the factors which affect the formation of the bubble, we find that the credit expansion is the most fundamental cause of bubble formation, and we verify it with the theory and historical data.Chapter 4, in this section, we mainly discuss mutual incentives mechanism between the bank’s credit expansion and asset price bubbles. Firstly, we analyze how bank’s credit makes the expansion of asset price bubbles with asymmetric information theory and the AG model; then we analyze how the asset price bubbles affect the feasibility of access to bank credit, credit supply and credit demand.Chapter 5, this section we mainly present transmission mechanism between the expansion and collapse of asset price bubbles and financial crises. Firstly, we analyze that asset price bubbles affect consumption, investment and money demand through some of the transmission mechanism, thereby affect the macroeconomic operation, and we point out that the credit crunch causes the bubbles burst. Subsequently, we analyze how the bursting of the bubbles cause the financial crisis. The bursting of the bubbles makes banks and enterprises deteriorate the balance sheet, triggering a storm of anti-dollar banking crisis, while the bursting of the bubbles reduces consumption and investment demand in the economy, a sharp rise in the unemployment rate, and makes market confidence frustrated, so the real economy are affected badly, then financial crisis bursts. Finally, we further analyze the volatile relationship between the monetary policy and asset price bubbles, and give the detailed analysis of how monetary policy should be implemented before and after policy financial crisis, how to avoid the crisis effectively before the crisis, and how to make the lose to a minimum after the crisis.Chapter 6, we present a systematic analysis to assets price bubbles in China’s current situation. Firstly, we present China’s real estate market, stock market development status, features, price trends, and the cause of price increases in a depth systematic analysis. Subsequently, we use the econometric models to demonstrate that China’s real estate market and the stock market do have some certain degree of bubbles. Finally we discuss how the macroeconomic situation in China trigger the formation of asset price bubbles and inflation, and the foreign trade surplus to a substantial increase in foreign exchange reserves year after year, triggering the expansion of the monetary base and international hot money inflow, which are coupled with a large number of bank credit expansion, so China’s money supply grew rapidly, and have an excess of market liquidity, triggering the bubble formation and expansion. Meanwhile, China’s every relative macro-economic policies affect currency liquidity, the operating mode of the real economy and the supply mode of housing market to some different extents, thereby affecting the asset price bubbles formation.Chapter 7, because China’s macro-economy presents some characteristics of overheating, in order to continue to maintain its stable growth and reduce the relatively large fluctuations in the economy, this last section presents a series of preventive measures for the financial crisis, for the policy-makers to refer to. For example, how to avoid effectively the currently popular international monetary system to prevent the dollar’s oversupply? How to carry reform of the RMB exchange rate steps forward and increae the RMB exchange rate’s elasticity to relieve the problem of huge trade surplus? How to rationally pronote reform of the financial liberalization and strengthen the management of bank to control effectively the oversupply of the bank credit? Finally, I anylized how to revitalize the real economy and change the dual-economic structure in our country, these will draw large sums of money to the real economy,which can avoid inflating the bubble. |
PDF Full Text Request