Research On Liquidity Crisis In The Perspective Of Financial Leverage

Ever since its dramatic transformation in the1970s, the economic growth and run model in US have lead to the virtualization and de-industrialization of US economy. After the collapse of Bretton Woods System, the exchange of US dollars to gold was terminated and currency issue was freed from gold reserves, thus causing an over-currency-issue abroad, an expansion of fictitious economy and an imbalance of real economy. These are the roots of subprime and financial crisis. As indicated by literature review, however, further research needs to be carried out in terms of the imbalance between real economy and virtual one and its effect on liquidity crisis. To be specific, the mechanism of how the imbalance caused liquidity is in need of further study.Taking the gap between financial asset size and M1as a research clue, the present dissertation studies the mechanism of liquidity crisis in the background of US economic transformation through both macro analysis and micro analysis. Main points in the dissertation include:1. Dramatic transformation of US financial system in the latest40years, financial innovation behind such transformation and the micro-process of financial assets production. These were studied from three aspects, namely, asset structure, debt structure and income structure.2. Causes of the rapid development of financial business since1970s, investment and related financing source as well as its effect on US financing and financial leverage.3. Through summarizing the empirical data of US financial market, it analyzes (1) the relationship between financial asset size of each sector in US economy and financial asset size;(2)the relationship among the asset, leverage ratio and liquidity; and (3) the effects of these relationship on financial system stability.4. It studies the process of finical asset inflation and the reason of decreasing credit quality and builds a supply-and-demand model of financial leverage and risk-adjustment. The mechanism of liquidity, process of risk delivering and the effect of enlarging financial crisis during deleveraging were also discussed in detail.Main conclusions of the dissertation include:1. A global awash liquidity stimulates US fictitious economy sector inflate, causing a rising of leverage and thus enlarging the effects of deleveraging. After the collapse of Bretton Woods System, the exchange of US dollars to gold was terminated and currency issue was freed from gold reserves, thus causing an over-currency-issue abroad, an expansion of fictitious economy and an imbalance of real economy. In addition, financial sectors as a whole, its leverage ratio changes pro-cyclically. That means the leverage ratio positively correlates with the size of balance size. When the delinquency rate of mortgage increases rapidly, the willing investment decreases. What follows is a large scale of deleveraging. Disordered deleverage and its feedback effect will force the market to another cycling process.2. Asset securitization and the separation of risk and responsibility are roots of the declining credit market and underlying asset. A loan distribution by asset securitization may not lead to a risk of declining credit quality. When the credit pool gets risky, chain of credit intermediation will be confronted with great pressure such as dumping, price fluctuation, decreasing liquidity, soaring financing cost and a wide run by investors on securitization market.3. The opaque of securitized market increases the unpredictability of investors and the fluctuation of asset prices. Some assets sticking to PE purposely conceal related information. If wholesale funding market meets difficulties in detecting distressed asset, thus leading to a decline of financial intermediaries, it will increase financial dumping and decrease market liquidity.Contributions of the dissertation include:1. A model of financial crisis based on leverage and risk-adjustment was built to analyze the macro-effect of deleveraging. This was conducted on the empirical evidence from Federal Reserve System, summarizing the relationship among assets, liquidity and leverage and analyzing the effects of leverage ratio on financial market.2. It analyzes the mechanism of risk delivering on different levels. An invoking fact of subprime mortgage crisis is that:it necessarily leads to credit market crisis such as credit card loan, auto loan and commercial mortgage loan. That indicates a mechanism of risk delivering among different levels, which was also studied from the perspective of leverage.