Analysis On Causes Of Subprime Crisis And Lessons For China

The subprime crisis has turned into the severest financial crisis since the great depression in 1929,and its impact on global economy is still spreading.To analyze the cause of the crisis,based on a monetary policy perspective,is of great importance to China's monetary policy adjustment against asset price bubbles.This paper first reviews the occurrence,development process,and the cause of the crisis,as well as its influence on the American economy.In this part,we conclude that causes of the crisis mainly are absence of regulation,excess innovation of financial instruments,and Federal Reserve's harsh reversal adjustment of monetary policy.Then,we explain the internal mechanism of how changes of interest rate react on the real estate bubble.Using Allen-Gale model,we illustrate that with a low interest rate policy,the real estate market thrives so that the demand for subprime loan raises,expanding the housing price bubble,which stimulates leveraged investments and relaxation of credit.When interest rate raises,the housing price goes down,and default rate increase greatly.Consequently,related banks,investment banks,insurance companies,and hedge funds face massive loss in assets,leading to bankruptcy.Following is empirical study,in the way of the Taylor rule and regression analysis,on adjustability of Federal Reserve's monetary policies and its relation with bubbles in real estate.Results indicate that a low interest rate policy of Federal Reserve is a major reason for the housing bubble,and the reverse change of interest rate is responsible for explosion of the crisis.Finally,based on the relation between US monetary policies and the subprime crisis,this paper summarized some suggestions for China's central bank on adjusting monetary policies:monetary policies should act more actively to deal with real estate bubbles,adjustments of policy are supposed to be moderate and prospective, changes of asset price ought to be taken into consideration of monetary policy,objective of monetary policy should be simplex,monetary policy needs to cooperate with financial policy and other policies.