An Analysis Of The U.s. Subprime Crisis In Terms Of Effect Cause And Teaching

The interaction of assets inflation and credit expansion characterizes the U. S. economy. When the crisis broke out, financial assets shrunk dramatically, leading to credit contraction, causing a decline in commercial and consumption activities and finally the economic downturn. In turn, the economic recession further worsened the financial market conditions.The paper holds that the rather low or even zero down payment makes the subprime mortgage have a feature of high risks. The low or even zero down payment of the subprime mortgage could easily make the borrowers'families fall into a state of negative equity. The very low savings rate of the U.S. residents undermined the ability to resist financial risks.The global background of excess liquidity and the Fed's loose monetary policies created the subprime mortgage market bubble. Information asymmetry led to many moral hazard problems and fraud in the mortgage market. Borrowers provided false proof of their income. The mortgage agencies softened the terms of the residential mortgage loans and relaxed the review of borrowers'information. Credit rating agencies and the subprime RMBS issuing institutions conspired. Investment Banks lowered the standards of the subprime mortgage loans when promoting them in the mortgage bond market. Hedge funds' leverage financing enlarged the risk in the subprime RMBS market and brought about simultaneously a lot of bad loans to commercial banks. The design of the subprime mortgage product itself had flaw. Structural derivative financial product CDOs, which was packaged and issued partly on the basis of the subprime RMBS, lacked transparency in the trading market. Therefore, the real price of CDOs could not be found and its price did not match with its risk. The delay, lack and conflict of financial supervision ought to be responsible for the occurrence of the present crisis.The crisis gives us some lessons. The government should help the low-income groups satisfy their housing needs through social security measures or ways of social welfare instead of through marketization. Be sure to select high-quality assets when they are securitized. Financial supervision should be strengthened and supervision of financial institutions be transformed to supervision of functions.A firewall needs to be established between real economy and virtual economy in order to effectively curb impact of the financial crisis on real economy. Information disclosure should be strengthened to reduce information asymmetry. Strengthen the management of credit rating agencies and also they are to be monitored. Enhance control of the derivative financial market to reduce its risk. To strengthen international financial cooperation on the trends of international financial integration.