On The Generation And Prevention Of Financial Crisis

In the history of mankind economic development, especially since the 20th century, financial crisis accompanied the whole development process like a ghost. The display and the influence of financial crisis can be viewed intuitionally. But what does financial crisis really mean and how does it come into being? Can we prevent it and warn against it? How to treat it or reduce its damages? All these questions need to be studied further.Taking the formation and prevention of financial crisis as the main research subject and applying certain economics theory, this thesis aims to discover the interior causes and spread approaches of financial crisis, analyze the method of preventing and warning against financial crisis, probe into the financial crisis inducements that China faces nowadays and look for the effective counter-measures for preventing financial crisis in China.This thesis consists of 5 chapters.Chapter 1: Connotation of financial crisis. This chapter summarizes the definition, classification and characteristics of financial crisis and makes some theoretical preparation for the whole thesis. Besides, a brief historical retrospect on some important financial crises since 20th century is also included in this chapter. Chapter 2: Formation and spread of financial crisis. In order to research the genetic mechanism of financial crisis, this chapter introduces three comparatively dominant models. Model of Payment of Balance Crisis (Krugman) reckons that the consistent creation of money by government will definitely cause the rising of domestic price level. This will then bring the stress of devaluation to domestic currency. At this time, the government must purchase domestic currency by foreign currency reserve to support fixed exchange rate system. Finally, foreign currency reserve will be exhausted and the fixed exchange rate system will certainly collapsed. Model of Self Fulfilling Crisis (Obstfeld) reckons that devaluation of domestic currency is self fulfilled: while most people expect that domestic currency will devalue, the government will find out that the cost of supporting fixed exchange rate is larger than the return and then decide to give up fixed exchange rate; while most people expect that domestic currency will not devalue, government will find out that the cost of supporting fixed exchange rate is less than the return and then decide not to devalue. Model of Excess-debt Crisis reckons that high financing lever ratio, low export trend and high ratio of foreign debt and export income will result in financial crisis. Two main spread approaches (trade and finance) are also analyzed in this chapter.Chapter 3: Preventing and warning against financial crisis. We can prevent financial crisis from macro and micro angles. Main macroeconomic methods in closing society are optimizing operation mechanism of financial system and controlling the swelling of financial foam; in open society main macroeconomic methods also include grasping the degree of finance freedom and insisting on certain degree economic protectionism. Strengthening the supervision of financial management bureau, improving financial institution's capability of preventing financial crisis and standardizing the operation criteria are main microeconomic methods. Warning against financial crisis is to recognize it and estimate its possible damages. Three qualitative methods can be used to recognize financial crisis and four quantitative methods can be used to estimate the damages. This chapter also explains in detail the concept of Value at Risk (VAR) and the four widely used measuring methods about VAR: Delta-Normal, Historical-simulation, Stress testing and Structured Mont Carlo. Chapter 4: Treatment of financial crisis. Financial crisis treatment is to take some effective measures to control the financial crisis, reduce its damages and prevent it from spreading to other markets and districts. Because bursting out and spreading of financial crisis depend on public confidence crisis to some extend, treatment of the financi...