The Cause of Global Financial Crisis

1?Boom and burst in the housing marketLow interest rates and large inflows of foreign funds created easy credit conditions. Subprime lending contribute to increase the housing demand.This fueled rising house prices.This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates.

This led to a building boom. Easy credit encouraged borrowers to obtain ARM. If borrowers could not make the payments ,they would try to refinance. Refinancing became more difficult, when house prices began to decline in USA. Borrowers found themselves unable to afford higher monthly payments ,then default. This places downward pressure on housing prices.

2?SpeculationSpeculation in residential real estate has been a contributing factor. Media widely reported condominiums being purchased while under construction, then being sold for a profit without the seller ever having lived in them. Speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising." Speculative borrowing has been cited as a contributing factor to the subprime mortgage crisis.3 ?High-risk mortgage loans and lending /borrowing practicesLenders began to offer more loans to higher-risk borrowers. The risk premium required by lenders to offer a subprime loan declined.

Lenders have offered increasingly risky loan options. Mortgage brokers, while profiting from the home loan boom, did not examine whether borrowers could repay. Mortgage fraud by borrowers increased.4?Securitization practicesSecuritization, combined with the high ratings, meant that mortgages could be originated almost at will, with the risk shifted from the mortgage issuer to investors at large. Issuers had incentives to lower their underwriting standards to increase their total profit. Investment banks placed the MBS into off-balance sheet entities.

Moving the debt enabled large financial institutions to increase profits but augment risk. It gave rise to a form of moral hazard. The current global credit crisis can be blamed on the securitization of such mortgages.5 ?Inaccurate ratingHigh ratings encouraged investors to buy MBS, helping finance the housing boom.

As rating agencies lowered the credit ratings in MBS. financial institutions had to lower the value of their MBS and acquire additional capital via issuing new shares of stock so as to maintain capital ratios.Thus ratings downgrades lowered the stock prices of many financial firms.That influence the Wall-street6 ?Government policiesIn order to achieve the goal of Increasing home ownership of USA,The government learned on GSE to lower lending standards.Besides this, incentive payments were paid by government to let the GSE buy MBS.

And directed the ratio of issuing to low-income borrowers .Thus fulfilling their government mandate to help make home buying more affordable.7 ?Policies of central banksThere are time lag between identifying an asset price bubble and determining the proper monetary policy to deflate it.The most important contributing factor is interest rate.The monetary policy of low interest rate was made primarily to deal with the effects of the soften market.However,that stimulated the house market.

While the rate increased,homeowners can’t afford the payments. Thus the mortgage market went sour.8 ?Financial institution debt levels and incentivesBorrowing at a lower interest rate and investing the proceeds at a higher interest rate is a form of financial leverage.High debt levels resulted in large losses when house prices began to decline and mortgages began to default.9 ?Credit default swapsCDS are insurance contracts used to protect debtholders from the risk of default.However,it is used frequently on speculation rather than on hedging risks.

As the net worth of banks and other financial institutions deteriorated because of losses related to subprime mortgages, the likelihood increased that those providing the insurance would have to pay their counterparties.That caused large losses to the providers.Explain how the subprime crisis of the US spreads to the whole world?The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe.

• First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities. Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and so on.Also, since global equity markets are closely interlinked through institutional investors, financial crisis affecting these investors sees a contagion effect throughout the world. The panic psychology takes over and a large number of people cash in their chips. This disturbs global financial market further.

For emerging market countries, in the first place, the crisis derived from the setback in exports of goods and services to the European and American countries, but not the collapse of the banking system. People claims that the model of crisis transmission in USA is from virtual economy to real economy, however, the harsh situation of developing country had to face is that the bad development of commercial drag down the financial sector of the country. what is more, in some countries the current account deficit are rising. This placed downward pressure on local currency devaluation. The monetary crisis will take place when the foreign exchange market fluctuates violently and foreign capital flows out greatly.

The subprime crisis to China's influence how, no one can give a definite answer. Because the answer to this question, still must clear two problems: one is the subprime crisis has seen the development of itself, Second is the subprime crisis, which mainly through channels, and affects the Chinese economy has what effect. This article attempts from the two aspects of the subprime crisis to specific analysis of the impact of China, and puts forward some corresponding measures.A, the subprime crisis has not really see bottomThere is every indication of the subprime crisis, now still in development process, is far from over.(a) as the subprime crisis, the American real estate prices eventually source not stabilisesOnly when the subprime crisis as the fuse is the direct real estate prices eventually stabilises, real estate equity problems to provide support for mortgage-backed securities, the crisis will end. Real estate prices stabilises will eventually eliminate uncertainty, because the market is expected loss will no longer, but known, main source will be eliminated.

When the credit market and capital market financing function will slowly back to normal, and the financial system to achieve stability.But so far, far from American house prices of stabilising the trend. In the fourth quarter of 2007 housing purchase price OFHEO drop two consecutive quarters, and compared by expanding. The fourth quarter of the 50 states in 49 states have appeared name in house prices, suggesting that prices nationwide weakness. According to the Case - Shiller index, since 2000 to housing adjustment of 2006 mid-term, before 10 cities 126.

3% price has risen, and adjust range is only by 11.4 per cent. Worse housing supply and demand gap still at high level (see chart 1), stock prices caused by high downward pressure to drop further price, so the space is large. From the historical experience, American post-war average price adjustment of five times for 15%, the biggest market is more than 20%, the prices are expected to average adjustment should be more than history.

Us house prices to by the end of 2009 will hit bottom, when prices than in the second quarter of 2006, the peak level at least 20 percent decline.(2) the subprime crisis caused loss continuesParticipate in subprime-related products investment is the main global financial institutions, thus to calculate the subprime losses caused by the direct method is to calculate the amount of loss of financial institutions. But because the subprime mortgage and structured investment products related derivatives of loss depends on the overall prices. Because of falling home prices, and the prediction by subprime and related products, as well as the complex pack for damage estimates range, which are not unified opinions, so it is difficult to losses caused by the subprime crisis is an accurate estimate.To be sure, but now the global financial institutions have plan about 900 billion dollars in subprime losses.

As prices continue to fall, and the subprime defaults, the rise of the investment amount of subprime provisions. 12 bulge-bracket major financial institutions to subprime dial forehead already prepared from November 2007 estimated at $24 billion to $750. For global financial market and in the subprime crisis in the amount of damage estimates in increasing. The newest estimate about 50 billion dollars, well above the fed initially estimated 10 million, but this is not the highest estimate (see chart 1).(3) by the subprime crisis triggered global capital market will continue to adjustSubprime crisis, the influence of the global capital markets were significantly unrest. Since the middle of 2007 the U.

S. subprime mortgage crisis erupted after the main index, global market appeared by more than 20% (see chart 2). But the southeast Asian financial crisis and the new economic bubble burst and the crisis in the global capital market adjustment range is still limited, the future market still have further adjustment of space.As in the southeast Asian financial crisis in 1997, as the storm center of east Asia countries, including severe losses of capital market is the most serious loss of Kuala Lumpur index fell by nearly 80%, Hong Kong's hang seng index fell 48% in Jakarta, Indonesia, Malaysia, 54 index fell in Kuala Lumpur index fell 79%.To compare the new economic bubbles in the stock market.

In the 1990s dotcom stocks after the failure of traditional theories of prosperity, constantly nasdaq market experience one and a half years of decline, fell by nearly 80 percent. Asia-pacific markets hit also appeared above 30% drop.But since the outbreak of the subprime crisis, the dow Jones industrial average adjustment range 19.41% only, the nasdaq index adjustment range 24.68% only. As a source of crisis of America's capital markets adjustment range is far less than asia-pacific capital market.

Compared with the previous crisis, as the biggest influence by the market, the crisis of its adjustment range should not place, the future with subprime losses sustained exposure, America and global stock markets will continue to adjust.(4) American recession possibility is further intensifiedA series of bad data and the deterioration of credit market that America's economy is step by step to slip into recession. The real estate market and the financial turmoil to deep tone negative impact on the economy more and more widely, also in deepening. This will lead to consumers and investors' confidence, probably expected self-realization through the economy into recession.

At the same time, because of the global economy and the U.S. financial markets remains profound influence. Will an American recession drag the world economy as the main risk decline. And because the price adjustment is a lengthy process, American consumer and GDP of recovery will also relatively slowly.

The subprime market generally expected to led the American economy into a "U" shaped into recession. We believe, even in the subprime crisis to financial institutions to damage the bottom, the U.S. economy will resume normal growth needs at least 2 years of time.