financial crisis.doc

The failure of the US financial bailout紧急援助 has had a volatile effect on European financial markets with banking shares in London the hardest hit.The world financial system is teetering动摇 on the brink边缘 of systemic meltdown, -rich nations had so far failed to restore confidenceIntensifying增强 solvency债务偿付能力 concerns about a number of the largest US-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown,-The first co-ordination between advanced countries and the rest of the world is now on track.-The IMF chiefs strong words reflect a belief that the global financial crisis can be contained. -The meeting came a day after Asian, European and US markets continued to panic sell despite rate cuts and cash injections注射 by central banks, amid widespread fears of a global recession. This time, market players seem truly horrified because theyve suddenly realized that they dont understand the complex financial system they created.Credit lending between market players is to the financial markets what motor oil is to car engines. The ability to raise cash on short notice, which is what people mean when they talk about “liquidity,” is an essential lubricant for the markets, and for the economy as a whole.But liquidity has been drying up. Some credit markets have effectively closed up shop.like the London market, in which banks lend to each other have risen even as interest rates on U.S. government debt, which is still considered safe, have plunged. “What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman required a face-to-face refresher course from hedge fund managers in mid-August.”The freezing up of the financial markets will, if it goes on much longer, lead to a severe reduction in overall lending, causing business investment to go the way of home construction and that will mean a recession, possibly a nasty one.Behind the disappearance of liquidity lies a collapse of trust: market players dont want to lend to each other, because theyre not sure theyll be repaid.Why was this allowed to happen? At a deep level, I believe that the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. And free-market orthodoxy dies hard. The bottom line is that policy makers left the financial industry free to innovate and what it did was to innovate itself, and the rest of us, into a big, nasty mess. He said the financial crisis would not end soon and called for the plans swift implementation完成The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, financial crises are still a regular occurrence around the world.This will restore consumer confidence and lead to an economic recovery.The crisis is the end product of the failure of Western Governments to govern - particularly the failure to legislate, regulate and to enforce the regulatory compliance of financial entities in the wider public interest. Government, ideally, exists to balance public and private interests. The fault lies not with Wall Street or Main Street or any other street - the fault is a product of legislative failure and the moral cowardice of politicians. In particular, the cowardice of Governments in bending to the intolerable influence of lobby groups has been breathtaking.A good start might be driving the lobbyists and usurers from the corridors of power.Not since 1929 have we stared so deep into the economic abyss深渊 and found ourselves teetering dangerously towards it. The promise is that the Western worlds politicians will do anything in their power including part-nationalisation of the financial system to bring the crisis to an end. If the deal fails, the message is that policymakers will not then flinch退缩 from nationalising the entire banking system. There will be higher unemployment and lower wages all round. Success, in this case, is to be measured against the consequences of failure. As impressive as the deal is, and though it ticks almost all of the boxes demanded by investors, there is no telling yet whether it will shake markets out of their current downward spiral. The financial system has quite simply broken down. In the final days of last week there were moments when even the safest, most reliable markets froze up. If the system is not yet beyond the point of no return, it is close enough that if markets do not regain some composure平静 in the next week it probably will be. The problem is that none of the finance ministers grand initiatives so far have prevented financial markets from lurching further downwards. Even the UK rescue plan on the face of it precisely the solution to the problem, recapitalising banks and guaranteeing their funding and the interest rate cuts which followed actually caused the panic to escalate rather than die down. It is about confidence. Quite simply, investors lost confidence in the banks. Not only that, but, certainly in recent days, they became so blinded by panic that they stopped taking rational decisions and instead sold everything they could. For the past week or so the financial system has needed dramatic action to pull it back from the brink. The G7 plan is not just our best hope, but one of the last we have left. Its probably one of the hoariest clichs in the book about China but in this case it keeps popping up because it has a core nugget of real insight. The word for crisis in Chinese is weiji, made up as the tale goes from two characters, one meaning danger and the other opportunity. Although its a bit of a stretch linguistically, it is a clever formulation and also an excellent descript_ion of what the unfolding financial crisis looks like when viewed from Beijing. As discussed in the preceding post, the opportunity part stems from the enormous mountain of cash that Chinas amazing economic growth has generated. The countrys foreign reserves of some 1.7 trillion dollars obviously arent all about to be used to snap up ailing banks, much as the U.S. Federal Reserve would like that. But a good portion will certainly continue to be used to buy U.S. government bonds (i.e. lend money to the U.S.) and some of it will be used to buy up the good bits of bankrupt companies. There is also another aspect to possible acquisitions by Beijing, The current crisis is also an occasion on which China can step up and demonstrate that it is ready to take on more responsibility for helping to manage the global financial system. China has impressive foreign exchange reserves, and I think it is well qualified to join the efforts to halt the escalating crisis, Its not only about preventing losses. Its also about playing a more active role in the world economy. But what about the crisis part of the equation等式? In some respects economists say Chinas peculiar combination of unbridled无拘束的 capitalism资本主义制度 and top down state control will seal it off from some of the potentially harmful effects of the crisis. Beijing still keeps a steely grip on its currency, there is still only a narrow range of derivative instruments and innovation in financial products is still slow. Well aware that further declines could have grave social and financial consequences, the authorities took a range of steps to restore confidence in the last couple of days, adjusting reserve requirements to free up capital, dropping some duties on stock purchases and promising to step in prop up banking counters. The measures worked, at least for today, with the index shooting up by 10 percent, one of its biggest ever daily gains. exports, which are already showing signs of weakening and would obviously be subject to large declines if (when?) the U.S. and European economies start to contract. its easy to see why Beijing will likely be concentrated much more on the danger side of things than plotting how to make money from the opportunity.No one knows where the bodies are buried. Indeed, no one is quite sure exactly how many bodies there are. But they are out there, and there are plenty of them: underperforming loans, worthless securities and overvalued assets, all safely buried well away from the banks balance sheets. Buried but not quite dead. Increasingly they are surfacing, and these financial zombies are every bit as frightening as any youll encounter in a horror flick. No less terrifying are the other ghouls haunting the global economy. Where the pain will be most felt can be predicted with some certainty. The top of the London property market is one potential victim but also at the bottom end, where our own sub-prime borrowers will find themselves refixing at higher rates where budgets are already tight. Americas mortgage crisis has spiralled into the largest financial shock since the Great Depression and there is now a one-in-four chance of a full-blown global recession over the next 12 months, The US is already sliding into what the IMF predicts will be a mild recession but there is mounting pessimism about the ability of the rest of the world to escape unscathed未受损失的, The report made it clear that there will be no early resolution to the global financial crisis.Sentiment in financial markets has improved in recent weeks since the Federal Reserves strong actions with regard to investment banks. But we have seen how strains in markets can quickly become reinforcing, and the possibility of a negative spiral or financial decelerator remains a possibility.Lets begin with the fact that the financial crisis is more or less worldwide. The mechanism that spread the American-made financial crisis abroad was the massive U.S. trade deficit. Every year the countries with which the U.S. has trade deficits end up in the aggregate with hundreds of billions of dollars.Countries dont put these dollars in a mattress. They invest them. They buy up U.S. companies, real estate, and toll roads. They also purchase U.S. financial assets. They finance the U.S. government budget deficit by purchasing Treasury bonds and bills. They help to finance the U.S. mortgage market by purchasing Fannie Mae and Freddie Mac bonds. They buy financial instruments, such as mortgage-backed securities and other derivatives, from U.S. investment banks, and that is how the U.S. financial crisis was spread abroad. If the U.S. current account was close to balance, the contagion传染 would have lacked a mechanism by which to spread.The fact that much of the financial world is polluted with U.S. toxic中毒的 financial instruments could affect the ability of the U.S. Treasury to borrow the money to finance the bailout of the financial institutions. Foreign central banks might need their reserves to bail out their own financial systems. As the U.S. savings rate is approximately zero, the only alternative to foreign borrowing is the printing of money.Financial deregulation撤消管制约定 was an important factor in the development of the crisis. Finance chiefs around the world are dealing with the crisis by bailing out banks and by lowering interest rates. This suggests that the authorities see the problem as a solvency problem for the financial institutions and as a liquidity problem. In place of a liquidity problem, I see an over-abundance of debt instruments relative to wealth. A fractional reserve banking system based on fiat money appears to be capable of creating debt instruments faster than an economy can create real wealth. Add in credit card debt, stocks purchased on margin, and leveraged derivatives派生物, and debt is pyramided增加 relative to real assets. Add in the mark-to-market rule, which forces troubled assets to be under-valued, thus threatening the solvency of institutions, and short-selling, which drives down the shares of trouble institutions, thereby depriving them of credit lines, and you have an outline of the many causes of the current crisis.If the diagnosis is correct, the solution is multifaceted.Instead of wasting $700 billion on a bailout of the guilty that does not address the problem, the money should be used to refinance the troubled mortgages, as was done during the Great Depression. If the mortgages were not defaulting, the income flows from the mortgage interest through to the holders of the mortgage-backed securities would be restored. Thus, the solvency problem faced by the holders of these securities would be at an end.The financial markets mu