Essay on Brife Analysis of Financial Crisis

Submitted By Zhangshuo222
Words: 1362
Pages: 6

The brief analysis of the cause of financial crisis and how to avoid

In September 2008, the collapsed of the fourth-largest securities firms in U.S., Lehman Brothers', like a storm that made financial crisis quickly spread across the United States and even the whole world (Besar et al 2011). Unlike the past, the background of outbreak of this economic crisis is that the capitalism had developed to the stage of monopoly-finance capital( Foster 2007) .

The characteristic of the financial crisis is that people are more pessimistic expectations for the future economy which based on the nowadays economy. There was a substantial devaluation of currencies throughout that region, the total economy and the scale of economies had a substantial reduction and the hit on economic growth. It often accompanied by the phenomenon of enterprises going bankrupt, increase on the unemployment rate, and general economic recession in the society, sometimes even accompanied by social unrest or turbulence on national political level (Kreps 1990, p.125) .

Mccauley et al (2010) state that the deep reasons of the financial crisis is that the intensification of the basic contradictions of capitalism. The development from monopoly capital to monopoly finance capital is only the internal adjustment of the capitalist relations. It cannot fundamentally resolve the basic contradictions of capitalism. The rapid expansion of financial capital without entity's capital is resulting in a large number of financial bubbles. It is the inevitable result that the situation of capitalist relations of production, capital fame and fortune to find a natural way. So, explore and solve the crisis only from the financial point of view can just resolve temporarily delay the arrival of the next crisis, it does not eliminate the possibility and necessity of the break out of crisis. To some extent, it may also lead to other forms of economic disaster (Fidrmuc and Korhonen 2010).

This view clearly point that the fundamental causes of the financial crisis but ignore the impact of economic environment of other countries which outside of the U.S., for example, the demand for the dollar and commodity surplus. Another view of cause of the outbreak of financial crisis is the United States had enacted a new banking law in 1999, to further relax the financial controls. Financial business "separate management" model is broken, "mixed operation" pandemic, forming "The ruled based financial mode of operation ",. It means that use of market pricing distortions, buy low and sell high, Arbitrage high interest, expand the “funding game”. With the increase in market participants, the price system is becoming more balanced and the game margins declined (Allen, Gale 2007, p.57).

To expand profit margins, the giant financial institutions in Europe, USA have innovated in financial technology, preparation of financial derivatives, artificially created virtual world of finance. For example, debt is secured by a subordinated loan and integration, segmentation, compiled a series of securitization products, and derived more virtual financial instruments to sell worldwide by split through the layers, and then preparation. This process touted as financial globalization and liberalization, and also be seen as the best ways to disperse financial risk (Fontagne 1999).

But the problem is that the financial risk is like computer virus, it will not disappear by desperation. In contrast, its constantly decentralized and became the path of the spread of virus, once virus attack in a part of the system, it will infect the entire system. This is the deep reason of why it constantly deepens proliferation after the outbreak of the subprime crisis. For instance, the five largest investment banks in Wall Street's, United States, investment banks are not only as a bridge between the real economy and the virtual economy. It often own the characteristics of independent of the real economy. It could use…