Tao Xiang International Finance Lectures (No. 8): Mechanism of and Lessons from the 2008 U.S. Financial Crisis
2017-03-19 IMI
Mr. Fan started with the after maths of the financial crisis. Through a series of graphs and data, he showed the dramatic slump of GDP, rapid rise of unemployment rate, sharp fall of stock market and closing-down of banks during the crisis. He also gave indicators such as VIX index, risk premium that reflected violent fluctuation and exhausted fluidity of the U.S. financial market at that time. Mr. Fan pointed out that until today, America is still shadowed by the 2008 crisis.
Mr. Fan then talked about the following causes of generating the 2008 financial crisis. First, at the early stage of the crisis, the Fed had a slow response, and failed to accurately predict the severity of the crisis. Second, as for regulation, the Basel II Accord then encouraged the banks to bear more risks and develop faster, raising the possibility of systematic risks. Third, the Fed issued ultra-low interest rate for the first time during post-war period, leading to the climbing of leverage ratio. The overuse of leverage destroyed the root of the whole economy.
In the end, Mr. Fan Xiwen elaborated on the development of the crisis from two perspectives: housing prices and financial innovation. With regard to the housing prices, too many speculative capitals entered the real estate market before the crisis, leading to the rising of housing prices and banks’ over-lending. The banks released many housing loans of new types, but they did not strictly verify the liabilities of the borrowers. Therefore, after the crisis, considerable loans were not taken back. On the other hand, various products of financial innovation frequently emerged. However, inaccurate risk predictions to these products resulted in numerous losses after the crisis. Mr. Fan concluded that China should strengthen the supervision and regulation of financial derivatives, so as to fend off financial crisis to a certain degree.
