Understanding the Global Financial Crisis
Managing Director, CICC
Dr. Huang discussed the feature of current financial crisis, explained why it happens, and sketched out the outlook of its future development.
Current financial crisis has been described as a rare event happening only once a century. It is so severe that the global financial system had have collapsed if governments did not take dramatic action. Ted spread has been brought to as high as 500 bps in past weeks. Major financial institutions have lost half of their market value by now.
The crisis is the result of the concurrence of four vicious circles. Firstly, financial institutions' efforts to avoid liquidity problem lead to lower liquidity. Secondly, investors' efforts on selling out assets in a falling market lead to lower asset prices. Thirdly, as risk exposure rises, capital becomes insufficient and scarce. Finally, while recession leads to unemployment and subsiding demand, unemployment and subsiding demand leads to more severe recession.
There are many factors to create such a crisis. Firstly, the absence of regulation encourages investment banks to be functioning like hedge funds. Secondly, after an era of high growth rates and low inflation rates throughout the 1990s, long-term interest rates become lower than short-term rates, namely the Greenspan's Conundrum. The Conundrum is some result of technology advancement and globalization.
Yet after the crisis, the United States will still be the most vigorous country in the world. Its power has not been weaken at all, if not strengthened. The dominance of the dollar is now even reinforced. There is no doubt that the global economy is heading for recession. In concerns of the US, some revised New Deal will be taken by the new president.