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Underlying Reasons Of The Current

Ch2

Literature review

Financial crisis definition:

Financial crisis and U.S.

FRED MOSELEY said: The financial crisis happened in the home mortgage market and also called “sub-prime” mortgage crisis, however which is now not only effect subprime but also on prime mortgages, stock, corporate bond, real estates and other forms of debts. The losses of U.S. banks could contain of one-third of total bank capital. This financial crisis cause a dramatic drop in bank lending and which also cause a severe recession in the U.S. economy.

Objective :

This article is to analyze the underlying reasons of the current financial crisis, the effect of this crisis, and discuss the government economic policies which to cope with the crisis. And take advice to government how to amend the economy policies response this financial crisis.

Result:

The reason cause the financial crisis is the decline of the rate of profit. The significant decline of the rate of profit was the main cause of higher unemployment and higher inflation, lower real wages.

Ways to reserve the rate of profit. The strategy of inflation is to increase prices at a faster rate, which can reduce real wages or avoid increases in real wages, so that the benefits of increasing productivity can go to higher profits. Another strategy is to cut back on both health insurance and retirement pension benefits. Reducing wage costs to move their production operations to low-wage areas. The recovery of the rate of profit has not result must increase of investment and not increase the employment rate in U.S.

Because of capitalists have a lot of funds to lend and workers are short of liquidity money to buy a house or new car, which cause they eager to borrow money. Meanwhile, the violate competition between banks so cause banks afford loan to low rate borrowers. This is the key reason cause the current financial crisis. The Fed’s policies do not and can not solve the problems of so much household debts, rising foreclosure rates and also declining housing prices. The nationalization of banks would not change the current economic crisis absolutely, but it would help stabilize the banking system and can cause lead to increase lending to creditworthy businesses and consumers.

Financial crisis and india

Definition:

Minar Pimple Deputy Director and Head of Asia UN Millennium Campaign said past couple of decades speculative lending and deregulation growth rapidly. Subprime lending and mortgage securities increase global liquidity and risk. This financial crisis affect almost of the world particular in security currency market, bank, financial institution. This global financial crisis impact on the growth in the United States and also affect other parts of the world through international trade.

Objective:

This article according to analyze which mechanisms transmit to Asian economies. The impact of the global financial crisis on the developing countries. And implantations on India and the impact on India’s economy employment and poverty group. Take key policy recommendations to deal with this financial crisis.

The results:

Asian economies do not have large direct effect from securitized assets associate with high-risk lending. However, the global economy slowdown sharply and has been transmitted from developed to developing countries. The effect of India especial on economic aspect, social and development. Economic impact include service sector (bank, finance and IT sectors). Social and development include employment and poverty reduction efforts, development expenditure of government fiscal position. This financial crisis also rise unemployment rate. After analyzing the key problems and the effect of global financial crisis on India’s development. India government should strength policy communication between government and civil society. The policy should protect the poor and the vulnerable.

Japan and the Global Financial Crisis

Paul Sheard said: From this financial crisis we can see Japan didn’t learn lesson from the 1990’s recession. Japan face this severe recession, distressed equity market and worsening deflation, almost using the same way to deal with it. Eventhough beagan the crisis Japan’s economy is far from the credit bubbles and U.S. hosing bubbles, the impact of global recession on Japan is very obviously.

Objective:

This article analyze the lessons Japan learned from this global financial crisis. Writer take the recommendation to Japan should how to deal with this financial crisis.

Result:

According to analyze the effect of global financial on Japan. We can conclude the three lessons which Japan learned from this financial crisis. These three lessons are all standard economic policy principals. First, need strong government intervention to fix crippled banking or financial systems quickly; it is not wise to try to grow out of a banking crisis. Second, fiscal policy require to be the central policy and large-scale and continued fiscal expansion is required in a deflation or liquidity trap. Third, the policy of the central bank and the governments needs to be determined, powerful, and coordinated.

Japan against a pro-active fix-it-quick strategy, the fundament of banking system policy was forbearance. Japan’s second policy error was to eschew the use of expansionary fiscal policy. Even worse, it made fiscal consolidation a prime policy goal despite the economy being in serious deflation. Japan’s second policy mistake was to avoid the use of expansionary fiscal policy. Even worse, despite the economy being in server deflation it made fiscal consolidation a prime policy goal.

The third lesson from Japan is that monetary, fiscal and financial system policy all require to be mobilized in a continued, powerful and coordinated way to achieve the policy goal especially when there is a risk of or actual deflation in a financial crisis time.

US policymakers mobilized fiscal, monetary, banking system and housing policy to end this financial crisis and reserve liquidity to financial market to end the recession and prevent deflation. Even though with a gaping deflationary output gap in prospect, the economy seems to be drop, the monetary and fiscal policy responses to date have been piecemeal, limited in scope and uncoordinated. Not only does it imply that Japan has not learnt from its own lessons, policymakers do not know what they should do to deal with this crisis.

Russia and the global economic crisis

Vladimir Volkov said: The world financial crisis has revealed the great impact of shifts in world markets on Russia’s economy over the last two months. This crisis has fluctuated the confidence of Kremlin leaders who had come to believe that Russia was not only recovering from the destruction and chaos of the post-Soviet years, but also had even achieved nothing can attack Russia’s economy. Meanwhile, the crisis has affected the nature of Russian government class. The primary bureaucratic and oligarchic groups control the main sectors of the economy have shown their determination to devote the state’s resources to saving themselves. And they do not consider of the social consequence for tens of millions of working people. No significant remission is being offered to the population to face this global financial crisis.

Objective:

The effect of the global financial crisis on Russia. Russia government what action they do response to this crisis

Result:

The Kremlin’s initial response to this financial crisis was described by nationalistic self-satisfaction and complacency. The regime’s representatives proceeded from the premise that the enormous revenues accumulated as a result of high prices for Russian oil, gas and other raw material exports, Russia was not threatened by the financial crisis that was sparked by the collapse of the housing and credit bubbles in the US.

However real status is not happen like he said. Both Russia stock market and bank

Even though since the fall of the Soviet Union almost 20 years have passed. Post-Soviet capitalism can not prove able to create a foundation for a development of the country in the interests of the mass of the population, and not simply a narrow group of businessmen. After the period of “fertile years,” the Putin era of Russian capitalism has entered a crisis to which it will respond with cruel attacks on the living standards and rights of the workers. Its parasitism is laying the basis for the reemergence in Russia of open class conflict.

Real estate market

US Housing Market Crash to result in the Second Great Depression

Mike_Whitney said: The drop date of real estate market leaves no doubt that the housing bubble is quickly crashing to earth and that hard times are on the way. “The sharp decline in home prices from the end of 2005 to the end of 2006 was the biggest year over year drop since the National Association of Realtors started keeping track in 1982.” (New York Times) The Commerce Dept announced that the construction of new homes fell in January by a whopping 14.3%. Prices fell in half of the nation’s major markets and “existing home sales declined in 40 states”. Arizona, Florida, California, and Virginia have seen precipitous drops in sales.

People without confidence and stopped buying on credit, the bubble-economy collapsed, and the mighty locomotive for growth, the American consumer, hobbled into the Great Depression. Tariffs were increase, foreigners stopped buying U.S. goods; banks break down, business went break down and unemployment increase.

Objectives:

This article analyze how U.S. real estate market crash cause the financial crisis. U.S. real estate market through which aspect effect the whole economic market.

Result

Housing bubble cause inventories increase, profits are eroding, sales are down, and the building industry is facing a steady downturn well into the foreseeable future. The ripple effects of the housing crash will be felt throughout the overall economy; shrinking GDP, slowing consumer spending and putting more workers in the growing unemployment lines. The banks and mortgage lenders are scrambling for creative ways to keep people in their homes but the subprime market is already teetering and foreclosures are on the rise.

The current account deficit is running at roughly $800 billion per year, which means that the US must attract about $70 billion per month of foreign investment to compensate for America’s excessive spending. When foreign investment falters, as it did in December, it puts downward pressure on the greenback to make up for the imbalance. In addition, the real estate market crash cause new jobless claims sharply increase. U.S. debt increase

On the imbalances between the real estate market and stock markets in China

Gaiyan Zhang said: From 2001 to 2004, housing prices in China have steadily increased. In Shanghai, where housing prices have been rising amazingly fast in the past two years, the average price in urban and suburban regions has exceeded 10,000 yuan (about US$1, 200) per square meter (National Statistical Bureau of China). It is believed by many experts a housing bubble has formed and is sure to burst. Rapid growth in housing price has had a dramatic impact on the lives of millions of Chinese citizens. Per capita incomes remain relatively low by international standards. The actual numbers (less than $1,000 a head on the World Bank Atlas method and about $4,000 on a purchasing power parity, PPP, basis) underline the point that China is still markedly poorer than many of its neighbors (www.worldbank.org), but the housing price is comparable to high-income countries.

Objective

This article discusses the imbalance between the stock market which has plunged over four years and China’s real estate market which is booming. What is the relationship between these two markets? How stock indexes changed by the surge of property market? Meanwhile, whether the stock composite index, inflation rate and hot money flow will affect housing price movements.

Result

The development of real estate sector has contributed considerably to the economic growth. The property boom is partly responsible for the poor performance of China’s stock markets. The negative link between two markets seems to be due to capital flows, including household savings and bank funds. The housing price is a significant explanatory variable of the Shanghai Stock Composite Index. However, the relationship is not significant for the Shenzhen Stock Composite Index. This finding suggests the presence of market segmentation for geographic reasons. The surge of housing prices causes the drop of the Shanghai Stock Composite Index. Commercial banks should prompt the development of the stock market by providing credit to high quality enterprise listed or to be listed on stock markets, and setting up investment companies to trade on stock markets

However, in the long-run, the performance of stock market depend on corporate basics rather than government intervention. In the housing market, the long-term issue is one of supply rather than demand factor and should consider housing need due to a mass rural migration to urban areas is anticipated over the next 30 years.

Inflation Hedging Characteristics of the Chinese Real Estate Market

Yongqiang Chu and Tien F. Sing said:

Over the last few years, the Chinese real estate market has been experiencing rapid growth and change. The Chinese real estate market is highly speculative and its inflation hedging characteristics may differ from other mature markets. So it is important to understand the behavior of real estate investment returns and their hedging characteristics against inflation.

Objective:

Using the OLS and co-integration models examined both the short- and long-term inflation hedging characteristics of Chinese real estate. The long-term relationship and causality between the real estate returns and inflation were also tested using country-level aggregate data.

The results show no evidence of long-term hedging ability. However, the causality test shows that there is a significant unidirectional causality from the inflation to the real estate return.

Result:

The results of the serial correlation adjusted OLS model show that real estate of all types in the four Chinese cities are poor hedges against both expected and unexpected inflation. The traditional thought that real estate is a good hedge against inflation. However, using both city- and country-level real estate market data in China rejected the inflation-hedging proposition for Chinese real estate. The real estate price changes that track the inflation rate in China may be caused solely by changes in construction cost.

Analysis of the US Real Estate Market

Rachid Bokreta, Matthieu Leblanc said

The real estate sector compose one of the main sources of growth for world leading economies. From the recent financial crisis, can find out the extreme dependence of the housing market with financial markets and the economic system. Housing price raise dynamic was food by a monetary politic with low interest rates and subprime loans which encourage risky US population to become householder. The mortgage refinancing knew an intensification of its activity. However, a change of direction in the monetary policy accompanied by a housing price decrease lead firstly a growing number of US households in difficulties to repay mortgage debt and then cause the collapse of the American financial system.

Objective:

To investigate the determinants which drive the evolution of the American real estate prices. Housing prices are modelling by a S&P index known under the name of Case-Shiller Index Composite 20 which aims to quantify the residential housing market in 20 US metropolitan regions across the United States. Using different regression methods examine the time-varying sensibility of the selected risk factors to the Case-Shiller 20 index. Then, an econometric multivariate model is proposed to anticipate its monthly time series evolution over the 1991-2009 period thanks to time-varying betas obtain with OLS and Kalman filter. One of the main difficulty concerns the consideration and the detection of the shift between a positive and a negative price return period (and vis-versa) by the modelling. Hence, the criterion decision about the choice of the best forecasting model is the one which capture the most regime switching.

Result

The anticipation of the real estate market prices is essential since they can influence the evolution of financial markets. The approach is carried out in two steps. In the first step, the time-varying beta series are constructed by the OLS model and the Kalman filter approach from February 1991 to June 2009. In the second step, the forecasting models are used to forecast the Case-Shiller prices and variations based on the estimated time-varying betas and results are compared in terms of forecasting accuracy. Hence, two sets of forecasts are made and the different methods applied are compared. We demonstrate that the estimation and the prediction of the housing prices by the Kalman filter are more robust than the traditional OLS.The Kalman filter estimation method is a recursive algorithm which includes the timevarying properties of estimated coefficients and we remark that the Kalman filter reacts more quickly to regime switching.

My opinion

Financial crisis: The largest characterized of U.S. economy is virtual economy, that is highly dependent on the circle of virtual capital create profits. Virtual economy is not in itself create value, its existence must be attached to the production of economic entities. The current U.S. financial crisis is economic liberalization over the consequences of virtualization and concentrated reflection. When the housing market bubble break, many subprime loan borrower can not afford the payment which cause the value of financial derivatives drop constantly, ultimately cause all economic market lack of liquidity and form the current financial crisis.

Real estate market

In real estate market the potential buyers and sellers of real property existence and transaction for real property at the current time. In china the real estate market is very systematic, which needs efforts of government, individual, and company. According to development of China’s economy and increase of employees’ salaries, commodity housing and economical housing come into line. Markets will gradually dominate the progress of housing production-consumption-- reproduction. Then China's housing market will enter a positive cycle and the housing industry will really become a new growth point of national economy.

http://www.isreview.org/issues/64/feat-moseley.shtml

India http://www.endpoverty2015.org/files/Global%20Financial%20Crisis%20-%20Implications%20for%20India's%20Development.pdf

http://globalasia.org/Current_Issues/Volume_4_Number_1_Spring_2009/Japan_and_the_Global_Financial_Crisis.html japan

http://www.cfr.org/publication/17844/ Russia

http://www.wsws.org/articles/2008/nov2008/russ-n12.shtml Russia

http://www.marketoracle.co.uk/Article383.html us real housing market

http://www.prres.net/Papers/Ye_China_Housing_Policy_and_Housing_Market.pdf

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