Chapter 29 The Roots and Effects of the American Financial Crisis

The US financial crisis that broke out in 2008 had a huge impact on the world economy, including the Chinese economy.Does this crisis herald the end of the American development model? ◎Reporter: Professor Chen, you are usually in the United States. The financial crisis in the United States has swept the global economic crisis. How do you interpret this matter from the perspective of a scholar? Chen Zhiwu: First of all, I want to emphasize that in the past two hundred years in the United States, there have been financial crises almost every ten years or so.You can look at 1817, 1857, 1893, 1907, 1929, etc. There will be a financial crisis of a certain scale almost every ten years.

In this sense, I don't think it is surprising that the financial crisis triggered the global economic crisis.Some people have long expected that the U.S. model of financial support for consumption and consumption-driven growth will eventually lead to a financial crisis.If you want me to predict, I can also predict that after this financial crisis, there will be another financial crisis in the United States in the future.If those who predicted the emergence of the financial crisis in the past few years were accurate, I believe that my prediction that there will be another financial crisis in the United States in the future will also be 100% accurate.

The main reason is not that I have any special abilities, but because the development of human beings has always been like this. Many people are required to make technological innovations, and a lot of financial innovations are also allowed in the financial field.Before the varieties and forms of these financial innovations become our common knowledge, there must be a lot of development and problems, and some crises will also appear.The financial innovation model in the United States has always been like this. First, people are allowed to innovate, and then everyone sees whether there will be problems with the innovative things. If there are no problems, the regulatory authorities will not and should not take care of them.

Only after a problem occurs, can regulators and legislators know the way and nature of the problem in the innovative technology.Then, after realizing the way and nature of the problem through the occurrence of the crisis, the regulators can reactively design how to adjust the regulatory rules, structure and system.According to such an innovation and regulatory logic, some new financial crises will inevitably be brought about in the United States in the future due to the emergence of new financial products, new financial markets, and new science and technology.This law cannot be changed. ◎Reporter: That is to say, it is normal for the United States to have a financial crisis, and they will continue to have crises, and to accumulate a correct development path and method through such crises. Is this the understanding?

Chen Zhiwu: Yes.The development of human society itself is such a process of continuous trial and error and error correction. ◎Reporter: The situation this time seems to be particularly serious, affecting many countries around the world. Chen Zhiwu: There are several reasons why this is very serious.One is that the housing mortgage loan market in the United States and many other financial markets have developed and deepened to such an extent that the final use of funds and the final supply of funds are investors in the United States and the world. The principal-agent chain between them has been stretched very, very long, which lays the foundation for the emergence of problems. This is one aspect.

In addition, financial globalization has sold various financial products of the United States to various countries around the world. At the same time, there is no world government with coercive power, legislation, law enforcement and administrative power. The contradiction between the globalized financial securities market and the absence of a world government, world central bank, and world law enforcement agencies is becoming more and more prominent.The financial crisis caused by the United States has had such a big impact on the real economy and financial markets of all countries in the world, which further highlights the increasingly serious imbalance between the actual level of financialization and the financialization capacity that institutional arrangements can support.

This financial crisis has implicated the real economies of all countries. This has given policy makers and people in society a great opportunity to understand the globalization of commodity markets and financial markets in the past few years and the world we have built since World War II. What exactly are the contradictions between orders, and where are they manifested.On this basis, everyone can make corresponding institutional adjustments and reforms in a more rational and calm manner, so that the further development of global financialization and capitalization can have a better global institutional framework.

◎Reporter: Do you think the subprime debt crisis has reminded us once again that with the deepening of financial development, the risk of economic fluctuations is also increasing? Chen Zhiwu: It may be the opposite.We can look at it this way. In the United States in 1900, the total value of financial bills plus securities was equivalent to 3.2 times the U.S. GDP. By 2006, the total value of financial bills was equivalent to 10 times the U.S. GDP.The highly financialized U.S. economy has a well-developed financial securities market in all aspects. Many people used to worry about whether the over-financialized economy would produce many economic and financial crises, which would greatly increase the volatility of US economic growth.But the reality is exactly the opposite of that fear.If you look at the U.S. economy and see how many months the U.S. GDP has experienced negative growth from 1980 to now, you can calculate that while the U.S. economy is becoming more and more financialized, the frequency of depressions is also decreasing.In fact, from 1980 to the present, in the 27 years, only 16 months of negative economic growth in the United States.Although it experienced the stock market crash in 1987, the U.S. savings bank crisis in the late 1980s, the Latin American debt crisis in the early 1990s, the Asian financial crisis in 1997, the bursting of the Internet stock bubble in 2000, and the financial crisis in 2001. "9? 11" incident.

Every time there is a crisis, many people think that "this crisis will overwhelm American society and the American economy", but every time it passes smoothly.Why is this so?The point is that with so many well-developed financial securities markets and a variety of financial instruments, businesses and households have the financial tools they need to avoid risks, so that different businesses and households can The risks and the risks that are willing to bear, to accurately arrange various investment and financial combinations, this has made the ability of American society to resist risks to an unprecedented level, and such an ability to allocate risks itself is the foundation of modern financial development. One of the core purposes.

◎Reporter: The U.S. government’s assistance to Bear Stearns, the “F&F” and AIG, does this mean that the principle of free economics in the U.S. has been shaken? Chen Zhiwu: Even the most radical advocates of the free market will admit that the era of the government playing no role in the market is long over. In today's world, a few big consortia can kidnap the interests of an entire country or even the global community.Due to the development of transportation and communication means, financial markets and commodity markets in various regions have been integrated at the national level.Under such circumstances, it is easy to form a small number of consortiums with large scale, wide market penetration and involving many public interests through the integration of enterprises.Therefore, the government needs to provide public services such as market rules and property rights protection.Moreover, because these few consortiums have hijacked too many public interests, a situation of "too big to fail" has emerged.Especially in today's financial globalization, the public interests involved by multinational financial companies are not only limited to their home countries, but also cross national borders and permeate the world, and the situation of "too big to fail" is more likely to appear.Therefore, the traditional pure free market has been difficult to sustain.

◎Reporter: Does this financial crisis mean that the US economic development model has encountered challenges? Chen Zhiwu: Some domestic commentators believe that this crisis is the end of American financial capitalism.I think this exaggerates the consequences of the crisis.American-style financial capitalism will definitely continue. The main impact of the crisis brought about by this crisis is quantitative rather than qualitative.The so-called American financial capitalism model includes many contents, for example, relying on credit to promote consumption, and then relying on consumption to drive economic growth, which is related to the current discussion.This pattern will certainly not change in the future.This development model is not exclusive to the United States, and developed countries have adopted this model to varying degrees.In fact, China is now also transitioning from an investment-driven model to a consumption-driven model. After the 19th century, the United States basically relied on consumption to drive growth. The reason was that the industrial revolution brought about a substantial increase in production capacity.The reason why modern society relies on consumption to drive the economy is because industrial technology and agricultural technology have been perfected enough, human material production capacity has been greatly improved, and material consumption needs can be met without much effort.Therefore, in the end, it is not the lack of production capacity or insufficient investment that restricts the growth of the human economy, but the lack of consumption demand, which is the bottleneck of growth.One of the purposes of the development of various financial markets is to alleviate the problem of insufficient consumption caused by people's income inequality through housing mortgage loans, car loans, and education loans.People also arrange possible future needs through financial products such as medical insurance, pension insurance, and various funds, so as to reduce the pressure of saving money in the youth and prime of life, thereby promoting consumption.In short, the securitization of housing mortgage loans and other related financial developments revolve around liberating people from the pressure of saving money, thereby releasing the motivation to consume.Not only the United States will not end this model, but many countries including China should learn quickly, otherwise, China and many other countries can only rely on manufacturing and export markets. So, what will be the outcome of the subprime mortgage crisis?First of all, of course, the financial institutions in the United States and the world must pay the price. China's foreign exchange reserves, commercial banks, and Japan's banking industry have all paid the price.The second is that the U.S. economy and society have been impacted, and consumer credit and other credits have shrunk severely. Not only will U.S. banks and other financial institutions be more cautious in lending and investing, but institutions and individuals in other countries will also significantly reduce credit and capital provided to the U.S.Therefore, it will be difficult for the credit consumption in the United States to grow in the next one or two years.Therefore, I think this financial crisis will compress credit consumption in the United States and reduce the scale of this economic model, but it will not be the end. After taking over the “two rooms” and using government funds to rescue other financial consortiums, the U.S. fiscal deficit has increased by at least hundreds of billions of dollars in the past two years. Coupled with the Iraq war expenses, the U.S. fiscal deficit will grow rapidly, and more funds need to be issued. national debt.This will transfer the funds originally provided to the private sector and enterprises to the government, reduce the space for economic growth and private welfare, and make the dollar tend to depreciate, further dampening the willingness of international investors to invest in US dollar assets and reducing the supply of US dollar funds. Therefore, in many ways, the impact of this financial crisis is far-reaching, the most serious since the Great Depression in the 1930s, and the impact is wide and deep.However, the Great Depression in the 1930s did not fundamentally change the financial and economic model of the United States, but instead strengthened it. This time, the United States will come out through corresponding reforms. ◎Reporter: Financial globalization and the free flow of capital have exacerbated the breadth and depth of the financial crisis. What impact will the US crisis have on international capital flows?In the context of the irreversible trend of global economic integration, what new measures should developing countries take to curb possible crises and gain opportunities in the crisis in the United States? Chen Zhiwu: The financial crisis in the United States should not be used as a basis for strengthening China's financial control.Because the situation in the United States and China represents two extremes.In the United States, financial innovation can be said to be completely liberalized. If there is a problem, let it go, and if there is no problem, you can be completely free.And China is, if there is no government approval, no innovation will work.We must understand that regulation is reactive in nature, and it is for what is already familiar.But innovation, as the name suggests, is something that did not exist before, and it creates something that was previously unfamiliar. Therefore, in essence, innovation should not be regulated, otherwise there will be logical contradictions.If China wants to become an innovative country, if the innovation in finance is not significant, it is impossible for other industries to achieve innovation.Chinese-style supervision cannot improve the ability to resist risks.For example, if you lock a person in a room and prevent him from learning to swim, he certainly doesn't have to worry about choking on the water, but he can't learn to swim, and the next time he falls into the water, he will drown. The United States allows free financial innovation, and of course there will be some problems, which is not surprising.Because you have to go through the problem to know where there should be supervision.In this sense, because of the problems caused by the subprime mortgage crisis, the US has definitely increased its control over securities and investment banks.Now so many investment banks need protection from the federal government and the Federal Reserve. After that, the Federal Reserve and other government agencies must establish prevention and supervision systems to avoid crises. On the surface, China's financial control has no cost, but in fact the cost is manifested in other forms.Why in the international division of labor we can only do manufacturing that sells cheap labor?This has a lot to do with the backwardness of financial development and the inability to let go of financial innovation.Without the development of the financial market, it will be difficult to increase domestic consumption. The cost to China's economy and society is that it must rely on exports to drive growth. I think the lesson that China should learn from this crisis is: Don’t think that it is right for us not to let go of financial innovation because of the problems caused by financial innovation in the United States.China must learn to swim, even if it has to pay tuition fees, it should learn.