Study On Diffusion Mechanism Of Subprime Mortgage Crisis

Since1990’s, based on rapid moving of the international capital and renovationof financial derivatives together with frequent in and out of large amount ofshort-term capital in stock market and foreign exchange market, investors have foundmany investment chances and all of which provide many countries with excellentexternal condition of economic development. Meanwhile， it brings about newimpact and instability in global economy and international finance. Large and smallfinancial crisises come from this background have been a common normal state oftoday’s world economic life. This research selected sub-prime crisis as object andsearched for the forming mechanism of sub-prime crisis. Besides, the researchexplained the dynamic mechanism and propagation path of sub-prime crisis diffusionand analysed the diffusion mechanism of sub-prime crisis. Furthermore, it putforward a strategic system of financial risk precaution and resolution.Based on the definition of key concepts such as economic crisis, financial crisisand sub-prime crisis, the authors conducted norm analysis on the origins of thissub-prime crisis and found out the origins contain the contradiction of currency, theconfliction of middle man between self-interest and altruism and contradiction ofcapital. The authors systematically summarized the evolution mechanism that thesub-prime crisis has become the financial crisis and continue to change into economiccrisis. The whole paper is based on the diffusion mechanism of sub-prime crisis fromcredit market to capital market and from virtual economy to real economy.Found the system dynamic mechanism of diffusion through analyzing thesub-prime crisis diffusion basis, channel and mechanism from the point of view ofsystem theory. The authors analyzed the diffusion effect with normal form ofnormative economics including Keynes effect, Wicksee effect, wealth effect andbalance sheet effect. The authors also analyzed the effect on Chinese economy of thiscrisis from the point of view of trade, investment consumer confidence and made awhole judgment on the real effect.Introduced empirical study on the crisis diffusion from trade channel, financialchannel and psychological channel and got the conclusion that the main diffusionchannel of sub-prime crisis is competitive depreciation of foreign exchange and thenon-cooperative game Nash equilibrium of competitive depreciation is not so good asthe condition under which all countries cope with the crisis cooperatively. Thediffusion though financial channel derives from the valuation effect of interest rateand foreign exchange rate and the condition of the above two rates is found out. The diffusion through psychological channel derives from the deduction of consumptionand investment due to the change of human expectation. The mechanism of the abovethree channel derives from the breaking of constant state of real economic system.Finally, the authors construct the precaution model of financial crisis by revisingthe classic KLR model and selecting24newly industrializing countries as samples.The quantitive answers and mathematical provements of the diffusion depth andwidth of sub-prime crisis are given by giving entity inspection of the model.According to the real circumstances of crisis diffusion, the authors made severalsuggestions and proposals in order to avoid and defuse the crisis. The fundamentalway of facing financial crisis is stimulate economic growth by increasing domesticdemand. The effective method of avoiding international economic fluctuation isaccelerating the steps of upgrading industrial structure. The powerful practice ofmaintaining the stability of financial system is setting up financial risk defensesystem. It is also important to keep the stability of RMB exchange rate to avoid thefurther diffusion of crisis.