The Analysis Of Financial Reform With The Financial Instability Theory

The subprime mortgage crisis in2007triggered a global economic crisis and then caused serious damage. There are many researches about this crisis. Among these researches, the Minsky’s financial instability hypothesis which caught the key has been related to the subprime mortgage. Financial instability is the inherent characteristics of the financial activities. Many researches related to the financial instability are multiple perspectives. Many professors studied the financial instability from the panic and agent’s behavior, such as Kindleberger (1978), Diamond and Dybvig(1983), Minsky(1992) and so on. Other people have the thought that financial instability was caused by information asymmetry and moral hazard. Besides, some studies figure out that the financial excessive innovation and deregulation are the key factors to explain this crisis. The financial excessive innovation is a double-edged sword. It can promote the efficient allocation of capital, increase the liquidity of the market and spread the risk. The other side, with the financial excessive innovation and efficient diversification of risk, the risk will be more and more. If the regulation can’t be timely, the financial instability will be changed to financial crisis.The financial innovation is beneficial to economic. But beyond is as wrong as falling short, the financial excessive innovation without timely regulation could be the nightmare of the economic. It’s the key time of the economic transform. The third plenary session of the eighteenth point out that the focus of the economic system reform is to comprehensively deepen reform, the core problem is to correctly handle the relationship between government and market. The market pays a decisive role in the allocation of resources and give play to the role of government better. Then we can find that the market-oriented reform is the focus of reform, but as the same time, the government will not exit. The point to handle the relationship between market and government is "make the market play a decisive role in the allocation of resources and better give play to the role of the government". The purpose of the market-oriented interest rate reform is to give the decisive role of the interest rates in the financial market. As an important kind of financial innovation, asset securitization began to pilot in China since2005. In2007, due to the global economic crisis has suspended shortly. It can be expected that asset securitization in China will get all-round development. The financial excessive innovation is one of the reasons on subprime mortgage crisis. What the path of the China’s financial reform. The purpose of this thesis is to study the China’s financial reform with financial instability perspective.Firstly, this thesis conclude the meaning of financial instability so as the performance and reasons. There are many definitions about financial instability from kinds of perspectives. This paper has the idea that the financial instability is the state, under this state, a normal-size shock could change the financial instability to financial crisis. Financial crisis can be seen as a transition which is financial instability be made from quantitative to qualitative change. In the first chapter, it combs the financial crisis in the history of the event, we can find that the financial crisis is related to the speculation of the people, after accumulated to a certain extent, panic during the crowd is formed. If the government does not get involved and regulated, the panic could push the financial instability to the financial crisis. Beside the history of financial crisis, we take the theory review about the financial crisis. In the third chapter,we measure the index of China’s financial stability, and take a combination analysis between financial stability and economic fluctuation. The result showed that from2005to2013, there is about15%month is in a state of extreme financial instability, mainly concentrated in the2007to2008. After the subprime crisis,China’s macroeconomic regulation is efficient, the degree of financial instability trend down, but the monetary conditions index which is included the main monetary variables such as M2, interest rate take the sharp rise. It perhaps concerned with the investment policy of China’s regulation. Among the East Asia, China play the main role. As the rising monetary condition index, we study the relationship between financial stability and monetary stability. With the China’s data, his paper finds out that the interest is the key to maintain the relationship between financial stability and monetary stability. But in China, the interest rate is not marketization. The main policy to regulate is the monetary supply such as M2. The three plenary session of the18proposed to deal with the relationship between government and market. The market plays a decisive role in the allocation of resources and better gives play to the role of the government. The reform is more deep and wide, so is the financial. The key reform of the financial is interest rate marketization.Next, this article studies financial reform in China from the perspective of the institutional economics, and points out that China’s reform in financial is a game among the interests groups, political bankers and ordinary people. If ordinary people don’t know their type or the benefit gotten from the reform. Along with the reform, there would be need to compensate for the damage to the people in the reform so as to ensure the smooth progress of the reform.We take the interest marketization and asset securitization to study the financial reform. In the analysis of the interest rate marketization, we use the Diamond Model to study the effect of interest rate marketization with the aged society. And then we also study the change of government functions after the market-oriented interest rate reform. For the analysis of the asset securitization,firstly,we review the development of China’s asset securitization and then find out the effect of asset securitization on the economic growth and financial instability. As the excessive financial innovation and deregulation of government are the main point for the subprime mortgage crisis, after the study of financial innovation, we should study the financial regulation. In the chapter7,we review the history of the financial regulation and deposit insurance in US, and find out that China should take the reform about macro-prudential regulation. Besides,the deposit insurance which is to established by the government and the legislative institution and ordinary people.There are four conclusions in this thesis. Firstly, from2005to2013, there are about15%months is in the state of "excessive instability". After the subprime mortgage crisis, the policy of regulation is valid. The degree of financial instability decreased, but the monetary condition index increased recently. Second, China’s reform is a game among the interest groups, political bankers and ordinary people. If the ordinary people don’t know their type or don’t know the benefits from the reform, only accord with the interest of the overwhelming majority of people to reform. Along with the reform, it need to compensate for the loser in the reform to ensure the progress of reform. Third, the effect of interest rate marketization reform is related to the risk aversion coefficient and the pension system. According to the reform of global countries, we can conclude that the market driven and the government leading type with gradual reform is the stable reform, which is worth of reference for China. Lastly, financial reform is not only the reform of the financial sector, but also needs the government, enterprises and citizens to enter in. With the experience of the development of the US, macro-prudential regulation can be found that China needs to reform and establish relevant government functional departments, the legislature and public interaction of a full range of deposit insurance system.