Introduction
This paper advances proposals that companies should exert to change their strategies regarding bonds, fixed income, and leveraged securities, given the 2007-2009 Global Financial Crisis. This appalling global phenomenon sabotaged economies worldwide and plunged them into radical bankruptcy and landslides (Farlow, 2010). Of vital significance is the impactful liquidation catastrophe on financial markets across the globe. As regards companies, this paper focuses on central banks and proposes measures to help return to normalcy while mentioning observed changes so far.
Body
Background
In the crisis course, central banks resolved to indemnify business institutions by donating liquidity support- an all abortive attempt to stabilize the money market and reestablish bank confidence (Kolb, 2010). Subsequently, they suffered massive deficits and incurred losses because they accepted bad loans, bond securities, and insolvent assets- a factor that blemished the investment banking sector (Farlow, 2010). In what follows are strategies regarding bonds, fixed income, and leveraged securities.
Bonds. Lehmann (2007) explains that bonds are a genre of debt securities loans, granted to sizable establishments, for example, governments, and other corporate institutions, with the promise to pay back. In crisis retaliation, below are measures put forward to restructure bond strategies.
Proposals and identified changes
- Expansionary monetary policy implementation. Expanding basis for fiscal policies and money supply involves lowering interest rates to foster economic growth and develop bond and asset demand (Farlow, 2010). Implementation will boost investments in government bonds and mortgage-backed securities (MBS), credits and deposits. Lehmann explains that the Fed has faithfully executed this policy, as there have been observable increased purchases of MBS, bonds, as well as deposits in their records (2007).
- Financial legislation incorporation. Finance ministries should illuminate the role of central banks and governments in mitigating crises, through bills and bodies of law, to sustain operations in crises frameworks (Kolb, 2010). The intent is to avoid future futile bond acquisitions by central banks in a desperate bid to stabilize the global market.
- Fixed income securities. According to (Farlow, 2010), fixed-income securities are predictable investments procured to yield fixed-interval incomes and, the capital sum at maturity. When the crisis hit, investors lost confidence in these securities, opting to reinvest elsewhere, thus the following proposed solutions to help revamp strategies.
Proposal and identified changes
- Quantitative Easing Program (QE). According to Kolb, QE is a Fed- complied grand design, targeted to print new money electronically, with the objective of dispensing it into the market while keeping interest rates near zero (2010). Lehmann says that increased money supply plus lowered interest rates lures investors to spend more purchasing leveraged securities, with the double advantage of yielding higher returns (2007). Farlow (2010) notes that Fed has successfully expanded its balance sheet, thanks to the QE program. He also adds that the European Central Bank (ECB) is looking to incorporate this measure to ameliorate the Eurozone economy.
- Leveraged securities. Leveraged securities are investment tools employed to multiply potential gains, losses and returns on assets and bond investments, with anticipation that property returns will exceed borrowed funds (Kolb, 2010). As regards new strategies, below is a proposition to revamp this market.
Proposal and identified changes
- Repurchase Investment. Repurchase investment- repo- is a calculated transaction approach where companies put up their assets as collateral. Here, companies sell and redeem them in an effort to raise funds to maximize leveraged securities (Farlow, 2010). Central banks should assimilate repo transactions as a device to operate with more force, in the event, improve endowment of bonds and debt- securities. Repo transactions enhance a firm’s purchasing power and gains, which is the idea behind leveraged securities (Kolb, 2010). Development is that securities dealers exercise repo transactions to speculate and boost finances (Lehmann, 2007).
Conclusion
The 2007-2009 “credit crunch” generated financial turmoil, crippling it with insolvency and liquidation problems. Working out this crisis will entail increasing the bond and asset equity among investors to ameliorate bank confidence (Farlow, 2010). Crisis resolution via financial legislations among others will serve as a motivational factor for the investment banking sector.
References
Farlow, A. (2010). Crash and beyond: Causes and consequences of the global financial crisis. Oxford: Oxford University Press.
Kolb, R. (2010). Lessons from the financial crisis: Causes, consequences, and our economic future. Hoboken, N.J: Wiley.
Lehmann, R. (2007). Income investing today: Safety and high income through diversification. Hoboken, N.J: John Wiley & Sons.