the internet has affected the financial markets by This is a topic that many people are looking for. newyorkcityvoices.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, newyorkcityvoices.org would like to introduce to you Corona and Financial Markets The effects of Covid-19 WHU. Following along are instructions in the video below:
“My name is christine andres i m professor of corporate finance at vega budhia. Tobias tobias m. School of management in germany in this short video. I would like to about the relationship between the corona or kovach.
19 crisis and financial markets and the economy at large because what has started as a primarily health crisis has by now become a fully fledged economic crisis. So i m not a biologist nor an epidemiologist i m an economist so i m not going to talking about the health related issues. That s for other experts to discuss. But we need a little bit of background to understand why the economy will be hit or is already being hit relatively hard so most of you have by now heard frequently about the concept of exponential growth.
It is something that most people or the human mind. Maybe has a hard time understanding. Because exponential growth is something that maybe some people in the finance industry or in technology. Computer signs are familiar with because we compound interest or if you want to use a computer science analogy.
You know that the density of chips and memory increases really rapidly processing power that s exponential growth. So the problem with an infection that spreads and spreads. Relatively quickly exponentially is that it needs to be contained. Really early.
Because once you ve reached 80. 90. 100. Thousands and this is not really locally contained concentrated as it was the case in the wuhan region in in china.
It is more or less impossible to contain and it s going to infect the entire population wise. There s a problem is problem because our health system will collapse. This is why many people have now pushed governments to act. Relatively early problem is we re behind the really early phase already so.
If you assume that people get infected and entire societies get infected. The capacity that we ll need for hospitals. Our intensive care even will be far exceeded by well who gets seriously infected. So acting early it means that we flatten the so that we will not have treatment in the sense of a vaccine or a pill that helps cure.
But that fewer people get infected at the same point in time so that we spread contagion over time again this does not mean that fewer people get infected. It means that people get infected. But they get infected more slowly. So if we flatten the curve to this extent it basically means that people can get treatment and the health system.
Does not collapse that s flattening. The curve and this is why many many governments because again again otherwise they hospitals will collapse and many people will die. Because they will not be treated. Well so governments have been imposing fairly strong restrictions well we call this social distancing.
It means that shops are closed that also fears and conferences cannot take place even that factories get closed. So this has severe implications for both mom and pop shops. Because if your restaurant is open you basically don t have any revenue. It s quite a hobbyist right.
But also for factories for larger companies. This is severe implications because people who do not work get lower income they spend less plus. We have a face of high uncertainty. But again this is something that s really really important.
Which is why governments. Mrs. Merkel yesterday. Addressed.
The german nation. And said that we re facing the largest challenge since world war two emmanuel macron. The president of france and andrew cuomo. The governor of new york have both while we re at war.
So this is a pretty strong shock to the economy. If everything is closed down. But not everybody is affected similarly. So we talked about the restaurants.
I mentioned restaurants and other entertainment sports and so on this is of course severe immediate impacts. But some industries are hit less hard. There s even well amazon is hiring everything that s doing home delivery groceries. Even talked about expediting.
Expect expedited hiring because they can t get people quickly enough nonetheless in the grand scheme of things. There s estimates that gdp by the standstill. That we will observe will decrease by five to ten percent roughly. So again.
The problem is we need to flatten the curve this means we will spread it what was spreading me. It means shops and everything will be closed. This is not going to be a matter of weeks. It s more likely going to be a matter of one two maybe three months even right so we will be facing a severe recession here.
So what can we do about it one way of approaching. This is monetary policy. This means that central banks who set interest rates and find other ways of getting liquidity money into the economy take action. So the us federal reserve has this past weekend lowered interest rates to effectively zero has also announced that they will be buying mortgage backed securities and government bonds to the extent of roughly eight hundred billion us dollars.
The ecb this morning took action in a similar fashion interest rates were already at zero in the eurozone or even negative by launching a seven hundred and fifty billion bond buying program so this is central banks creating incentives to invest by lowering interest rates for investors government debt becomes less interesting because you don t get any interest at all even negative interest in the euro zone. But also for consumers to take out loans because they get them on really good terms to buy houses to well invest in goods. But also in while consuming more the problem is right now consumers who are facing a high degree of uncertainty might even lose their jobs will not invest much. Plus investors are so concerned that they might not even buy corporate bonds.
Because that is safer than equity. So if you shy away from risks you want to buy debt instruments not equity not stock. But even for in these high times of uncertainty bonds are too risky corporate bonds for many investors. Which is why the ecb is also buying these bonds that firms issue.
So that s one aspect. But nonetheless what we seeing in these hide periods of uncertainty is equity markets have plummeted again not very surprisingly because companies face the risk of well getting going out of business. But even for large companies take boeing as an example company that was already facing severe economic problems in good times and are now hit even harder and will need government support on the other hand debt markets have remained calm for a long time so equity. Again that stock that company s issue debt is well are different debt instruments.
That the issue. What you can see here is triple b. Investment. Grade.
Rated. Debt markets have remained calm for a long time. Until last week. When also here yield spreads.
So that s the risk premium that investors demand skyrocketed. This is why it s really really important for the fat. The ecb. But all other central banks as well to take action not only lower interest rates.
But also to actively engage in buying bonds. Which is or used to be 10 15 years. Something that people would say well this must not happen. Why should the central bank buy act as an investor in companies well they need to do it this time.
And there are you doing it big time so where does all of us leave all of this leave us where do we stand now we do have a severe health crisis. We do have a supply chain crisis because again if what s started in china. We see factories being shut down daimler tesla other companies don t get the parts that they need things so there s insufficient supply because factories are closed down. But we also have a severe demand crisis why because people are laid off they face uncertainty and they cannot even buy and even if they want because shops are closed restaurants are closed.
So we re going to see significantly less spending and this ultimately leads to stock market crisis. So that s a severe crisis. How is it different from the other crisis because again this merkel said. It s the biggest challenge since world war.
Two other leaders have called a war. This is different from the post world war two era because even though we call this a war to make obvious. How important. It is to stay home infrastructure is not destroyed right so we don t need to rebuild infrastructure here.
But also it s very different from the financial crisis. Where we had a core city a problem that also became came from wall street to what we said a main street problem. So that the real economy. As it was called was hit this is a problem that originated from the financial industry.
This time around the financial industry is as far as we can tell now still in a healthy financial state of course if everybody defaults financial history also has a problem. But this is not the time which you need to support governments. Which is we saw with the european government debt crisis or banks. Least hopefully not least not in the first step.
This is a period. Where we need to take different measures. Which is also why the trumpian answer. Which was first well we need to lower interest rates.
Yes sure. But this is only a small small part of the problem governments need to make sure that this does not become a fully fledged labor market crisis so in many european these social democracies in western europe people have fairly strong employment protection in the us for example. They don t which means. Many people are laid off.
Which is why governments in the us and other markets. Where you have relatively low labor protection are considering sending out checks. So but directly getting money into people s pockets. So that the pain they feel from being laid off and the implications this has also for for their health care coverage is somewhat mitigated payroll taxes will need to be deferred.
But again this is something that not everybody benefits from because if you ve just been laid off the lower payroll tax doesn t help you much right also we do not have it yet. But governments need to make sure that we don t get the bond market crisis. Governments slash central banks. This is why the ecb and the fat has taken action because what we need to prevent almost all cost is that this extends to a housing market crisis.
The housing market has recovered not only in the us but also in european economies spain germany. The uk france housing prices have increased significantly over the past couple of months and even years. Thank and people fear. There s already already bubble.
If this bubble now bursts on top of all the other problems that we have we are in even more trouble so what we mean above all is confidence. Which is why it s so important that governments act in concert that they also refer people we have a plan. Frankly speaking it didn t help much that president trump. But also the uk boris johnson for a long time.
Didn t really have a plan of how to contain the virus. Even said well this is not really a problem for us and this is well then the fact that the. Fed the federal reserve in the us took action so quickly wasn t really reassuring markets. But was seen as something that even fueled uncertainty because the idea was the fed sees this as a significant problem.
The president and the administration does not so. What s the what s the matter here. We need leadership and action and action taken in concert. So at the end of the day.
We need liquidity support through banks low interest rates. Encouraging them to give out loans to the economy. The problem is these bond buying programs of the ecb and the fed do not reach the small mom and pop shops. So governments need to adopt different measures to get liquidity to these companies.
So they re not closing. They re not laying off people that they would otherwise want to keep because you re not only well in this case. You re not losing a production facility. It s not a war where something is destroyed.
But human capital knowledge in your company. I d be destroyed. If you lay off people that in the well next couple of months find employment elsewhere. So we need liquidity support for companies and also small mom and pop shops.
We need of course monetary policy. These are both short term solutions are needed and in the long run we also need the pure path world war two which would be fiscal policy you invest into infrastructure you revitalize the economy by creating demand also from the government side so we need to basically need everything that was used in the past to approach. A crisis. Now we have a crisis on the order in the order of the magnitude that it is a health crisis again a supply chain crisis at a man crisis and it s already a crisis in stock markets.
Where investors are not willing to supply. So firms need liquidity and they ve ran out of cash. They can turn to the equity markets or turn to the debt markets. Raising equity in these kinds of market environments is basically impossible raising debt is extremely difficult in particular for small companies.
So government s need to make sure through well deferring tax payments or finding other ways of getting money into the hands of small shop owners and also they need to mitigate the effects on those who are being laid off monetary policy can do its part. But again we need other other mechanisms as well like tax cuts and so on and then the long run fiscal policy. So i hope that this short video was able to put everything a little bit better into perspective in these very unusual times. Thank you very much bye bye.
Thank you for watching all the articles on the topic Corona and Financial Markets The effects of Covid-19 WHU. All shares of newyorkcityvoices.org are very good. We hope you are satisfied with the article. For any questions, please leave a comment below. Hopefully you guys support our website even more.