Firm Investment Efficiency – What Does the Stimulus Package Mean For Firm Investments?
There has been a lot of discussion about the so-called firm investment. For many years, it was believed that firms invest only their own profits, and nothing else-a laissez faire. As part of the economic stimulus package that the United States government recently implemented, however, that was changed. While profits are still important for firms, they are now going to have to put more of their money into something other than their own pockets.
The bank supervision and liquidity committee of the Federal Reserve made this change in part because they wanted to make sure that a major portion of the profits of firms doing business on the US financial markets come from working capital. Many people do not realize that until it is too late that their firm investment decisions have harmed their own bank balances. In many cases, bank supervision and supervisory changes can force banks to liquidate bad debt balances, which means taking away the funds that they are supposed to use on mortgage payments or their own dividend payments. The new requirements that will soon be enforced by banking unions will make it much more difficult for financial firms to take on too much working capital debt.
Perhaps even more startling than the fact that banks will be forced to drop a large percentage of their assets and allocate them to other activities will be the effects of the global credit crunch. This is the situation where all of the world’s largest banks stop making loans to each other. When this happens, it can cause a run on lending facilities throughout the economy. Because it will be difficult and even impossible for any firm to keep up with its borrowing requirements at the same time, the result is going to be an increase in market volatility and a reduction in both prime rate volatility and lending rates.
In addition to the above-mentioned changes, there will also be some fundamental revisions that will be implemented within the European Union as well. One of the most substantial of these revamps comes in the form of the European Supervisory Authority for credit institutions. This new body, headed up by the European Central Bank, will be responsible for ensuring that all of the major credit institutions remain properly under surveillance by the law. Some of the changes that are being effected by the EU as a whole will include the following:
In order for the Supervisory Authority to become effective and ensures that it has a meaningful impact on firm investment efficiency, there will need to be significant changes in the rules and guidelines that govern the supervision of financial companies. Among the things that will be affected by these changes will be the rules surrounding indirect and direct supervision. These refer to the different kinds of government intervention that can be applied in the financial market in order to avoid the use of unnecessary risks or the application of inefficient strategies. For instance, it has been debated whether or not it is appropriate for the government to step in and buy struggling banks in order to prevent the failure of banks or their owners from going bankrupt. If direct and indirect supervision is not allowed, the only option open to financial institutions would be to fail to pass on their losses to the governments.
The idea behind this idea is that if banks are given stimulus money, they will be more willing to absorb the loss of unprofitable investments in order to protect the value of their assets. Although it would seem like a simple concept, this kind of government intervention has sometimes proven very difficult to implement. For instance, it is quite impossible for a government to purchase property when there are already many people who want to buy them. Another difficulty occurs when the amount of money needed to make a purchase is much greater than the amount of money available in the market. When all these factors are taken into consideration, it is clear that any form of government intervention will most likely be a temporary one until the situation changes, making it clear that it is not in favor of firm investments in any case.