7/30/2019 Government finance short notes

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Impact of stock market crash on the economy:

1. Reduce earning capability of people: It is estimated that at least 10% of our total population is directly or

indirectly related with capital market. Simply by losing more than of their capital they find themselves less

capable of earning, in less than one hour.

2. Liquidity crisis: To get the desired level of money Bank invested more money than they are authorized which

causes lack of liquidity in their hand when market goes down.

3. Sister Banking is impossible: Even though sister banking is not possible cause no bank has enough money to

lend. (Sister banking means taking loan from another bank.)

4. Decrease of Investment: The price of share has decreased means the listed companies have lost their values as

per the percentage of their stock has fallen. It means industrialist has lost their money to invest to productive

sectors, financial institutions has lost their money to give loan.

5. Wider Gap between Poor and rich: At the time of price hike there were huge injections of money but when

the price gets fall, the money did not come out to the investors. Money manipulated by some syndicates and it

goes to them it means money goes to a single hand. So, it is clear that some people are getting rich but the

ordinary people getting poorer than they were.

6. Short term Price hike: Manufacturer has lost their momentum to produce product with the pace of demand.

Because there is a liquidity problem on the banking and finance sector and producers can’t get enough loans.

Which cause a price hike of almost every consumer product.

7. Reduce Foreign Investment: It creates a bad impact of our country throughout the world which may cause

effect on coming foreign investment.

8. Reduce future value of pension funds: Anybody with a private pension or investment trust must beaffected by the stock market, at least indirectly. Pension funds invest a significant part of their funds on

the stock market. Therefore, by the serious fall in share prices, it reduces the value of pension funds.

This means that future pension payouts will be lower. When the share prices fall too much, pension

funds can struggle to meet their promises.

9. Reduced confidence of general people: Often share price movements are reflections of what is

happening in the economy. E.g. recent falls are based on fears of a US recession and global slowdown.

However, the stock market itself can affect consumer confidence. Bad headlines of falling share prices

are another factor which discourages people from spending.

10. Bond market will be attractive: A fall in the stock market makes other investments more attractive.

People may move out of shares and into government bonds or gold. These investments offer a better

return in times of uncertainty.