- Government-sponsored enterprises
The government-sponsored enterprises are privately held entities which have been established to help in improving in in some instances, make possible the flow of credit to the desired sectors of the economy. The GSE acts as a financial intermediary to help borrowers in housing and agriculture. The GSE make loans or guarantees for purposes like provision of credit for specific borrowers in the economy. To the lenders, the GSEs help in leveraging their financial position through the provision of loan facilities and purchase of debts.
Securitization is the process of taking a group of assets or a liquid asset through economic transformation to be a security. The significant benefits that banks derive as a result of securitization are that they end up with reduced funding cost. The securitization also helps in managing the risks, balance sheet and improving financial leverage.
- Classic financial panic.’
These are events during which the depositors try to access their deposits market participants seek to liquidate their assets whereas the equity holders try to sell their stock. During the short run period of the financial crisis, the asset prices are set to decline in value; financial institutions are likely to experience shortages in liquidity whereas the businesses and consumers are likely to have difficulty in repaying their debts. In the long run, companies and financial institutions are expected to liquidate. There is expected to be a speculative bubble, stock market crash and a sovereign default and currency crisis.
A solvency crisis happens when the country has debts that it is not in a position to meet through disposing of its assets. It is also not in a place to settle such debts by taking another debt. Liquidity crisis happens whenever a firm has temporary cash flow issues. In such a situation, the assets are more than the liabilities.
- Policy reforms for the financial crisis
The central bank may relax the terms needed to access the discount windows and also employ several similar mechanisms. The central bank may embrace the unconventional monetary policy concerning whatever is purchased and on what grounds. Another strategy can be to promote financial market stability more directly. The measures in most cases blend to monetary policy actions thereby contributing to structural repair and the market stability.
- Money market funds
The money market funds are a form of the mutual funds that only allow the highly liquid instruments like the cash and the high credit rating debt-based securities usually less than 13 months, securities which are regarded as cash equivalents. Commercial papers are forms of unsecured debt instruments that are issued by corporations to help in financing the accounts payable, meet short term liabilities and finance the inventories. The role of the commercial paper during the financial crisis is to freeze the market thereby denying the investors the ability to access affordable funding. The money market fund, on the other hand, assists through breaking the buck.
- Feds new unconventional policies
Reducing the size of the balance sheet by limiting the replacement of maturing securities portfolios. Fed also introduced quantitative easing which involved the purchase of the long term bonds. Bond purchases provide signals of how the policy rates will be adjusted in the future and also provide proper guidance in the right direction. Fed also introduced reduction of the short term interest to near zero which made it seek to affect the long term bond yields and other financial assets. The measure was meant to push down the expectations of the future short rates to lower term yields and also help in easing the business conditions.
- How the economic conditions in Europe may affect economic activity in the USA
A market surge in the European economy may affect the USA since the two countries are trading partners. Therefore, an increase in production will increase the exports to the United States whereas a decrease will reduce the commodities in the United States thereby creating a shortage.