FinancialCapital Market Instruments
Thefinancial capital market instruments include both bonds and stocks.The instruments are not suitable options for financing corporationsin a declining economy as they make the businesses vulnerable to bothcapital and liquidity risks. For example, Gokay (2009) attributes the2008 and 2009 financial depression in the United States to the promptdepreciation of the capital market instruments. In addition, theunprecedented depreciation also led to the fall of the LehmanBrothers bank, which was an investment firm with over 158 years inthe market. Similarly, financing corporate businesses with thecapital market instruments are extremely risky in the decliningeconomy as the investments are gradually losing value. In the end,businesses that rely on capital market instruments may sufferbankruptcy, and in worst cases closure due to both liquidity andcapital risks.
Between2007 and 2009, The US and other developed economies in the Westsuffered a major financial downturn that resulted in the worstdepression since 1929. According to Rosengren (2014), the US bankingsystem was on the verge of collapsing in 2009 since the extreme losson one investment instrument triggered extreme fear on the on otherinvestment firms. The outcome of the unstable market was widespreadfear that when the shares or commodities of one organization losevalue, it will soon lead to the depreciation of other firms capital.
Consequently,the investors would begin to sell the investments they have investedin other organizations leading to widespread panic over the stabilityof the investments. Availability of too many financial capitalsmarket instruments for sale leads to a sudden fall in the value ofthe portfolio. Instead, using money markets to finance corporatebusiness is advisable because it provides higher security for capitaldepreciation even during bad economic times (World Bank, 2015).
Gokay,B. (2009). The 2008 world economic crisis: Global shifts andfaultlines. GlobalResearch.Web. Retrieved fromhttp://www.globalresearch.ca/the-2008-world-economic-crisis-global-shifts-and-faultlines/12283
Rosengren,E.S. (2014). Broker-dealer finance and financial stability. TheFederal Reserve Banks of Boston and New York.Retrieved fromhttps://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=6&cad=rja&uact=8&ved=0ahUKEwi5j6CutO3JAhVHUhQKHcDdBlkQFghCMAU&url=https%3A%2F%2Fwww.bostonfed.org%2Fnews%2Fspeeches%2Frosengren%2F2014%2F081314%2F081314text.pdf&usg=AFQjCNFh4g4srh_akYEgQK2svZ-X9LDUpA&sig2=x4QeYXFflG9gXGuBl7dwYg
WorldBank, (2015). Capitalmarket instruments to mobilize institutional investors toinfrastructure and SME financing in emerging market economies: Reportfor the G20.Washington, D.C. : World Bank Group. Retrieved fromhttp://documents.worldbank.org/curated/en/2015/12/25510899/capital-market-instruments-mobilize-institutional-investors-infrastructure-sme-financing-emerging-market-economies-report-g20