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The contraction of the equity market in 2008 triggered by the fall of the banking giants Lehman Brothers led to a global financial crisis. The reason for the stock market failure in 2008 was the failure of the banking mechanism all over the world. The rise in the subprime mortgage rates led to the crash of the stock prices in the US. In other words, banks were lending money to people who were already enlisted as defaulters and therefore, creating bad debt. Thus the banks exposed to such loans eventually collapsed as they were lending more money than the banks had (Wiedemer par. 8).
When the banks were flooded with bad debt and were unable to pull themselves through such bad dealings, the governments tried to bail out these financial institutions in order to ensure their continuance. Monetary policies were changed in order to restrict lending capacity of banks interest rates were reduced in order to encourage increased consumer spending in the market. However, consumer demand was dampened due to low trust level and fear of a financial crash in future. This dropped the prices of houses and the economy slipped into a recession.
In order to safeguard the failing business institutions, the US authorities enlisted the Troubled Asset Relief Program (TARP). The program aimed at limiting executive compensation, tax benefits to corporates, and increase liquidity in the secondary mortgage market. The program has aimed at stabilizing banks and has been successful in saving taxpayers money. Further, it has also helped to revive the American auto industry.
The revolving door is a workforce movement phenomenon in the US wherein the financial investigators were hired to work for the federal bank when the private banks were not working properly because of the recession. However, now that the economy ahs started to function properly and the private banks are growing, these employees are moving back to the private institutions. Thus, with expansion of the banks their compliance departments expanded so the employees returned to their private employers (Boesler and Kearns par. 3).
Such movement indicates that the private sector will become a stronger employer than the public sector. This migration of finance professionals from public to private sector posses a regulatory problem. For instance the problem of Rohit Bansal who was hired by Goldman Sachs from New York Fed had illegally gained information from a friend working at New York Fed (Boesler and Kearns par. 8). This raises questions regarding the security hazards that this revolving door policy holds for the federal authorities.
Thus, the authorities have started to enforce harsh bans and regulations that would prevent such exodus and create regulatory issues. Many believe that the hiring of employees from the private financial institutions during recession is a good thing as this ensures continuation of employment. However, from the point of view of information security this can cause immense hazard to the functioning of the central banks.
The revival of the financial market from the stock market crash of 2008 signaled to the investors an era of economic recovery. Long-term investors will probably be more optimistic and would review their portfolio to limit their risk-aversion and embrace a more dynamic portfolio. Aggressive portfolio management and stock trading in short term is definitely a risky measure but ensures high earnings. A trader who can buy socks when the market is low and sell when the prices are high will definitely profit a lot more than the long-term risk-averse investor.
However, such trading can be highly risky as stock market predictions are not always successful and especially when the market shows tendency towards acute volatility, it is best not to undertake risky trading. Dynamic portfolio management can help in dissipating the risk associated with the short-term trading of stocks in a volatile market. This will safeguard the investor from loosing all his money at one trading. Dynamic portfolio is an effective and lucrative trading technique.
Therefore, in a volatile market, the aim is to reduce portfolio risk and not maximize trading profits (Jourovski par. 4). Another method to dissipate risk would be invested in inflation friendly sectors (Dash par. 6). Further seeking dividends will help investors to minimize capital losses (Dash par. 8). Thus, in order to embrace an active or aggressive portfolio management, an investor must seek dividends, which becomes a natural hedge against the possibility of inflation and therefore minimizes capital loss. Hence, while undertaking an active portfolio strategy, investors should aim at buying stocks of companies that have historically paid dividends.
Bonds should be avoided as an investment in a volatile market as they tend to be less stable in such situations. Commodity trading in a volatile market can be a good option as this helps in dissipating the risk of associating with the ups and downs of the financial market. I would advice an investor to trade in a volatile market but with caution and a dynamic portfolio that has the right mix of risk and stability.
Works Cited
Boesler, Matthew and Jeff Kearns. Revolving Door Between Fed and Banks Spins Faster. 2015. Web.
Dash, Shailesh. Map varilables values for portrait image Dynamic portfolio management in volatile markets. 2015. Web.
Jourovski, Alexei. The benefits of active risk management in volatile markets. 2013. Web.
Wiedemer, Robert. Five Reasons for the Stock Market Crash and Zero Interest Rate Read more: Five Reasons for the Stock Market Crash and Zero Interest Rate Important: Can you afford to Retire? . 2011. Web.
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