Was the European Financial Crisis Caused by a Stimulus Package?
We all know that firms have been building cash for years, but do you really understand the details of how they do so? The process has become increasingly more sophisticated and complex in recent years, and firms are able to take advantage of this with considerable ease. There are many firms which deal exclusively with short selling. However, this paper explores the tellativeness of short selling in detecting firm over-all investment efficiency, locating that most short sellers adjustment their short positions prior to the announcement of an economic statement. It then makes the point that this announcement provides the firms with a ready made ‘data hook’ to ‘push’ investment decisions in their favour.
The paper then examines three important events which have directly or indirectly had an impact on firm investment decisions, namely the onset of the global credit crisis, the release of the transcript of the President’s speech to the Congress, and the subsequent worldwide spread of the economic slowdown. These three events provided major boosts to the equity markets across the world, as investors felt like their money was being put to good use and were willing to take a risk in the hope that the recession would end sooner rather than later. However, none of these events led to any sharp increases in total assets, as was initially expected. Instead, it is the net effect of the credit crisis period which impacted on firm investments in the most negative way.
After the economic stimulus package was announced, many firms became uncertain about the long term impact of such a move, particularly in Europe. As a result, firms suddenly found themselves holding losses and were forced to reduce their total assets. A major portion of the funds injected into the economy came as a result of government stimulus packages, which are not necessarily viewed as an appropriate source of stimulation in certain quarters. The paper therefore goes on to show that the unexpected increase in equity financing resulted in a significant shift in ownership shares, with larger firms tending to capture more shares and overall net assets than smaller ones.
However, as is always the case when investing, it is important to be skeptical about what you see and not necessarily believe everything you read. Most of the European financial crisis firms benefitted from the European Central Bank’s extensive monetary policy. However, this policy, which was meant to act as a stimulus program, did not actually cause an increase in investment efficiency. On the contrary, the policy merely increased bank liquidity, but did not provide any boost to the economy in the short or medium term. For all intents and purposes, the European Central Bank’s intervention was simply a technicality.
Furthermore, a closer look at the data on firm levels of capital spending shows that the financial crisis did not really lead to an increase in total firm capital spending. In fact, there was a marked decline in total spending on fixed assets, as well as on fixed assets only, and not on either inventory nor production. It should also be noted that most European firms, despite a significant increase in overall asset value, found little to no increases in productivity. All other factors were pulled down: not market competition, not firm efficiency, not technology, and not technological change.
Finally, to interpret the data on government-intervened firms’ investment is to interpret the data on overall investment. The European Central Bank’s stimulus package did nothing for these firms save for increasing bank liquidity. However, increased bank liquidity likely did affect investment because banks would have become more willing to lend money, leading to greater investment activity, and greater overall economic activity. In short, the European Central Bank’s monetary stimulus package did not help European firms out with respect to investment decisions.