Question

b. Many celebrated economists have likened the recent novel covid-19 pandemic to “the great depression” of the 1930s. One of the havocs this pandemic has caused is the general decline in the value of most stocks. As a student of corporate finance, what cardinal concept in finance will you attribute this

to and what are the critical issues involve in this concept.

Answer 1

The cardinal concept of finance, I will drive through this event is that the past event is reflective of future reactions in the stock market so there are lot of interlinkage between recession of 1930 and an impending recession of 2020 which could be summarised as follows-

A.1930 crisis was not just limited to the overall economy as it lead to a civil war & in this coronavirus crisis, it is not just limited to an economic crisis, it is leading to death of a whole lot of people all across the globe so it is triggering a Global health crisis.

B. There is a culmination of long-term debt cycle as it is to be believed by various experts including Ray dalio and it will lead to a highest degree of contagion in the overall global economy.

C. In both the cases, there is a lot of intervention by the Federal Reserve and monetary policy are highly made to favour general public so policies are made in such a way that will stimulate the overall demand in the economy.

D. There is downgrade on the part of the government borrowings as the additional borrowing and the overall books of accounts of government has expanded leading to cautious approach of various lenders all across the globe as the repayment capability of government is highly endangered because of soaring debt in overall books of accounts.

E. There is also a highest degree of intervention by central government in order to curve the crisis in both the scenarios in 1930 as well as in 2020.