In the stock market crashes of 1987, 1989, and shortly after "September 11th," money market yields dropped. What caused this drop in money market interest rates? Discuss. [Be careful -- the question DOES NOT deal with why the markets crashed.]
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After the Stock Market crashes of 1987, 1989 and September 11th there were fall in the interest rates in the money markets. The reasons are:
1. Fall in demand from the corporate sector for funds. Since, there is fall in confidence and business adapts a wait and watch policy.
2. As the stock falls the value of the collateral against which funds can be raised fall leading to lower demand for loans. This causes fall in the demand for funds pushing down interest rates.
3. The crash makes the banks less optimistic about the performance of new projects and so they lend less causing excess money in the system causing a fall in the interest rates.
4. When stock market crashes because of insolvency several borrowers falter in making payments to the bank leading to stoppage of lending to them and causing excess of funds with the banks and fall in the interest rate.
5. When there is a fall in the stock exchange prices, there is a fall in the interest rates. Why? In a nutshell, because there is no evidence to suggest that spend-happy consumers have mended their ways. 'We are not not spending. We are merely spending with a bit more savvy, waiting for retailers to slash prices before venturing into shops. Or we are repeatedly taking advantage of past house-price rises to eke out just that little bit more credit. '
6. What happens when the Stock Market falls? All of which rather helps to explain the dramatic leap in the number of sequestrations ...