17 March 2008

Systemic collapse?

Obviously, the Bear Stearns collapse and fallout is the main headline at the moment. Some reporters are going a bit over the top perhaps... Bear Stearns was a large US investment banks but not the largest. If it had been Citibank or J P Morgan going under then that would have been worthy of some of the hyperbole which has been thrust in the markets' direction over the weekend. And the FTSE 100 is 217 points down in trading today; well, that's not tiny, but neither is it earth-shattering. It's been up and down like a yo-yo recently anyway.

No, at the moment the real news is the unease and suspense gripping the markets; no-one knows how big this credit crunch really is. Certainly the Federal Reserve is behaving like it's very big indeed; cutting interest rates every week, injecting billions and billions of dollars of liquidity into the market. It would be very interesting for someone to do an analysis of who benefits most from these market interventions. Is it encouraging even more reckless speculation? Is the Fed throwing good money after bad? Certainly J P Morgan, who acquired Bear Stearns for about $2, seem to be laughing all the way to the bank. The joys of being just a little more solvent than one's competitors are becoming more and more evident in the current economic situation - to those that hath, more shall be given.

The nagging worry is that the interventions are just delaying the inevitable - a systemic collapse with most of the financial institutions in the US going to the wall, not just one or two. If that happens then it may end up making the early 80s recession look pretty shallow. On the other hand Bear Stearns could be the bottom of the barrel. No-one knows for sure. Fun, innit?

1 comment:

Van Patten said...

I think the next few months could prove interesting. We've been banking on the house of cards that is the appallingly poorly managed UK economy collapsing in ruins - could be just what the doctor ordered. Might be able to afford a house, even!