Bear Stearns, the monetary meltdown...and you

Wednesday, 19th March 2008 15:35 - by Resident IFA

The Fed (Federal Reserve, America’s Central Bank) has slashed interest rates by 0.75% (75 ‘basis points’), but will it help? There has been a spike in the markets on both sides of the Atlantic already today, the FTSE up over 60 points after early trading, but has swung back down by around 110 points since then, now being 5,560.80 (As at 11.49 am) with the euphoria having subsided. The Fed could well, some commentators say, drop interest rates to as low as 1% by mid-2008. This is all well and good, but the fact remains that if lenders perceive other banks to be ‘bad risks’, they won’t start lending to them again, however low interest rates are (and thus loans less likely to be defaulted on). Inflationary pressures the Fed’s actions and the dramatic rise in oil prices may bring can also not be ignored in assessing the overall financial picture. This follows the Fed’s injection of cash into the banking system in the last few days to try to grease the lending cogs and get the machine running again, days after Bear Stearns was snapped up by JP Morgan for a startlingly heavy discount compared to its recent share price. Bear Stearns is a great, if unfortunate, example of how jitters have been sent through the lending markets and inter-bank lending has virtually ceased on the basis of a ‘Who’s next?’ attitude. Bear Stearns is America’s 5th largest bank - approximately double the size of Northern Rock - and employs many people around the globe, including over 1,500 in London. When a well-respected Wall Street investment bank that was founded in 1923 can be perceived so quickly to be shaky and thus unable to borrow, resulting in having to request emergency cash from the Fed, it becomes a scary financial world. What is certain is that this is a global crisis. The U.S. has sneezed and, instead of the mandatory cold being caught, it is clear that it is influenza the U.K. and the rest of the world is now in danger of suffering from. I can’t see the NHS or a private healthcare plan being able to treat this illness... Until next time...