Thursday, March 13, 2008
Global Credit Crunch
The credit crunch caused by the mortgage fiasco in the United States is now truly a global phenomenon. The Bank of Canada announced yesterday that they will be injecting $4 billion in an attempt to ease some of the liquidity issues caused by the mess south of the border. During the same period a credit infusion will also be offered by the Federal Reserve, the Bank of England, the European Central Bank and the Swiss National Bank. It may be too little too late however at this stage in the game what other reasonable options are there? The bottom line is more liquidity is required to allow financial institutions to continue doing business. At this point the only other alternative would be to force the financial sector to liquidate its rotten assets and wipe out the leverage which would cause many of them to go bankrupt. That would be a lose-lose for everyone.
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8 comments:
Maybe what the world needs is a lose-lose for everyone. It will teach people that mass consumption and the throw away society can't continue, that savings, planning, and hard work are what make a good life, not credit and purchasing 'stuff'.
traciatim,
You might be right. However, it would be the hard working savers who would suffer the most in the lose-lose situation. The consumers and purchasers will still have all their stuff if the financial sector collapses. It will be the responsible savers and investors that will take a huge hit in the markets.
This is just an observation, I am not an economist or even a banker. I think that at this point the central banks of the world can inject all of the cash that they want to into this banking system, it will not change these two things. 1. The banks of the developed world are suffering a credit hangover of their own doing, at this point they are loathe to take any risk. It will not matter how much credit they have access to, they have all tightened their lending criteria. 2. Any fool can see how inflation is impacting North America. If this fact is not obvious to the average consumer, all that person has to do is look at the commodity markets. How can you explain oil hitting 110 DPB two days after the USA releases an oil inventory reports that shows a lower drawdown than expected.
I think that the central banks have lost control of the monetary system and the market is going to do what they don't have the political will to do. Tighten credit.
There is a lot more pain to come and the central banks will be helpless to do anything. We need to clear the excess from the system and unfortunately this will cause a lot of pain. What goes up (house prices up 200% in 3 years) must come down and the higher you are, the further you fall.
Cheers,
Andy @ www.financeivewpoint.com
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With the news that Bear Stearns is being bought for pennies on the dollar... I can't help but to think what will teach the power players a lesson on Wall Street isn't printing more money but rather some big dogs to go under and bring many investors with them. I think we're only 1/3 of the way through this credit crunch so we have a long way to go.
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