Yesterday’s bloodbath in the financial markets should be seen as the final attempt by investment banks aka the market makers to persuade central banks (especially the Fed) to implement immediate interest rate cuts, conveniently forgetting that it has been they who have caused this mess in the first place.
When markets panic in the way they are doing so at present it is easy to forget the root cause of the problems; namely the sub prime debacle and subsequent offloading of toxic investments, leading to a credit crunch when central banks started to raise interest rates. The reason why so many banks entered the sub prime market was because they could not make enough money out of the prime and alt A sectors because interest rates were too low. It was only by exploiting the bottom end of the market could they hope to continue to make the obscene amounts of money they were used to.
The struggle is now between the central and commercial banks and my bet is that once again it will be the market makers (aka Goldman Sachs, Merrill Lynch, Morgan Stanley and others) who will win as ultimately central banks are accountable to their political masters who in turn will not want to preside over a financial meltdown last seen in 1929.
Well Anna it’s now a .75% cut later, and the print media is saying next week another .5% cut is needed as well. Seems like these policy makers have lost there poker face. In this global market can the ECB afford to carry on it’s bluff? My guess is no.
You’re right. In Mervyn’s speech last night he joked that he might have to write 2 letters to the treasury explaining why inflation is over 2 percent – not very funny as inflation here in UK is actually so much higher. Also neither the bank nor the govt has any control over the elements causing the inflation in the first place, namely fuel costs and food.