Tuesday, March 18, 2008

Next Domino To Fall?

Following on from the failure of the Northern Rock in the UK and Bear Stearns in the US, CNN are reporting that Lehman may be the next victim of the credit crunch.

The brokerage firm saw its shares drop as much as 39% in early trading in wake of JPMorgan Chase's $2-a-share purchase of Bear Stearns. Monday's sell-off took Lehman shares to $24.50, down from $39 Friday, before they staged a mild recovery. The recovery mirroring the general up turn in the Dow Jones.

The collapse of Bear Stearns has fueled fears of a widespread breakdown in the U.S. financial system. Lehman, like Bear Stearns, has been a big player in the mortgage market in recent years and investors worry that its exposure to now-toxic mortgage-based securities, combined with its relatively small size, might be fatal. Lehman is the fourth-largest U.S. player on Wall Street, behind Goldman Sachs, Merrill Lynch and Morgan Stanley.

I've also heard, separately, that the Fed are considering a 0% interest rate - like Japan did in the late 80s and early 90s, although they did go to negative rates at one point - in an attempt to kick start consumer spending again. As people are being told "there's a recession coming" so they start to save their money. Unfortunately, this actually speeds up the recession as there's a reduced demand for goods and services, leading to lay-offs and closures. Which prompts more people into saving.

You can see the spiral, can't you?

As far as I am aware, the Bank Of England has no plans to follow suit, although this is more likely due to the inflationary effect such a policy would have on the UK's housing market.

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