The uncertainty of the money markets
Article source: John Authers - www.ft.com
There has never been a more uncertain time in the investment market than now. It is so hard to make any predictions about long term investments until we actually wait and see how some decisions and the investment steps we make are going to play out in the long term.
One of the things that contributed to this situation was when every giant US mortgage lender got an implicit guarantee from the Government for support and bail out if the need ever arose; this saw a lot of them flourish and totally sideline existing private sector lenders who could not put up with the competition. Those private sector lenders thus opted to go to the sub-prime lending sector. Such companies as Fannie Mae and Freddie Mac did not follow suit and this obviously ended badly.
Other consequences witnessed within the financial markets include the time the Federal Reserve and other Central Banks flooded the market with cheap money in the fear that computer systems would collapse at the turn of the millennium. This initiated the boom and bust of dot com stocks and elicited further fears of a downturn; hence the Federal Reserve threw in more money throwing the credit markets in all possible directions to try and salvage the situation. The decision by the US Treasury to stop issuing 30 year long bonds is another move that left many companies and fund managers that had laid down plans around the long bonds scouting for substitutes; mortgage backed securities became a popular choice, a move towards which created huge demand. But with the credit crunch and problems in the housing market such as falling house prices and repayment arrears, many of these securities will now be loosing their value and appeal very fast.
The uncertainty of the situation was clearly depicted by the fall of Lehman Brothers; this showed us how risky the money markets can become. The aftermath was as shocking as ever, as hedge funds finally admitted to having a huge amount of capital tied up with Lehman Brothers; this in turn caused great panic in the world wide financial market.
The next outstanding thing was the ban on short selling which refers to buying of shares and then selling them in order to profit when the share prices fall. Many hedge funds that relied on shorting financials had nowhere to turn and were left totally stranded. They however had to raise money to cover their losses and they moved to sell high- tech, transport and energy stocks pushing their prices down.
This whole situation has had even politicians reconsidering whatever decisions they make in regard to the market situation, no wonder they have re-thought their decision about voting against the $700 billion bail-out plan.
With Ireland’s decision to insure all Irish deposits, it has created the fear of other countries’ rushing their money to Ireland. It is also interesting to see how the Euro zone countries are going to react to this market crisis considering that they have the same monetary policy but varying national banking systems and national fiscal policies.
The reality of the market situation is hitting a lot of people now, with figures showing a possible world wide recession, as stock markets sell their shares in huge numbers, all eyes are on the market with hope that it will turn around. It is a wait and see situation, for the time being anyway!
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