±«Óătv

So, Evan, what you are telling us is that if the Chinese Communist Party suddenly discovers the joys of unbridled consumerism the City of London may have a consumer with money that will continue to buy its worthless bits of paper?

Putting to one side the low political likelihood of this happening, one must remember that Asia is also not without its credit problems. How do you think China financed its massive growth to service the economies of the West with cheap patio heaters and toxic toys? That's right - with massive debt!

So what would ±«Óătv moan ABOUT if Fed did zilch????? damned if u do, damned if you do not.

Well done the Fed - just what was needed and lets hope they cut again and again if they have to - at least it is doing more than this incompetent, sleaze ridden, snouts in trough, Government.

Perhaps Evan you would explain to Mr Peston that cutting interest rates is what you do when there is a lack of liquidity in the money markets - and guess what its worked before.

He seems to thinks that its a panic stricken response to do this - instead of one of the prime things learnt from the 1929 crash ..

I'm no economist but isn't there a danger that by reacting in a fashion which has panic written all over it, that the Fed's action will tip the balance towards recession.

Surely what is happening is the lenders are withdrawing from the market so that the supply of money has been substantially reduced. To use that well worn metaphor, the Fed is pushing on string. Whilst ever the banks are scared of their counterparties the economy is destined to seize.

There are two interlinked problems in this potential downturn that you didn't mention. One is that due to the extreme complexity of how loans were repackaged into tranches, the dispersed ownership of those tranches, and the widespread use of liquidity puts, SIV's, "credit default swaps", etc., nobody in the world knows which institutions are on the hook for how much. Therefore, nobody wants to bail out anybody. Second, because monetary and fiscal measures are taken on a national level, but the financial markets now operate completely globally, governments and central banks have much less leverage on economies and on the financial systems than they used to, unless they all get together to sing off the same sheet of music, which is exceedingly difficult for them to do.

None the less, although a significant downturn seems likely, there is no reason to expect a crash that would completely disrupt world markets. It could happen; we could have a triggering event such as happened when Credit Anstalt collapsed in 1929. But with exercise of good sense on the part of governments and central banks, that needn't happen.

However, the exercise of good sense to prevent such a calamity may require violating current policies. This has already happened in the UK; the bailout of Northern Rock must be done somehow, even if it means that Gordon Brown has to break his own rules for budgetary and government debt stability. Whether all governments and central banks will be similarly willing to shift from the comfort of established policy remains to be seen.

the markets are proving to be very liquid it is clear that it is not all sell sell sell.We forget that a lot of institutions,companies and individuals have a lot of disposable cash,this is their chance to wade in and pick up some bargains ! Maybe the markets just feel like they are missing out on the January sales.It is clear that this might be the beginning of a seismic shift in the worlds ecopolitcal make up,is it time for the yankee to give way to the chinkee !

I'm not an economist and one thing I can't get my head around, is the idea that the world economy has to be constantly in growth.

Surely there is a limit to how much individuals can (and should) spend? Are there any alternative ways of regulating money markets? And what about speculation and "fears" - how is it that they make things worse?

Any help to a layman in these things would be appreciated.

David Marshall

..oh dear, so I`ll turn off my 42"plasma,lookup the possibility of upping the rent on my buy to let property, cancel this month`s wine order and tell themisses were only to have 3 foreign holidays this year....hardly 1929 is it?

Steve

As much as the markets are talking this up surely the media are as well as we all know they do love a drama and a crisis. This will spook people even more and the more news coverage it is given over other headlines the worse it will get.

I was reading one of your post on irrationality, and makes me wonder at what point will it be irrational to continue to hold on shares hoping for an improvement?

1. The mortgage bubble was actually a construction bubble, which was the case in 1925-28 just prior to the crash. One key destabilizing factor now is the fall in property valuations, which extends to areas outside the US where too much construction took place. The correct remedy is to halt construction loans in areas where inventory is high, but this carries a blue collar political price, so it is not being discussed.

2. We have several new potential bubbles waiting in the wings, in particular war, especially over the Iranian province of Khuzestan where tremendous wealth (oil, gas, water, hydroelectric power) could be routed to new consumers, if only borders would not get in the way. We could also easily create a global warming remediation bubble by approaching the issue in all the wrong ways that make a few rich.

This is not a meltdown -- just a realignment.

I don't think national interest rates even count for that much anymore. It's the spread between national rates and LIBOR, EURIBOR etc and those rates themselves. They show the true state of the market.

So what would Buybuybuy moan ABOUT if the government did do something????? (Incompetent and sleaze-ridden if you like - seems the rot sets in with all governments around the 8-year mark. Maybe the Yanks and the Russkis are onto something.) Far as I can see, Broon and Darling can't do much fiscally unless it's a) take back interest rate-setting powers or b) cut taxes. And they can't really do either, can they? So to quote BBB again: "damned if you do, damned if u do not."

PS I thought slashing interest rates is what the Japanese govt did in the early 90s. Worked jolly well for them, didn't it, Tony?

I don't see how you can combat panic with panic.

I agree with Mr. Evan's analysis but I ask some questions - is the well-being of stockbrokers and bankers in the City and Wall Street SO important to the world's economy to prompt such drastic action by Mr. Bernanke? Why is the Fed so spooked by the markets? Fair enough, banks stricken by bad debt are less willing to lend to customers, and investment banks with worthless portfolios of exotic securities are less willing to lend to businesses....but is the situation so critical that the world could slip into a serious recession? Where have demand and supply of goods and services gone? Aren't we still genuinely inclined to grow as a global economy, at least with many developing countries striving to further improve their status? Please, let's not bail out bankers and stockbrokers, they aren't more clever, they just talk difficult!

How are average US consumers expected to react to the rate cut?

They're up to the hilt in debt; losing their homes to the repro man; and under threat of losing their jobs in a recession. But now they are expected to go out and buy an SUV on credit to help the economy because, wow, look at that ridiculously small interest rate?

Seems a kind of draft way to run an advanced economy.

It's not that this rate cut won't work as well as it did in 2000 - it won't work at all. It is just not that kind of recession. The issue is lack of confidence and a tonne of bad debt on the banks' books - not a lack of liquidity which is the typical issue that requires monetary easing.

The banks have overstretched themselves with dubious loans, consumers have overstretched themselves with the same loans and governments have ignored the mess. Now it's getting messier, they think it's a case of pressing the Greenspan button and, hey presto, you get a buoyant economy again. Well, it's not that kind of recession and it's not going to work. The Fed and other policy-makers need to think beyond simplistic monetary easing towards fiscal stimulus instead.

So let me get this right.

The dotcom crash was offsett by a housing bubble based on debt.

This bubble has burst and you now want spending in Asia to increase - no doubt another bubble fueled by debt.

And when this bubble bursts no doubt you'll want an African led bubble - fueled by debt.

Eventually you run out of bubbles. I would rather have had the last one over and done with than face this one - and definitely before we go to another one!

There are any number of countries, including the US, where the standard of living has been financed on debt for several years now.

There is no way for the consumer to add to their existing debt, especially in the US, as income has remained flat after 9/11, while cost of living has been increasing at an increasing rate.

A recession is simply unavoidable as a correction to the economy, until debt is reduced and saving is increased.

Nor will this recession be short-lived.

I'm fed up with this situation. We in the UK haven't done all that much wrong, the credit crunch has come from US lender being bsically stupid, even negligent in who they lent money to, and Northern Rock died as a result. And now this, "market fears" of a slowdown. It reminds me of sheep in a field...one sheep dawdles across the field and the rest charge along to see whats happening. Except I think the sheep have more sense than the market!

This huge rate cut clearly depicts the enormity of problems hiding around the corner.

I have never bought what I could not afford and consider myself to be one of the prudent consumers who will now end up losing out through drastic rate cuts which will surely follow to the U.K.

My businesses (very small, removals and general logistics) all revolve around the housing market are showing signs of a serious slowdown.

Everyone will be effected to a certain degree and I do feel that our government has a lot to awnser for. Rates should go up and the spendthrift will learn an important lesson.

I heard Evan on ±«Óătv "Today" today - and it's the first time I have heard one of our media economists hint that to depend on consumerism is fatal for this small and finite planet and suggest what has long been obvious to many ordinary people - that in any event this consumption cannot be financed by borrowing on the security of inflated and otherwise unproductive housing stock. This sort of perverse consumption orientated growth spread outwards to the rest of the world from Liverpool and from Manchester just about 250 years ago. And now here in Liverpool we really celebrate London as the Capital of a Casino Culture whereas this original City should be calling the world back to local sourcing, to import substitution, to creative conservation and to all of the convivial, creative and responsive systems that each city and each country so urgently needs for the survival of our children.

re post #9

The economy can't keep growing indefinitely on a global basis because sooner or later it will run out of raw materials and destroy the environment that sustains it. Economists and their employers rarely trouble themselves with such long-term issues, however, as there is no money in it and no-one knows the answers. A slowdown, however painful, might just give us time to think this through a bit more.

It is by no means certain that cutting interest rates or government spending by getting people to dig holes and be paid for it actually means people will spend more money to dig the economy out of a recession. (Who would now (a) want to borrow crazy sums of money to say buy a house or (b) find a lendor prepared to lend at 5+ times salary eh?)

The only thing that actually seems to work historically is for a government to borrow money and spend it on having a war! Thats what got the world out of 1930's problems - markets seem to be quite happy for governments to borrow for such purposes - probably because the money wil be spent on businesses and thus create profits which is all that investors want.

I thought that the interest rate cuts were aimed at the consumer to help maintain consumtion and make their high debt levels affordable. The markets are supposed to be a reflection of what is happening in the economy - or am I wrong. If so we should wait and see what happens. The daft market activity just shows what a game day-to-day trading is for the FTSE to drop 250 points and then gain 150 in one day is not credible.
I think we all agree that prudent lending and market governance is required - and has been sadly lacking over the last few years. The important objective must to change the consumer activity to encourage them to manage credit more effectively. This should be a multi-year effort, and driven by prudent behaviour from Banks and Government.
Will we have a recession - only if the market wants one - the level of real economic activity will change slightly, but stocks and shares will wizz around because that's how these people make money. The Banks have now HUGE bad debt provisions, new capital, new management and will want to start making money again. Kicking the stock market to a new low and then making stacks of money as it rises is a good way for the banks to get even richer, or is that just me.
With respect to the housing bubble, whilst it may have enabled some people to borrow more at lower rates for the vast majority of people it has delivered no real useable wealth. I would suggest that affordability through low interest rates has been the main driver over the last few years. Which is why the Fed's cut in interest rates is a good thing, if they ensure that lending is more prudent. Although when Credit Card rates are base rate plus 10 will it make a huge amount of difference if the rate is 13.5% or 15% ?

Confidence will not return to the money markets until the banks all come clean about their lending, which they are failing spectacularly to do.

Rev David Marshall (post 9) : When our money is all debt, we must have growth so we can service the debt. Growth requires the creation of more debt, because all our money is debt. So we must have growth.... etc etc

The realignment required is to start restricting our use of resources to the amounts that are replaced by the natural productivity of our planet. A switch by consumers to purchasing products, not for luxury, but to reduce or replace their own energy consumption - from LED lighting systems to Photo-voltaic roofs and energy efficient cars/bikes could create a new boom in energy-efficient technology.
I'm doing it, are you?
As Gandhi said, "Be the change".

Steve @11

put your rent up and no-one will rent your property.

There are plenty of other places to rent, y'know.

The Asian credit crunch of '98 saw South Korea implementing a credit card amnesty.

Debt amnesty is a POWERFUL economic tool and should now be part of domestic policy as it is in Finland.

Classic analysis, maybe, but let's not forget Bush's "war on terrorism". From September 2001, the USA executive recognised a fantastic opportunity to regenerate three keys sectors of the USA economy; defence, construction and communications. All they needed was a war -- preferable somewhere overseas and with resources that could be purloined to pay not only for thee war effort itself but also for the subsequent, US cpompanies only, "reconstruction". Hey-ho and off we go -- to the oilfields of Iraq.

We all know the terrible outcome. Thank goodness Bush's term is coming to an end -- let's just hope his successor does not choose another foreign adventure as the route to US economic recovery.

Response to Mr. Phillip Hoy at comment #1: Chinese growth is an export-based growth, helped by the artificially weak Yuan.

As for the US account deficit: THAT is the growth based entirely on debt. And China owns most US government bonds. Ask yourselves what will happen if they decide to sell them.

Re cynics point #14: to put it another way, how much effect does a change in central bank rate have these days? Mortgage rates have in general gone UP since the last cut in BoE rate. The Fed rate is obviously much more significant, but in these days of globalised finance central bank rates do not seem to be the force they once were.

Bubbles are Nature's way of curtailing the money supply. Like anything Darwinian, the long-term gain outweighs the short-term pain.

In an ideal world (one in which Ben Bernanke turns out to be wiser than Alan Greespan!) we want a way out of this which doesn't create another asset bubble. (And unlike Evan, I believe that the fact we don't yet know where the next one will be doesn't mean it won't come.)

This suggests a long hard slog, and so bringing forward tax rebates (but weighted towards low earners, as the House of Representatives wants but President Bush doesn't), might be better than rapid interest rate cuts.

Evan

How's your "Looking ahead" prediction going or is it too early to judge?

Don't expect any lead or vision from the Bank of England.

THE AVERAGE, MIDDLE CLASS US CONSUMER MAY BE TAPPED OUT - TALK ABOUT KILLING THE GOOSE THAT LAID THE GOLDEN EGG! SOMEONE HAS TO SPEND SPEND SPEND TO KEEP THIS HOUSE OF CARDS/ TITANIC GOING A WEE BIT LONGER. PAST EXPERIENCE WITH ASIANS SUGGESTS THEY ARE NOT READY FOR WALMART CONSUMERISM QUITE YET. GOOD NEWS? GLOBAL WARMING MAY BE REDUCED A WEE BIT AS THE WORLD ECONOMY SINKS INTO A WEE BIT OF A CHILL.

The FED and US government are trying to delay a big crash caused not by high interest rates or a lack of consumer spending , but by the misspending of US taxpayer money. The US government has, according to Prof. Stiglitz, already spent more than 1.5 trillion dollars on its `war on terror`. This is 10 times the proposed 150 billion dollars proposed in the new US `Stimulus Package` which is supposed to calm the markets.
Why are so few economists talking about the cost of the `War on Terror`? If you could Evan, please could you make up for this lack of information and enlighten us about the pertinent economic effects of americas `war on terror`. I certainly don`t understand why the economic impacts of these wars are so little talked about or written about.
I feel that this awful misspending of US taxpayer money must have something to do with the level of the US dollar, interest rates and general economic well-being of the US. America has become a shadow of itself in less than 10 years and the world is looking down the barrels of another recession. Is it possible for american taxpayers to spend trillions of dollars on war and not suffer a recession?
The rate cut and stimulus package are at best going to delay, (perhaps till after the next US elections?) the economic results of these wasteful wars.

Fear and greed affect the price of equities. At the moment the fear component is all too apparent in the "panic" selling that is taking place but there is little discussion on the greed factor: The greed for fat bonuses that created the global credit crisis and the greed that is now pile driving the market into the ground as the hedge funds manipulate stocks that they do not own.

Please spare us the dog's dinner of metaphors. In a pretty short piece we have bubbles, soft/crash landings, engines/breakdowns, batons and quagmires.

The ±«Óătv's senior economic correspondent can surely produce a worthwhile analysis without trivialising the language quite so gratingly.

Rate cuts lead to inflation don't they? How do we know that the extra liquidity and the lower mortgage and loan repayments won't be offset by higher oil, food and commodity prices?
With high inflation being a present danger, rate cuts may well make things worse.

This is all Bush's fault.

So, the lemmings are on the run again, are they? It would appear that the world's financial markets are controlled by clever idiots who seem to think that debt is a 'good thing'.

To quote Dickens, "Annual income twenty pounds, annual expenditure nineteen and sixpence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and sixpence, result misery."

I have no debt. I always pay off my credit card every month. I wouldn't dream of buying anything if I didn't have enough savings to cover it. Maybe I'm the only person in the whole wide world who operates like this, but it suits me and I don't have financial worries.

However, interest rate cuts reduce my income from savings. So what will I do in response? I'll stop buying non-essentials. So how will that help the world economy?

With the best tax month in each year being January and in 2007 the exchequer recieved tax revenue of 22 billion pounds. Take the 50 billion committed and promised to prop up Northern Rock,combine that with the 153 billion being borrowed by the then Chancellor Gordon Brown over the next four+ years. That to me makes us look like we bought our recession already.

Perhaps we can try and pay our way out of this using our gold reserves ? Silly me, Gordon sold them for a song back in 1999, just when the prices were at there lowest for years !!

But it is always reassuring to know that we are in safe hands.

The American problem is reckless lending (a la subprime) and reckless borrowing. Hell much lending and borrowing has been more than reckless... IT HAS BEEN FRAUDULENT! Trying to fix this by offering cheaper loans is like trying to help a junkie by giving them cheaper smack. Or in the case of Dubya's tax rebate giving them enough money to feed their habit for a fortnight.

I fear the situation is EVEN WORSE here in the UK.

Comparing this downturn to the dot com bust is not really comparing apples to apples.

I live in the bay area (San Francisco) and the dot com bust was very local. The rest of the US was not hit that hard at all.

The interesting thing is now it is the other way around. The Bay Area is doing the best it has since the dot com bust while the rest of the US is hit hard.

Poster 22 - Craig,

You will start to see, over the next few months that the UK has as bad, if not worse credit problems that the US.

Our house price bubble has been bigger, we owe more money per capita than the US and our government is in more debt.

The only thing we do not have is the blatant 'teaser' mortgage rates that they had in the US.

We do however have mortgage brokers fraudulently supplying people with credit they cannot afford to buy massively overpriced houses. This will all come crashing down and we will have our own credit melt down. We are just a few months behind the US........

"The Fed is spooked by the markets" Not half as much as the markets are spooked by the Fed!!! The package announced by Bush last Friday was all the confirmation needed that the situation WAS as bad as the markets thought and they duly sold off.

On the basic question in your heading: "Will the Fed's shock rate cut rescue the global economy?"

No, of course not!

30. At 05:10 PM on 22 Jan 2008, ClarityEconomics wrote:
The interest cut is good news, albeit overdue.

Sorry but the interest rate cut is a double-edged sword. It's good news for people with debts and bad news for people with savings. I'm sick and tired of interest reductions rates being classed as a one way bet. It isn't.

People need to save for their retirement, if you keep rates too low then the savings rate drops. Keep rates too low for too long and you get a credit boom.

What we need is for the economy to rebalance and take the pain, not more of the same "low interest rate" crack which has caused all this mess.

My pensions adviser (my SIPP being the only asset apart from the home that I had), a person who appears from time to time on Radio 4's Moneybox, has been predicting this current state of affairs for some years. On the back of that advice I have sold my home and put the proceeds into UK Gilts thus breathing a sigh of relief just now.
The point of this is that the fundamentals of building an economy on the back of debt always seemed fataly flawed and we should not be surprised at where we are today.
With so much of the global economy depending on consumer spending, this looks like a very long haul before individuals have restored their savings to the point where they want to spend again on assets and other goods.
Of course if banks had stuck to looking after their client's money in a risk averse manner rather than chase higher and higher returns .... dream on, eh?

This helps show that the concept of 'letting the market decide' or trusting to market forces only works during the good times.

When there's nothing left to eat, the market eats itself.

I remember a time when we accepted recessions more stoically.
They were part of a cycle that swung from boom to bust - inflated values and expectations needing the adjustment of recession to re-direct the economy to more productive paths.
In recent years we have managed to delude ourselves into thinking that economic management by governments and central banks can avoid the need for this cycle.
Perhaps this is a wake up call for a more serious consideration of what has gone wrong in our economy by central banks.
Resorting to the short term fix of dramatically lowering interest rates is a mainly symbolic effort to restore confidence in the markets and the more times it is used the less effect it is likely to have.

I think this is a mistake. There's only so far you can drop rates - if they go down to zero and still people aren't spending or investing, you can't drop them to -0.25%. And then we end up with a long-drawn out Japan-style recession.

The problem was the rates were left too low for too long while the spending went on. We've had the huge surplus but there's nothing to cover the impending huge deficit.

Well Evan, how about you offer the FED some advice on what to do?

My current thinking is that this is much like the end of the Japanese bubble when no one was able to admit the stock and property they had was worth less than before. This resulted in a prolonged recession as the sensible investor had nowhere to invest their money.

From the limited amount I know (& I know v.v.little) the best thing for the US economy would be a fast and deep destruction of wealth cleaning out the system and providing real opportunities to make money by sensible investing.
This would probably be done by raising interest rates (or at least keeping them steady), not lowering them.

Of course, this runs the risk of many banks going bust and most of the currently wealthy probably won't want to see their paper worth pretty much disappear on their PC screen.

Therefore it's a crazily brave thing to do politically and I can't see it happening.

As I said, I don't know much so any thoughts on if it would indeed unfold as mentioned?

Still, not too much longer before it's the UKs credit bubble that's collapsing.

Evan,
I talked to my father about this, he is 90, and so has seen many more booms and busts than I have. To him and me it's all a bit of "here we go again" The question I have is why don't economists and especially governments learn from the past?? Or maybe we should be a little more paranoid and say it's deliberate? It certainly seems that way at times.

Cut interest rates to boost consumer spending to save the markets? Is this really what the rate cut is meant to do? If so, isnt this just putting off trouble for later? If the structural remedy is for the US trade deficit to be curbed i.e. spending reduced, how is increased short term consumer spending going to help? Perhaps put off the pain for a bit longer - but why? So we can have a sharper correction later? The concept of never-ending growth fuelled by ever increasing consumption is probably what needs a 'correction,

For the Federal Reserve to open... or tighten... the faucet of interest rates is to divert the attention from the desperately needed reforms of the American economy. The President AND Congress need to slash government spending... first, the good ol' military industrial complex and the nightmare of massive defense spending on Bush's absurd & costly wars in Iraq and against the so called "International Terrorism", redistrubute the burden of taxation off the backs of the struggling middle class and more out of the pockets of the "Yippe, we're rich!" rich and the myriad of other sound economic initiatives, like balancing the budget... to bring some accountability & responsability to the US economy.

The end result of this economic instability... insanity might be a better word... is to witness the trasformation of the American political scene into one towards " populism" . When people are out of work... out of a home... sick & uneducated, they turn to demagoguery for the answer. And, history has shown that demogogues make terrible economic managers.

The American people permitted a Bush. Now they get to stew in their own sad juices. Too bad that they are dragging the rest of us folk down with them.

Business confidence in the US and Western Europe is at a very low level whilst Businesses in India show much optimism; so why are we committing large amounts of aid to India?

This is surely a naive and irresponsible use of public money?

"Alas this time there are no more obvious bubbles to create."

This may be true for the US, unfortunately here in the UK we have not yet popped the existing one, and ours is much bigger than that of the US.

This evening's headlines already appear to be celebrating cheaper UK mortgages, presumably anticipating similar interest rate action from the BoE.

But, while house prices now have downward momentum in the US, they are only just pausing for breath in the UK. Let's hope the BoE gives it a little longer before reinflating the housing bubble yet again.

But what about when the UK's subprime extent comes to light? RICS points out around 9% subprime mortgages, but cites that a further 11% are not based on "proof of income" (i.e. self-certified).

This means that the UK has many, many times the potential for subprime fallout as does the US.

sometimes it seems as if commentators are playing with the markets - with their negative comments and forebodings of uncertain times ahead - confidence and the feel good factor have long been necessary conditions of growth in economic activity - financial markets are particularly sensitive to sentiment - i feel that it is crucial that commentators comment rather than lead - see some of Mr Peston's recent output!

I think you are far too optimistic. Sterling and the euro went up by over 1% today against the US, the New Zealand dollar was up by over 3%. As the US dollar falls oil will be repriced upwards, and inflation, that is already 4.1% in the US, will rise. Sooner or later the Fed will have to raise rates to clamp down on inflation and then the US will be in serious trouble. The more the Fed tries to save domestic consumption, the more it risks a currency and inflationary crisis. Economic downturns are a natural part of the economic cycle and they happen roughly every eight years. This was the wrong action at the wrong time.

(Post 28) You've hit the nail on the head really, what you end up with is a debt monster. It's only going to grow until one day it eats you. (Sounds like you have seen the youtube video "Where does money come from?")

Quite clearly the current model cannot work in the long term and it's going to take a full collapse of the system to force people to stop and think. Governments can fiddle with inflation figures, stats and interest rates all they want, they're only delaying the inevitable now.

As I understand it the remit of the BoE is to tackle inflation, not sustain high house prices (they're failing at both now). As already pointed out earlier, it's suicide to think an economy can be sustained by high house prices in the long term. No wealth is created from housing, merely transferred. This housing debacle has been the biggest pyramid scam in history, if we can't learn from the past we are certainly doomed to repeat it.

The idea that the UK does not have a sub prime problem is also extremely naive. Average wage figures seem to range between ÂŁ20k and ÂŁ30k. I'd say even those figures are skewed by big earners. The average house price seems to range between ÂŁ180k and ÂŁ200k+. Even taking the best case values that's a 6x multiple, not sustainable figures at all. Which ever way you look at it there's a lot of people out there with a hell of a lot of debt.

Blaming this on the US is laughable (Nothern Rock died of it's own bad practises as well as a few smaller UK banks). The UK has appalling levels of debt and it's time to start paying back. Governments need to stop thinking short term and stop reacting to every headline. I think it's going to be a long time before we ever see a government with the strength and integrity to do what needs to be done.

After the binge comes the hangover.

The western economy has been bingeing on cheap money and its natural associate cheap credit for years. Throughout that time we were told it was the new paradigm when actually we were stealing from the future.

Now the future is here and the old paradigm is returning us to the reality that nothing can only mean nothing. Until we can make good our debts, restructure our balance sheets, and create products that are desired then we will have to count the pennies.

Almost no one is saving any money in the United States today. Many don’t have any money to save or simply don’t want to save. Saving rates are very low or negative in many US states. The US government debt grows by about $1.3 billion per day and has now crossed more than $13.2 trillion dollars. The US private household debt has now crossed more than $14.7 trillion and half of these debts have been incurred after 1998. The fact is that the expanding consumer debt drives the US economy. The Americans are enjoying the present spending spree at the cost of their own future and future generations. In the near future, many Americans might have to face harsh reality like a poverty-stricken, third world family, living from hand to mouth situation without any kind of financial reserves whatsoever. The imminent economic crisis is waiting to happen in the US and will be most thoroughly predicted one in recent human history.

If the economists running th world were so expert we'd have no bubbles and the expert academic economist at the FOMC would not be frantically cutting interest rates.
The bubble developed because rates were too low for too long and now when sanity was about to strike home the economics experts panic hoping to blow up a further bubble to support the fallout from this one.

Time to sack the lot.

The financial position of the US has declined dramatically in the last 15 years. The US federal budget is in the deep red, adding to US's dependency on borrowing money from overseas lenders and instantly creating huge debts to pay back. So far overseas borrowings have provided essential support to the value of the US dollar but the dollar is declining and so is that support by overseas lenders. As the largest debtor nation, the US will have to be more conciliatory to its lenders; China is one of the biggest among them. The overseas lenders will be forced to switch from the dollar to a new currency reserve for international trade. At that time, the US economy and it’s credit standing will plunge all together.

The United State’s biggest overseas lenders are China and Japan; both these countries could easily cause very serious financial problems to the US, if they wish to do so at any time in the future. Nearly 36% of the government bonds issued by the US treasury are bought by China and Japan, another 14% by the Middle East countries. That’s why the US doesn’t complain much about lawless dictatorships and states with very worst human rights record. A country whose financial affairs are in the hands of foreigners is possibly not a superpower.

From the beginning of this 21st century, the United States is facing several challenges and competition from beyond its borders as well as internal difficulties. The American upper middle class and middle class, which is enjoying the industrial success of the US with designer homes, luxury cars, long vacations, and even private boats - has seen their income declining for the last 15 years. The American working class and lower income class families are slowly turning out to be the biggest losers of current globalisation. It is because of rising world economies such as China, India, Russia and Brazil, who can now very well collectively collaborate, compete and deliver low cost-high quality products and services around the clock to anywhere in the world.

The current globalisation is heavily striking on the United States economy. In fact, the United States is the very first country to actively promote the worldwide exchange of goods and services like no other country in the world. The result is that many local manufacturing industries in the US are closing the doors one by one and declaring bankrupt. US based manufacturing industries such as home furnishings, consumer electronics, textile, automobile parts suppliers and computer manufacturers have had already closed the doors for good. In the recent past, the ‘Free Trade’ concept has primarily benefited the rival countries that are now mounting heavy economic offence on the US. Knowingly, the US let the rival countries to cut off large slice of America's global market share in the last 25 years before ‘globalisation’ phenomenon emerged into the scene.

If Greenspan was still in charge of the Fed, would action have been taken earlier to forestall the crisis or was it inevitable?
Also, one assumes that the global system has got to slow down at sometime so wouldn't it be better to adopt strategies that will allow this without causing problems?

Artificially low interest rates gave birth to the housing bubble and the speculative economy. Now the debtors have borrowed all they can cope with...

Reality bites!

If Greenspan was still in charge of the Fed, would action have been taken earlier to forestall the crisis or was it inevitable?
Also, one assumes that the global system has got to slow down at sometime so wouldn't it be better to adopt strategies that will allow this without causing problems?

The financial system is looking very sick. The US might be going into recession but that is just a symptom.

The cancer is the over the counter derivatives ... they're out of control and the Fed is panicking. Look how the declared losses have steadily crept up and each central bank intervention has failed to stem the tide over the months since the so called credit crunch kicked off. We've only seen the tip of the iceberg ... if derivatives based on household mortgage debt can cause this much trouble, imagine what those covering corporate debt can do if recession bites.

The Fed is slashing rates to try and save the equity market for the politicians ... they will have to sacrifice the worlds reserve currency in their efforts. Where's all the liquidity going to end up? More bubbles, hyper inflation, recession, complete financial melt down ... who knows where it will end because no-one really knows how big the problem is and hence the panic.

Markets are all about fear and greed ... we've had the greed, here comes the fear.

Michael Hesletine said twenty-five years ago "We have historically, in a collective sense, always lived beyond our means and, in my opinion, will continue to do so".

Wise words, a pity he is still right.

Keep up the good work Evan!!

this matter is being hyped well beyond its importance or relevance.

>>Craig wrote:

I'm fed up with this situation. We in the UK haven't done all that much wrong, the credit crunch has come from US lender being bsically stupid,

Uh, yeah, Craig, nothing wrong at all...except for allowing rich Russians, Arabs, and other bloodsuckers to drive our property market to such excesses that every chav and chavette thought they could get rich through Buy-to-Let scams, while producing nothing of value. 25% of the uk are dependent on government handouts, and the rest think they can keep buying landrovers because they own a studio in Notting Hill. European markets are already down 23% since June, and already in recession. The US hasn't even entered recession yet. They'll be out of the "recession" while the pain is just starting here...and we deserve it for our smug arrogance towards the US all these years. They actually work hard and produce something of value. We moan and whine and blame everyone else for our problems.

It is blindingly obvious that we need to re-engineer the world to maintain a reasonable standard of life whilst producing less pollution - i.e. less global warming etc.

This is where huge investment is needed. Large numbers of worthwhile jobs would be created and the basis for sustainable wealth generation would be increased.

How does stimulating consumer spending (i.e. pointless, wasteful and polluting consumption), in the US , China or anywere, square with this?

Is'nt the there a fundamental 'contradiction' between current techniques for maintaining stability in free market capitalism and the looming environmental crisis? Can macro economic management be modified so that it is no longer dysfunctional for the environment?

Is it true the Democrats are going to propose building a new dam in Nevada and call the project "The Newer Deal"?.

I see Keynes is the new black this season.

Thus far, there has been no effect on my lifestyle, but then I have always lived well within my means. I have no debt, aside from a mortgage that I could pay off immediately. I have lots of cash on hand, and feel relatively more well-off as everyone else with financed debt feels the pinch. Why? Because I heard stories about the Depression growing up, and believed that hard times could come, and it was up to me to prepare. After the next wave of foreclosures this summer, I'll have enough cash to go bargain hunting among the mutual funds.

I was surprised to see it in print: what is good for personal finances is bad for the economy. Amazing that the concern about low personal savings rates is not due to people being unable to meet their bills, but instead is because it means consumers will no longer be able to drive the economy by debt-financed spending. I always knew that economists were pinheads! They care only about one side of the curve, assuming limitless spending, limitless resources, and a limitless consumer base--the curve always goes up, never down! Does it not occur to anyone that at some point, everyone who wants a cell phone, or a new house, will already have one? What would be so wrong with "zero growth", whereby worn out products are simply replaced? It's true, this country is in dire need of an "adjustment".

The root of the problem still has not been addressed. Currently banks have written off over ÂŁ60 billion due to Sub Prime mortgages in the US. Over the next 2 years many more are facing large rises as their morgages change to higher rates, which will further effect world banking/pensions/other investors in a serious negative way to an expected ÂŁ420 billion loss. The action the US has taken does not remedy this situation in any way.
At the same time the UK government is preparing to finance Northern Rock with an extra ÂŁ25billion to enhance its sale, of which should be returnable if the sale is positive. The ÂŁ55billion of UK taxpayers money already propping up Northern Rock has NOT been included in any safeguards and is in greater peril if northern Rock is in private hands because it's return can only be realised on an upward market. Due to common knowledge that the next 2 years will enevitably involve a downward trend due to Sub Prime losses I find the UK position on Northern Rock to be untenable especially as it will have to be included in UK government finances which are already at upper limits. That ÂŁ55 billion would make for substantial expenditure on UK infrastructures which could have been used to boost the economy through this uncertain period. That ability has now been lost and I cannot see UK government now coming up with a similar spare amount even though the seriousness of the situation WILL merit such action.
At the same time UK manufacturing does NOT now produce many consumer goods, that other countrys may want, which as financial services are going to take a huge knock down, are ever more important. The UK has neglected the fact that solid goods are more permanent than paper/electronic services which are more easily disposed of, hence the struggle that will enevitably fall upon us will be much harder for the UK to overcome.

Before this is all over there needs to be a serious campagne to change the gross neglect & greed that drives banking systems to take action that breaks their own basic policys & rules as has happened with US Sub Primes. The cost of such neglect will ensure much more than just economic & monetery problems. The wider world issues can be very severe - poverty/famine, opportunity for less friendly nations to take advantage of the situation, direct challenge to Western political/economic ideals/ loss of resources from Africa & other nations due to change of alliance, change of the main western US economic engine to Asia which can severely result in damage to western society's and ability to protect itself and its world interests.

The possible resulting damage outcome should NOT have been in the control of a few elitist bankers who cannot see further than the greenback.

im sorry but this was coming for a long time first we had the discounters then furniture sold to be paid back later then discount loans from the car companies then 3 year terms 4 years then five then six dont you think their was a reason for longer terms.the current will take 2 maybe 3 years to straiten out hold on its going to be a bumpy ride

I hope there is a big recession and I say this as a business owner, and one on one of the lowest incomes in the country. The reason for having a recession is to teach people a lesson that has long since been forgotten:

You cannot get something for nothing. Consumers driving down prices by demanding the cheapest products is what leads to recessions because it cuts profits and puts people out of business and loses jobs. Think of the thousands of exported jobs already - made necessary so as to make products and services even cheaper.

Another important lesson: high profit with low market share helps a business survive a recession. Low profit with high market share will be the first businesses to go under; most likely farmers and mobile phone companies.

It seems we are asking the wrong questions. For example how will lowering the interest rates solve the "liquidity crisis" or magically make debt "affordable" several standard deviations above wages/profits. We are simply bypassing reality in the name of hope and fear. The market will continue to hit us in the face with the truth and it won't disappear with any central banks magic marker.

The problem is not liquidity, the problem is solvency.

Re Post 25:
Whilst I share your expressed sentiments, I regret that human history does not support your thesis that a slowdown will give us all time to reflect on the merits of growth.

Rather history suggests that the appetite for economic growth is voracious by governments, business and most consumers alike. The Limits to Growth arguments of the 1970's fell on deaf ears then and sadly are only likely to be heard when it is far too late for the planet.

What a system! Our whole lives, our well being,our social provision,everything depends on a big gambling casio called the stock exchange.
Nothing is worth doing unless it makes a profit.
As we have seen today the system depends upon people spending, even on things we don't need.Hence the interest rate cut and tax relief.
Tax dollars are being given out to end up in the capitalists pocket to keep them happy and prop up their system.
Meanwhile our fellow men all over the world go hungry.It seems bizare.

RE: Phillip Hoy:

Modern China has one of the most consumerist societies in the world. Even the CCP doesn't pretend that China is a communist country; the official term is 'socialism with Chinese characteristics' and the current philosophy right now is 'make and spend as much money as you can to grow the economy'. The factors that currently prevent China from overtaking the US as the world's largest consumer market is the poverty gap between rural and urban areas, and the relatively small size of China's middle class. This will change, but probably not fast enough to overtake the US any time soon.

I think the U.S government cutting the interest rate might not change the economic going down because the gasoline price is so high to decrease their struggle of saving economy. Fortunately,this effort may reduce the speed of economic failing. Due to the higher gasoline price, the Internet shopping and delivered businesses may become popular tools and be instead the traditional buying habits in this present years.

No doubt many private individuals are just bemused by all this stock market volatility and don't see it as affecting them.

Brits better get ready for a massive increase in income tax. This is the only way the government can hope to balance the books with respect to the PSBR.

Many pension funds are also about to go into deficit - and don't think the govt will do a Northern Rock to save you - they won't.

Those with money in deposit accounts in banks should be nervous too - we are potentially on the verge of a massive banking crisis once the monoline insures start folding like dominoes.

Any drop in BOE base rates will not alter any of the above. All they can hope to do is delay the inevitable for a few weeks.

World wide recession... Brought to you by Keynes, the real bills doctrine and fractional reserve banking...

Have fun...