Bear Stearns collapse adds further woes to Global credit crunch
Filed Under: Featured, Finance, Politics & Current Affairs
So it seems another investment bank is in trouble.
The bailing out of Bear Stearns by rival JP Morgan Chase for a mere $2 per share has rocked the US banking system. For many people, this might seem like just another financial saga at another distant investment bank. However, the collapse of Barings in 1995 and the troubles at BNP Paribas late last year were as a result of Rogue Traders. The problems at Bear Stearns were a direct result of the current credit crunch.Â
So what does this all actually mean to the average Joe on the street?Â
Well for one, it indicates that the current credit crisis runs much deeper than many people thought (or should that be hoped). The emergency takeover of Bear Stearns means that many domestic banks are likely to reconsider mortgage deals and be less likely to lend. Â Indeed some estate agents are reporting that even some creditworthy potential homebuyers are being turned down.
Securing a home loan will now be much harder, especially for first time buyers. Why? Well, it is now becoming increasingly difficult for the banks themselves to borrow money from their peers at the base rate. Consequently, they are now charging what it costs them and therefore not passing on the savings to prospective home buyers.
US Federal Reserve Steps In:
It could have been much worse. Without a Federal Reserve backed buyout – the US Federal reserve put up $30 billion to back the extremely risky Bear holdings – JP Morgan would have most likely not taken the risk with the buy out, thus facilitating a freeze in the US mortgage market. The fallout of this would have been catastrophic for the US economy; with the subsequent trickle down effect percolating to every other global economy and hitting Joe and Jane Public hard. The buy out has, at least in the short term, bolstered the stock market and alleviated further panic.
Bank of England to follow suit:
In the UK, it is widely tipped that the Bank of England will help alleviate the crisis by injecting £5 billion into the UK economy each week between now and April 9th. The hope is that this will help bring about a halt in spiraling inter-bank interest rates, and the freeze in lending between Britain’s biggest banks.
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