Saturday, March 15, 2008

An Economic Tsunami?

Yesterday saw another outcome of the sub-prime mortgage disaster. Bear Sterns, the fifth biggest investment banker in the U.S.A. was bailed out by the Federal Reserve Bank. This was the same Bear Sterns which, one year ago, was voted the most "admired investment bank" in America.

There will be more such banking collapses to come. The question is how many, to who, when and can the financial system smoothly come through this. If any of the banks bigger than Bear Sterns in the States or Northern Rock in the U.K. the recent British bank collapse that was nationalized a couple of weeks back,  goes down then we are in for very big trouble. 

That is why it is essential that our central banks give total and immediate support if there is any sign of a problem. Our entire banking system relies on customers having faith in the system. Nothing is more important than this, it is what they exist for. If faith in the system vanish we get runs on the bank, and Northern Rock's near total collapse demonstrated this to perfection. It took very little time to see people fighting for their cash. Surely that example will have been taken on board by the central bankers and they will not hesitate to give help again. If there is a moment where they blink we are all in very big trouble, and a tsunami will come that could sweep away much, if not all, of the prosperity we have enjoyed for nearly twenty years.


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