The economy’s descent into hell continues this week, with several unprecedented developments in the U.S. The world’s fourth largest investment bank, Lehman Brothers Corp., has filed for bankruptcy, and another behemoth, Merrill Lynch, has been forced to merge with Bank of America over fears for their solvency.
These are significant events, both in terms of scale and the reactions they brought from the market. These are massive, and once highly sought after banks. That such a prestigious bank as Lehman could fail, let alone fail to attract a buyer, would only a couple of years ago have been unthinkable. Now, the bigger the bank the more polluted it is with debt that no one wants to be holding.
Lehman’s debt must now be unwound, and the markets are in for a couple of jittery days while they try to absorb it. There is the potential there for a panic, but expect the Fed to anaesthetise the market should things start to get out of control.
While the financial markets may now be closer to collapse than at any time in recent history, it has been the Fed’s actions in recent weeks that most drawn my attention. The Federal Reserve has now opened its lending window to almost anyone, and will accept any old junk for cash. As real banks go to the wall, the Fed increasingly steps in to fill the credit void. The Fed is becoming the market. And we can expect this to continue for some time longer, until the Fed and its member banks are the only ones left standing.
Not since the Great Depression has the financial world been in such turmoil. Its painful penance for the excesses of the last decade is a story Dante would have been proud of. And this tale is nowhere near finished yet.
Tags: boa, crash, descent, economy, fed, lehman, merril, risk, usa
