Sub-prime meltdown

The past few days, the bods that present the financial/business news on CNN, the BBC etc have looked increasingly frisky and nervous. Its been a bit like watching fake news within some apocalyptic film. What is going on?

The narrative is familiar by now: interest rates are raised by the Fed Reserve bank to kick-start a flagging economy nearly a year ago. This knocks-onto the riskier end of the US housing market (going by the euphemism of the 'sub-prime' market). Given the globalised, interwoven nature of equity markets, its only a matter of time before financial institutions overseas are aversely affected - specifically those who have invested in the US mortgage market by buying passed on debt. The worst hit are those playing for high stakes anyway - the hedge fund magi. The knock-on effect of this is a huge credit global credit squeeze as risk-fear spreads across and within financial institutions like a forest fire. The European Central Bank and the Fed Reserve bank respond by pumping billions of dollars into the money markets to stop the credit market from freezing over.

Quite where all this is heading, no one seems to know. Of course, canny investors will make a killing, as solid companies momentarily slip beneath their real value on global share indexes. For the US economy, I'm not sure what the way out is: the housing market looks set to continue to slump thanks to rising interest rates, continuing to increase risk in the wider credit sector. Inflationary pressures will continue to flare around the world, threatening a global depression. Energy security remains the threat on the horizon for the US (and Europe), with China offering more bang-for-the-buck per barrel.

Its not looking good.