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Bear Stearns the end of the beginning?

How deep is the credit crisis? That must be the question on everyone's mind at the moment. Pundits have been trying to answer this question ever since the term credit crunch was first heard in the USA and is now being heard loud and clear in Europe. The Northern Rock saga accelerated attention beyond the finance industry into the view of a now very worried public. The UK treasury and the politicians have been concentrating on keeping the perspective of the crises calm to keep panic down to a minimum but the news that Bear Stearns, one of the top five US Banks, has now been brought down, has put the credit crises into a more worrying perspective.

Are we anywhere nearer to knowing how deep the Credit Crunch chasm is? Who is next? What are the medium and long term effects on the global finance system? These questions will be answered in time and will become historical facts. However, in the meantime virtually every business and individual on the planet looks to be heading for a time of extreme financial concern.

It is now becoming obvious that we are in the greatest global financial catastrophe, since the Wall Street crash in the twenties and the Bear market in the late eighties. Both had huge social ramifications that impacted every facet of society leading to upheaval in the financial markets, as restructuring took place with new rules and regulations. Where the great and the good financial institutions swapped places with those able to take advantage of the new order. The current financial crises could have similar impacts on the present financial structure as large firms disappear and new opportunists appear. The opportunity will be created as people become wary of the old and demanding of new financial services, which protects them from risks of irresponsible banking behaviour.

The aftermath of this crisis will surely produce a new world of traditional banking. Where the individual is measured against their ability to repay loans and collateral is valued against industry benchmarks. More transparency of the financial condition of corporates and the valuation of assets should have always been practised but we may now find that tighter regulatory controls will restrict the number of loans in the future. We can also anticipate that re-mortgaging and refinancing offered by "fly by night" loan companies will come under closer scrutiny. All this will reduce the high street spending and create an economic downward spiral that will be a recession. How deep is yet to be determined but don't rule out a depression as a result!    

In the last two decades we have been living in an unusual period of calm when measured historically. We can place problems like the dot com bust as mere blips rather than an earth shattering situation of the magnitude we are now facing. The difference with the credit crunch is that it has the ability to impact most people in the free world economy and not just investors as with dot com.     

The other major difference with the credit crunch against other financial calamities of previous decades is that it is happening at a time when the world is suffering global political problems, ranging from terrorism to the instability of governments. The USA, UK, a number of countries in mainland Europe, and Japan all have internal issues that destabilises their ability to manage their own problems within a global economic roadmap. We can not leave the resurgence of China out of the equation that is producing this current financial crisis. The demand of China to enjoy the same social benefits as those of western countries is creating a squeeze on manufacturing as well as food supplies for both animals and humans. The cheap labour exported by China has come at a price and the new world order must include China as part of the solution.

As always oil prices are a factor in global financial problems. However, this time its oil problems at a time of conflict in the Middle East as well as the global economic issues mentioned previously. So the world financial system is in a hurricane of multiple issues all converging and creating a crisis of untold magnitude.

When governments are in trouble at home they can turn their eye away from the bigger global issues that ultimately will determine their fortunes and today the focus must be on the bigger picture. Tickling this problem on the home front will not have any impact on the massive long term issues that need to be addressed urgently. Failure to produce a global solution will make home front solutions superfluous.

Managing the impacts of the global economic bubble sometimes requires governments to take measures that maybe unpopular domestically. However, politicians rarely do anything that risks votes in the short term Hence the USA and the UK are both keeping one eye on elections, new governments and possibly a radical change of direction and while they are concerned with elections important global decisions will be delayed.       

It would be bad enough if the credit crunch was contained just within the banking industry but it isn't! The global financial markets are unable to manage their way through the credit crunch in a world facing a combination of social, political and acts of God. To survive this financial crisis firms will need to retrench and steer a steady course, avoiding exposure to bad debt and win a fair share of good business to limit the downside and take full advantage of any upside. This looks like a long period of rebuilding rather than the fast growth we have enjoyed for decades. We must hope that the politicians can find global solutions that bring a future loaded with optimism.    

What Bear Stearns tells us, is that the credit crunch is no way near an end but to coin a phrase we may be at the beginning of the end. We can anticipate more bad news concerning a number of financial institutions as the effects of the crunch take a firmer hold. We are certainly going to be on tenterhooks throughout this year and probably the next.

It is too late to prevent the results of the credit crunch but we must now steal ourselves to manage as best we can the impacts. We must focus on the illness and not the symptoms and that means tackling the global issues and China in particular  

There are lessons to be learnt from this current crisis, namely that government policies must not inspire people to borrow beyond their means to repay just to create a veneer of economic growth and stability. This will fool no one in the future and bringing the age of spin to a close!

In addition financial institutions have to be regulated much more closely, to prevent over the mass over lending, against risk collateral. We must regulate closely firms that offer cheap lending that appears to offers solutions but prays on the soft underbelly of the innocent. We must create a new more transparent financial reporting structure, which transcends markets and borders as the globalisation of the financial system now means that no one is left untouched. The Bear has roared a warning of the future and as it joins the growing list of financial disasters we all must take heed! 


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