Giant US investment bank, Lehman Brothers, has filed for Chapter 11 bankruptcy under US law after the US Treasury refused to bail it out and no buyers came forward to provide additional capital.At the same time, fellow giant investment bank, Merrill Lynch, has been bought by the Bank of America, itself a very large investment bank.
Events are moving rapidly and the details are changing by the hour as financial markets scramble to deal with the fallout. Suffice to say, there is going to be a lot of turmoil in the weeks and months ahead as other institutions caught short by the failure of Lehman Brothers find themselves tottering on the edge of the abyss.
I don't profess to be an expert in these matters, but it has been apparent for some time losses from the sub-prime market collapse and the string of dominoes that set tumbling over have been aggregating toward the remaining centres of financial strength. Lehman was one of them and Merill Lynch another, but both have been overwhelmed.
The US Federal Reserve, the US's privately-run, heavily regulated collection of central banks, has moved to over funds for equity to firms who need cash. In effect, they are a buyer of last resort for financial firms who would otherwise fall over for lack of capital from any other source.
We live in interesting times....and with elections in New Zealand, Canada and the US only weeks away, the calculations will be furiously worked and re-worked in the days and weeks ahead.
How interest rates can avoid going up is hard to see. With risk now arguably greater than for a very long time, reducing interest rates would look like walking naked in a blizzard.
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