There is a real panic setting in in the capitalist world’s financial system with the main world banks beginning to act to secure themselves by bankrupting others.
Stock markets see-sawed violently downwards last week: with the Dow Jones Industrial Average down 382 points on Thursday night, then refusing to recover and falling a further 31 points down on Friday, closing 0.23 per cent lower.
This was after major Federal Reserve interventions pumped ‘liquidity’ into the market.
On Friday the FTSE 100 in London plunged 3.71 per cent, losing almost 700 points in a month. Over £170 billion has been lopped off share prices.
Panic has set in with the central banks massively intervening to inject liquidity into the markets, to try to control the situation but with the result being the opposite to that intended.
One school of thought says that the crisis can now be controlled, so don’t worry, the central banks will bail everybody out, leaving only the small fry investors to drown.
The other view is that their intervention is not working, proving that the crisis is out of control, and heading for a financial crash on the scale of 1929-1931.
The combined action of the central banks triggered heavy selling in the equity markets as traders interpreted these actions as a tacit admission that the current credit crisis is more severe than previously perceived and threatens the economic expansion in the US and European countries.
The markets are clamouring for Fed chairman Ben Bernanke to cut interest rates. The Federal Open Market Committee (FOMC) has held the key federal funds rate unchanged at 5.25 per cent for 13 months.
However, the major banks are acting to preserve themselves and by that act worsening the crisis for everybody else.
Friday’s panic selling by hedge funds, is being blamed on the leading investment banks demanding early repayment, forcing hedge funds to sell high priced shares below their quoted price to raise cash.
It is alleged that banks such as Goldman Sachs, Lehman Brothers and Merrill Lynch, whose prime brokerage arms act as lending banks to the hedge funds, insisted that the funds settle a greater proportion of their debts at the end of the day than they had done previously.
The increased payments forced hedge funds to sell shares that were solvent at low prices to cover their losses.
Markets were further shaken as the hedge funds’ losses mounted, compounding fears that some funds will collapse altogether.
One banker commented: ‘We are in a situation where everyone is very scared.’
Meanwhile, Britain’s Financial Services Authority watchdog began an emergency audit of London banks to assess their exposure to the US sub-prime mortgage collapse and to highly leveraged corporate loans.
