Turmoil in Financial Markets

Now everyone is reporting on turmoil in the financial markets. The FTSE 100 dropped to the lowest point in a year.

Meltdown is the word that is being used.

A bit of perspective is needed. Remember though that the FTSE 100 and Dow Jones are only so high as they have risen so fast over the last few years. Going back to the level of a year ago is not a meltdown, going back to the level of 15 years ago is a meltdown.

So the market is going down. Everyone is now surprised that the banks have lent too much. It is the banks fault for bad lending or the rating agencies fault for bad models. It is not the fault of individuals for borrowing too much.

The banks all knew exactly what they were doing. They were lending the money because they could make huge profits off these loans (until the economy turns). The money earned was huge, they new exactly what they were doing. This is the normal course of business, and they should feel the losses from the decisions they made and should not be covered or should not be 'excused' as bad decisions.

The central banks, ECB and Fed have now pumped billions into the market to stabilise the market. This does add liquidity, but inflates prices. It did not and will not work long term.

The net effect of this is to allow those in the know (or with the losses) get out of the market at the best price. Whoever is left in the market will suffer the big losses, ie small investors and pension funds, people with illiquid asset or not onto of the markets enough to pull the money out in time when the central bank money runs out.

Essentially the central banks underwrote the bank losses, or put another way the country/taxpayer underwrote these losses.

Bad lending and borrowing is a huge business and problem. The problem will continue to deteriorate and get worse.