US Fed sacrifices Bear Stearn shareholders

http://www.interest.co.nz

Intro

Today, we'll look at the latest signs of panic on Wall St and ask what it means for us.
And we'll check out how much local governments are charging us in rates, fees and fines. It's a lot and its getting bigger fast.

Wall Street panics

But firstly, we look at the latest news from Credit Crunch central: Wall St.
Late on Sunday US time America's fifth biggest investment bank was sold in a firesale after a few rumours essentially triggered a run on the bank and threatened to empty its coffers within days.
JP Morgan bought Bear Stearns for US$236 million. That sounds like a lot but its not. Bear Stearns was generating annual revenues of US$6 billion. It was worth US$3.5 billion on markets just four days ago.
Essentially, the US Federal Reserve decided to sacrifice the shareholders of Bear Stearns to ensure it did not go into bankruptcy.
The situation on Wall St is extremely serious. For the first time since the Depression the US Federal Reserve has started lending money to brokers, not just to banks.
So what does this all mean to us.
It means that our interest rates will go up or be higher than they otherwise would have been, and for longer.
And inflation will rise.
That's because the US Federal Reserve is pumping cash into the global financial system like there's no tomorrow. Gold and oil prices are rising because people are worried about inflation.
We've already seen New Zealand mortgage interest rates rise half a percentage point since last June when the sub-prime credit crunch started.
This global financial crisis is different from the last ones in that we care a lot more now about interest rates than we do about share prices.
Now only 31% of our assets are in shares and bonds. Back in 1986 before the 1987 crash that was over 50%. Now we care a lot more about our mortgage debt and house prices.
That's because 69% of our net worth is tied up in our houses. And our mortgage debt has blown out to NZ$160 billion from NZ$26 billion in 1986.
So we care about interest rates.
They are rising fast on anything that is not a US government bond. The gap between New Zealand one year wholesale interest rates and US interest rates has blown out to 7.2%.
We can expect our mortgage rates to either rise or not to fall when we would otherwise have expected them to fall as the economy slowed.



Local government drives inflation

Now for a quick look at another angle on the inflation story. Government fees and charges. Or more particularly local government rates, fees and charges.
They rose 11% in December to just over NZ$1 billion.
So local government rates, fees and charges are rising 3 times faster than inflation generally.
The biggest driver is local government employee costs, which rose 9.1%. This because of a jump in employment in local government as central government shifts more responsibilities to local government and as regulations such as building regulations and the resource management act require more and more bureaucrats.
No wonder the Reserve Bank has inflation problem.
This is one of the reasons interest rates can't be cut.

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[ybworld]

Does this mean that in NZ, most people have adjustable rate mortgages? Is that the standard in new zealand? Or is it the opposite, as in the US?

[cw2992]

"Ron Paul Yall"

[Paetaor]

It was worth $0 (Zero) or maybe negative and they got $10 per share. That's not a sacrifice it's a bailout.

[WesSeid]

The Federal Reserve sucks and is unconstitutional. Big government sucks too. Tell your friends!

[WHYNOT1972]

Remember that every country has a central bank. The first being "The bank of England" Think about the "idea of consolidation".Research J.P. Morgan and the making of the "Federal Reserve".

Think monetary controls.Consolidation of the currency is next. Canada,USa,Mexico. ["Camex". Registered trademark.]

[frederickson1]

BS got what hey had coming. The Fed punished them because of their huge Long position in gold and short positions in the dollar. See for your self!!!!!1

[montjack1]

Well said. I hope the courts see the travesty of justice which has occurred.

[palex9]

good video. stupidity is reigning supreme in the financial markets. thanks alot for blowing billions of our tax money bernanke, paulson and co....!

[thai1959]

I'm American and you 100% spot on freind.

[truthsabre7]

Good job mate.