Bank of England and US Federal Bank play it tough
Those hoping for a short sharp drop in interest rates in the UK and the US have had their hopes dashed today with news that the threat of inflation growing in strength is greater than that of a further economic downturn. As stock markets around the world continue to tumble in the face of the Lehman Brothers bankruptcy and concerns about insurance giant AIG perhaps a drop in rates would have helped sentiment but is it really the long term answer?
As tough as it may sound there is only way out of this current mess and that is to take the pain and let it work through the system. We are in this predicament not because one company went under and one other is struggling but because the whole worldwide financial market has been trading to excess, chasing the next profit on ever thinner margins and greater risk to capital.
We have companies investing in the sub-prime market who did not fully understand what they were buying, we have consumers taking out 120% mortgages at the top of the property market and the consumer is now geared up to the hilt with debt. A short sharp fix by the authorities would have helped markets stabilise but we are only feeling the after affects of years of excess, something which needs to work its way through the system.
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