Mixed Signs on Troubled Global Financial Markets

The Dow Jones Industrial Average experienced a massive rally recently, as did most global markets, but the general trend for the first half of 2009 continues sideways. In Asia, banks jumped recently as described by MSN Money, quote”…with banks extending gains on hopes the struggling global financial system is stabilizing”.

Hope has no place on the financial market unless you are into funding abstract start-ups but the use of the word is perhaps indicative of today’s global sentiment: unstable uncertainty and suppressive denial of indications of further decline.

The fact that the market contractions are gradual and constant instead of sharp massive corrections marks a historic difference to earlier crashes and bursting bubbles.

The current financial trends also react (or will react) to the spread of dependencies being more complex than ever. In the maximized scale, just consider the economic interaction between USA and China: China is funding part of the US recovery. In this, the angle of balance is shifted.

For the moment, China is still showing strength, but the Bank of Japan warns of further contraction of the Japanese economy.

If the 2009 Q1 numbers for China come in more red than expected the shrinkage of China global activities will affect all of us. China itself will cope better than most since their political and cultural system can still backtrack to a more centralized control and rural focus.

Meanwhile, President Obama┬┤s outrage at the AIG distribution of taxpayer support is indicative of another aspect of our times. Speed is (was?) of essence to abort the doomsday scenario of tens of millions of jobs lost. It was probably a sound move but the necessity of speedy delivery overtook the system with a loss of control and direction.

In view of this, it is not surprising to see how the received funds were, are, and will be spent. None of the receiving corporate parties are in the market of employee support. Survival of the entity is at the top of the agenda, not social benevolence.

The socio-economic playground shifts continually and at a pace that is reminiscent of modern computer games where speed and flexible responsiveness to unexpected factors are key ingredients to success. This is also true of the financial markets where fundamental values are affected by more than the local scene.

We can no longer view the markets as separate entities. As you look at the live Dow Jones charts and try to figure out what level it is reaching for you are already too late in your decisions.

Debt Consolidation and the Financial Markets

Lehman Brothers, bailouts, government rescue packages – the financial news in America might not seem important to UK citizens in debt, but the state of US markets is sure to affect the availability and price of debt consolidation loans in Britain.

“There is definitely a connection between what’s going on in the US and what goes on in the UK,” said Graham Beale, Nationwide Building Society chief executive, “and it really comes down to market confidence, and we are talking about global market confidence because clearly, with the massive disruption in the US, banks have stopped lending to one another. And we need that fluidity back in the market.”

Normally, the debts which institutions own (i.e. the money which people owe them) count as assets. Each Pound / Dollar of debt is basically seen as being worth a number of pence / cents, depending on how likely that debt is to be repaid. Today, however, no-one knows how much a lot of that debt is worth, so companies can’t sell it. They also can’t use it as collateral – and that makes it hard to borrow money from other companies.

This is one reason it’s difficult for banks and other financial institutions to provide credit, whether it’s a mortgage or a debt consolidation loan, to individuals. For people in debt, this is bad news. Debt consolidation isn’t the only debt solution, but it’s one which could help many borrowers get their finances in order once more.

So the authorities are trying to resolve the situation. In the US, there’s the proposed $700 billion ‘bailout’. In the UK, there’s the Bank of England’s (BoE’s) Special Liquidity Scheme.

Quoted on CNN, Treasury Secretary Henry Paulson said the $700 billion bailout was necessary “in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy”.

As for the BoE Special Liquidity Scheme, the BoE website says: ‘Under the Scheme, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks. By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets’.

The details are very different, but the basic idea is the same – to remove some of the debt which banks and other financial institutions are carrying, ‘unfreezing’ the financial markets and allowing consumers greater access to the credit they need for everything from buying a house to consolidating their debts.