Bear Stearns and what it means for us
(For more future updates, kindly subscribe to this blog's feeds via RSS reader or via e-mail.)
Few people in this country outside of the City of London will have heard of Bear Stearns, the American investment bank, until today. It is now being called the ‘American Northern Rock,’ which tells you that the bank is more infamous than famous, except the ramifications of Bear Stearns are likely to be far more serious than those of Northern Rock.
Experts are warning that there is now an increased likelihood of recession and a painful housing slump, after Bear Stearns, which was America’s fifth biggest bank, was forced to turn for emergency cash to the US Federal Reserve.
The news sparked scenes of panic in Wall Street and the City of London, where bank shares tumbled and fears grew that other banks around the world will be hit by the crisis. Many of the problems at Bear Stearns, which employs 1,500 people at its London office, are isolated to the company. However, they underline the almost unprecedented scale of the financial crisis.
There will be potentially severe knock-on implications for the UK which is already struggling to cope with the credit crunch. British families have already seen their finances squeezed by higher utility bills, food prices and taxes. Now, banks in the US and the UK are nursing their losses are likely to raise the interest rates charged on mortgages and loans to try to recoup cash from their customers, analysts have predicted.
Since the credit crunch first hit last summer, the Bank of England has had to cut its interest rates twice in a bid to stimulate the flagging economy. However, lenders, who have found it increasingly hard to borrow money from each other, have failed to pass on the benefits to their customers.
Some 1.4 million householders are due to agree new mortgages when their fixed rate deals run out over the next 18 months, while around six million have home loans with variable rates.
The growing crisis also places pressure on Alistair Darling, the Chancellor, who is facing questions after he suggested in this week’s budget that Britain is well placed to weather the current economic turbulence. Senior economists have said the growing financial crisis has increased the chances of recession in the UK as families struggle with their finances.
The Bear Stearns crisis severely undermines the optimistic economic forecasts delivered by Mr Darling. The Chancellor may be forced to slash spending, raise taxes and borrow even more in the coming months as the economic slowdown takes hold.
