Tuesday, September 23, 2008
Capitalism gets chest pains
US bailout concerns hit market
The New Zealand sharemarket followed US and Australian markets lower on concerns about the US plan to bail out its ailing financial institutions, a sharp increase in oil prices and the dampening effect of emergency bans on short selling.
As the big bailout was debated in the US Congress, divisions between the Bush Administration's proposal and the demands of the Democrats spooked markets. The NZX-50 was down 27.53 points, or 0.85 per cent, to 3228.19 after Wall St's Dow fell 3.27 per cent and the S&P 500 fell 3.8 per cent. Oil posted its biggest one day price rise in history, gaining US$16.37 to close at US$120.92 a barrel but was easing in Asia last night.
Who would have thought unregulated and unsustainable corporate greed would have any downside? Here is the thing though, and here is why it could get much worse, much quicker – CDS’s, Credit Default Swaps, these are basically a bet tied to whether a loan is repaid as a risk management to insure against all these dodgy loans they have kept making, the real danger is that they are all off the books so no Bank is sure who has what in terms of CDS’s, and here is the kicker, there are a predicted $62 Trillion worth of CDS’s out there, which means the Trillion the US have put up to stabilize the financial environment will be as effective as pissing on a forest fire if loans continue to default. Capitalism isn’t looking very healthy this week.