Wednesday, August 15, 2007

Money Market woes, Brown says not a lot

Something very odd happened over the last few days: the international money markets stopped working. These are where institutions, banks in particular, lend to each other in order to raise capital or to lay off the risk of lending. The markets are dependent on the accurate pricing of risk, the risk that you may not get your money back, but for some days there has been so much uncertainty stemming from the sub-prime mortgage collapse in the US that risk could not be priced and hence trades were not made. So, the Central Banks stepped in as lenders of last resort and business was able to continue. That is not likely to be the end of it though. Many institutions have admitted to losses in the sub-prime meltdown, and many more are likely to. There will certainly be an effect on the so-called real economy as well, which will probably take the shape of a reduction in the availability of credit to both companies and individuals. If your economy has been fuelled by credit, and Britain’s has, then a lower level of economic activity is likely to result. That means jobs and wages to you and me.

This story hasn’t really gone beyond the business sections, and the government hasn’t said much either. Neither state of affairs is likely to persist.

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