Recession fears spark another big sell-off

Another massive fall in world share prices shows that these big state bail-outs will be no panacea...

It’s been yet another horrible 24 hours for the world’s stock markets. The FTSE tumbled by over 200 points this morning after the US Dow Jones index fell by 8% yesterday, its biggest one-day drop for more than 20 years. Asian markets also took a hammering, with the Japanese Nikkei (down a whopping 11.4%) and Hong Kong’s Hang Seng (down 7.6%) the biggest losers. After the heady euphoria of earlier in the week, as the announcement of huge state rescue packages sent markets soaring, we’ve been brought back down to earth with a bump…

It’s increasingly clear that the trillions of government dollars poured into the financial sector in recent weeks will only get us so far. Although investors may have been reassured about the long-term viability of our big banks, they’ve clearly just turned their attention to other unpleasant problems instead: in particular, the apparent inevitability of a very nasty global recession in what boffins like to call ‘the real economy’ (i.e. outside the gleaming towers of the City). On both sides of the Atlantic, retail sales were significantly down last month, while only yesterday the UK was rocked by a bigger-than-expected rise in the unemployment figure.

To make matters worse, all this concerted government action hasn’t even succeeded in one of its key aims: getting the banks lending again. Although LIBOR (the inter-bank lending rate) has edged down slightly, it’s still running way ahead of interest rates – which means banks are still hoarding their money, Scrooge McDuck-style. And this makes it incredibly difficult for central bankers to influence events through interest rates – if banks are basically unwilling to lend, lopping another 25bps off the base rate isn’t going to make much difference.

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