The Credit Crunch As Karen Carpenter said 'We've Only Just Begun'

There's a lot going on behind the scenes at the moment with the credit crisis and the Fed, even though they have openly cut rates by 0.75% and then 0.5% to try and give the look of having some sort of control. Yes, I know what you're thinking, it doesn't look like they are in control, and you're right, but they actually want to cut more but they can't cut too fast because the potential of a market collapse.

So at the moment the Fed is trying to look like an only slightly flustered Duck, yet its feet are paddling away as if there's a dozen hungry Chinese chefs chasing after them.

I'd say that the rates which are currently at 3% in the US will be down under 2% as the Fed are trying to set the scene for the banks to trade their way out of trouble - 'Help me, Obi-Wan Kenobi; you're my only hope!'. Obviously this causes large inflationary pressures, but I'll come on to that in a minute as currently there is a much bigger problem to deal with than inflation.

You remember I said about the financial markets being so highly geared and that when one domino fell then another could topple after it and then the whole market could topple over. Well the first domino was the sub-prime crisis £300 - £350 billion, and as yet less than half of it is accounted for. So there's still uncertainty there. Well this fell and pushed against the next domino. I thought that the next one would be the hedge funds (which would spell total disaster) but it wasn't them. Well the next domino is falling and starting to put pressure on the others but the Fed and others are trying to stand it back up.

This domino is the Monoline Insurers. Never heard of it? Well this is a name that was new to me this week too but it's only a matter of time before it becomes a term like credit-crunch or sub-prime crisis. These terms weren't in our vocabulary either this time last year.

What is a Monoline Insurer - Monoline Insurers lend their balance sheets to weaker borrowers so that the weaker borrower can raise money in the global bond markets. Once the bond is insured then the big investors (pension funds for example) can buy it.

The problem is that the big investors are obligated to only hold onto investments that are either AAA or AA. Once they drop below that credit rating then they are obligated to sell. So if you imagine for a second that the insurance backing the bond is valueless, then that means the big investors are obligated to sell. What happens when everybody is obligated to sell at the same time?