The credit crunch is a 'slow-motion train wreck'

Fear returned to the markets this week as it became increasingly clear that the year-long credit crunch is nowhere near over. Money market rates are up, and, as the economy worsens, banks are dealing with mounting bad debts.

"Every sensible person should be at the beach today," as one depressed fund manager put it. Fear returned to the markets this week as it became increasingly clear that the year-long credit crunch is nowhere near over. A jump in US producer prices to a 27-year high provided a reminder that inflation is not likely to fade away quickly, even though commodity prices are now falling. Meanwhile, the shaky financial system was back in focus as shares in the giant US mortgage lenders Fannie Mae and Freddie Mac resumed their recent slide.

These key providers of liquidity to the US mortgage market "continue to bleed mortgage losses" as defaults have spread beyond the sub-prime sector, noted The Wall Street Journal. As they are too big to fail, speculation over a government bail-out to recapitalise them is mounting, and this is likely to see shareholders wiped out. Meanwhile, former IMF chief economist Ken Rogoff further rattled investors when he warned that the credit crisis was only half over: "America was not out of the woods the worst [of the financial crisis] is yet to come." What's more, bankruptcies won't be confined to mid-sized banks "we're going to see a big one" collapse in the next few months.

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