So much for the big banking bail-out.
The Dow Jones took a 7% dive last night, and stock markets around the world have followed suit. This morning, the FTSE 100 fell by more than 10% first thing.
What's happening? Why haven't the interest rate cuts, the banking bail-outs, and all the world-saving politicians managed to do anything?
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Let's find out
Latest Videos FromMoneyWeek
Why the bail-outs aren't working
The simple reason the various bail-outs seem to have come to nothing so far, I suspect, is mainly because the US hasn't sorted itself out yet.
Britain has taken a big stride in coming up with a genuine bail-out plan for its financials (and to be fair to the Government, if you're going to do a bail out at all, then this is much more the way to do it than the path the Americans have followed so far.)
However, on the global stage, the US is really what counts. And at the moment they seem to be in a mess. The government keeps trying to chip in with new ideas, but it really looks like they're making this up as they go along. It seems very likely that they will now have to pump more money into the banks by buying shares, similarly to the UK.
Meanwhile Iceland's banking sector is no more
Meanwhile, other hugely disruptive events are keeping credit markets tightly shut. For a start, there's the wholesale collapse of Iceland's banking sector. The Icelandic government has nationalised Kaupthing, after Britain used anti-terrorist legislation to freeze assets in Iceland's UK banking units.
(As a brief aside, this is a timely warning on why we should all be very wary of governments passing laws which say one thing on the label (let's take money belonging to people who want to blow us up), but give them the power to do something quite different (let's jump the queue in a potential corporate bankruptcy situation).)
Back to the story in hand. Trouble is, the Icelandic government might not be able to stand behind any of its banks, because they owe so much. The question then is how much added counterparty risk does this throw into the financial markets? If sub-prime mortgages could trigger the collapse of the global financial system, what happens when a whole country goes sub-prime? I suspect it won't be pretty.
Everyone is stuck in 'sell mode'
So it looks like everyone is in serious 'sell' mode for now. And the trouble is, they won't come out of it until it's clear that a line has been drawn under this crisis, which doesn't look like happening any time soon. The scale of the problem is so severe that people are now having difficulty trusting even governments to have the financial resources to sort it out.
Enjoying this article? Sign up for our free daily email, Money Morning, to receive intelligent investment advice every weekday. Sign up to Money Morning.
And more to the point, the underlying assets which caused the problems in the first place mainly property-related ones are still falling in price. And that will only get worse as credit remains tight, and the global economy piles into recession.
So I'm not at all surprised that people are worrying about where to put their money at the moment. According to The Times yesterday, sales of household safes are up by 25%. I wouldn't go so far as to recommend that route, and the good news is that the Government has made it pretty clear that it's not going to let any UK savers lose any of their money. That's not so great for taxpayers of course, who will end up having to shell out what looks like billions to compensate for the Icesave debacle.
Property pundits still believe it's worth buying a second home
But one thing I definitely wouldn't recommend is buying a second property.
That goes without saying, surely? But no, it seems that even amid the greatest financial crisis in a generation, the property pundits are still trying to stick their oar in for bricks and mortar. According to Anne Ashworth in The Times, some cash buyers have decided they'd rather stick their money into a dilapidated property and board it up for a few years than 'risk' it in a bank.
That's possibly the stupidest thing I've ever heard. Property is an extremely illiquid asset. It's also one of the most dependent on easy credit for its value. So if you buy property right now, no matter how cheap it looks, you are losing control of both when you can get your money back; and pretty much guaranteeing that your capital will depreciate as the market continues to weaken.
How to really keep your money safe
That doesn't sound like a safe haven to me. The truth is that if you want to keep your money safe, about the safest thing just now is probably National Savings & Investments, which is 100%-government backed. If it looks like we're getting to the stage where the UK can't stand behind its debts, we should get to know about that well in advance.
The only sound property investment you can make right now, is to pay off as much of your mortgage as possible (assuming you have an emergency fund built up see Five things to do with your money now). It's a debt you're going to have to pay off anyway, and you get a guaranteed return in the form of the interest you'll save. That's an attractive deal at the best of times it's nigh on unbeatable now.
Our recommended article for today
AIG's crucial role in the banking collapse
The recent collapse of insurance giant AIG has long-lasting and far-reaching consequences. Only once you understand why it failed can you understand why the economy is shrinking - and why it's not going to rebound quickly.
