Lee Jay Walker Dip BA MA

Since the subprime crisis and then Alt-A ripple it is clear that global confidence is relatively negative.  However, specialists remain extremely mixed about the possible outcome in America and the same applies to the global impact of negative growth in America.  So does anyone really know the outlook for late 2008 and 2009?

First of all, it is abundantly clear that it is the mainly mega financial institutions in America which have problems and not regional banks, however, the knock on effect could still cause mayhem.  Yet the main weakness within the American financial sector appears to be mega-companies, notably Citibank, Morgan Stanley, Wachovia, the collapsed Bear Sterns, and several others.  Therefore, why did these financial institutions get it wrong?

One symptom of the Alan Greenspan era at the Fed was de-regulation and it is clear that he did not run a tight ship when it applies to regulation.  Therefore, hedge funds, and other sectors grew outside of the role of traditional banking and investments.  At first it appeared to be a gravy train, however, suddenly the train jolted and then it came to a stop.  So what happened to risk management and other safety mechanisms?   Did they all fail or was limited regulation too risky?

Irrespective of your opinion, it would appear that de-regulation got out of hand and borrowing requirements, loans, risky investments, and so forth, took a new turn becuase the rules were changed and sadly it would appear that this even applies to basic rules.  So more money was flowing into negative investments and ultimately you had a bad loan crisis and liquidity crisis.  The snowball effect, therefore, spread far and wide because many international institutions also invested heavily and banks like Northern Rock, in the United Kingdom, needed to be bailed out.

Yet just like the crisis began the demise also appears to be rapid and now many financial institutions are optimistic that the worse is over.  However, other issues, like Alt-A, remain to be problematic and it is too early to know which way it will go.  Despite this, we have both sides playing up the crisis or playing it down.  Therefore, just what does the rest of 2008 have in store and will 2009 be negative?

Frankly, most people believe that a slowdown will happen in America, Japan, and many European nations; however, it is more complex because nations like China and the Russian Federation should see strong growth.  Therefore, the global economy is now much more divided and geographical regions or other economic systems may escape the fall out?   But from my point of view I am going to sit on the fence.

Therefore, I believe that America, Japan, and many European nations, will suffer, however, I believe that it may not be so dramatic because all nations still have dynamic sectors within the wider domestic economy.  However, if inflation gets out of control, then my forecast would change and the same applies to increasing prices of raw materials, energy, and foodstuffs.  So I am going to sit on the fence and study the next few months because now, frankly speaking, it could go either way, and does anyone really know which direction the wind will change in late 2008 and 2009?