Economics: Bear Stearns sale - trend or glitch?

The sale of Bear Stearns to JP Morgan is not so much as a sign of failure by the BS management, but a signal that the last six months of attempts by the financial services industry, economists and the US Treasury have failed to save the sector from a downturn of catastrophic proportions. Whilst less well known funds have gone under, and funds run by large banks have been baled out, the fact that nothing saved Bear Sterns will dramatically undermine confidence in the US economy.

Emergency measures have not worked - and the latest rate cut, for emergency funding, of just a quarter of one percent will not improve confidence.

The pressure on Bear Stearns is a the opposite side of the coin for the pressure on Carlyle Capital and other funds.

What is happening, behind the facades of Wall Street and other financial centres, is that financial institutions are watching their capital adequacy ratios falling.

When that happens, they must report it to the regulator, and when that happens, rating agencies find out and report that the bank may not be a good credit risk, and when that happens, other banks either stop lending to it or raise the price at which they are prepared to lend, and when that happens, the business runs into trouble, perhaps insurmountable, and when that happens the regulator puts out a call to the very banks that concluded it was not credit worthy and says "will someone step in and take over.

When that happens, one of the biggest ironies of all comes into play: the merchant banks and funds that, in may cases, built their wealth on taking on ailing businesses and breaking them up become the carcase instead of the vulture.

But the risks spread far beyond the USA. Today, the New Zealand Treasury said that it expects its economy to head for a consumer-led recession. New Zealand is one of the few countries in the world that still has interest rate high enough for a substantial reduction to be made - and made in one go. That may stave off recession in a way that the nibbling approach of the USA and the UK, for example, has not.

Businesses in Australia have been quoted as saying that recession is inevitable with a bottoming out in mid 2009.

The contagion effect across the manufacturing sectors in South East Asia may logically be seen to suffer as their major markets unravel.