After a chaotic few days the market has calmed as it awaits the next round of soothing medicine from the Fed. 100bps is expected now and anything less could see a major sell 0ff. So perhaps its time to recap on what’s happened:

- Global expansion of the money supply by the banking system abetted by loose regulation.

- Financial assets treated as investments.

- Trading on a leverage basis whether in the markets or in property.

- Reliance on capital gain to pay off debts.

- Creation of an asset bubble in property and stocks.

- New financial products promising spectacular gains.

A quick recap:

- Asset prices can go no higher as the mathematics of compound interest and cashflow catches up.

- The first domino falls as the sub-prime market starts to fall.

- Property finally turns and heads south in the US.

- Debts over run equity in houses.

- Spirals into derivative products causing a more widespread reaction.

- First reaction from Fed.

- Banks start to revalue (mark to market) loans.

- First run on a bank: Northern Rock fails.

- UK nationalises Northern Rock.

- General deleveraging starts as contagion spreads.

- Banks review lending and fringe financing companies fail.

- Rogue traders appear.

- Central banks provide copious amounts of liquidity.

- Fed cuts rates heavily and provides open lending to all.

- $ collapses and commodities explode as safe haven.

- Second run on an investment bank: Bear Stearns fails.

- Fed sort of nationalises Bear Stearns but gives it to JP Morgan under guarantee.

- Financial system on the verge of complete collapse.

So what now?

Well the Fed has studied the 1930s depression very carefully and realises that systemic bank failure is simply not an option. Yes shareholders will lose most of their money but that’s the risk with equity. The lines of credit and liquidity must be kept open and depositors must be kept afloat. If necessary banks in trouble will be taken over or have to merge.

It’s safe to say they will do whatever it takes, regardless of the cost. The clean up can come later but for now this is mainly about preserving confidence in the system.

How it pans out is impossible to predict but i wouldn’t want to own any banking stocks.

Tags: banking, bear stearns, central banks, confidence, credit crunch, currencies, federal reserve, financial crisis, forex, intervention, markets