Fed just cut the fed funds and discount rate by 75bps voting 8-2. The 2 against were for less aggressive cuts.

Overall the market wanted a bit more but still rallied initially. Better than expected numbers from Goldman Sachs and Lehmans helped with overall confidence

So what now? Well it’s hard to say. I don’t think much has changed and its hard to justify a big market rally from here. So the best to hope for is some stability from here.

I think the focus will now shift back to the banking sector and who is next up for refunding.

As for the market I expect that to come under further pressure.

Recent data shows the downturn in property prices is well underway. Whilst the big picture is clouded we are seeing some major shifts. In Auckland the median price was down 6% from December with Auckand city down a whopping 15%. Now sales volumes are at seven year record lows which impacts on the numbers but the reality is quite clear: the market has had a vicious turn and no amount of talking it up is going to help.

What is off major concern is the knock on effects. These will be felt over the next 6 months especially with interest rates continuing to bite. Yet some economists are looking for further rate rises.  The recent drought is expected to eat into farmers’ recent windfall gains from commodity prices rises.

So the Reserve Bank needs to look through this inflation blip and focus on the impacts of the credit crunch and falling house and land prices.  And banks have a responsibility not to pull the plug too quickly but work with people and businesses if they get into trouble.

It’s a tough time to be exposed in property.

News comes of a huge class action suit brought in Canada by a litigator called John Dempsey. Following on from John Kutyn’s (a Canadian living in NZ) paper “the Nature of Money” it takes the next step of actually calling banks to account under the law.

It’s being held up in the courts but at some point the suit must be acknowledged and heard. Its a tough one for the judges as they are being asked to rule on one of the most accepted practices in society today, namely the equivalence of “digital money” and cash in the form of notes and coins.

With the relentless advance of Peer to Peer lending systems coming online and complimentary currencies in every country it is easy to see how a major change is underway. Sure the banks may not be too concerned now but we are seeing the beginnings of a major revolution in what we know as money.

So the Fed arrived late at the party with a scything 50bp cut all round. But they left a cloud of uncertainty to block out the ray of sunshine.

Bernanke is not known for his pandering to the markets and inflation is still mentioned as a concern. So this move is part of the restoration of confidence in the US economy and global monetary system. The G7 central bankers and finance ministers will have been wired into each other this past month and since the Northern Rock meltdown probably on 24 hour call.

They all depend on each other now.

How the Asian central banks must be laughing given the dressing down they received during the 1998 crisis and how the G7 bankers and IMF threw the financial risk playbook at them.

So where does all this leave us. Well pretty much in the same place except we know that G7 will underwrite the financial system. This is good for big guys and bad for small ones (or foreigners!). Small guys can fail and be picked up for a song by the big fellas……nice bit of wealth transfer (anyone remember Long Term Capital or Barings?).

But fundamentally there is still pain to come. The fact that asset prices have been inflated way beyond realistic levels means at some point they must retreat and money must be destroyed as the money supply contracts.

No amount of paper shuffling can change that. Pumping out more money will help in the short term to keep institutions from falling over and the system functioning but it cannot prevent the inevitable.

The best we can hope for is a gentle downturn in asset prices. And of course lessons will be learnt….just like in 1794 and every 18 years since

Another day, another finance company. Haven’t i written that before? Maybe but my memory is becoming blurred as groundhog day for the credit system is on a repeat cycle.

What we have now is an old fashioned run on finance companies. Clearly anyone who can read a balance sheet can see they don’t carry much cash so if you rock up asking for your money back you may be waiting for some time. Of course you should have checked that before you invested. As some argue this is a good cleaning out process which is long overdue.

Why should the RB bail them out? Well i would argue the RB is not worried about fnance companies going under but more concerned about the financial system freezing solid. So they opened their wallet and the banks were more than happy to plunder. But the poor finance companies can’t access this cash.

So here’s a story from a few years ago (verbatim from Fred Harrison’s “Boom Bust: House rices, Banking and the Depression of 2010″:

In 1794 “the City Council of Liverpool faced a complete collapse in the local banking system. On March 20, the Mayor reported that 58 merchants urged the council to secure a loan from the Bank of England to enable the City to survive “the distress which had engulfed the people”. Parliament issued a special Act which entitled Liverpool to issue negotiable notes for a limited period, to be lent at a rate of interest slightly below 4.5%. The citizens weathered the storm, thanks to what the Webbs described as “the boldest financial step recorded in the annals of English local government.

What caused this trauma? Speculation focused on the rent-yielding opportunities presented by canals”.

Oddly enough the same thing happened in 1812, 1830, 1848, 1866….and on and on.

As Samuel Taylor Coleridge wrote in 1817, in his Lay Sermon booms and bust seemed to occur “at intervals of about 12 or 13 years each {as a result of} certain periodical Revolutions of Credit”.

Thanks Fred for this great piece of research. Let’s hope the central bankers read it and then weep voraciously.

You have to feel sorry for Kiwi investors as another finance company goes bust. Today it’s the turn of Nathans Finance to declare itself out of the game. They used to send me stuff through the mail every month. Who knows how many were seduced by the slightly higher interest rates on offer.

It may sound like i’m enjoying this but i’m not. I wrote several letters to the powers that be well over 3 years ago exhorting them to sort out the non-bank financial sector but to no avail.

Ultimately it’s a case of caveat emptor. Before you invest in anything understand the risks. I am amazed how many financial “advisors” have put their clients into these flaky companies. I use the term advisor loosely here.  I seriously doubt whether many of them actually understand how the products they sell actually work and how to stress test them.

If you want higher yields then invest in a decent fund that buys the whole spectrum of bonds and therefore diversifies the risk. A couple of decent Kiwi funds are Fisher Funds and of course the self styled people’s champion, Gareth Morgan.

Check the fees and check what you are getting. Don’t listen too much to the experts. Learn about it yourself. There really is no free lunch out there except at the City Mission and if you’re down there the chances are you’ve blown your dough already.

It’s your money and your responsibility.