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Market grapples with Lehmans’ demise

In last week’s column I said I thought there would be worse to come before we saw signs of a recovery, but little did I know that a major US bank was about to go down the tubes and HBOS would be swallowed by Lloyds TSB.

Lehman Brothers was subject to market concerns for months so the fact it eventually went down should not have come as a surprise.

Nevertheless, the resulting turmoil in the markets as they struggled with the aftershock of its demise was considerable.

The US government’s bailout of Fannie Mae and Freddie Mac only a few days earlier had been heralded by some pundits as the first steps towards recovery.

Indeed, the markets reacted well to the news. Banking stocks across the globe had their best rally in months.

The fact that the government was prepared to let Lehmans fail was the big surprise that caught many offside.

What will be interesting to see is how the US Federal Reserve reacts to the fallout. I think it will cut rates further to stimulate the economy and I wouldn’t be surprised to see a 0.5% reduction over the next month or so, bringing rates down to 1.5%.

The Bank of England must now react to the events happening around the world and act decisively by cutting rates significantly. Every 0.5% cut has the potential to keep thousands of borrowers in their homes.

The price of crude oil is now at a seven-month low and has fallen well below the $100 a barrel level, so the likelihood of falling fuel prices has increased. As a result, inflation could start to decline too.

The BoE must not take its usual wait-and-see approach as we cannot afford to allow the economy to slide any further.

The road to recovery is likely to take many twists and turns over the next 12 months and sustained periods of good news won’t come quickly.

Businesses and individuals must adapt to the new financial circumstances we find ourselves in and quickly.

Some will find it difficult and some will fail but those that adapt effectively will find a way through the credit crunch. In the meantime, we must hope the BoE doesn’t fiddle while the market burns.

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