As I mentioned on Monday, I and my fellow Fleet Street editors are at a conference. Basically, I’m in a château in France surrounded by financial experts from all around the world. As you can imagine, the debate has been lively! Hearing the different perspectives on the current carnage is fascinating.

Frustratingly I don’t have time to give it all the usual full on FSD treatment. But here are a few thoughts on the latest dramas:

• HBoS shares have continued falling. They fell 30% this morning - more fall-out from the Lehman business (there are concerns about HBoS’s reliance on wholesale funding. LIBOR, the interest rate at which London private banks lend to each other, hit a seven-year high on Monday night). Will the next act in this production feature Northern Rock-style queues outside branches of Halifax? We shall see…
• Fresh from refusing to guarantee Lehman’s (LEH) liabilities, the US Fed has turned back into Good Cop. It will lend $85 billion to insurers American International Group (AIG), taking an equity stake in return. The Fed now owns 79.9% of AIG
• Just to confuse things slightly, though, the Fed voted to keep interest rates on hold at 2%. OK, so these are already pretty low. But the decision confounded those who expected recent turmoil would result in further rate slashing.

Just a quick point on the Fed before I head back in. It’s often said that the key task of a central bank is to manage expectations. Make sure no one gets it in their head that inflation is out of control (if they do, they’ll want higher wages… meaning higher inflation is more likely).

But the Fed has a dual mandate - unlike the Bank of England it has to take account of economic output. And the Fed’s dual mandate seems to have given it a split personality. Sometimes it is good to confound expectations. To keep everyone guessing. It’s a way for policymakers to retain and exert control.

But there’s a downside. In such volatile markets as these, keeping people guessing fuels uncertainty. As such, it can exacerbate volatility. This week’s news is especially bad if you’re British. That’s because we’re heavily exposed to the global financial sector - as evidence by HBoS’s plight.

So, you won’t be surprised to hear, I’m still very bearish on the pound. Sterling’s weakness looks set to continue.

To find out why - and how you can prepare for it - read my Britain’s Going Bust - Again report here.

Until next time

Ben Traynor, Editor

Source: Bad Week For Finance - Especially For Britons