UK must cut and cut again

Updated: 17:42 EST, 29 October 2008

You would be hard put to find any joy in last night's statement from the US Federal Reserve.

The Fed may have chosen to cut its two key interest rates by half a point, but it is offering little hope of relief from the severe gloom enveloping the global economy.

With the reduction in the key fed funds rate to 1 per cent, the cost of official borrowing in the US is now back to where it was post the 9/11 terrorist threat to Wall Street.

The half-point cut in the discount rate, the price of money available to banks overnight, means that short-term credit is now as cheap as chips.

But mortgage rates in the US remain fixed at 6 per cent and above, pricing in a huge risk in the housing market.

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No sympathy: Few tears will be shed for hedge funds who gambled wrong on Volkswagen

The omens for the economy from the US central bank are not good. Fed chairman Ben Bernanke and the Open Markets Committee, which set rates, avoided the 'R' word for recession but painted a bleak picture of the consumer, industry, the nation's export sectors and of the financial system.

The only glimmer of light comes from falling oil and commodity prices, which rapidly has lifted the inflation threat.

The American cut in rates will not be the last. The odds are heavily in favour of the Bank of England following suit next week.

Members of the Monetary Policy Committee need to listen carefully to what maverick member David Blanchflower has to say. He argues that if rates are not cut 'aggressively' the nation faces 'the prospect of a relatively deep and long lasting recession'.

If this is the greatest financial crisis in 'human history', as deputy governor Charles Bean has belatedly accepted, then we need the policies to address that.

The Bank should consider a full one point cut in rates to 3.5 per cent next week  -  if it cannot bring itself to act earlier. The cost of borrowing has been kept too high for too long, because the MPC failed to recognise that the supposed return of inflation was very temporary.

It must now make up for lost time or we all will suffer the consequences.

Speed trap

No one is going to be shedding very many tears if the hedge funds who lost billions of dollars in the short squeeze on Volkswagen stock end up going bust.

The more respectable hedge funds have over time effectively turned themselves into 'active' fund managers and conduct superior research without fear or favour.

Unfortunately, this group is a minority. Many of the hedge funds engage in a sophisticated form of insider trading where they garner scraps of information from brokers and investment banks, pool the data and then, like locusts, begin a feeding frenzy in the stocks concerned.

In the case of Volkswagen, the not unreasonable assumption was that the blight on car sales globally would eventually hit Germany's biggest manufacturer and the shares would go into freefall.

They of course reckoned without the Porsche factor. The high-end car manufacturer has over time bought a controlling stake in VW but for some reasons did not feel obliged to tell the market of its intentions.

This would certainly have been verboten under Takeover Panel rules. But unlike the City, Frankfurt does not have a referee.

As a result the affair is now being investigated by Germany's financial regulators after bleats from the hedge funds about being misled about Porsche's intentions. More transparency would no doubt have been helpful.

But the hedge funds  -  who over the last couple of months have behaved disgracefully in their targeting of financial stocks putting the savings of millions of ordinary depositors at risk  -  deserve no sympathy at all. If one or two of the more reckless hedge funds crash we will be sitting on the sidelines cheering.

As for VW, it must have felt great being the world's largest company for brief moment. However, it was never going to last given the oncoming slump.

BMI carve-up

Sir Michael Bishop has decided to exercise his put option and sell his controlling share stake in BMI, the airline he created, to Lufthansa.

Given how airline stocks are trading at present, the price, which places a value of £640million on BMI, may look steep.

But Lufthansa must be rubbing its hands at the thought of grabbing BMI's hugely valuable takeoff and landing slots at Heathrow.

Not surprisingly Virgin Atlantic, a Lufthansa partner through the Star Alliance, wouldn't mind cutting itself in on the deal.

It argues that linking its long haul routes with BMI's short haul network would be ideal.

Such a carve-up could work to the benefit of BA. It might weaken the competition arguments against the efforts of Willie Walsh to forge a deeper alliance with American Airlines.