Will the U.S. soon have an interest rate of zero?

In the U.S., the interest rates set by the Federal Reserve get lower and lower. They may even hit zero at some point (probably only for very short periods of lending). This means that they would be allowing banks to borrow over time, at no cost.

Apparently, the U.S. government would be willing to take the risk of lending out, without hope of any return to compensate for the risk. The theory is that the stimulation to the economy - in the medium term - outweighs the risk to the government in the short term.

Rates to businesses would remain above zero, because banks need to operate at a margin to make a profit.

The more risk the U.S. government takes on, the more it intertwines its fate with that of the economy it oversees. And the more vulnerable it becomes to anyone who wants to disempower it by financial means.

Why was VW the world's second most valuable company yesterday?

On Tuesday, VW briefly became the world's second most valuable company in terms of market capitalisation (share price x number of shares).

A number of hedge funds (risky funds) had bet on a fall in the share price. These bets took the form of an agreement to borrow VW shares, sell them immediately at the current price, and then buy them back again at a (hopefully) lower price before giving them back to the lender. This is a process known as 'short selling'.

However, when Porsche revealed it had a larger stake in VW than expected, the price of VW shares rose. The hedge funds all became desperate to buy back the shares they had borrowed before the price rose too high. The demand for the shares meant the price rose by 82% in a day.

This leaves some hedge funds having sold their borrowed VW shares low, and then having been forced to repurchase the same shares at a value up to 82% higher in order to 'close their position' (escape from the deal).

For many, it's hard to have sympathy for the loss-makers. Yet short-term investing is akin to betting: perhaps the kind thing would be to offer the fund managers (or their computers) a spell with Gamblers Anonymous to treat their addiction.

Why are the markets so volatile?

Think of how you behave when you are uncertain or under threat. It's very hard to retain a sense of perspective. If you are a family or a football team under pressure, you may well become a little paranoid about your team members, and super-touchy about each event in the outside world. Think how your heart jumps when you are anxious and your mobile phone rings. Irrational, but understandable.

There is a strong urge at the moment to do what the group is doing, to hide behind everyone else's combined opinion. But investors, as a group, are not necessarily being particularly rational. A number of companies, which provide essentials such as food, are reasonably financially healthy, and may survive quite well. Yet their shares are still lower than reason would expect, because we cannot get rid of an overall sense of fear.

Some investors may soon choose to step across the line and decide which companies have a good future after all. They may make some money by getting in early. But this is not investment advice. Make your own decision!

Why can't UK banks help small businesses?

Why do the UK banks find it so hard to help small businesses during the current crisis?

They cannot lend more than usual, because that would be a relaxation of their attitude to risk. Relaxing their attitude to risk is what got them into the current mess in the first place. If they extend unusually high credit to failing businesses, without first giving new loans to healthy businesses, then their portfolio as a whole will get more risky. Unfortunately, healthy businesses are repaying debt, not increasing it.

To stimulate healthy businesses to approach the banks, I suggest an enlightened partnership between government and banks. The government could create new schemes to incentivise capital expenditure by healthy businesses. The banks could then coordinate their lending to match the government incentives, where a business can prove a good growth plan. Increased lending to good businesses might then create room to extend facilities to businesses in difficulty.

What causes markets to panic?

Markets can show the same dysfunctional emotions as the rest of us. They can worry, they can panic, and they can get depressed.

Imagine you hear on the news that petrol is going to be in short supply. You may rush out and buy extra petrol. If everyone does the same thing, the petrol shortage will suddenly get worse, potentially crippling a community's ability to function. What is rational in small doses, becomes self-destructive in large doses. To make matters worse, we all start fighting against each other, and it seems that nothing can restore order. Rumour abounds, and the uncertainty makes everyone unsure what to believe.

Again, imagine that you hear some bad personal news. Your hormones rush out a shot of adrenaline to adjust your system. But if too much of your system joins in, you get overloaded with adrenaline, leading to excessive anxiety, and inability to function. Your system starts behaving counterproductively. Internal rumour starts - in the form of paranoia and excessive worry. The uncertainty undermines our confidence in our own perceptions.

Now look at the current world financial situation. The markets received some bad news about U.S. mortgage debts and their performance. Cash supply was interrupted, and rumours began to circulate of cash shortages in the market. Dealers started to get anxious, and then panicked, rushing out and buying cash - in other words, converting their securities into ready money. This is crippling the financial markets' ability to function. Again, what was rational in small doses (a market adjustment), becomes self-destructive in large doses (a market collapse).

When young children feel threatened, in their panic they often rush into a barrage of self-defensive tactics. They take back their toys. They hit out. They cry. None of this helps, and it is up to adults to restore order by separating everyone for a while, waiting until things calm down, and then clearly administering guidance and discipline. With this in mind, perhaps governments should have simply closed the markets for a while, and told banks that they could have their toys back if they sat down and behaved. Well, it's a thought...!

German property giant in trouble

German property lender Hypo Real Estate is one of the latest to find that banks are unwilling to keep extending its lines of credit.

The German government has been trying to avoid going the route of wholesale nationalisation of threatened financial institutions. However, a partnership approach between government and a consortium of banks appears to have collapsed.

The banks haven't given a reason. But they may have realised that Hypo Real Estate, with its 400bn Euro balance sheet, will need a lot more than the 35bn Euros they had agreed to raise.