KEY POINTS:
It's little wonder some of us are panicking about the US credit crisis. Commentators are talking about a financial crisis worse than the Great Depression, and even some economists are confused.
We answer some questions from readers about what the credit crisis really means.
* What's the difference
between the banks that are collapsing in the United States and the bank I keep my savings in here in New Zealand?
Global investment banks like Bear Stearns and Lehman Bros are in trouble because they bought complicated debt products without really understanding what they were getting into.
When the US housing market plunged, which was the end-of-the-line security for many of the loans, those at the end of the lending chain realised the loans were worth a fraction of what they had thought.
Explaining why he still has confidence in our banking system, Reserve Bank Governor Alan Bollard said yesterday that New Zealand banks were not involved in these kind of transactions.
And while the big Australian banks will feel the effects of uncertainty in the financial markets, so far the experts say they are in good shape.
As well, the Australian Government has a lot of money, and would be likely to bail out its banks rather than see them go under.
* Is the Federal Reserve privately owned (that is, not Government owned as many believe?) Where does all the money come from in order to bail out the big banks, mortgage companies or insurance companies?
The Federal Reserve is a branch of the United States Government. However, like the Reserve Bank of New Zealand, it makes decisions independently of Government control.
The Fed is run by a board of governors, who decide how much money should be released into the economy and at what price (ie, interest rate). When things get ugly the central banks cannot just print more money.
In the rare cases when they decide to bail out a private company, they get money by issuing Government bonds. This increases Government debt, which is the responsibility of the taxpayer.
* Is my super fund safe?
Superannuation funds are not guaranteed. How your fund is faring will depend on how much money you have invested in shares and property. If you have a lot invested, your returns will be down.
However superannuation funds should be seen as long-term investments, and it's likely the effects will even out over a number of years.
* Where's the safest place to have my money?
Generally Government bonds are seen as the safest place to have your money, although any investment comes with a risk. The New Zealand Government's credit rating is between the highest level rating, AAA, and AA+.
However, the lower risk means Government bonds may not pay as much interest as other investments.
The interest rate for six-month Kiwi Bonds is 6.75 per cent, and the rates for one- and two-year bonds are 6.25 per cent and 6.00 per cent respectively.
* Is this really as big a crisis as the Great Depression?
No. But some people are saying it may be the biggest financial crisis since the Great Depression.
The Great Depression was a worldwide economic crisis. So far this crisis is limited to the financial sectors.
A financial crisis can become an economic crisis if falling confidence brings down other parts of the economy. But so far, the New Zealand economy remains in fairly good shape.
* I thought this was a credit crisis. So why is the stock market going down?
In times of uncertainty people tend to pull money out of investments they see as risky - including the stockmarket. On the other hand, investments that are considered to hold their value, like gold, go up in price.
As well, borrowing becomes more difficult in a financial crisis as lenders shy away from risky loans. This makes it harder for businesses to grow.
