The failing United States financial system will affect New Zealand's recovery as global economic growth slows, and has emerged as a significant election issue.
New Zealand is already in a recession.
This now could continue through to the end of the year or beyond.
Investment banking giant Lehman Brothers went bankrupt yesterday and Wall Street sent up distress signals, sparking a global fall in world share values and widespread fears for the financial system.
The significance of the failure, and the related financial melt-down, could result in the United States Federal Reserve lowering its central lending rate as early as today by 0.5% to 1.5%.
Expectations are that the European Central Bank could do the same and the Reserve Bank of New Zealand could soon follow.
Finance Minister Michael Cullen yesterday offered assurances that New Zealand's banks were in strong health.
"I'd emphasise the important thing from our perspective in New Zealand is that our banking and financial system by and large is strong," he said.
Billions of dollars were wiped off the value of world sharemarkets yesterday in response the news from the US.
The Bank of England injected 20 billion ($NZ55.38 billion) into money markets.
Prime Minister Helen Clark said in an interview that yesterday's events were now being described as the world's biggest financial crisis since the 1930s.
"For the Opposition to be out there saying 'let's borrow more money' during the worst financial crisis for 70 years is so mind-boggling and stupid I can hardly find words to describe it."National Party leader John Key, who once worked on Wall Street for Merrill Lynch - which yesterday was teetering on the edge of bankruptcy - said attempts to link him to the bank's current problems were absurd and pitiful.
Bank of America said it was buying Merrill Lynch for $US50 billion ($NZ75.84 billion).
Asked if Mr Key could hold up his experience on Wall Street as the right qualifications to deal with the financial crisis as a prime minister, Miss Clark was scathing.
"What started this crisis was very bad money-market practices in the US, so why would you put yourself in the hands of someone with that sort of experience?
"It's very worrying for Kiwis. It's time to say be afraid, very afraid," she said.
The National Party had earlier indicated it was prepared to borrow for infrastructure spending, increasing the government debt as a percentage of GDP by 2%.
National Party finance spokesman Bill English said further financial instability in world markets would create more uncertainty about a quick recovery from the current recession in New Zealand.
"These significant events could have negative consequences for our economy through lower commodity prices and less availability of credit. At the very least, households face more uncertainty about their economic outlook."
The election campaign was not a time for reckless promises from desperate governments.
With the New Zealand economy in recession, fiscal initiatives must be targeted at strengthening the economy for the future.
Finance Minister Michael Cullen said it was a bit rich for National to promise $50 a week in tax cuts on Monday and then attack reckless spending promises on Tuesday.
"The challenges facing the world economy are serious and they are happening right now.
"John Key's plan to borrow for tax cuts exposes the exact sort of short-term, risk-taking behaviour that got his friends at Merrill Lynch into trouble."
Miss Clark said Mr Key had raised the issue of his Merrill Lynch experience recently as proof that he could be trusted to run the economy here.
Mr Key said in linking him to the bank's situation Dr Cullen was "so desperate he was dredging the bottom of the barrel".
He also attacked Labour's record, which he said amounted to overtaxing voters so it could put money into its pet projects.
The political fall-out from the crisis spilled over into the US presidential race, with Republican candidate John McCain pledging reform and Democratic candidate Barack Obama painting him as out of touch.
It was unclear which candidate voters might be more likely to turn to in an ongoing climate of economic turmoil.
Polls generally showed voters believed Mr Obama would do a better job than Mr McCain in handling the economy, but his lead on economic issues had been shrinking.
