May 16, 2008
Bank of England has admitted interest rate cuts don't cure inflation: gang8
March 26, 2008
Educated opinion on current global fiscal crisis ..
New Zealand Herald, Wednesday March 19, 2008
By Brian Fallow
Stiglitz: US fiscal measures 'too little too late'
The United States financial crisis will get much more serious,
the Federal Reserve has little ammunition left and the kind of measures that
would help are unlikely to appeal to the Bush Administration, says economist
Joseph Stiglitz. Stiglitz, who won the Nobel prize in economics in 2001, is
a former chief of the Word Bank and chaired President Bill Clinton's council
of economic advisers. He was in Auckland yesterday to deliver a seminar at
the University of Auckland Business School.
The financial markets have been calling for the Federal Reserve
to slash the Fed funds rate by another 100 basis points overnight to 2 per
cent. The bank has also in the past week implemented further sweeping moves
to boost liquidity and bailed out Bear Stearns, a large investment bank.
"The Fed can keep the system from collapsing but it can't get the banks to
lend - to each other or to the market," Stiglitz said.
His recipe would be to stem the bleeding from the bottom by
bailing out the people who have been encouraged to take out injudicious
loans but now face losing their homes.
He thinks it is unconscionable that the shareholders of Bear
Stearns will walk away with US$250 million ($310 million), especially if the
remaining assets of the bank turn out to be garbage. "We have mechanisms to
he said.
bail out the system without bailing out the banks,"
Stiglitz expects the situation to get much more serious as a
vicious circle develops with banks husbanding their resources, restricting
lending and deepening the downturn. A series of interest rate cuts and
liquidity-boosting moves by the Federal Reserve and other central banks has
so far failed to persuade markets that they have touched bottom.
Some commentators such as Paul Krugman have started to worry
about the risk of a Japanese-style liquidity trap where interest rates get
so low that monetary policy ceases to have any traction. Calls for the US
Government to take action have intensified. But the only fiscal measures so
far - notably a US$150 billion stimulus package - were too little, too late
and badly designed, Stiglitz said. The Bush Administration had vetoed more
effective moves, like increasing unemployment insurance to stimulate demand.
It might be useful to have a public body buying up property left
vacant by the housing market collapse in order to underpin house prices, he
said. But that idea had been vetoed too.
Stiglitz's latest book is a scathing attack on the Iraq war and
puts a figure of US$3 trillion on its ultimate cost. He sees parallels
between Washington's Iraq adventure and Wall St's innovations which have led
to the current turmoil in the financial markets: a kind of recklessness and
hubris, a readiness to offload costs and risks on to other people, and an
indifference to the human cost. "There are a lot of parallels."
FOCUS ON INFLATION 'A MISTAKE'
The Reserve Bank's exclusive focus on curbing inflation is a
mistake, says Joseph Stiglitz. "It's exactly the wrong mandate, especially
at this juncture," he said. "In a small open economy quite often raising
interest rates is counter-productive because it induces a flood of capital
into the country and doesn't have the dampening effect it would have in a
closed economy."
It is also ineffectual if the inflation is imported, like when
it reflects high international prices for oil and food. "Raising New Zealand
interest rates will have no effect whatsoever on Saudi oil production."
Stiglitz prefers the US Federal Reserve's dual mandate which
includes employment (and by extension economic growth) alongside inflation.
He also questions the wisdom of having almost all the country's banks
foreign-owned, seeing it as a potential risk to stability in the supply of
credit if the parent banks get into difficulties. "I don't think countries
should turn over control of the supply of credit to international markets."
He is not advocating a return to an insular economy. "But at
least part of the system should be deeply rooted at home." The current
devaluation of the US dollar might be necessary, in light of the large trade
and current account deficits the US had built up, but it had the effect of
spreading a lot of the cost of adjustment to other countries, Stiglitz said.
"US problems do become the world's problems."
John Bishop’s call (letters 24th March) to reintegrate the supervision and regulation of banks into the Bank of England is correct, but another department also needs to be brought within the Bank, the Debt Management Office (DMO). The DMO has the power to determine exactly the level of liquidity (that is balances at the Bank of England) of the banks. When liquidity is needed all the DMO has to do at the moment is to underfund the government’s huge borrowing requirement and the banks become awash with liquidity.
The Financial Statistics, Table 4.2A, show that in September 2007 the Bank of England decided to increase the compulsory deposits of the banks by £10,000,000,000, nearly a 50 per cent increase. Ideally the Bank should have had the power to instruct the DMO to underfund by the amount required, but it seems that instead the problem was dealt with by the Bank of England lending the banks that sum, using market operations to achieve it. So the Bank of England lent the banks a sum which it then accepted back as deposits. This of course sounds crazy until one realises that the lending rate of interest was higher than the rate on the deposits, so the difference became effectively a tax on the banks, that yet another ‘Stealth Tax’.
Because the DMO overfunded the National Debt, it was inevitable that the banks did not have the cash to lend to Northern Rock, an excellent bank with an extremely sound balance sheet but whose creditworthiness had, according to the report of the Treasury Select Committee, been inadvertently prejudiced by the BBC which linked the Northern Rock’s need for a standby credit, a routine operation in the circumstances of the activities of the DMO, with the Subprime Crisis in the US. The Northern Rock had no sub-prime lending as it was passing all borrowing enquiries of that nature to Lehman Brothers, as was at least one other mortgage bank.
I need not inform your readers of who was responsible for creating the current incompetent system of monetary management. They will surely need only one guess.
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There is no subprime crisis here - yet. Our banks have had to provide for losses in America caused by what looks like the biggest fraud of all time, but no increase in British loans going bad. Northern Rock's finances were in great shape, with a lower than average impairment experience but it ran into trouble because of what the BBC said. Yes it had a standby facility at the BofE but no doubt the cause of that was the BofE's sudden dedcision to increase the compulsory reserve by 50 per cent. There would have been no problem if the BofE had had the power to instruct the DMO to hold back on funding to the tune of £20bn.
However The FSA has decided to don sackcloth and ashes, but really it is not to blame for the fiasco. Everyone has been talking rubbish on the BBC a few minutes ago, showing how rare is the understanding of how the credit system works. Perhaps we should offer them all a course, starting with invention of shubati.
No-one seems to realise that 'liquidity' comes from government debt and nowhere else. If the government has no debt, as in Australia, it has to buy assets from the banks to create a debt to them, but in the US and the UK this line of action is not needed.
What happened at Bear Stearns is that the banks took $10bn from it to increase their own liquidity. That put Morgan in a position to buy Bear Stearns on the cheap as it had the liquidity to cover the deficit. Presumably Morgan had not been bled of liquidity in the way the British banks have been.
Geoff Gardner
Britain is subsidising the US by £20bn. a year but in turn is receiving £50bn from others.
'Liquidity', that is credit balances owned by banks at the FED or BofE , are government debt, so if liquidity is short, let some of the government deficit go unfunded until the banks have the cash they need, and if some banks are still short the others will have a lot and must lend it to them or go without interest. Surely this is far better than the present crazy system where the FED or BofE lends to the banks at 6.75 per cent so that the banks can have the compulsory reserves of cash which earn them only 4 per cent. It could of course be another of Gordon Brown's 'Stealth Taxes'.
February 17, 2008
- Public announcement GEAB N°22 (February 16, 2008) -
A revealing harbinger: from March 2008 onward, the US government will cease to publish its economic indicators due to budget restrictions (3). Those who read the GEAB N°2 (02/2006) and included Alert certainly keep in mind our anticipation which connected the upcoming fall of the US dollar with the US Fed's decision to cease publishing the M3 indicator. This new decision is another clear sign that US leaders are now anticipating a very bleak economic outlook for their country.
On the occasion of the second anniversary of the publication of our famous “Global systemic crisis Alert” which toured the world in February 2006 (4), LEAP/E2020 wishes to remind that we are now resolutely stepping into an era with no historical precedent. Our researchers insisted on that many times in the last two years: any comparison with the previous crises of our modern economy would be fallacious. It is neither a “remake” of the 1929 crisis nor a repetition of the 1970s oil crises or 1987 stock market crisis. It is truly a global systemic crisis, that is to say a crisis affecting the entire planet and questioning the very foundations of the international system upon which the world was organised in the last decades.
According to LEAP/E2020, it is also instructive to observe that, two years after the release of this « Alert » which at the time generated both the interest of millions of readers worldwide and the condescending irony of most « experts » and « managers » of the economic and financial spheres, everyone is now convinced that a crisis is truly happening, that it is really global, and for most people already that it could indeed be systemic. However, it is always a repeated astonishment for our team to see the degree of incapacity of these same experts and managers in understanding the specific nature of the phenomenon currently unfolding. According to them, this crisis would only be a usual crisis but bigger. As a matter of fact that's how the financial media reflect the dominant interpretations of the ongoing crisis. According to our team, this approach is not only intellectually lazy (5), it is also morally guilty, because it has for a main consequence to prevent their readers (whether they are simple citizens, private investors or public or private organisation managers) from preparing for the upcoming shocks (6).
For this reason, in opposition to all what can be read in the mainstream media always eager to conceal the truth and serve the interests of those who rule them, LEAP/E2020 wishes to remind that it is first and foremost in the United States that the systemic crisis is taking an unprecedented shape (the « Very Great US Depression » as our team decided to call it in January 2007 (7)) because it is around this country, and this country alone, that the world got progressively organised after the second World War. The various issues of the GEAB extensively described this situation. In short, it appears to be useful to make clear that neither Europe nor Asia have a negative saving rate, a full-scale housing crisis throwing millions of citizens out of their homes, a free-falling currency, abysmal public and trade deficits, an economic recession and, on top of all this, a number of costly wars to finance.
Neither Asia nor Europe (or more precisely ‘nor the Eurozone') will suffer the roughest, the most sustainable and the most negative impact of the ongoing crisis; but the United States will, as well as all the countries/economies strongly linked to the US (what our experts have decided to call “the American risk”) (8). A “decoupling” is indeed taking place between the US economy and the other large regions of the world. But “decoupling” does not mean “independence” and it is clear that, as anticipated by LEAP/E2020 for many months, Asia and Europe will be affected by the crisis. But « decoupling » entails that the evolution of the US economy and of the other large regions of the world are no longer synchronised, that Asia and Europe are now moving along courses no longer determined by the US economy.
The global systemic crisis is in fact the beginning of an economic « decoupling » between the US and the rest of the world, knowing that the non « decoupled » economies will be dragged down the US negative spiral.
US Self-Employment in a Steep Downturn - Source Bureau of Labor Statistics / Merril Lynch (shaded region represents period of US recession)
Concerning stock markets, our team has anticipated since October 2007 that international stocks would plummet by 20 to 60 percent according to the region in the course of the year 2008. Today, we must re-evaluate our anticipations as we estimate that losses will be even greater than that. Indeed, on the one hand, stock markets have already lost between 10 and 20 percent since the beginning of the year (10), and, on the other hand, the collapse of the real economy in the US by the end of Summer 2008 will drag down all stock markets. According to LEAP/E2020, international stock markets will probably drop by 50 percent in average compared to 2007 (including in the emerging countries) (11).
This sort of re-evaluation is typical of the work of anticipation carried by LEAP/E2020. Month after month we try to distinguish which trends are growing and which are relenting in order to improve the accuracy of our evaluations. We do not strive to “be right” (12), not to “sell” or “promote” anything. We seek simply and without prejudice to describe in advance the consequences of the heavy trends at play in this 21st-century world, and to share with our readers what we think are the proper means to protect oneself from the most negative effects.
In this 22nd issue of the Global Europe Anticipation Bulletin, with the alert we sound about a collapse of US real economy from September 2008 onward, we are trying again to warn those concerned that this major event will generate many very severe socio-political troubles in the United States (13) whose economy is truly on a tumbling course (14), a situation extremely likely to entail very heavy consequences for the financial and monetary markets, and for the world's economy. We have not yet reached the heart of the crisis. According to LEAP/E2020, we will be there in the second semester of 2008.
Notes:
(1) A very instructive film was recently nominated at the Sundance Film Festival: I.O.U.S.A., directed by Patrick Creadon. As it follows the journey of David Walker, US Comptroller General (and therefore responsible for controlling federal public spending), during a series of conferences on the state of public expenditures throughout the country, this film shows the very direct impact of the current crisis on American citizens and the United States. The release of this film illustrates the fact that, in just a few months time, this crisis left the mere circles of experts and boardrooms of financial institutions to enter into the daily life of the US citizens.
(2) In the past few days, the complete collapse of Municipal bonds (or « Munis ») illustrates the fact that the crisis is spreading to all the sectors of the US society. This collapse will freeze all public investment projects scheduled by local authorities in the US. It is one of the first big victims of the implosion of « bonds insurers » announced by LEAP/E2020 in the GEAB N°19. It also demonstrates the fact that large banks are now incapable of playing their role of financers of the country's economic activity. Sources: Financial Times, 02/13/2008 & Bloomberg, 02/14/2008
(3) Source: EconomicIndicators.Gov, Economics & Statistics Administration, US Department of Commerce
(4) See GEAB N°2, 02/15/2006
(5) The first reason that may prevent those « experts » to conceive the « unconceivable », is not a matter of intelligence but a « commercial » problem. Indeed it would compel them to review most of their intellectual principles (their work hypotheses) and their business base (their « clients » would not appreciate to learn that they were on the wrong track all these years).
(6) On this subject, it is worth noticing the very straightforward speech made by the head of the Bank of England, Mervyn King, who recently warned his fellow citizens that the current crisis would downgrade significantly their living standards. Unfortunately, no US leader, including among the Democrats, is able to produce such a speech, knowing that their fellow citizens are hit even harder than the British. Source: The Telegraph, 02/14/2008.
(7) See GEAB N°11, 01/15/2007.
(8) In this 22nd issue of the GEAB, the LEAP/E2020 team gives a set of recommendations helping investors to assess themselves the « American risk » of a country, sector or investment.
(9) The same goes for all those who chose to listen to similar arguments telling them, along the years 2006 and 2007, that it was impossible for the EURUSD exchange rate to go above 1.30, then 1.40, and now 1.50… while waiting 1.70 at the end of the year 2008.
(10) Only « dream merchants » can still imagine that stock markets could improve by the end of the year, while the crisis is speeding up.
(11) It is worth reminding that in January 2008, in just a month, global stock markets saw USD 5,200 billion-worth go up in smoke. Source: China Daily News, 02/10/2008
(12) Even if our anticipations undeniably proved to be right in the past two years concerning the global systemic crisis.
(13) See ‘Sequence 6 : 2nd quarter 2007 – 4th quarter 2009 : « Very Great Depression » in the US, social unrest and growing influence of the army on public management, GEAB N°18, 10/15/2007
(14) Predictions about the failure of dozens of US banks in the coming two years illustrate the scope of upcoming difficulties. Source: Reuters, 02/01/2008
