Germany’s Recession

The Financial Times reports Germany’s economy shrank at a record pace during the first three months of 2008, shrinking at a faster rate than analysts had predicted and confirming that Germany is among the European countries hardest hit by the crisis.

The New York Times reports the economy of the eurozone as a whole shrank 2.5 percent during the same period. 

Theory of Integrated Macroeconomics

By Professor Solomon Budnik

Former professor of Comparative Law, currently chairman of the Aerospace company UTG-PRI LTD. – Tel Aviv, Israel

Subtitle: Crisis of Unified Economic Systems and Uniform Currency. Macroeconomic Geometry.

ABSTRACT

IN RE: New advances in open economy modeling

With regard to economic modeling, it should be noted that we deal now with the expanding economic universe with ever changing space-time continuum due to ever expanding world population and consumer market. No artificial economic model could adjust to such  circumstances or fit various rigid and incompatible economic systems, particularly not the Nobel Prize in Economics gained behavioral, equilibrium, and game models.

In re:   human behavior and free market  are unpredictable, being unstable, and exercise a cumulative effect upon given economy due to mass public and monetary upheavals. For example, the economy of ill-conceived socio-communist and socialist states was and is based on social rules instead of the rule of capital, and couldn’t therefore be properly planned and predicted, as proven by history.

Astoundingly, the  economic system in USA, etc. is not capitalistic but Capitolistic, judging by politically induced state interference into free market affairs, with catastrophic results remedied by same state with trillions of dollars of misappropriated taxpayers’ money, forcing thereby future generations to slave themselves to repay that national multitrillion dollar debt to totalitarian and human rights violating China and totalitarian, racist and terrorist Arab states controlling the US State Dept. with oil dollars.

The equilibrium model is also wrong, since it contradicts the common sense, physics and geometry, for a physical or economic system doesn’t function or operate in a vacuum of economic space, and  an equilibrium can only be reached  by two corresponding systems positioned in the same economic plane, which is impossible. It means that no monetary system can reach a state of equilibrium in ever changing environment and monetary parameters. In fact, a model or a system in equilibrium is a dead, non-functional body, as is Zimbabwean Central Bank which has abolished its worthless national currency.

The  economic game model is wrong as well, since a game needs at least two players, with the end result of a  winner and a looser, or means a single player that plays with a third-party invented program (Russian and Israeli central banks that used the American FED’s model with devastating results), and usually a game theory is applied post-factum to a past event, as the Israeli economic game theorist applied his game paper to a so-called Oslo Accord and its step-by-step Israeli concessions  never matched by the opposing PA,  the Arab terror outcome of which the Israeli people and economy suffer under since 1993.

In all such circumstances, the society and the free market rebel and correct themselves via revolutions and financial downfalls, with trillions of dollars lost. Accordingly, as the Church had separated itself from the state and became a quasi financial institution above the state, the free market economy should function as a non plus ultra financial institution ruled and protected by integrated macroeconomics with a self-correcting mechanism of a three-tier stock exchange system developed by me.

Accordingly, I suggest that in order to prevent future economic depressions and collapses, the common  macroeconomics should be replaced by integrated macroeconomics (as formulated by me) separated from the monetary and fiscal economics induced and controlled by the state via central bank and the treasury which are self-conflicting bodies without taxpayers’ control.

The reason for such a change is that the capital market should be free from the state control in both

THESIS

Preamble: this paper has been composed due to the fact that all previous economic theories and models have failed in the modern turbulent economic circumstances of the intertwined, dependable and unstable global markets and economic powerhouses, with unpredictable fluctuations of domestic and foreign capital.

In re: let’s reminiscent briefly on the history of the past empires, state unions and confederations that had led to the rise and fall of the British Empire (despite the gold standard of the Pound Sterling which was the primary reserve currency for much of the world in the 18th and 19th centuries, but perpetual account and fiscal deficits, financed by cheap credit and unsustainable monetary and fiscal policies used to finance wars and colonial ambitions eventually led to the pound sinking (read current U.S. economic situation), Spanish and Dutch empires, whose economics were based on colonial assets, and the fall of the Austrian-Hungarian entity. The USA had united independent states which then exist on cash injections of the Treasury and the Federal Reserve via dollar printing and the issue of now unsellable state bonds, e.g., the state of California, which has now a budget deficit of $42B, while the overall national debt per American household is now $35.000, to rise to $75.000 due to President Obama’s financial policy. Economic crisis in America happened a number of times, albeit dollar was the world reserve currency guaranteed by gold.

In post World-War II, the US dollar took over the sterling’s dominant position and became the world’s newest reserve currency. The Bretton Woods Accord, the first major economic transformation toward the end of World War II, established the International Monetary Fund (IMF) and a way to value the various currencies of the world relative to each other. All foreign currencies would trade in relationship to the US Dollar and only the US dollar (as the reserve currency) would be tied to a gold standard (meaning the value of dollars circulating must be backed by gold reserves). The Roosevelt dollar was a schizoid, two-tier dollar, whose purchasing power at home did not match its gold parity abroad. At home, it was a fiat monetary unit, not convertible to gold; abroad, it was convertible to gold at $35 per ounce.

Americans of that era learned rather quickly that the maintenance of wealth in tangible form was preferable to paper wealth, so as bank runs became more pronounced, they rushed into and hoarded gold, since a growing distrust of banks meant an equal distrust of paper money.

Executive Order 6102 of April, 1933 and the United States Gold Reserve Act of January, 1934 changed all that. The 1934 Act raised the official price of gold to 35$ per ounce from the 20.67$ paid to Americans who, under the threat of a 10,000$ fine and/or 10 years imprisonment, had been forced to turn in their gold a few months earlier.

The gold standard caused major problems in the 1960’s when France (under the London Gold Pool) called America’s bluff and demanded gold for payment of debt, rather than US dollars (they understood that USA were printing more money, to finance the Vietnam conflict and fund new social programs, than we had available in gold reserves).

Due to the rapid loss of US gold reserves, President Nixon had no choice but to abolish the Bretton Woods accord in August of 1971 and he took the US dollar off the gold standard (it was $35 per ounce then).

Ruble of the Imperial Russia had also been guaranteed by gold, but that colonial and agrarian country, notwithstanding its industrial output of the 1913, existed due to wars and foreign loans. The crash of that economically poor, on bayonets unified empire was inevitable, as well as the crash of the following Soviet empire due to its domestic and international aggression and annexation, failed Communist ”planed” economy, fifteen fictitious republics on Moscow’s payroll,  one-side introduced fake ruble-dollar parity, purchases of grain abroad for dollars, arms race and non-repaid foreign loans, paid-off by Russia only recently.

And nothing have come up of  the idea of the  Belarus-Russia economic union and  unified currency, and  Belarus now lobbies the EU.

With regard to Euro, it had lost  30% of its value at the issue, and that issue and the annulment of the former European currencies has cost tens billions of dollars. The economy of the leading EU states had thereby been undermined due to the incompatibility of the different economic systems and internal state protectionism of the EU members. The economy of minor states had been damaged due to sharp discrepancies  between the low wages and 2-3 times higher prices due to joining the EU where wages are 10-20 times higher. Example: Bulgaria, Czech Republic, and Baltic States which are virtually bankrupt.

Euro keeps its mark due to free circulation of the paper money in a monetary spread now affecting the UK and Switzerland, but  Euro can fall to a critical point due to reduced  consumption and production,  credit crunch and the strengthening dollar.

EU Central Bank and the Bank of Israel (BOI) had followed suit by emulating FED’s actions applicable in USA only, i.e., by zeroing all interest earning saving deposits and to buying-in own state bonds. In  Israel, the American-led BOI had unreasonably devalued the strong shekel by 30% in favor of  weak dollar and Euro due to threats of total strike and extortion  by the leftist subversive Israeli Labor Union (so-called New Histadrut), albeit the Israeli import is 3-4 times larger then export, and BOI had bought-in the Israeli state bonds, albeit there was no huge foreign debt as in USA, had depleted the Treasury of its large  tax income of 15% on now non-existing shekel saving deposits of the bank customers, had reduced the interest rate to 0.5% thus depriving the bank clients and the banks of their earnings, and made thereby poorer  the consumers. Said erroneous and highly damaging actions had deflated the Israeli economy with no official inflation, caused mass unemployment, closed companies and factories, and caused the 20%-50% rise in travel expenses, food, gas and RE prices due to actual inflation concealed by the BOI, since  its actions are in contradiction to all written and unwritten free market rules, with negative results for Israeli economy, for the reduced money supply wasn’t compensated by a $750B stimulus  package and capital infusion in banks and companies, as in USA.

In Russia, on the contrary, its Central Bank had opted for inflation vs. deflation, and had allowed large interest rates at falling consumer and RE prices, with now value appreciating ruble, thus saving the consumer market, its money circulation and earnings on saving deposits.

Paradox but fact: dollar had appreciated against foreign currencies despite the collapse  of the U.S. economy, since all countries buy up dollars for currency reserves and support of their U.S. market dependent economies.

Hence, it is obvious in my opinion that the U.S. and EU economies and monetary expansions were based quasi on the Einstein’s formula Е = мс2, i.e. energy of the economy is equal to the money mass  multiplied by the speed of its circulation in the quadrature of the given monetary territory. But in case of  the  reduced  circulation of money, as occurs now everywhere, the economy of a state shrinks and is subject to a gravitational collapse due to a  financial black hole.

I would elaborate and picture the economic model in geometric terms of universal macroeconomics, i.e. a circle within a square. Central Bank and the SE of any state are the gravitational monetary bodies in the center of the circle of thereby attracted  economy, and distribute financial energy – the money mass and securitized wealth within the boundaries of given economic universe, whose revolving circle represents the circulation of capital. The ”square” of the GDP, cornering the circle of the economy forms four corners – fields of the given financial space, representing respectively the banks, the RE market, consumption and production.

This represents my Unified Field Theory in Economics, as per Einstein’s theory in Physics, applicable to macroeconomics where accordingly monetary forces between the objects of  economy are not transmitted directly between them, but instead go through intermediary financial fields whose  interactions should be unified  (from strongest to weakest) to prevent the crisis of economy.

To substantiate: when too much monies are pumped into that system as in USA prior to the crisis, the ill fetched economy expands and depresses said fields – cornered banks, RE market, consumers and companies,  constituting the depression with corporate bankruptcies where macroeconomics enter into the conflict with the microeconomics (strongest vs. weakest). To rebound, the economy must contract to relieve the tension from said affected segments of the economy and that had happened recently in USA, proving my assumption.

 Here I also introduce the terms of the “spot” money, “intangible” money with delayed transaction and repayment, and “remote” money, the discrepancies in which had led to enormous consumers’ debt and credit crunch in USA. The matter is that the US economy and financial market were erroneously oriented toward assumed  wealth of the consumers, i.e.,  their unsecured credit cards and loans (intangible money with delayed transaction and repayment), but the actual wealth of the consumer is the real money in his pocket (spot money) and remote money in his bank saving account, so if the US credit report companies and lenders would have had checked and calculated the actual cash status of the consumers/debtors using my money terms above prior to issuing  a mortgage or a loan, the monetary and economic crisis in USA could have been avoided.

It means that apart from the usual state and corporate credit rating, the new gross consumer credit rating (GCCR) should be introduced and used to constitute the essential part of the advanced modern macroeconomics, and that is particularly applicable to REITs, Fannie and Freddie in USA. Here, my term of the General Growth Personal Income (GGPI) should be introduced (as previously applied to RE properties), and calculated by the FED or any Central Bank via IRS and Tax Authorities to keep the economy in check and prevent any crisis.

Nota bene: the problem of common macroeconomics is that it is not based on the Rule of Golden Section and the Fibonacci sequence, albeit all universal systems from the human body, plants and up to the universe are based and develop on this very same principle. To elaborate, I would define the monetary correlation between various states and economic systems in the  following approximate ratio, applying Fibonacci figures: USA to the EU as 1:2, USA - UK as 2:3, to China, Japan, India, Mexico respectively as 3:5, 5:8, 8:13, 13: 21, and so on, showing the dilution of capital, having in mind the relevant buying potential of the consumers  which is low in China and India,  in relation to  the billions of people in said states.

The expanding global economy also reflects the geometry of the Fibonacci spiral that approximates the golden spiral of the universal macroeconomics and globalization based on irrational constant of economic dynamics.

This is all because the GDP based common economy is assumed to be closed, no imports or exports occur.

So my opinion  is that any economy should be based  on  the financial pillars consolidated under one roof, i.e., the real estate market, the stock exchange and the gold trade should constitute a uniform, self-containing system, as the project developed by me, namely the Alternative Int. Stock Exchange, to include the Real Estate SE  and the Gold SE, constituting my Integrated Macroeconomic Theory.

I suggest therefore that apart from the GDP, modern economy should be linked to the Gross Foreign Product  (GFP), as termed by me, including foreign revenues of domestic companies and the offshore assets. This implies the repatriation and reinvestment of the foreign gained income and fled capital as the amortization of the domestic corporate and private assets that constitute thereby  the Cumulative Gain Product (СGP), a term  formulated by me. Said new measure  can mitigate the domestic economic crisis and attract foreign capital due to adjusted financial parameters and upgraded credit rating of the given state.

In re: Concerning the collapse of major U.S. and EU investment banks, with heavy losses at the NYSE,  Russian, EU and Asian stock exchanges and monetary systems and to mitigate the economic and financial situation, I have devised the  project  of the innovative Alternative  Int. Stock Exchange  (AISE), to be established in Jerusalem, to include the Real Estate Stock Exchange and the Gold Exchange to secure investors’ assets and gains. Said project is based on my previous project and bylaws of the Tel Aviv Alternative Stock Exchange solicited by the Israeli Finance Ministry.

Said uniquely integrated three-tier financial system would attract large capital due to innovative self-compensating triple index which is not entirely GDP oriented, as the world economies are based  erroneously upon, leading to collapses, so the Israeli economic and financial system would thereby be based on our introduced GFP as well, thus securing the stability of capital and market and bringing the economy out of recession.

Reprinted with kindly permission of Solomon Budnik. (C) 2009 by Solomon Budnik. All Rights Reserved.

G-20-Finance Ministers Meeting

News reports indicate a meeting of finance ministers from the G-20 countries, laying the groundwork for a major April 2nd, 2009 heads-of-state summit addressing the financial crisis, produced agreement in several areas.

Australia’s representative at the meetings said: “Everybody agreed: It’s fiscal stimulus plus. We’ve got to do something about the flow of credit in the financial system; we’ve got to reform our international financial institutions.”

Reportedly the delegates reached general agreement on the need both to boost International Monetary Fund (IMF) resources in the short-term and to reshape the fund in the longer term, including a timetable to increase the voting rights of emerging economies.

Reuters reports the group also agreed to boost funding to the Asian Development Bank (ADB) by $100 billion, bringing the bank’s war chest to $150 billion total.

Keynes and the triumph of hope over economics

In a Financial Times op-ed, Benn Steil, author of Money, Markets, and Sovereignty, satirizes the tendency of economists to cite John Maynard Keynes in support of dramatic fiscal interventions where cold analysis should give us pause.

“Citing Keynes gives us special licence to talk economics without using any. To paraphrase the lawyers’ dictum, when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes – and to great effect.

Keynes, not coincidentally, had nothing to say about the proper components of fiscal stimulus. This allows him to be cited with great effect by both paternal progressives (who favour government spending) and caring conservatives (who favour middle-class tax cuts).”

Read full story.

Die neue Einsamkeit des Josef Ackermann

Die Frankfurter Allgemeine Zeitung berichtet über die neueste Hetz- und Medienkampagne gegen den eigentlich ganz vernünftigen und erfolgreichen (nicht der Tod, sondern der Neid ist ein Meister aus Deutschland, um den Spruch von Paul Celan aktueller zu machen) Deutsche Bank-Chef Josef Ackermann, der in seiner Wortwahl über Staatskapitalismus sich nur treu geblieben ist. Vermutlich versuchen Politiker (die in Aufsichtsgremien von Banken sitzen, und von dem Ernst der Lage wussten) und Mitläufer (sprich Bänker) vom eigenen Versagen abzulenken, in dem sie Ackermanns Aussage, die nicht anders als die blanke Wahrheit ist, anprangern, um ihn als Sündenbock für das gereizte Volk zu präsentieren.

“Er ist jetzt wieder ganz allein. Alle dreschen auf ihn ein: härter, grausamer als jemals zuvor. Josef Ackermann, der Schweizer, hat alle Hochs und Tiefs in Deutschland erlebt. Aber so hoch oben wie in den vergangenen Monaten war er noch nie. So tief gefallen wie in der letzten Woche ist er ebenfalls noch nie. Ob er sich davon je wieder erholen wird, ist ziemlich ungewiss.”

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Ralf Dahrendorf zur Finanzkrise

Während Europäer allzu schnell die freie Marktwirtschaft begraben und den Staatssozialismus einführen wollen, äußert sich im Gespräch mit der Frankfurter Allgemeinen Zeitung  die Galionsfigur des europäischen Liberalismus Ralf Dahrendorf zur globalen Finanzkrise, und plädiert für eine Erneuerung des Kapitalismus:

“Zur Freiheit gehören die Krisen der Freiheit. Und dass die Freiheit des Marktes Regeln, braucht, habe ich immer vertreten. Der Finanzkapitalismus hatte sich zuletzt verselbständigt: für bestimmte Innovationen, die Spekulation auf Schulden oder Indexentwicklungen, hatte sich ein ungeregelter Handel entwickelt. Das war noch kein Markt – und es war auf Dauer so nicht durchzuhalten. Jetzt werden sich die verbleibenden Banken und Investmenthäuser Regeln suchen. Für diese neuartige Ökonomie wird ein Markt mit Regeln entstehen.”

Vollständiges Gespräch lesen.

Bloody Party on financial markets has just begun

The Central Banks have lost control, market panic spreads and several exchanges suspend trading.

Yesterday’s rapid sell-off on Wall Street, which dragged the Dow Jones Industrial Average down more than 7 percent in late trading, kicked off a wave of global selling today that some analysts termed a panic selling.

Japan’s Nikkei index plunged nearly 10 percent, as did London’s FTSE index at market open, before making a slight recovery to losses of around 8 percent. In Asia, markets in Hong Kong, South Korea, India Thailand, Indonesia, Australia were among those that suffered major losses.

Shares also fell sharply across Europe, with Germany and France each showing early losses over 7 percent. Russia, Indonesia, Iceland, Austria, and Thailand all halted trading after steep losses.

The New York Times reports the United States and UK appear to be converging on coordinating global action to end the decline. The article says the idea that governments should inject money into banks in return for partial ownership and guarantees of loan repayment will be closely examined when IMF finance ministers meet tomorrow.

The Wall Street Journal reports the U.S. Treasury has begun a process of interviewing financial executives to gauge interest in new programs aimed at injecting capital into banks.

European economy goes into recession

European and Asian markets stabilized today, showing sober gains following unprecedented coordinated interest rate cuts by many of the world’s major central banks. Russian stock markets, which had suffered worse losses than any major market, gained 17 percent.

Meanwhile, the International Monetary Fund (IMF) said it projects Europe is headed toward a recession and that the continent’s banking system is currently under “extraordinary financial stress”.

Read full story.

Globalised Economy

In the International Herald Tribune, Paul Kennedy, director of International Security Studies at Yale University, and author of the bestseller The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, comments on how the consequences of the financial crisis are affecting all parts of an increasingly globalised economy.

“Even the rising Chinese superpower is being blasted by these distant capitalistic convulsions. How could its Finance Ministry, seduced by the advice of Wall Street bankers and consultants to place billions of dollars into American so-called ’safe havens,’ not be badly shaken by the financial tumults of the past few weeks?

Should China trust the Yankee capitalist system? What will happen to its vital exports to that enormous, volatile consumer market? Already The People’s Daily in Beijing has published a noteworthy piece by the economist Shi Jianxun calling upon the world to create ‘a diversified currency and financial system and (a) fair and just financial order that is not dependent on the United States.’ Where goes the dollar then, and its reputation as a safe haven?”

Read full story.

Coordinated interest rate cuts by central banks worldwide to stop breakdown in financial markets

Following a bloody Tuesday on Wall Street, in which the Dow Jones Industrial Average dropped more than 500 points, over 5 percent of its value, Middle Eastern markets also collapsed today, with Egypt’s main index falling 16 percent and Saudi Arabia’ s falling over 8 percent.

Japanese markets fell over 9 percent in early trading, and Hong Kong’s main index fell over 8 percent. Markets in UK, France, and Germany all suffered heavy losses as well.

Great Britain also announced a rescue plan the Financial Times says amounts to a part-nationalization of the country’s banks.

In response to the growing crisis, the U.S. Federal Reserve, Bank of England, European Central Bank, and other major central banks all cut interest rates this morning in a coordinated move.

Read full story.

Russia Call to Action On Financial Crisis

President Medvedev records his video at the Kremlin. Photo: © ITAR TASS

While the severe global crisis of confidence in financial markets continues to grow, and with a succession of EU countries announcing individual rescue plans, the Wall Street Journal reports on greater call for a coordinated response to the crisis threatening the bloc’s financial system.

Iceland, one of the countries hardest hit due to its highly developed banking sector, says it has arranged for a 4 billion euro bailout package from Russia, though the Financial Times reports Russia thus far has denied reports of the loan.

Russian President Dmitri Medvedev issued a call for coordinated global action to confront credit problems and said he would present a plan for how to tackle the crisis in meetings later this week in France.

Read full story.

Europe’s Financial Storm

Stocks fell sharply in Asia and Europe this morning as fears over breakdown in the European financial system spread out. The slowdown came as Germany took what the Financial Times calls a “dramatic move” by saying it would guarantee all funds in German bank accounts – currently worth nearly 570 billion euros – to protect against panic withdrawals. The Economist reports a number of European central banks have started taking similar moves and looks at some of the fallout in European financial markets.

In an editorial, the Guardian comments that the financial storm is now on Europe’s doorstep. As this crisis turns from a financial to an economic one, government intervention will surely become more the rule than the exception.

An editorial in The Wall Street Journal says that the only thing more predictable than European Schadenfreude at American economic trouble is how quickly it falls away amid Europe’s own big problems.

In the Sydney Morning Herald, columnist Paul Sheehan comments on a book written five years ago by George Soros, warning about the dangers of excessive debt and asks why nothing was done until the financial system was on the brink of collapse.

China’s Financial System

China’s Prime Minister Wen Jiabao said China’s financial system as a whole has proven well buffered to the financial concerns elsewhere in the world. He says Chinese financial firms have generally increased their strength during the course of the crisis.

The Wall Street Journal looks at how East Asian central bankers, including China’s, have responded to the U.S. bailout plan.

Read full story.

America’s Economy Will Recover Faster Than Britain

In The Times of London, Lawrence B. Lindsey says the economic crisis will not result in Depression-era hardship.

“Even the smartest people make mistakes. Sir Isaac Newton lost money in the South Sea Bubble. He not only figured out gravity, but was Master of the Mint, as close to being a central-bank governor as one could be back then. Recognising the developing bubble, he sold his position. Then, when prices continued to rise, he felt that he might have been mistaken and bought back in just before the top, losing a small fortune.

With roughly three and a half centuries of experience with financial bubbles that burst, we can make some reasonable judgments on how this one will end and what the world will look like afterwards.”

Read full story.

Central Banks respond to worst financial crisis since 1929

Several of the world’s most influential central banks unveiled a coordinated response to this week’s market turmoil and broader concerns about financial markets.

The U.S. Federal Reserve announced it would make an additional $180 billion available to foreign banks for overnight and longer-term money markets.

The European Central Bank, Bank of Japan, Bank of England, Bank of Canada, and Swiss National Bank made a joint statement that they would work with the U.S. Fed to help make short-term loans available to financial institutions in their countries.

Separately, the Financial Times reports Russia will inject over $19 billion to support its sputtering financial markets, following a dramatic stock slide.

A backgrounder from the Wall Street Journal says the credit crisis, spawned from bad U.S. mortgage-backed debt, has spread into the worst financial crisis since the 1930s, and that there is no clear end in sight.

Read full story.

Fed’s Follies

In an op-ed in the Wall Street Journal, Benn Steil argues that the U.S. Federal Reserve has damaged the credibility of inflation targeting by pursuing other objectives inconsistent with price stability.

“In the dozen or so years until 2007, it had become as close to a global orthodoxy in economic policy making as we ever see: Central banks should target a low and stable rate of inflation.

This replaced earlier orthodoxies – such as that central banks should maintain a fixed exchange rate with an ounce of gold, which was abandoned in 1971. Though inflation targeting left far more latitude for government officials to expand the money supply, it too ultimately proved too great a shackle on the exercise of central bank wisdom.

The U.S. Federal Reserve, the European Central Bank, the Bank of England and other rich-country central banks have generally made 2% inflation, give or take a smidge, the touchstone of good performance. Fed officials have for 20 years paid public obeisance to their statutory ‘dual mandate,’ to maximize employment as well as stabilize prices. But in practice, until recently, they treated it much like a mildly embarrassing biblical injunction that could be safely ignored, if not repudiated.”

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Eurozone Stagflation

The Financial Times reports economic indicators from the Eurozone countries show a significant risk of economic slowdown and rising inflation across the region.

Read full story.

Europe and US want a stronger dollar

U.S. and European officials have come together in the belief that the U.S. dollar should strengthen against the euro, following more than a year of sharp decline.

Read full story.

Credit crunch and opportunities for corporate banking in Europe

A new article from the McKinsey Quarterly examines the credit crunch with an eye toward possible opportunities it opens up in Europe’s corporate banking sector.

“Continuing turmoil in global capital markets after the credit crunch of mid-2007 has clouded the short-term outlook, especially in investment banking. We believe, however, that corporate banking in Europe will benefit from several profitable growth areas over the next 18 months and that shrewd players should position themselves accordingly.”

Read full story.

France and UK to press banks over more transparency

French President Nicolas Sarkozy and British Prime Minister Gordon Brown made a joint push for greater regulation of European banks, calling for “full and immediate disclosure” of potentially bad debts.

Read full story.

U.S. Dollar plunges to record low

Bad U.S. sales data added to recession concerns as the dollar fell to record lows the euro and reached its lowest point against the Japanese yen since 1995. Gold also reached record highs, topping $1000 per ounce for the first time in its history.

Read full story.

U.S. Federal Reserve takes radical action

The U.S. Federal Reserve took action to boost liquidity and stave off market meltdown. The Fed said it would offer the bond market $200 billion in Treasury bonds for a month at a time, accepting ordinary triple-A rated mortgage-backed debt as collateral.

Several major global central banks followed suit with similar moves.

The Wall Street Journal calls the move a “surgical strike” in response to a growing wave of investors selling out of mortgage-backed securities. Global markets made heady gains on the news, and U.S. stocks posted their largest single day of gains in over five years.

Despite the move and the market gains, experts remained skeptical about the prospects for quick economic recovery. The economist Nouriel Roubini writes on his blog that many of the world’s most prominent economists are now subscribing to his estimates – formerly considered extreme – that U.S. financial losses could top $1 trillion.

EU Treaty of Lisbon

A paper from the Swiss Center for Security Studies notes broad institutional changes the EU’s Treaty of Lisbon would require of the EU’s security network, if the treaty is passed.

A policy brief written by Nicolas Véron, an expert on accounting, financial regulation and capital markets, also looks at the Treaty of Lisbon, but with respect to Europe’s financial hubs and what impact it will have on European growth.

Bearing Down – The coming recession

Desmond Lachman doubts that monetary policy can stem the looming recession.

by Desmond Lachman

Wall Street estimates that bank losses stemming from bad lending behavior will range anywhere from $500 billion to $1 trillion. These numbers dwarf the losses from the savings-and-loan crisis of the 1980s.

Until very recently, most Wall Street analysts were in denial about the prospect of even a mild economic recession, let alone a serious and prolonged one. Ever optimistic, they turned a blind eye to the onset of the worst U.S. housing bust since World War II. They also minimized the gravity of the subprime mortgage crackup, the subsequent credit crunch (which has been plaguing the U.S. banking system since mid-2007), and the approximate doubling of global oil prices to around $90 a barrel.

Now that practically every economic indicator is signaling recession-from rapidly falling home prices to abysmal Christmas spending figures to declining employment growth to tightening bank lending standards-Wall Street analysts are conceding, reluctantly, that America might experience a recession in the first half of 2008.

However, they are all too quick to reassure us that this recession will be short and shallow, with a slowdown in the first half of the year to be followed by an early and vigorous rebound in the second half of the year. In making that forecast, they are pinning much hope on two things: the Federal Reserve’s recent decision to slash interest rates aggressively and the $168 billion fiscal stimulus package announced last week on Capitol Hill.

It would be wonderful if the Wall Streeters were right this time in their sanguine prognostication. The sad truth, however, is that all the important clues are pointing in the opposite direction. The main forces driving us toward a recession-high oil prices, a serious credit crunch, and the bursting of a major asset price bubble-are operating in combination with each other. At the outset of America’s three previous recessions-in 1981, 1990, and 2001-these forces were operating separately. Therefore, it seems reasonable to expect that a recession today will be longer-and more painful-than the postwar average (around nine months).

Steven Roach of Morgan Stanley argues, correctly, that the present housing market bust is affecting a very much wider swath of the U.S. economy than did the dot-com bust (which led to the 2001 recession). After all, the combined output of the housing sector and housing-related industries accounts for roughly 10 percent of the total U.S. economy-a considerably larger share than technology investment. And there is every reason to believe that national home prices will fall by at least another 10 percent in 2008, under the weight of record inventories of unsold homes, the scheduled resetting of adjustable rate mortgages, and a severe tightening of mortgage lending standards. These facts alone suggest that a 2008 recession will be more serious than the one in 2001.

In a similar vein, the present credit crunch is far more debilitating than was the savings-and-loan crisis of the mid-1980s. For while the credit woes of the 1980s were largely confined to the savings-and-loan sector, today’s credit problems seem to be much more pervasive, going well beyond subprime mortgage lending. Indeed, Wall Street estimates that bank losses stemming from bad lending behavior will range anywhere from $500 billion to $1 trillion. These numbers dwarf the losses from the earlier savings-and-loan crisis.

The optimists are hoping that the 2.5 percentage point cut in interest rates over the last few months, coupled with the recently announced fiscal stimulus package, will soon turn the economy around. But they choose to forget that interest rates had to be cut by 5.5 percentage points (to as low as 1 percent) following the dot-com crash before the economy began to recover. They also choose to overlook the troubled state of today’s banking system, which may reduce the efficacy of interest rate cuts this time around.

The good news is that both the Bush administration and the Federal Reserve have finally (if belatedly) grasped the urgency of the present situation. This indicates that they will do whatever it takes to prevent the U.S. economy from succumbing to the sort of vicious cycle that crippled the Japanese economy after the bursting of its asset price bubble in 1990. Yet monetary and fiscal policies often take a long time to have their full effect on economic activity. Indeed, at this late stage, it’s doubtful that either the administration or the Fed can prevent a nasty recession.

About the author: Desmond Lachman joined The American Enterprise Institute after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the IMF’s Policy and Review Department and was active in staff formulation of IMF policies toward emerging markets. Lachman has written on topics such as economic policy, fund arrangements, monetary reform, import restrictions, and exchange rates.

Reprinted with kindly permission of The American Enterprise Institute.

Subprime Crisis

Germany’s finance minister said to ministers from the Group of Seven financial leaders that total financial losses from subprime mortgages could top $400 billion and that central banks may need to make more emergency cash injections.

The comments come amid speculation that the European Central Bank may be increasingly willing to cut rates. Thus far it has stood pat as the U.S. Fed and the Bank of England have made cuts.

European leaders discuss Markets

The leaders of Germany, France, and UK met in London to discuss joint efforts at financial regulation in light of recent market turmoil.

The Financial Times reports, however, that the meetings could wind up “long on rhetoric and short on concrete outcomes.”

Read full story.

Börsenkrise: Wortdroge Fehlspekulation

Die Gründe für die Börsenkrise “Fehlspekulation” zu nennen, ist für die Frankfurter Rundschau reine Fehlinterpretation.

“Wir haben es mit einem Euphemismus zu tun, der ein sprachmagischer Trick ist, um schmerzlichen Tatsachen den Stachel zu nehmen. Beschönigungswörter wie Fehlspekulation erzielen den weiteren Effekt, dass sie die Verantwortung von Bankiers und Kapitalmanagern verschleiern”.

Diese unglückliche Entwicklung hat mit der Zunahme von “Beratern” Methode bekommen: “Der Berater verfügt im Auge dessen, der ihn engagiert, über besondere Kompetenz und Autorität, aber er hat seine Ratschläge nicht zu verantworten. Der Berater ist zumal das Symptom eines Umbaus der Verantwortung in neuerer Zeit. Hinter der ‘Fehlspekulation’ verbirgt sich tatsächlich der Abbau von Autorität und Verantwortung. Verantwortung besagt sonst, dass die Folgen und Wirkungen des Handelns und Entscheidens über die Sphäre der persönlichen sachlichen Zuständigkeit hinaus gesehen werden.”

Zum Artikel.