U.S. Federal Reserve Balance Sheet Worries Paul Volcker

Former U.S. Federal Reserve Chairman Paul Volcker warned the Fed’s independence and credibility could be harmed by the many different sorts of assets it took on to its balance sheet to stave off a credit crisis.

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Drug cartel murdered Mexican official

Edgar Millan Gomez, the chief coordinator of Mexico’s government crackdown on organized crime was murdered in his home. The Los Angeles Times says the Sinaloa drug cartel seems the likely culprit.

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Oasis Economies

A new article from the journal strategy + business says Middle Eastern oil states, particularly in the Persian Gulf, are investing the proceeds of the recent oil boom more cleverly than they did the last time they reaped such windfalls.

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China’s Exchange Rate Policy

An excerpt from a new book by two experts at the Peterson Institute for International Economics looks at the main policy issues dominating discussion of China’s exchange rate.

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U.S. military expands role in West Africa

The Christian Science Monitor reports on a new U.S. military initiative called the Africa Partnership Station and U.S. efforts to train soldiers in western Africa.

“America now gets more than 15 percent of its oil from Africa, a figure expected to grow to one quarter by 2015, and West Africa is an oil-rich region. ‘We wouldn’t be here if it wasn’t in US interests,’ concedes Nowell but he argues that oil is only one component part. Ninety percent of commerce is by sea so a stable and secure maritime environment is good for the US.”

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Swiss energy deal with Iran finances Terror

The Wall Street Journal, April 8, 2007

In an effort to draw attention to Switzerland’s $30 billion energy deal with the world’s leading sponsor of terrorism - Iran - the Anti-Defamation League (ADL) has taken out advertisements in major international newspapers and in leading Swiss dailies with a message to the Swiss government that, “When you finance a terrorist state, you finance terrorism.”

The series of ADL ads, appeared on April 8, 2008 in The New York Times, The International Herald Tribune, The Wall Street Journal  and The New York Sun.  Additional ads will appear in Switzerland in Le Matin Bleu and Le Temps and Neue Zürcher Zeitung.

ADL is concerned that Iran’s profits from the energy deal could help the regime to accelerate and complete its nuclear weapons program and provide tens of thousands of additional missiles to Hezbollah and Hamas, two terrorist groups and sworn enemies of Israel who routinely benefit from Tehran’s largess.

These concerns about the Swiss-Iran energy deal, as well as Switzerland’s foreign policy record vis-à-vis Israel, are explained in the following op-ed by Abraham H. Foxman, ADL National Director.

Swiss Err on Iran, Israel

by Abraham H. Foxman
National Director of the Anti-Defamation League
This article originally appeared in the JTA on April 7, 2008

Swiss Foreign Minister Micheline Calmy-Rey’s visit to Tehran was billed as an opportunity to deliver a stern message about the need for Iran to end its human rights violations and its threats to destroy Israel. This was according to the government’s official announcement of her March 17 diplomatic visit.

As a secondary matter, the announcement noted, Calmy-Rey would attend the signing of a gas deal between Iran and a Swiss energy company.

But Calmy-Rey herself inadvertently exposed the flimsy human rights pretext when she acknowledged on the day of her departure that she was traveling to Tehran in response to Iran’s invitation.

It is highly unlikely that Iran invited Switzerland’s foreign minister to chat about Iran’s bleak record on human rights or its belligerent statements about Israel. The real purpose of the visit, which included photo ops with President Mahmoud Ahmadinejad, was to raise the profile of a $28 billion energy deal, one that has consequences for Iran’s continued pursuit of a nuclear weapons capability.

The Swiss are not alone in signing gas contracts with Iran, but the size of the deal and its timing so soon after the latest round of United Nations sanctions will surely encourage Iran on its march toward nuclear weapons and in its defiance of international demands to stop enriching uranium.

If Switzerland were committed to ending the Iranian nuclear threat, it would join with other responsible countries to reinforce the isolation of the ayatollahs’ regime. If Switzerland were serious about supporting an effective strategy, it would join the movement to target Iran’s energy industry.

This gas deal is just the latest example of Swiss actions that are out of step with the West’s determination to confront Iran and commitment to the security of Israel.

Switzerland joined Saudi Arabia, Cuba and other dictatorships in support of the U.N. Human Rights Council resolution that condemned Israel’s reaction to the rockets from Gaza while ignoring the actions of Iran’s terrorist client, Hamas. The resolution was so biased that Canada, an international leader in human rights promotion, voted against it, and every European Union member of the council abstained.

The Swiss ambassador feebly explained that the importance of condemning Israel’s alleged wrongdoing outweighed all other considerations.

That decision logically followed from Switzerland’s apparent policy of censuring all Israeli military operations, no matter how justified. In their condemnations, the Swiss invariably invoke international humanitarian law, with which they are closely associated as the depository for the four Geneva Conventions. Missing, though, is evidence of understanding the proper application of those laws of war.

In one egregious example, Israel’s 2006 raid on a Palestinian prison in Jericho was denounced for “violat[ing] the principle of proportionality.” In that incident, Israeli soldiers had surrounded the prison, in which armed terrorists, including the assassins of an Israeli government minister, were granted free reign and permitted to communicate with the outside world.

One prisoner and one prison guard were killed in an exchange of fire, but the terrorists and other Palestinian prisoners were convinced to surrender without any further hostilities. Even that successful operation the Swiss condemned as a disproportionate use of force.

Switzerland hasn’t been content to undermine Israel’s right to self-defense. Calmy-Rey has also tried to undercut Israel’s diplomacy. Brazenly disregarding Israel’s sovereignty and democratically elected government, Switzerland sponsored negotiations between private Israeli and Palestinian individuals, known as the Geneva Accord.

Unlike the Oslo negotiations, which were backed by the Israeli government after the first couple of private meetings, the Swiss project was officially rejected by Israel and the Swiss ambassador summoned to receive a protest.

Regardless of the content of the resulting document, the Swiss action represented an inexcusable intrusion by a foreign government in the peace process and an end run around the “road map” that reflected the will of the international community and demanded an end to Palestinian terrorism as a condition of further Israeli steps.

Some of the above examples of unfriendly behavior toward Israel could be explained away as soft-headed do-goodism. But one incident in particular punctures that theory.

In December 2006, Tehran hosted its infamous Holocaust denial conference, which responsible nations condemned unequivocally. Switzerland’s reaction was different. A week after the Tehran conference, Calmy-Rey met with Iran’s Deputy Foreign Minister Said Jalili in Switzerland.

According to the Swiss government’s minutes of the meeting, subsequently leaked to the Swiss press, she proposed that “a seminar about different perceptions of the Holocaust could be organized in one of the Geneva centers.” Public outrage killed that idea, but the fact that Calmy-Rey made the proposal provided encouragement to the Holocaust deniers in Iran and elsewhere.

In the battles against the Nazi regime during World War II and communism during the Cold War, Switzerland pursued its narrow self-interest by professing neutrality.

Today the Swiss appear to be taking the same approach in the current global war against the radical Islamist threat, spearheaded by Iran, which menaces Israel’s existence and the security of the West. But neutrality isn’t an option. And for Switzerland, a country that takes pride in its liberal democracy and claims to have learned from its history, it shouldn’t even be considered.

***

Abraham H. Foxman is the National Director of the Anti-Defamation League and author of “The Deadliest Lies: The Israel Lobby and the Myth of Jewish Control.”

The Anti-Defamation League, founded in 1913, is the world’s leading organization fighting anti-Semitism through programs and services that counteract hatred, prejudice and bigotry.

Showdown on U.S.-Colombia Free Trade Agreement

United States House of Representatives Speaker Nancy Pelosi has signaled she will take the unusual step of changing House rules to effectively stop the 90-day clock on the Colombia free trade deal after President George W. Bush had submitted the measure for action.

The Brookings Institution examines the showdown on Capitol Hill over the U.S.-Colombia free-trade pact and says Colombian leaders may react sharply if the deal is shot down by the U.S. Congress.

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The Top 10 Risks for Business

A new report from Ernst & Young surveys the top ten “strategic risks” for U.S. companies, including emerging market pressures, energy shocks, and cost inflation.

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Asia’s Achilles Heel

In a article for Newsweek, David Victor argues that the big challenge in the coming century may not be the strength of Asia’s emerging economic powers but rather their weakness.

Victor shows how China’s recent power crisis was caused by the tensions between China’s burgeoning free-market sector and its residual state-owned and regulated industries. India faces a similar problem: Its state-owned power utilities are supposed to be run for a profit, but incessant political meddling with electricity prices has pushed most into bankruptcy. In both China and India, dynamic economic growth has masked these governance problems. But the power sector conveys a warning: Vestiges of the statist tradition can still obstruct progress.

“Market reforms are making Beijing less and less relevant to what’s really going on in the economy, threatening to turn China into a ‘weak state.’ And it’s not just China - India, too, is having trouble regulating its industry and economy. The phenomenon is a dark cloud on the Asian century.”

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Switzerland’s shabby deal with Iran

In an opinion piece, the president of the World Jewish Congress criticizes Switzerland’s recent gas deal with Iran.

Switzerland’s shabby deal with Iran

by Ronald S. Lauder

The ejection of the populist politician Christoph Blocher from the Swiss government in December 2007 gave rise to hope that Switzerland could restore its tainted image and that the country’s “splendid isolation” on the international stage might soon be over.

In an opinion piece for the Swiss newspaper NZZ am Sonntag on 30 December 2007 I wrote: “Switzerland will not have a glorious future by isolating itself from the European Union and the wider world. In our globalized world (…) you cannot isolate yourself if you want to be heard. Swiss diplomacy can only return to its former strength if the Federal Council and the parties supporting it once again represent an open-minded Switzerland.”

Who would have thought that this call would be heeded so quickly? Two weeks ago, Swiss Foreign Minister Micheline Calmy-Rey appeared, veiled in a headscarf, at the side of Iranian President Mahmud Ahmadinejad to seal an enormous deal with the National Iranian Gas Export Company. She did so on behalf of a private Swiss company, “to safeguard Switzerland’s own strategic interests,” as she put it.

Back home, Calmy-Rey said that she had pressed Tehran on issues such as human rights or the nuclear program. The Iranian newspaper Tehran Times phrased it somewhat differently: “Calmy-Rey appreciated Iran for its cooperation with the IAEA. She also called for the continued Iran-Switzerland dialogue on human rights.” It became clear immediately that the visit by the Swiss foreign minister was a propagandistic triumph for the mullahs.

A few days after the Iranian gas deal, Calmy-Rey’s Foreign Affairs Department secured the election of Jean Ziegler as special adviser of the United Nations Human Rights Council. Ziegler, a self-declared human rights activist, is best known as campaigner for dictators such as Colonel Khaddafi of Libya, Robert Mugabe of Zimbabwe or Fidel Castro of Cuba.

Brushing aside all criticism leveled against Ziegler by respected international personalities and organizations, Calmy-Rey got her preferred candidate elected by forging alliances with the many Asians and Africans represented on the council - the same countries that rarely miss an opportunity to bash Israel for defending itself against the attacks by Hamas and Hezbollah.

Incidentally, it was Jean Ziegler who in 2006 claimed that Hezbollah in Lebanon was not a terrorist group, but a “national resistance movement”. He even expressed understanding for the kidnapping by Hezbollah of the two Israeli soldiers Ehud Goldwasser and Eldad Regev, who have not been released until this day.

In early March, Micheline Calmy-Rey personally appeared before the Human Rights Council to advocate a one-sided resolution, sponsored by Islamic countries, condemning Israel for its operations in the Palestinian territories - operations that are aimed at protecting Israel’s citizens from the constant rocket attacks by Hamas supporters. While all European Union countries on the council abstained, Switzerland voted in favor of the one-sided resolution, yet the Human Rights Council failed to condemn the deadly terrorist attack at a Jerusalem rabbinical seminary which had occurred shortly before.

There is nothing wrong with governments defending their national interests, but such actions should be centered around certain basic principles, i.e. those of democracy, peace and human liberties.

There is nothing wrong with criticizing Israel, provided equal measures of judgment and criticism are being applied to all countries.

What is horribly wrong, though, is Mrs. Calmy-Rey’s flawed foreign policy. It makes Switzerland a hostage to countries that, rather than respect human rights, pay merely lip service to them. This is especially true of international bodies like the UN Human Rights Council that has lost its credibility in the record-breaking time of 18 months.

Only days after the manipulated parliamentary election in Iran, Mrs. Calmy-Rey chose to lend public support to the Islamist regime in Tehran, whose declared aim is the eradication of Israel, while at the same time strengthening Israel’s (hypo-)critics at the United Nations in Geneva. But beware: placating the mullahs in Tehran comes with a heavy political price tag.

Micheline Calmy-Rey has gravely undermined the efforts of the international community, in particular the five permanent members on the UN Security Council and Switzerland’s neighbor Germany, to prevent Iran from becoming a nuclear power eventually capable of wreaking havoc on Israel and the entire Middle East. How on earth can we expect the sanctions regime to achieve results if a UN member - host country to many UN bodies - makes a mockery of the United Nations?

The current Swiss government has chosen to reduce the country’s natural gas dependence on Russia by helping a Swiss company to clinch a deal with another (the Islamic Republic of Iran).

The Swiss Jewish Community Federation is right to point out that Mrs. Calmy-Rey’s trip to Tehran sends out all the wrong signals. The US government is correct in criticizing Switzerland for setting a bad example for the rest of Europe.

It would be naïve to believe that Micheline Calmy-Rey’s announcement of a “human rights dialogue” with the rulers in Tehran will lead to any concrete improvements of the situation in Iran. The hanging and stoning of dissidents, students, homosexuals and other regime critics; the rigging of elections; the anti-Israel campaign sponsored by Tehran and its allies Hamas and Hezbollah that is violent both in words and in action; the denial of the Holocaust; the apparent quest for nuclear weapons: all that will continue, not only in spite of, but perhaps also because of the gas deal.

The concept of Swiss neutrality has a long tradition, but Switzerland’s credibility as an honest broker in international diplomacy has been badly bruised. Mrs. Calmy-Rey has sold out her government’s international credibility in return for 5.5 billion cubic meters of Iranian natural gas and perhaps for some new friends in the radical Muslim world - definitely not a good investment!

The next months will show if this Swiss diplomacy will be able to undo the damage that has been done.

Latin American Drugs: Losing the Fight

A report from the International Crisis Group says cocaine production in the Andes region appears to have set new records in 2007 and questions how policymakers can improve counternarcotics policy in a way that doesn’t jeopardize regional stability.

“Coca leaf and cocaine production in the Andean region appear to have set new records in 2007. Cocaine trafficking and use are expanding across the Americas and Europe. Despite the expenditure of great effort and resources, the counter-drug policies of the U.S., the European Union (EU) and its member states and Latin American governments have proved ineffective and, in part, counterproductive, severely jeopardising democracy and stability in Latin America.

The international community must rigorously assess its errors and adopt new approaches, starting with reduced reliance on the measures of aerial spraying and military-type forced eradication on the supply side and greater priority for alternative development and effective law enforcement that expands the positive presence of the state. On the demand reduction side, it should aim to incarcerate traffickers and use best treatment and harm reduction methods to avoid revolving and costly jail sentences for chronic users.

Well-armed, well-financed transnational trafficking and criminal networks are flourishing on both sides of the Atlantic and extending their tentacles into West Africa, now an important way station on the cocaine route to Europe. They undermine state institutions, threaten democratic processes, fuel armed and social conflicts in the countryside and foment insecurity and violence in the large cities across the Americas and Europe. In Colombia, armed groups derive large incomes from drug trafficking, enabling them to keep up the decades-long civil conflict. Across South and Central America, Mexico and the Caribbean, traffickers partner with political instability.”

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China-U.S. Relations: Current Issues and Implications for U.S. Policy

A new report from the Congressional Research Service gives an overview of China-U.S. relations and questions the implications of developments in Tibet and Taiwan on U.S. policy toward China.

“U.S.-China relations were remarkably smooth for much of the George W. Bush Administration, although there are signs that U.S. China policy now is subject to competing reassessments. State Department officials in 2005 unveiled what they said was a new framework for the relationship - with the United States willing to work cooperatively with China while encouraging Beijing to become a ‘responsible stakeholder’ in the global system.

U.S. Treasury Secretary Henry Paulson in December 2006 established a U.S.-China Strategic Economic Dialogue with Beijing, the most senior regular dialogue yet held with China.

But other U.S. policymakers have adopted tougher stances on issues involving China and U.S.-China relations. They are concerned about the impact of the PRC’s strong economic growth and a more assertive PRC diplomacy in the international arena; about procedures to assure the quality of Chinese pharmaceuticals, food, and other products being imported into the United States; and about trade practices and policies in China that contribute to a strong U.S.-China trade imbalance in the latter’s favor.”

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India is the best bet for foreign investment

The Economic Times interviews the head of Morgan Stanley India, Narayan Ramachandran, who says the country’s prime brokerage sector is due for a boom if politics in the country liberalize.

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France’s Nuclear Diplomacy

Michelle Smith and Charles Ferguson evaluate Sarkozy’s nuclear deals in the Middle East, in the International Herald Tribune.

“The recent war games in the Gulf with France, Qatar and the United Arab Emirates are connected to French President Nicolas Sarkozy’s nuclear diplomacy. Sarkozy has been leveraging France’s leading civilian nuclear technology to gain diplomatic, commercial and military advantages with countries in the Middle East, as well parts of Africa and Asia. In response, nonproliferation experts have voiced their unease at the idea of exporting potentially nuclear bomb-usable technologies to proliferation-prone regions.”

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Kenya - Agriculture and Export Markets

A recent paper from the Harvard Business School uses case studies in Kenya to question why farmers in the developing world often insist on growing crops for domestic consumption when export markets are readily available to them and potentially more profitable.

“Why do farmers continue to grow crops for local markets when crops for export markets are thought to be much more profitable? Several answers are possible: missing information about the profitability of these crops, lack of access to the necessary capital to make the switch possible, lack of infrastructure necessary to bring the crops to export outlets, high risk of the export markets (e.g., from hold-up problems selling to exporters), lack of human capital necessary to adopt successfully a new agricultural technology, and misperception by researchers and policymakers about the true profit opportunities and risk of crops grown for export markets.”

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Switzerland rejects criticism of gas deal with Iran

Switzerland’s foreign minister Micheline Calmy-Rey has rejected criticism of a multibillion-dollar gas deal with Iran, saying that her country did not need permission from the United States to advance its strategic interests.

The brusque remarks by Calmy-Rey, who has ruffled feathers in Washington and Jerusalem with her outspoken positions on the Israeli-Palestinian conflict, threatened to escalate tensions over a 25-year natural gas contract between Swiss energy trading company EGL and the state-owned National Iranian Gas Export Company.

“Switzerland is an independent country that has its own strategic interests to defend,” Calmy-Rey told reporters after returning from a visit in Tehran.

The US government was quick to vent its displeasure over the development. “We have conveyed to the Swiss that major new oil and gas deals with Iran send precisely the wrong message at a time when Iran continues to defy UN Security Council resolutions,” the US Embassy in Bern said in a statement, according to AFP.

Calmy-Rey claimed the bilateral deal did not violate UN sanctions imposed on Iran over its nuclear program and served only to secure energy supplies for Switzerland. She called the deal an example for successful cooperation between Swiss business and diplomacy. The foreign minister added her visit had allowed her to maintain a difficult dialogue on human rights with Tehran.

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.

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Made in Israel – Highlights der israelischen Sicherheitsindustrie

Der Heimatschutz hat in Israel schon vor der Staatsgründung höchste Priorität besessen. Israelische Sicherheitssysteme wurden für ein Land entwickelt, dass ständig um seine Existenz zu kämpfen und wachsam gegenüber andauernden Bedrohungen zu sein gezwungen gewesen ist. Aus dieser einzigartigen Perspektive heraus hat die israelische Sicherheitsindustrie eine beispiellose Fachkompetenz und eine weltweite Reputation in der Entwicklung von Spitzenprodukten erlangt.

Die Ereignisse des 11. September 2001 haben die globale Perspektive auf den Terrorismus verändert. Überall auf der Welt suchen Länder nun nach Mitteln, um der Bedrohung durch den Terrorismus zu begegnen, und viele der nötigen Technologien können von Israels Sicherheits- und Heimatschutzindustrie geliefert werden. Hunderte von israelischen Unternehmen bieten ausgeklügelte Sicherheitslösungen an - von automatischen Spracherkennungssystemen und Fernsensoren bis hin zu Videolokalisierung, Frühwarngeräten und taktischen Bildbearbeitungssystemen.

Gegenwärtig arbeiten in Israel 25 000 Menschen in 450 sicherheits- und heimatschutzbezogenen Unternehmen, von denen mehr als 300 ins Ausland exportieren. Die Exporte im nichtmilitärischen Bereich beliefen sich dabei im Jahr 2005 auf eine Milliarde Dollar und zwei Milliarden Dollar im IT-Sektor.

Über die Jahre hat sich Israel bei der Landesverteidigung auf seine eigenen Ressourcen verlassen müssen. Für ein kleines Land mit einer Bevölkerung von etwa sieben Millionen Menschen hat es eine unverhältnismäßig große Zahl von militärischen Projekten entwickelt und hergestellt, darunter Satelliten, die Kampfflugzeuge Kfir und Lavi, den Merkava-Panzer, die Maschinenpistole Uzi sowie die Sturmgewehre Galil und Tavor u.v.m.

Die israelische Sicherheits- und Heimatschutzindustrie umfasst ein weites Spektrum von Unternehmen. Dazu gehören große Rüstungsfirmen wie Elbit, Tadiran, Israel Aerospace Industries (IAI), RAFAEL, Elisra, ELTA und Israel Military Industries (IMI), aber auch Unternehmen aus der Telekommunikationsbranche wie Motorola, Comverse, Nice, Verint, Mer Group, Ness TSG u.a.

Einige Firmen haben sich allein auf die Entwicklung und Herstellung von Sicherheitsprodukten in Bereichen wie Eingangskontrolle oder Körperschutz spezialisiert. Einige der weltbekannten Unternehmen in diesem Zusammenhang sind ISDS, Magal Security Systems, Plasan Sas und Rabintex.

Zu den Kernbereichen der Branche gehören: Luft- und Seefahrt-Sicherheit, CBRN-Bereitschaft, Kommando- und Kontrollsysteme, Terrorismusbekämpfung, Krisen- und Notfallmanagement, Infrastrukturschutz, internationale Veranstaltungen, IT-Sicherheit und Betrugsbekämpfung, Körperschutz, öffentliche Aufmerksamkeit und Bereitschaft, Dienstleistungsanbieter.

Israelische Sicherheitsunternehmen sind in allen Regionen der Welt aktiv und bieten Lösungen und Technologien für staatliche und private Abnehmer. Die folgenden Beispiele veranschaulichen die globale Präsenz:

- Mehr als ein Dutzend israelischer Unternehmen waren bei der Sicherung der Olympischen Spiele in Athen beteiligt.

- Gegenwärtig sind israelische Unternehmen in Grenzschutzprojekte v.a. in den USA, Asien und Lateinamerika involviert.

- Israelische Schutzeinrichtungen für Fahrzeuge, Gebäude und Personen werden von den internationalen Truppen und Organisationen im Irak und anderen Konfliktzonen verwendet.

- Die Infrastruktur des Buckingham Palace, des Vatikan und des Eiffelturms werden mit israelischer Technologie gesichert; ebenso die Flughäfen JFK in New York, Heathrow in London, Hannover, Tel Aviv und Singapur u.a.

Ausführliche Informationen zur israelischen Sicherheitsindustrie findet man unter folgendem Link.

© The Israel Export and International Cooperation Institute

Russian Capital Markets are better than ever

The Christian Science Monitor reports on Russian efforts to use a new sovereign wealth fund to expand Moscow’s role in global capital markets.

“Russian companies are increasingly investing abroad - a trend encouraged by Medvedev, who has pledged to make Russia ‘one of the world’s biggest financial centers’ once he takes over from his mentor, President Vladimir Putin.

Barely a decade ago, Russia’s economy was in tatters, best known for its astronomical rates of capital flight - up to $25 billion annually. But since Mr. Putin came to power eight years ago, a quiet turnaround has occurred that saw Russia take in a record $28 billion in direct foreign investment last year, according to state statistics.”

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North America’s Oil

The Canadian newspaper Globe and Mail examines the shifting North American power dynamic wrought by rising oil prices. The paper says the rise has served to boost Canada’s regional strength.

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Iraq’s Oil

Al-Jazeera reports that more than seventy foreign firms have registered with the Iraqi government to compete for Iraq’s oil resources, despite the fact that the country has yet to settle on an oil revenue-sharing plan.

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Israels Währung gewinnt internationale Anerkennung

Der Shekel wird bald auf dem globalen Währungsmarkt präsent sein. In drei Monaten soll die israelische Währung auf den internationalen Finanzmärkten voll konvertierbar sein und damit in den Kreis der bislang 15 führenden Währungen aufgenommen werden.

Praktisch bedeutet dies, dass der Shekel zukünftig international im Austausch für eine der 15 Spitzenwährungen gekauft und verkauft werden kann und in allen größeren Banken der 80 entwickelten Länder der Erde erhältlich sein wird.

Insgesamt wird Israels Status bei öffentlichen und privaten Investoren und - was nicht weniger wichtig ist - den internationalen Krediteinstufungs-Agenturen Moody’s, Standard and Poor’s und Fitch aufwerten. Die FTSE-Gruppe, ein bedeutender Sicherheitsindex-Anbieter, hat das technologieschwere Israel bereits im vergangenen September hoch gestuft.

Neben dem israelischen Shekel soll auch der mexikanische Peso in die Liste der dann insgesamt 17 großen Weltwährungen aufgenommen werden.

© Haaretz, 14.02.2008

Kosovo’s economic prospects

German broadcaster Deutsche Welle reports on Kosovo’s economic prospects should the Serbian province declare itself independent in the very near future, as it is widely expected to do. The article says Kosovo would have to rely heavily on coal deposits but questions whether that can sustain its population.

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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.

Prospects for the U.S. Economy in 2008

In remarks last Thursday, Dr. Janet L. Yellen, the president and CEO of the Federal Reserve Bank of San Francisco, outlined the major risks she sees threatening U.S. growth over the coming year. Yellen said further housing market declines, a weakening job market, and lingering troubles in the financial sector continue to pose big problems.

Speech to the Chartered Financial Analysts of Hawaii

by Dr. Janet L. Yellen, February 7, 2008

Good evening, and thanks for inviting me to be part of CFA Hawaii’s Annual Economic Forecast Dinner tonight. As President of the Federal Reserve Bank of San Francisco, it’s my responsibility to be in touch with what’s happening to the economy throughout our District, which includes Hawaii and eight other Western states. I do this both by monitoring developments and by visiting in person. I must say that this responsibility gives me particular delight when it comes to this beautiful and diverse state. For many years, my family and I have come to these islands for the perfect getaway, and, though I’m not able to stay for much R&R this time, simply being here in Hawaii adds a special kind of pleasure to this business visit.

Tonight I am giving my first speech of the year. And though the year is only seven weeks old, a great deal has already happened in the realm of monetary policy. On January 22, the Federal Open Market Committee cut its main policy rate-the federal funds rate-by three quarters of a percentage point. Then, on January 30, at the scheduled meeting, the Committee voted to cut the policy rate again, this time by half a percentage point to 3 percent. Taking these actions together with those that began last September, the Committee has cut that rate by a total of 2¼ percentage points.

The purpose of these actions is to stimulate demand in the face of the combined impact of the severe contraction in housing and the related financial market disruptions. While housing construction has been weak for more than two years, its effects did not spill over to most other sectors until fairly recently. That’s why we used to talk about a “dual economy,” with housing notably weak, but other sectors doing well. However, financial markets became disrupted in the middle of last year, which has not only intensified the housing slump, but also has tightened credit conditions for some households and businesses. The combined impact has led to slowing more broadly through the economy. It is this broader slowdown that has elicited Federal Reserve actions in recent months.

In my remarks today, I plan to discuss my views on policy and on the prospects for the nation’s economy this year and beyond.

Financial markets

I’d like to begin with a discussion of the disruptions in U.S. and global financial markets, because they influence not only the economy’s most likely course but also the risks that could alter that course. In my view, these disruptions are likely to continue for some time. In other words, I think they have laid bare some fundamental issues with the structure of the financial system that will require significant adjustments.

The financial disruptions are centered in the markets for asset-backed securities. The aim of such instruments is to diversify and spread risk, potentially enhancing economic welfare by broadening access to credit and lowering its cost. These instruments have been around a long time. For example, for many years, when a bank originated a mortgage, instead of holding it on its books, it may have sold the mortgage to one of the government-sponsored agencies, Fannie Mae or Freddie Mac. The agencies, in turn, would then bundle that mortgage with other similar mortgages into a security. The virtue of this mortgage-backed security is its liquidity-that is, it can be traded in financial markets. Since around 2003, private investment banks and commercial banks have increasingly been involved in securitizing mortgages and other assets as well. This business has grown dramatically, securitizing many types of underlying loans and, importantly, about 75 percent of all subprime mortgages in 2006.

Advances in financial engineering have led to new and complex forms of asset-backed securities. For example, CDOs, or collateralized debt obligations, package multiple mortgage-backed securities-essentially securitizing several already securitized bundles of long-term debt instruments. Typically, they include tranches-literally, “slices”-of mortgage-backed securities with different exposures to risk based on a prioritization of the payments from the underlying mortgage securities, and are a type of “structured credit.” There are even instruments, known as CDO2, that consist of tranches based on holdings of other CDOs, rather than “simple” mortgage-backed securities, and CDO3 that, as you might now guess, consist of tranches based on holdings of CDO2.

To deal with the complexity of these instruments, many market participants, including financial institutions and other sophisticated investors, relied to a great extent on credit rating agencies for assessments of the risk. However, last summer, to the surprise of many, the rating agencies announced a set of substantial downgradings of highly rated tranches of a number of subprime mortgage-backed securities in light of rapidly rising delinquencies in some types of those mortgages. These downgrades raised concerns not only about mortgage-backed securities themselves, but also about the quality of rating agencies’ evaluations of risk in other structured credits. As a result, investors grew wary, as they had trouble knowing what risks were embedded in these instruments, how to price the risks, and who would ultimately bear the risks. The consequence is that the markets for many such assets are now highly illiquid and all but closed for new business.

With the benefit of hindsight, it is now apparent that underwriting standards slipped substantially in the United States as house prices soared. For example, permissible combined loan-to-value ratios edged up during 2005 and 2006. And no- or low-documentation loans-so-called “stated income” loans-became more prevalent. Such loans might have performed reasonably well if house prices had continued to rise, but once house prices leveled off and then began to decline, the stage was set for trouble.

The financial turmoil has spread beyond the mortgage market in part because structured credits have been based on a wide variety of underlying loans, such as business loans, including the loans used to finance the recent wave of leveraged buyouts, or LBOs, commercial real estate, student loans, credit card loans, and subprime mortgages, to name a few.

The bottom line is that, in recent years, the financial system has gone through a significant restructuring that made evaluating and pricing risk difficult. The reverberations of the resulting financial disruption are still with us. I’d like to describe some of them now.

As investors have sought to shun risk, there has been a worldwide “flight to safety,” leading to a strong demand to hold U.S. Treasury securities-the safest and most liquid instruments in the world. This demand has contributed to a sharp decline in interest rates on Treasuries. Of course, these rates also have declined because of the Committee’s moves to ease policy.

However, the potential stimulatory effects of this drop in risk-free Treasury rates have been offset in many cases by another key feature of the financial turmoil, namely, a sharp rise in interest rate risk spreads, as riskier borrowers have had to pay higher premiums to compensate lenders for a perceived increase in the probability of default or losses in that event. On the corporate side, prime borrowers have actually experienced some net decline in interest rates since the shock first hit-that is, even though risk spreads are higher, they have been more than offset by lower Treasury rates. However, issuers of low-grade corporate bonds with greater credit risk, in contrast, face notably higher interest rates.

The mortgage market has been the epicenter of the shock, and, not surprisingly, greater aversion to risk has been particularly apparent there, with spreads above Treasuries increasing for mortgages of all types. Although borrowing rates for low-risk conforming mortgages are now lower than they were before the financial shock hit, fixed rates on jumbo mortgages are higher on net. Subprime mortgages remain difficult to get at any rate. Moreover, many markets for securitized assets, especially non-agency mortgage-backed securities, continue to experience severe illiquidity; in other words, the markets are not functioning efficiently, or may not be functioning much at all.

The turmoil is reverberating in depository institutions as well.1 One problem is an unanticipated buildup of mortgages as well as LBO-related loans on their balance sheets. These loans were in the pipeline for securitization but could not be sold. This problem has hit banks in part because they themselves were involved in creating structured credits that held mortgages and the leveraged loans that they had originated. In addition, they face problems with some structured investment vehicles, or SIVs, that they had sponsored and backstopped to hold and fund portfolios of securitized assets through the issuance of asset-backed commercial paper. When the SIVs were in danger of failing, the banks were concerned about reputational effects and decided to rescue them by taking the underlying assets back onto their own balance sheets. Furthermore, as investors have pulled back from the markets for asset-backed securities, the value of these securities and CDOs has fallen dramatically, so banks and other financial institutions have had to write down their values, which has shrunk their capital and driven their stock prices down.

Another problem for bank balance sheets is that credit losses have been edging up.
The latest reverberation involves monoline financial guarantors. These companies guarantee the timely payment of principal and interest due on various types of securities, including structured credits. The guarantees can increase the credit rating of the covered securities and thus increase the value of those securities on banks’ balance sheets. The problem today is that the guarantors are reporting sizable losses because of the increased riskiness of the securities they are covering. Those losses can affect the guarantors’ capital positions and even their own credit ratings. A rating downgrade of a guarantor reduces the value of its credit enhancements and lowers the price of the covered securities. Holders of those securities such as banks then have to take write-downs to reflect the lower value of the securities.

Fortunately, the banking system entered this difficult period in a strong position. Most institutions were extremely well capitalized. However, the combination of unanticipated growth in assets and in write-downs has put increased pressure on banks’ capital positions. Given their concerns about capital adequacy and their increased caution in managing liquidity, it is not surprising that they are tightening credit terms and restricting availability. At first, the focus was mostly on mortgages, but now it has spread to other kinds of loans, including home equity lines of credit, credit cards, and other consumer credit, as well as business loans. The tightening of credit is also a response to a now noticeable deterioration in credit quality, particularly for subprime mortgages; the losses in other parts of the consumer loan portfolio remain at relatively low levels from an historical perspective, but they, too, have edged up.

Finally, equity markets have hardly been immune to recent financial turbulence. Broad U.S. equity indices have been very volatile, and, on the whole, have declined since August, representing a restraint on spending. More recently, some of these declines have occurred as profits have come in below market expectations for some financial firms due to write-downs of the value of mortgage-backed securities.

My overall assessment is that the turbulence in financial markets is due to some fundamental problems that are not likely to be resolved quickly. The effects of these problems have now made credit conditions tighter throughout most of the economy’s private sector, and this will restrain spending going forward. The impact hit economic activity mainly in the fourth quarter, and so far, it has been starkly negative. After robust performance in the second and third quarters of last year, growth slowed significantly in the fourth quarter-to a pace of only ½ percent. This brings me to the outlook for the economy.

Economic outlook

Current indicators point to continued anemic growth for at least the first half of this year as well as significant downside risks even to those weak expectations. As I mentioned at the outset, though the prolonged slump in housing construction did not spill over significantly to the rest of the economy during 2006 and much of 2007, when combined with the recent financial market turmoil, it has been central to the emergence of today’s slow-growth environment. And the course of its resolution will be a key factor in the economic outlook.

Forward-looking indicators of housing activity strongly suggest that the downward cycle may be with us a while longer. Housing permits and sales are dropping, and inventories of unsold homes are at very high levels. Those inventories could rise even higher as foreclosures continue to mount. I’m not referring only to foreclosures on subprime adjustable-rate mortgages, which, as we all know, have increased sharply over the past couple of years. More recently, we’ve begun to see increases in foreclosures on subprime fixed-rate mortgages and even on prime adjustable-rate mortgages.

Within this Federal Reserve District, housing has been harder hit in some areas than in others. For example, builders and homeowners in parts of Arizona, Nevada, and the inland regions of California have seen some of the worst of the downturn, watching prices fall and equity evaporate as homes sit unsold for extended periods.

Hawaii has been near the opposite end of the spectrum. Indeed, the sales pace for existing homes actually increased during the first nine months of the year compared with the same period in 2006, reflecting healthy economic conditions in the state, and a lower exposure to the subprime mortgage market. Subprime lending accounted for only about a fifth of mortgage originations in Hawaii in 2006, compared to about one-third in parts of Arizona, California, and Nevada. Nevertheless, the foreclosure rate has risen sharply here, although it remains well below rates in the harder-hit states. Following several years of double-digit appreciation rates, prices on existing homes in Hawaii largely flattened out by the end of 2007, but have not shown the declines that are evident in some other parts of the District.

On the national level, housing construction probably will continue to contract through the end of this year. It is true that the residential construction sector is a fairly small piece of the overall economy and is unlikely to cause significant overall weakness in and of itself. But the fallout from the housing cycle has many dimensions, and in the fourth quarter there were signs of spillovers to other sectors of the economy, most worrisomely, to consumer spending. This sector is a huge part of the economy-about 70 percent-and its growth slowed to a rate that is somewhat below its long-run trend in the face of spillovers from the housing market and rising energy and food prices.

Looking ahead, developments related to housing are likely to continue to put a strain on consumers. For example, house prices have fallen noticeably and the declines have intensified. Moreover, futures markets for house prices indicate further-and even larger-declines in a number of metropolitan areas this year.

With house prices falling, homeowners’ total wealth is declining, and that could lead to a pullback in spending. At the same time, the fall in house prices may constrain consumer spending by lowering the value of mortgage equity; less equity reduces the quantity of funds available for credit-constrained consumers to borrow through home equity loans or to withdraw through refinancing.

Indeed, it would not be surprising to see even more moderation over the next year or so, as consumers face additional constraints due to the declines in the stock market, the tightening of lending terms at depository institutions, and the lagged effects of previous increases in energy prices. National surveys show that consumer confidence has plummeted. And I have been hearing comments and stories from my business contacts in the retail industry that are also downbeat. The rise in delinquency rates across the spectrum of consumer loans is strongly indicative of the growing strains on households.

Finally, another negative factor for consumption is that labor markets have softened. In recent months, growth in employment from a survey of business establishments slowed sharply, actually falling in January, and many other indicators point in the same direction. Slower job growth will have a negative impact on the disposable income available to households and therefore will provide an additional restraint on consumer spending.

Slower growth in consumer spending has already started to affect the Hawaiian economy. Up to last year, Hawaii enjoyed an extended run of robust growth in the tourism industry, spurred primarily by visitors from the U.S. mainland. This helped Hawaii achieve the lowest unemployment rate in the nation during 2004 through 2006. Last year, tourist visits actually dropped a bit, largely because fewer mainlanders came over. Employment growth in the state has slowed accordingly, and the unemployment rate is up by more than a percentage point from its remarkable low of 2 percent at the end of 2006. Nevertheless, economic conditions remain sound by historical standards, and the state appears well-positioned to weather any further spending reductions by U.S. consumers.

With the domestic consumer likely to be pretty hobbled, it is tempting to look at consumers beyond our own borders to be a source of strength for economic activity. Foreign real GDP has advanced robustly over the past three years. With the dollar falling well below its level of a year ago, U.S. exports have done very well; partly for this reason, U.S. net