Euro area probably in recession
The September purchasing managing survey of the euro area produced another deep fall, which suggests that we are already in recession. The index went down from 48.2% to 47% (50 is the neutral point). Industry is at 45%, services at 48%, and a little more stable too. It seems that industry is suffering from a severe decline in exports, and there was no relief from the temporary weakness of the euro this month. Markit, which produces the index, says there is a high probability of negative GDP growth in Q3. FT Deutschland also reports that Spanish finance minister Pedro Solbes has been calling for an ECB rate cut. The article also makes the point the balance of opinion in the ECB’s governing council is slowly shifting, with the Greek and Austrian governors have expressed confidence that inflation is falling.
Bundesbank of Council of Economic Advisers see low growth in 2009
The chief of Germany’s council of economic advisers, Bert Rurop, see a reduction in economic growth to under 1% next year, according to Frankfurter Allgemeine, an estimate which is now shared by the Bundesbank. Axel Weber now puts next year’s growth at 0.9%. He had previously been among the most optimistic about the 2009 growth outlook. Rurop also oppose a German participation in the US bailout scheme for the financial sector, although at least one of his colleagues on the council supports such action.
Bank for International Settlements says inflation does not matter
We have not heard this from the BIS before, but FT Deutschland reports that the BIS’ new chief economist Stephen Cecchetti says in the short-term financial stability must be regarded as the priority, not the fight against inflation. He says the main responsibility of central banks was to protect the real economy from financial sector shocks. Only after that should we have a talk about whether inflation is going to be 2, or 3, or 4 per cent. (He stopped at that number!) Cecchetti also made the point that central banks must think more globally. He was sceptical about whether central banks were able to do anything about asset price bubbles.
Germany’s IG Metall has highest wage claim for 16 years
There is nothing more pro-cyclical than the German labour market. As the economy grinds to a halt, the trade union have suddenly discovered that they had accepted years of excessive wage moderation for which they now have to compensate. IG Metall yesterday decided to press for a 8% for wage increase. They are not going to get 8%, but they might get 5% - which is way above inflation plus productivity gains – and even though the unions’ influence on average earnings has decline, the union’s new tough stance clearly signals an end to the long period of wage moderation. Frankfurter Allgemeine has the details, plus a predictably outraged comment.
McCreevy modifies “origin and distribute” legislation
FT Deutschland reports that Charly McCreevy has modified one important piece of European legislation, which the Commission is planning for the future: the banks should maintain a certain portion of the risk, when selling on credits. The original proposal of a 10% stake met with an outcry by banks, and McCreevy has now caved in to reduce that stake to 5%.
European Parliament votes in favour of financial legislation
Jean Quatremer is among the few to report on the European Parliament, which yesterday voted with an overwhelming cross-party majority to urge the European Commission to adopt legislation to control hedge funds and private equity companies. Charly McGreevy, whom Quatremer describes as a liberal extremist, has once again ruled out any such legislation.
Sarkozy proposes financial crisis summit
Les Echos reports that Nicholas Sarkozy, speaking in front of the UN General Assembly in New York, proposed to hold a summit of the countries most affected by the crisis, before the end of the year. He said the goal should be to reconstitute a regular and regulated capitalism, where the function of the banks is to provide capital to the economy, and not to speculate.
The reaction to Paulson is getting more devastating by the day
The Paulson bailout package was stuck in the US Congress yesterday, despite warnings from Ben Bernanke that a further delay would be the end of the world as we known. Oppossion to the package became louder, not only inside Congress, but also among economic commentators. Here is a selection.
Jeff Frankel, writing in Vox, says that a consensus is emerging among economists that the Paulson plan is not working. The key point is no equity. If the Treasury were to buy at market prices, the financial institutions would all go bust. They could sell at market prices even today. If the Treasury were to buy at above market prices, then this amounts to an unfair subsidy, that could only be justified if the US government gets an equity stake in return. “Sounds right to me,” Frankel says. “Don’t socialise the losses, without socialising the gains.”
Paul Krugman is also fuming about Paulson dishonesty about Congressional oversight. His bill said there would none. Now he says the opposite.
Martin Wolf, in the FT, is a little kinder, but makes the substantively the same point. He says the best solution would be force banks to halt dividends and raise capital. The second best solution would public-owned preference shares.
Naked Capitalism was never a fan of the Paulson bailout plan, but the tone and content of the attack on Ben Bernanke suggests that the gloves are now coming off as we are heading into the next round of the financial crisis. Yves Smith, who runs the blog, said Bernanke was either delusion or dishonest, when he predicts that the economy will contract unless the plan is passed. Bernanke, so Smith, simply does not get it that the American economy is going to contract anyway. This is a choice between bad and worse outcomes. The blog also cites some interesting comment from other analysts on why the rescue plan is not working.
Writing in FT Deutschland, Wolfgang Munchau says the plan is probably the worst economic policy error of the Bush administration. It will lead to a massive increase in indebtedness. While the US is not going to default directly, it is more likely to default through accepting an increase in inflation, which will ultimately trigger a buyers’ strike. This a hugely ugly scenario for foreign investors. The long-run prognosis for the US economy is not good. It will be like Japan. Dynamic today, for stagnating tomorrow.
In an interview with Frankfurter Allgemeine, Dominique Strauss Kahn says the crisis is first and foremost an American crisis, and the cost would and should be predominantly born by Americans. European banks also had exposures to the US property market, but on the whole they are in a better shape than the Americans. He also said the significance of the financial sector will diminish over time.
Mishkin on inflation targeting
Writing in the FT, former Fed governor Frederik Mishkin advocates the use of a formal inflation target as a nominal anchor for monetary policy, but departs from orthodoxy by pointing to modern research showing that under adverse shocks, the central bank should allow the target to be reached over a longer time horizon than two years, which many central banks define as a sensible medium term horizon. He said the central banks of Sweden and Norway have successfully followed this approach.
What happened to the oil market on Monday?
Oil future up $25, then almost down by the same amount. James Hamilton explains in his Econbrowser that the market saw a classic bear squeeze, as short-selling were forced to buy oil on the October contract to cover their positions. While this happened there was a $9 price gap to the November contract, which is totally unheard and would have provide arbitrage opportunities. He speculator that the professional operators themselves were unprepared for the size and persistence of that gap, and used suboptimal trading rules, that work in normal condition.
Why the UK should join the euro now
In the UK, nobody talks about the euro any more – except for one person: Willem Buiter, who in his latest blog makes the case that the so-called five tests, unilaterally impose by Gordon Brown when he was chancellor, have been met. The blog post goes through each test. Buiter’s fundamental error is to take those tests literally. They were designed as a front, flexible enough to arrive at any judgement at any time in any direction. The fact that the UK is outside the euro area has only very little to do with economics. It is almost entirely to do with politics.
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