As Paulson opens his mouth, global equity markets crash again
Global equity markets were crashing again overnight in reaction to the announcement by Hank Paulson, soon but not yet ex US treasury secretary, that he will completely abandon the TARP programme to buy up toxic securities, and use the money for other purposes. The announcement meant that shareholders in financial companies no longer get indirectly bailed out by the US government in the way that they had hoped. The Dow Jones Industrial closed down over 400 points at 8282, near the October low. Overnight, Asian indices also slumped in the order of 4-6%. The Naked Capitalism blog remarked dryly: “Every time Paulson talks, the market goes down.” Oh, and by the way, oil is down to $53 a barrel.
Paulson said he will use the money for two purposes only: to recapitalise financial companies and to support markets for securities back by various classes of consumer debt. Paulson said that approximately 40% of US consumer credit is provided through securitization of credit cards, auto loans and student loans and similar products. This important market has ground to a halt.
How will they do this? Paulson said he and Bernanke are exploring a new liquidity facility for AAA-rated consumer credit securities, with the goal to get investors back into the market. This programme is initially confined to securitised consumer credit, but may eventually be extended to mortgages.
The best news source on this story are the blogs, not the newspapers. See for example Calculated Risk, which has a good summery.
British pounds reaches record low against the euro
During the good times, a euro was worth 67 British pence. Now you have to pay more than 84 pence. (Perhaps the British will join the euro on parity). Against the dollar, sterling is now at $1.4898, according to FT Deutschland, as the markets expect further steep interest rates cuts following the increasingly depressing comments by Mervyn King about the UK economy, and the forecast that RPI inflation might soon become negative (as it includes a measure of house prices). The FT also reports that Mr King, who gave a press conference yesterday, when he presented the Bank’s monthly inflation report, said the UK government should use fiscal policy to stimulate the economy, but warned that any tax cut should be temporary.
Euro area economy sinks fast
Les Echos reports that industrial production was down 2.4% in the euro area in September year-on-year, and -1.6% compared with August. The yoy decline is the biggest drop since February 2002. The strongest deterioration came in Germany with -3.7%, while France suffered a 0.5% fall making for an accumulated Q3 tally of -0.7%. In France, the biggest single factor was the car industry, which recorded a sales fall of 3.1%. The data essentially confirm that the euro area economy is in a recession.
Ireland is sinking even faster
The Irish Independent has a story according to which the outlook for Irish commercial property is the worst in the entire world, according to a survey by the Royal Institute of Chartered Surveyors. The survey asks professionals of their views about relative changes, and in Ireland the number of those expecting a deterioration is close to 100%. The were negative balances in 35 markets, and positive balance in 11, the most positive being the United Arab Emirates. As regard actual Q3 commercial property prices, Ireland was ranked last alongside Slovakia.
EU wants to regulate rating agencies
Charlie McCreevy, EU finance commissioner, has launched a regulation under which rating agencies will have to submit to a supervisor, and be regulated. The new regulation has three goals, according to McCreevy, as reported by Frankfurter Allgemeine: the agencies have to improve the quality of their ratings, which means that a minimum of information must be necessary on which to base ratings; there must be persistent checks and balances; and there must be transparency in the form of publication of underlying model. To reduce conflicts of interests, rating agencies must not accept consultancy work. They must also hire three independent board members.
Trichet says macroeconomics partly a cause in this crisis
Writing in the Financial Times, Jean-Claude Trichet lists his priorities for reform, including the reform of the financial system to reduce clustering of risk. But he says financial reform is necessary but not sufficient. Macroeconomics has played a big role in this crisis, as countries maintained large imbalances for long-time. He writes macro policies require a medium term orientation – which is obviously true for monetary policy. Since he extends it to all policies this comment might be construed as a criticism of the current debate about economic stimulus – which is obvious short-term oriented. He said the IMF should be strengthened in its macro-supervisory roles, especially vis-à-vis the industrialised countries.
Tim Duy on the Fed’s misguided policies
One of the best macro comments of the day came by Tim Duy in the Economists View blog, in which he criticised US policy to support the housing market and consumption. Such policies are a black hole for public spending. The US is entering a period of structural adjustment, and it will be painful. “We spent decades pretending that the relentless focus on producing non-tradable goods and relying on a ballooning current account deficit to hide our lack of productive capacity was an appropriate policy approach. But ultimately, those policies have failed us, with stagnant income growth for median income families and the deepest recession since the 1980’s (or even worse).” He said the task for policy makers is to envision a future that is distinctly different from the past.
A new system of unemployment support for Italy
Writing in Lavoce, Tito Boeri and Pietro Garibaldi say that as the financial crisis hits the real economy, the real victims are the four and a half million working poor in Italy, many immigrants, who enjoy no effective unemployment insurance. It is of great importance to bring them into the social safety net, independent of the type of work contract. Where to find the resources? It would be sufficient to get rid of Berlusconi’s tax cut on extraordinary profits, which is in itself a huge incentive for companies to reduce employment.
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