Draghi says only fiscal policy can help us now
Bank of Italy government Mario Draghi made a statement you would never think possible coming from a member of the ECB’s governing council. He called on governments to strengthen demand by raising spending or cutting taxes, according to the Wall Street Journal, which remarked that this was the first such exhortation from an ECB official during the current crisis. The paper reminds us that ECB official normally preach compliance with the euro’s stability rules. Mr Draghi warned the world economy could stagnate until the middle of next year. Since interest rates are already low, it is now up to governments to do the rest. “Given the minimum level reached by America’s official interest rates and the ample liquidity put in circulation by central banks, the room for monetary policy maneuver is reduced,” Mr. Draghi is quoted as telling a meeting of Italian bankers in Rome.
Germany’s €5bn stimulus
So this it, Germany’s stimulus plan. It will cost a meagre €5bn next year, and consists of a collection of pork barrel measures optimised for an election year. FT Deutschlands lists the most important points, such as cheap credits to reduce CO2 emission in private homes, tax deductibility of building work, credits for instructure projects, more lending to SME’s, and a one or two year tax exemption for new cars (the only real stimulus bit of the stimulus packages, as it amounts to a time-limited tax cut).
Not very stimulating
Heike Gobel of Frankfurter Allgemeine was quick in denouncing this stimulus as useless, not because they think it should have been bigger (they do not) but because the package is incoherent. It consists of a collection of election presents the two governing parties had planned in any case. The changes in car tax, and a new depreciation rules, will not trigger any additional spending or investments, but bring a windfall to those who had planned to spend in any case. The article made one very good political economy point. In Germany, such packages always benefit those groups with the highest threat potential. Gobel says the Keynesian argument that tax and interest rate cuts are insufficient during recessions as they drive up savings, should not be easily dismissed. But the particular economic outlook for Germany is not nearly as bleak for that effect to set in.
Fed tries to regulate CDS market
The market for credit default swaps is a true time bomb, and the Fed has not decided that it wants to move the $55 trillion behemoth onto a regulated exchange by December. FT Deutschland reports that the Fed has started a huge power battle with the likes of the Commodities and Futures Trading Commission, which says Congress, not the Fed, should be in charge. (We imagine that the International Swaps and Derivatives Association, the great apologists for the CDS market, is not going to be enthusiastic either.) It is not clear yet which exchange should get go ahead to provide settlement and clearing services for the CDS market. (to be clear: this is not an attempt to turn CDS into exchange-traded instruments, merely to turned the backoffice administration of CDS onto markets to produce more transparency.)
Deutsche Bank refuses government aid
FT Deutschand and Frankfurter Allgemeine leads the newspaper with the story that Deutsche Bank continues to refuse any government recapitalisation. There were stories circulating last week that the government wants to turn voluntary recapitalisation into forced recapitalisation, but these stories have now been denied by the finance ministry. Angela Merkel personally appealed to the private banks to accept the recapitalisation offer, but banks have shunned it on the grounds that it would exposure their weaknesses. Josef Ackermann of Deutsche Bank said from today’s perspective he would not take part.
Berlusconi to retire in 2056
Silvio Berlusconi said yesterday that human beings, in the near future, could live to become 120 years in good health, according to Corriere della Sera. We have got everything together, he said, such as stem cell research, DNA analysis, and preventative medicine. (We assume the idea is for him to remain prime minister for another 48 years, i.e. until the year 2056. Modern medicine is really a blessing.) The paper also carries some impressive pictures showing how much younger he looks today compared to eight years ago.
Portuguese government nationalises BPN
El Pais reports that the Portuguese finance minister Fernando Teixeira dos Santos, has announced that nationalisation of the Banco Portugues de Negocios, a bank threatened with suspension due to irregular activities, and after incurring a €700m loss. The bank will fall under the control of Caixa Geral de Depositos, the country’s main public bank. This is the first Portuguese banking nationalisation since 1975. The paper reports Vitor Constancio, the president of the Portuguese central bank, as saying that BPN was subject to six open investigations, including into clandestine activities, and to hand out unregistered credits.
Munchau on eurozone expansion
Citing the example of Denmark and Hungary, Wolfgang Munchau writes in his FT column that eurozone expansion is likely to be accelerated by this financial crisis, as well as EU expansion if and when Iceland joins. The reason is that small European economies with overblown financial sectors that have been relying on a credit binge for economic growth are simple not viable outside the eurozone. That even goes for relatively well managed countries like Denmark. And Hungary will miraculously fulfil the conditions of EMU membership.
Krugman on East Europe
Paul Krugman makes the comparison between eastern European now and southeast Asia in 1997. We quote in full: “The key to the Asian crisis — and of Argentina’s collapse in 2002 — was the way domestic players leveraged themselves up with foreign-currency loans. When the capital inflows dried up, and the Asian currencies plunged, these debts suddenly became a much bigger burden, decimating balance sheets and causing a downward spiral of deleveraging.”
Bretton Woods II looks like an empty shell
The FT has a very good article on Gordon Brown and Nicholas Sarkozy’s pre-G20 diplomacy. The main purpose of next week’s summit is for either politician to declare victory – not to fix the banking system. The article remarks that Brown and Sarkozy may agree on the idea of a new Bretton Woods but not on the details. The French want an end to regulatory competition, while the British want to benefit from it. Here is the crunch quote from the FT’s article. “Officials on both sides of the English Channel said the two leaders have in fact put their differences about the need for harmonisation of rules to one side so that they can both claim success at the summit.”
Discussion on Bretton Woods II
Writing in Telos, Peter Kenen warns the forthcoming G20 summit to be careful about redesigning the rules of the international financial system. He is particularly critical of Gordon Brown’s proposal that a new Bretton Woods conference should reform the prudential supervision of the international financial system. The IMF cannot, and should not, play such a role, as its governing structure is far too narrowly focused on only a few countries. If we want to go down this road, we may have to create a new more specialised institution.
Buiter disagrees with Wolf
Willem Buiter picks up on an argument by Martin Wolf in the FT, who wrote that David Blanchflower, an external representative on the BoE’s board and noted dove, was right after all when he called for sharp interest rate cuts. Wolf also said that it is absurd for UK rates to be 4.5%, and for US rates to be 1%. Buiter says Wolf is right, in the sense that US rates are far to low. And he disagrees also about Wolf’s statement on Blanchflower. Buiter makes the point that interest rate cuts in a liquidity crunch amount to an infra-marginal transfer of resources from the central bank to the banking system, not to borrowers.
This is a balance sheet crisis first and foremost
Michael Heise of Allianz and Dresdner Bank writes in Frankfurter Allgemeine that this is predominantly a balance sheet crisis that cannot be addressed through interest rate cut, or an expansionary fiscal policy, but only through balance sheet restructuring, or rather reduction. It will not be possible for countries to try to grow into their existing debt mounting, something the Japanese had tried and failed. This is predominately a structural crisis that needs to be addressed by structural measures.
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