Global economy and recession

[Parihaka]

Due to the recent destruction of the US credit market and various associated political shenanigans, I'm collecting a series of articles on how the rest of the worlds markets are coping with the contraction this caused, and what is being suggested as a way forward to avoid this problem in the future. Not really a discussion on the American economy as there's not a lot the rest of the world can do about what happens there but watch from a safe distance.
Rice says nations confident of U.S. despite crisis

NEW YORK, Sept 24 (Reuters) - U.S. Secretary of State Condoleezza Rice said her government was taking "bold action" to deal with the financial crisis and she believed other nations still had confidence in the United States.

In a CNBC interview transcript released by the State Department on Wednesday, Rice said the Bush administration was moving to address the root cause of the problem via its $700 billion bailout plan, which is being debated in Congress.

"We recognize that this is something that needs to be addressed and addressed boldly and urgently," Rice told CNBC in an interview recorded late on Tuesday.

"That, I believe, will reassure everyone," she said.

Asked whether the U.S. financial crisis had diminished her ability to do important diplomatic work at the U.N. General Assembly, Rice said U.S. standing had not been affected.

"Everybody understands that this is a very specific, indeed once-in-a-lifetime -- well, we certainly hope -- circumstance. But people have confidence in the United States," said Rice.

"As the president has said, this is a financial crisis, but the fundamentals of the U.S. economy are strong. Everyone understands our great ability to innovate, the productivity of our workers, the ability of the country to move quickly."

A strong tenet of the Bush administration has been to tout the benefits of a free market and to promote democracy throughout the world.

"Democratic capitalism is a tried and true system that has brought prosperity and it has brought a lot of good for much of the world," she said.

Rice has also been a key player in pushing for free trade agreements with other nations and for the stalled Doha round of trade negotiations to be finished.

"We're going to continue to work right up until the end to see if we can't bring a conclusion to -- a successful conclusion -- to the Doha round," she added.

"Nothing would send a stronger signal of the potential for greater economic growth for taking advantage of the interconnectedness of the global financial system than to have a successful trade round." (Reporting by Sue Pleming)

[Parihaka]

After market turmoil, Merkel says 'I told you so'

LINZ, Austria, Sept 20 (Reuters) - German Chancellor Angela Merkel indirectly criticised the United States and Britain on Saturday for thwarting her government's previous attempts to tighten controls on financial markets.

Speaking at an election rally in Austria, Merkel said on Saturday her government tried in vain to win G8 support at a summit last year for tighter regulation of hedge funds and said the financial market turmoil would hurt people outside markets.

"It was said for a long time 'Let the markets take care of themselves' and that there is 'no need for more transparency'," Merkel said at a rally in Linz, where she was campaigning on behalf of the Austrian conservative People's Party (OeVP).

"Today we are a step further because even America and Britain are saying 'Yes, we need more transparency, we need better standards for the ratings agencies'," said Merkel, leader of Germany's conservative Christian Democrats.

"And I'd like to add that everyone who produces a real product knows what it looks like and what standards it is up to," said Merkel, chancellor since 2005. "One also needs to know with a financial product what's involved.

"Otherwise, these sorts of things happen that we then all have to pay for," she said.

Merkel had hoped to reach a common position on hedge fund transparency in 2007 when Germany held the rotating presidency of the Group of Eight, which includes the United States, Japan, Germany, Britain, France, Italy, Canada and Russia.

Germany had expressed fears that hedge funds could threaten the stability of the financial system through their heavy reliance on borrowing to finance risky trading strategies. It has also raised concerns about private equity funds. (Reporting by Carsten Lietz, writing by Erik Kirschbaum)

[Parihaka]

Tsunami of anger over financial crisis

Today’s European edition of the International Herald Tribune is fronted by a photo montage of the presidents of Senegal, Afghanistan, Bolivia, Argentina, France and Brazil.

They have two things in common - all are attending this week’s United Nations General Assembly in New York and all see a global threat from the financial crisis that began on Wall Street and, in the words of President Gloria Macapagal Arroyo of the Philippines, has moved “like a terrible tsunami around the globe”.

Some of the strongest words were directed at Washington lawmakers, Wall Street speculators and market regulators.

French President Nicolas Sarkozy has called for those responsible for the crisis to be punished. Chancellor Angela Merkel of Germany has said to the United States and Britain: “I told you so”.

Her finance minister, Peer Steinbrueck, believes the United States has lost its financial superpower status.

Bolivia’s President Evo Morales has been quoted as saying: “There is an uprising against an economic model, a capitalistic system that is the worst enemy of humanity.”

How does this fit with Secretary of State Condoleezza Rice’s assurance that the world still has confidence in the United States?

Who needs to adjust their lenses?

[Parihaka]

U.S. Losing Finance Superpower Status, Germany Says (Update3)

By Leon Mangasarian

Sept. 25 (Bloomberg) -- German Finance Minister Peer Steinbrueck said the U.S. will lose its position as the world's undisputed financial ``superpower'' and called for a ban on speculative short-selling to help restore the global economy.

Steinbrueck, in a speech on the financial-market crisis to lawmakers in Berlin today, set out an eight-point plan urging greater regulation and larger capital reserves for banks. He championed the German banking system over its U.S. counterpart, dismissing the ``Anglo-Saxon'' model as having ``an exaggerated fixation on returns.''

``The long-term effects of the crisis are impossible to gauge,'' Steinbrueck said. ``One thing seems probable to me: The U.S. will lose its status as the superpower of the global financial system. The global financial system will become multipolar.''

Steinbrueck's comments underline a deepening divide between European and U.S. attitudes to the financial system and how to resolve the rout triggered by the worst U.S. housing slump since the Great Depression. European members of the Group of Seven leading industrial nations refused to back a U.S. bank-rescue plan Sept. 22, with Steinbrueck saying that the U.S. situation ``is not comparable'' to that in Germany.

`Purely Speculative'

In his speech, Steinbrueck targeted short-selling, where traders borrow shares with the hope of buying them back later at a lower price. The global financial community ``must together agree to a ban on purely speculative short-selling at the international level.''

He said in a later interview with Bloomberg Television that someone looking back from 2018 would regard the events of today as the beginning of a ``slight erosion'' in the status of the U.S. in financial terms.

``America will not be the only power to define which standards and which financial products will be traded all over the world,'' he said. ``The dollar will remain a very reliable and important currency, as well as the euro as well as the yuan and the yen, so I think it will perhaps be the starting point of some changes.''

Steinbrueck said that sovereign wealth funds and banks from Asia, the Middle East and Europe will play a bigger role in the new financial world. In the medium- and long-term, ``new pledges of voluntary action or self-regulation by the financial sector'' will not resolve the current crisis, he said.

`Not Enough'

``That's not enough,'' he said in the speech. ``For me the important answer is stronger, internationally agreed regulation at the international level because the crisis goes beyond measures that can be taken by nation states.''

Steinbrueck is a deputy leader of the Social Democratic Party, coalition partners to Chancellor Angela Merkel's Christian Democrats. A former prime minister of North Rhine- Westphalia, Germany's most populous state and home to the industrial Ruhr Valley, Steinbrueck became finance minister in 2005 after Merkel came to power. The two parties will compete against each other in national elections in September 2009.

Merkel pressed for an international framework to bring greater transparency to financial markets during Germany's Group of Eight presidency last year. She returned to that theme this week, welcoming the conversion of the U.S. and the U.K. to her cause while bemoaning them for not listening to her sooner.

Merkel's Mantra

Economic players ``must accept'' rules on strengthening the independence of ratings companies, greater transparency in financial markets and the fact that high-risk products entail big risks, Merkel told employers in Berlin on Sept. 22.

``These measures aren't new; they were spelled out at the G-7 meeting in Heiligendamm,'' northern Germany, Merkel said. ``Germany has always pointed out how necessary they are.''

Steinbrueck, in his speech to the lower house of parliament, the Bundestag, blamed the U.S. as the source of the current crisis that will leave ``deep scars'' globally.

``The U.S. is the origin and the clear focal point of the crisis,'' Steinbrueck said, adding that the ramifications are now ``spreading worldwide like a poisonous oil spill.''

The world will have to brace itself for lower economic growth rates, he said, without giving any new projections for Germany. The government forecasts 1.7 percent growth this year and 1.2 percent in 2009.

Steinbrueck said the root cause of the crisis lies far deeper than the collapse of the U.S. subprime mortgage market.

``In my view, it's the irresponsible overemphasis on the `laissez-faire' principle, namely giving market forces the most possible freedom from state regulation in the Anglo-American financial system.''

[Parihaka]

Market woes go beyond financial sector

September 26, 2008: What many analysts have recently described as financial turmoil in the share markets around the world goes far beyond the financial sector. The world is facing important structural shifts that could have deep economic, political and social implications.

Most of these changes, which emanated from the US, have their origins in the 1980s. In the past 12 months, their negative effects have been felt throughout the world, but, unfortunately, they have been misdiagnosed and consequently isolated from their structural contexts.

The initial signal of this malaise emerged in mid-2007 and was described as sub-prime problems and the attendant falling house prices across the US.

Some respected analysts claimed repeatedly that this issue would not have wider implications. However, the cause of the sub-prime problem has spread quietly and caused the collapse or impairment of three of the five major merchant banks in the USA: Bear Stearns, Merrill Lynch and Lehman Brothers.

Aside from the collapse of the merchant banks, some of which have lasted for more than 150 years, the US government has reversed its ideological stance and nationalised the country’s biggest insurance company, the American International Group, after committing $85 billion to its rescue.

As if that is not enough, the US government is working on legislation to set up something akin to a “toxic waste dump” for bad debts from financial organisations, which will cost over $700 billion.

These US measures have several implications for Kenya and other African states. Not only will they lead to a decrease in the amount of aid allocated to Africa, but they will also fuel inflation, which will spread to Africa and other parts of the world, and weaken the US dollar, thereby rendering oil more expensive.

Anything that is manufactured in the US has the capacity to reach Europe and other parts of the world, and this financial virus was no exception.

Accordingly, earlier in the year, the British government nationalised one of its banks, Northern Rock, to save it from collapse. However, this was not enough to inoculate the British economic system, so in the past few weeks, White Hall has taken extra measures to buttress the financial sector following the acquisition of the Halifax Bank of Scotland by its rival, Lloyd’s TSB.

In the past week, the central banks of several OECD countries have injected more than $500 billion into the financial system to try to save the current incarnation of capitalism, which, in turn, is doing everything to self-destruct.

Why have analysts refused to acknowledge that the turmoil in the share market is a symptom of weaknesses in the wider global structure?

First, these problems suggest that the neoliberal economic model that has been promoted since the early 1980s can no longer be relied upon by itself to tackle the challenges that we face.

Like other models before it, including the Keynesian one, which was very successful after the Second World War, the neoliberal model has lost its potency.

This is why the US and UK governments have re-discovered virtue in the nationalisation of some key socio-economic assets.

Even the American financial elite, which has traditionally derided anything that smacks of government regulation, has readily accepted government interventions.

Second, recent problems suggest that the US is losing its role as the global economic leader.

Third, it is misleading to describe what is going on as merely financial turmoil. These problems have serious social, political and economic implications.

[Parihaka]

Barroso calls for US economic coordination with EU

BRUSSELS, Sept 24 (Reuters) - The next U.S. president should coordinate carefully with Europe on economic policies over the long term in response to the crisis sweeping global financial markets, the head of the European Commission said on Wednesday.

In a speech at Harvard University, Jose Manuel Barroso also urged the United States to work with Europe to bring new emerging powers into the world's top institutions to tackle challenges such as climate change, terrorism and trade.

He called on the United States to eschew protectionism, isolation and economic nationalism, and to join the European Union in pursuing an Atlantic Agenda for Globalisation.

In response to the current financial crisis, 'the degree of interdependence of our economies requires careful coordination, not just in the coming weeks but, crucially, in the longer term,' he said.

To maintain open and dynamic financial markets on both sides of the Atlantic 'we need clear and effective rules -- maybe commonly agreed rules, where appropriate -- to ensure transparency and confidence in the market', Barroso added.

'We have to make room at the top table for others, because that is the only way we can consolidate and strengthen a stable, multilateral world, governed by internationally agreed rules,' Barroso said, according to an advance text issued by his office.

Without spelling out which emerging powers should be brought into which institutions, he appeared to advocate opening up both the Group of Eight leading industrialised nations and the United Nations Security Council to rising powers.

Neither China nor India is a member of the G8, which groups the United States, Japan, Russia, Germany, France, Britain, Italy and Canada.

Economic powerhouses Japan, India and Brazil are not permanent members of the U.N. Security Council, which also has no permanent members from Africa and Latin America.

COOL HEADS NOT COLD WAR

In an apparent rejection of calls in the United States to isolate Russia over last month's war in Georgia, Barroso said: 'This is a time for cool heads, not Cold War.'

He urged the successor to President George W. Bush to join the 27-nation EU in taking a global lead in the fight against global warming, saying they must engage China and India in dialogue to curb greenhouse gas emissions.

Barroso said the strategic effect of the U.S.-European partnership would 'start to evaporate' unless they were able to reach out to the world in search of new partnerships and effective multilateral strategies.

EU officials are optimistic that both Republican John McCain and Democrat Barack Obama would do much more than Bush to help international efforts to fight climate change.

But they are concerned both at McCain's tough rhetoric against Russia and advocacy of an alliance of democracies that would exclude major countries such as China and Russia, and at Obama's declared reservations about global free trade.

[Parihaka]

India's Iranian Pipeline Deal

India, Pakistan and Iran will sign a deal this month to build a natural gas pipeline to help feed the subcontinent's desperate need for energy, a major blow to American sanctions against Tehran and a defeat for U.S. influence in South Asia.

The $7.5 billion, 1,700-mile Peace Pipeline (IPI) project would bring gas from the South Pars Gas Fields through Balochistan (in Western Pakistan) into India. The project has stalled multiple times since first proposed in 1994 due to political tensions, changing governments, conflicts over prices, and most recently, the weight of American opposition.

The agreement comes amid growing tension between the United States and Iran, which the U.S. has sought to isolate from the world community. But rising fuel prices and a soaring Indian economy seem to have outweighed America's desires--as well as a rival plan for a U.S.-backed pipeline from Turkmenistan.

Though Iran and Pakistan finalized a deal earlier this spring, India remained noncommittal. IPI advocates say the reluctance is due to American pressure: The 2006 U.S.-India nuclear agreement puts pressure upon India to cooperate with American foreign policy goals, and bolstering the Iranian economy through oil imports is hardly on Washington's to-do list.

Riskier, perhaps, is Pakistan's fall-back: to bring the oil down the Himalayas into China, since Islamabad gets transit fees regardless of where the pipeline ends. Though actually building a line to China would be difficult, "Pakistan is smart to talk about China," says Thomas Pickering, former U.S. Ambassador to India and Russia.

The China threat seems to have jostled India. After talks with Iranian officials in Jeddah, Saudi Arabia, India's Petroleum and Natural Gas Minister Murli Deora made a surprise announcement June 23 that he too is ready to move forward. Since his announcement, Deora says he's been "continuously meeting" with Iranian and Pakistani officials and expects a formal agreement by month's end.

Meanwhile, an American-backed alternative languishes. The TAPI plan, to bring gas from Turkmenistan through Afghanistan and Pakistan into India, would keep Iran out and diminish Russian influence in Central Asia.

But projected costs have doubled since 2002 to $7.6 billion, and energy experts remain skeptical of the new number, given that the pipeline passes directly through war-torn Afghanistan. Former World Bank economist and energy expert John Foster believes TAPI proponents are underestimating their budget in order to compete more aggressively with the IPI plan. "There are some games going on with that number," he says.

There are doubts too about TAPI's output: the Asian Development Bank, financiers for the project, have yet to reveal data regarding Turkmenistan's energy resources. As a result, says Deora, "TAPI is at a very primitive stage. We're not even sure if there's gas there, or how much." India's growing economy, he says, cannot wait any longer for an energy lifeline. In 2007, when global energy consumption rose 3%, India accounted for a third of that growth.

In today's economy, says Ambassador Pickering, "energy is increasingly more important to development," not only as a resource for cars and computers, but as a powerful commodity market. For Pakistan, the IPI brings $200 million a year in transit fees and a form of strategic advantage over its larger, wealthier neighbor.

American opposition or not, the IPI project seems to be headed for a formal contract signing this summer. On paper, India and Pakistan may have addressed U.S. objections by allowing each nation to organize its own leg of pipeline construction. In previous rounds of talks, Gazprom and British Petroleum (nyse: BP - news - people ) surfaced as potential bidders.

Behind the scenes, however, officials admit that the South Asian nations are simply ignoring American directives. Dr. Noor Jehan Panezai, MP, who represents the region in Western Pakistan where the pipeline will run, welcomes the plan as an employment package for her constituents. "Indians and Pakistanis," she says, "will choose our own projects. We have decided that the United States has no business in our problems."

Given the crucial role India and Pakistan play in American strategy, experts say it's unlikely that Washington will punish its allies politically or financially for dealing with Iran. Until the deal is inked, however America may exert its best efforts behind the scenes. "The current administration," says Pickering, "might try to impose conditions on India, and I'm sure they are trying to dissuade Pakistan."

If the IPI deal wins out, then it will send an uplifting message about Indo-Pak collaboration, but also a sobering one about America's international clout.

[Parihaka]

Mainland Lenders Ordered to Halt Interbank Deals with U.S. Firms

By Jane Cai and Adam Chen
South China Morning Post, Hong Kong
Thursday, September 25, 2008

SCMP.com - the online edition of South China Morning Post, Hong Kong's premier English-language newspaper

BEIJING -- Mainland regulators have told domestic banks to stop lending to United States financial institutions in the interbank market in a bid to prevent possible losses during the financial crisis, industry sources said yesterday.

The ban from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to US banks but not to banks from other countries, a source said.

The CBRC was not available for comment yesterday.

The decree appears to be Beijing's first attempt to erect defences against the deepening US financial meltdown after the mainland's major lenders reported billions of US dollars in exposure to the credit crisis.

Lending transactions on the mainland interbank market totalled 10.65 trillion yuan (HK$12.17 trillion) last year, according to the People's Bank of China.

In the first eight months of this year, transactions totalled 10.11 trillion yuan, up 104 per cent from a year earlier.

At the end of last year, the mainland interbank market had 717 members, including banks, securities companies and trust companies.

Another banking source said the CBRC issued the ban after obtaining data about the exposure of mainland banks to bonds issued by bankrupt Lehman Brothers Holdings.

Top officials said they were keeping a close watch on the crisis and warned mainland financial institutions to be cautious in their daily business and overseas expansion.

"The international transaction volume of Chinese banks is not big. Those concerning subprime loans are probably lower than US$10 billion," deputy central bank governor Ma Delun wrote this week in the China Business Post, a People's Bank of China-affiliated newspaper.

But the deteriorating situation in the US has shocked top officials.

Mr Ma said that among the unexpected developments was the effect the crisis was having on normal assets, not just problematic assets; its impact on the whole credit market, not just single products; and its effect on Europe and other nations, not only the US.

The exposure of seven listed mainland banks to bonds related to Lehman Brothers totalled US$721 million.

Mainland banks had US$9.8 billion in exposure to US subprime loans at the end of last year and US$25 billion to Fannie Mae and Freddie Mac by June 30.

[Parihaka]

followed by

China bank regulator denies media report of lending ban to U.S. institutions

By Lisa Twaronite, MarketWatch
Last update: 6:26 p.m. EDT Sept. 25, 2008
Comments: 25
SAN FRANCISCO (MarketWatch) -- China's government moved to calm financial markets Thursday and denied a report that it had ordered mainland banks to curb lending to U.S. banks, a day after rumors of financial stability led to a run on a Hong Kong institution.
The China Banking Regulatory Commission moved to quash a South China Morning Post report Thursday that said Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions.
"The CBRC has never, through any channel, released a statement or ordered domestic commercial banks not to lend to or borrow from U.S. financial institutions," the regulator said in a statement on its Web site.
On Wednesday, customers swarmed Bank of East Asia Ltd. (HK:0023: news, chart, profile) branches to withdraw funds, following text-message rumors about the lender's stability.
"I think mainland policy-makers are well aware of the damage that rumors can cause -- like the Hong Kong bank run -- and so appear extra sensitive to making sure negative rumors don't spread," said Win Thin, senior currency strategist at Brown Brothers Harriman.
Liu Mingkang, chairman of the CBRC, said a statement posted on the commission's Web site that Chinese banks should learn from the U.S. crisis and closely watch for changes and unforeseen events in the international economic and financial sector.
China's joint-stock commercial banks had an average capital-adequacy ratio of 10.1% and nonperforming loan ratio of 1.65% by the end of June, the statement said.
"Clearly, fear and stresses remain strong in the global financial system, but we note that for the most part, Asian financial institutions have largely dodged the subprime bullet," said Brown Brothers Harriman's Thin.
Hong Kong Monetary Authority Chief Executive Joseph Yam told reporters Wednesday that Bank of East Asia was highly capitalized and highly liquid, with minimal exposure to failed Lehman Brothers Holdings (LEHMQ:
Lehman Brothers Holdings Inc

Yam reportedly said depositors are well-protected throughout Hong Kong's banking system, and that the HKMA -- Hong Kong's de facto central bank -- would be ready to provide liquidity to Bank of East Asia if needed, but that no such request had been made.
Cheung Kong Holdings Ltd. (HK:0001: news, chart, profile) confirmed Thursday its chairman Li Ka-shing bought shares in Bank of East Asia Ltd. with his own funds on Wednesday.

I love the way the Chinese do business...

[Parihaka]

Asian Central Banks Cut Rates to Counter Impact of U.S. Crisis

By Shamim Adam

Sept. 27 (Bloomberg) -- Asia's central banks have started to cut interest rates, judging they need to counter the effect of the U.S. financial crisis on their export-dependent economies as inflation peaks.

Taiwan cut borrowing costs on Sept. 25, joining China, Australia and New Zealand in easing the price of money this month. Inflation rates have slowed in Thailand and Sri Lanka, and policy makers in the Philippines, India and Indonesia forecast price gains will cool before the end of the year.

Lower borrowing costs may spur growth as the economies of the U.S., Europe and Japan weaken and the deepening credit crisis threatens to tip the world into a recession. Still, some analysts say the inflation fight isn't over and that loose monetary policy or a surge in oil costs may spark another bout of higher prices.

``The bias may be shifting too quickly to growth and that is not wise,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. ``It's too early to declare victory over inflation.''

The credit crisis led Lehman Brothers Holdings Inc. to file for bankruptcy and prompted the sale of Merrill Lynch & Co. to Bank of America Corp. this month. U.S. regulators have seized at least nine lenders since July, including Washington Mutual Inc. yesterday, the fastest pace in 15 years.

While the contagion from the turmoil isn't likely to infect Asia's banking systems, the credit crisis is hurting exports.

Fewer orders for made-in-Asia goods are cooling industrial production in China, Singapore and Taiwan among others. Bank of Korea official Kang Myung Hun, who opposed a rate increase last month, said the nation's slowing economy is more of a concern than accelerating inflation.

Growth Forecasts

Merrill Lynch & Co. this month cut its forecast for Asia's growth in 2008 and 2009. The region will expand 7.7 percent this year, and ease further to 7.3 percent in 2009. Both forecasts were reduced from previous predictions of 7.9 percent growth.

``The U.S. is deteriorating and investors are increasingly pessimistic about the European economy,'' said Tomo Kinoshita, chief economist for Asia outside Japan at Nomura Holdings Inc. in Hong Kong. ``These are major destinations for Asian exports, and the implications of slower growth cannot be ignored.''

Taiwan's central bank unexpectedly reduced interest rates 12.5 basis points to 3.5 percent on Sept. 25, saying the global financial crisis had heightened the risk of an economic slowdown.

The People's Bank of China reduced its one-year lending rate to 7.20 percent from 7.47 percent on Sept. 15 and Australia's central bank lowered borrowing costs on Sept. 2, its first reduction in seven years.

In Malaysia and Sri Lanka, central bank officials refrained from raising rates even as inflation accelerated to the highest in decades.

Philippines, Indonesia

The Philippine central bank may not need to raise interest rates further as inflation may have peaked at 12.5 percent, Economic Planning Secretary Ralph Recto said Sept. 17.

Bank Indonesia's Deputy Governor Hartadi Sarwono last month said an interest rate of 9.5 percent may be ``adequate'' to slow inflation. The central bank's key rate is at 9.25 percent now.

``They're all pretty much done with raising interest rates, and those who didn't move probably won't have to,'' says Joseph Tan, chief economist for Asia at Credit Suisse Private Banking in Singapore. ``Asia needs to cushion against further downside risks to growth and guard against the fallout in the global financial system.''

Some economists are concerned the interest-rates cuts will rekindle inflation.

`Inflation Genie'

``Put the inflation genie back in the bottle now,'' said Asian Development Bank Chief Economist Ifzal Ali. Asia needs to ``tighten monetary policy even if it requires a temporary sacrifice of growth.''

Inflation in Asia will reach 7.8 percent this year, higher than an April forecast of 5.1 percent that was already the most in a decade, the ADB said. Prices may ease to 6 percent next year, it predicts.

``Lower rates will increase domestic demand and inflation pressures will start to kick in once again, exactly what central banks were trying to avoid in the first place,'' Lambregts said. ``It's a risky move and they'll pay a price for it.''

[Parihaka]

France: Laissez-Faire Capitalism is Over

Both France and Germany on Thursday (25 September) said the current financial crisis would leave important marks on the world economy, with French president Nicolas Sarkozy declaring that the under-regulated system we once knew is now "finished," and German finance minister Peer Steinbruck saying the crisis marks the beginning of a multi-polar world, where the US is no longer a superpower.

Speaking to an audience of some 4,000 supporters in Toulon, France, Mr Sarkozy said the financial turmoil had highlighted the need to re-invent capitalism with a strong dose of morality, as well as to put in place a better regulatory system.

"The idea of the all-powerful market that must not be constrained by any rules, by any political intervention, was mad. The idea that markets were always right was mad," Mr Sarkozy said.

"The present crisis must incite us to refound capitalism on the basis of ethics and work & Self-regulation as a way of solving all problems is finished. Laissez-faire is finished. The all-powerful market that always knows best is finished," he added.

He accused "this system that allows the ones responsible for a disaster to leave with a golden parachute" of having "increased inequality, demoralised the middle classes and fed [market] speculation."
A European response

The French president also criticised "the logic of short-term financial profit" and said risks were hidden "to obtain ever more exorbitant profits" — something which, he said, was not the true face of capitalism.

"The market economy is a regulated market ... in the service of all. It is not the law of the jungle; it is not exorbitant profits for a few and sacrifices for all the others. The market economy is competition that lowers prices ... that benefits all consumers."

The speech by Mr Sarkozy, who is also the EU's current president-in-office, echoes similar statements he made earlier this week, when he called for an international meeting to discuss the crisis before the end of the year.

On Thursday, he also called on Europe to "reflect on its capacity to act in case of an emergency, to re-consider its rules, its principles," while learning the lessons from what is happening worldwide.

Mr Sarkozy said: "For all Europeans, it is understood that the response to the crisis should be a European one."

"In my capacity of president of the Union, I will propose initiatives in that respect at the next European Council [15 October]," he added.
'The world will never be the same again'

Meanwhile, German finance minister Peer Steinbruck criticised the US for failing to act in the wake of the crisis and said it would now lose its status of "superpower."

"The US will lose its status as the superpower of the world financial system. This world will become multi-polar," with the emergence of centres in Asia and Europe, he told the German parliament on Thursday.

"The world will never be as it was before the crisis," he added.

Mr Steinbruck's criticism of the US has been amongst the sharpest yet made since the beginning of the crisis.

He notably blamed Washington for resisting stricter regulation, even after the crisis started last summer, and said this free-market-above-all attitude and the argument "used by these 'laissez-faire' purveyors was as simple as it was dangerous," the Associated Press reports.

He stressed that Germany had made recommendations last year for more rules, which Washington refused to consider.

They "elicited mockery at best or were seen as a typical example of Germans' penchant for over-regulation," Mr Steinbruck said.

Earlier this week, German foreign minister Frank-Walter Steinmeier also said the US should have listened to the advice coming from Europe, notably from Germany, that more control was needed.

"It is a discussion that we have had for a long time in Europe, that the completely unregulated parts of the international financial market must be more closely monitored and that we must try to reach an agreement on common regulations," he said during a visit to the New York Stock Exchange on Wednesday, according to Forbes

[Parihaka]

European governments have been involved in four bank rescues since Sunday; the Euribor 3-month rate rose to a record on Monday reflecting elevated tensions in the inter-bank markets and Irish bank shares crashed to 20-year lows.

In Europe today, markets plunged as the UK government seized Bradford & Bingley, Britain's biggest of buy-to-let mortgages. On Sunday, the governments of Belgium, the Netherlands and Luxembourg gave a €11.2 billion lifeline to Fortis, Belgium's largest financial- services firm in return for a 49% stake. In Germany, Hypo Real Estate Holding AG, Germany's second- biggest commercial-property lender, received a €35 billion loan guarantee from the state and Iceland agreed to buy 75% of Glitnir Bank hf, the country's third-biggest lender.

In Dublin the ISEQ has crashed 12%.

AIB is down 21% and Anglo Irish Bank has tumbled 32%. IL&P has crashed 34% and BoI is down 16%.

Belgium and the Netherlands, home to Fortis are both down over 7%.

Hypo Real Estate is down 73%.

.

[cyppok]

I was so happy today the vote made my day.

Hopefull they wont pass it on Thursday.
House nixes $700B bailout bill in stunning defeat - Yahoo! News

But somewhat jittery.

[JamesCash]

Much appreciated.

[Parihaka]

Thanks to Oscar for this one

FINANCIAL TSUNAMI
The End of the World as we Knew it
by F. William Engdahl
October 1, 2008


The unexpected US Congress’ rejection of the Bush Administration financial rescue plan, TARP on September 29 has opened up the spectre for the first time of a 1931-style domino wave of worldwide bank failures. That is already underway across the US banking spectrum with the failure, nationalization or forced liquidation in the past two weeks of Fannie Mae and Freddie Mac, of the giant Washington Mutual mortgage lender, of the nation’s fourth largest deposit bank, Wachovia. That was on top of a wave of smaller bank failures that began with IndyMac in the spring. For some it is appealing and more simple to grasp the magnitude of these titanic events in the US-centered financial world by assuming it is all part of a pre-planned grand conspiracy by the Money Masters, what in the 1920s in the USA was termed the Money Trust, to control the entire financial world.

As the details of the present crisis reveal, there are huge ideological fault lines making for chaos and a potential meltdown of the Laissez Faire financial system. That present system, which was built on the back of Wall Street financial and banking deregulation since 1987 when Alan Greenspan, a devout follower and close friend of radical individualist Ayn Rand, became Wall Street’s man at the Federal Reserve for almost 19 years, is over now with the failure of the Henry Paulson $700 billion bailout scheme. Governments worldwide now face no alternative but to begin the painful process of putting the financial genie back in the bottle and re-regulating an out-of-control financial system. The failure of the UK Government and the US Government to address that fundamental issue is behind the present crisis of confidence.

A brief look at history

The Great Depression in Germany in 1931 began with a seemingly minor event—the collapse of a bank in Vienna, Creditanstalt, that May. For readers interested in more on the remarkable parallels between that crisis and that of today, I recommend the treatment in my earlier volume, A Century of War: Anglo-American Oil Politics and the New World Order.

That Vienna bank collapse in turn was triggered by a political decision in Paris to sabotage an emerging German-Austrian economic cooperation agreement by pulling down the weakest link of the post-Versailles system, the Vienna Creditanstalt. In the process, Paris triggered a series of tragic events that led to the failure of the German banking system over a period of several weeks. The post-1919 Versailles System, much like the post-1999 US Securitization System, was built on a house of cards with no foundation. When one card was removed, the entire international financial edifice crumbled.

Then, in 1931, there was an inept Brüning government in Germany, which believed severe austerity was the only solution, merely feeding unemployment lines to pay the Young Plan German reparations to the new Bank for International Settlements in Basle.

Then, in 1931 George Harrison, a Germano-phobe, was the inexperienced Governor of the powerful New York Federal Reserve. Harrison was a member of the anglophile Skull & Bones, the elite Yale University secret society which also included George H.W. Bush and George W. Bush as initiates. Harrison, who went on to coordinate the secret Manhattan Project on the development of the Atomic bomb under fellow Skull & Bones member, War Secretary Henry Stimson, believed the crisis had started not from abroad but with German bankers trying to make a profit at the expense of others.

Within weeks of rumor and jitters, the New York Bankers Trust, ironically today a part of Deutsche Bank, announced it would be forced to cut the credit line to Deutsche Bank and by July 1931 began to pull its deposits from all big Berlin banks. Harrison insisted the Reichsbank dramatically raise interest rates to stabilize things, only turning bad into worse as a credit crisis across the German economy ensued.

The Bank of England Governor, Montagu Norman, while somewhat more supportive of Luther argued that his friend Hjalmar Schacht was better suited to manage the crisis. On July 13, 1931, a major German bank, Darmstädter-und Nationalbank (Danat) failed. That triggered a general a depositors’ run on all German banks. The Brüning government merged the Danat with a weakly capitalized Dresdner Bank, and made large state guarantees in an effort to calm matters. It didn’t.

New York Fed governor, Harrison, who was personally convinced it was a ‘German’ problem, barked orders to Reichsbank chief Hans Luther on how to manage the crisis according to archival accounts. A foreign drain on Reichsbank gold reserves ensued.

The rest is history, the tragic history of the greatest most destructive war of the 20th Century, with all the suffering that ensued. At that time in history, the American banking elite saw itself, despite a stock market crash and Great Depression in America, as standing at the dawn of a new American Century.

The decline of the American Century

Today, in 2008, some 77 years later, a German Finance Minister stands before the Bundestag announcing the end of that American Century. Today the German government encourages a fusion of Dresdner with Commerzbank. Today Deutsche Bank, which some years ago acquired Bankers Trust in New York in a merger wave, appears to be in a stronger position than its American counterparts as Wall Street investment banks, some more than 150 years old as the venerable Lehman Bros., simply vanish in a matter of days. The American financial Superpower crumbles before our eyes.

In March 2008 there were five giant Wall Street investment banks, banks which underwrote Mortgage-Backed Securities (MBS), corporate bonds, corporate stock issues. They were not deposit banks like Citibank or Bank of America; they were known as investment banks—Morgan Stanley, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns.

The business of taking deposits and lending by banks had been split during the Great Depression from the business of underwriting and selling stocks and bonds—investment banking—by an act of Congress, the Glass-Steagall Act of 1933. The law was passed amid the collapse of the banking system in the United States following the bursting of the Wall Street stock market bubble in October 1929.

That Glass-Steagall act was a prudent attempt by Congress to end the uncontrolled speculative excesses of the Roaring Twenties by New York finance. It established the Federal Deposit Insurance Corporation to guarantee personal bank deposits to a fixed sum that restored consumer confidence and ended the panic runs on bank deposits.

In November 1999, after millions spent lobbying Congress, the New York banks and Wall Street investment banks and insurance companies won a staggering victory. The US Congress voted to repeal that 1933 Glass-Steagall Act. President Bill Clinton proudly signed the repeal act with Sandford Weill, the chairman of Citigroup.

The man whose name is on that repeal bill was Texas Senator Phil Gramm, a devout advocate of ideological free market finance, finance free from any Government fetters. The major US banks had been seeking the repeal of Glass-Steagall since the 1980s. In 1987 the Congressional Research Service prepared a report which argued the case for preserving Glass-Steagall. The new Federal Reserve chairman, Alan Greenspan, just fresh from J.P. Morgan bank on Wall Street, in one of his first speeches to Congress in 1987 argued for repeal of Glass-Steagall.

The repeal allowed commercial banks such as Citigroup, then the largest US bank, to underwrite and trade new financial instruments such as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs) and establish so-called structured investment vehicles, or SIVs, that bought those securities. Repeal of Glass-Steagall after 1999, in short, enabled the Securitization revolution so openly praised by Greenspan as the “revolution in finance.” That revolution is today devouring its young.

That securitization process is at the heart of the present Financial Tsunami that is destroying the American credit structure. Citigroup played a major part in the repeal of Glass–Steagall in 1999. Citicorp had merged with Travelers Insurance company the year before, using a loophole in Glass-Steagall that allowed for temporary exemption. Alan Greenspan gave his personal blessing to the Citibank merger.

Phil Gramm, the original sponsor of the Glass-Steagall repeal bill that bears his name, went on to become the chief economic adviser to John McCain. Gramm also went on to become Vice Chairman of a sizeable Swiss bank, UBS Investment Bank, in the USA, a bank which has had no small share of troubles in the current Tsunami crisis.

Gramm as Senator in 2000 was one of five co-sponsors of the Commodity Futures Modernization Act of 2000. A provision of the bill was referred to as the ‘Enron loophole’ because the it was later applied to Enron to allow them unregulated speculation in energy futures, a key factor in the Enron scandal and collapse. The Commodity Futures Modernization Act, as I described in my earlier piece in May, Perhaps 60% of Today’s Oil Price is Pure Speculation, allowed investment bank Goldman Sachs (coincidentally the former bank of Treasury Secretary Paulson), to make a literal killing in manipulating oil futures prices up to $147 a barrel this summer.

Paulson’s impressive interest conflicts

The actions of Treasury Secretary Paulson since the first outbreak of the Financial Tsunami in August of 2007 have been directed with one apparent guiding aim—to save the obscene gains of his Wall Street and banking cronies. In the process he has taken steps which suggest more than a mild possible conflict of interest. Paulson, who had been chairman of Goldman Sachs from the time of the 1999 Glass-Steagall repeal to his appointment in 2006 as Treasury head, had been one of the most involved Wall Street players in the new securitization revolution of Greenspan. Under Paulson, according to City of London financial sources familiar with it, Goldman Sachs drove the securitization revolution with an endless rollout of new products. As one London banker put it in an off-record remark to this author, “Paulson’s really the guilty one in this securitization mess but no one brings it up because of the extraordinary influence Goldmans seems to have, a bit like the Knights Templar order of old.’ Naming Goldman chairman Henry Paulson to head the Government agency now responsible for cleaning up the mess left by Wall Street greed and stupidity was tantamount to putting the wolf in charge of guarding the hen house as some see it.

Paulson showed where his interests lay. He is by law is the chairman of something called the President's Working Group on Financial Markets, the Government’s financial crisis management group that also includes Fed Chairman Bernanke, the Securities & Exchange Commission head, and the head of the Commodity Futures Exchange Commission (CFTC). That is the reason Paulson, the ex-Wall Street Goldman Sachs banker, is always the person announcing new emergency decisions since last August.

Two weeks ago, for example, Paulson announced the Government would make an unprecedented $85 billion nationalization rescue of an insurance group, AIG. True AIG is the world’s largest insurer and has a huge global involvement in financial markets.

AIG’s former Chairman, Hank Greenberg—a close friend of Henry Kissinger, a former Director of the New York Fed, former Vice Chairman of the elite New York Council on Foreign Relations and of David Rockefeller’s select Trilateral Commission, Trustee Emeritus of Rockefeller University—was for more than forty years Chairman of AIG. His AIG career ended in March 2005 when AIG's board forced Greenberg to resign from his post as Chairman and CEO under the shadow of criticism and legal action for cooking the books, in a prosecution brought by Eliot Spitzer, then Attorney General of New York State.

In mid September, in between other dramatic failures including Lehman Bros., and the bailout of Fannie Mae and Freddie Mac, Paulson announced that the US Treasury, as agent for the United States Government, was to bailout the troubled AIG with a staggering $85 billion. The announcement came a day after Paulson announced the Government would let the 150-year old investment bank, Lehman Brothers, fail without Government aid. Why AIG and not Lehman?

What has since emerged are details of a meeting at the New York Federal Reserve bank chaired by Paulson, to discuss the risk of letting AIG fail. There was only one active Wall Street banker present at the meeting—Lloyd Blankfein, chairman of Paulson’s old firm, Goldman Sachs.

Blankfein later claimed he was present at the fateful meeting not to protect his firm’s interests but to ‘safeguard the entire financial system.’ His claim was put in doubt when it later emerged that Blankfein’s Goldman Sachs was AIG’s largest trading partner and stood to lose $20 billion in a bankruptcy of AIG. Were Goldman Sachs to go down with AIG, Secretary Paulson would have reportedly lost $700 million in Goldman Sachs stock options he had, an interesting fact.

That is a tiny glimpse into the man who crafted the largest bailout in US or world financial history some days ago, the failed TARP—Troubled Asset Relief Program—a proposed $700 billion financial stabilization scheme which, in Paulson’s original version would have allowed him or his Treasury successor to use $700 billion, with no oversight or accountability, to buy bad or worthless assets from financial institutions he deems worthy of help.

As respected economist, Nouriel Roubini pointed out, in almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks, take over their management and assets, and inject public capital to recapitalize the banks to allow them to continue doing business, lending to normal clients. In the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market and the banks could gradially buy the state ownership shares back into private hands. In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses.

Paulson’s plan, the one essentially rejected on September 29 by the House of Representatives, would have done nothing to recapitalize the troubled banks. That recapitalization could cost an added hundreds of billions on top of the $700 billion toxic waste disposal.

Serious bankers I know who went through the Scandinavian crisis of the 1990’s are scratching their head trying to imagine how crass the Paulson TARP scheme is. That politically obvious bailout of Wall Street by the taxpayers, what some refer to as ‘Bankers’ Socialism—socialize the costs of failure onto the public, and privatize the profits to the bankers—is a major factor behind the defeat of the TARP compromise version. Under Paulson’s scheme, which seems likely to get very little alteration by Congress in coming days, the Treasury Secretary, initially Paulson, would have sole discretion, with minimal oversight, to use a $700 billion check book, courtesy of taxpayer generosity, to buy various Asset Backed Securities held not only by Federal Reserve regulated banks like JP Morgan Chase or Citicorp, or Goldman Sachs, but also by hedge funds, by insurance companies and whomever he decides needs a boost.

‘The Paulson plan is unworkable,’ noted Stephen Lewis, chief economist with the London-based Monument Securities. ‘No one has an idea how to set a price on these toxic securities held by the banks, and in the present market a lot of them likely would be marked to zero.’ Lewis like many others who have examined the example of the temporary Swedish bank nationalization, called Securum, during their real estate collapse in the early 1990’s, stresses that ultimately only a similar solution would be able to resolve the crisis with a minimum of taxpayer cost. ‘The US authorities know very well the Swedish model, but it seems in the US nationalization is a dirty word.’

But there is an added element. John McCain decided to boost his flagging Presidential campaign by trying to profile himself as a ‘political Maverick’ one who opposes the powerful Washington vested interests. He flew into Washington days before the TARP was to be approved by a panicked Congress and conspired with a handful of influential Republican Senate friends, including Banking Committee ranking member, Senator Shelby, to oppose the Paulson TARP. What emerged, with McCain’s backing, was a political power play that may well have brought the United States financial system to its knees, and McCain’s Presidential hopes with it.

Power and greed are the only visible juice driving the decision-makers in Washington today. Acting in the long-range US national interest seems to have gotten lost in the scramble. As I wrote last November in my Financial Tsunami five part series on the background to today’s crisis, all this could be foreseen. It is what happens when elected Governments abandon their public trust or responsibility to a cabal of private financial interests. It will be interesting to see if anyone in Washington realizes that lesson.

Whatever next comes out of Washington, however, one thing is clear, as reflected in what German Finance Minister Peer Steinbrück told the Bundestag. This is the end of the world as we knew it. The American financial Superpower is gone. The only important question will be what and how will the alternative be.