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Posted by warren mosler (65.113.90.29) on 13:23:43 01/01/08
In Reply to: What are your thoughts? posted by Robert S.
: What are your thoughts on this article?
:
: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml
Crisis may make 1929 look a 'walk in the park'
As central banks continue to splash their cash over the system, so far
to little effect, Ambrose Evans-Pritchard argues that things risk
spiralling out of their control
Twenty billion dollars here, $20bn there, and a lush half-trillion
from the European Central Bank at give-away rates for Christmas.
Buckets of liquidity are being splashed over the North Atlantic
banking system, so far with meagre or fleeting effects.
IT'S ABOUT PRICE, NOT QUANTITY (NET FUNDS AREN'T ALTERED), AND THE CB
ACTIONS HAVE HELPED SET 'POLICY RATES' AT DESIRED LEVELS.
THAT'S ALL CB'S CAN DO, APART FROM ALTERING THE ABSOLUTE LEVEL OF
RATES, WHICH, BY THEIR OWN RESEARCH, DOES LITTLE OR NOTHING AND WITH
CONSIDERABLE LAGS.
NOT TO SAY CHANGING RATES ISN'T DISRUPTIVE AS IT SHIFTS NOMINAL
INCOME/WEALTH BETWEEN BORROWERS AND SAVERS OF ALL SORTS.
Read more from Ambrose Evans-Pritchard
Is the crisis getting worse? Get the latest comment
The financial outlook in 2008: Experts' predictions
As the credit paralysis stretches through its fifth month, a chorus of
economists has begun to warn that the world's central banks are
fighting the wrong war, and perhaps risk a policy error of epochal
proportions.
Faces of power: The Fed's Ben Bernanke, the BoE's Mervyn King, the
ECB's Jean-Claude Trichet
"Liquidity doesn't do anything in this situation," says Anna Schwartz,
the doyenne of US monetarism and life-time student (with Milton
Friedman) of the Great Depression.
THE LAST MAJOR, INTERNATIONAL FIXED EXCHANGE RATE/GOLD STANDARD
IMPLOSION. OTHERS SINCE- ERM, MEXICO, RUSSIA, ARGENTINA, HAVE BEEN
'CONTAINED' TO THE FIXED FX REGIONS.
"It cannot deal with the underlying fear that lots of firms are going
bankrupt. The banks and the hedge funds have not fully acknowledged
who is in trouble. That is the critical issue," she adds.
THE CRITICAL ISSUE AT THE MACRO, POLICY LEVEL IS WHAT IT'S ALL DOING
TO THE AGG DEMAND THAT SUSTAINS OUTPUT, EMPLOYMENT, GROWTH. SO FAR SO
GOOD ON THAT FRONT, BUT IT REMAINS VULNERABLE, ESPECIALLY GIVEN THE
STATE OF KNOWLEDGE OF MACRO ECONOMICS AND FISCAL/MONETARY POLICY
AROUND THE GLOBE.
Lenders are hoarding the cash, shunning peers as if all were sub-prime
lepers. Spreads on three-month Euribor and Libor - the interbank rates
used to price contracts and Club Med mortgages - are stuck at 80 basis
points even after the latest blitz. The monetary screw has tightened
by default.
THE CB CAN READILY PEG FED FUNDS VS LIBOR AT ANY SPREAD THEY WISH TO
TARGET.
York professor Peter Spencer, chief economist for the ITEM Club, says
the global authorities have just weeks to get this right, or trigger
disaster.
SEEMS THEY PRETTY MUCH DID BEFORE YEAR END. SPREADS ARE NARROWER NOW
AND PRESUMABLY AT CB TARGETS.
advertisement"The central banks are rapidly losing control. By not
cutting interest rates nearly far enough or fast enough, they are
allowing the money markets to dictate policy. We are long past
worrying about moral hazard," he says.
THEY HAVE ALLOWED 'MARKETS' TO DICTATE AS THE ENTIRE FOMC AND OTHERS
HAS REVEALED A TROUBLING LACK OF KNOWLEDGE OF MONETARY OPS AND RESERVE
ACCOUNTING.
"They still have another couple of months before this starts
imploding. Things are very unstable and can move incredibly fast. I
don't think the central banks are going to make a major policy error,
but if they do, this could make 1929 look like a walk in the park," he
adds.
HARD TO DO WITH FLOATING EXCHANGE RATES, BUT NOT IMPOSSIBLE IF THEY
TRY HARD ENOUGH!
The Bank of England knows the risk. Markets director Paul Tucker says
the crisis has moved beyond the collapse of mortgage securities, and
is now eating into the bedrock of banking capital. "We must try to
avoid the vicious circle in which tighter liquidity conditions, lower
asset values, impaired capital resources, reduced credit supply, and
slower aggregate demand feed back on each other," he says.
SEEMS A LACK OF UNDERSTANDING OF THE 'SUPPLY SIDE' OF MONEY/CREDIT IS
PERVASIVE AND GIVES RISE TO ALL KINDS OF 'UNCERTAINTIES' (AKA- FEARS,
AS IN BEING SCARED TO AN EXTREME).
New York's Federal Reserve chief Tim Geithner echoed the words,
warning of an "adverse self-reinforcing dynamic", banker-speak for a
downward spiral. The Fed has broken decades of practice by inviting
all US depositary banks to its lending window, bringing dodgy mortgage
securities as collateral.
BANKS CAN ONLY OWN WHAT THE GOVT. PUTS ON THEIR 'LEGAL LIST' AND BANKS
CAN ISSUE GOVT INSURED DEPOSITS, WHICH IS GOVT. FUNDING, IN ORDER TO
FUND GOVT APPROVED ASSETS.
FUNCTIONALLY, THERE IS NO DIFFERENCE BETWEEN ISSUING GOVT INSURED
DEPOSITS TO FUND THEIR LEGAL ASSETS AND USING THE DISCOUNT WINDOW TO
DO THE SAME. THE ONLY DIFFERENCE MAY BE THE PRICE OF FUNDS, AND THE
FED CONTROLS THAT AS A MATTER OF POLICY.
Quietly, insiders are perusing an obscure paper by Fed staffers David
Small and Jim Clouse. It explores what can be done under the Federal
Reserve Act when all else fails.
Section 13 (3) allows the Fed to take emergency action when banks
become "unwilling or very reluctant to provide credit". A vote by five
governors can - in "exigent circumstances" - authorise the bank to
lend money to anybody, and take upon itself the credit risk. This
clause has not been evoked since the Slump.
GOVT ALREADY DOES THIS. THEY ALREADY DETERMINE LEGAL BANK ASSETS,
CAPITAL REQUIREMENTS, AND VIA VARIOUS GOVT AGENCIES AND ASSOCIATION
ADVANCE GOVT GUARANTEED LOANS OF ALL TYPES.
THIS IS BUSINESS AS USUAL, ALL PRESUMABLY FOR PUBLIC PURPOSE.
GET OVER IT!!!
Yet still the central banks shrink from seriously grasping the
rate-cut nettle. Understandably so. They are caught between the Scylla
of the debt crunch and the Charybdis of inflation. It is not yet
certain which is the more powerful force.
YES, AS THEY CLING TO THE BELIEF THAT 'INFLATION' IS A 'STRONG'
FUNCTION OF INTEREST RATES, WHILE IT'S AN OIL MONOPOLIST OR TWO AND A
GOVT INDUCED AND SUPPORTED LINK FROM CRUDE TO FOOD VIA BIO FUELS
THAT'S DRIVING UP CPI AND INFLATION IN GENERAL.
America's headline CPI screamed to 4.3 per cent in November. This may
be a rogue figure, the tail effects of an oil, commodity, and food
price spike. If so, the Fed missed its chance months ago to prepare
the markets for such a case. It is now stymied.
CPI MIGHT ALSO BE HEADED HIGHER IF CRUDE CONTINUE ITS ADVANCE.
This has eerie echoes of Japan in late-1990, when inflation rose to 4
per cent on a mini price-surge across Asia. As the Bank of Japan
fretted about an inflation scare, the country's financial system
tipped into the abyss.
AS I RECALL, IT WAS A TAX HIKE THAT HURT GDP
YES, THE WORLD ECONOMIES ARE VULNERABLE TO A DROP IN GDP GROWTH, BUT
THE FINANCIAL PRESS SEEMS TO HAVE THE REASONING TOTALLY CONFUSED.
On Dec 24, 2007 10:44 PM, Russell Huntley wrote:
> http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis12
> 3.xml
>
> U.K. looks like it may be in trouble.
>
>
--
blog: www.mosler-economics.net
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