Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Bernanke's Re-Confirmation TestimonyWith opposition from the left (from Bernie Sanders, who promised to put an "official hold" on a floor vote for Bernanke's re-confirmation) and from the right (by two Republicans, as yet unnamed, according to FireDogLake, via NakedCapitalism).Meanwhile, here's the New York Times account of Bernanke's testimony, where he concedes that the Fed "could have done more" to avert the crisis. Here's a nice discussion on The Big Picture of whether Bernanke will get re-confirmed, should get re-confirmed, and whether we the people have any say whatsoever (one commenter claims that Bernanke's approval rating is at 21%). And here's an op-ed from left-ish economist Dean Baker and libertarian Mark Calabria arguing that an agreement on Fed transparency should precede Bernanke's re-confirmation. Sounds good to us. Labels: Ben Bernanke, Bernie Sanders, Federal Reserve, firedoglake, Monetary Policy, Naked Capitalism Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Thursday's IndicatorsMore signs that the boost to US employment in August was merely a blip on the screen came in today, ahead of tomorrow's penultimate employment reports. Initial claims for unemployment continued to fall, but at a slower rate than anticipated. Applications fell 4,000 to 570,000 last week. Continuing claims rose by 92,000 in the week ended Aug. 22 to 6.23 million, however. In the all-important service-sector (from the point of view of employment), however, the pace of the business activity decline slowed, but remained in depressed territory. So the data remain uncomfortably mixed, with the outlook bias stuck in discernably negative territory. Tune in tomorrow at the same bat time for the big news to get a clearer picture (and even then...).The Washington Post reports today that the US will need "massive" hiring" to fill mission-critical posts in the next three years. But the number given, 270,000, represents a little more than the offset on one GOOD month's losses during this recession, so it's not like it's going to make much of a difference, especially over three years, as unemployment is slated to persist at more than 8 percent levels beyond 2011. Retail sales numbers came in, and confirm a contunuing trend toward success for low-end stores at the expense of those catering to fashion addicts. But the data are unusual because the important back-to-school numbers are truncated due to the lateness of the Labor Day holiday next week (which aren't included, for obvious reasons). The Financial Times reported yesterday (I forgot to post this then, and I'm piggybacking on Morningstar--thanks--for this link) that insider selling on Wall Street soared in August, in yet another sign that the summer equity rally had little substance to it (beyond huge rises for the like of AIG, Fannie and Freddie, Citi, etc., and indications that short-sellers were engaged in panic-buying to cover bets gone bad, for starters). And it's funny: whereas, during the "green shoots" days, stocks moved up with every report that wasn't a disaster, now even better news is being greeted with frostiness from investors. But bonds continue to stay with stocks at relatively advanced levels, at least if you're not in China. And stocks rose there for the third straight day, at an impressive 4.8% clip (losses from Monday's dive were 2 percentage points more), on assurances from a Chinese regulator that markets were functioning despite all the hoopla about gazillions of yuan of loans being cut off and whatnot. In Japan, howver, the Nikkei index was down because of strength in the yen (which serves as something of a safety valve when temporary or slight weakneses in the US--like a poor jobs report--surface). Also, China is bracing for another bout of instability in the west. Finally, the European Central Bank left its key interest rate at one percent, in a move that surprised only those who perhaps never knew that a Europen Central Bank ever existed. A far more interesting development will take place in two developed-country central banks, Norway's and Australia's, in the next few months. These countries, having chalked up impressive growth (both on rising natural resource prices, and Australia on super-stimulus enabled Chinese growth), are saying they will begin to extricate themselves from their "quantitative easing" programs in the next few months. You'd better believe that the folks at the Fed, the Banks of Japan and England, and the European Central Bank will be watching to see how messy an affair this could be. Labels: Australia, China, corporate profits, economic indicators, economic stimulus, european central bank, insider trading, Monetary Policy, Norway, retail sales, service industries, weekly initial claims Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Quantitative Easing Fails To Get Banks To LendAnalysis from FT Alphaville. Here are the main ideas:The Deputy Governor's remarks on 'quantitative easing' (QE) suggest the Bank of England has abandoned any hopes it might have had that its asset purchases would lead to a revival in bank lending. If QE is purely and explicitly aimed at flattening yields, it also raises certain questions for central bankers beyond those of the moral hazard of monetising debt. For instance, if yields (10-year gilt shown below) stop responding to government-bond buybacks, and rates start rising, what then? Today's FT also notes that the Bank of England is considering a move already taken by Sweden's Riksbank, of introducing negative interest rates on balanced banks hold with the central bank, to induce banks to finally lay out cash to borrowers (which has been liberally financed by the taxpayer, of course...) Labels: Bank of England, bond market, financial crisis bailout, Monetary Policy, Quantitative easing, The Riksbank, yield curve Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Labor Leader To Head New York FedYves Smith thinks it's a gimmick, but one that may have some unexpected consequences.Tuesday, August 25, 2009 Naked Capitalism Labor Leader Chosen to Head of New York Fed Board of Directors Joseph Stiglitz has said that labor should have a voice in the setting of interest rate policy. Is this change at the New York Fed, teh appointment of the AFL-CIO's Denis Hughes as the replacement to ex Goldman co-chairman Steve Friedman as chairman of the New York Fed, a step in that direction? If it proves to be, it will only be by dint of miscalculation. This is clearly an image-burnishing move by the Fed, throwing a bone to critics, But letting labor into the tent may have unexpected consequences, simply by allowing someone who has not drunk the financial services industry Kool-Aid more influence (Hughes was on the board, but as vice chairman). This appointment is only until year-end, but if the Fed continues to be under political pressure, it isn't hard to imagine this appointment being extended. The Journal's Deal Journal voices the opposite possibility, that labor is being co-opted. The branding of labor as monolithic and radical is a bit of a canard. In the 1930s, the old AFL, which was a craft union, was comparatively conservative and regarded more favorably than upstart and aggressive CIO, for instance. From the Wall Street Journal (hat tip reader LeeAnne): Denis Hughes, president of the New York state branch of the AFL-CIO, had been serving as acting chairman of the New York Fed board since May, when Stephen Friedman stepped down from the position. Mr. Friedman, a former Goldman Sachs Group Inc. chairman and adviser to President George W. Bush, had faced questions about his purchases of Goldman stock while serving on the New York Fed's board. The Fed decision formalizes Mr. Hughes's role as chairman through the end of 2009. The Fed board in Washington will announce in November or December who will serve as chairman in 2010. Columbia University President Lee Bollinger was named deputy chairman, a position that Mr. Hughes previously held. Mr. Bollinger has been a New York Fed director since January 2007. The New York Fed chairmanship typically has gone to prominent Wall Street executives or academics. The ascension of a labor leader is a new twist for the New York Fed and a sign of the public pressure the Fed has been under to loosen its close ties to Wall Street. Labels: AFL-CIO, Bureau of Labor Statistics, Denis Hughes, Federal Reserve, Monetary Policy, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). It's Better than the Alternative...to wit, nominiating Lawrence Summers. From Reuters:Obama renominates Bernanke as Fed chief Tue Aug 25, 2009 9:55am EDT OAK BLUFFS, Massachusetts (Reuters) U.S. President Barack Obama nominated Ben Bernanke to a second term as Federal Reserve chairman on Tuesday, entrusting him with guiding the economy out of the worst downturn since the Great Depression. Obama interrupted his vacation on the Massachusetts island of Martha's Vineyard to make the announcement with Bernanke at his side. "Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall," Obama said. U.S. stock index futures were slightly higher on Tuesday on the news. There was no significant impact on financial markets in Asia and Europe, however, where investors were more focused on whether a global economic recovery was really under way. Obama is counting on Bernanke to nurse the economy back to health at a time when unemployment, home foreclosures and bank failures are still mounting. Obama's Democrats control the Senate, but Bernanke has faced criticism from lawmakers of both parties who say he has gone too far in extending Fed support that will be difficult to unwind, threatening future inflation. "While I have had serious differences with the Federal Reserve over the past few years, I think reappointing Chairman Bernanke is probably the right choice," Senate Banking Committee Chairman Christopher Dodd said in a statement. Dodd vowed a "thorough and comprehensive" hearing to consider the nomination. (Additional reporting by David Lawder, Tim Ahmann and Anthony Boadle in Washington) Labels: Barack Obama, Ben Bernanke, Federal Reserve, financial crisis, Lawrence Summers, Monetary Policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Strange Things Afoot in the Bond MarketFrom Bloomberg:Bond Bears Dumping Two-Year Treasuries Defy History (Update3) By Oliver Biggadike and Daniel Kruger Aug. 24 (Bloomberg) Bond investors that drove two-year Treasuries down on Aug. 21 by the most since early June after Federal Reserve Chairman Ben S. Bernanke said the economy is "beginning to emerge" from recession may find themselves wishing they had held onto the securities. While the comments sparked speculation that the central bank may soon raise borrowing costs as growth resumes, history shows the Fed is likely to keep its benchmark interest rate at a record low for a year or more. Policy makers didn’t boost rates after the 2001 recession until 12 months into the recovery, while it was 17 months following the 1991 economic contraction. "It's going to be very difficult for the Federal Reserve to raise rates simply because there's no inflation," said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. "The two-year at a yield of 1 percent is an excellent yield," said Cheah, who has been buying the securities. The yield on the benchmark two-year note rose almost 11 basis points at the end of last week, or 0.11 percentage point, to 1.1 percent, according to BGCantor Market Data. That was the most since it surged by the same amount on June 8. The slump came after the National Association of Realtors said sales of existing U.S. homes jumped 7.2 percent to a 5.24 million annual rate, the most since August 2007, and Bernanke said at a Fed-hosted central bankers' symposium in Jackson Hole, Wyoming, that "prospects for a return to growth in the near term appear good." Speculative Positions Trading positions show that last week's sell-off may be short-lived, even as the government prepares to sell $109 billion of Treasury notes this week, including $42 billion of two-year securities. The benchmark two-year note rose today, with yields falling three basis points to 1.06 percent. Speculative long positions on two-year notes, or bets prices will rise, outnumbered short positions by 158,041 contracts on the Chicago Board of Trade last week, the most since Dec. 7, 2007. That was just before the securities, which are more sensitive to changes in Fed policy than longer-term debt, posted their biggest quarterly gain since 2001, returning 3.26 percent, Merrill Lynch & Co. indexes show. Read the rest of the article Labels: Ben Bernanke, bond market, Monetary Policy, speculation, Treasury bonds, yield curve Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). CBO: 2009 Deficit Down, 10-Year up by $2 TrillionFrom Reuters:New deficit projections pose risks to Obama's agenda Mon Aug 24, 2009 8:06am EDT By Jeff Mason WASHINGTON (Reuters) President Barack Obama's domestic policy proposals will face the reality of skyrocketing deficits on Tuesday when officials release two government reports projecting huge budget shortfalls over the next decade. The White House budget office and the Congressional Budget Office (CBO), a non-partisan arm of Congress, release updated economic forecasts and deficit estimates on Tuesday, providing further fiscal fodder to opponents of Obama's nearly $1 trillion healthcare overhaul plan. Many of the figures are already known. The White House has confirmed that its deficit estimate for the 2009 fiscal year, which ends September 30, will inch down to $1.58 trillion from $1.84 trillion after eliminating billions of dollars originally set aside for bank rescues. Looking forward, an administration official told Reuters the 10-year budget deficit projection will jump by about $2 trillion to roughly $9 trillion from an original forecast of $7.1 trillion. "One message the numbers will send is that the medium- and long-term deficits need to be addressed," said Chuck Marr, director of federal tax policy at the Washington-based Center on Budget and Policy Priorities, an analysis and research organization. Obama has promised to do that. The president, a Democrat, says he will cut the deficit in half by the end of his four-year term, and he sees lowering healthcare costs as a key ingredient toward achieving long-term deficit reduction. But Republicans charge that his proposals to extend coverage to uninsured Americans and create competition for private insurance providers are too expensive, especially as deficits go up Read the rest of the article Labels: Barack Obama, congressional budget office, deficit, financial crisis bailout, health care reform, Monetary Policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Inflection Point for Dollar as Risk Haven?From The Financial Times:Speculation grows over dollar's turning pointBy Peter Garnham Financial Times Published: August 11 2009 19:31 | Last updated: August 11 2009 19:31 Just a week after the dollar hit its lowest level for 10 months, the main talking point in FX markets is whether the US currency is about to strengthen. The change of sentiment has been sparked by last week's US payrolls report, which saw far fewer job losses in July than expected. This strengthened the view that the US is past the worst of its recession and that its economic recovery could precede that of Europe and Japan. "Markets are in a flurry of debate about whether Friday's US payrolls data marks an inflection point for FX, whereby good US economic news starts to benefit rather than hurt the dollar," says Ray Farris at Credit Suisse. Hans Redeker at BNP Paribas says there are signs that the US economy has responded positively to the massive US fiscal and monetary stimulus, thus reducing the risk premium for holding US assets. "The introduction of quantitative easing in March has let the performance of the dollar diverge from the guidance of real interest rate differentials," he says. "Now, as the economic outlook has stabilised, the relative yield and interest rate differentials should regain their impact on currency markets." Others are hesitant to call an end to the trend of dollar weakness, given that the currency's rebound has been based on its reaction to a single piece of economic data. Read the rest of the article Labels: bailout, currencies, dollar, financial crisis, foreign exchange, macroeconomics, Monetary Policy, Peter Garnham Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To Use Forex Reserves for M and AFrom The Financial Times:China to deploy forex reserves By Jamil Anderlini in Beijing Financial Times Published: July 21 2009 19:09 | Last updated: July 21 2009 19:09 Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country's premier, said in comments published on Tuesday. "We should hasten the implementation of our 'going out' strategy and combine the utilisation of foreign exchange reserves with the 'going out' of our enterprises," he told Chinese diplomats late on Monday. Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports. The "going out" strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China. Qu Hongbin, chief China economist at HSBC, said: "This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets." Read the rest of the article Labels: China, financial crisis, foreign exchange, Mergers, Monetary Policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama in His LabyrinthFrom the Financial Times:Deficit disorder By Edward Luce Published: June 25 2009 19:53 | Last updated: June 25 2009 19:53 Back in February, Barack Obama's presidency suffered an early setback when Judd Gregg, the Republican senator from New Hampshire, withdrew as his nominee for commerce secretary. Mr Gregg, who was to be the most high-profile exhibit of Mr Obama's bipartisan credentials, decided he could not belong to an administration that would preside over such high budget deficits. The figure then being projected for this year was above the $1,000bn mark for the first time. But in the few short months since, the number has rocketed much further--to $1,800bn (1,106bn pounds, 1,291bn euros) or 13 per cent of gross domestic product. The Congressional Budget Office, a nonpartisan watchdog, forecasts that the US will post deficits in excess of a trillion dollars in each of the next 10 years. Even on its relatively optimistic assumptions for economic growth, moreover, the CBO predicts national debt will double to 82 per cent of GDP in the next decade--a level not seen since the second world war. This would push the US close to the chronic debt levels seen in Japan and Italy. "People used to talk about America's long-term fiscal crisis," says Douglas Elmendorf, head of the CBO. "That crisis is now." Once merely a worthy subject of concern, America's fiscal outlook has rapidly become the object of widespread alarm. "Aside from weapons of mass destruction and terrorism, America's fiscal situation is the most dangerous challenge facing the country," says Mr Gregg. "Unchecked, it will reduce growth, weaken the dollar and ultimately undermine America's global leadership role." Read the rest of the article Labels: baillout, Barack Obama, financial crisis, fiscal policy, Monetary Policy, tax policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China Reduces US Dollar Reserves In FebruaryIt's hard to tell how significant or durable an occurence this is, but it certainly deserves close attention. From Brad Setser's fine blog, Follow the Money:China Reduced Its Dollar Holdings in FebruaryPosted on Wednesday, April 15th, 2009 by bsetser It is a good thing the US trade deficit has come down, because foreign demand for US financial assets--actually foreign demand for US assets other than short-term Treasury bills--has dried up. Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia's central bank) bought close to $14 billion. Private investors--seemingly Japanese private investors--also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn't buy much of anything. And Americans also didn’t buy many foreign assets.* After Keith Bradsher's New York Times article, though, all eyes are on China. In February, China bought Treasuries. $4.64b by my count. It bought $5.61b of bills, while reducing its long-term Treasury holdings by $0.96 billion. But China also reduced its US bank deposits by $17.24 billion. Consequently, by my count, China's total US holdings fell by $13 billion. Short-term claims fell by $11.3b, and long-term claims fell by $2b. The data on China’s short-term claims can be found here. Is this the beginning of the end? Has China decided to stop buying US assets? Read the rest of the post Labels: bailout, Brad Setser, China, dollar, financial crisis, Monetary Policy, trade deficit, Treasury bonds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To TIGHTEN CreditThey did this in the run-up to the crash, too. And were blamed for it then. Article contains a distressing picture of China's real estate market from one of Chiona's chief economists, which would pour some cold water on hopes that China's stimulus program can create, rather quickly, demand on the scale required to put a serious dent in trade and currency imbalances. From The Financial Times:Beijing to tighten controls on credit By Kathrin Hille and Jamil Anderlini in Beijing Published: April 12 2009 16:43 China's central bank on Sunday warned it planned to "strictly control" credit to some sectors of the economy after the country recorded a record surge in bank loans and money supply in March. The central bank's statement, made after a routine quarterly monetary policy meeting, followed the release on Saturday of the money supply data. The data appeared to confirm that Beijing's stimulus measures are revitalising the domestic economy but raised credit risk and inflation concerns. Read the rest of the article Labels: bailout, China, financial crisis, Monetary Policy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'We're All Mercantilists Now'So says Ambrose Evans-Pritchard. Here's a snippet:Yields on 10-year US Treasuries are 2.84pc--lower than Germany (3.3pc) or France (3.81pc). One-year notes are 0.46pc. The worse the crisis gets, the more the world wants to place its shrunken wealth in the care of Washington. The US Treasury is finding it all too easy to suck in enough global capital to fund trillion-dollar deficits. This is the "exorbitant privilege" of reserve primacy that so vexed Charles de Gaulle. You could hear the gnashing teeth at Davos. "They can print the dollars," said a weary Ernesto Zedillo, Mexico's former president. The injustice of it. The arch-sinner is dodging its own disaster, leaving scores of well-behaved countries starved of capital and exposed to the crunch from Hell. In Davos, protectionism is a dirty word The beggar-thy-neighbour phase has begun in earnest. "Buy American" legislation has advanced from a barely credible threat to imminent reality on Capitol Hill in just weeks. By Ambrose Evans-Pritchard Last Updated: 11:31PM GMT 31 Jan 2009 The House has voted for a bill that prohibits the use of foreign steel in most infrastructure projects funded by Barack Obama's $820bn (563bn pound) rescue package. The Senate is drawing up plans to widen that to all manufactured goods. This is what happens when a country loses half a million jobs a month, and when the state becomes spender-of-last-resort. Taxpayers are tribal. They do not want precious stimulus to feed the foreigner. Even so, this Dutch auction has the disorderly feel of the Smoot-Hawley Tariff debacle in 1930, though this time the collapse of commerce--if allowed to happen --will have very different consequences for the global balance of power. Mr Obama can veto the law, should he wish to pick a fight with Capitol Hill from day one. The world watches and waits in horror, especially in Davos. "Everybody here is talking about protectionism. There's not a prime minister present not talking about protectionism," said Peter Sutherland, former (GATT) trade chief and now chair of BP. Days earlier, US Treasury chief Tim Geithner called China a "currency manipulator" --meaning that Beijing holds down the yuan to boost exports. The term is turbo-charged. It implies mandatory trade sanctions under US law. Mr Geithner's bluntness prompted an angry outburst by Chinese premier Wen Jiabao behind closed doors in Davos. Mr Wen later let rip against "blind pursuit of profit" and unstable economic models based on "low savings and high consumption". Not a word about China's role in accumulating $1.9 trillion of reserves and thereby helping to stoke a global credit bubble; Mr Wen clings to the fallacy that greedy banks alone created this disaster. A fat lot of good it will do him. Read the rest of the article Labels: Ambrose Evans-Pritchard, bailout, financial crisis, Monetary Policy, trade policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Global Imbalances and the Triffin DilemmaInteresting piece from Reuters:January 13th, 2009 Global imbalances and the Triffin dilemma By: John Kemp John Kemp is a Reuters columnist. The opinions expressed are his own For the world monetary system, the financial crisis which erupted in the summer of 2007 is a cataclysmic shift that will prove every bit as significant as the outbreak of the First World War (which heralded sterling's demise as a reserve currency) and the suspension of gold convertibility in 1971 (which marked the end of bullion's monetary role). The crisis marks the passing of an era in which the U.S. dollar has been the world's undisputed reserve currency for making international payments and storing wealth. The dollar is not about to lose its reserve status completely. But it is set to become less "special". In future, it will increasingly have to share its reserve status with the euro, the yen and perhaps the currencies of the other advanced economies. In time, it may even have to share its status with China's yuan. In fact, the whole concept of a single reserve currency (the dollar) and a principal reserve asset (U.S. Treasury bonds) is set to undergo a profound shift. Policymakers, businesses and households will in future think about and hold a whole portfolio of competing reserve currencies and assets. Multipolarity in the world of security and economic relations is set to be matched by a world with multiple reserve currencies. Read the rest of the article Labels: financial crisis, Monetary Policy, trade policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The G-20 CommuniqueThis meeting, which President-elect Obama has said he won't attend anyway, has been pushed in some circles (even on our blog, in a highly conditional way: see posting of 22d October "NOT a Slow News Day") as a possible "Bretton Woods II." The Harvard trade theorist Dani Rodrik managed to get his hands on the documents, which he posted on his blog.Rodrik's introduction: Everyone knows that the final communiques of summits held by political leaders are written way in advance by their "sherpas." Through my contacts in the Bush administration I have managed to get my hand on the communique that will be issued at the conclusion of the G-20 summit being held on November 15th in Washington, DC. Here is how it reads: The G-20 communique of November 15th We, the leaders of the G20 nations, have come together to develop a common action agenda to prevent the further spread of the financial crisis and to ensure that the consequences for output and employment are minimized. We are pleased that G7 member governments have agreed to engage in an appropriate degree of fiscal expansion to stimulate their economies. While the degree of reflation of different economies can be best evaluated by policy makers in individual countries, we believe joint action on this front will be more effective than isolated changes in policy. We also call on countries with large current account surpluses to adopt policies that boost domestic demand. China has a particularly important role to play here, and we are happy to report that the Chinese government has decided to embark on a significant program to increase domestic consumption--both private and public--by boosting spending on infrastructure, health, education, and social transfers. We are particularly concerned that the financial crisis, which has already hit emerging markets, will have even more serious consequences in the weeks to come for the stability of their banking and financial systems. We welcome the creation of the new Short-Term Liquidity Facility (SLF) at the International Monetary Fund, and the Federal Reserve's new swap facilities for four emerging market economies. These countries are the casualty of financial excesses that are not the result of their own doing. So we emphasize that access to the SLF will be available to all developing countries that are adversely affected by the financial turbulence emanating from the subprime fallout. Further, G7 member governments emphasize that they stand ready to expand these facilities as needed, in case they are not sufficient to restore stability to markets. We also welcome the decision by the Chinese government, described in greater detail in the accompanying communique, to make available part of its foreign currency reserve assets towards an expanded swap facility in support of global financial stability. The weeks and months ahead will be trying times for economic policy makers everywhere, as they try to contain the fallout for output and employment. Raising trade barriers against imports will be a temptation, especially when currencies fluctuate so much. But the experience with the Great Depression teaches us that this is the surest way to magnify the costs of the crisis, and to spread it to other countries. Hence the most serious challenge for the global trading regime at the present is to ensure that the financial and economic crisis does not lead to a vicious cycle of protectionism, greatly exacerbating the economic downturn. So we jointly commit ourselves in public to not raising protectionist barriers in response to perceived threats to employment from imports. We further ask the secretariat of the World Trade Organization to monitor and report unilateral changes in trade policy, with the purpose of "naming and shaming" G20 members that depart from this commitment. The unfolding financial crisis has made it amply clear that we need a new regulatory approach to finance--both domestically and internationally. The rules that govern financial globalization need to be rethought to ensure that finance serves its primary goals--allocate saving to high-return projects and enhance risk-sharing--without leading to instability and crises. Our discussions have revealed that there exist great differences amongst us with respect to our respective needs and therefore with respect to how to achieve these ends. A key challenge will be therefore to strike an appropriate balance between common international regulations, on the one hand, and space for domestic approaches that may diverge from harmonized regulations, on the other. Recent experience has taught us that there may need to be a greater role for the active management of international financial flows by governments. Designing the new traffic rules for international finance, as it were, will take considerable time and thought. We have asked our ministers of finance to establish a high-level working group that will convene as soon as practically feasible to seek wider input, and craft a framework for discussion among heads of governments. Despite our differences on the details, we share a common goal: to make international finance safe for the world economy--and not the other way around. Labels: Dani Rodrik, financial crisis, financial crisis bailout, G-20, Larry Peterson, Monetary Policy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lessons From JapanInteresting Article in the International Herald Tribune on Japanese monetary policy (both yesterday's version and that the more longer-term variety stretching back to the serious deflation days). Here's the most pertinent point:"According to Jerram, of Macquarie, one lesson of Japan's experience with such indirect measures is that they work only if bankers are confident that they will remain in place until the economy actually revives. To make this clear, he said the bank should accompany such an easing with public commitments not to raise borrowing costs again until some target is met, such as a rebound by consumer prices." Not sure if our program, such as it is, is geared toward this sort of option--at least not yet. Bank of Japan cuts rates for the first time in 7 years By Martin Fackler Friday, October 31, 2008 TOKYO: The Japanese central bank cut its benchmark interest rate for the first time in seven years on Friday, joining earlier moves by the U.S. Federal Reserve and other central banks to soften the brunt of a possible global recession. The Bank of Japan's policy board voted to lower the overnight lending rate between banks by 0.2 percentage point to 0.3 percent, reducing borrowing costs in order to rekindle growth in the country, which has the largest economy in Asia. The bank also seemed to confirm fears here that Japan was heading into a recession by lowering its forecasted growth rate for the current year to around zero percent, citing higher energy prices and weakening demand for Japanese exports. The loosening Friday was also aimed at easing a growing credit crunch in Japan, which had long seemed immune to the international financial contagion. As an additional credit-easing measure, the bank said it would start paying interest on some of the reserves that commercial banks keep at the central bank, a step that would provide more cash to lenders. This was the first interest rate cut during the current financial crisis by Japan, where short-term interest rates, already near zero, have constrained the central bank's room for maneuver. Read the rest of the article Labels: Bank of Japan, banking system, financial crisis bailout, Monetary Policy, recapitalization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
