Consensus...

...and compromise. These are not things you want in your supposedly politically independent reserve bank. The Fed presidents of the U.S. are a far cry from bank presidents from sovereign nations who understand only too well the effects of low interest rates.

From a Bloomberg article:

The Bundesbank’s diminished clout may mean the council, which convenes on July 2 in Luxembourg, will keep interest rates lower for longer than it would have tolerated in the past. Barclays Capital predicted last week that Europe’s central bank won’t increase them for at least two years.

While Weber, 52, has already called for rates to be raised before inflation risks materialize, “the Bundesbank colossus is losing its influence,” said Stuart Thomson, who helps oversee the equivalent of about $107 billion at Ignis Asset Management in Glasgow.

Balance of Power

“In a Bundesbank-driven ECB, rates wouldn’t have been cut this low, and it would have been the first central bank to signal an exit,” said Thomson, who’s shunning the euro and buying British pounds on speculation the Bank of England will be faster to scale back its purchases of bonds and raise borrowing costs.

The shift in the balance of power away from the Bundesbank is forcing investors to look beyond Weber for clues about the strategy of the Frankfurt-based ECB, which is headed by President Jean-Claude Trichet, a 66-year-old Frenchman. That’s pushing officials such as Slovenia’s Marko Kranjec and former Federal Reserve senior adviser Athanasios Orphanides of Cyprus onto their radar screens.

“Other countries’ collective voices are now becoming much more important, and the ECB is more likely to strike a compromise,” said Andrew Bosomworth, a former economist at the central bank and now a fund manager in Munich for Newport Beach, California-based Pacific Investment Management Co.

Tuning up the violins on the Titanic...

Perhaps the title to this post is a bit much, but one of the consistent themes of this blog for the past 2 years is the myriad problems facing the European Union.

And now pragmatic Sweden takes the helm of the EU "Presidency", while the real leaders of the several countries have only just started to realize the gravity of the crisis, and announces it will "fight hard" for a global climate change deal that will have the U.S. and China on board. They had better get back to basics soon or the Euro area will climb to first on my list of potential firebrand areas. Full article here.

Mr Reinfeldt said Europe’s financial sector was to some extent protected by emergency legislation put in place after the crisis touched its peak last September and October. “We are better prepared to deal with the fact that we might get further financial turbulence,” he said.

Nevertheless, his words echo the concerns of EU policymakers and financial specialists in Brussels, who say they doubt the capacity of many European banks to absorb future heavy losses stemming from the Continent’s worst recession in almost 80 years.

Mr Reinfeldt said it was all the more important for EU governments to restore order to their public finances in the post-crisis era because it would not be long before demographic changes – more pensioners and fewer of the population in jobs – started to put immense pressure on Europe’s welfare state.

Mr Reinfeldt, promising Sweden would push as hard as possible during its EU presidency for a global deal on fighting climate change at a Copenhagen conference in December, said he would do his best to persuade the US and China to sign up.

“We can never reach the global answers we need unless China and the US take the decision to do much more,” he said.

ADP Employment report...

...consistent with most other statistical releases as of late. Worse than expected with prior month downward revisions.

And yet the 2nd derivative argument (a decrease in the rate of decline) is bandied about by pundits and participants alike. Now is not the time to be too attached to any scenario.

Sparks...

...next to timber soaked in lighter fluid.

Honduran coup early test for Obama's Latam policy

Sun Jun 28, 2009 8:38pm EDT

By Ross Colvin

WASHINGTON (Reuters) - The Honduran military's ouster of President Manuel Zelaya on Sunday could be an early test for U.S. President Barack Obama as he tries to mend the United States' battered image in Latin America, a regional expert said.

"This is a golden opportunity to make a clear break with the past and show that he is unequivocally siding with democracy, even if they (Washington) don't necessarily like the guy," former Costa Rican Vice President Kevin Casas-Zamora told Reuters in Washington.

Shortly after news of the coup broke, Obama issued a statement expressing his "deep concern" at Honduran troops arresting Zelaya at his residence and exiling him to Costa Rica. The leftist president had angered the army, Congress and the courts by pushing for constitutional changes to allow presidential re-election.

Casas-Zamora said he had heard reports that the U.S. State Department had got wind of plans for a coup and had tried to prevent it, but this could not be independently confirmed.

Obama's statement urged Hondurans to resolve the dispute peacefully but did not explicitly call for Zelaya's reinstatement as president. A senior administration official said later, however, that the United States recognized only Zelaya's government as legitimate.

Waking up next to the Paper Dragon...

...mainstream media is quickly "getting it". Original article here.

By Ambrose Evans-Pritchard
Published: 5:38PM BST 28 Jun 2009

China's banks are veering out of control. The half-reformed economy of
the People's Republic cannot absorb the $1,000bn (£600bn) blitz of new
lending issued since December.

Money is leaking instead into Shanghai's stock casino, or being used
to keep bankrupt builders on life support. It is doing very little to
help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China's lenders are
wading into dangerous waters, but its latest report is even grimmer
than bears had suspected.

"With much of the world immersed in crisis, China appears to be one of
the few countries where the financial system continues to function
largely without a glitch, but Fitch is growing increasingly wary," it
said.

"Future losses on stimulus could turn out to be larger than expected,
and it is unclear what share the central and/or local governments
ultimately will be willing or able to bear."

Note the phrase "able to bear". Fitch's "macro-prudential risk"
indicator for China threatens to jump from category 1 (safe) to
category 3 (Iceland, et al). This is a surprise to me but Michael
Pettis from Beijing University says China's public debt may be as high
as 50pc-70pc of GDP when "correctly counted".

The regime is so hellbent on meeting its growth target of 8pc that it
has given banks an implicit guarantee for what Fitch calls a "massive
lending spree".

Bank exposure to corporate debt has reached $4,200bn. It is rising at
a 30pc rate, even as profits contract at a 35pc rate.

Fitch traces the 2009 bubble to the central bank's decision to cut
interest on reserves to 0.72pc. Bankers responded to this "margin
squeeze" by ramping up the volume of lending instead. Over half the
new debt is short-term. Roll-over risk is rocketing. China's monetary
stimulus since November is arguably more extreme than the post-Lehman
printing of the US Federal Reserve, though less obvious to the
untrained eye.

Under the Taylor Rule, US policy remains tight (for the US). China's
policy is loose (for China). New loans doubled in May from a year
earlier, almost entirely to companies.

Entropy

Plenty of it in congressional measures to "assist" the economy. Nice article by here detailing some of the provisions in the stimulus package to went under the readar.

The meat of the article:

Congress inserted the tax benefits for companies other than banks in a fog of confusion and panic after the House of Representatives rejected the first attempt to fund the bank support effort urged by then President George W. Bush and Treasury Secretary Henry Paulson.

Rubber Stamped

Lawmakers rubber-stamped the package of arcane, if innocuous-sounding, tax items with one eye on the calendar. An election was only a few weeks away, and legislators were desperate to return home to campaign for their own re-election.

A year later, lawmakers and the public are just now discovering some of the curious subsidies tucked into TARP and the government’s other massive intervention programs. Four months after TARP took effect, President Barack Obama pushed through a $787 billion bill intended to pump up the nation’s economy.

That legislation included $20 billion in tax breaks for companies that produce energy from wind and other alternative sources as well as $1.6 billion in relief related to the tax treatment of canceled debt for Sprint Nextel Corp., the third- largest U.S. mobile-phone-service company, and other firms.

Like TARP, the stimulus bill was passed quickly, with little scrutiny.

‘Backroom Deals’

“You had this remarkable brief period with no transparency, filled with backroom deals being made and an absolute blackout of information,” saysJim Lucier, a senior political analyst at Capital Alpha Partners LLC, a Washington firm that tracks legislation for hedge funds and institutional investors.

Auspicious research timing...

...to say the least. More evidence of Fed papers as trial balloons.

Forthcoming

JEL classification: E42, N22, E58

William L. Silber After a month-long run on American banks, Franklin Delano Roosevelt proclaimed a Bank Holiday, beginning March 6, 1933, that shut down the banking system. When the banks reopened on March 13, depositors stood in line to return their hoarded cash. This article attributes the success of the Bank Holiday and the remarkable turnaround in the public’s confidence to the Emergency Banking Act, passed by Congress on March 9, 1933. Roosevelt used the emergency currency provisions of the Act to encourage the Federal Reserve to create de facto 100 percent deposit insurance in the reopened banks. The contemporary press confirms that the public recognized the implicit guarantee and, as a result, believed that the reopened banks would be safe, as the President explained in his first Fireside Chat on March 12, 1933. Americans responded by returning more than half of their hoarded cash to the banks within two weeks and by bidding up stock prices by the largest ever one-day percentage price increase on March 15—the first trading day after the Bank Holiday ended. The study concludes that the Bank Holiday and the Emergency Banking Act of 1933 reestablished the integrity of the U.S. payments system and demonstrated the power of credible regime-shifting policies.