continentaleconomics.com Blog

May 29 (Bloomberg) — Federal Reserve Bank of Dallas President Richard Fisher said he expects the central bank would raise the benchmark U.S. interest rate should the public begin to expect greater gains in consumer prices.

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic'’ economy, Fisher said yesterday in a speech in San Francisco.

Fed bank presidents, including Gary Stern of Minneapolis and Thomas Hoenig of Kansas City, have expressed growing concern this month about rising prices. Fisher, 59, is the only member of the Federal Open Market Committee to dissent three times from decisions to lower the overnight bank-lending rate, favoring either no change or less aggressive reduction.

“I don’t know a single person on the committee that isn’t concerned about inflation,'’ the Dallas Fed chief said after his speech to the Commonwealth Club of California. “The question is, `what is the right treatment?’ That is subject to debate.'’

http://bloomberg.com/apps/news?pid=20670001&refer=economy&sid=a9UfchgqijAI

– May 30 (Bloomberg) — European inflation accelerated faster than economists forecast this month as oil prices jumped to a record, adding to what European Central Bank President Jean-Claude Trichet has called policy makers’ “biggest challenge.'’

The inflation rate in the euro area rose to 3.6 percent, matching a 16-year high, from 3.3 percent in April, the European Union statistics office in Luxembourg said in a statement today. Economists had forecast a 3.5 percent rate, according to the median of 36 estimates in a Bloomberg survey.

The ECB, which aims to keep consumer-price growth below 2 percent, said yesterday there are signs inflation expectations “have been trending up recently'’ and it’s imperative that they remain contained. The Frankfurt-based bank celebrates its 10th anniversary this weekend, having failed to meet its target for the last eight years, and holds its next policy meeting June 5. –

http://bloomberg.com/apps/news?pid=20601068&sid=a_nSD_lkzIQY&refer=economy

– May 30 (Bloomberg) — Former Federal Reserve Chairman Alan Greenspan says the U.S. economy, which has been buffeted by speculation in the housing and stock markets, now faces a more immediate threat from inflation than from additional speculative “bubbles.'’

“I don’t expect to see bubbles for a very long period of time,'’ Greenspan said today in a speech in Montreal. “The necessary conditions are low inflation, low long-term interest rates, economic stability and a certain element'’ that “gives people excess confidence.'’

Greenspan, 82, who served as Fed chairman from August 1987 to January 2006, said containing inflation may require “very tight monetary policies'’ in future years. He spoke at an event sponsored by BMO Financial Group.

“In my mind, there is no doubt that every central bank will lean very hard against'’ inflation, he said. “But will they be able to maintain the degree of independence that is required? To allow the progress we have made on inflation to dissipate would be a great tragedy.'’ –

http://bloomberg.com/apps/news?pid=20670001&refer=home&sid=amYxEdIf5mVQ

– May 30 (Bloomberg) — Brazil will draw 13 billion reais ($8 billion) from its budget to build a sovereign wealth fund with the main purpose of fighting inflation, Finance Minister Guido Mantega said.

The goal is to cut overall demand, which is putting pressure on consumer prices, by reducing government spending and creating a fund set aside for future investments, Mantega told reporters today in Sao Paulo.

“At the moment the priority is to fight inflation,'’ Mantega said. –

http://bloomberg.com/apps/news?pid=20601086&sid=a8NnJZ0G_KMc&refer=news

– May 29 (Bloomberg) — Federal Reserve Board Vice Chairman Donald Kohn raised the possibility of giving Wall Street securities firms permanent access to loans from the central bank, as long as regulators tighten oversight of the companies.

Kohn also advocated continuing Fed auctions of funds to commercial banks and loans of Treasuries to Wall Street dealers even after markets stabilize. Such channels would stay open “either on a standby basis or operating at a very low level,'’ he said in a speech in New York today.

The remarks go beyond Chairman Ben S. Bernanke, who has indicated the central bank would shut lending to investment banks when the credit crisis passes. Lawmakers and regulators are debating how to approach the supervision of investment banks in the aftermath of the Fed’s rescue of Bear Stearns Cos. in March.

Kohn said he hasn’t decided whether securities firms should continue to gain access to loans from the central bank.

“The more extensive the access, the greater the degree to which market discipline will be loosened and prudential regulation will need to be tightened,'’ Kohn said in his speech to a conference hosted by the New York Fed. “Unquestionably, regulation needs to respond to what we have learned about the importance of primary dealers and their vulnerabilities to liquidity pressures.'’

Kohn didn’t discuss the outlook for the economy or interest rates in his prepared remarks. Financial markets are still “far from normal,'’ he said, repeating a phrase other Fed officials have used. –

http://bloomberg.com/apps/news?pid=20601068&sid=afHr9Tmktbfs&refer=home

Comment: Current central bank action follows the same insane logic as that of the madman who bangs his head to the wall ever more fiercely because it won’t disappear.

Antony Mueller

Evans-Pritchard from the British Telegraph sees warning signals flashing again in the debt markets:

– “The debt markets in the US and Europe have begun to flash warning signals yet again, raising fears that the global credit crisis could be entering another turbulent phase.

The cost of insuring against default on the bonds of Lehman Brothers, Merrill Lynch and other big banks and brokerages has surged over the last two weeks, threatening to reach the stress levels seen before the Bear Stearns debacle. Spreads on inter-bank Libor and Euribor rates in Europe are back near record levels.

Credit default swaps (CDS) on Lehman debt have risen from around 130 in late April to 247, while Merrill debt has spiked to 196. Most analysts had thought the coast was clear for such broker dealers after the US Federal Reserve invoked an emergency clause in March to let them borrow directly from its lending window.

But there are now concerns that the Fed itself may be exhausting its $800bn (£399bn) stock of assets. It has swapped almost $300bn of 10-year Treasuries for questionable mortgage debt, and provided Term Auction Credit of $130bn.

“The steep rise in swap spreads this week is ominous,” said John Hussman, head of the Hussman Funds. “The deterioration is in stark contrast to what investors have come to hope since March.” –

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/29/cndebt129.xml

Also in The Telegraph: George Soros: “We face the most serious recession in our lifetime”.

Quote: “This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made.” When George Soros - the phenomenally successful hedge fund manager - says this, you know something is wrong, very wrong. And indeed it is. The 77-year-old billionaire sinks back into the sofa in his Chelsea townhouse and exhales.” –

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/05/26/ccsoros126.xml

— “… It is time to create a European crisis committee that will bring together high-level political representatives, former heads of state and of government, or former ministers of finance, as well as renowned economics and financial experts from all continents. This committee must be tasked with:

Performing a detailed analysis of the financial crisis in the broader context we’ve tried to describe above;

Identifying and evaluating the socio-economic risks that the financial crisis entails for the real economy, especially in Europe;

Proposing a series of measures to avoid or limit these risks to the EU Council;

Presenting a series of proposals to limit the effects of the crisis to the Council of Ministers, the United Nation’s member states and Security Council, the director general of the IMF and all the authorities and governmental institutions involved and preparing a global financial conference in order to rethink the rules of international finance and governance involved in global economic matters.

In 2000, we agreed to make the European Union the most competitive region in the world. We must guarantee that Europe’s competitive standing be supported rather than undermined by financial markets. We must act without further delay: for our citizens, for increased investment, for economic growth, for social justice, for employment opportunities, and, in conclusion, for a better future for all Europeans.

Jacques Delors and Jacques Santer are former presidents of the European Commission.

Helmut Schmidt is a former German chancellor.

Massimo d’Alema (Italy), Lionel Jospin (France), Pavvo Lipponen (Finland), Goran Persson (Sweden), Poul Rasmussen (Denmark), Michel Rocard (France) are former prime ministers.

Daniel Daianu (Romania), Hans Eichel (Germany), Par Nuder (Sweden), Ruairi Quinn (Ireland), Otto Graf Lambsdorff (Germany) are all former economics and/or finance ministers.” —

http://www.truthout.org/article/mad-finance-must-not-rule-us

Comment: While these authors are right in many details, they miss the central point: the inherently fraudulent nature of our modern monetary system. The central problem is the institutional setting. More regulation will only produce more of same kind of mess that we have been experiencing. After all, if there is someone to blame, it is less so the bankers and brokers, but more so the regulators themselves, among them the central banks that have acted as the prime instigators and pushers of the credit bubble.

Antony Mueller

– May 28 (Bloomberg) — Federal Reserve Governor Frederic Mishkin, one of Chairman Ben S. Bernanke’s chief supporters for the steepest interest-rate cuts in two decades, resigned to return to Columbia University.

Mishkin, 57, on a leave of absence from the New York school, will step down as of Aug. 31, the Fed said in a statement today, also releasing his letter of resignation to President George W. Bush. –

http://bloomberg.com/apps/news?pid=20601087&sid=a4o_EVeYv0aY&refer=home

Comment: This is quite a sensation. It leaves the FED without an effective crisis management team. Mishkin must have severe reasons to quit. Perhaps he smells a big rat. Nevertheless, Frederick Mishkin is to praise for setting an example for the rest of the gang to join him and also and to resign. After a short period of chaos, markets would find a funcioning system without central banking.
Antony Mueller

– May 24 (Bloomberg) — The dollar declined for a third consecutive week against the euro, the longest losing streak in two months, as the U.S. housing slump and record crude oil prices slow growth in the world’s largest economy.

The U.S. currency also dropped versus the yen and fell to a 25-year low against the Australian dollar. The Chinese yuan posted its biggest weekly increase this year on signs the country’s officials are accelerating the currency’s gains to curb rising prices. –

http://www.bloomberg.com/apps/news?pid=20601103&sid=aSl5VTnzj_i0&refer=news

– BERLIN (Reuters) - The United States is already in a recession and it will be longer as well as deeper than many people expect, U.S. investor Warren Buffett said in an interview published in German magazine Der Spiegel on Saturday. –

http://news.yahoo.com/s/nm/20080524/bs_nm/buffett_us_recession_dc