It looks like the smoke is clearing and the mirrors are breaking.

As central banks continue to splash their cash over the system, so far
to little effect, Ambrose Evans-Pritchard argues things are rapidly
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.

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.

"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.

"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.

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.

York professor Peter Spencer, chief economist for the ITEM Club, says
the global authorities have just weeks to get this right, or trigger
disaster.

"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 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.

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.

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.

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.

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.

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.

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.

In theory, Japan had ample ammo to fight a bust. Interest rates were 6
per cent in February 1990. In reality, the country was engulfed by the
tsunami of debt deflation quicker than the bank dared to cut rates. In
the end, rates fell to zero. Still it was not enough.

When a credit system implodes, it can feed on itself with lightning
speed. Current rates in America (4.25 per cent), Britain (5.5 per cent),
and the eurozone (4 per cent) have scope to fall a long way, but this
may prove less of a panacea than often assumed. The risk is a Japanese
denouement across the Anglo-Saxon world and half Europe.

Bernard Connolly, global strategist at Banque AIG, said the Fed and
allies had scripted a Greek tragedy by under-pricing credit long ago and
seem paralysed as post-bubble chickens now come home to roost. "The
central banks are trying to dissociate financial problems from the real
economy. They are pushing the world nearer and nearer to the edge of
depression. We hope they will eventually be dragged kicking and
screaming to do enough, but time is running out," he said.

Glance at the more or less healthy stock markets in New York, London,
and Frankfurt, and you might never know that this debate is raging.
Hopes that Middle Eastern and Asian wealth funds will plug every hole
lifts spirits.

Glance at the debt markets and you hear a different tale. Not a single
junk bond has been issued in Europe since August. Every attempt failed.

Europe's corporate bond issuance fell 66pc in the third quarter to
$396bn (BIS data). Emerging market bonds plummeted 75pc.

"The kind of upheaval observed in the international money markets over
the past few months has never been witnessed in history," says Thomas
Jordan, a Swiss central bank governor.

"The sub-prime mortgage crisis hit a vital nerve of the international
financial system," he says.

The market for asset-backed commercial paper - where Europe's lenders
from IKB to the German Doctors and Dentists borrowed through Irish-based
"conduits" to play US housing debt - has shrunk for 18 weeks in a row.
It has shed $404bn or 36pc. As lenders refuse to roll over credit, banks
must take these wrecks back on their books. There lies the rub.

Professor Spencer says capital ratios have fallen far below the 8 per
cent minimum under Basel rules. "If they can't raise capital, they will
have to shrink balance sheets," he said.

Tim Congdon, a banking historian at the London School of Economics, said
the rot had seeped through the foundations of British lending.

Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent
sans "goodwill"), compared with 5 per cent seven years ago. "How on
earth did the Financial Services Authority let this happen?" he asks.

Worse, changes pushed through by Gordon Brown in 1998 have caused the de
facto cash and liquid assets ratio to collapse from post-war levels
above 30 per cent to near zero. "Brown hadn't got a clue what he was
doing," he says.

The risk for Britain - as property buckles - is a twin banking and
fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at
the peak of the economic cycle, shockingly out of line with its peers.
America looks frugal by comparison.

Maastricht rules may force the Government to raise taxes or slash
spending into a recession. This way lies crucifixion. The UK current
account deficit was 5.7 per cent of GDP in the second quarter, the
highest in half a century. Gordon Brown has disarmed us on every front.
In Europe, the ECB has its own distinct headache. Inflation is 3.1 per
cent, the highest since monetary union. This is already enough to set
off a political storm in Germany. A Dresdner poll found that 71 per cent
of German women want the Deutschmark restored.

With Brünhilde fuming about Brot prices, the ECB has to watch its step.
Frankfurt cannot easily cut rates to cushion the blow as housing bubbles
pop across southern Europe. It must resort to tricks instead. Hence the
half trillion gush last week at rates of 70bp below Euribor, a
camouflaged move to help Spain.

The ECB's little secret is that it must never allow a Northern Rock
failure in the eurozone because this would expose the reality that there
is no EU treasury and no EU lender of last resort behind the system.
Would German taxpayers foot the bill for a Spanish bail-out in the way
that Kentish men and maids must foot the bill for Newcastle's Rock?
Nobody knows. This is where eurozone solidarity stretches to snapping
point. It is why the ECB has showered the system with liquidity from day
one of this crisis.

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to
reveal their losses. At some point, enough of the dirty linen will be on
the line to let markets discern the shape of the debacle. We are not
there yet.

Goldman Sachs caused shock last month when it predicted that total
crunch losses would reach $500bn, leading to a $2 trillion contraction
in lending as bank multiples kick into reverse. This already seems humdrum.

"Our counterparties are telling us that losses may reach $700bn," says
Rob McAdie, head of credit at Barclays Capital. Where will it end? The
big banks face a further $200bn of defaults in commercial property. On
it goes.

The International Monetary Fund still predicts blistering global growth
of 5 per cent next year. If so, markets should roar back to life in
January, as though the crunch were but a nightmare. There again, the
credit soufflé may be hard to raise a second time.

http://www.telegraph.co.uk/money/mai...123.xml&page=1

On Mon, 24 Dec 2007 14:31:26 -0500, HK wrote:

....another boating related post.

Oh, never mind.
--
John H

*Have a Super Christmas and a Spectacular New Year!*

On Dec 24, 11:31�am, HK wrote:
It looks like the smoke is clearing and the mirrors are breaking.

As central banks continue to splash their cash over the system, so far
to little effect, Ambrose Evans-Pritchard argues things are rapidly
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.

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.

"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.

"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.

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.

York professor Peter Spencer, chief economist for the ITEM Club, says
the global authorities have just weeks to get this right, or trigger
disaster.

"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 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.

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.

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.

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.

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.

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.

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.

In theory, Japan had ample ammo to fight a bust. Interest rates were 6
per cent in February 1990. In reality, the country was engulfed by the
tsunami of debt deflation quicker than the bank dared to cut rates. In
the end, rates fell to zero. Still it was not enough.

When a credit system implodes, it can feed on itself with lightning
speed. Current rates in America (4.25 per cent), Britain (5.5 per cent),
and the eurozone (4 per cent) have scope to fall a long way, but this
may prove less of a panacea than often assumed. The risk is a Japanese
denouement across the Anglo-Saxon world and half Europe.

Bernard Connolly, global strategist at Banque AIG, said the Fed and
allies had scripted a Greek tragedy by under-pricing credit long ago and
seem paralysed as post-bubble chickens now come home to roost. "The
central banks are trying to dissociate financial problems from the real
economy. They are pushing the world nearer and nearer to the edge of
depression. We hope they will eventually be dragged kicking and
screaming to do enough, but time is running out," he said.

Glance at the more or less healthy stock markets in New York, London,
and Frankfurt, and you might never know that this debate is raging.
Hopes that Middle Eastern and Asian wealth funds will plug every hole
lifts spirits.

Glance at the debt markets and you hear a different tale. Not a single
junk bond has been issued in Europe since August. Every attempt failed.

Europe's corporate bond issuance fell 66pc in the third quarter to
$396bn (BIS data). Emerging market bonds plummeted 75pc.

"The kind of upheaval observed in the international money markets over
the past few months has never been witnessed in history," says Thomas
Jordan, a Swiss central bank governor.

"The sub-prime mortgage crisis hit a vital nerve of the international
financial system," he says.

The market for asset-backed commercial paper - where Europe's lenders
from IKB to the German Doctors and Dentists borrowed through Irish-based
"conduits" to play US housing debt - has shrunk for 18 weeks in a row.
It has shed $404bn or 36pc. As lenders refuse to roll over credit, banks
must take these wrecks back on their books. There lies the rub.

Professor Spencer says capital ratios have fallen far below the 8 per
cent minimum under Basel rules. "If they can't raise capital, they will
have to shrink balance sheets," he said.

Tim Congdon, a banking historian at the London School of Economics, said
the rot had seeped through the foundations of British lending.

Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent
sans "goodwill"), compared with 5 per cent seven years ago. "How on
earth did the Financial Services Authority let this happen?" he asks.

Worse, changes pushed through by Gordon Brown in 1998 have caused the de
facto cash and liquid assets ratio to collapse from post-war levels
above 30 per cent to near zero. "Brown hadn't got a clue what he was
doing," he says.

The risk for Britain - as property buckles - is a twin banking and
fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at
the peak of the economic cycle, shockingly out of line with its peers.
America looks frugal by comparison.

Maastricht rules may force the Government to raise taxes or slash
spending into a recession. This way lies crucifixion. The UK current
account deficit was 5.7 per cent of GDP in the second quarter, the
highest in half a century. Gordon Brown has disarmed us on every front.
In Europe, the ECB has its own distinct headache. Inflation is 3.1 per
cent, the highest since monetary union. This is already enough to set
off a political storm in Germany. A Dresdner poll found that 71 per cent
of German women want the Deutschmark restored.

With Br�nhilde fuming about Brot prices, the ECB has to watch its step.
Frankfurt cannot easily cut rates to cushion the blow as housing bubbles
pop across southern Europe. It must resort to tricks instead. Hence the
half trillion gush last week at rates of 70bp below Euribor, a
camouflaged move to help Spain.

The ECB's little secret is that it must never allow a Northern Rock
failure in the eurozone because this would expose the reality that there
is no EU treasury and no EU lender of last resort behind the system.
Would German taxpayers foot the bill for a Spanish bail-out in the way
that Kentish men and maids must foot the bill for Newcastle's Rock?
Nobody knows. This is where eurozone solidarity stretches to snapping
point. It is why the ECB has showered the system with liquidity from day
one of this crisis.

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to
reveal their losses. At some point, enough of the dirty linen will be on
the line to let markets discern the shape of the debacle. We are not
there yet.

Goldman Sachs caused shock last month when it predicted that total
crunch losses would reach $500bn, leading to a $2 trillion contraction
in lending as bank multiples kick into reverse. This already seems humdrum..

"Our counterparties are telling us that losses may reach $700bn," says
Rob McAdie, head of credit at Barclays Capital. Where will it end? The
big banks face a further $200bn of defaults in commercial property. On
it goes.

The International Monetary Fund still predicts blistering global growth
of 5 per cent next year. If so, markets should roar back to life in
January, as though the crunch were but a nightmare. There again, the
credit souffl� may be hard to raise a second time.

http://www.telegraph.co.uk/money/mai...123.xml&page=1


No, not Bush's legacy. Despite an "off budget" expeniture of maybe $1
trillion spent very questionably in Iraq and Afghanistan, and despite
failing to remember the power of executive veto until after his own
party lost control of congress, George W Bush cannot be cast as the
villain in any upcoming economic realignment. Need a scape goat? Chalk
it up to magical thinking, the "bigger fool" theory, and the cult of
consumerism run wild.

Everybody wants to go to heaven, but nobody wants to die. That's the
problem. Everybody in the country thinks he or she should live with
all of the privileges and trappings of a multi-millionaire, without
making the sacrifices or practicising the disciplines required to
achieve actual wealth. We turn to the government and say, "cut our
taxes, but increase your delivery of services". We turn to the credit
markets to take 2 and 3 mortgages on our properties, (in many cases
squandering the proceeds on consumer spending), relying on the "bigger
fool" theory and imagining that some idiot will be willing within a
few years to overpay so badly for our houses and investment properties
that equity will magically be restored. We send 100-pound women to the
market in 4000-pound trucks, own and operate high consumption
recreational vehicles and vessels and live in homes with 1500 sq ft
per occupant. We often remark that "This is a free society, and I can
use as much energy as I want, as wastefully as I want, as long as I'm
willing to pay for it!"

Pay for it we shall.

But hooking this all on Bush is unrealistic and unfair.

Chuck Gould wrote:
On Dec 24, 11:31�am, HK wrote:
It looks like the smoke is clearing and the mirrors are breaking.

As central banks continue to splash their cash over the system, so far
to little effect, Ambrose Evans-Pritchard argues things are rapidly
snip
You cannot blame consumers lured into playing the game rigged by
Globalist "economists". There is no real value out there. It is all
based on weird or non economics where any gambling loses, by them, will
be replaced by merely cranking up US currency presses, to the point,
that all that comes out is green toilet paper. It plays into the grand
scheme of Globalism, of leveling the world playing field. They are
losing the gamble but we will be the ones suffering. It be a different
1929 but still a disaster time.