How the Goldman Vampire Squid Just Captured Europe

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Editor’s Comment:

Guest Writer:  Ellen Brown

Ellen is an attorney and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com.  She is also chairman of the Public Banking Institute.

How the Goldman Vampire Squid Just Captured Europe

By Ellen Brown, Truthout | News Analysis

The Goldman Sachs coup that failed in America has nearly succeeded in Europe – a permanent, irrevocable, unchallengeable bailout for the banks underwritten by the taxpayers.

In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress. But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair. Paulson’s plea for a permanent bailout fund – the Troubled Asset Relief Program or TARP – was opposed by Congress and ultimately rejected.

By December 2011, European Central Bank President Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion euro bailout for European banks without asking anyone’s permission. And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press. The ESM imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the ESM’s eurocrat overseers demand.

The bankers’ coup has triumphed in Europe seemingly without a fight. The ESM is cheered by euro zone governments, their creditors and “the market” alike, because it means investors will keep buying sovereign debt. All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the euro zone governments?

There is another alternative to debt slavery to the banks. But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB….

The Dark Side of the ESM

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as member states representing 90 percent of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 YouTube video titled “The shocking truth of the pending EU collapse!” originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states:

The EU is planning a new treaty called the European Stability Mechanism, or ESM: a treaty of debt…. The authorized capital stock shall be 700 billion euros. Question: why 700 billion?… [Probable answer: it simply mimicked the $700 billion the US Congress bought into in 2008.][Article 9]: “,,, ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them … within seven days of receipt of such demand.” … If the ESM needs money, we have seven days to pay…. But what does “irrevocably and unconditionally” mean? What if we have a new parliament, one that does not want to transfer money to the ESM?…

[Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 … accordingly.” Question: … 700 billion is just the beginning? The ESM can stock up the fund as much as it wants to, any time it wants to? And we would then be required under Article 9 to irrevocably and unconditionally pay up?

[Article 27, lines 2-3]: “The ESM, its property, funding and assets … shall enjoy immunity from every form of judicial process…. ” Question: So the ESM program can sue us, but we can’t challenge it in court?

[Article 27, line 4]: “The property, funding and assets of the ESM shall … be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.” Question: … [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization? That’s a pretty powerful treaty!

[Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them … and shall enjoy inviolability in respect of their official papers and documents.” Question: So anyone involved in the ESM is off the hook? They can’t be held accountable for anything? … The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply? Governments cannot take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU – a Europe devoid of sovereign democracies?

The Goldman Squid Captures the ECB

Last November, without fanfare and barely noticed in the press, former Goldman executive Mario Draghi replaced Jean-Claude Trichet as head of the ECB. Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments – lavish money on them at very cheap rates. French blogger Simon Thorpe reports:

On the 21st of December, the ECB “lent” 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years. I say “lent,” but in reality, they just ran the printing presses. The ECB doesn’t have the money to lend. It’s Quantitative Easing again.The money was gobbled up virtually instantaneously by a total of 523 banks. It’s complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that’s fine. Or they might just shift all the money to tax havens.

At 18 percent interest, debt doublesin just four years. It is this onerous interest burden – not the debt itself – that is crippling Greece and other debtor nations. Thorpe proposes the obvious solution:

Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%?

The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments. But Thorpe reasons:

My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. “We want half a billion of really cheap money!!” they say. OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared.

At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control.

Goldman Sachs and the financial technocrats have taken over the European ship. Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government. Yet, the government is the people – or it should be. A democratically elected government represents the people. Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind.

Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse Article 123 of the Lisbon treaty. Then, the ECB could issue credit directly to its member governments. Alternatively, euro zone governments could re-establish their economic sovereignty by reviving their publicly owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest free. This is not a new idea, but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada.

Today, the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies. This right needs to be returned to sovereign governments. Credit should be a public utility, dispensed and managed for the benefit of the people.

To add your signature to a letter to parliamentarians blocking ratification of the ESM, click here.

Reuters: Central Banks Worldwide: Past, Present And An Uncertain Future

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EDITOR’S NOTE: The farce of preserving the huge plume of vapor that was created by Wall Street is starting to come home to roost. Central Bankers, are in conflict and politicians are using their influence on what is now a highly politicized sector that SHOULD have been regulating and restricting. The “Too Big to Fail” banks are acting as if they won. Nothing has changed. Perhaps they are right.

The Fed is the ultimate regulator of financial institutions. It is part of the growing orthodoxy that the banks must be saved rather than restricted in their activities. It is a prescription for disaster. It won’t admit its ownership claim in the loans and mortgages, it hasn’t divulged the details of the mortgage bond purchases that would in turn reveal the fictitious nature of the entire securitization scheme that has been and will always be empty, and it has not uttered a word about the behavior of the banks because on a grand scale, it IS the banks.

Central Banks Global Policy

By Paul Carrel, Mark Felsenthal, Pedro da Costa, David Milliken and Alan Wheatley

FRANKFURT/WASHINGTON – On a warm, Lisbon day last May, Jean-Claude Trichet, the ice-cool president of the European Central Bank, was asked whether the bank would consider buying euro zone governments’ bonds in the open market.

“I would say we did not discuss this option,” Trichet told a news conference after a meeting of the ECB’s Governing Council. Four days later, the ECB announced that it would start buying bonds.

Trichet’s U-turn was part of an emergency package with euro zone leaders to stave off a crisis of confidence in the single currency. By reaching for its “nuclear option”, the ECB had also helped rewrite the manual of modern central banking.

That’s happened a lot over the past three years. Since the early days of the financial crisis in 2008, the European Central Bank, the U.S. Federal Reserve and the Bank of England have all been forced to adopt policies that just a few years ago they would have dismissed as preposterous. And the Bank of Japan responded to the Sendai earthquake and tsunami by doubling its own asset-purchase programme, to keep the banking system of the world’s third-largest economy on an even keel.

For a generation, the accepted orthodoxy has been to focus on taming inflation. Financial stability has taken something of a back seat. Now, whether mandated to do so or not, western central banks have bought up sovereign debt to sustain the financial system, printed money by the truckload to stimulate their economies, sacrificed some of their independence to coordinate monetary policy more closely with fiscal decisions, and contemplated new ways of preventing asset bubbles. Some — such as Bank of England Governor Mervyn King — have joined wider political protests at commercial banks that are still behaving as if they are “too big to fail”, and as if being bailed out is just a hazard of business.

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In the measured world of central banking, it amounts to nothing short of a revolution. Otmar Issing, one of the euro’s founding fathers and a career-long monetarist hawk, told Reuters that in buying government bonds the ECB had “crossed the Rubicon”. The question now for the ECB — and for its counterparts in Britain, the United States and elsewhere — is what they’ll find on the other side.

EXTRAORDINARY CIRCUMSTANCES

Don Kohn, a former vice-chairman of the Federal Reserve, realized central banking was changing forever at a routine meeting of his peers in Basel, Switzerland, in March 2008. The shockwaves from the U.S. subprime mortgage meltdown had begun rocking banks around the world and Kohn, a 38-year veteran of the U.S. central bank, listened as one speaker after another described the fast-deteriorating economic conditions.

“It was terrible,” Kohn said. “One of the people at the meeting used the phrase, ‘It’s time to think about the unthinkable’.”
Kohn left the meeting early to return to Washington, but the line stuck in his head. He would use it a few days later to justify his support for a Federal Reserve decision to spend $29 billion to help J.P. Morgan buy investment bank Bear Stearns, which was teetering on the edge of bankruptcy.

That financial meltdown caused a credit crunch that triggered a severe recession and, in countries such as Greece, a sovereign debt crisis. After slashing interest rates practically to zero, central banks desperate to prevent a new global depression had no choice but to expand the volume of credit, rather than its price, by reaching for the money-printing solution known as “Quantitative Easing” (QE). In the eyes of critics, Federal Reserve Chairman Ben Bernanke was living up to his nickname of “Helicopter Ben” — a reference to a speech that he gave in 2002 in which he took a leaf out of the book of the renowned monetarist economist Milton Friedman and argued that the government ultimately had the capacity to quash deflation simply by printing money and dropping it from helicopters.

Until that point, the Fed was a lender of last resort for deposit-taking banks. By invoking obscure legislation from the Great Depression, it also became a backstop for practically any institution whose collapse could threaten the financial system. Kohn and others at the Bear Stearns meeting had just done the unthinkable.

“When the secretary of the (Fed) Board was reading off the proposals … my heart was racing,” Randall Kroszner, a Fed governor at the time, says of the decision.

An academic economist from the conservative, free market-oriented University of Chicago, Kroszner was instinctively against intervention. At the same time, he knew that a decision by the Fed to stay above the fray would trigger financial panic. Before the meeting Kroszner had chatted with Bernanke, another scholar of economic history, about a historic parallel in which financier J.P. Morgan — the person, not the company — opted against stepping in to save the Knickerbocker Trust, precipitating a financial panic in the first decade of the 20th century.

“I couldn’t believe that we were faced with these questions, and I couldn’t believe that I could support them,” Kroszner told Reuters in February. “In these extraordinary circumstances, it was very risky to just say no.”

By the time the $600 billion second round of quantitative easing wraps up in June, the central bank will have spent a staggering $2.3 trillion — more than 15 percent of GDP — buying bonds. It has also created new lending windows to channel funds to financial institutions and investors and expanded its financial safety net for everything from money market mutual funds to asset-backed securities and commercial paper. The Fed argues that its loans have been repaid without any cost to taxpayers, and that the beginning of a recovery in the U.S. economy and the fading of the threat of deflation, which gnawed at Bernanke, justify its bold improvisation.

But some experts, including a number of Fed officials themselves, believe the central bank is paying a big price. Some critics say the Fed’s open-ended provision of next-to-free money is encouraging more reckless risk-taking by banks and speculators. Others say the Fed has exceeded its remit and encroached on the turf of politicians. Some Republicans, in particular, want to curtail the Fed’s powers.

The United States has not been alone. In Britain, the Bank of England has run its own programme of quantitative easing, spending 200 billion pounds (about 14 percent of GDP) mostly on UK government securities, and has introduced a scheme for financial institutions to swap mortgage-backed securities for UK Treasury bills. The ECB took three main steps: adjusting its money market operations to offer unlimited amounts of funds, lowering standards on the collateral it accepts in such operations, and buying bonds. The bond buying, though amounting to 1.5 percent of euro zone GDP, is less radical than the Fed’s because the bank absorbs back the money that its purchases release. But its initiative is still highly controversial.

Issing, the ECB’s chief economist from 1998 to 2006, calls the bond-buying dangerous. But he also concedes that the problems of the past few years have required extreme measures. “It is difficult to justify within the context of the independence of the central bank,” says Issing. “But, on the other hand, the ECB was the only actor who could master the situation. What matters now is that it finalizes this programme and gets out.”

BLOWING UP THE ORTHODOXY

Central banks have historically often been subordinated to governments, but the high inflation and slow growth that followed the oil price shocks of the 1970s ushered in a relatively simple orthodoxy: their goal should be to keep inflation in check. Maintaining a slow and steady pace of price rises became the overriding aim of central bank policy, and independence from political pressures came to be seen as a pre-requisite for achieving this. Starting with New Zealand in 1989, central banks in more than 50 countries adopted explicit, public targets for inflation.

Western governments claimed this was responsible for the Great Moderation, a two-decade period of relatively stable growth in developed economies. It still has many proponents, but the credit crisis has made a mockery of that overriding simplicity, exposing serious flaws in how central banks defined their mission and operated. One flaw: they did little to prevent the build-up of the asset bubbles that triggered the financial crisis, such as the boom in U.S. subprime mortgages. Another: the obsession with inflation blinded them to dangerous trends in banking. After all, what is the point of keeping inflation low if lax lending and feckless financial supervision threaten to tip the economy into the abyss?
“The problem was not that the Fed lacked instructions to avoid a crisis,” says James Hamilton, a professor of economics at the University of California, San Diego and visiting scholar at the central bank on multiple occasions. “The problem was that the Fed lacked the foresight to see the crisis developing.”

Fed Chairman Bernanke doubts central banks can know for sure that an asset bubble has formed until after the event, and feels monetary policy is too blunt a tool to arrest any worrisome developments. At the same time Bernanke, former vice-chairman Kohn and others agree that the central bank might be able to employ broader tools to prevent asset prices from getting too frothy. For example, the Fed regulates margin requirements for buying equities with borrowed funds; it could use these to rein in a galloping stock market.

“The simplicities of extreme inflation targeting — which said if you meet your inflation target and keep inflation stable the rest of the economy would look after itself — have been blown apart,” Sir John Gieve, who was deputy governor at the Bank of England from 2006 to 2009, told Reuters. “The Bank’s objectives have become a lot more complicated. Some people have been quicker to realize this than others. If you talk to the Japanese, they would say they have been doing this for a while.”

ANY ANSWERS?

Could the Fed and its counterparts in Britain and Europe learn from Asian central banks, many of which limit the proportion of deposits that banks can extend as loans? Should they insist that a home buyer make a sizeable deposit when taking out a mortgage — a practice that might have tempered the U.S. housing bubble? Central banks in some emerging economies outside Asia already appear to be adopting such methods – known as ‘macroprudential’ steps – to complement traditional interest rate policy. Turkey has been raising commercial banks’ reserve ratios while simultaneously cutting interest rates, and Brazil signaled this month it would rely more on credit curbs and less on rate increases to fight inflation.

Or should they look closer to home, for example to the central banks of Australia and Canada? Both are inflation-targeters, but they sailed through the global crisis without having to resort to extreme measures. A history of conservative banking regulation in those countries meant they never faced severe credit problems.

“Prior to the crisis a lot more people were of the view that if it’s not broke don’t fix it,” said Dean Croushore, professor of economics at the University of Richmond in Virginia and a former economist at the Philadelphia Federal Reserve. “Policymakers didn’t react, particularly with respect to housing. Maybe being a bit more proactive is a good thing.”
Then again, some Republican lawmakers want the Fed, which has a dual mandate to keep inflation low and maximize employment, to focus exclusively on the first task. They contend that monetary policy is not the right tool to create jobs.
Buying up bonds and bailing out failing firms does indeed blur the boundaries between monetary and fiscal policy. Critically, it also suggests that supposedly autonomous central banks are doing the bidding of politicians.

“Things cannot change in a measured way,” said European Central Bank policy maker Axel Weber earlier this month. He is also head of Germany’s Bundesbank, but last month he stood down as a candidate to succeed Trichet at the ECB. His outspoken opposition to the bank’s bond-buying underlined the rift between the traditional approach to central banking and the political expediency born of the crisis. “There will have to be fundamental change … If institutions are too big to fail, they are too big to exist,” Weber said, echoing comments by King at the Bank of England.

MORE INTRUSIVE

The shift is already happening. “Bond investors are not facing a future change; they are living through a change,” said Gieve, the former Bank of England deputy governor. Inflation remains very important, and I have no doubt my colleagues at the Bank of England take it very seriously … But they are also aware of the need to stabilize the financial system. They need to get the economy on a sustainable growth track.”

Of course the Fed has never operated in a vacuum. Greenspan swiftly cut interest rates after the Black Monday stock market crash in October 1987 and again in September 1998, after the Fed had to organize a $3.5 billion rescue of LTCM, a big hedge fund. But some experts, including Stephen Roach, Morgan Stanley’s non-executive chairman in Asia, have long argued that an explicit financial stability mandate would force the Fed — and other banks — to pay closer attention to looming bubbles and weak links in the system rather than simply mopping the mess up later.

Legislators are giving central banks more powers to keep an eye on financial — as distinct from monetary or economic — trends. Academics have also broadened their reach in that direction, with the Federal Reserve’s prominent Jackson Hole conference last summer featuring a paper arguing that policymakers should pay closer attention to financial variables in their macroeconomic assessments.

That’s exactly the direction things are headed. Since the beginning of this year, ECB boss Trichet has chaired something called the European Systemic Risk Board (ESRB) — a body designed to take a bird’s eye view of Europe’s financial system and flag up emerging problems so the relevant authorities can act. In Britain, the government has decided to disband the Financial Services Authority and give the Bank of England the job of preventing any build-up of risk in the financial system, on top of its monetary policy role. And in the United States, newly enacted legislation gives the Fed a leading role in financial regulation as part of the Financial Stability Oversight Council.

“From a regulatory standpoint, we’ll be more aware and more intrusive in monitoring institutions that are systemically critical,” Dallas Fed President Richard Fisher told Reuters in an interview.

POLITICS, OF COURSE

With those expanded roles comes a greater need for central banks to explain their actions to citizens, markets and politicians alike. Investors will no longer be able to anticipate how policy makers will act just by tracking inflationary trends as they did for a generation before the Great Financial Crisis.

Bernanke made it a priority from the start of his tenure in 2006 to improve communications. He didn’t have to do much to improve upon his oracular and sometimes opaque predecessor, Alan Greenspan, who famously said, “if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

But the crisis exposed the Fed to withering fire. “It’s hard to maintain mystique when there have manifestly been a series of policy errors, not just at the Fed but in many branches of government,” says Maurice Obstfeld, a professor of economics at the University of California at Berkeley.

Even harder, when the big central banks themselves have yet to work out how they will implement their new powers. The new rules in the United States, for instance, give regulators more leeway to wind down global financial institutions deemed too large to fail in case they touch off a catastrophic domino effect as loans are called in. But how that will work in practice remains to be seen.

“At the end of the day it comes down to whether or not the too-big-to-fail resolution mechanisms are robust. There’s still some thinking to be done on that,” David Altig, research director at the Atlanta Fed and a professor at the University of Chicago’s Booth School of Business, said in a telephone interview.

To judge by comments by Weber and King, that’s a big, unanswered, politically charged question. The BoE chief has been vocal in complaining that the concept of “too important to fail” has not been addressed, and that bankers continue to be driven by incentives to load up on risk.

Then there’s the fact that deciding which firm should live and which not is an intensely political process. Look no further than the furor over the U.S. authorities’ decision to bail out insurer AIG and car maker GM, but to let investment bank Lehman Brothers go to the wall months after arranging a rescue of Bear Stearns.

With an expanded awareness of their mandates, wouldn’t central banks be forced to take into account such dilemmas when they are setting interest rates?

“It’s a risk, but one has to be aware of the risk and to avoid it,” says Issing, the former ECB chief economist. “It’s macroeconomic supervision; it’s not micro control of individual banks. But if the European Systemic Risk Board identifies systemic risk, it must be solved with tools of regulation and not by lax monetary policy.”

A FACT OF LIFE

In truth, central banking, by its nature, has always been an intensely political enterprise. To pretend otherwise is naive. War, revolution, depression and calamity have always subjugated central banks to political necessity, and most are still state-owned. Like a country’s highest court, a central bank cannot — no matter how vaunted its independence — be unaware of the political and social mood. The Fed chairman and the U.S. Treasury secretary worked hand in glove during the financial crisis and have the freedom to discuss a range of topics when they meet informally every week.

The political nature of central banking was brought home last month when Weber decided to stand down early. He had judged that he did not have enough political support from the 17 members of the euro zone, and his relationship with German chancellor Angela Merkel was also rocky. He will hand over to Jens Weidmann, Merkel’s economic adviser. Critics of the appointment — and there is no shortage of them in a country that likes its central bankers tough and independent — worry that Weidmann will weaken the Bundesbank’s statutory freedom from political influence.

That misses the point completely, says David Marsh, co-chair of the Official Monetary and Financial Institutions Forum, which brings together central banks, sovereign wealth funds and investors. Marsh says the launch of the euro in 1999 was a political act itself, one that has already led to a much more politicized regime of monetary management.

“The interplay with governments — whatever the statutes say about the supreme independence of the European Central Bank — is a fact of life,” he says. “The mistakes and miscalculations of the last 12 years show how monetary union has to be part of a more united political system in Europe. That is not loss of independence. That is political and economic reality.”

It is against this backdrop that Trichet’s apparent conversion on the road from Lisbon to Brussels last May must be seen.

Niels Thygesen, a member of the committee that prepared the outline of European Economic and Monetary Union in 1988-9, says the euro zone debt crisis forced the ECB to show some flexibility by agreeing to the bond-buying programme. “It is a departure relative to the original vision for the European Central Bank, which was supposed to be a bit isolated from dialogue with the political world,” he says. “On the other hand, I never thought that was quite a tenable situation.”

Thygesen, now a professor at the University of Copenhagen, said he did not particularly like the idea but acknowledged that the ECB might in fact have gained some clout by agreeing to the bond-buying plan. Trichet helped rally euro zone leaders into arranging standby funds and loan guarantees that could be tapped by governments in the currency bloc shut out of credit markets — relieving the ECB of some of the burden of crisis management. “It was part of a bargain and I’m sure Mr Trichet bargained very hard and in a way successfully,” says Thygesen. “The ECB has stood up well and gained substantial respect for its political clout in bringing about actions on the part of governments, which otherwise might not have taken place.”

LESSONS FROM JAPAN

It doesn’t always work out that way. Just ask the Bank of Japan.

The BOJ embarked on quantitative easing as far back as 2001. But a decade on, it has still failed to decisively banish the quasi-stagnation and deflation that has dogged Japan’s economy since the early 1990s. Only once in the past decade, in 2008, has Japan experienced inflation of more than 1 percent — the central bank’s benchmark for price stability.

When the global crisis hit, the BOJ revived a 2002 scheme to buy shares from banks and took a range of other unorthodox steps to support corporate financing. But its actions failed to placate critics who view it as too timid. Senior figures in the ruling party and opposition parties talk of watering down the BOJ’s independence and forcing it to adopt a rigid inflation target.

“The government tends to blame everything on the BOJ,” Kazumasa Iwata, a former BOJ deputy governor, told Reuters. Makoto Utsumi, a former vice finance minister for international affairs, defended the bank’s current set-up, saying it would be “absurd” and “unthinkable” for a developed country like Japan to make its central bank a handmaiden of the government.

The bank’s prompt response to the devastating March 11 earthquake and tsunami has since earned it widespread plaudits. The BOJ poured cash into the banking system, doubled its purchases of an array of financial assets and intervened in the foreign exchange market in coordination with the central banks of other rich nations to halt a surge in the yen that was hurting Japan’s exporting companies.

Charles Goodhart, a professor at the London School of Economics who was on the Bank of England’s Monetary Policy Committee from 1997 to 2000, believes a measure of central bank independence can be preserved, even if cooperation with ministers is needed to keep the banking system stable. “I think trying to maintain the independent role of the central bank in interest rate setting remains a very good idea,” he told Reuters. “When it comes to financial stability issues, at any rate under certain circumstances and at certain times, there will have to be a greater involvement of the government.”
How to achieve that balance is the subject of a whole other debate. “None of this is going to be quite in the separate boxes it has been in the past,” says Gieve, the former Bank of England deputy governor. “If you have inappropriate monetary policy, all the macroprudential instruments in the world will find it very difficult to push water up hill.”

IMPORTING INFLATION

As if the political dimension was not enough of a headache, central bank rate-setters seem to be finding it harder to nail down the sources of the inflation they are tasked to fight. One reason is globalization.

Central banks have traditionally turned a blind eye to a one-off rise in prices stemming from, say, an increase in consumption taxes, a sharp drop in the exchange rate that boosts import costs or, as now, a spike in oil. As long as the price jolt does not change inflationary expectations or worm its way into the broader economy by prompting workers to ask for higher wages, policy makers have usually felt comfortable in keeping their eye on underlying cost pressures at home.

That remains the consensus, as demonstrated by the Bank of England, which has failed to keep inflation down to its 2 percent target for much of the past five years.

But in a world of integrated supply chains, can inflationary impulses be neatly attributed to either domestic or international forces? Does it now make sense, as some analysts argue, to estimate how much spare capacity there is globally, not locally?

The answers to those questions will have huge implications for monetary policy.

Lorenzo Bini Smaghi, one of six members of the ECB’s Executive, has warned that sharper rises in the prices of commodities and goods imported from emerging economies will push up euro zone inflation unless domestic prices are controlled. “A permanent and repeated increase in the prices of imported products will tend to impact on inflation in the advanced countries, including the euro area,” he said in Bologna in January.

St. Louis Fed President James Bullard admits the United States could not consider its own inflation outlook in complete isolation from the rest of the world.

“Perhaps global inflation will drive U.S. prices higher or cause other problems,” he told a business breakfast in Kentucky in February. The ties that bind global banks and the ease with which capital flows across borders mean that central banks have to be more aware than ever of the international consequences of their policy actions.

Because the dollar is the dominant world currency, the Fed came under widespread fire for its second round of bond buying. Critics in China and Brazil among others charged that dollars newly minted by the Fed would wash up on their shores, stoking inflation and pumping up asset prices.

“How do we conduct monetary policy in a globalised context?” asks Richard Fisher, the Dallas Fed president. “How do we regulate and supervise and develop our peripheral vision for those that we don’t supervise in a formal way, in a globalised context? Not easy.”

Structural shifts in the world economy also raise questions about how long central banks should give themselves to hit their inflation goals — further blurring the picture for investors.

“The central bank always has the choice of the time horizon over which it hits its inflation target,” Thygesen, the Copenhagen professor, said. “As the Bank of England is now learning, it may have to extend that horizon somewhat in particularly difficult circumstances. There may be good reasons for doing it, but that is where the element of discretion lies.”

The Bank of England expects inflation to remain above target this year before falling back in 2012. The ECB, which seeks medium-term price stability, is resigned to inflation remaining above its target of just below 2 percent for most of 2011. In the last 12 months, it stood at 2.3 percent.

It all adds up to a significant shift in the environment in which central banks operate. Policy-making is a whole lot more complicated. With a broader mandate for keeping the banking system safe comes increased political scrutiny. With fast-expanding export economies like China becoming price setters instead of price takers, offshore inflation and disinflation are of growing importance. If the rise in oil prices is due to increased demand from developing nations, for instance, can western central banks still play down ever-higher energy bills as transient?

That all means it will become tougher for central banks to preserve their most precious asset, credibility.

“Look at the ’90s and the early years of this century — central banks were at the peak of their reputation worldwide, and I was already saying at that time that we know from experience that the risk is highest when you are on top,” Issing says. “Central banks have to take care to restore their reputation, if it has been lost. I think this is a difficult situation for central banks worldwide.”

(Paul Carrel reported from Frankfurt, David Milliken from London and Mark Felsenthal and Pedro Nicolaci da Costa from Washington; Additional reporting by Rie Ishiguro in Tokyo; Writing by Alan Wheatley; Editing by Simon Robinson and Sara Ledwith)

Mortgage Meltdown: Fed Helps Investment Banks But No Relief for Homeowners

It isn’t rocket science: Stop the foreclosures and you stop the bleeding for our economy. For each one of you that exercises your many rights to defend your property and attack the validity of the mortgage and note, you are not only doing yourself a huge favor, you are doing the economy a favor. The Fed doesn’t get that because politics and business are so intermingled these days that the only windfall they see as acceptable is the one that goes up to large companies feeding off the national treasury. A multi-trillion dollar “windfall” to borrowers is not acceptable even though it was created by fraudulent and deceptive practices of the big players. It doesn’t matter what they think or how they operate. Unless they change 300 years of common law, modify the Uniform Commercial Code, order the change of state property laws across the country, their mortgages and notes are DEAD.

I proposed a solution 6 months ago which spread the loss amongst everyone. The closest they came to accepting that solution was Barney Frank’s bill which has passed but which is amended in so many ways as to render it largely ineffective. So it’s time for war. The Homeowner’s War: How to Sue Your Lender, Keep your Property, Collect Damages and Thank Your Layer will be out soon in paperback. Meanwhile, stay tuned here.

Here is the latest announcement from the Fed:

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The Federal Reserve today announced several steps to enhance the effectiveness of its existing liquidity facilities, including the introduction of longer terms to maturity in its Term Auction Facility.  In association with this change, the European Central Bank and the Swiss National Bank are adapting the maturity of their operations.

Federal Reserve Actions
Actions taken by the Federal Reserve include:

  • Extension of the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) through January 30, 2009.
  • The introduction of auctions of options on $50 billion of draws on the TSLF.
  • The introduction of 84-day Term Auction Facility (TAF) loans as a complement to 28-day TAF loans.
  • An increase in the Federal Reserve’s swap line with the European Central Bank to $55 billion from $50 billion.

These actions are described in detail below.

Extension of the PDCF and TSLF
In light of continued fragile circumstances in financial markets, the Board has extended the PDCF through January 30, 2009, and the Board and the Federal Open Market Committee (FOMC) have extended the TSLF through that same date.  These facilities would be withdrawn should the Board determine that conditions in financial markets are no longer unusual and exigent.

The PDCF provides discount window loans to primary dealers, collateralized by investment-grade securities.  The interest rate charged is the primary credit rate (discount rate) of the Federal Reserve Bank of New York.  Under the TSLF, the Federal Reserve Bank of New York conducts weekly auctions of 28-day loans of Treasury securities to primary dealers.  Loans under the TSLF are collateralized by a range of government and private securities.

Auctions of TSLF Options
The FOMC has authorized the Federal Reserve Bank of New York to auction options for primary dealers to borrow Treasury securities from the TSLF.  The Federal Reserve intends to offer such options for exercise in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends.  Under the options program, up to $50 billion of draws on the TSLF using options may be outstanding at any time.  This amount is in addition to the $200 billion of Treasury securities that may be offered through the regular TSLF auctions.  Draws on the TSLF through exercise of these options may be collateralized by the full range of TSLF Schedule 2 collateral.  (Schedule 2 collateral includes Treasury securities, federal agency debt securities, mortgage-backed securities issued or guaranteed by federal agencies, and AAA/Aaa-rated private-label residential mortgage-backed, commercial mortgage-backed, and asset-backed securities.)  Additional details of this program will be announced once consultations with the primary dealer community have been completed.

Eighty-four-day Term Auction Facility Loans
Beginning on August 11, the Federal Reserve will auction 84-day TAF loans while continuing to auction 28-day TAF funds.  Specifically, the Federal Reserve will conduct biweekly TAF auctions, alternating between auctions of $75 billion of 28-day credit and auctions of $25 billion of 84-day credit.  Currently, the Federal Reserve auctions $75 billion of 28-day funds every two weeks.  During a transition period, the amount of 28-day credit being auctioned will be reduced to keep the amount of TAF credit outstanding at $150 billion.  A schedule of TAF auctions and applicable terms and conditions can be found at http://www.federalreserve.gov/.

Under the TAF, the Federal Reserve auctions term funds to depository institutions, secured by a wide variety of collateral.  All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank are eligible to participate in TAF auctions.

Increase in Swap Line with European Central Bank
The European Central Bank (ECB) and the Swiss National Bank (SNB) have informed the Federal Reserve that, in association with the lengthening of the maturity of the Federal Reserve’s TAF loans, these central banks will also make 84-day funds, as well as 28-day funds, available at their dollar auctions.  The FOMC has authorized an increase in its dollar swap line with the ECB to $55 billion from $50 billion in order to accommodate a temporary increase in the ECB’s dollar auctions as the ECB shifts some of its auctions to 84-day terms.  The size of the SNB’s swap line remains at $12 billion.  These swap lines are authorized through January 30, 2009.

Mortgage Meltdown: Central Bankers Prepare for Collapse of Dollar

That confidence in the U.S. dollar is at an all-time low is no surprise. But when countries start propping up currencies that are barely on the radar, you know that central bankers are thinking that the U.S. government is not doing enough to shore up the fundamentals of its economy. This translates to a lack of confidence that the dollar will recover. Like the price of oil headed inexorably toward $200 per barrel, the dollar is seen headed inexorably downward. This kind of thinking leads to self-fulfilling prophecy, so it needs to be taken seriously. 

The plain fact is that we have $500 trillion in derivative securities that are treated, for the most part, as cash equivalents. In the face of a half-gig behemoth of private sector money supply, central bankers understand that their impact on monetary policy, money supply, credit, and economic growth is virtually out of reach. Like it or not, economic policy is in the hands of the private sector now.

More pretense of regulation from a corrupt government will produce less rather than more instability in the financial sector. Government is providing cover for wrongdoers rather than relief for everyone. 

The dangers are obvious. The inevitable conclusion of this paradigm shift can already be seen: a massive shift in the distribution of wealth, with its attendant death grip on government policy and action.

The role of government — to be the referee in assuring a fair playing field — has been subverted beyond recognition.

The tangible results are that millions of homes are being foreclosed, tens of millions of people are being hit with economic losses, and despite even the calls of the conservative Economist magazine for a U.S. “Federal effort to streamline the states’ convoluted foreclosure laws” nothing has emerged thus far.

We are aware and I have assisted in the writing of emergency rules of civil procedure for foreclosures from initiation of proceedings through mediation and judgment. These rules have been submitted to Nevada, Florida and Arizona thus far. The Courts are warming to the idea, but it is likely that a uniform approach will not be adopted, leaving the country in a morass of hoops to jump through before borrowers and lenders and investors can be brought to the table to put a stop to the downward slide. 

Under normal conditions, we would be the first to scream for better regulation, more enforcement and criminal prosecution arising from the massive fraud that killed the residential housing market, and severely damaged the rest of the credit markets worldwide. But we are of the opinion that this is an emergency that transcends normal government response. It is akin to the emergency of war where we are fighting for our very survival. Amnesty for every participant on the investor-lender side and on the borrower loan origination side is essential even if it gives a break to “speculators” and criminal minds that irresponsibly launched this plan to nowhere.

Only then will we demonstrate to central bankers around the world that we are serious about this crisis. Only then will they lose momentum is distancing themselves from the dollar.

Overseas banks save a currency
Commentary: A useful game plan if the dollar really hits the skids
LONDON (MarketWatch) – It’s official — overseas central banks stepped in Friday to prop up a beleaguered currency that’s been weighed down by an out-of-control financial sector and an economy on the rocks.
Sounds like the U.S. dollar, but actually, it’s the Iceland krona. See related story.
The central banks of Norway, Sweden and Denmark will each provide up to 500 million euros that the Central Bank of Iceland can swap for krona.
Of course, any central bank intervention to prop up the dollar would have to be done on a far larger scale than chucking in a bit more than $2 billion.
So understandably, the Bank of Japan and the European Central Bank reportedly have kept their ammunition so far to words and arm twisting. See related story.
And U.S. interest rates are just a touch lower than what’s on offer in Iceland — 2.25% compared to 15.5%.
But it’s worth noting that the intervention has worked, on the day at least – the currency is up over 4% against the euro.
If nothing else, the move by the Scandinavian central banks is a game plan that can be dusted off if the dollar really goes into meltdown mode.
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