Michael O'Leary could be back in the market to buy up to 300 aircraft in a multibillion-dollar spend that could scupper investors' hopes of future dividends from the European budget airline.He also revealed he is writing to aviation authorities for permission to use only one pilot per flight because he says co-pilots are unnecessary in modern jets where "the computer does most of the flying now".
Michael O'Leary could be back in the market to buy up to 300 aircraft in a multibillion-dollar spend that could scupper investors' hopes of future dividends from the European budget airline.
He also revealed he is writing to aviation authorities for permission to use only one pilot per flight because he says co-pilots are unnecessary in modern jets where "the computer does most of the flying now".
Wall Street giant Goldman Sachs has been fined £20m ($31m) by the UK City regulator, the Financial Services Authority, the BBC has learned. The fine is for failing to tell the FSA it was under investigation for fraud by the US financial watchdog this summer. In July, Goldman settled the fraud charge with the Securities and Exchange Committee by paying $550m (£356m). The £20m is one of the heaviest fines ever imposed by the FSA, said the BBC's business editor Robert Peston.
Wall Street giant Goldman Sachs has been fined £20m ($31m) by the UK City regulator, the Financial Services Authority, the BBC has learned.
The fine is for failing to tell the FSA it was under investigation for fraud by the US financial watchdog this summer.
In July, Goldman settled the fraud charge with the Securities and Exchange Committee by paying $550m (£356m).
The £20m is one of the heaviest fines ever imposed by the FSA, said the BBC's business editor Robert Peston.
The Irish government has said it will break up the nationalised Anglo Irish Bank as part of the bank's resolution. The failed lender will be split in two - a funding bank and an asset recovery bank, the finance ministry said. The asset recovery bank would retain a banking licence, but would focus on managing the existing loans inherited by Dublin when it took over the bank. The funding bank, meanwhile, will hold all of Anglo's deposits and will not engage in any new lending.
The Irish government has said it will break up the nationalised Anglo Irish Bank as part of the bank's resolution.
The failed lender will be split in two - a funding bank and an asset recovery bank, the finance ministry said.
The asset recovery bank would retain a banking licence, but would focus on managing the existing loans inherited by Dublin when it took over the bank.
The funding bank, meanwhile, will hold all of Anglo's deposits and will not engage in any new lending.
He is bull-necked and barrel-chested, bald and foul-mouthed, the owner of a bejewelled Rolex and the hundreds of millions - perhaps billions - that go with it. His English is Russian-accented and salted with expletives. He is holidaying in Antigua, on a peninsula that he owns in its entirety. He is the kingpin in a brotherhood of Russian super-criminals, a financial whiz who until now has acted as a human Laundromat, expertly washing clean his fellow crooks' soiled fortunes. But now he has made covert contact with the British authorities: he wants to be an informant, a mega-grass who will reveal the secrets of the dark underworld he has inhabited for so long.If that sounds like the plot of a thriller, that's because it's the set-up of the new and utterly riveting John le Carré novel, Our Kind of Traitor. The Russian gangster is Dima, whose fate we follow as a rogue unit in British intelligence seeks to reel the would-be defector in to safety on England's shores.
He is bull-necked and barrel-chested, bald and foul-mouthed, the owner of a bejewelled Rolex and the hundreds of millions - perhaps billions - that go with it. His English is Russian-accented and salted with expletives. He is holidaying in Antigua, on a peninsula that he owns in its entirety. He is the kingpin in a brotherhood of Russian super-criminals, a financial whiz who until now has acted as a human Laundromat, expertly washing clean his fellow crooks' soiled fortunes. But now he has made covert contact with the British authorities: he wants to be an informant, a mega-grass who will reveal the secrets of the dark underworld he has inhabited for so long.
If that sounds like the plot of a thriller, that's because it's the set-up of the new and utterly riveting John le Carré novel, Our Kind of Traitor. The Russian gangster is Dima, whose fate we follow as a rogue unit in British intelligence seeks to reel the would-be defector in to safety on England's shores.
`Why did I desert Labour? Total bloody disillusionment. The party was a corpse. It had no ideology, it became detached, old, spineless and needed to go. The Blair/Brown feud and their factions dominated everything. `In the last shameful years there was wild over spending. When Alistair Darling was warning the financial crisis was the worst for 60 years, Brown almost sacked him for it. And the Blairs...' Cornwell shakes his head despairingly. `Him and his wife. The shared greed that emanates from the pair. It's embarrassing. I've become more radical in old age than I've ever been. The Blair catastrophe went far beyond the Iraq war and the destruction of the old Labour Party. It was about his creation of an inner circle.'
`In the last shameful years there was wild over spending. When Alistair Darling was warning the financial crisis was the worst for 60 years, Brown almost sacked him for it. And the Blairs...' Cornwell shakes his head despairingly. `Him and his wife. The shared greed that emanates from the pair. It's embarrassing. I've become more radical in old age than I've ever been. The Blair catastrophe went far beyond the Iraq war and the destruction of the old Labour Party. It was about his creation of an inner circle.'
Andrew Haldane is an economist at the Bank of England who writes some of the most interesting stuff available on the (mis)behaviour of the financial sector, and I recommend his recent speech on Patience and Finance. This argues that patience (or long-sightedness) is an economic virtue, the exercise of which should lead to faster GDP growth, higher returns to fund managers, and a sounder financial system. However, the part of his speech which I found most fascinating seemed to contradict this conclusion. This is an assessment of investment strategies which are based on momentum in asset prices, rather than long term economic fundamentals. Momentum wins the race hands down
Momentum wins the race hands down
Despite talk about how the U.S. economy will soon lose the support of economic stimulus, or that stimulus 'hasn't worked', U.S. fiscal stimulus for the economy is far from finished, and this doesn't even consider additional measures being debated. This is because a large chunk of the 'old stimulus' hasn't even hit the economy yet. As shown below using data from ProPublica, 35% of the government's $790 billion original fiscal stimulus program (started in early 2009) is still on the way. 'Tax cuts remaining' and 'stimulus money either unspent or in progress' total $278 billion dollars.
Despite talk about how the U.S. economy will soon lose the support of economic stimulus, or that stimulus 'hasn't worked', U.S. fiscal stimulus for the economy is far from finished, and this doesn't even consider additional measures being debated.
This is because a large chunk of the 'old stimulus' hasn't even hit the economy yet. As shown below using data from ProPublica, 35% of the government's $790 billion original fiscal stimulus program (started in early 2009) is still on the way. 'Tax cuts remaining' and 'stimulus money either unspent or in progress' total $278 billion dollars.
Which country is the biggest gainer from the creation of the eurozone? My answer would be Germany. This view is hardly accepted in Germany itself. But such scepticism needs to evaporate. Not only is Germany a beneficiary, but it needs to recognise this far more clearly than now. Only then are Germans likely to support the reforms the eurozone needs.EDITOR'S CHOICEMore from Martin Wolf - Sep-02Martin Wolf's Exchange - Sep-02Economists' Forum - Oct-01The starting point must be that the crisis is not dead, but sleeping. José Manuel Barroso, European Commission president, claimed in his "state of the union" speech on Tuesday that "the economic outlook in the European Union today is better than one year ago, not ... least as a result of our determined action". This is true. But confidence has definitely not been restored (see chart). Further shocks are likely.So why, when confronting those shocks, should Germans accept that they have an overwhelming interest in the success of the eurozone? The immediate answer is that the economy is hugely dependent on exports for demand (see chart). From 2000 to 2008 external demand generated as much as two-thirds of the growth in overall demand for German output. Germany needs both captive markets and a competitive exchange rate. The eurozone has delivered both, to an inordinate degree: the crisis in the periphery has dragged down the value of the euro; and many of Germany's eurozone partners (who absorb two-fifths of its exports - nine times as much as China) are uncompetitive, after a decade of rising relative costs.
The starting point must be that the crisis is not dead, but sleeping. José Manuel Barroso, European Commission president, claimed in his "state of the union" speech on Tuesday that "the economic outlook in the European Union today is better than one year ago, not ... least as a result of our determined action". This is true. But confidence has definitely not been restored (see chart). Further shocks are likely.
So why, when confronting those shocks, should Germans accept that they have an overwhelming interest in the success of the eurozone? The immediate answer is that the economy is hugely dependent on exports for demand (see chart). From 2000 to 2008 external demand generated as much as two-thirds of the growth in overall demand for German output. Germany needs both captive markets and a competitive exchange rate. The eurozone has delivered both, to an inordinate degree: the crisis in the periphery has dragged down the value of the euro; and many of Germany's eurozone partners (who absorb two-fifths of its exports - nine times as much as China) are uncompetitive, after a decade of rising relative costs.
Not for the first time in its history the German people have been irresponsibly misled by a political leadership that seems to have lost any sense of history, any sense of order and stability in Europe, and any sense of Germany's key contributing role to the current crisis. As ever, the mindset of lawyers frames the political debate among a political class that seems inhumanly uneducated in matters of economics. If economic voices are heard at all, it is usually the voice of the Bundesbank. It is a peculiar democracy that expects either its constitutional court or central bank to have the final word of wisdom....Germany likes to see its international competitiveness as the fruit of hard work and productivity. Yet, German productivity growth since 1999 does not stand out. What stands out is wage stagnation. Germany's improved competitiveness was derived from reducing German wages relative to its European partners; the equivalent of a beggar-thy-neighbor devaluation in pre-euro times. The consequences of this strategy have proved disastrous: domestic demand stagnation in Germany, housing bubbles in partner countries with higher inflation, given that the ECB sets one rate that has to fit all. One way or another, the country that runs up trade surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible. Today, German policymakers refuse to do either. Fooled into believing that beggar-thy-neighbor was the right thing to do, popular demands appear to be just that. One cannot fail to see that insane austerity in the periphery serves to keep the euro low enough so that Germany can now grow on external exports.That is neither what Europe needs nor what the world may reasonably expect from Europe. Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe's fate is in France's hands.
...
Germany likes to see its international competitiveness as the fruit of hard work and productivity. Yet, German productivity growth since 1999 does not stand out. What stands out is wage stagnation. Germany's improved competitiveness was derived from reducing German wages relative to its European partners; the equivalent of a beggar-thy-neighbor devaluation in pre-euro times. The consequences of this strategy have proved disastrous: domestic demand stagnation in Germany, housing bubbles in partner countries with higher inflation, given that the ECB sets one rate that has to fit all. One way or another, the country that runs up trade surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible. Today, German policymakers refuse to do either. Fooled into believing that beggar-thy-neighbor was the right thing to do, popular demands appear to be just that. One cannot fail to see that insane austerity in the periphery serves to keep the euro low enough so that Germany can now grow on external exports.
That is neither what Europe needs nor what the world may reasonably expect from Europe. Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe's fate is in France's hands.
A top federal prosecutor in New York will on Thursday declare another front in the war on Wall Street fraud, focusing new resources on civil litigation to complement existing criminal actions.The move by Preet Bharara, US attorney for the southern district of New York, comes amid criticism of the relatively small number of criminal prosecutions brought after the financial crisis. The district has mounted high-profile prosecutions after previous crises."Not every case is a criminal case," Mr Bharara told the Financial Times. "It's important for us that we deploy all the tools we have, even in cases where a criminal prosecution is not appropriate."Mr Bharara will announce the appointment of Heidi Wendel, a former New York state deputy attorney-general, to head a six-strong unit focused on taking civil enforcement action against fraud. Her remit covers "every single type of fraud", including complex financial misconduct, mortgage deals, abuse of the government's troubled asset relief programme and healthcare scams, Mr Bharara said.
The move by Preet Bharara, US attorney for the southern district of New York, comes amid criticism of the relatively small number of criminal prosecutions brought after the financial crisis. The district has mounted high-profile prosecutions after previous crises.
"Not every case is a criminal case," Mr Bharara told the Financial Times. "It's important for us that we deploy all the tools we have, even in cases where a criminal prosecution is not appropriate."
Mr Bharara will announce the appointment of Heidi Wendel, a former New York state deputy attorney-general, to head a six-strong unit focused on taking civil enforcement action against fraud. Her remit covers "every single type of fraud", including complex financial misconduct, mortgage deals, abuse of the government's troubled asset relief programme and healthcare scams, Mr Bharara said.
One would hope that a few zeros are missing from that astounding number -- alas. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
China's main bank regulator has warned that serious risks are building up in the financial sector and specifically linked improving financial risk management to the "important task" of maintaining social stability in the country.The comments from Liu Mingkang, chairman of the China Banking Regulatory Commission, contrasted with the bullish outlook presented by most state-controlled banks in their interim reports in recent weeks .The banks mostly dismissed concerns about risks building up on their balance sheets following an unprecedented credit boom over the last two years.Mr Liu said financial institutions needed to improve the design, implementation and application of "stress tests" conducted recently to assess how vulnerable they are to a downturn in the economy or a crash in the property market"The risk management system in the Chinese banking sector still has many weaknesses," Mr Liu said in comments published Wednesday. "We must not ignore the hidden systemic risks and dangers."
The comments from Liu Mingkang, chairman of the China Banking Regulatory Commission, contrasted with the bullish outlook presented by most state-controlled banks in their interim reports in recent weeks .
The banks mostly dismissed concerns about risks building up on their balance sheets following an unprecedented credit boom over the last two years.
Mr Liu said financial institutions needed to improve the design, implementation and application of "stress tests" conducted recently to assess how vulnerable they are to a downturn in the economy or a crash in the property market
"The risk management system in the Chinese banking sector still has many weaknesses," Mr Liu said in comments published Wednesday. "We must not ignore the hidden systemic risks and dangers."
Securities firms around the world will cut as many as 80,000 jobs in the next 18 months as revenue growth begins to slow, said Meredith Whitney, the former Oppenheimer & Co. analyst who now runs her own firm. The reductions, about 10 percent of current levels, will come after 2010 compensation payments, Whitney, 40, said in a report dated Aug. 31 and obtained by Bloomberg News today. The industry's payouts will be "down dramatically," said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.'s dividend cut in 2007. "The key product drivers of Wall Street's revenues and profits over the past decade have been in a structural decline over the past three years," Whitney said in the report. "2010 marks the first year in many in which Wall Street-centric firms will go through structural changes."
The reductions, about 10 percent of current levels, will come after 2010 compensation payments, Whitney, 40, said in a report dated Aug. 31 and obtained by Bloomberg News today. The industry's payouts will be "down dramatically," said Whitney, who started New York-based Meredith Whitney Group after correctly predicting Citigroup Inc.'s dividend cut in 2007.
"The key product drivers of Wall Street's revenues and profits over the past decade have been in a structural decline over the past three years," Whitney said in the report. "2010 marks the first year in many in which Wall Street-centric firms will go through structural changes."
Of all the uncertainties in our halting economic recovery, the housing market may be the most confusing of all. .... I can't claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it's more like food, clothing and other staples that account for an ever smaller share of consumer spending over time? If you believe housing resembles a luxury good, then you'll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren't terribly overvalued. If housing is a staple, though, prices will rise more slowly -- with general inflation, as food tends to. ... Here's the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That's roughly the gap between average household income growth and inflation over the last generation. It's also the overvaluation suggested by Mr. Shiller's historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it's still far above the 1890 to 1970 average of 94.
....
I can't claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it's more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?
If you believe housing resembles a luxury good, then you'll end up thinking house prices will rise nearly as fast as incomes in the long run and that houses today aren't terribly overvalued. If housing is a staple, though, prices will rise more slowly -- with general inflation, as food tends to.
Here's the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That's roughly the gap between average household income growth and inflation over the last generation.
It's also the overvaluation suggested by Mr. Shiller's historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it's still far above the 1890 to 1970 average of 94.
The Japanese finance minister has raised concerns about China's recent sharp increase in purchases of Japanese government bonds, highlighting nervousness about its impact on the strengthening yen."There is something unnatural about the fact that China can buy Japanese government bonds while Japan cannot [buy Chinese bonds]," Yoshihiko Noda said. "There is room for both governments to hold discussions with an eye towards improving that situation."In the first seven months of this year, Chinese purchases of JGBs had come to a net Y2,315.9bn ($27.6bn), Mr Noda said. While the finance minister failed to link Chinese purchases of Japanese bonds to the rise of the yen, he pointed to China's purchase of a "huge amount of short-term" JGBs in May and said Japan wanted to know what was behind the build up.
"There is something unnatural about the fact that China can buy Japanese government bonds while Japan cannot [buy Chinese bonds]," Yoshihiko Noda said. "There is room for both governments to hold discussions with an eye towards improving that situation."
In the first seven months of this year, Chinese purchases of JGBs had come to a net Y2,315.9bn ($27.6bn), Mr Noda said.
While the finance minister failed to link Chinese purchases of Japanese bonds to the rise of the yen, he pointed to China's purchase of a "huge amount of short-term" JGBs in May and said Japan wanted to know what was behind the build up.
There has been much in the news lately discussing food inflation, speculation, and global food supply scares. Much of the supply issue, as of now, is hype, sensationalism, and lazy reporting, which is why I put together this chart from the very recent FAO September 1, 2010 updated report. This year's cereal use is expected to be slightly higher than production, but is expected to end at 23%, down 2% from last year. Last year's opening stocks were at an eight-year high. During the food crisis of 2007/08 cereal stocks-to-use hit a low of 19.5%. Food inflation in Asia and other nations, however, is very real and concerning. Policy determines much in agriculture, and food inflation is no exception. Why do they riot in Mozambique over bread prices? Because their governing situation is worsening and because it sets the price of bread. Domestic policy changes in Mozambique such as less wheat and gas subsidization due to deteriorating national finances which have resulted in a greatly devalued currency explain both the food inflation and the frustration of the citizens. In poorer nations, citizens spend much more of their income on food.... Currently, slack remains in the agricultural commodity production system. This should afford reasonable global food security for some time, however, it is always subject to the unpredictable wildcards of weather and geopolitics. A sustained global deflationary period would also provide a short-term oversupply of agricultural commodities.
Food inflation in Asia and other nations, however, is very real and concerning. Policy determines much in agriculture, and food inflation is no exception. Why do they riot in Mozambique over bread prices? Because their governing situation is worsening and because it sets the price of bread. Domestic policy changes in Mozambique such as less wheat and gas subsidization due to deteriorating national finances which have resulted in a greatly devalued currency explain both the food inflation and the frustration of the citizens. In poorer nations, citizens spend much more of their income on food.
Currently, slack remains in the agricultural commodity production system. This should afford reasonable global food security for some time, however, it is always subject to the unpredictable wildcards of weather and geopolitics. A sustained global deflationary period would also provide a short-term oversupply of agricultural commodities.
Of course, destructive effects of international capital's blackmailing policy (of plant relocation or capital flight) reach beyond the curtailment or elimination of jobs and wages--vital as these are to the working class. This pernicious policy has become a weapon in the hands of the footloose and fancy-free multinational capital when it opposes any humane social program, or essential social needs: science, technology, education, health care, use of natural and/or environmental resources, and so on. Attempts to place environmental standards on firms are met with the threat of moving production elsewhere. Higher taxes to improve the schools? Again, the same threat. Better health and safety standards? The same response, or blackmailing strategy. What can the working people and other grassroots do to protect their jobs, their sources of livelihood, their communities and their environment? Is there a defense against these threats? Are there alternatives to the global corporate agenda? What can communities do to undermine the strategies of multinational corporations that block progressive social and economic reforms? A logical, first step deterrent to multinational corporations' blackmailing strategies, and their actual export of jobs, would be to remove the lures that induce plant relocation, or capital/manufacturing flight. Making labor costs of production comparable on an international level would be crucial for this purpose. This would entail taking the necessary steps toward the establishment of wage parity within the same company and the same trade, subject to (a) the cost of living, and (b) productivity in each country. It would also entail abandoning the current business unionist policies of the labor bureaucracy in major industrialized countries and, instead, organizing international trade unions.
Of course, destructive effects of international capital's blackmailing policy (of plant relocation or capital flight) reach beyond the curtailment or elimination of jobs and wages--vital as these are to the working class. This pernicious policy has become a weapon in the hands of the footloose and fancy-free multinational capital when it opposes any humane social program, or essential social needs: science, technology, education, health care, use of natural and/or environmental resources, and so on. Attempts to place environmental standards on firms are met with the threat of moving production elsewhere. Higher taxes to improve the schools? Again, the same threat. Better health and safety standards? The same response, or blackmailing strategy.
What can the working people and other grassroots do to protect their jobs, their sources of livelihood, their communities and their environment? Is there a defense against these threats? Are there alternatives to the global corporate agenda? What can communities do to undermine the strategies of multinational corporations that block progressive social and economic reforms?
A logical, first step deterrent to multinational corporations' blackmailing strategies, and their actual export of jobs, would be to remove the lures that induce plant relocation, or capital/manufacturing flight. Making labor costs of production comparable on an international level would be crucial for this purpose. This would entail taking the necessary steps toward the establishment of wage parity within the same company and the same trade, subject to (a) the cost of living, and (b) productivity in each country. It would also entail abandoning the current business unionist policies of the labor bureaucracy in major industrialized countries and, instead, organizing international trade unions.
The EU banking system is in big trouble. That's why European Central Bank (ECB) head Jean-Claude Trichet continues to purchase government bonds and provide "unlimited funds" for underwater banks. It's an effort to prevent a financial system meltdown that could wipe out bondholders and plunge the economy back into recession. "We have the best track record on price stability over 11 1/2 years in Europe and among the legacy currencies," Trichet recently boasted. "What we have done and what we do with the same purpose is to help restore an appropriate functioning of the monetary-policy transmission mechanism." Nonsense. EU banks and other financial institutions are presently holding more than 2 trillion euros of public and private debt from Greece, Spain and Portugal. All three countries are in deep distress and face sharp downgrades on their sovereign debt. The potential losses put large parts of the EU banking system at risk. Trichet knows this, which is why he continues to support the teetering system with "unlimited funds". It has nothing to do with restoring the "functioning of the monetary-policy transmission mechanism". That's deliberately misleading. It is a straightforward bailout of the banks. Imagine that you are deeply in debt, but the bank offers to lend you as much money as you need to keep you from bankruptcy. To help maintain appearances, the bank agrees to accept the worthless junk you've collected in your attic in exchange for multi-million dollar loans. Does the bank's participation in this charade mean that you are not really broke after all? Does it increase the value of the garbage collateral you've exchanged for cash? The ECB is providing billions of euros per week to maintain the illusion that the market is wrong about the true value of the bonds. But the market is not wrong, the ECB is wrong. The value of Greek bonds (for example) has dropped precipitously. They are worth less, which means the banks need to take a haircut and write down the losses. More liquidity merely hides the problem. This is from Reuters: "Despite the open-arms approach, outstanding ECB lending has fallen more than a third since the start of July to 592 billion euros.... Liquidity remains abundant though. Over 120 billion euros was deposited back at the ECB overnight, the latest figures show." So, overnight deposits are increasing because the wholesale funding market is on the fritz, while--at the same time--the ECB has had to lend more than half a trillion euros to stabilize the under-capitalized banking system. This is progress? It's a farce.
The EU banking system is in big trouble. That's why European Central Bank (ECB) head Jean-Claude Trichet continues to purchase government bonds and provide "unlimited funds" for underwater banks. It's an effort to prevent a financial system meltdown that could wipe out bondholders and plunge the economy back into recession.
"We have the best track record on price stability over 11 1/2 years in Europe and among the legacy currencies," Trichet recently boasted. "What we have done and what we do with the same purpose is to help restore an appropriate functioning of the monetary-policy transmission mechanism."
Nonsense. EU banks and other financial institutions are presently holding more than 2 trillion euros of public and private debt from Greece, Spain and Portugal. All three countries are in deep distress and face sharp downgrades on their sovereign debt. The potential losses put large parts of the EU banking system at risk. Trichet knows this, which is why he continues to support the teetering system with "unlimited funds". It has nothing to do with restoring the "functioning of the monetary-policy transmission mechanism". That's deliberately misleading. It is a straightforward bailout of the banks.
Imagine that you are deeply in debt, but the bank offers to lend you as much money as you need to keep you from bankruptcy. To help maintain appearances, the bank agrees to accept the worthless junk you've collected in your attic in exchange for multi-million dollar loans. Does the bank's participation in this charade mean that you are not really broke after all? Does it increase the value of the garbage collateral you've exchanged for cash?
The ECB is providing billions of euros per week to maintain the illusion that the market is wrong about the true value of the bonds. But the market is not wrong, the ECB is wrong. The value of Greek bonds (for example) has dropped precipitously. They are worth less, which means the banks need to take a haircut and write down the losses. More liquidity merely hides the problem.
This is from Reuters:
"Despite the open-arms approach, outstanding ECB lending has fallen more than a third since the start of July to 592 billion euros.... Liquidity remains abundant though. Over 120 billion euros was deposited back at the ECB overnight, the latest figures show."
So, overnight deposits are increasing because the wholesale funding market is on the fritz, while--at the same time--the ECB has had to lend more than half a trillion euros to stabilize the under-capitalized banking system. This is progress? It's a farce.
