Latest from David Smith at economicsuk.com.

Just don’t hold your breath

‘As global companies draw up contingency plans for a Greek exit from the euro, we examine the feasibility of Athens’ departure – from new drachmas to illegality and 1 trillion euro costs’

Love the headline.  Cue the Jaws music…….

Fairly lengthy article by Andy Xie, but well worth the read.

Big thanks to Tommy for bringing it to our attention

They don’t look too happy about it

Europe’s low birth rate and aging population will make fast growth hard to come by.

By Chris Cermak

WASHINGTON (MNI) – Bank of England Governor Mervyn King Saturday
said it was undesirable to use only monetary policy to control risk in
the financial system, without the benefits of new macroprudential tools.

“The tradeoffs involved in trying to do everything through monetary
policy are undesirable,” King said after taking questions at the Federal
Reserve’s central banking conference in Washington.

King also said he considered both using interest rates and the
purchase of government debt to be part of the central bank’s common tool
chest.

“These instruments I would put in one bucket, because the objective
of using those is to try to achieve price stability,” King said.

On regulation, King said it was important for central banks to show
a “degree of humility” in their understanding of the financial system
and chastised politicians for expecting central banks to use their
“absurdly magic powers” to predict and control future economic
conditions.

Central banks needed “to try to get across to people that these
problems were very severe and that we are focusing all our efforts to
try to make sure that the risks that it will be happening again will be
lessened, but anyone who thinks there’s an easy route to that is
mistaken,” King said.

–Chris Cermak is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$$BE$,MK$$$$,M$B$$$,MT$$$$]

By Chris Cermak

WASHINGTON (MNI) – Bank of England Governor Mervyn King Saturday
said the new macroprudential tools sought by central banks were still in
an experimental phase and acknowledged little was known about exactly
how many of the new tools were going to work in practice.

Speaking at a Federal Reserve conference in Washington, King also
said it remained an “open question” whether central banks should focus
primarily on their existing monetary policy tools or new macroprudential
regulation to control risk in the financial sector.

“This is an experiment,” King said. He noted central banks were
well informed on monetary policy, but “we know absolutely nothing about
how these (macroprudential) instruments are going to work.”

The BOE’s Financial Policy Committee Friday issued its advice to
the UK Treasury on what specific macroprudential tools the future
statutory FPC should be empowered to direct financial authorities to
deploy.

These tools comprised a countercyclical capital buffer, sectoral
capital requirements and a leverage ratio. King said the committee saw
the “potential attractiveness” of many other tools not included in the
recommendations, but stressed there remained “reservations” about the
effectiveness of many.

The FPC also advised the Treasury that it should be given powers to
direct a “time-varying liquidity tool” but the form of this would depend
on international agreement on liquidity standards. King said he attached
“a lot of importance to this to this tool.

King also noted the FPC left out of its recommendations a
loan-to-value and loan-to-income tool, which he said would require a
high degree of political and public support before it could be
considered. The measure would therefore require “further public debate.”

“We will have to keep under review the parameters of the regulated
sector and the instruments in the toolkit of the regulators,” King said.

King said another challenge for central banks remained maintaining
their independence and legitimacy in the aftermath of the crisis. The
means “winning the battle of hearts and minds” and could be helped by
increased transparency.

“It is pretty crucial to explain what we are doing and why,” King
said.

–Chris Cermak is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$$BE$,MK$$$$,M$B$$$]

‘Italian Prime Minister Mario Monti said on Saturday he was concerned about Spain’s public finance situation and said contagion could easily return to the eurozone and affect Italy.’

I’ve learned that sometimes it’s just best to keep your own council  I have to admit it took me many many years to work that one out

Something about that picture reminds me of Max Bygraves.

If you can guess what, let me know and the first correct answer can have a ForexLive t-shirt (as long as they’re happy with XL or XXL size,  as that’s all I got)

By Chris Cermak

WASHINGTON (MNI) – Bank of England Deputy Governor Paul Tucker
Saturday said the practice of rehypothecation by primary brokers had
fallen “under the radar” and suggested it may merit greater regulation
by financial authorities.

By using clients money and assets, rehypothecation by primary
brokerages means “in economic substance, they are banks,” Tucker said
at a Federal Reserve conference in Washington.

“This is a really significant issue that lies absolutely under the
radar. We have to think through what rehypothecation means, and what we
should do about it,” Tucker said.

Tucker was responding to a paper presented by Professor Darrell
Duffe of Stanford University’s Graduate School of Business, on progress
in overhauling financial regulations since the crisis.

Duffe, responding to Tucker’s concerns, said rehypothecation
“hasn’t received the attention that it should going into the crisis,”
despite consequences for the broader financial system.

Duffe noted existing SEC rules should have restricted the ability
of brokers to increase leverage too drastically through this “bank-like
operation,” but the rules “didn’t work and we still don’t know why.”

“This is very low hanging fruit in terms of research,” Duffe said.
“I don’t know exactly what to do yet because I don’t know what
happened.”

–Chris Cermak is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$$BE$,MK$$$$]

–Adv Econs Must Use Lessons From Crisis To ‘Vaccinate Ourselves’

By Chris Cermak and Brai Odion-Esene

WASHINGTON (MNI) – Former European Central Bank President
Jean-Claude Trichet said the ECB’s recent LTROs were “fully justified”
but stressed certain conditions would have to be met by the financial
system and the governments to ensure their success.

Trichet also urged advanced economies to use the lessons learned in
the current crisis to “vaccinate” their economies against future
troubles.

Trichet stressed the ECB should ensure commercial banks do not take
advantage of the easy provision of liquidity and continue to address the
need for deleveraging despite the ECB’s three-year LTROs.

“The measure that has been taken recently was in my opinion fully
justified because we had to cope with a very very grave and immediate
threat of major disruption of our market,” Trichet said at a Federal
Reserve conference of central bankers in Washington.

But he added: “You also have to care for nobody to take advantage
of this situation.”

That same message should be sent to governments, Trichet said, “not
to take unfair advantage of the fact that the central bank has engaged
in non-standard measures” to relax their fiscal commitments.

Another condition of the ECB’s provision of lilquidity should be
the “improvement of governance” in the Eurozone: “That is of course
absolutely essential.”

Trichet warned finance ministers around the world not to take the
actions of central banks globally as a reason to believe the crisis has
passed. He urged groups like the G20 to “do the job and not to think
that because of the central banks’ forth-comingness, there is no
crisis.”

“I believe that we are all still in a crisis,” not just in Europe,
Trichet said, and that advanced economies are experiencing big
structural adaptations.

“We are experiencing a structural adaptation of the global economy
over the last 35 years with the various continents being targeted by the
structural adaptation processes successively,” he said.

Other continents underwent the process early, he continued, meaning
emerging economies were “remarkbaly resilient” given current conditions
in the global economy, meaning “they drew on the lessons of their own
experience and had a kind of vaccine that had functioned.”

This would suggest that advanced economies must learn all the
lessons from the recent crisis.

“It is a unique opportunity to be sure that we vaccinate ourselves
in a right and proper fashion,” Trichet said.

He noted that the advanced economies that have been insulated from
the current turbulence sparked by the Eurozone debt crisis, are Canada,
Scandinavian nations and Germany.

Canada had “enormous problems” at the end of the 80s, he said, but
used the lessons from that period, as did Sweden and other Nordic
nations during their crisis at the beginning of the nineties.

Now, “they are very well protected in the present circumstances,”
Trichet said.

As for Germany, the European giant had to deal with reunification
in 1989 — again an “enormous challenge,” Trichet said — implemented a
lot powerful adjustments over the last 30 years “and of course is in a
situation which everybody knows is better than many others.”

“We have all the proof that this opportunity which is open to us
has to be fully utilized,” Trichet said.

Looking to the future, Trichet said he feared the global financial
system may have entered a “new world” in which the kinds of non-standard
measures taken by central banks since the collapse of Lehman Brothers
could become permanent, because the new interconnectedness meant shocks
to the system could occur in a matter of days.

Central banks reacted after Lehman because of the “systemic tail
risk with an immediate threat of dislocation of the market…but then
perhaps you continue to step in because it is the way the system
functions,” Trichet said.

“That would be a kind of permanent regime,” Trichet said. He hoped
such “conjecture” would be proven “absolutely wrong” and also painted a
more “optimistic” scenario in which central banks would slowly be able
to unwind their extraordinary measures and reduce balance sheets over
time.

Still, Trichet pointed to the length of the extraordinary measures
to date, noting that “nobody would have expected that after such a long
time after Lehman Brothers, we would continue to have this expansion of
our balance sheet and non-standard measures,” he said.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$X$$$,M$$CR$,M$$EC$,MI$$$$,M$U$$$,M$A$$$]

By Chris Cermak

WASHINGTON (MNI) – Central banks would do better to focus on price
stability due to a lack of precise measurements of output gaps in the
economies, the European Central Bank’s Athanasios Orphanides said
Saturday.

Taking questions from the audience at a Federal Reserve conference
in Washington, Orphanides said there remained a lack of accurate and
timely measurements of the output gap in an economy, and said most
policymakers in any case agree that keeping inflation in check has
positive benefits for output and employment.

“Since we can not measure one, we should actually focus on the
other,” Orphanides said. Using price stability is “an ideal solution to
the fact that we do not know exactly how to model the output gap.”

The head of the Central Bank of Cyprus said this is “what many
central banks have been doing in practice, which is placing greater
emphasis on stabilizing inflation and inflation expectations.”

Orphanides added that this had practical benefits for the overall
economy.

“The one thing most of use would agree on policy is that, if we
manage to achieve price stability, then on average, and perhaps even in
the short and the long run, we’re going to be getting right economic
activity to be around the potential of the economy,” Orphanides said.
“Most of us believe that works except for the very short run.”

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$X$$$,M$$CR$,M$$EC$]

By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve’s commitment to maximum
employment, and now its adoption of an explicit 2% annual inflation
target, has moved it to the “leading edge” in of the best practice of
monetary policy, Riksbank Deputy Governor Lars Svensson said Saturday.

Speaking at the Fed’s central banking conference in Washington, the
Swedish central bank official said his view of what is considered best
practice involves stabilizing inflation around a target, and employment
around a long run sustainable rate.

“The new strategy of the Fed is very clear on these things,”
Svensson said.

Svensson also argued that central banks should not rely that much
on the output gap when crafting monetary policy, but focus on the
employment gap instead.

“That implies stabilizing unemployment around a long run
sustainable rate,” he said, not to mention the fact that unemployment is
more “welfare related” than output, and is more transparent as well as
better understood by the general public.

“And it has smaller measurement errors in most countries,” he
added.

The principles of good monetary policy are very simple, not
complex, Svensson argued, rather it is the applications of the
principles — constructing conditional means of forecasts for inflation
and employment — that can be complex.

As a result, Svensson said monetary policy is “exceedingly simple”
compared to, for example, fiscal policy which has “enormously
complicated” objectives, numerous instruments — taxes, subsidies — and
is “inherently political.”

However, despite the straightforward nature of monetary policy,
Svensson said adopting basic formulas to govern how policy is
implemented is not the best approach.

“I don’t think looking for simple instrument rules, formulas is the
best way to conduct monetary policy,” he said.

Any simple policy rules utilize only part of “available relevant
information,” he argued, information that could vary a lot from policy
decision to policy decision.

Svensson was discussing a paper authored by ECB Governing Council
member Athanasios Orphanides and German economist Volker Wieland. The
paper argued that the intertwined uncertainties regarding the structure
of the economy and determinants of short run inflation have inserted a
complexity into monetary policy that means the best approach to
achieving price stability, and the force with which it should be
applied, cannot be made with “precision.”

Svensson said the paper seems to advocate a “once and for all”
choice for policy.

“But of course this is not how it works in the real world,” he
said. “In the real world there is updating, there is learning. You
re-estimate models, you find news ones, you disregard the old ones.”

No central bank follows a simple set of rules, Svensson continued,
with new guidance sometimes needed.

The San Francisco Fed’s Glenn Rudesbusch, who also discussed the
paper, said the crisis in the Eurozone underlines the need to “enlarge
our conception of monetary policy.”

He also stressed the importance of gathering more information on
the effects of new tools utilized by the European Central Bank to tackle
the European banking crisis.

“Are there effects of large scale provisions of central bank
liquidity … are there consequences?” he asked, citing the ECB’s
provision of cheap 3-year loans to banks and noting it is “outside the
realm of experience of most central banks and that is important.”

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: MMUFE$,M$X$$$,M$$CR$,M$$EC$,MI$$$$,M$U$$$]

By Brai Odion-Esene

WASHINGTON (MNI) – The intertwined uncertainties regarding the
structure of the economy and determinants of short run inflation have
inserted a complexity into monetary policy that means the best approach
to achieving price stability, and the force with which it should be
applied, cannot be made with “precision,” the European Central Bank’s
Athanasios Orphanides said in a paper released Saturday.

Orphanides, head of the Central Bank of Cyprus and Volker Wieland
of Goethe University in Frankfurt argue that based on the aforementioned
uncertainties, “the exact form of the systematic policy rule that a
central bank should pursue, or the degree to which its orientation
should be forward-looking or the intensity with which it should aim to
stabilize inflation over the near term, and so on, cannot be determined
with precision.”

Orphanides presented the paper at the Federal Reserve’s central
banking conference in Washington.

The Eurozone debt crisis “has served to reaffirm the limits of our
knowledge and temper optimism that central banks can stabilize the
economy with great precision,” the paper said.

In addition, the current crisis has also highlighted specific blind
spots that the ECB could not effectively deal with due to a lack of
similar experiences and data configurations from the recent past that
the paper said are needed for “estimation and calibration.”

“Consider, for example, the uncertainty regarding the monetary
policy transmission mechanism. Even under normal conditions this
uncertainty is recognized to be considerable. The crisis brought us to
an even more complex situation as the policy transmission had to be
evaluated in an environment of policy rates approaching the zero lower
bound,” the authors wrote.

It added, “in this light, the crisis has reaffirmed that our
efforts should be focused on improving robustness in policy design,
acknowledging that our measurement may be imperfect and our models
misspecified.”

For example, it noted that with regard to price stability — the
ECB’s sole mandate — uncertainties regarding the determinants of
inflation in the short run, as well as the formation and evolution over
time of inflation expectations, “are all areas where our knowledge is
necessarily limited.”

The paper focused on the design of robust policy guides aimed at
maintaining economic stability while recognizing the above mentioned
“misspecification” in modelling and “mismeasurement” of the state of the
economy.

As the ECB worked to craft measures to deal with the crisis in the
Eurozone banking system, “quantitative evaluation of the channels of
transmission and relative effectiveness of alternative unconventional
policies were hard to come by when some decisions about these policies
had to be taken.”

The paper argued that a simple macroeconomic model, no matter how
sophisticated or modern, “will be, at best, incomplete,” and opined that
“a suite of models” may be best suited to address a range of potential
questions in greater detail.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$X$$$,M$$CR$,M$$EC$]

By Chris Cermak

WASHINGTON (MNI) – Bank of England Deputy Governor Paul Tucker
Saturday said financial regulation should be aimed at improving the
resilience of the banking and shadow banking system during an economic
boom, rather than constricting the lending power of borrowers.

Speaking at a Federal Reserve conference of central bankers in
Washington, Tucker largely backed a paper that argued capital and margin
requirements were likely the best means of improving the resilience of
the entire system, without too greatly impairing credit availability.

“Policy works better if it constrains the balance sheet of lenders”
or financial intermediaries, Tucker said, “than if it constrains the
balance sheet of borrowers.”

Such a conclusion “has a bearing on even how one frames the macro
prudential objectives,” Tucker said. The aim, which he argued has become
the Bank of England’s primary goal, “should be to underpin the
resilience of the financial system.”

Tucker also suggested central banks could be drawn to using their
own balance sheet to mitigate risks, such as by raising reserve
requirements for banks in order to limit risk-taking in an economic
boom.

“I suspect that many of us would feel that we’re on safest ground
when we can use the parameters of our balance sheet … rather than
things that are equivalent to regulation in the more normal sense,”
Tucker said.

Tucker was responding to a paper presented by Professor Anil
Kashyap of the University of Chicago’s Booth School of Business,
offering an integrated model for rating various macro prudential
regulatory tools for their effects on the financial system and broader
economy.

Tucker said the paper suggested capital requirements on banks,
combined with margin requirements on shadow banks, offered a “better
trade-off between promoting resilience without impairing the provision
of financial services.”

He added that capital requirements ahead of a crisis were more
useful in improving resilience than waiting for a sectoral bubble to
collapse. Post-crisis tools were by their nature pro-cyclical and
“playing catch-up” in a manner than made them less effective.

Tucker acknowledged loan-to-value ratios that limit borrowers
ability to take out a loan could also have some benefits for making the
financial system “more resilient,” but was especially damaging to
first-time home buyers.

“The macro prudential debate hasn’t turned out to be (about) can we
find the perfect single instrument to complement interest rates. It’s a
search across a whole zone of instruments. This is a serious choice,”
Tucker said.

–Chris Cermak is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,M$$BE$,M$B$$$,MK$$$$]

‘The cost of oil imports for leading economies will surge to $1.5 tn this year if crude prices stay at their current levels – a figure large enough to tip the World back into recession, the International Energy Agency warned on Friday.’

If you want to depress yourself and read the article, do a google search using the headline.

I put 15 quid’s worth of petrol in my car yesterday.  It amounted to a quarter of a tank.  Seems like only yesterday 15 quid would have amounted to half a tank

‘Euro zone finance ministers are moving closer to agreeing a combined rescue fund of around 700 bln euros in Copenhagen next week.’

Blimey

Wall Street journal