The European Central Bank

Hard talk, soft policy

The ECB has run a looser monetary policy than some might think

THE global economy has stopped sinking and central bankers are pausing for breath. On Thursday July 2nd, the European Central Bank (ECB) kept its main “refi” interest rate unchanged, at 1%. The ECB’s rate-setting council has been chary of cutting rates closer to zero as policymakers elsewhere have done. Its reluctance to do more has attracted criticism, only some of it fair.

The focus on policy rates may put the ECB in a bad light but these are no longer a reliable guide to the overall monetary-policy stance. If you look at market rates the policy stance in the euro area is as loose as anywhere else, because of stimulus decisions taken at the height of the financial crisis. In October the ECB decided it would offer banks as much cash as they wanted, at a fixed interest rate (the refi rate) and against a wider range of security than usual, for up to six months. It also scheduled extra three-month and six-month refinancing operations, so that banks could come more often to the central-bank well.

In May the ECB council agreed to extend the offer of fixed-rate cash to one year. At the first 12-month refinancing operation on June 24th, euro-zone banks borrowed a staggering €442 billion ($620 billion). With so much cash splashing around, the charge that banks make for overnight loans has stayed well below the refi rate, with some occasional spikes (see chart). Since the €442 billion cash injection, overnight interest rates in the euro zone have fallen to a record low of 0.3%, below those in Britain and scarcely higher than in America. Indeed banks can now borrow more cheaply in euros than in pounds for either three, six or 12 months.

Before the crisis, the ECB would aim to keep overnight interest rates close to the refi rate. Since it moved to unlimited fixed-rate funding, the central bank has been content to allow the overnight rate to drift much lower than the policy rate. In effect, the bank now has a target range for short-term rates: the upper bound is the 1% refi rate and the lower bound is the rate the central bank pays on banks’ deposits with it, currently 0.25%. The deposit rate has been a better guide to the policy stance than the refi rate has. ECB-watchers and markets understand this, even though it has not been spelt out in so many words by Jean-Claude Trichet, the ECB’s president.

Why be so coy? One concern is that by playing up the fight against recession, the ECB could appear to have lost sight of inflation. Keeping the totemic refi rate above zero may be seen as necessary to prevent inflation expectations from drifting up. There may also be a reluctance to admit that such a gushing provision of liquidity has altered the policy stance. Since the start of the crisis in August 2007, the ECB has insisted the two are separate. “They are bold on liquidity because they don’t see it as mainstream monetary policy,” says Charles Wyplosz of the Graduate Institute in Geneva. Yet the terms of its refinancing for banks have clearly led to looser monetary conditions.

Another reason for obfuscation is to mask differences among rate-setters. Monetary-policy hawks can reassure themselves that the policy rate is not too low. Doves are happy that effective interest rates are nearer to zero. And Mr Trichet can claim there is a “consensus”. The terms of the truce make it easier to reverse policy when the time comes. By restricting its liquidity support, the ECB will be able to guide overnight interest rates towards 1% without having to alter its policy rate.

Because the ECB has had one eye on the exit since the start of the crisis it has earned plaudits from those who think the Federal Reserve has been incautious. That judgment is too kind to the ECB, which could afford to have scruples about the medium term because other central banks were taking more care of the present. It is also unfair on the Fed, which had to stand in place of America’s collapsed shadow-banking system. When the economy was in most danger, the ECB could have cut rates more quickly. “If the ECB had been more proactive, the recession would have been less bad,” says Marco Annunziata of UniCredit. The striving for consensus militated against bolder action.

Another criticism is that the ECB has not done more to ease credit conditions by buying government and corporate bonds outright, as the Bank of England and the Fed have done. Its scheme to purchase up to €60 billion of the safest bank bonds, launched this month, is modest by comparison. Mr Trichet believes that focus makes sense, as euro-zone businesses and homebuyers rely more on banks than capital markets for credit. In America, capital markets matter more, so the Fed had to get its hands dirtier by buying commercial paper and mortgage-backed securities.

The ECB is also loth to soil its hands with public debt, though banks flush with central-bank cash are keen buyers of such low-risk assets. If this is monetisation at a remove, so be it. The central bank keeps its independence from government and does not have to worry about selling bonds back into the market once the interest-rate cycle turns. “If you want to stay clean, the exit strategy is easier,” says Thomas Mayer of Deutsche Bank.

But offering ample liquidity support to banks gets you only so far. By buying assets, the Fed allows American banks to shed them, freeing scarce capital for fresh lending. As losses mount in the euro zone, capital may trump liquidity in determining credit growth. Lending to the private sector slowed to 1.8% in the year to May, an all-time low. Until credit starts to revive, the ECB cannot think about tightening policy. It may yet have to be bolder.

FOX NEWS TALK

Spitzer's Return to Public Stage Stirs Talk of Political Comeback

The disgraced former New York governor has recently returned to the public stage, with articles on the Wall Street's role in the economic crisis and interviews on TV and radio.

By Stephen Clark

Former New York Gov. Eliot Spitzer (AP photo)

Spitzer as the next comback kid? Stranger things have happened.

Hookers and infidelity aside, Eliot Spitzer, once known as the "Sheriff of Wall Street," has won kudos for his observations on the present economic crisis, and some observers suggest conditions now are better than ever for him to return to the limelight -- if he wants to.

"I don't think he's interested in a political comeback at this point," Mark Weingarten, a Democratic Party activist and friend of Spitzer, told FOXNews.com. Weingarten, who recently spoke to Spitzer, said the former New York governor needed to take time away from the public eye last year to resolve personal issues after he was caught up in a prostitute scandal.

"I think he's now at a point where he can move on with his career," Weingarten said. "It's time to speak out. ... He feels a need to make a public contribution. This is a perfect opportunity for him to enter the public debate."

As New York's top attorney for eight years, Spitzer sent chills up the spine of people on Wall Street with investigations of white-collar crime, including a fraud case against insurance giant AIG, which led to the resignation of CEO Maurice "Hank" Greenberg and a $1.6 billion settlement.

Spitzer was elected governor by a wide margin in 2006, but he resigned in disgrace in March 2008 when it was revealed he was "Client 9" of a Washington, D.C., prostitution ring. Recently he has returned with articles on the Wall Street's role in the economic crisis and interviews on TV and radio.

But Douglas A. Muzzio, a political scientist at Baruch College and an expert on New York politics, said it would be "real difficult" for Spitzer to mount a political comeback.

"It's not only his problems as Client 9 but his problem as the ...steamroller," he said, referring to Spitzer's vow to roll over opponents of his agenda as governor. His approval ratings had dropped as his battles with the state Legislature intensified.

"He showed an inability to govern before the prostitution scandal," Muzzio said.

But Muzzio said that although Spitzer may never be able to win elected office again, he could be appointed to a study commission or advisory council.

"He's got cred," he said. "And in particular, he's got Wall Street cred."

Since December, Spitzer has written a column for Slate, offering a critique of the financial crisis, and granted his first interviews since falling from grace last year.

Spitzer told CNN's Fareed Zakaria that AIG and other giant financial firms deemed "too big to fail" need to be broken up. The next day, he expressed remorse and sorrow to NBC's Matt Lauer for the pain his personal actions caused his family.

"This is something that has caused excruciating pain to [my wife] and my daughters," the 49-year-old Spitzer said. "It's something that I carry with me every day because of the pain I've caused. And so I've tried to balance: The obligation to speak is vast but also the pain to my family has been enormous."

Some say Spitzer lacks the moral or ethical certitude to even speak out against the ills of Wall Street or Washington, but others disagree. Weingarten said no one could talk if lacking personal failings were the threshold.

Muzzio said, "I don't know that moral and ethical issues preclude him from being a savvy and sage analyst and commentator. We've had throughout history thousands of quote on quote great people with ethical and moral lapses."

Muzzio said Spitzer may be able to rehabilitate his image as an analyst, but he'll never the the Eliot Spitzer that people once thought could become the first Jewish president.

"There are certain dreams beyond him now," he said.

On Wall Street, Talk of Trust and Civil War

ANNELENA LOBB HEIDI N. MOORE

Finance executives expressed anger and betrayal at Washington's latest anti-Wall Street rhetoric during Tuesday's sessions of the Future of Finance Initiative, a conference hosted by The Wall Street Journal.

WSJ's Annelena Lobb and Heidi Moore ask Future of Finance participants if they see signs of an economic bottom, what they think of the Obama administration's handling of the crisis and what lessons they've learned from government involvement in Wall Street.

The conflict suggested that the lines of communication between government and the private sector remain limited just as government is hoping to expand cooperation with private investors. Those tensions flared over the last week, as the U.S. House passed a bill taxing bonuses by 90% for banks and other companies receiving large government capital injections.

"Washington and Wall Street are the equivalent of Gettysburg and Antietam right now," said Glenn Hutchins, co-chief executive of private-equity firm Silver Lake.

"To point the finger at one group means, No. 1, you're not understanding the problem, two, you're stretching our social fabric thinly, and you're throwing the baby out with the bathwater," Mr. Hutchins noted. "Trust goes both ways."

Arthur Levitt

The divide between Main Street and Wall Street surprised even Arthur Levitt, a former chairman of the Securities and Exchange Commission.

"This is an issue of 'we' and 'they,'" Mr. Levitt said. "Compensation is a part of it, but a symbolic part of it. We are a centrist nation ... We're now shifting to the left pretty far in terms of business-bashing and it has reached extremes of incivility that are intolerable."

Meanwhile, President Obama plans to meet Friday with about a dozen of the U.S.'s top banking chiefs in an unusual gathering designed to discuss the administration's plans to shore up the financial sector.

Attendees are expected to include Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc.

At the conference, Goldman's president and co-chief operating officer Gary Cohn spoke in support of his firm and its investment-banking focus. Mr. Cohn said that profitability is still possible for investment banks.

"Wall Street is alive and well," Mr. Cohn said.

Asked if Goldman Sachs would be the first financial institution to return funds granted by the Treasury's Troubled Asset Relief Program, Mr. Cohn said he didn't know, adding that he couldn't speak for the other banks that had accepted TARP money. He also said he would be surprised if any institution repaid TARP funds "until ... stress tests and first-quarter earnings are out of the way."

Gary Cohn

Mr. Cohn also said Goldman wouldn't have lost money had insurer American International Group been allowed to fail. He said the firm's greatest exposure at any one time was about $2.5 billion and that Goldman's credit-default swaps and collateral would have covered those sums in the event of default. "We would have been 100% fine," he said.

Fund manager George Soros dismissed many of the proposals discussed at the conference as "tinkering." Mr. Soros sought a thorough overhaul of regulation of the markets. "The idea that the markets are self-correcting has been proven false. ... The market, rather than reflecting the underlying reality, is always distorting it."

Paul Volcker, former Federal Reserve chairman, spoke for many of the attendees when he acknowledged that "we're in a government-dependent financial system; I never thought I'd see the day."

Obama's Double Talk On the Budget

Obama's Double Talk On the Budget

By Robert Samuelson

To those who believe that Barack Obama is a different kind of politician -- more honest, more courageous -- please don't examine his administration's budget. If you do, you may sadly conclude that he resembles presidents stretching back to John Kennedy in one crucial respect. He won't tax voters for all the government services they want. That's the main reason we've run budget deficits in 43 of the past 48 years.

Obama is a great pretender. He repeatedly says he is doing things that he isn't, trusting his powerful rhetoric to obscure the difference. He has made "responsibility" a personal theme; the budget's cover line is "A New Era of Responsibility." He says the budget begins "making the tough choices necessary to restore fiscal discipline." It doesn't.

With today's depressed economy, big deficits are unavoidable for some years. But let's assume that Obama wins reelection. By his last year, 2016, the economy presumably will have long recovered. What does his final budget look like? Well, it runs a $637 billion deficit, equal to 3.2 percent of the economy (gross domestic product), projects Obama's Office of Management and Budget. That would match Ronald Reagan's last deficit, 3.1 percent of GDP in 1988, so fiercely criticized by Democrats.

As a society, we should pay in taxes what it costs government to provide desired services. If benefits don't seem equal to burdens, then the spending isn't worth it. (Exceptions: deficits in wartime and economic slumps.)

If Obama were "responsible," he would conduct a candid conversation about the role of government. Who deserves support and why? How big can government grow before higher taxes and deficits harm economic growth? Although Obama claims to be doing this, he hasn't confronted entitlement psychology -- the belief that government benefits once conferred should never be revoked.

Is it in the public interest for the well-off elderly (say, a couple with $125,000 of income) to be subsidized, through Social Security and Medicare, by poorer young and middle-aged workers? Are any farm subsidies justified when they aren't essential for food production? We wouldn't starve without them.

Given an aging America, government faces huge conflicts between spending on the elderly and spending on everything else. But even before most baby boomers retire (in 2016, only a quarter will have reached 65), Obama's government would have grown. In 2016, federal spending is projected to be 22.4 percent of GDP, up from 21 percent in 2008; federal taxes, 19.2 percent of GDP, up from 17.7 percent.

It would also be "responsible" for Obama to acknowledge the big gamble in his budget. National security has long been government's first job. In his budget, defense spending drops from 20 percent of the total in 2008 to 14 percent in 2016, the smallest share since the 1930s. The decline presumes a much safer world. If the world doesn't cooperate, deficits will grow.

The gap between Obama rhetoric and Obama reality transcends the budget, as do the consequences. In 2009, the stock market has declined 23.68 percent (through March 6), says Wilshire Associates. The Wall Street Journal's editorial page blames Obama's policies for all of the fall. That's unfair; the economy's deterioration was a big cause. Still, Obama isn't blameless.

Confidence (too little) and uncertainty (too much) define this crisis. Obama's double talk reduces the first and raises the second. He says he's focused on reviving the economy, but he's also using the crisis to advance an ambitious long-term agenda. The two sometimes collide. The $787 billion "stimulus" is weaker than necessary, because almost $200 billion for extended projects (high-speed rail, computerized medical records) take effect after 2010. When Congress debates Obama's sweeping health-care and energy proposals, industries, regions and governmental philosophies will clash. Will this improve confidence? Reduce uncertainty?

A prudent president would have made a "tough choice" -- concentrated on the economy; deferred his more contentious agenda. Similarly, Obama claims to seek bipartisanship but, in reality, doesn't. His bipartisanship consists of including a few Republicans in his Cabinet and inviting some Republican congressmen to the White House for the Super Bowl. It does not consist of fashioning proposals that would attract bipartisan support on their merits. Instead, he clings to dubious, partisan policies (mortgage cramdown, union card check) that arouse fierce opposition.

Obama thinks he can ignore these blatant inconsistencies. Like many smart people, he believes he can talk his way around problems. Maybe. He's helped by much of the media, which seem so enthralled with him that they don't see glaring contradictions. During the campaign, Obama said he would change Washington's petty partisanship; he also advocated a highly partisan agenda. Both claims could not be true. The media barely noticed; the same obliviousness persists. But Obama still runs a risk: that his overworked rhetoric loses its power and boomerangs on him.