I have written for a while now about how I see a clear division and open opposition hardening between the US and Europe, Washington and Berlin, the FED/IMF and the ECB. Well today we got to see that opposition break out into the open.
The FED and the ECB are now on a collision course.
Today Ben Bernanke continued the testimony on Capitol Hill that he began yesterday. Last night I suggested Bernanke had spooked the market by not being bullish enough. Perhaps after seeing what his cautious remarks did the the Dow Jones, he was suddenly a lot less cautious than he was.
Yesterday when asked about specific policies he was coy and said it was not his position to recommend or judge specific policies. Today Bernanke said loud and clear he thought extending the Bush era tax breaks would be good and support a recovery.
No problem today with passing judgement on specific policies. Maybe someone had a word with him. And it worked. Today the new improved Bernanke, plus upbeat earnings reports, has given the Dow a suprercharged lift.
On the same day over in Europe, however, in an article for the FT the ECB chief M. Trichet says, “tax increases should be imposed immediately across the industrialised world” and that, “policymakers who want to prolong the stimulus are mistaken ….” Doesn’t get much clearer and more blunt than that. Call for Ben on line one!
This is what I have been saying for a while now. For example Debt Asymmetry, US European Tensions, EU/US Non-Agression Pact, Things get political and nasty.
I don’t see how the much clearer the opposition between FED and ECB can get. For the moment this is just the Central bankers. The politican, if they have an ounce of sense, will stay away from commenting and allow the proxy war to rumble on. But these financial differences are going to fuel political frustration which could easily turn to emnity if/when a big problem “spills out” of Europe.
I couldn’t help but notice with a sense of foreboding, that ‘spills out’ wording used by Dodds or Shelby, I can’t remember which. Whichever Senator it was, spoke of a financial problem ‘spilling over from Europe’ to affect the US. It was said in reference to the Fed having opened cfredit lines with European banks during the Greek episode. Those credit lines were very controversial to say the least. They were seen by many in the US as evidence of the US having to bail out Europe’s banks. I wrote about this at the time in one of the above mentioned blogs.
The problem is the asymmetry of teh US and EU policies. If the US stimulate their economy it doesn’t hurt Europe. But when the Europeans vut spending and don’t stimulate then lower consumption and lower growth does hurt US exports and if European banks or nations erode confidence that too will be seen as harming America’s best efforts. This is the problem. From a European perspsective this is just a sovereign choice of policies. From the US our particular sovereign policy choice is harmful to their national interest.
Perhaps I’m being over sensitive, remembering the ‘old Europe’ rancour that rose so easily in Amercia during Iraq War two, but there is something about the ‘spill over from Europe’ phrase, which makes me think it will have a damaging currency. It paints a picture of an uncontained Europe contaminating the US.
I wonder if the Senator considered that US sub-prime spilled over into the whole world? Personally I think the ‘spill over’ metaphor will have an acidic effect and is not a helpful way forward. It encapsulates and encourages an us and them mentality. It smacks of politicians looking for someone to blame. All politicians do it when they feel themselves in danger of being held to account.
The danger I see is politicians looking to cast blame around to protect themselves when things get nasty come the cuts and bail-outs in the Autumn.
" The growth of public debt has been driven by three phenomena: a dramatic diminishing of tax receipts due to the recession; an increase in spending, including a pro-active stimulus to combat the recession; and additional measures to prevent the collapse of the financial sector. Because we avoided the catastrophic scenario of a financial meltdown, the third element does not represent a very significant volume of spending for most countries. BUT ( my caps) calculations by the European Central Bank show the volume of taxpayer risks earmarked to support the financial sphere, including all options – recapitalisation, guarantees, toxic assets etc – was as high as 27 per cent of gross domestic product. It is, remarkably, the same gigantic proportion on both sides of the Atlantic."
Jean-Claude Trichet at FT 22 july 2010
Well, it looks like a significant volume of spending to me, as the problem has not been resolved once and for all ?
Hi Golem,
It has seemed inevitable (and necessary) to me, for a long time now, that this conflict occur. This is not merely a clash between different economic models, but one of cultures too, with the UK sandwiched uncomfortably between.
The USA has great cultural diversity and many fine traditions, but much of what the world sees is through the green-tinted glasses of corporate America, or the clod-hopping actions of the US armed forces.
If only we (the UK) could take a good dollop of Hungarian democracy, combine this with a typically French appreciation of social life, add in some German efficiency to improve our exports, and oriental philosophy to keep us calm and considerate.
But what virtues shall we take from the Americans? Exuberance and ambition perhaps? Too much ambition (greed?) got us in to this mess -now is the time for some good old British reservedness. [Yuck! Is that a real word?]
Frog2 –
Trichet seems to be more courageous than many. Perhpas more honest too. But even he, I suspect, is parsimonious with the truth.
His 27% is calculated on what nations tell the ECB. What do you bet the the ECB has no real idea what liabilities are still undeclared in the Caja's or in off-balance sheet vehicles? And what about completely off-shore bank activities. It si s ahuge amount and that money interacts with the declared part of finance. There will be CBS written by and for off-shore funds.
And in the case of a big bank collapse that 27% is nonsense. The assets/risk exsposure of any of the big banks is very often worth more than the GDP of the nation housing them.
But then again mate, what do I know. Look at the markets. Rally on!
People are just not going to get it until they find the services are gone.
RichGB –
I think this conflict will be deep and serious. Not shooting serious but I think it might start to expose how compromised certain sections of our government are and where their real loyalties lie.
America is NOT our ally. Some Amercian people are fond of us and are intelligent outward looking people like you have everywhere. But some our poorly informed, eager to hate and easily manipulated. It fear it will get ugly.
The UK needs to make up and decide where it is heading.
To be fair, (fairer than I probably ought to be, given how much I loathe most of the members of our new government) there are a few straws in the wind that suggest the government's sensibly edging towards remembering we're part of Europe.
Cameron has so far been much less of a lickspittle towards the US than his recent predecessors and he's been making efforts to improve relations with Germany, who (temperamentaly) should be the UK's natural allies.
Tam,
You're right about Cameron. I noticed that too. Intersting. Still can't say I like any of them though.
A project for media studies people – how many articles like this reminder of the 'banking crisis' appear in the MSM ?
It's a sobering thought amid all the talk of cuts that Royal Bank of Scotland stands to lose almost as much as the entire Budget deficit on the loans that poured out of its doors in the boom years before the crunch.
The travails of BP and lesser companies dominate the headlines but arguably the organisation voters should most care about, and the one with the potential to have the most adverse impact on the nation's wallet is the Asset Protection Agency.
This little-known body, which presented its first annual report yesterday, is supervising the unwinding of RBS's £270 billion book of potentially bad loans. RBS has agreed to pay the first £60 billion of losses. After that, the costs fall almost entirely on the taxpayer.
One might have thought that even a bank that was as cavalier as RBS in its dash for global domination would be hard-pressed to lose £60 billion on a total book of £270 billion. But it is going to be a very close-run thing. The APA's best estimate is that the losses will amount to “only” £57 billion, a figure conveniently — perhaps too conveniently — just the right side of the line, but still an appalling sum of money, and the most awful indictment of the bank's previous management." etc …
evening standard friday 23