Replies to post #321335 on $Stock*Shop*Charts*News*Option$

[Tuff-Stuff]

uk<>Banking split essential to avoid new financial crisis, warns OECD adviser

'We need to separate capital market banking from standard commercial banking. That's the most basic lesson of the crisis,' says Adrian Blundell-Wignall

(Sound familiar? It should)=Glass-Steagall Rule

Thursday 27 May 2010 11.33 BST

The global economy will be plunged into a second and even more serious crisis unless banks are split into separate retail and speculative arms, a senior policymaker from the west's leading thinktank said today.

Adrian Blundell-Wignall, special adviser on financial markets to Angel Gurría, secretary general of the Organisation for Economic Co-operation and Development, said that without a basic reform of banks "the lesson from the crisis was that it was not big enough".

Blundell-Wignall, speaking in a personal capacity at the OECD's annual forum in Paris, said one of the big obstacles to better global governance was "institutional capture" of policymakers by the leading global financial institutions.

"I think the whole regulatory structure and incentives are wrong," he told a panel on the future of capitalism. "We need to separate capital market banking from standard commercial banking. That's the most basic lesson of the crisis."

The annual ministerial meeting of the OECD has been dominated by discussion on how to rebuild the global economy after the financial turmoil and economic downturn of the last three years.

Blundell-Wignall, the OECD's deputy director for financial and enterprise affairs and a former investment banker, was critical of the reform proposals currently being discussed. "How big a crisis is big enough? It seems as if this crisis was not big enough."

The near-meltdown of the international banking system in the autumn of 2008 has prompted debate about whether banks should be able to use deposits from retail customers for speculative activities. Mervyn King, governor of the Bank of England, and Paul Volcker, former chairman of the US Federal Reserve and now economic adviser to Barack Obama, have both expressed support for splitting up the big banks.

Blundell-Wignall said: "If we can't even do that, I'm very pessimistic about the future of capitalism. I'm afraid that governance will only be sorted out by another big crisis and it will probably be bigger than this one."

He added later that reforms of banking should also include common limits on leverage for all countries, so banks would be unable to circumvent attempts to clamp down on excessive risk-taking.

Last week the US Senate approved the biggest reform of Wall Street since the Great Depression. However, some measures remain unresolved, including the precise shape of the "Volcker rule" blocking banks from engaging in riskier activities such as operating hedge funds and trading with their own capital.

Gurría launched the OECD's Innovation Strategy today, calling on countries to "harness innovation and entrepreneurship to boost growth and employment".

Four new countries – Chile, Slovenia, Israel and Estonia – were admitted to the OECD today, taking its membership to 34.

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~>US money supply plunges at 1930s pace as Obama eyes fresh stimulus
The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.


By Ambrose Evans-Pritchard
Published: 9:40PM BST 26 May 2010

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html


The stock of money in the US fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc Photo: AFP

The M3 figures - which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance - began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. "You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip," he said.

The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.

Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.

Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, "failure begets failure" in fiscal policy as the logic of compound interest does its worst.

However, Mr Summers said it would be "pennywise and pound foolish" to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy "faces a liquidity trap" and the Fed is constrained by zero interest rates.

Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown "Friedmanite" monetary stimulus.

"Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty," he said.

Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who "despise traditional monetary theory and have a religious aversion to any mention of the quantity of money". The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust.

Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.

This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed raised rates - gave a second warning that the economy was about to go into a nosedive.

Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called "creditism" has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.

Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. "Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched," he said.

However, Mr Ashworth warned against a mechanical interpretation of money supply figures. "You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets," he said.

Events may soon tell us whether this is benign or malign. It is certainly remarkable.