World Economic News

Bank of England Warns of Potential 'System-Wide Stress'

The latest Bank of England Financial Stability Report, issued April 26, warns that "ever riskier lending practices," including everything from derivatives, to the bundling and resale of loans, and issuing of "sub-prime" loans in every sector, has "potentially increased the vulnerability of the [global financial] system as a whole ... to an abrupt change in conditions."

The report points to "recent developments in the U.S. sub-prime mortgage market" as a mild taste of what could happen, should "more significant" markets, such as corporate credit, be hit by similar drops in liquidity. As John Gieve, the bank's Deputy Governor for Financial Stability, put it in the press statement announcing the release of the report: "Risk-taking is increasing, including through higher leverage, lower margin requirements and relaxation of covenants. The rapid growth in credit risk transfer markets is also making more participants dependent on continuous market liquidity and could amplify the impact of shocks like a sharp reversal in credit spreads from their current low levels." Sharp language, for a banker.

Across the Atlantic, U.S. Treasury Under Secretary for Domestic Finance, Robert Steel, told a Manhattan Institute forum taking place on the same day, that the Bush Administration believes that government regulation of speculative hedge funds would increase "moral hazard." Steel gave the twisted argument that government regulation would "communicate a sense of confidence in the actual product, which, by definition, is more risky, illiquid and has more flexibility than the average person should embrace," and it might encourage the average person to put his money into hedge funds.

Steel, who like Treasury Secretary Henry Paulson, was a top executive at Goldman Sachs before moving over to Treasury, didn't mention that in the past few years, pension funds, university endowments, and the like, have been moving "the average person's" money for them, into these "risky and illiquid" speculative funds, which the Bank of England now admits can blow out at any time.

Global Consequences of U.S. Housing Collapse

April 23 (EIRNS)—One of the unspoken, but predictable, consequences of collapse of the U.S. housing bubble is being felt by the nation's immigrant community, and by their relatives back at home, in the form of collapsing remittances from workers to Mexico and other Central and South American countries. As reported in the Wall Street Journal today, remittances to Mexico have dropped from a peak of $2.6 billion per month in May of 2006, to a level of $1.7 billion per month in February 2007. Similarly, for the month of February, Brazil received $330 million, down 25% from $446 million in the same month last year; and Guatemala has dropped from a peak of $361 million last May, to $271 million this February. This is now coinciding with a slowing of the Mexican economy, which normally would lead to an increase in remittances as workers flowed toward the wages in the United States. Now both are dropping. This has even led to a decrease in border crossings, as judged from the number of apprehensions by the border patrol, which are down 10% for the first quarter of this year.

Putin Calls for 'National Welfare Fund' for Infrastructure

April 26 (EIRNS)—On April 26, in his final annual message to the Federal Assembly of his second term as Russian President, Vladimir Putin presented economic and social programs, ranging from a second Volga-Don Canal to a national drive to rebuild Russia's library system, as vital tasks to be taken up by the Russian state. Even more so than in last year's message, when Putin invoked Franklin Delano Roosevelt on the need for the government to step on the toes of selfish financial operators, in the name of the general welfare, Putin indicated breaks with some of the rules of monetarism and globalization that have trapped Russia for the past 15 years.

The Stabilization Fund, for example, was set up in 2002, according to the monetarist dictum that Russia's oil and gas revenue must be sequestered (invested in foreign government bonds), lest its investment inside the country trigger inflation. "Today, however," Putin told the Federal Assembly, "the nature of our economic objectives requires correction of the function and structure of the Stabilization Fund, while maintaining a conservative financial policy. That is why, in my Budget Message, I proposed a new procedure for the use of oil- and gas-derived financial resources." Now, the Stabilization Fund is to be divided into a Reserve Fund (against the eventuality of a petroleum price crash); a part to go into the Federal Budget, to be spent chiefly on social needs; and a Future Generations Fund, "to raise the quality of life and develop the economy, for the improvement of the welfare of future generations, as well as present ones."

Discussing in more detail this "National Welfare Fund," Putin highlighted the importance of institutions to promote physical capital investment:

"Some of these resources should be directed into the capitalization of development institutions, especially the Development Bank, the Investment Fund, the Russian Venture Company, and others. I propose to direct 300 billion rubles [$11.5 billion] in this way, already this year, and to anticipate further allocation of funds for these purposes in the future. As for the projects to be financed by the development institutions, I think they ought to be dedicated to addressing the most important tasks in our economy.

"First, the elimination of infrastructural constraints on growth. Second, improving the efficiency of natural resources utilization. Third, modernization and development of high-technology industrial manufacturing." Putin stressed that the government will not fund all of this activity directly: "Budget resources should not be the main source, but chiefly a catalyst for private investment." The state, he added, "should put its shoulder to the wheel, in cases where the risk for private investors is too great." Meanwhile, "the main role of the government should be to assist business in creating new, truly modern manufacturing."

Better Than Subprime Mortgages: Carbon Credit Trading

April 26 (EIRNS)—Carbon credit trading is being viewed by some as the new speculative gold mine, even better than speculating on housing, since in carbon credit trading there is little by way of verification of credit to get in the way of making a large haul on trading in hot air. This is the conclusion of an investigation by the London Financial Times, which ran a front-page article today detailing the lack of verification of carbon credits. And when some verification of the carbon credits was done, there was little evidence that the credits were issued in relation to any real carbon offset projects, like wind farms or solar cells. The Financial Times notes from their investigation, that with the little or no verification in the carbon market, the consumer is left with no real way to assess the value of their "investment."

The Financial Times profiled a website set up on March 1 called CarbonVoucher.com, set up to help households offset carbon emissions through funding projects to protect the Amazon rainforest in South America. The FT found out the owner of the website was taking the money for the carbon offsets, but did not have a contract to do any work or help build any projects to help protect the rainforest. According to the owner of the website, the money was coming in so fast they have not had time to build the rest of the business.

German Finance Minister on Hedge Fund Controls: Too Little, Too Late

April 24 (EIRNS)—In Berlin on April 23, German Finance Minister Peer Steinbrueck complained that the Bush Administration's plan to control hedge funds will do nothing more than publish a proposal for a voluntary code of conduct. "This is not enough," he said, adding that he prefers a more binding agreement, though also one that is "market-driven." Germany insists that such a measure be discussed at the mid-May meeting of the G-7 plus Russia, in Potsdam.

German news wires announced today, that the financial market watchdogs of the U.S. and Germany—the Securities and Exchange Commission (SEC) and the BAFIN (German regulatory agency for banks)—will sign a cooperation agreement in Berlin on April 26, which will allow the exchange of information about crisis symptoms and investigative cases on either side, and allow either agency to carry out investigations on the request of the other.

Steinbrueck's comments on hedge funds should be seen in this context.