In Profile: Axel Weber, Top Candidate to be Named Next ECB Chief

By Christian Vits, Jana Randow and Richard Tomlinson

On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council -- including his boss, President Jean-Claude Trichet.


“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.

His comments, in an interview with the Frankfurt-based Boersen-Zeitung that was later posted on the Bundesbank’s website, came after he had spent part of the previous night on an emergency ECB conference call, Bloomberg Markets magazine reports in its August 2010 issue.

As finance ministers in Brussels hammered out a European Union-led rescue package worth about $927 billion, Trichet persuaded almost all of his council colleagues that purchasing government bonds was essential to halt a bond market rout triggered by Greece’s yawning fiscal deficit.

One of the dissenters was Weber -- the top candidate to become the ECB’s third leader when Trichet’s eight-year term expires in October 2011. Weber’s words matter because he represents the central bank of more than one-quarter of the euro region’s economy and a German habit of fiscal discipline and price stability that most of the euro-member countries have broken.

Just as German Chancellor Angela Merkel held out on rescuing debt-stricken Greece until the last minute, Weber, 53, stands against getting the ECB too entwined with indebted nations.

‘First Among Equals’

“After Trichet, Weber is the first among equals,” says Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “He’s not an ideologue, but he does represent a lot of the hard-money values that Germany is associated with.”

Weber’s intransigence presents a dilemma for European leaders, who must decide in the next year whom to pick as Trichet’s successor. The ECB president chairs a 22-member council of the heads of all 16 central banks plus a 6-member Executive Board.

By moving Weber from the Bundesbank’s bunker-like concrete building in northern Frankfurt to the Eurotower, the ECB’s 36- story glass-and-steel headquarters downtown, the member countries would be guaranteed an inflation fighter in the German tradition that underpinned the deutsche mark for half a century. They would also be choosing a plain-spoken former monetary economics professor who’s prepared to question policies he thinks are hazardous.

Wanting Him?

“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”

Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.

“There’s a rising risk of breakup of the monetary union, and the ECB will have to play an important role to prevent that from happening,” says Roubini, who sees Weber as the “leading candidate” for the top post.

Tackling the Deficit

Germany has a 2010 estimated budget deficit of 5 percent of gross domestic product, smaller than all but 4 of the 16 euro- member countries, and is fighting to keep the euro region under fiscal control. Merkel insisted Greece’s deficit be “tackled at its roots” before agreeing to the bailout package and is touting Germany’s constitutional amendment on fiscal restraint, which will start to go into effect in 2011, as an example to all euro governments.

The euro has plunged 13.8 percent this year against the dollar, falling below $1.20 on June 4. Even after the round of rescue measures announced by the EU and the ECB, the extra yield that investors demand to hold 10-year Spanish bonds over German bunds is close to a euro-era high of 216 basis points. (A basis point is 0.01 percentage point.)

Trichet’s successor thus may be confronted with the prospect of continuing to implement unconventional policy measures to safeguard the currency, such as wading deeper into the European debt market.

“The ECB has crossed the Rubicon with the bond purchases,” says Julian Callow, chief European economist at Barclays Capital in London. By June 4, the ECB had purchased 40.5 billion euros ($50.1 billion) of bonds, according to the bank.

First in Decades

If Weber takes over from Trichet, he’ll be the first German to win a top EU post since Walter Hallstein, who led the European Commission’s predecessor institution from 1958 to 1969. To get this far, Weber -- who has a British wife, Diane, and speaks fluent English -- gave up a two-decade-long academic career specializing in applied monetary and international economics when he became Bundesbank president in 2004.

Read the rest here.

Bank Run in Spain and Its Destabilizing Ramifications for the Entire EU

Spanish banks are borrowing record amounts from the European Central Bank.

According to FT, Spanish banks borrowed €85.6bn ($105.7bn) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 per cent of net eurozone loans offered by the central bank.

“If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,” said Nick Matthews, European economist at RBS.

Bottom line: This is nothing but a sign of a run on Spanish banks. They can't get funding in the markets and there is a steady withdrawal of funds from the banks. For all practical purposes, the ECB is supporting the Spanish banking system with life support measures. This means that the ECB will have to drain funds from elsewhere in the system to sterilize this rescue operation. Without sterilization the effort becomes very inflationary, with sterilization the effort distorts the entire EU economy. It's all destabilizing.

The only reasonable alternative is to allow the Spanish banks to go into bankruptcy and restructure.

The Fake Bailout Continues (Federal Reserve division)

The Federal Reserve currency swaps have collapsed.

In the last week, the Fed conducted only $1 billion in swaps (this was with the ECB). The Fed is now also reporting that the initial $9.2 billion swap conducted on 5-19 has matured and was not rolled over.

Bottom line: There is near zero Fed participation in the "bailout" and on Tuesday we will see if the data indicates any strong bailout activity from the ECB, but, at this point, it appears that the central bank bailout operations consist  pretty much of smoke and mirrors press releases.

Geithner Does London

On Wednesday morning, Treasury Secretary Geithner will arrive in London, UK for a series of meetings with European officials to discuss the economic situation in the region and the measures being taken "to restore global confidence and financial stability and to promote continued recovery."

Also, in advance of next month's G-20 meetings, Secretary Geithner will join an informal meeting with European colleagues to discuss the next stage of the financial reform agenda. 

Later Wednesday morning, Secretary Geithner will meet with UK Secretary for Business and Trade Vince Cable. 

In the afternoon, he will meet with Chancellor of the Exchequer, George Osborne, at 11 Downing Street. Following their meeting, they will hold a joint press availability.

Later in the afternoon, Secretary Geithner will meet with Mervyn King, Governor of the Bank of England.

From London, Secretary Geithner will depart for Frankfurt, Germany.

In the evening, Secretary Geithner will hold a working dinner with President of the European Central Bank (ECB) Jean-Claude Trichet. 

ECB: New Bond Program Essential to Policy Execution

The European Central Bank said Thursday its new program to buy government bonds on the open market was “essential” to ensure that its monetary policy continued to have the intended effect, reports WSJ.

“The Governing Council considers the…measures essential in order to ensure the effectiveness of the monetary policy transmission mechanism,” the bank said in its monthly report for May. “In particular, the measures will help to mitigate the spillover of increased financial market volatility, liquidity risks and market dislocations in the access to finance in the economy.”

Uh, no kidding. Money printing is the key to the madness. How much printing? It will be Tuesday's with the ECB to find out.

Details are likely to only be available in the ECB’s weekly financial statements that are published every Tuesday.

The Kaleidoscope Has Turned, Again

The business scene and its participants can be looked on as a staging contest of rival orientations, rival ambitions, rival exploitations of the world. It is capable, for all the analyst can tell ex ante facto, of realizing some one or other of these visions in some degree, and thus of presenting an appearance of momentary or temporary orderliness during the ascendancy of one orientation and its sponsors. Or the contest may be inconclusive and sterile, and result in a period of rudderless backing and filling of the sails and of untidy, blind struggle and groping for decisive policy.It will be a kaleidic society,interspersing its moments or intervals of order assurance and beauty with sudden disintegration and a cascade into a new pattern. Such an account of the politico-economic process may at various epochs or in the course of various historical ages appear less or more suggestive and illuminating. It invites the analyst to consider the society as consisting of a skein of potentiae, and to ask himself, not what will be its course,but what that course is capable of being in case of the ascendancy of this or that ambition entertained by this or that interest. The rival orientations, in the pure form of each, if it were conceivable that one or the other would be perfectly realized, would define the boundary of the possible situations, or transforms of situations, through which the society might pass in the course of a few year or a few decades. The partial or mixed success of several would lead to interior paths within this boundary, or to the temporary loss of a sense of direction. Such a loss of direction, in the economic aspect of affairs, might consist in a catastrophic slump or an uncontrollable inflation and the destruction of the currency and the society's confidence.

-G.L.S Shackle
Epistemics & Economics: A critique of economic doctrines (1991) P76

The above words written by G. L. S. Shackle, I believe, are among the most beautiful and insightful words ever written by an economist.

With these words, Shackle describes the nature of economics, of what we can and can't know about the economy, and at the same time recognizes the deceptive orderliness that we sometimes see in the market, that can quickly change.

Placing this template over the current financial crisis, we can see that few have understood what has occurred to date, and more important, few understand what the future may hold.

The current crisis  started in a curious way. The real estate market was being fueled by a huge money printing operation, years long, that convinced most that real estate could only go up in price.  This is what Shackle would consider the orderliness. There were a few, myself included, that knew this bubble would not last. But, it would be impossible to predict in advance just how and when the kaleidoscope would turn. In fact, what happened is that  it was turned twice.

The start of the financial crisis can now be pegged to the February 27, 2007 announcement that The Federal Home Loan Mortgage Corporation (Freddie Mac) would no longer buy the most risky subprime mortgages and mortgage-related securities. Prior to that announcement the real estate market was in a roaring full-fledged bull market.

One key to a roaring bull market is that more and more money needs to be added to the ballooning structure to keep it climbing. If the flow of money simply slows down, then the most leveraged who are betting on a quick return will find difficulty making that quick return. In the stock market, those seeking quick returns are exemplified by day traders, in the real estate market it is the equivalent "flippers".

The Freddie Mac announcement slowed the flow of the most risky, most aggressive money that was blowing up the real estate bubble. It was enough to prick the bubble.

To this day, few are aware of this as the start of the real estate crisis. It was a turn of the kaleidoscope that changed the dynamics of the subprime market.

The crisis would have temporarily stopped there except for another turn of the kaleidoscope. In the summer of 2008, the Fed chairman, Ben Bernanke, stopped printing money. This collapsed the remainder of the real estate market and the rest of the economy.

In the fall of 2008, we had a knee jerk reaction from the Federal Reserve to the escalating crisis, when the Reserve mutual fund "broke a buck". This resulted in the Fed adding mounds of new money to the system. The money printing did not stop until the early spring of 2009. This fueled the stock market boom which has always been in long term danger because the Fed had stopped its aggressive money printing ways in the spring of 2009 and has not yet resumed them.

This lack of money printing suggested a strong dollar and lower gold. The strong dollar appeared and the gold ascent stopped. The lack of money printing by the Fed, along with the same lack of printing by the European Central Bank, also produced another problem for the global economy, a double dip in the crisis in the form of sovereign debt problems by countries that needed monetary inflation to devalue the true cost of their debt. Without this inflation they had started a slow decent into default.

With the defaults becoming obvious, the kaleidoscope has been turned once more with news of bailout money from other EU members for the PIIGS, and the ECB pronouncing that it will enter the European bond markets to support debt prices. The Federal Reserve has also appeared on the scene with swap money.

And this is where we stand today. Rumors swirl that Germany may abandon the Euro for a new Dmark. Greeks appear ready to riot more to break the Greek government's attempt to install an austerity program. And in the U.S., various states and cities are emerging with budget strains, and the first murmurs of "Federal bailout" are being heard for some of the 50 states.

News of the money printing by the Fed (via swaps) and by the ECB (via debt support programs) is most alarming. If this money printing is not sterilized by offsetting money drains in other sectors of the economy, then serious inflation may be around the corner. The climb in the gold price is an indication that many have placed the quite solid bet that the central bank money printing will not be sterilized. The inflation scenario appears to be the most likely at this time.


However, and here is where the kaleidoscope may turn again, a strong inflation will boost the coffers of governments as their tax structures are very much tied to inflation. At such time, the Fed may again tighten for fear of a great inflation. This would reverse trends in the stock market and gold once again, pushing them downward. It is an extremely tricky and delicate time period with minor moves that could ripple through out the economy. We must keep in mind what Shackle has written. This time period, for sure,:

... invites the analyst to consider the society as consisting of a skein of potentiae, and to ask himself, not what will be its course,but what that course is capable of being in case of the ascendancy of this or that ambition entertained by this or that interest.

Indeed, with central banks, riots, banksters, politicians and the public all mixed in this brew, one move this way or that could push the economy over the edge, in this direction or that. As Shackle writes:

The partial or mixed success of several would lead to interior paths within this boundary, or to the temporary loss of a sense of direction. Such a loss of direction, in the economic aspect of affairs, might consist in a catastrophic slump or an uncontrollable inflation and the destruction of the currency and the society's confidence.

A crisis is coming, the details of how it will unravel will be provided only to the alert and nimble minded. The most likely scenario is a strong inflation with gold as king, but this is just the most likely scenario. This is not the time, though, to fall into a belief in a pseudo-orderliness of any kind, even for gold. In a free market gold would most likely emerge as the means of exchange. Gold is a great inflation hedge and everyone should own some, but there are scenarios in the current environment under which it would not perform well. Should the Germans turn the kaleidoscope by abandoning the euro and re-launching a new Dmark. The Dmark would at once become one of the strongest currencies in the world. In Europe, it would likely cause a flight by non-Germans in Europe to the Dmark, and thus in a way not only a flight from the euro but a European flight from gold.

The only thing we know with certainty is what Shackle has taught us:

It will be a kaleidic society, interspersing its moments or intervals of order assurance and beauty with sudden disintegration and a cascade into a new pattern.

Stay alert. It is going to be very tricky out there, kaleidoscopic, if you will.

No Change in ECB Interest Rates

No surprise here. Given the turmoil in the EU, there was no chance of a rate hike.

The entire ECB statement is in the EPJ Vault, here.

Pritchard: ECB May Have to Turn to 'Nuclear Option'

Ambrose Evans-Pritchard is reporting that "the ECB may no longer have any choice [other than to print money and buy up the bonds of the PIIGS ]. There is a growing view that nothing short of a monetary blitz — or 'shock and awe' on the bonds markets — can halt the spiral under way."

For me, it is hard to see this happening. Germany, a key player, would most assuredly be against it, for the obvious inflationary repercussions. Any such move would send the euro into a nosedive that it quite possibly would never recover from. There are likely players in the EU that would like to see the nuke money printing button pushed, but Germany most likely has a strong enough influence to stop this.

Our view of Germany's posture right now is that they will continue to nod in favor of a Greek direct bailout--as long as the bail out continues to be "a few weeks down the road," rather than today.

(ViaMike)

Fed Quadruples Dollar Availability To Foreign Central Banks

The international re-inflation has begun.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion to $247 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Following the announcement the cost of borrowing in dollars overnight dropped to 3.84 percent from 5.03 percent yesterday.

Under the new arrangements, the ECB doubled its limit of dollars it can get from the Fed to $110 billion and Switzerland's central bank can offer $27 billion, an extra $15 billion. New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorized until Jan. 30.

The ECB said it would offer $40 billion ``for as long as needed'' in overnight funds to the region's banks. It will also increase by $5 billion the amount it lends for 28 days and 84 days to $25 billion and $15 billion. The Swiss National Bank will boost its 28-day auctions to $8 billion and the 84-day offering to $9 billion. Both were previously $6 billion.

The Bank of Canada said it has decided not to draw on its $10 billion swap facility at this time. The Bank of Japan, whose policy board held an emergency meeting today, said it will use its $60 billion as required by market conditions.

In auctions of their own currencies, the ECB today lent 25 billion euros in one-day money and the Bank of England 66.2 billion pounds in one-week loans.

-EPJ Newsdesk

ECB, BOE Pump Extra Cash Into Money Markets

In the wake of a Lehman bankruptcy, a sale of Merrill and a request by AIG for $40 billion from the Fed,the ECB and BOE pumped extra cash into money markets this morning.

With interest rates on the overnight loans that euro-zone banks make to one another climbing, the ECB early Monday injected €30 billion (US$42.65 billion) in extra overnight funds into markets. The Bank of England pumped £5 billion (US$9.87 billion) in extra three-day funds. The Swiss central bank said it would take similar steps if necessary.

The ECB issued a statement early Monday morning saying it "stands ready to contribute to orderly market conditions." The Bank of England said its action was "being taken in response to conditions in the short-term money markets this morning."

-EPJ Newsdesk

No Change To Euro Interest Rate

The European Central Bank has announced that it has left its key interest rate unchanged at 4.25%.

ECB President Jean-Claude Trichet conceded that the economy has slowed but reiterated that a spike in inflation must be avoided.

"The latest economic data confirms a weakening of real GDP growth in mid-08; this reflects partly an expected economic reaction to strong growth seen in the first quarter as well as dampening economic effects including direct and indirect effects from high commodity prices," Trichet said.

"In this environment it remains imperative that we avoid broad based second round effects in price and wage setting. In full accordance with our mandate we emphasise that maintaining price stability in the medium term is our primary objective," he added.

The euro zone economy's weakness in the second and third quarters of this year has been anticipated by the European Central Bank, Trichet said. "We will have a progressive recovery" after the third quarter, he added.

Given the fact that the ECB is not cutting rates, it is pretty impossible to see the "progressive recovery" after the third quarter that Trichet expects. It's not going to happen.

ECB "Competes Agressively for the Criminal Currency Market"

London School of Economics Professor Willem H. Buiter delivered a very controversial paper at this weeks Jackson Hole Conference. More on his full paper shortly, but check this out. In a footnote to his paper, Buiter contends that the ECB "competes aggressively for the criminal currency market":

The existence of currency is, because of the anonymity it provides, a boon mainly to the grey and black economy and to the outright criminal fraternity, including those engaged in tax evasion, money laundering and terrorist financing. The Fed has reduced its subsidisation of such illegality and criminality by restricting its largest denomination currency note to $100. The ECB practices no such restraint and competes aggressively for the criminal currency market with €200 and €500 denomination notes. When challenged on this, the ECB informs one that this is because in Spain people like to make housing transactions in cash. I am sure they do.

While a very good case could be made that some of the items Buiter lists as criminal are simply cases of individuals protecting their privacy, I never before thought of the ECB competing for this business, but I guess they are. So when it comes between the US and the EU on this tiny spot on the privacy meter, you now know who is your friend and who is not.