Bernanke Hits Back at Fed Critics, Blames China

A bit tad late, this should have been clarified before QE2 was launched to calm BRIC’s and the World.

Federal Reserve Chairman Ben Bernanke hit back on Friday at critics of the U.S. central bank’s bond-buying program and issued a thinly veiled attack on China’s policy of keeping its currency on a leash. Bernanke, facing a chorus of protests about the asset-buying spree from within and outside the central bank, said a more vigorous U.S. economy was essential to fuel the global recovery and dismissed charges he was debasing the dollar.

“The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in a speech to a conference at the European Central Bank in Frankfurt. The Fed’s Nov. 3 decision to buy a further $600 billion in U.S. government debt with new money generated outrage among policymakers in many nations, who accused the United States of seeking to weaken the dollar to gain an export edge. German Finance Minister Wolfgang Schaeuble called the policy “clueless” while domestic critics have argued the policy could ignite inflation and fuel asset bubbles. Fed officials circled their wagons this week to defend the program. Two added their endorsement on Thursday, but another expressed opposition and a fourth said monetary policy should not play the main role in driving a stronger recovery. “Deficits and surpluses are generated by many countries’ behavior not a single currency,” Bernanke said in a later panel discussion with IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.

“It will be very difficult for exchange rates by themselves to restore the balance and so I think structural adjustments on both sides are necessary,” Bernanke said. Strauss-Kahn said he too recognised the difficulties involved but said global imbalances could not be tackled without “important changes in the relative values in the currencies.” “We need to move in that direction,” he said.

Addressing international criticism of the Fed’s action, Bernanke said much of the recent weakness of the dollar reflected an unwinding of the increases that were notched as investors fled to the safety of the greenback during the European sovereign debt crisis in the spring. Many emerging economies have worried that volatile investment inflows sparked by the dollar’s decline could be destabilizing—either fuelling inflation or asset bubbles. Bernanke said the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate was making the problems those countries face worse.

Meredith Whitney Plans to Launch Rival Rating Agency

Moody’s and S&P rating agencies have been absolutely late in rating the MBS, bonds, and corporate debt. We need an Angency independent of the Markets of  true valuations. Down with Moody’s!!! Meredith Whitney, a Wall Street analyst who shot to prominence with bearish calls on banks before the financial crisis, plans to set up a credit-rating agency to go head to head with Moody’s Investors Service and Standard & Poor’s. 

Ms Whitney said in an interview with the Financial Times that her new agency would use the same business model as established agencies, in which issuers of debt pay for ratings. She maintained that she would be able to manage potential conflicts of interest, saying: “If you run a good business and you have compliance in place, there should not be problems.”

Indeed, the huge amounts of debt financing and refinancing activity that has been going on this year in the capital markets, particularly in the US bond markets where interest rates are at record lows, have boosted revenues for the biggest rating agencies. Bond sales by companies with “junk” or “high yield” ratings, for example, are higher this year than they have ever been before. S&P, owned by media company McGraw-Hill (MHP)  34.99   had its highest earnings of the year in the last quarter, even though the third quarter is traditionally the quietest time of the year. “Growth is coming without the benefit of a recovery in the structured finance market and despite a decline in European issuance,” said Harold McGraw, chairman and chief executive of McGraw-Hill, last month. At Moody’s, the picture is similar.  For potential newcomers, such as Meredith Whitney’s company which is seeking approval from regulators to become a rating agency, it is difficult to compete against such established agencies. Fitch Ratings, for example, has been in the business for many years, but has remained in third place after S&P and Moody’s (MCO)  27.07 // throughout its existence. One of the key ways to break into the business is to get the backing of investors, a strategy that other potential newcomers, such as a ratings firm set up by Jules Kroll, are pursuing. If investors say they will only buy bonds rated by a certain company, then debt issuers have a reason to include those ratings when they sell bonds.

Ralph Daloisio, managing director at Natixis, a bond investor, says there are investors willing to buy bonds without ratings, but this would be a “very narrow market”. “Ratings have woven their way into the fabric of financial society and I don’t know how you can extract that,” said Mr Daloisio. In recent months, the many lawsuits that have been filed against the big rating agencies for their actions in the run-up to the financial crisis have also failed to dent their market share. Indeed, so far none of the legal procedures have resulted in the rating agencies being found liable for inaccurate ratings. However, with many new rules still being written, and litigation still working its way through the system, it is unclear exactly what profit margins will be in the future. “There are a lot of uncertainties in what the pipeline would be like and what any additional regulatory issues and compliance costs [will be],” said Mr McGraw.

China Central Bank Hikes Banks’ Reserve Requirements

China ordered lenders on Friday to lock up more of their money with the central bank for the second time in two weeks, stepping up its battle to pull excess cash out of the economy before inflation has a chance to take off.  The People’s Bank of China said that it would increase banks’ required reserves by 50 basis points, its fifth such announcement this year. Including a temporary increase, the move takes required reserve ratios (RRR) to 18.5 percent for big banks, a record high. The increase was intended “to strengthen liquidity management and appropriately control money and credit issuance,” the central bank said in a statement on its website. The move was not a surprise and, in fact, could be something of a relief for investors who had expected worse. It suggests China is intent to manage price pressures through withdrawing liquidity from the system. China raised interest rates on Oct 19 — the first time in nearly three years — and most analysts still expect 2-4 more increases by the end of next year. Increasing reserve requirements is a more direct approach to absorbing the excess liquidity that has been spurring Chinese inflation.

The 50 basis point RRR increase, which takes effect on Nov.29, should lock up about 350 billion yuan that banks could otherwise lend. Along with playing a key role in the fight against inflation, policy tightening also signals the government’s confidence that the world’s second-largest economy is on solid ground, even as the United States and European recoveries remain fragile. In addition to increasing required reserves and interest rates, China has also issued strict orders to banks to curtail their lending. “China tightening reserve requirements is just part of the arsenal that they will use and we would expect to see more of these measures coming through,” said Michael Lewis, global head of commodities research at Deutsche Bank in London. Chinese policy makers have blamed monetary easing in the United States for propelling cash towards emerging markets, fuelling commodity price rises and inflation risks. But most of the excess cash that lies at the root of inflation in China has domestic origins. To power the economy through the global financial crisis, Beijing called on banks to lend more aggressively. Banks responded by unleashing an unprecedented credit surge and the government has been slow to mop up the money still cascading over the economy.

Food prices have driven Chinese inflation. Accounting for about a third of the consumer price index, food costs rose 10.1 percent in the year to October, while non-food inflation crept up just 1.6 percent. Overall consumer price inflation reached 4.4 percent in October from a year earlier and many analysts expect that the November figure could breach 5 percent. The government’s target was to keep inflation at a full-year average of 3 percent, but that is increasingly looking in doubt.

Ireland Pressured on Bailout; Unsure of Amount

It’s inevitable, Ireland will be owned by England once again. IMF, ECB, and England will force the bailout on Ireland to shore up Irish banks once touted by the Finance Minister as the “Cheapest Bailout in the World” He put his foot in his mouth on that one Ouch. But people are forgetting California and other US states debt issues, Which I believe will inevitably be the next shoe to drop and deemed most catastrophic.

Ireland came under renewed pressure from euro zone partners on Friday to accept quick support for its banks, but Dublin said it remained unclear for now how much its battered financial institutions required.  A day after Ireland’s central bank chief acknowledged the country needed a loan running into tens of billions of euros to shore up banks that have grown dependent on ECB funds, the euro edged up on expectations of an aid deal and Irish bond spreads narrowed. Reflecting concerns among other euro zone periphery countries that a delay in cleaning up Ireland’s financial mess could sow contagion in the 16-nation single currency bloc, Greece’s finance minister pressed Dublin to move fast.

“We are now at a point where decisions have to be taken,” George Papaconstantinou told a European banking congress in Frankfurt. “Time is of the essence.” Irish community minister Pat Carey said the government would publish the details of its four-year fiscal plan to save 15 billion euros early next week, before a Nov. 25 by-election which threatens to cut the already razor-thin parliamentary majority of unpopular Prime Minister Brian Cowen. But Carey said it was impossible to say how much aid Ireland would need until a joint mission of the European Commission, European Central Bank and International Monetary Fund, which arrived in Dublin on Thursday, had gotten to grips with the state of the banks. “Until such a time as the IMF and others have examined how critical the situation in the banks is, I think it would be impossible to say how much would be required,” he said. Banks in Ireland have been largely shut out of market lending due to concerns about their solvency. They are almost entirely reliant on funding from the ECB, which reached 130 billion euros by end-October, plus an extra 35 billion euros from the Irish central bank.

Allied Irish, the hardest hit listed Irish bank, is expected to give a trading update later on Friday which will be closely scrutinized for signs of any rise in retail deposit withdrawals. EU sources have told Reuters Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

Euro Gains, Spreads Narrow Dublin’s borrowing costs have rocketed since late October as concerns about the banks’ swelling liabilities and a German-led drive to create a system for restructuring stricken euro zone state debts unsettled investors. Markets settled down in recent days after it became clear Ireland was open to financial aid. On Friday, the euro pushed up to $1.37 and the risk premium on Irish 10-year bonds edged down to 5.5 percentage points over German benchmark Bunds. The bond spreads of other financially weak euro countries like Greece and Portugal also fell. “There is a degree of calm on anticipation of a near-term resolution for the Irish banks, which has fed to renewed risk-taking and a relief rally for the euro which could potentially rise to $1.40,” said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. Still, aid talks could drag out if Dublin and the EU are unable to agree on the conditions attached to financial assistance that is expected to come from a 60 billion euro fund set up by the 27-nation bloc in May following a joint EU/IMF rescue for Greece.

Irish Finance Minister Brian Lenihan has insisted the IMF and EU will not have any input into Ireland’s budgetary measures, even though EU rules stipulate that assistance programs can only be granted to governments that sign a strict fiscal conditionality agreement. Ireland’s rock-bottom 12.5 percent corporation tax is shaping up as a major bone of contention, with euro zone neighbors pressing Ireland to raise it as part of any deal and Dublin resisting, arguing it is crucial for foreign investment.

Irish Deputy Prime Minister Mary Coughlan told parliament on Thursday that the corporate tax rate, which countries like Britain and Germany have long viewed as a form of unfair competition, was “non-negotiable.” The government is under severe pressure from the media and an opposition which smells blood. In an exchange on Thursday night on RTE radio, an opposition MP from the Labour Party screamed at community minister Carey for ruining the country. “You ought to be ashamed to show your face in this studio after you have brought our country to penury tonight and after the damage you have brought to people’s livelihood,” the MP Pat Rabbitte said. “You have destroyed this economy. It’s about time you went because you can do no more damage to this country.”