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Archive for June, 2008

Complacency triumphant:

The pollsters for John McCain’s campaign sent out a memo challenging the findings of a poll conducted by the Los Angeles Times and Bloomberg. Hundreds of polls are released during a typical campaign without such a public objection. One finding in particular caught their attention. According to the L.A. Times, 22 percent of those surveyed identified themselves as Republicans, 39 percent as Democrats, and 27 percent as independents. The party identification in this poll, argued McCain’s pollsters, “is greatly out of line with what most other surveys are reporting.”

They’re right. And that fact probably helps explain why the L.A. Times/Bloomberg poll has Barack Obama beating John McCain by 15 points (in a field including Nader and Barr)–a much larger margin than most other respected polls. (The Gallup daily tracking poll, the McCain campaign eagerly points out, has McCain down just 3 points.)

McCain’s pollsters point to the findings of other surveys on party identification. That they would do this suggests just how damaged the Republican party brand is heading into the 2008 general election. Although the L.A. Times/Bloomberg poll shows a larger gap between Democrats and Republicans than all others–+17 for Democrats–the news for Republicans is uniformly bad.

Among the numbers the McCain campaign highlighted: AP/Ipsos’s +14 for Democrats; CBS News/New York Times‘s +14 for Democrats; and Democracy Corps’s +12 for Democrats. The average advantage for Democrats in the ten surveys the McCain campaign cited was 9.3 points. So Republicans are clearly at a significant disadvantage.

The conventional wisdom, adopted and internalized by many on the McCain campaign, is that McCain must move to the center to appeal to independents. So that’s largely what he’s done. Immediately after McCain became the de facto nominee, he toured the country touting his biography. Shortly after that he spent a week on a trip informally dubbed the “Places Republicans Don’t Go” tour. Not long afterwards, he traveled to Washington and Oregon talking about global warming. He has launched radio ads explicitly targeting Hispanics and last month held secret meetings with Hispanic and gay leaders. Twice in recent weeks, McCain has participated in virtual town halls targeting disaffected Democrats and moderates.

[…]

“Where are they going to go?” asks one McCain adviser, expressing a sentiment I’ve heard from several others.

One possibility: nowhere. Unmotivated by a candidate who would rather talk about global warming than gay marriage, conservatives might simply stay home. This lack of enthusiasm for McCain among conservatives was evident in the Washington Post/ABC News poll taken in mid-June. Ninety-one percent of those who identified themselves as Obama supporters say they are “enthusiastic” about their candidate; 54 percent say they are “very enthusiastic.” Seventy-three percent of self-identified McCain supporters say they are “enthusiastic” about his candidacy; but only 17 percent say they are “very enthusiastic.” More ominous, while almost half of the liberals surveyed are enthusiastic about Obama, only 13 percent of conservatives are enthusiastic about McCain.

Republican pollster David Winston believes that McCain can close this enthusiasm gap by campaigning on issues where there are sharp differences between the candidates. “We are still a center-right country,” says Winston. “And voters will still prefer a center-right candidate to a liberal one.” …

All surveys are showing declining Republican affiliation over their time series. Whether it’s Dems +8 or Dems +15, Republican party ID has collapsed over the past 12 months.

At this point in the horse race, the guy arguing against the data trends is the guy who’s losing.

Oil prices aren’t going anywhere until Asian economies stop subsidizing oil consumption, which incidentally would cripple the Asian export advantage by forcing businesses to pay the full cost of energy. Therefore, inflation-driven discontent against the incumbent administration won’t subside in the near term.

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Limits Put on Some Oil Contracts On ICE Amid Outcry Over Prices
By IAN TALLEY
June 17, 2008

WASHINGTON — The U.S. commodity futures regulator Tuesday said ICE
Futures Europe has agreed to make permanent position and
accountability limits for some of its U.S.-traded crude contracts,
subjecting itself to the same regulatory oversight as its New York
based counterpart.

Following intense scrutiny and censure by Congress over skyrocketing
oil prices, the U.S. Commodity Futures Trading Commission also said it
would require daily large trader reports, and similar position and
accountability limits from other foreign exchanges.

Many in Congress have criticized the agency for not doing enough to
rein in what they believe is rampant speculation contributing to
record energy prices and have pointed the finger in particular at
trading on IntercontinentalExchange’s ICE Futures Europe.

ICE and other foreign exchanges have been exempt from the many of the
rules that govern the New York Mercantile Exchange, which critics
charge has attracted a host of financial investors intent on pushing
prices higher. The new agreement, made in consultation with the U.K.’s
Financial Services Authority, will subject ICE to the same oversight
as Nymex.

“This combination of enhanced information data and additional market
controls will help the CFTC in its surveillance of its regulated
domestic exchanges,” while preserving the integrity of its
cross-border cooperation with other regulators, acting CFTC Chairman
Walter Lukken said in prepared testimony.

“We have not found a smoking gun… [but] we’re definitely taking
constructive steps to make sure the markets are working correctly, to
make sure there is not excessive speculation driving the markets,” Mr.
Lukken said.

Specifically, the agreement will require trader reports on positions
in the benchmark U.S. crude contract — the West Texas Intermediate
contract — traded on the ICE Futures exchange. The contract is linked
to the WTI contract on the regulated New York Mercantile Exchange.

ICE has 120 days to implement the new reporting requirements.

On the Nymex, where the majority of oil futures are traded, most
traders face accountability levels and position limits on their
positions in crude oil and other commodities. Accountability levels
are guidelines for trading in all futures contracts, while position
limits are hard-and-fast caps on the number of front-month contracts a
trader may hold in the last three days before the contract expires.

Traditionally, the U.K.’s FSA has had informal accountability levels
of 10,000 contracts in West Texas Intermediate crude, but no position
limits, an ICE spokeswoman said. The new CFTC rules will make ICE oil
trading consistent with practices on Nymex: a 3,000 contract position
limit in the last three days of trading, and a 20,000-contract
accountability level.

Lukken said the same oversight requirements would apply to the Dubai
Mercantile Exchange if it were to also offer the WTI contract.

The Nymex and DME have been mulling offering such a contract and will
decide in the next few months, said Nymex chief executive James
Newsome.

ICE Warns Oversight Won’t Lower Prices

The CFTC will incorporate the ICE data into its commitment of traders
report, a weekly report categorizing positions held by speculators and
companies that use futures contract to hedge against operations in the
physical energy market.

ICE said it would comply with the new regulations but warned tighter
oversight won’t lower oil prices.

“With a mere 15% market share of global WTI, on a futures equivalent
basis, we feel it is highly unlikely that the ICE Futures Europe’s WTI
market is the primary driver of WTI prices,” Charles Vice, ICE
president, told a special Senate committee exploring exploring
oversight and resources for the CFTC.

“Therefore, any expectation that WTI crude oil prices will fall as a
result of increased restrictions on this relatively small portion of
that market are likely to go unmet,” he said.

Jennifer Gordon, an analyst at Deutsche Bank in New York said the
greater regulatory oversight was driving volatility and leading to
less liquidity in the oil markets. “So whatever the CFTC is doing, it
is certainly scaring away the marginal player,” she said. Ms. Gordon
noted that the CFTC move was “adding to the bearish tone on crude,” in
Tuesday trading.

Oil prices climbed within shouting distance of $140 a barrel on Monday
before slipping towards $134.03 on Tuesday, down 58 cents. Prices are
still up about 40% so far this year.

The CFTC action follows rebuke by Congress, which has ratcheted up its
efforts to regulate oil-markets trading. Several of the most powerful
U.S. senators and representatives have introduced proposals that would
give more money and power to the agency.

In the past several weeks, the CFTC has announced a raft of
investigations and new initiatives targeting speculation, the role of
financial participants in current prices and the potential for market
manipulation. Mr. Lukken said the agency couldn’t rule out that market
manipulation was going on in the commodity markets.

The agency disclosed in late May that it is conducting a broad
investigation into practices surrounding the purchase, transportation,
storage and trading of crude oil and related derivative contracts.

Mr. Lukken said the agency was studying the impact of swaps deals and
index trading in the commodity markets and would report back to
Congress by Sept. 15.

The agency said the massive increase in commodity trading, the growing
complexity of the market and an aging CFTC workforce meant that it was
just about able to maintain a business status quo.

“This agency’s lack of funding over the course of many years has had a
negative impact on our staffing situation, rendering it unsustainable
for the long run,” Mr. Lukken said.

“Given our staffing numbers, the agency is working beyond its steady
state capacity and is unable to sustain the current situation for much
longer without being forced to make…choices about which critical
projects should be completed and which ones will be delayed,” the
acting chairman said in his testimony.

The agency is now requesting a 20% rise in its funding for the next
fiscal year to $157 million, from $130 million previously requested.

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From
June 13, 2008

Vietnam on brink of Thai baht-style currency crisis of 1997

Vietnam, until recently a poster child among emerging economies, is on the brink of a currency collapse, which would mirror the rout of the Thai baht that sparked the Asian crisis in 1997.

This week the State Bank of Vietnam effectively devalued the dong 2 per cent against the dollar, a move that analysts said was designed to head off a speculative attack on the embattled currency.

The move highlighted concerns that Vietnam, where consumer price inflation is running at more than 25 per cent, is poised to suffer an exodus of foreign-controlled capital.

The nation’s benchmark equities index has lost 60 per cent of its value since January, making it the world’s worst performing stock market. Vietnam’s trade deficit for the year to May, at $14.4 billion (£7.4 billion), exceeds the $12.4 billion shortfall for 2007.

Claire Innes, at Global Insight, said: “The weakening of the currency is principally aimed at preventing speculative attacks.”

Matthew Hildebrandt, an economist at JP Morgan, said the move “will embolden the view that Vietnam is on the verge of a [balance of payments] crisis and larger devaluation.”

On the streets of Vietnam’s cities, there has been growing disquiet over the fate of the dong. Vietnam’s black-market currency exchange rate has reportedly jumped to a record high of more than 18,000 dong to the dollar – above last week’s official rate of 16,268.

Sherman Chan, at Moody’s economy.com, said: “A sense of déja vu and fears of sky-rocketing inflation are causing individuals and merchants to hoard rice, cement and steel, a return to old habits formed back when annual inflation exceeded 60 per cent.”

She added that inflationary pressures has prompted a stampede into gold: “The price of gold has tended to be a reliable proxy for the public’s assessment of the Government’s ability to stabilize the economy. Gold’s price in recent months underscores their stunning lack of confidence.”

The situation underscores the sharp reversal of sentiment over the Vietnamese economy, which, until last year, was among the fastest growing in Asia. In March 2007, the combined value of stocks on the Ho Chi Minh City and Hanoi stock exchanges stood at about $29 billion – up from less than $1 billion in 2005.

Economists say that a recent suggestion by the Vietnamese Government that it does not have sufficient foreign reserves to fend off an attack from speculators, who may bet on the dong suffering a sudden and sharp drop, was ill-timed.

Ms Chan said: “The bitter lessons of the Thais and Indonesians in 1997 are clear: even $22 billion can be used up very quickly when the currency is under heavy pressure from determined and well-financed speculators.

“The only way to regain credibility is by employing serious tools to attack the roots of the problem, which are an overheating economy and excessive inflation.”

She added: “To prevent a currency and balance of payments crisis, it is necessary that the Government take a tough tightening stance. This could dampen growth in the near term but the benefits outweigh the downside, as it would take an extended period for an economy to recover from a major crisis.”

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======================================================================
country; nominal interest rate; date; official CPI; last update; real interest rate
======================================================================
China 7.47% 06/13/08 7.70% 05/31/08 -0.23%
Hong Kong 3.50% 06/13/08 5.40% 04/30/08 -1.90%
India 8.00% 06/11/08 8.75% 05/31/08 -0.75%
Indonesia 8.50% 06/13/08 10.38% 05/31/08 -1.88%
Japan 0.50% 06/13/08 0.80% 04/30/08 -0.30%
Malaysia 3.50% 06/12/08 3.00% 04/30/08 0.50%
Pakistan 12.00% 05/23/08 19.27% 05/31/08 -7.27%
Philippines 5.25% 06/05/08 9.60% 05/31/08 -4.35%
South Korea 5.00% 06/30/08 4.88% 05/31/08 0.12%

Sri Lanka 10.50% 06/06/08 26.20% 05/31/08 -15.70%
Taiwan 3.50% 03/28/08 3.71% 05/31/08 -0.21%
Thailand 3.25% 05/21/08 7.60% 05/31/08 -4.35%
Vietnam 14.00% 06/11/08 25.20% 05/31/08 -11.20%
==============================

========================================

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on today’s seismic Treasury selloff:

“The point is that the world was long Treasury, and we can see how they’ve been suckered.”

In other news, more insanity from the federales, who think they can permanently reduce commodities prices by shoving out leveraged players.

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Didn’t get this memo. No sir.

Fetch your tin helmets once again. The European Central Bank is opting for a monetary purge. So too is the US Federal Reserve, now ruled from Dallas.

Über-hawks and Cromwellians have gained the upper hand at the great fortress banks. Whether or not they admit it, both are embarked on policies that must lead to retrenchment across the Atlantic world.

The City mood turned wicked as the full import of this policy switch sank in last week. On Wall Street, the Dow’s 396-point dive on high volume late Friday had an ugly feel.

“There is now the distinct possibility of a simultaneous sell-off in global bonds, equities and commodities,” said Jonathan Wilmot from Credit Suisse.

I dunno. I saw Lehman almost die again, and we all knew that the Fed was ready to fire a paper fusillade in the hole.

Trichet’s hawkishness is not in doubt. Bernanke’s is. Spain and Ireland do not a dovish majority make.

Bernanke’s hawkishness is in doubt.

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Thomas Palley, Open Society Institute pontificator emeritus cum DC-cocktail laude, mocks himself best when he’s most honest. As do most political people.

Defending the Bernanke Fed

Filed under: U.S. Policy, Uncategorized — Administrator @ 6:37 am

Federal Reserve Chairman Ben Bernanke has recently been on the receiving end of significant criticism for recent monetary policy. One critique can be labeled the American conservative critique, and is associated with the Wall Street Journal. The other can be termed the European critique, and is associated with prominent European Economist and Financial Times contributor, Willem Buiter.

Brought up on the intellectual ideas of Milton Friedman, American conservatives view inflation as the greatest economic threat and believe control of inflation should be the Fed’s primary job. In their eyes the Bernanke Fed has dangerously ignored emerging inflation dangers, and that policy failure risks a return to the disruptive stagflation of the 1970s.

Both argue the Fed has engaged in excessive monetary easing, cutting interest rates too much and ignoring the perils of inflation. Their criticisms raise core questions about the conduct of policy that warrant a response.

At least he didn’t call us “liquidationists.” Generous.

Rather than cutting interest rates as steeply as the Fed has, American conservatives maintain the proper way to address the financial crisis triggered by the deflating house price bubble is to re-capitalize the financial system.

Correct.

This explains the efforts of Treasury Secretary Paulson to reach out to foreign investors in places like Abu Dhabi. The logic is that foreign investors are sitting on mountains of liquidity, and they can therefore re-capitalize the system without recourse to lower interest rates that supposedly risk a return of ‘70’s style inflation.

“Supposedly.

The European critique of the Fed is slightly different, and is that the Fed has gone about responding to the financial crisis in the wrong way. The European view is that the crisis constitutes a massive liquidity crisis, and as such the Fed should have responded by making liquidity available without lowering rates. That is the course European Central Bank has taken, holding the line on its policy interest rate but making massive quantities of liquidity available to Euro zone banks.

In other words, the Buiter critique advocates one set of interest rates for banks, and a very different one for individuals, without regard to respective credit risk. Presumably, there would be no arbitrage between these two bifurcated markets. Presumably, liquidity provisions to other banks–“inflation by other means”–would both 1) save the banks, and 2) not institutionalize higher prices on the tabs of the people who didn’t take the stupid risks.

Never made much sense to me either. [I used to like Buiter because he was the only person who trashed Bernanke way back in the day. Unfortunately his “lender of last resort” bailout loophole was an unforgivable leap of illogic, and while formally very different from the Bank of Japan’s disastrous early-1990’s bailout, was functionally indistinguishable.]

According to the European critique the Fed should have done the same. Thus, the Fed’s new Term Securities Lending Facility that makes liquidity available to investment banks was the right move. However, there was no need for the accompanying sharp interest rate reductions given the inflation outlook. By lowering rates, the European view asserts the Fed has raised the risks of a return of significantly higher persistent inflation. Additionally, lowering rates in the current setting has damaged the Fed’s anti-inflation credibility and aggravated moral hazard in investing practices.

The problem with the American conservative critique is that inflation today is not what it used to be.

It’s different this time.

1970s inflation was rooted in a price – wage spiral in which price increases were matched by nominal wage increases. However, that spiral mechanism no longer exists because workers lack the power to protect themselves. The combination of globalization, the erosion of job security, and the evisceration of unions means that workers are unable to force matching wage increases.

DC establishment liberal: “Inflation is okay now, because workers have to eat all costs themselves.” As if workers will just sit back and take this? As if they can’t read these internet posts, which presume weakness, ignorance and stupidity on the part of American workers?

The problem with the European critique is it over-looks the scale of the demand shock the U.S. economy has received. Moreover, that demand shock is on-going. Falling house prices and the souring of hundreds of billions of dollars of mortgages has caused the financial crisis. However, in addition, falling house prices have wiped out hundreds of billions of household wealth. That in turn is weakening demand as consumer spending slows in response to lower household wealth.

Different. This. Time.

Countering this negative demand shock is the principal rationale for the Fed’s decision to lower interest rates. Whereas Europe has been impacted by the financial crisis, it has not experienced an equivalent demand shock. That explains the difference in policy responses between the Fed and the European Central Bank, and it explains why the European critique is off mark.

The bottom line is that current criticism of the Bernanke Fed is unjustified. Whereas the Fed was slow to respond to the crisis as it began unfolding in the summer of 2007, it has now caught up and the stance of policy seems right. Liquidity has been made available to the financial system. Low interest rates are countering the demand shock. And the Fed has signaled its awareness of inflationary dangers by speaking to the problem of exchange rates and indicating it may hold off from further rate cuts. The only failing is that is that the Fed has not been imaginative or daring enough in its engagement with financial regulatory reform.

Copyright Thomas I. Palley

The bottom line is, DC policy emerati are profoundly ignorant, sycophantic, and irresponsible people.

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