Mish's Global Economic Trend Analysis

University of California Economist Bradford DeLong is Blind: "I Don’t See Any Argument Against QE3"
EU Pledges to Support Banks Failing Stress Tests, Rumored to Have Purchased Italian Government Bonds
Cardiac Arrest; Italy and Spain Close to the Abyss; EU Commissioner Seeks to Prohibit Agencies from Rating Debt of Countries in Rescue Programs

University of California Economist Bradford DeLong is Blind: "I Don’t See Any Argument Against QE3"

Posted: 12 Jul 2011 04:06 PM PDT

Bloomberg reports Federal Reserve Needs QE3 to Boost Economic Growth, Berkeley's DeLong Says

The Federal Reserve should engage in another round of quantitative easing as growth in the U.S. economy remains slow and inflation concern remains low, according to Bradford DeLong of the University of California at Berkeley.

"I don't see any argument against QE3," Delong said during an interview on Bloomberg Television's "Surveillance Midday" with Tom Keene. "The worry is always that it will destabilize inflation expectations, that they'll lose their anchor, and yet when you look out as far as you can at the prices of the TIPS and of the 30-year Treasuries, you see no sign at all that there's been any loss of confidence that the Fed will keep inflation under control."

DeLong is Blind

The only way you cannot see any arguments against QE3 is if you are blind.

For starters, people on fixed income have been getting hammered. Food prices are up and so are energy bills and gasoline. Reported "inflation" is not up because the Fed does discounts food and energy prices.

I am not a big proponent of the rampant food inflation theory. However, for the first time in a long time, sale prices on food I buy is increasing.

Does Delong want gasoline prices at $6? We might see that on another round of QE. This view comes from a staunch deflationist (except I must point out I view inflation and deflation as a function of money supply and credit, not prices).

Regardless, 0% interest on CDs and savings accounts is hurting a lot of people. DeLong needs to read Hello Ben Bernanke, Meet "Stephanie"

One must also ask what good did QE2 do?

Banks did not increase lending, nor did businesses hire, nor did the housing market recover, nor did long-term interest rates drop. Those were the stated goals of QE2. I see 4 strikes. Delong cannot see that because he is blind.

What Delong suggests is so preposterous that it is hard for me to be polite. But polite I will be. The only way you cannot see any arguments against QE3 is if you are totally and completely blind.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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EU Pledges to Support Banks Failing Stress Tests, Rumored to Have Purchased Italian Government Bonds

Posted: 12 Jul 2011 10:17 AM PDT

The ECB bought Greek bonds in belief it would show the market it meant business. The market smashed that pitch to high heavens.

Nonetheless, Bloomberg reports Italian Bonds Snap Six-Day Drop on Speculation ECB Bought Country's Debt

Italian and Spanish bonds rose on speculation the European Central Bank bought the debt of the euro region's most-indebted nations to stabilize markets amid concern that the debt crisis is worsening.

Greek 10-year yields fell the most in almost two weeks while equivalent-maturity Spanish yields retreated from a euro- era record reached earlier. Italian bonds rose, with yields below 6 percent after breaching the level for the first time since 1997. The 27 European Union finance ministers continued meetings today after euro-region officials said late yesterday that they may revive bond buybacks to ease Greece's debt woes. An ECB press officer declined to comment on whether it bought so-called peripheral euro-region bonds today.

"The suspicion has to be that there has been some unofficial central bank activity this morning, be that the ECB, or Asian central banks or a combination of the two," said John Davies, a fixed-income strategist at WestLB AG in London. "The hurdles of the T-bill auctions from Italy, Greece and, to a lesser degree, Belgium, were overcome successfully."

Yields on 10-year Italian bonds declined for the first time in seven days, falling 12 basis points to 5.56 percent as of 4:33 p.m. in London. The yields climbed as high as 6.02 percent, widening the spread over German bunds to 318 basis points, a euro-era record. Spanish 10-year yields were 18 basis points lower at 5.85 percent, after surging to 6.31 percent, the most since 1997.

"Speculation of central bank involvement encouraged short positions in peripherals to be closed," said Peter Chatwell, a strategist at Credit Agricole Corporate & Investment Bank in London. "If the ECB were to announce an intention to buy, then it would have the same effect: shorts would scuttle to cover their positions."

Credit-default swaps on Greece surged 150 basis points to 2,453, signaling an 88 percent probability of default within five years, according to CMA prices in London, before settling at 2,324, up 21 basis points from yesterday.

Swaps on Ireland slid 15 basis points to 1,000 after reaching 1,086, Italy slipped 16 to 286 after rising to 343. Portugal dropped 89 basis points to 1,048 after rising to 1,187 and Spain reached 380 basis points before falling 29 to 320, according to CMA data.

EU Will Support Banks Failing Stress Tests

Market "support" does not end with government bond purchases. The Wall Street Journal reports EU Will Support Banks Failing Stress Tests

European Union governments committed at a meeting Tuesday to backstop banks that fail stress tests.

Ahead of the publication of financial-sector stress test results on Friday, officials said all vulnerable banks must recapitalize themselves, be recapitalized by their governments or restructure.

"These measures privilege private-sector solutions but also include a solid framework for the provision of government support in case of need, in line with state aid rules," according to a statement from the economic bloc's 27 finance ministers.

At the meeting, ministers said their governments either have action plans ready or would have them in time for publication of the test results, said Polish Finance Minister Jacek Rostowski. However, he added: "It's not the case that everything has to be in place ... although in the majority of countries most things are in place."

The EU Commission's internal market commissioner also put rating agencies on warning in comments following the meeting, saying that a proposal to increase regulatory oversight would come this November.

"I want to have transparency concerning their methods, particularly when they're rating countries," said Commissioner Michel Barnier. "You don't rate a country the same way you rate a business or a product."

Questions of the Day

Is support for banks and bond buying unlimited?

Buying government bonds failed before, and spectacularly at that, so why would it work now other than for a day or two as weak shorts get pushed out of the market?

For now, these actions have calmed the bond an equity markets. How long will that last?

For more on Commissioner Michel Barnier's preposterous rating plan to prohibit rating agencies from rating the debt of countries in rescue programs please see Cardiac Arrest; Italy and Spain Close to the Abyss; EU Commissioner Seeks to Prohibit Agencies from Rating Debt of Countries in Rescue Programs

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Cardiac Arrest; Italy and Spain Close to the Abyss; EU Commissioner Seeks to Prohibit Agencies from Rating Debt of Countries in Rescue Programs

Posted: 12 Jul 2011 12:31 AM PDT

In yet another step deeper into the theater of the politically absurd, Euro Intelligence reports EU competition commissioner Michel Barnier wants to prohibit rating debt of countries in EFSF rescue programs.

The degree of confusion and desperation among eurozone policymakers is reaching new heights. EU competition commissioner Michel Barnier wants to prohibit ratings for countries which are part of an EFSF rescue program, Frankfurter Allgemeine Zeitung reports. In a speech in Paris he argued that they enjoyed European solidarity and that they were under the watch of the EU and the IMF.

Barnier asked the Polish EU presidency to put the topic on the agenda of the next finance minister's meeting. All economists interrogated by the paper thought Barnier's proposal was absurd.

Cardiac Arrest

The actual lead to that Euro Intelligence report is "Hallo, anybody there? Eurozone about to suffer a cardiac arrest"

In the absence of a policy response, the eurozone's financial system may implode within a few days.

El Pais' front page story ran with the headline that Europe was close to the abyss. The paper writes in an editorial that Germany, the Netherland, Finland and Austria stood in the way towards a solution of the crisis, and accused politicians in these countries to react hysterically.

The translated El Pais article Italy and Spain are close to the abyss does not say anything you have not seen elsewhere. However, it is interesting to see mainstream newspapers discussing "the abyss".

For a recap of Monday's panic, please see