Mish's Global Economic Trend Analysis

Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers
Germany Central Bank President Slams Debt Crisis Steps; Europe Goes All In; S&P Says Larger Europe Bailout Fund Could Weigh on Ratings
Barclays Capital Changes Stance, Now Sees Additional UK Quantitative Easing
Australian Mortgage Stress Climbs; Reflections on Obama's Streamlined Proposal to Fix US Housing
International Tensions Soar: Jamie Dimon, CEO of JP Morgan, Accuses Bank of Canada Governor Mark Carney of "Juvenile Delinquency"

Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers

Posted: 26 Sep 2011 05:36 PM PDT

The major story of the day is the leveraged EFSF is dead without a popular referendum and a new German constitution says Germany's top judge.

Please consider German turmoil over EU bail-outs as top judge calls for referendum

Germany's top judge has issued a blunt warning that no further fiscal powers may be surrendered to Europe without a new constitution and a popular referendum, vastly complicating plans to boost the EU's rescue machinery to €2 trillion (£1.7 trillion).

Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent.

"The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature (even with its powers to amend the constitution)," he said.

"There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit – which might be politically legitimate and desirable – then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people," he told newspaper Frankfurter Allgemeine.

The extraordinary interview comes just days before the Bundestag votes on a bill to revamp the EU's €440bn bail-out fund (EFSF), enabling it to purchase EMU bonds pre-emptively and recapitalise banks.

Carsten Schneider, finance spokesman for the Social Democrats, demanded that Chancellor Angela Merkel and finance minister Wolfgang Schäuble clarify their "true intentions " before the vote on Thursday.

"A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable," he said.

Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag's deputy president and finance chief for the Free Democrats (FDP) in the ruling coalition, expressed outrage over the secret plans.

"Unless the German finance minister can give an immediate assurance that there will be no leveraged formula, I will not vote for this law. We might as well dispense with months of negotiations if all this means is that the Bundestag will be circumvented and served cold left-overs," he said.

The accusation that German leaders are conspiring with EU officials to emasculate the Bundestag is highly sensitive, going to the core of the raging debate in recent months over EU encroachments on German democracy.

The German court has already killed eurobonds. Now, if the top judge's call stands, leveraged EFSF just bit the dust as well.

Clearly the German court has had enough of Chancellor Angela Merkel, her cronies, and all the politicians who want to rob German taxpayers for their own agenda.

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

Germany Central Bank President Slams Debt Crisis Steps; Europe Goes All In; S&P Says Larger Europe Bailout Fund Could Weigh on Ratings

Posted: 26 Sep 2011 02:03 PM PDT

The open feud between the German Central Bank and the ECB widened significantly. Making matters even worse Chancellor Angela Merkel is also in an open feud with the Bundesbank.

Please consider, Top German central banker slams debt crisis steps

Germany's top central banker warns that efforts to halt the debt crisis in Europe could give countries incentives to run up deficits in the future.

The statements by Bundesbank president Jens Weidmann underline his differences with German Chancellor Angela Merkel and his fellow board members of the European Central Bank.

Weekend meetings of global financial leaders in Washington raised hopes of a change in strategy, with officials indicating that would focus on further boosting the firepower of the euro440 billion ($595 billion) rescue fund -- perhaps by allowing it to tap loans from the European Central Bank or otherwise leveraging its lending capacity.

Hopes for such a move boosted European stock markets on Monday, with German and French bank shares rising strongly.

However, ahead of a parliamentary vote Thursday on changes to the fund that eurozone leaders already agreed to in July, Berlin was keen to underline its attachment to its often-criticized step-by-step approach.

When asked in Washington whether he supported the idea of leveraging the rescue fund, German Finance Minister Wolfgang Schaeuble said: "Of course we will use the EFSF in the most efficient way possible."

Some in Chancellor Angela Merkel's center-right coalition already find the beefing up of the EFSF by giving it new powers hard to swallow, and anything beyond that could be a hard sell among its lawmakers.

Christian Lindner, the general secretary of the Free Democrats -- Merkel's junior coalition partner -- called on the chancellor to provide clarity and stressed that his party opposes allowing the fund to tap ECB loans.

The rescue measures were criticized once again by Germany's top central banker, Bundesbank head Jens Weidmann.

Weidmann said in a speech in Washington that the package of support measures for indebted governments "weakens the underlying principle of European monetary union that each country has to bear the full consequences of its own fiscal policy."

Efforts to shield governments from the consequences of their behavior means "we risk seeking the propensity for excessive deficits rise even further in the future."

Weidmann was until earlier this year Merkel's economic adviser, but since his appointment at the Bundesbank he has defended its traditional strict approach to monetary and fiscal policy.

Merkel has been caught between criticism from abroad for doing too little and from supporters at home who fear she is putting taxpayer money at risk. She went on German television Sunday night to defend her step-by-step tackling of the crisis.

She warned of the dangers a radical restructuring of Greek debt might bring at this stage.

"Lehman Brothers was allowed to go bust, and then the world was surprised that it fell into a deep crisis," Merkel said on ARD television. "What we have to learn is that we can only take steps we can really control."The rescue measures were criticized once again by Germany's top central banker, Bundesbank head Jens Weidmann.

Europe Goes All In

Peter Tchir of TF Market Advisors writes EU Goes From Monetary Union To Suicide Pact

As alleged details are leaked about an alleged proposal to leverage the EFSF all I can do is cringe. I'm waiting for some actual details, but as far as I can tell, Europe is attempting go all in. It is going to make leveraged bets on itself. If it doesn't work, the senior debt holders will own Europe if the BRICs buy the senior tranche and will end in a fast and furious death spiral if the senior tranche is owned by the ECB or European banks. We may get a lift on the news. We are trying to rally on the back of the news right now. But if this plan goes ahead, even the slightest cold in the future will turn into the plague. There will be no strong countries left as they will have tied themselves to the PIIGS anchor with a Gordion Knot that will never be untied in time.

Haven't they seen what happens to SIV's? Are the so confident in an economic recovery that will risk it all at this time? If they get it wrong and it doesn't work, there will be no fall back.

All I can hope is they are tired and too happy with the late night "solution" and the markets initial reaction that after the initial euphoria, cooler heads, like Schaeuble, will prevail. This has the makings of an Epic disaster in the making.

Schaeuble a "Cool Head" or a "Clueless Minister"?

I agree with Tchir this has the makings of an epic disaster. However, I disagree that Schaeuble is a "cooler head".

Please consider this snip from a Eurointelligence Daily Briefing, September 22, 2011.

Mass circulation tabloid Bild launches a campaign against Wolfgang Schäuble accusing him that he has been systematically misleading the German public on Greece and the euro crisis in the 18 months. In a scathing article it presents a long list with dates and contradictory statements on the need for a rescue program for Greece and the conditions attached to it.

Bild reporter Rolf Kleine adds to that a column under the title "Minister Clueless". "Whether the billions for Greece will be sufficient to save the country from collapsing, whether the Euro will remain stable – all that is decided by the markets, not by the German finance minister. He can tell the people whatever he wants – and also the opposite".

Please consider these Schäuble Flip-Flops courtesy of Google Translate.

21st December 2009
"We Germans can not pay for Greece's problems."

16th March 2010
"Greece has not asked for help, this is why there is no decision, and there is no decision had been taken."

11th April 2010
Four weeks later, on 11 April, he decided to finance the first Euro-Greece-aid package of € 30 billion.

16th April 2010
"We still believe that the Greeks are on the right track and that they may end up not even have to take the help."

22nd April 2010
"The country has had no problems in financing themselves this week in the markets. The agreement on the assistance in an emergency has been a purely preventive measure."

Greece officially asked for help April 23. In early May a rescue package of 110 billion € was in the works.

27th April 2010
"Rescheduling not an issue"

May 2010
The 110 billion euros in the first aid package "ceiling" is a one-time emergency assistance.

21st March 2011
The EU finance ministers decide on a rescue fund with legendary 750 billion euros (ESM) - with the voice Schäuble.

6th June 2011
Greece will receive a new package with more than 100 billion €. Schäuble said: Otherwise, "we face the real risk of the first disordered state of insolvency within the euro zone."

AND WHAT'S NEXT?
Previously, the Finance Minister is on his no to common bonds of all euro countries, the so-called Euro-bonds remained. But perhaps he thinks it is so different again next week .

Unless the definition of "cool head" encompasses "clueless political hacks", Schäuble is not a "cool head".

Larger Europe Bailout Fund Could Weigh on Ratings

Reuters reports Larger Europe Bailout Fund Could Weigh on Ratings

David Beers, the head of S&P's sovereign rating group, said it is still too soon to know how European policymakers will boost the European Financial Stability Facility, how effective that will be and its possible credit implications.

But he said the various alternatives could have "potential credit implications in different ways," including for leading euro zone countries such as France and Germany.

European officials, seeking more resources to protect the euro zone against fallout from its debt crisis, are considering ways to increase the impact of the 440 billion-euro fund by leveraging, although it remains unclear exactly how.

Beers said it was evident, however, that policymakers cannot leverage the EFSF without limits.

"There is some recognition in the euro zone that there is no cheap, risk-free leveraging options for the EFSF any more," Beers told Reuters.

Some analysts say at least 2 trillion euros would be needed to safeguard Italy and Spain if the Greek crisis spreads.

"We're getting to a point where the guarantee approach of the sort that the EFSF highlights is running out of road." Beers said in an interview late on Saturday.

Today, fueled by rumors of still more bailouts, the market rallied for umpteenth time, as if use of leverage to bail out Greece is a good idea. It isn't and just a week ago, the ECB was against the idea. Desperation has set in. If the ECB agrees to do this, Peter Tchir is correct: Europe essentially went "All In".

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

Barclays Capital Changes Stance, Now Sees Additional UK Quantitative Easing

Posted: 26 Sep 2011 10:03 AM PDT

Damn the price inflation, the massive UK housing bubble, and the fact that previous rounds of Quantitative Easing did not do the US or UK any good, expect more QE says Barclays Capital Research.

Via Email, Barclays says Monetary Policy Committee set for November QE boost

We are changing our UK monetary policy forecast, and now expect the MPC to announce an expansion of QE at its November meeting. We think additional asset purchases of £75bn will be announced within an overall additional facility of £150bn. As a consequence of this change, we have pushed back our forecast for the first rise in Bank Rate into 2013.

Why expect more QE?

The case for more QE is relatively straightforward. In the August Inflation Report the MPC's modal projection was for inflation to fall below target in the medium term, albeit with risks skewed slightly to the upside. This forecast was predicated on expectations of GDP growth of 0.8% q/q in Q3 (factoring in a strong rebound from an erratically depressed Q2) and 0.5% q/q in Q4. Growth in H2 now seems likely to be much weaker than this, however. We are expecting growth of just 0.2% q/q in each of Q3 and Q4, while the MPC itself has said the forward indicators for Q4 suggest growth could be zero. Mechanically, this implies that the degree of spare capacity in the economy will be higher for longer, and that without further monetary easing inflation is more likely to fall substantially below target in the medium term.

This forecast assessment is consistent with the message from the minutes of the September MPC meeting. Most MPC members appear to have become alarmed at the deterioration in the growth outlook, believing that the decision on monetary policy had become "finely balanced" and that it was "increasingly probable" that QE would have to be resumed. The consensus view in September seemed to be that a further deterioration in the outlook would mean that additional QE was warranted. The various demand and confidence indicators published since that meeting suggest the outlook has indeed deteriorated further.

Whatever the reason, more QE cannot possibly do the UK any good. It will not help growth or hiring any more than it did in the US, which is to say none.

In fact, global QE exacerbated a bubble in the stock market and commodities. Bernanke since abandoned QE in favor of "Operation Twist" and that policy has failed already as well.

Central bankers never learn on their own accord, from others, or from history.

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

Australian Mortgage Stress Climbs; Reflections on Obama's Streamlined Proposal to Fix US Housing

Posted: 26 Sep 2011 09:34 AM PDT

Bloomberg notes that Australian Mortgage Stress Climbs, Rental Vacancies Decline

A quarter of Australian homeowners are experiencing mortgage stress and rental vacancies remain "tight," driven by higher interest rates, rising costs and a shortage of rental properties in some cities.

The number of homeowners facing mortgage stress has jumped from 21 percent in March, mortgage insurance provider Genworth Financial Inc. said in its September Homebuyer Confidence Index, based on surveys conducted from July 30 to Aug. 5, and released today. Rental vacancies slipped to 1.8 percent from 1.9 percent in the previous month and below the equilibrium 3 percent rate, according to data from SQM Research Pty.

Australian homes cost 6.1 times gross annual household income, the highest among English-speaking nations, compared with 3 times in the U.S., Belleville, Illinois-based consulting company Demographia said in January.

Here is the link for the 7th Annual Demographia International Housing Affordability Survey cited by Bloomberg.

Additional information specific to Australia and New Zealand can be found at Performance Urban Planning

I list links for completeness. I do not agree with all positions stated by either organization.

What's Obama Up To?

Inquiring minds are reading an article on Ml-Implode by Patrick Pulatie. Please consider Analysis of Obama's Proposed Fannie/Freddie "Streamline Refi" Program.

The Real Objectives and Outcomes
As with any new government program, we must look beyond the obvious to determine what the real objectives and outcomes of a program are. With this program, we don't have to look far, because some objectives are readily admitted.

The report estimates that mortgage payments will fall by about $70 – $80 billion.. What this really means is that it is being undertaken as a "new stimulus" for the economy, under the disguise of mortgage refinancing.
Attempt to stabilize home values by refinancing to lower rates to keep people in homes. Finance underwater loans to avoid default. This will fail.
Make the GSE's more profitable through increased fees. GSE's receive upfront cash flow from $54b – $72b. Allow the GSE's to control more of the housing market.
Bondholders to pay bulk of the costs of the program. Nearly all gains to homeowners come at the expense of the bondholders. (Total bondholder costs not given.)

In the end, this program will have little or no effect upon solving the housing crisis. It does not address the core issues of the crisis, which is a lack of real income growth in the US, excessively inflated home values, people who cannot afford the homes that they have now, those who cannot afford to buy a home at today's prices, or the lack of private investors in the housing market.

Looking Beyond the Obvious

Pulatie wants to look beyond the obvious.

However, it's obvious is this is an election ploy, and a case can be made there is little reason to look beyond the obvious other than to determine exact winners and losers.

Given there is no agreed specifics as to exactly how the program would work, it is difficult to ascertain who the winners are. However, losers are easy enough to ascertain (US Taxpayers).

Will bondholders lose? What bondholders?

If banks get to dump crappy mortgages on Fannie and Freddie for a lousy fee of .4%, banks will jump at the opportunity, as will bank bondholders.

Will Fannie and Freddie bondholders take a hit? That all depends on government guarantees. Regardless, taxpayers are 100% guaranteed to get screwed by the plan. The question is to what degree.

Until we have more specifics, it is tough to say whether any bondholders take a hit or not. I suspect they would not. If I am correct, then the losses borne by taxpayers will be all the greater.

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

International Tensions Soar: Jamie Dimon, CEO of JP Morgan, Accuses Bank of Canada Governor Mark Carney of "Juvenile Delinquency"

Posted: 26 Sep 2011 12:03 AM PDT

In case you mistakenly thought there was some semblance of a chance of international accord to address the global financial crisis, please consider Dimon in attack on Canada's bank chief

Jamie Dimon of JPMorgan Chase launched a tirade at Mark Carney, Bank of Canada governor, in a closed-door meeting in front of more than two dozen bankers and finance officials, underscoring mounting tensions between bankers and officials over financial regulation.

The atmosphere was so bad after the meeting that Lloyd Blankfein, chief executive of Goldman Sachs and head of the Financial Services Forum bankers' group which arranged the session, emailed the central banker to try to smooth relations, people familiar with the matter said.

On Sunday, 48 hours after the contretemps, Mr Carney delivered a speech to global bankers at the Institute of International Finance, warning them "it is hard to see how backsliding [on implementing new capital rules] would help" the global economy.

"If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon," he said.

Mr Dimon told Mr Carney that many of the rules discriminated against US banks and he was going to continue to use the phrase "anti-American", first used in a Financial Times interview this month, because it seemed to resonate with people who might be able to modify the reforms.

In his speech, Mr Carney said: "Authorities are increasingly hearing concerns about the pitch of the playing field for Basel III implementation. Everyone is claiming to be a boy scout while accusing others of juvenile delinquency."

He added: "However, neither merit badges nor detentions will be self-selected but, rather, determined by impartial peer review and mutual oversight."

Exclusive Response from JP Morgan

The dispute was over rules agreed by the Basel group of international regulators that would force all banks to hold 7 per cent core capital against risk-weighted assets. The biggest face an additional surcharge of up to 2.5 per cent.

Financial Times did not capture a response from Jamie Dimon but I managed to do so. Please consider this exclusive video straight from the closed door meeting at the Institute of International Finance.