Thank goodness we don’t have Jean-Claude Trichet as governor of the Reserve Bank. He’s the po-faced President of the European Central Bank and last week he and his colleagues at the ECB left European interest rates, ridiculously, on hold. In the process he gave the banks a gratuitous clip around the ears and told them to “keep their composure”.
Woe is Europe. A few days later European leaders gathered at a mini-summit to try to come up with a co-ordinated response to the crisis and ended up in disarray, with the rich countries refusing to do anything that might bail out the increasingly poor ones like Iceland and Greece, only highlighting the fact that no one is in charge.
“Who is Mr Europe? What is his telephone number?” asked currency strategist with BNP Paribas, Hans Redeker.
“There is no such thing. We have a cancer eating at the system because even healthy companies cannot roll over their debts, yet the politicians still don’t understand the risk.”
Say what you like about the leadership in the United States, at least they have some. The US Treasury will soon be buying mortgage securities, and although there was an initial wobble on Congress on the matter, there is no question that Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke are in charge and that they at least have a plan.
True, they did let Lehman Brothers explode, which turned out to be a rather bigger bomb than they thought. It has been directly responsible for the tightening of credit conditions over the past few weeks and has set off a chain reaction that has led to Paulson’s TARP measures and an increase in Bernanke’s TAF and is threatening to bring whole nations undone.
But those nations are in Europe, and the greatest danger the world faces now lies not in the United States, but in Europe. For once, last night’s fall on Wall Street was most likely due to all eyes being on Europe, particularly the spectacular 40 per cent fall in the share price of Royal Bank of Scotland yesterday, following a rating downgrade and rumours it was begging the government for capital.
One thing Jean-Claude Trichet does well is explain fully what he’s doing: he always has a press conference after an interest rate decision.
Last week’s contained this gem: “I tell households, our fellow citizens in Europe, that they can trust us to deliver price stability. They can count on us, and we are fully conscious of the fact that it is their main concern today.”
Er, actually JCT, I don’t think price stability is their main concern today. I reckon their main concern is their jobs and their savings. Just putting it out there.
As Ambrose Evans-Pritchard wrote in the London Telegraph yesterday:
The European Central Bank — which raised rates into the teeth of the crisis in July — has played a shockingly destructive role in this enveloping slump. Its growth predictions this year have been, and still are, delusional. Neglecting its global role, it has vastly complicated the fire-fighting efforts of Washington.
And now it is complicating and deadening the efforts of Reserve Bank governor Glenn Stevens to reflate the Australian economy with yesterday’s remarkable 1 per cent rate cut. Maybe, as we’ve argued, the rate hikes in February and March were a mistake, but yesterday’s action goes a long towards fixing that error.
But nations cannot reflate alone; that has been shown time and again. Those that do have their currency smashed. Last night, in a major speech, Ben Bernanke made it perfectly clear that the Fed is preparing to cut the Fed funds rate, although at 2 per cent the magazine is running low on bullets.
Despite the fact that foreigners own half of the US Treasury bonds on issue, and two-thirds of government agency bonds, Bernanke is signalling that the currency is no longer his main concern (although that seems a distant threat with the current shortage of US dollars sending it soaring).
In any case, co-ordinated global action to cut interest rates and recapitalise banks is required, but Europe cannot even co-ordinate itself let alone participate in something wider. When tested, the political super-structure of Europe has been found wanting. And then there is Jean-Claude Trichet.