Notes From Underground

Friday and Saturday were the days that U.S. Treasury Secretary Geithner was in Poland sitting in on an ECOFIN meeting to try to persuade the financial policy makers of the EU to come to some type of resolution on a bailout of the PIIGS, an increase in the European Financial Stability Facility, and, hopefully, some program of support for the recapitalization of the European banking sector. Geithner pressed the ECB and European Governments to increase the 440 billion EURO EFSF rescue fund by utilizing leverage in its buying of sovereign debt. The tone of Geithner’s message was that the U.S. has woken up to the huge threat the EU debt crisis poses for the American economy, and, of course, President Obama’s election chances. Mr. Geithner warned that the EU crisis was a “CATASTROPHIC RISK TO FINANCIAL MARKETS.” He advised that the conflict between European governments and its central bank must end.

The Treasury secretary must be aware that it is more than financial markets that are at risk–probably the whole edifice of western capitalism. It does make one wonder if Geithner understands that the conflict between policy makers in Europe is a result of no centralized fiscal authority and the world is asking President Trichet to take on the task of monetary and fiscal policy by intervening in the sovereign bond market. Now that the FED, BOJ, SNB and BOE have agreed to the opening of SWAP LINES, the Europeans basically told Geithner: “Thanks for the MONEY but the fact that your house is far from in order we do not need your lectures.” The U.S. was especially rebuffed by the Northern Germanic block, an indication of the chasm over economic policy.

Overall, it was another very poor showing by the highly discredited Treasury Secretary. Following up Mr. Geithner’s efforts is a piece by Larry Summers in tomorrow’s Financial Times. It is another effort by a major U.S. ECONOMIC MANDARIN from the Obama administration advising the EU to take immediate action to resolve its crisis. The piece, “THE WORLD MUST INSIST THAT EUROPE ACT,” places the onus on the European community to realize the global significance of its crisis and move in a dramatic fashion to get ahead of the problem rather than reacting to every poor result in the markets. The tone of the article, coupled with Geithner’s actions should make for a very interesting IMF and G-20 meeting in Washington this week.

Quick Hitter#1: In what is becoming a regular event, Chancellor Merkel’s CDU Party has suffered another drubbing at the POLLS. In a Berlin municipal Mayoral election, the CDU came in third with the Social Democrat (SPD) and Greens apparently coming in first and second. I caution that the rise in the SPD may mean that Merkel moves to form a coalition with the PRO-EURO labor group as the EUROPHOBIC FDP is losing its standing in Germany. As the German electorate becomes more disillusioned with the DEBT CRISIS, it is not moving toward the anti-European FDP but rather to the SPD and Greens. The movement is paving the way for Frau Merkel to get the legislation necessary to enhance the EFSF that she has promised others in the EU. Even though Geithner was rebuffed it doesn’t mean that Europe–under the protective umbrella of Chancellor Merkel–won’t do the bailouts that will support the banks in Germany and France. Isn’t it IRONIC that the more Merkel loses the more probable the bailouts?

Quick Hitter#2: According to the BLOOMBERG story, “Global Banks Quietly Ask BRICS to Subsidize Greek Aid With $27.6 Billion,” the IIF (Institute of International Finance) chaired by Deutsche Bank Chairman Josef Ackermann,is pushing for the bulwarks of the emerging market economies to provide funding for the GREEK package in an effort to show the universality of the EU crisis. The IIF is a consortium of 400 banks and insurance companies, thus looking for support to prevent a collapse of the global financial system. As Larry Summers noted in his opinion piece, monetary and fiscal expansion are necessary and anything less would be a dereliction of duty. The IIF is helping to pressure all players in global finance. Between Geithner, Summers and the IIF we have a three-pronged attack on making sure that there is plenty of liquidity.

The FED meets this week in an extended 2-day meeting. It will be Mr. Bernanke and company who will be examining the European implications. The European debt crisis is certainly front and center–so much so that Greek Prime Minister Papandreou canceled his scheduled visit to Washington on Saturday. With all the tension will the Bernanke Fed reach into its tool box and do more than just TWIST? During the weekend it was reported that David Rosenberg, an economist I hold in high regard, issued a piece picked up on Zero Hedge, that the FED will be forced to do far more than just TWIST. Rosenberg makes a compelling case but I am on the cautious side about another QE program at this time. RON PAUL‘s Congressional authority is very real and the FED is already becoming an election issue.

Tags: Ackermann, BOE, BOJ, CDU, ECB, Ecofin, EFSF, FDP, Fed, G-20, Geithner, Greens, IIF, IMF, Merkel, money, PIIGS, Pro-Euro labor, QE, SNB, SPD, swap lines, Twist

This entry was posted on September 18, 2011 at 7:41 pm and is filed under ECB, Europe, Federal Reserve, FOMC, Germany. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.