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Bush convenes
Plunge Protection Team
By Ambrose Evans-Pritchard, International Business Editor
08/01/08 "The
Telegraph" -- - Bears beware. The New Deal
of 2008 is in the works. The US Treasury is about to shower
households with rebate cheques to head off a full-blown slump,
and save the Bush presidency. On Friday, Mr Bush convened the
so-called Plunge Protection Team for its first known meeting in
the Oval Office. The black arts unit - officially the
President's Working Group on Financial Markets - was created
after the 1987 crash.
It appears to have powers to support the markets in a crisis
with a host of instruments, mostly by through buying futures
contracts on the stock indexes (DOW, S&P 500, NASDAQ and
Russell) and key credit levers. And it has the means to fry
"short" traders in the hottest of oils.
The team is led by Treasury chief Hank Paulson, ex-Goldman
Sachs, a man with a nose for market psychology, and includes Fed
chairman Ben Bernanke and the key exchange regulators.
Judging by a well-briefed report in the Washington Post, a mood
of deep alarm has taken hold in the upper echelons of the
administration. "What everyone's looking at is what is the
fastest way to get money out there," said a Bush aide.
Emergency measures are now clearly on the agenda, apparently
consisting of a mix of tax cuts for businesses and bungs for
consumers. Fiscal action all too appropriate, regrettably.
We face a version of Keynes's "extreme liquidity preference" in
the 1930s - banks are hoarding money, and the main credit
arteries of the financial system remain blocked after five
months.
"In terms of any stimulus package, we're considering all
options," said Mr Bush. This should be interesting to watch. The
president is not one for half measures. He has already shown in
Iraq and on biofuels that he will pursue policies a l'outrance
once he gets the bit between his teeth.
The only question is what the president can manage to push
through a Democrat Congress.
The Plunge Protection Team - long kept secret - was last
mobilised to calm the markets after 9/11. It then went into
hibernation during the long boom.
Mr Paulson reactivated it last year, asking the staff to examine
"systemic risk posed by hedge funds and derivatives, and the
government's ability to respond to a financial crisis", he said.
It seems he failed to spot the immediate threat from mortgage
securities and the implosion of the commercial paper market. But
never mind.
The White House certainly has grounds for alarm. The global
picture is darkening by the day. The Baltic Dry Index has been
falling hard for seven weeks, signalling a downturn in bulk
shipments. Singapore's economy contracted 3.2pc in the final
quarter of last year, led by a slump in electronics and
semiconductors.
The Tokyo bourse kicked off with the worst New Year slide in
more than half a century as the Seven Samurai exporters buckled.
The Topix is down 24pc from its peak. If Japan and Singapore are
stalling, it is a fair bet that China's efforts to tighten
credit are starting to bite. Asia is not going to rescue us. On
the contrary.
Keep an eye on Japan, still the world's top creditor by far,
with $3 trillion in net foreign assets. The Bank of Japan has
been the biggest single source of liquidity for the global asset
boom over the last five years. An army of investors - Japanese
insurers and pension funds, housewives and hedge funds borrowing
at near zero rates in Tokyo - have sprayed money across the
Antipodes, South Africa, Brazil, Turkey, Iceland, Latvia, the US
commercial paper market and the City of London.
The Japanese are now bringing the money home, as they always do
when the cycle turns. The yen has risen 13pc against the dollar
and 12pc against sterling since the summer. We are witnessing
the long-feared unwind of the "carry trade", valued by BNP
Paribas in all its forms at $1.4 trillion.
The US data is now relentlessly grim. Unemployment jumped from
4.7pc to 5pc - or 7.7m - in December, the biggest one-month rise
since the dotcom bust and clear evidence that the housing crunch
has spread to the real economy.
"At this point the debate is not about a soft land or hard
landing; it is about how hard the hard landing will be," said
Nouriel Roubini, professor of economics at New York University.
"Financial losses and defaults are spreading from sub-prime to
near-prime and prime mortgages, to commercial real estate loans,
to auto loans, credit cards and student loans, and sharply
rising default rates on corporate bonds. A severe systemic
financial crisis cannot be ruled out. This will be a much worse
recession than the mild ones in 1990-91 and 2001," he said.
Sovereign wealth funds stand ready to rescue banks, as they have
already rescued Citigroup and UBS. But as Moody's pointed out
this week, the estimated $2,500bn in lost wealth from the US
house price crash is more than the entire net worth of all the
sovereign wealth funds in the world.
Add fresh losses as the property bubbles pop in Britain,
Ireland, Australia, Spain, Greece, The Netherlands, Scandinavia
and Eastern Europe, as they surely must unless central banks opt
for inflation (which would annihilate bonds instead, with equal
damage), and you can discount $1,500bn in further attrition.
Not even a Bush New Deal can hold back the post-bubble tide that
is drawing in across the globe. What it can do is buy time.
Fortunately for America - and the world - the US budget deficit
is a healthy 1.2pc of GDP ($163bn). Washington has the
wherewithal to fund a fiscal blitz.
Britain has no such luxury. Our deficit is 3pc of GDP at the top
of the cycle. Gordon Brown has shut the Keynesian door.
© Copyright of Telegraph Media Group Limited 2008
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