Thread: Federal Reserve and ECB are in no mood to save us from the c

Federal Reserve and ECB are in no mood to save us from the consequences of our debt
By Ambrose Evans-Pritchard
Last Updated: 12:58am BST 10/06/2008

Fetch your tin helmets once again. The European Central Bank is opting for a monetary purge. So too is the US Federal Reserve, now ruled from Dallas.

Ãœber-hawks and Cromwellians have gained the upper hand at the great fortress banks. Whether or not they admit it, both are embarked on policies that must lead to retrenchment across the Atlantic world.

Fortress Fed: The US Federal Reserve building in Washington
The City mood turned wicked as the full import of this policy switch sank in last week. On Wall Street, the Dow's 396-point dive on high volume late Friday had an ugly feel.

"There is now the distinct possibility of a simultaneous sell-off in global bonds, equities and commodities," said Jonathan Wilmot from Credit Suisse.

ECB chief Jean-Claude Trichet has "signalled" a rate rise in July to combat 3.6pc inflation, much to the fury of Paris, Madrid, Rome, Lisbon and Dublin. It is a perilous path for Europe's monetary union.

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"I would advise Mr Trichet to be more careful in his comments," said Spain's premier Jose Luis Zapatero. The counter-attack has begun.

Spain's property crash is calamitous. House prices have tumbled 15pc since September, say the developers (APCE). Over 98pc of Spanish mortgages are on floating rates, priced off three-month Euribor. This rate leapt 32 basis points to 5.24pc after Mr Trichet opened his mouth.

The ECB demarche is ominous for the rest of us as well. We may be watching a replay of the Bundesbank's ill-judged rate rise in October 1987, which sent the dollar into a tailspin and triggered the Black Monday crash.

Any tilt to monetary tightening is a dangerous gamble at this delicate juncture. The world is facing an almighty clash between two opposing storm systems.

The West is in the full grip of a debt deflation as years of credit abuse come back to haunt it. The East - loosely speaking - is in the blow-off phase of an inflationary boom. Russia, Ukraine, Vietnam and the Gulf are out of control. China has dithered beyond the point of no return. It is they who have repeated the errors of the 1970s, not the West.

The two camps face radically different problems at this point.

It will take central banking skills of great subtlety to pilot these seas. Slavish adherence to "inflation-targeting" and other such totemism and pseudo-science will ruin us all.

Yes, we face an oil and food price spike. Call that inflation if you want, but note that Europe's M1 money supply has contracted over the last five months. America's M1 has turned deeply negative, while M2 and MZM growth has collapsed.

America is going from bad to worse. A net 861,000 people joined the dole in May, pushing the unemployment rate from 5pc to 5.5pc. US house prices have fallen 14.4pc over the past year (Case-Shiller index). Miami is off 25pc.

The Mortgage Bankers Association says 8.8pc of all US house loans are in default or arrears. Negative equity has engulfed 11m households.

The "AA" rated tranches of 2007 sub-prime mortgage debt are now trading at 12pc of face value (ABX index); the "BBB" grades are down to 5pc. The debacle is reaching the 2004 vintage debt. We moved a step closer to a meltdown in the US municipal bond market last week when the "monoline" insurers Ambac and MBIA lost their "AAA" rating from Standard & Poor's.


Fed chairman Ben Bernanke
Roughly $1,100bn (£559bn) of insured debt must be downgraded in lock-step. This will force pension funds to liquidate holdings. A fire sale looms. UBS says banks could face another $200bn of losses as this unfolds.

Had this happened over the winter - before the Fed rescued the banking system - it might have triggered a systemic crisis. We are in Phase II, the slow grind of economic distress. Or as George Soros puts it: "The end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."

Fed chairman Ben Bernanke knows that the crunch will tame inflation over time. The CPI rate lags the cycle. It rises into the first stage of recessions. Wise bankers look beyond it. But Bernanke is now compelled - against his better judgment - to declare an end to the easing cycle. An interest floor of 2pc has been fixed.

Assailed by critics as an inflationist, he is a lonely soul. His closest ally - Frederic Mishkin - is leaving. Dallas governor Richard Fisher has led a hard money revolt from the hinterland warning of a "debauching of credit". After voting against the last three rate cuts, he now wants rate rises.

As for Europe, growth is stalling. Retail sales fell 2.9pc in April, the steepest drop since EMU began. Manufacturing orders in Germany have fallen for five months. Car sales in Italy dropped 18pc in May.

The ECB policy shift has already had a perverse effect. By sending the dollar into a fresh dive this week, it triggered a $16 surge in the price of oil over two days.

Crude is now moving almost reflexively as a sort of "anti-dollar", a currency on steroids with eight times leverage. No matter that the global economy is slowing hard. Bad is good for oil in the topsy-turvy world of commodity funds.

We are in uncharted waters. The easy trade-off between growth and inflation that so flattered asset prices for a quarter century is over. The monetary lords can no longer shield us from the full consequences of our debts. Nor do they want to.

http://www.telegraph.co.uk/money/main.j ... iew109.xml

Review: Troubling passages in texts at Va. school
By MATTHEW BARAKAT – 1 day ago

McLEAN, Va. (AP) — Textbooks at a private Islamic school in northern Virginia teach students that it is permissible for Muslims to kill adulterers and converts from Islam, according to a federal investigation released Wednesday.

Other passages in the school's textbooks state that "the Jews conspired against Islam and its people" and that Muslims are permitted to take the lives and property of those deemed "polytheists."

The passages were found in selected textbooks used during the 2007-08 school year by the Islamic Saudi Academy, which teaches 900 students in grades K-12 at two campuses in Alexandria and Fairfax and receives much of its funding from the Saudi government.

The academy has come under scrutiny from critics who allege that it fosters an intolerant brand of Islam similar to that taught in the conservative Saudi kingdom. In the review, the panel recommended that the school make all of its textbooks available to the State Department so changes can be made before the next school year.

The U.S. Commission on International Religious Freedom, a panel formed by Congress, last year recommended that the school be closed amid concerns that it promotes violence and too closely mimics the conservative Saudi educational system.

The commission made its recommendation last year to close the school even though it had not reviewed the textbooks. Now that some have been reviewed, "we feel more confident that the potential problems we flagged before really are there," said the commission's spokeswoman, Judith Ingram.

School officials have long denied that the academy fosters intolerance. It has acknowledged that some of the Saudi textbooks contain harsh language, but says that the texts have improved in recent years and are revised as needed by the academy before being distributed to students.

School officials and the State Department did not immediately respond to phone calls and an e-mail seeking comment Wednesday.

The commission said it obtained 17 of the academy's textbooks through a variety of channels, including from members of Congress. The texts did appear to contain numerous revisions, including pages that were removed or passages that were whited out, but numerous troubling passages remained, according to the panel:

_ The authors of a 12th-grade text on Koranic interpretation state that apostates (those who convert from Islam), adulterers and people who murder Muslims can be permissibly killed.

_ The authors of a 12th-grade text on monotheism write that "(m)ajor polytheism makes blood and wealth permissible," meaning that a Muslim can take with impunity the life and property of someone believed guilty of polytheism. According to the panel, the strict Saudi interpretation of polytheism includes Shiite and Sufi Muslims as well as Christians, Jews, Hindus, and Buddhists.

_ A social studies text offers the view that Jews were responsible for the split between Sunni and Shiite Muslims: "The cause of the discord: The Jews conspired against Islam and its people. A sly, wicked person who sinfully and deceitfully professed Islam infiltrated (the Muslims)."

More generally, the panel found that the academy textbooks hold the view that the Muslim world was strong when united under a single caliph, the Arabic language and the Sunni creed, and that Muslims have grown weak because of foreign influence and internal divisions.

The commission's findings issued come a month after the Fairfax County Board of Supervisors voted unanimously to extend the academy's lease for its main campus, which sits on county property.

The county conducted its own study of the textbooks last year at the request of Supervisor Gerald Hyland, whose district encompasses the academy.

Hyland and the county never released results of what they had found, but Hyland said in approving the lease that he is comfortable with the school's teachings, though he did so with a qualification.

"I would be less than frank if I didn't tell you that the curriculum does contain references to the Quran, which, if taken out of context and read literally, would cause come concern," Hyland said at the meeting at which the lease was extended.

On the Net:
Islamic Saudi Academy: http://www.saudiacademy.net/
USCIRF Press Release: http://www.uscirf.gov/index.php?optionc ... 206&Itemid 1

http://ap.google.com/article/ALeqM5igZi ... wD91859CG0