The Fed
More worried about growth
The Fed suggests that growth is now as big a worry as inflation
IN THE past month, a worsening economic outlook, renewed financial turmoil and a big drop in oil prices have all made the Federal Reserve’s anti-inflation rhetoric seem increasingly out of place. The central bank on Tuesday August 5th acknowledged as much, in effect postponing again the date at which it can start to raise interest rates.
“Although downside risks to growth remain, the upside risks to inflation are also of significant concern,” America’s central bank said at the conclusion of Tuesday’s policy meeting. The news was in what it did not say: it dropped the assessment of its statement on June 25th, that downside risks to growth had “diminished somewhat.”
The optimism in June reflected the Fed’s belief that its job of cushioning the economy from the credit crisis was nearing completion and it could turn its focus to inflation and deciding when to start raising its short-term interest rate target from the current 2%.
That view was rapidly overtaken by events. The failure of IndyMac, a mid-sized bank, and a sudden loss of investor confidence in the big quasi-public mortgage agencies, Fannie Mae and Freddie Mac, convulsed markets. A pledge by the Treasury Department and the Fed to back up the two agencies’ borrowing ensured that neither would founder, but they are likely to become even more reluctant to expand their backing of American home mortgages. That is another blow to the moribund housing market, which had shown signs of stabilising.
The Fed’s statement on Tuesday should not have come as a surprise. Ben Bernanke, the chairman, had signalled a renewed concern about the outlook in testimony in July. Only last week the Fed announced that it was expanding and extending some of its liquidity programmes in light of “continued fragile circumstances in financial markets.”
But confusion about the central bank’s priorities has persisted because it has coupled such statements with a continuing drumbeat of concern about inflation. Lou Crandall, chief economist at Wrightson ICAP, a money-market research firm, says the Fed has a “conviction vacuum.” In fact, the Fed has been unclear whether growth or inflation would dominate its decision-making for the rest of the year because the data on both are dreadful.
The confusion has begun to lift. The inflation outlook has improved since June: commodity prices (most importantly oil) have dropped and measures of inflation expectations have improved. The unemployment rate rose to 5.7% in June, up a full percentage point since November and well above most estimates of the natural rate of unemployment, below which inflation tends to accelerate. And with the economy not expected to grow much in coming quarters (it may even shrink), downward pressure is likely on wages and inflation.
The Fed’s statement did not short-change inflation worries this week, of course: “Inflation has been high…some indicators of inflation expectations have been elevated.” But by putting these developments in the past tense, the Fed indicated that the news has stopped getting bad. Moreover, even that degree of concern may not be widely shared. That it found its way into the statement may reflect Mr Bernanke’s efforts to mollify hawkish members of the Federal Open Market Committee who might otherwise have joined repeat dissenter Richard Fisher, president of the Federal Reserve Bank of Dallas, in voting against the decision. Elizabeth Duke, a former banker who was sworn in just before the meeting started, was one of the ten officials voting in favour.
Dubna’s tale
Russia is trying to build a high-tech economy, but red tape is strangling it
LIKE pagan gods, two giant statues of Stalin and Lenin once faced each other across the canal linking the Volga and Moskva rivers. Built in the 1930s partly with gulag labour, the canal is described in a Soviet encyclopedia as “a wonderful architectural ensemble of a new socialist type, reflecting the creative might of the Soviet people inspired by the great ideas of building communism”. Soon after Stalin’s death his statue was blown up. But Lenin still towers over Dubna, a model scientific town that once exemplified the Soviet Union’s achievements in nuclear physics.
Now Dubna wants to stand for Russia’s high-tech diversification. It has recently been designated a free economic zone, in which Russian high-tech companies are exempted from customs duties and pay lower taxes. A new town, designed by British architects, is being built on the Volga’s left bank. Russia hopes that Dubna will turn into a Silicon Valley—or at least a Bangalore. Anatoly Karachinsky, head of Russia’s biggest IT company, IBS, plans to move in hundreds of his programmers.
Dubna was built after the war as a closed town. Following Stalin’s death it became the home of an international institute for nuclear physics, in which other Warsaw Pact countries were also members. This was the Soviet answer to the European nuclear-research organisation, CERN, that had just opened in Geneva. On the one hand it was closely guarded by the KGB (Dubna also had a military-equipment plant and a rocket construction office). On the other it offered scientists and engineers liberties and privileges that most Soviet citizens could only dream of.
The end of the Soviet Union reduced funding for science to a twentieth of its former budget. Yet Dubna’s research institute survived. “The science survived plagues and wars, why should it not have survived the collapse of the Soviet Union?” asks Yuri Oganesyan, head of the nuclear-reactions laboratory. Even when the cash dried up, experiments went on. Indeed, the 1990s were productive, bringing the discovery of new super-heavy nuclei, the opening of a university and the rebuilding of an accelerator. “It may not be beautiful, but it is the most powerful one in the world,” says Mr Oganesyan, pointing optimistically to a vast installation of magnets and tubes.
Unlike most Russian research institutes, Dubna lost relatively few scientists to the West. Even more unusual was the survival of its construction offices and military plants. The criminal gangs that rampaged through Russian industrial towns in the 1990s stayed away from Dubna, which was protected by the security services. And the economic shock of transition, says Valery Prokh, Dubna’s dynamic mayor, was offset by the growth of small businesses. “We have removed all the barriers, and in two years registered 2,000 new companies, of which 700 are still working today.” One such business built the first commercial accelerator in Russia, using it to make filters that separate blood plasma from red cells.
Last year the then President Vladimir Putin declared that “speedy development of fundamental science is becoming a necessary and basic condition for the modernisation of the Russian economy and winning a leading position in the world.” After years of high oil prices, money is again no object: in 2007 Russia put 130 billion roubles ($5.5 billion) into a state corporation for nanotechnologies that is being likened to the Manhattan Project. Even China, which quit Dubna after Khrushchev’s denunciation of Stalin in 1956, has been lured back to the nuclear institute.
But the big problem for high technology in Russia is neither money nor ideas. It is the country’s all-pervasive bureaucracy, weak legal system and culture of corruption. This may explain why the nanotechnology corporation has so far found only one project to invest in (and that is registered in the Netherlands). The share of high-tech products in Russia’s exports is only 0.6%, “a shameful rate” according to Vladimir Fortov, a member of the Russian Academy of Science. Over the past 15 years, he says, Russia has not brought to the market a single significant drug. The average age of Russia’s scientists is well over 50. One of the main commercial activities of Russian research institutes is leasing or selling their property and land.
Scientific inventions tend to be developed abroad. The chain that turns a scientific innovation into a marketable product simply does not exist, says Mr Fortov. And the key to creating it, he argues, is not setting up state corporations, but unshackling the system from bureaucracy and letting private companies operate freely. “We have tried everything else and we know it does not work,” he concludes.
Win some, lose some
The battle against AIDS is becoming a war of attrition
LAST month George Bush signed an act reauthorising PEPFAR, the President’s Emergency Plan for AIDS Relief. It provides for $39 billion to be spent on AIDS over the next five years, up from $15 billion for the past five. It was a welcome backdrop to the XVIIth International AIDS Conference, held this week in Mexico. Mr Bush has received of a lot of flak from activists for imposing conditions on the way PEPFAR’s budget is disbursed—preferring chastity to condoms, for example—but, overall, he has been a force for good in the field of AIDS.
There is also good news elsewhere. A report from UNAIDS, a United Nations agency, released on July 29th suggests that the death rate from AIDS is now falling. It peaked in 2005 at 2.2m a year. Now it is down to 2m, as patients in poorer parts of the world get drugs that keep HIV, the virus that causes the disease, under control. The aim was to provide such drugs to all who need them by 2010, but 2015 now looks more realistic.
It is still the case that nobody has the faintest clue how to cure someone once they have been infected with HIV. The drugs, welcome as they are, merely stave off the immune-system crash that opens the victim to lethal secondary infections such as tuberculosis.
Anti-retrovirals, or ARVs, work by stopping HIV from breeding. They do not cure, because there are places in the body that the virus can hide from them. But while someone is taking the drugs, the virus almost disappears from his blood stream—and, crucially, his seminal fluid. Moreover, if the infected individual is a she, rather than a he, the drugs have a tendency to accumulate in the tissue of the vagina.
Those observations are leading in three directions. The first is the idea of pre-exposure prophylaxis—in other words, giving ARVs to uninfected people to clobber any new infection before it can get going.The second is to use ARVs as microbicides. Other, unsuccessful, microbicide trials used either long, complicated molecules intended to act as a physical barrier to the viruses or detergents to disrupt them. ARVs in the vagina might stop them breeding before they get into the rest of the body.
The third approach, though, is the most intriguing: press ahead faster with the treatment programme. Since treatment reduces viral load, it should, in theory, make those being treated less infectious. Studies in Taiwan and British Columbia have shown big falls in transmission rates as ARVs have been rolled out. Myron Cohen, of the University of North Carolina, Chapel Hill, is beginning a clinical trial involving 1,750 “discordant” couples (those in which one partner is infected and the other not) to see if ARVs really do reduce transmission. This trial will not report for seven years, but Dr Montaner hopes the mere likelihood that treatment also prevents transmission will spur governments to redouble their efforts to roll out ARVs and thus obtain a prevention programme at no additional cost.
It was this sort of careful science—starting with a scientific hypothesis, following it up with observations in the field and ending with clinical trials—which proved that circumcision protects against infection. Circumcision is the one bright spot in the field of AIDS prevention. There are already parts of Africa, including South Africa, Swaziland and Zambia, where men are queuing up to have their foreskins cut off. The scientific basis of all this is that foreskin tissue is rich in a particular sort of cell that HIV likes very much. Within Africa, one of the two best predictors of the intensity of the epidemic in any given place is the prevalence of circumcision. The clinical trials suggest that circumcision by itself reduces a man’s chance of becoming infected by 50-60%. According to Brian Williams of the World Health Organisation, if, in some ideal world, every sexually active man in sub-Saharan Africa were circumcised, 2m new infections would be avoided over the course of ten years, and 300,000 deaths prevented.
Another predictor of the scale of the epidemic in African countries is the rate of what are known, delicately, as concurrent partnerships. That is, how many lovers the average individual has at any one time. In this case, changing people’s behaviour involves pushing very hard indeed.
Behavioural change is, in some ways, prevention’s orphan. The chiding voice saying “use a condom” or, worse, “don’t have sex with anyone other than your regular partner”, is not what most people want to hear. But, according to Helene Gayle, co-chairman of the Global HIV Prevention Working Group, which has been investigating the matter, no national epidemic has been brought under control without it.
Aug. 7 (Bloomberg) -- U.K. house prices declined the most in at least a quarter century in July as banks starved the housing market of credit and pessimism about the economy increased, an HBOS Plc report showed.
The average cost of a home fell 8.8 percent to 177,351 pounds ($345,825) from a year earlier, the steepest drop since the survey began in 1983, Britain's biggest mortgage lender said in a statement today. Prices fell 1.7 percent from June.
The worst housing-market slump in more than two decades is deepening as rising fuel, food and credit costs erode living standards, raising the prospect of the first U.K. recession since 1991. Bank of England policy makers will probably keep the benchmark interest rate at 5 percent today as they try to tame the fastest inflation in 11 years.
``Pressure on householders' income, together with a very significant reduction in mortgage finance due to the global financial markets crisis, is constraining potential house buyers' ability to enter the market,'' Suren Thiru, an economist at HBOS, said in the statement. ``This is resulting in both lower prices and activity levels.''
Home values last month fell to the level they were at in June 2006, HBOS said.
Banks have curtailed credit as the collapse of the U.S. subprime mortgage market pushed writedowns and credit losses above $493 billion. U.K. lenders approved 36,000 loans for house purchase in June, the least since comparable data began nine years ago.
Falling Confidence
U.K. consumer confidence fell the most in at least four years in July as property values fell, unemployment rose and living costs soared, Nationwide Building Society said yesterday. The British economy grew 0.1 percent in the quarter through July, the slowest pace in three years, the National Institute of Economic & Social Research said.
Prime Minister Gordon Brown is considering ways to revive the market for residential property to shore up his dwindling popularity. A survey by BPIX Ltd. showed 47 percent of respondents backing the Conservative opposition compared with 24 percent for the ruling Labour Party. BPIX surveyed 2,194 adults from July 31 to Aug. 2.
Chancellor of the Exchequer Alistair Darling, in an Aug. 5 interview on BBC Radio 4, left open the possibility of a temporary suspension of a tax on house sales to boost the housing market. The government charges homebuyers a levy of between 1 percent and 4 percent, depending on the value.
Squeeze on Incomes
Britons' incomes are getting squeezed by the fastest price gains since at least 1997. Consumer-price inflation reached 3.8 percent in June, almost double the government 2 percent target, as oil and food costs soared.
Faster inflation has sharpened the dilemma facing central bank policy makers as the economy slows to a crawl. U.K. services from banks to airlines contracted in July, according to a survey of about 700 companies, and factory production unexpectedly dropped for a fourth month in June, reports on Aug. 5 showed.
All 60 economists in a Bloomberg News survey predict the Monetary Policy Committee will keep the main rate unchanged for a fourth month. The bank will announce the decision at noon in London.
Aug. 7 (Bloomberg) -- In 1769, short of funds to rebuild Prussia after attacks by Russia, Sweden and Austria, Frederick the Great let aristocrats, churches and monasteries raise money by pledging their estates as security to investors.
From those beginnings emerged what today is Europe's $3 trillion market for covered bonds -- securities backed by assets such as mortgages as well as the seller's promise to pay. Now U.S. Treasury Secretary Henry Paulson, faced with carnage in the housing market that led to $480 billion of losses and writedowns at the world's top financial institutions, is using a similar strategy to help America's banks turn assets into cash.
While the European market has grown for 250 years, Paulson's plan confronts obstacles Frederick never faced: Besides competition from the biggest U.S. housing-finance companies, the debt would be tied to mortgages and banks that are sliding in value with America's homes and economy.
``Not every bank is going to be able to do this,'' said William Isaac, the chairman of the Federal Deposit Insurance Corp. from 1981 until 1985. ``Even the banks people are not concerned about are probably only going to be able to do it in a limited amount right now.''
Covered bonds get higher ratings than notes sold by banks and pay less in interest because they augment the issuer's repayment pledge with assets that can be sold in a default.
Paulson's blueprint, unveiled last month, allows banks to sell bonds backed by mortgages made to homeowners who provide down payments of 20 percent and are current on their loans. U.S. covered-bonds might yield as much as 0.75 percentage point less than unsecured bank debt over time, according to analysts at New York-based JPMorgan Chase & Co.
Relative Yields
European investors have snapped up pfandbriefe, as they are known in Germany, because they're considered almost risk free. No bank has missed a payment on the securities in at least 100 years, according to Germany's Pfandbrief Association.
While elements of covered bonds have been used in the U.S., the market has yet to catch on. Seattle-based Washington Mutual Inc. started the first U.S. program two years ago, followed by Bank of America Corp. in Charlotte, North Carolina. The two companies have issued a combined $20 billion of covered bonds.
Sales in the U.S. may total $10 billion this year, rising to $20 billion in 2009, according to Dan Markaity, head of agency debt at New York-based Merrill Lynch & Co. The potential is between $180 billion and $228 billion, according to Morgan Stanley, also based in New York.
``It's an idea whose time has come,'' said John Cerra, a managing director and fixed-income fund manager at New York- based TIAA-CREF. Cerra, who helps manage $15 billion, has owned covered bonds sold by Bank of America.
`Time Has Come'
The bonds are Paulson's latest initiative to revive lending among banks and boost the housing market, stuck in the worst slump since the Great Depression. The S&P/Case-Shiller home- price index that tracks 20 metropolitan areas dropped 15.8 percent from a year earlier, the biggest decline since records began seven years ago.
Paulson's plan for a ``SuperSIV'' to bail out the $400 billion market for structured investment vehicles failed last year after Wall Street firms rescued the credit funds independently.
On July 13 he unveiled a plan to buy unlimited equity stakes in Fannie Mae and Freddie Mac if needed, while the Federal Reserve agreed to lend directly to the companies. Congress included Paulson's proposals in a broader housing bill that President George W. Bush signed into law last week.
Little Use
Banks have had little use for the securities partly because they can sell mortgages to Washington-based Fannie and Freddie of McLean, Virginia, the U.S. government-chartered companies created to provide financing to banks and promote home ownership. There is no comparable system in Europe. By keeping the loans on their balance sheets, banks are unable to free up capital.
The U.S. system dates to back to President Franklin Delano Roosevelt's administration, and includes the 12 Federal Home Loan Banks, or FHLBs. The regional cooperatives extend loans secured by mortgages to banks, thrifts, insurers and credit unions. Those loans are cheaper for the financial institutions than they could get by selling covered bonds.
The FHLB of New York offered four-year fixed-rate loans secured by mortgages at 4.4 percent last week. Bank of America's $2 billion of covered bonds maturing in June 2012 were trading at yields of 5.03 percent, according to data complied by Bloomberg. The company's $1 billion of unsecured notes due in September 2012 yielded 5.42 percent.
Any Open Market
``The covered bond has been a very useful and widely accepted vehicle in Europe, but in the U.S. it remains an expensive financing mechanism versus home-loan banks and it doesn't offer the same capital relief as a true sale,'' said Richard Dorfman, chief executive officer of FHLBank Atlanta, the Georgia Federal Home Loan Bank, which has $150 billion of loans.
While the costs of covered bonds look worse to banks than financing options, such as deposits and FHLB loans, that may change if Paulson's ``initiative is successful,'' Morgan Stanley strategists George Goncalves and Michelle Bradley wrote in an Aug. 1 report.
No matter the costs, banks ``recognize, having lived through the shutdown of the structured finance market, that there are times that any markets that are open are useful, even if the pricing isn't always what you want,'' said James Tanenbaum, a partner in New York at law firm Morrison & Foerster, which worked on Bank of America's deals.
The FHLBs have ``unwritten rules'' about how much a member bank can borrow as a percentage of overall liabilities, often looking to cap the amount at about 50 percent, according to Robert Pardes, the former chief lending officer at OceanFirst Financial Corp. in Toms River, New Jersey.
`Unwritten Rules'
For investors, a pledge this month by 13 banks and securities firms including Bank of America, London-based Barclays Plc and Goldman Sachs Group Inc. of New York to appoint dedicated traders, provide pricing information and make a market in the bonds may be the most important development, said TIAA- Cref's Cerra. The ability to easily trade and value the debt falls short of what's available in Europe, he said.
Another hurdle is that so-called risk-based capital rules require banks to hold more than twice as much in reserves to issue covered bonds than if they worked with Fannie to create mortgage securities, and kept the bonds on their balance sheets.
Frederick the Great's financing plan worked so well that Denmark followed suit in 1797 after a fire destroyed much of Copenhagen. By 1850, France had joined in. Whether the idea catches on in the U.S. is another question, said Richard Kemmish, head of covered bond origination at Credit Suisse Group in London and member of the European Covered Bond Council's steering committee.
``The jury is still out on whether this is going to make economic sense,'' he said.
Aug. 7 (Bloomberg) -- European stocks rose for a third day as better-than-estimated earnings from Axa SA and Barclays Plc and a plan to cut costs at Veolia Environnement SA eased concern the economic slowdown will stifle profits. U.S. index futures and Asian shares fell.
Axa, Europe's second-biggest insurer, climbed to a two-month high, and Barclays, the U.K.'s third-largest bank, rallied to the highest since May. Veolia, the world's biggest water company, rose the most since 2006. American International Group Inc. fell in Germany after posting a bigger loss than analysts estimated.
``Earnings across Europe have been better than expected overall, giving sentiment a nice boost,'' said Emmanuel Soupre, a fund manager at Neuflize OBC Asset Management in Paris, which oversees the equivalent of $33 billion. ``Veolia and Axa are good examples of companies which have reacted quickly.''
Europe's Dow Jones Stoxx 600 Index added 0.4 percent to 288.77 as of 12:01 p.m. in London. Gains this week have trimmed the 2008 decline to 21 percent after BNP Paribas SA's earnings eased concern the bank will have to raise capital, Xstrata Plc's hostile bid for Lonmin Plc lifted mining shares and the Federal Reserve indicated interest rates are on hold.
Stocks maintained gains after the Bank of England kept its benchmark interest rate unchanged at 5 percent. The European Central Bank, which increased borrowing costs last month, is also expected to leave its key rate on hold. The Frankfurt-based ECB publishes its decision at 1:45 p.m. local time.
Futures on the Standard & Poor's 500 Index fell 0.3 percent, while the MSCI Asia Pacific Index slumped 0.8 percent.
Worst Performers
Energy stocks, Europe's worst performers in the past month, advanced as oil rose for the first time in four days. BP Plc, Europe's second-biggest oil company, and Total SA gained.
Dexia SA, the world's largest lender to local governments, tumbled on plans to add $300 million to its U.S. bond insurance unit after the division posted a second-quarter loss.
All 23 countries in the MSCI World Index except Canada have entered bear markets since September as accelerating inflation pressures central banks to raise borrowing costs, while credit losses nearing $500 billion worldwide and record oil prices threaten economic growth. Freddie Mac, Taylor Wimpey Plc and Babcock & Brown Capital Ltd. have led declines this year.
National indexes increased in 11 of the 18 western European markets. The U.K.'s FTSE 100 added 0.5 percent. France's CAC 40 rose 1.2 percent, while Germany's DAX gained 0.3 percent.
Axa rallied 6.8 percent to 21.77 euros. First-half profit declined 32 percent to 2.16 billion euros after falling stock markets curbed sales of savings plans and on writedowns of investments. Analysts projected earnings at 1.93 billion euros in a Bloomberg survey.
Barclays, Veolia
Barclays gained 5.6 percent to 389.75 pence. First-half profit fell 34 percent to 1.72 billion pounds ($3.4 billion) as it took a more ``conservative'' stance in response to deteriorating credit markets and criticisms that past writedowns were insufficient. Net income beat the 1.5 billion-pound average estimate of 11 analysts surveyed by Bloomberg.
Veolia climbed 7.8 percent to 35.83 euros after announcing a plan to cut costs and sell assets in a bid to boost profit growth. The company today pledged to sell assets after first-half profit was curbed by the weak dollar and higher energy costs.
Profits at Stoxx 600 companies may drop 2.5 percent on average in 2008, according to projections tracked by Bloomberg. That's down from a forecast for 11 percent growth in January.
Securitas AB, the world's second-largest security company, jumped 7.1 percent to 79 kroner. Second-quarter profit totaled 546.4 million kronor ($89.8 million) following an overhaul at its Loomis armored-car division and the disposal of a U.K. unit. Analysts estimated profit of 506.7 million kronor.
BP, Total
BP added 1.8 percent to 530.25 pence. Total, Europe's third-largest oil company, increased 1.1 percent to 48.58 euros.
Crude oil for September delivery rose 81 cents, or 0.7 percent, to $119.39 percent on the New York Mercantile Exchange. Yesterday, oil fell 59 cents, or 0.5 percent, to $118.58 a barrel, the lowest close since May 2.
The Stoxx 600 Oil & Gas Index has dropped 9.6 percent in the past month after oil retreated more than $28 from a record $147.27 on July 11.
AIG, the world's biggest insurer, reported a worse-than- estimated loss after housing-related writedowns wiped out profit for a third straight quarter, renewing concern that the company may need more capital.
AIG lost 7.8 percent to $26.83 in Germany.
Allianz, Dexia
Allianz SE slid 1.1 percent to 111.69 euros. Europe's biggest insurer abandoned its earnings growth forecast after losses at Dresdner Bank led to a 29 percent drop in second- quarter profit.
Allianz expects markets to remain difficult through 2009 and its target for 10 percent compound annual growth in operating earnings ``cannot be maintained,'' the Munich-based insurer said.
Dexia sank 7.7 percent to 9.25 euros on plans to add $300 million to its U.S. bond insurance unit after the division posted a second-quarter loss.
The capital will allow the unit, Financial Security Assurance Inc., to exceed requirements for a AAA credit rating, New York-based FSA said.
Grupo Ferrovial SA advanced 8 percent to 35.21 euros after U.K. airports division BAA Ltd. won ``overwhelming support'' from bondholders for a planned refinancing, and as investors who had sold borrowed shares bought them back.
Investors approved plans to swap 4.3 billion pounds of notes for bonds backed by Heathrow, Gatwick and Stansted airports and the Heathrow Express rail link, the company said yesterday.
Barratt Developments Plc, the worst-performing U.K. homebuilder this year, added 8 percent to 121 pence after MF Global raised its share-price estimate to 200 pence from 190 pence.
Aug. 7 (Bloomberg) -- The Bank of England kept the main interest rate unchanged for a fourth month after inflation accelerated and the economy teetered on the brink of a recession.
The Monetary Policy Committee, led by Governor Mervyn King, left the bank rate unchanged at 5 percent today, the central bank said in London. The decision was predicted by all 60 economists in a Bloomberg News survey.
U.K. services, manufacturing and construction shrank in July and house prices dropped the most in a quarter-century, while King predicts inflation will soon quicken to more than double the 2 percent target. Policy makers split three ways last month on which direction interest rates should move, and they may have disagreed again in today's decision.
``They're in a terrible position,'' Paul Mortimer-Lee, head of market economics at BNP Paribas SA in London, said in an interview on Bloomberg Television. ``They're torn between a disastrous growth outlook and a disastrous inflation outlook. In that case, they're doing nothing.''
The pound stayed close to a seven-week low against the euro after the bank's decision, trading at 79.25 pence per euro as of 12:09 p.m. in London.
The bank, which cut the benchmark rate three times since December, will publish new forecasts on Aug. 13 and will release minutes of today's meeting, showing how each of the nine policy makers voted, a week later.
G-7 Rates
The U.K.'s main rate is the highest in the Group of Seven countries. The U.S. Federal Reserve this week kept the benchmark at 2 percent. The European Central Bank raised its rate to 4.25 percent last month and will keep it at that level today, all 60 economists in a Bloomberg survey predict. The Czech central bank cut its benchmark rate to 3.5 percent today.
With the British central bank standing pat, Prime Minister Gordon Brown may try to shore up the economy with tax changes to benefit consumers. Brown's popularity has plunged after 13 months in office, with his ruling Labour Party attracting 24 percent support in a BPIX Ltd. poll between July 31 and Aug. 2, compared with 47 percent for the Conservative opposition.
Nationwide Building Society's index of consumer confidence dropped by the most in four years, and HBOS Plc said today that house prices fell an annual 8.8 percent, the biggest drop since it started measuring the property market in 1983.
Barclays Plc, the U.K.'s third-biggest bank, said today that first-half profit fell 34 percent as securities trading declined and credit writedowns increased. Global losses and writedowns at financial institutions from the U.S. subprime-mortgage market collapse now total more than $493 billion.
IMF Forecasts
The International Monetary Fund yesterday slashed its forecast for British economic growth to 1.4 percent in 2008 from the 1.8 percent it predicted in May, and to 1.1 percent in 2009, down from 1.7 percent.
The Washington-based lender also predicted that inflation may accelerate to almost 5 percent, from 3.8 percent in June, which was the fastest pace since at least 1997. King predicted on July 14 that it will exceed 3 percent ``until well into next year.''
Record oil prices and rising utility bills have fanned inflation. Centrica Plc, Britain's biggest energy supplier, and Electricite de France SA's U.K. unit announced price increases of as much as 35 percent in the last month. While crude oil costs have dropped 18 percent since the record high on July 11, they are still up 66 percent from a year ago.
Inflation Forecast
``Cutting rates to soften the landing doesn't make sense when inflation is so high,'' said Peter Dixon, an economist at Commerzbank AG in London. ``The peak in inflation may be above 4 percent, and what will be interesting is how quickly they predict it will fall back to 2 percent.''
Last month, policy maker Timothy Besley favored a rate increase, arguing that faster inflation risks eroding the bank's credibility. David Blanchflower supported a reduction, saying that the economy is likely ``to contract sharply in the near term, possibly for several quarters.'' The majority voted for no change.
The central bank's decision today defied calls from unions and companies for a rate cut. Adam Lent, head of economics and social affairs at the Trades Union Congress, which represents 7 million workers, said in a statement that the bank ``must prioritize economic growth now rather than waiting until the economy has stalled.''
``It's a particularly uncomfortable decision'' for policy makers, Investec's Shaw said. ``You'd love to be a fly on the wall.''
Wednesday, August 6, 2008
What McCain Should Do Next
August 7, 2008
Notwithstanding the hype about Barack Obama, here is where the presidential race stands: John McCain was within an average of 1.9% of his Democratic opponent in last week's daily Gallup tracking poll.
It shouldn't be this close. Sen. Obama should be way ahead. It's not that Sen. McCain has made up a lot of ground. Pollster.com shows that the Republican steadily declined from March through June as the Democratic contest dominated the news. Mr. McCain stabilized in July, and then ticked up slightly. But the most important political fact of July is that Mr. Obama has lost altitude. Gallup now projects that 23% of this year's electorate will be swing voters, more than twice the share in 2004.
![[What McCain Should Do Next]](http://s.wsj.net/public/resources/images/OB-BZ765_oj_rov_20080806220822.jpg) |
| M.E. Cohen |
It seems that each candidate is underperforming with his base. Mr. Obama's problem is that only 74% of Democrats in the latest Fox Poll support him, while Mr. McCain gets 86% of Republicans. But Mr. McCain's support lacks the same intensity Mr. Obama receives. The latest Pew poll found that 24% of voters "strongly" support Mr. Obama, compared to 17% for Mr. McCain.
Old doubts about Mr. Obama remain. In a late June Washington Post poll, 46% said Mr. Obama lacked the experience to do the job, the same number as in March, before he spent $119 million to run ads extolling himself. In February 2000, 59% said George W. Bush, then governor of Texas, had the experience to be president. That number grew as the campaign wore on. Now Mr. Obama faces new doubts over perceptions that he's arrogant, self-centered and calculating.
So what should Mr. McCain do? He's rightly raising questions about Mr. Obama's fitness to be president, starting with his failure to admit that the surge in Iraq worked. Mr. McCain should stay at it, though he'll need help to make the case.
Mr. McCain was correct to seize on Mr. Obama's insinuations that the GOP would mount racist attacks against him. Now Mr. McCain needs to find ways to describe an Obama who is running on empty rhetoric. He needs to do to Mr. Obama what Walter Mondale did to Gary "Where's the Beef?" Hart in the 1984 Democratic primaries. Given Mr. Obama's thin résumé and accomplishments, this can be done, with a sustained effort.
But to win, Mr. McCain must also make a compelling case for electing John McCain. Voters trust him on terrorism and Iraq and they see him as a patriot who puts country first. But they want to know for what purpose?
In the coming weeks, he needs to lay out a bold domestic reform program. He gave a taste on energy, but with a few missteps. He should appear in front of manufacturing plants where jobs depend on affordable energy, small businesses affected by fuel prices, and farms hurt by skyrocketing fertilizer costs -- and not in front of oil rigs. He needs to describe the consequences of specific domestic policy decisions. He must explain how his proposals on energy, health care, jobs and education will make a difference for ordinary families.
Mr. McCain also needs to elevate his arguments. It's not only that he opposes tax increases and Mr. Obama favors them. Mr. McCain must also make the principled case that there should be a limit to what government can take from its citizens. This argument will appeal to a large majority of voters. The top income tax rate is 35% and, according to the Tax Foundation, 89% of Americans believe that government should take no more than 30% from anyone's paycheck.
Mr. McCain should also talk about issues that increase Republican enthusiasm and win over independents, such as earmarks and judicial activism. And he should not shy away from appeals for bipartisanship. He's done it -- and talking about it undermines Mr. Obama, who hasn't. It also explains who Mr. McCain is. Mr. McCain should welcome opportunities to go against the grain. Defending free trade in manufacturing states is gutsy and feeds his maverick, straight-talk image.
He will be pleasantly surprised to find out how many people in Ohio and elsewhere understand that their state's prosperity depends on knocking down trade barriers.
Then there's character. Mr. McCain is the most private person to run for president since Calvin Coolidge in the 1920s. He needs to share (or allow others to share) more about him, especially his faith. The McCain and Obama campaigns are mirror opposites. Mr. McCain offers little biography, while Mr. Obama is nothing but.
The Republican Party's convention next month is Mr. McCain's biggest chance to improve his posture. The best minds in his campaign should be carefully working on its script. Everyone knows conventions are show, but voters want to see if a candidate can put on a good one that rings true.
Mr. Obama has the easier path to victory: reassure a restive electorate that he's up to the job. Mr. McCain must both educate voters to his opponent's weaknesses and persuade them that he has a vision for the coming four years. This will require a disciplined, focused effort. Mr. McCain has gotten this far fighting an unscripted guerrilla campaign. But it won't get him all the way to the White House.
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