An AIG bankruptcy would have triggered shock waves around the world. We were all staring into the abyss at that point.

TO BE NOTED: From Spiegel:

NOTE DATE : DON

"09/29/2008

SPIEGEL INTERVIEW WITH GERMAN FINANCE MINISTER STEINBRÜCK

"'We Were All Staring into the Abyss'

SPIEGEL spoke with German Finance Minister Peer Steinbrück about the roots of the US credit disaster, whether Germany is in grave danger and what the future has in store for world banking.

SPIEGEL: Mr. Steinbrück, Wall Street is imploding. The government of the United States wants to establish a $700 billion (€480 billion) bailout program for its banks and their bad loans. How serious is the situation for the rest of the world?

Steinbrück: We are experiencing the most severe financial crisis in decades, although one should be careful about historic comparisons with 1929. One thing is clear: After this crisis, the world will no longer be the same. The financial architecture will change globally.

AP

German Finance Minister Peer Steinbrück says that it's time for more regulation.

SPIEGEL: Could you be more specific, please.

Steinbrück: There will be shifts in terms of the importance and status of New York and London as the two main financial centers. State-owned banks and funds, as well as commercial banks from Europe, China, Russia and the Arab world will close the gaps, creating new centers of power in the financial world.

SPIEGEL: In other words, we are experiencing the beginning of a tectonic shift…

Steinbrück:... but not one that is abrupt and jarring. It will be an evolutionary process that will take several years.

SPIEGEL: The current thunder is certainly deafening. We have just seen all US investment banks disappear in one fell swoop.

Steinbrück: Three of them were either taken over or went bankrupt. The two others, because they abandoned their business model to save themselves. No one would have thought this possible until recently. Meanwhile, 25 financial service providers have disappeared from the market in the United States. All of this is illustrative of an earthquake. In addition, many institutions are still fundamentally lacking liquidity.

SPIEGEL: And is the United States completely to blame?

Steinbrück: The source and focus of the problems are clearly in the United States. There are many causes. After 9/11, a great deal of cheap money was tossed into the market. Apparently some of that money went to people with poor creditworthiness. This led to the growth of the real estate bubble. The banks embarked on a race over profit margins. Then speculation spun completely out of control…

DER SPIEGEL

German growth could be dropping.

SPIEGEL: …which also benefited German banks for a while.

Steinbrück: But they didn't invent these transactions. The stokers on the financial markets were responsible for that.

SPIEGEL: And how is the US patient doing now?

Steinbrück: It's in the ICU with pneumonia. This means that here in Europe, we can at least expect to get a bad cold. The US patient lacked legislation, a regulatory framework that could have helped avoid this development. That's the key issue for me. The financial products became more and more complex, but the rules and safeguards didn't change. I don't know anyone in New York or London who would have asked for a stronger regulatory framework 18 months ago. They were always saying: The market regulates everything. What a historic mistake!

SPIEGEL: Your US counterpart, Treasury Secretary Henry Paulson, began by essentially nationalizing the two US mortgage giants, Fannie Mae and Freddie Mac. But then he allowed investment bank Lehman Brothers to plunge in bankruptcy before saving the insurance giant AIG with an $85 billion (€58 billion) bailout. This doesn't exactly look like a clear course of action.

Steinbrück: In the case of Lehman, the US government wanted to send a signal to the market that they are not prepared to offer a bailout under any circumstances. In the case of AIG, we had direct talks at the G7 level and implored them to stabilize the situation. An AIG bankruptcy would have triggered shock waves around the world. We were all staring into the abyss at that point.

SPIEGEL: What role does the US election campaign play in resolving the crisis?

Steinbrück: I hope that my US counterpart will be capable of taking action for as long as possible. We cannot have a six-month vacuum until the next president takes office and his administration is ready to get to work.

SPIEGEL: Paulson headed the investment bank Goldman Sachs for a long time. Does this make him part of the problem?

Steinbrück: He is undoubtedly doing a good job. And at least Goldman Sachs still had the option of making its own decision to transform itself into a bank holding company.

FROM THE MAGAZINE

Find out how you can reprint this DER SPIEGEL article in your publication.

SPIEGEL: That same Paulson snubbed you a year and a half ago. You arrived late for a meeting with him in Washington and he gave you all of 11 minutes of his time -- standing up.

Steinbrück: You don't seriously believe that such trivia plays any role whatsoever in my assessment of a counterpart and of the situation!

SPIEGEL: We are alluding to arrogance and a way of thinking that Paulson may have shared with many major players on Wall Street.

Steinbrück: The way of thinking on Wall Street was quite clear: "Money makes the world go round!" The logic went like this: The government should stay out of our business! And when we Germans began -- and perhaps it was even too late by then -- to ask for controls, for more transparency and equity guidelines, they laughed at us at first.

SPIEGEL: When did those initiatives begin?

Steinbrück: Back in the days of Gerhard Schröder's chancellorship. It was reinforced when Germany assumed the G-7 presidency in early 2007. The first real debate on the subject happened in February 2007, during a meeting of the G-7 finance ministers at Villa Hügel in Essen. Then British Chancellor of the Exchequer Gordon Brown was not very amused by our call for more transparency for hedge funds. The talks have been significantly more constructive since last fall.

SPIEGEL: What, specifically, will you call for?

Steinbrück: A few agreements were already reached with the British and Americans within the G-7 in April. They include imposing new rules on the conduct of the rating agencies, tightening equity regulations and gaining a better handle on cross-border bank supervision. But as far I am concerned, it isn't enough for the industry to develop its own code of conduct. I also want to see the banks no longer allowed to sell all of their risks as they see fit. I think it as a dangerous systemic design flaw that not only loans, but also credit risk is 100-percent marketable. This can lead to uncontrollable wildfires, as we are now seeing.

SPIEGEL: How much government does capitalism need? How much can it tolerate?

Steinbrück: Overall, we have to conclude that certain elements of Marxist theory are not all that incorrect.

SPIEGEL: And you, of all people, are saying this?

Steinbrück: Every exaggeration creates, in a dialectic sense, its counterpart -- an antithesis. In the end, unbridled capitalism with all of its greed, as we have seen happening here, consumes itself…

SPIEGEL: …because it creates an unbridled state?

Steinbrück: That would the wrong development. And I don't believe in it, either. Fortunately, we in Germany have done quite well for ourselves with a happy medium, the social market economy.

SPIEGEL: The German government is unwilling to participate in America's $700 billion bailout package. Is this your final word?

Steinbrück: I see neither the need for nor the possibility of taking on the responsibility for American banks. Besides, our situation is more robust.

SPIEGEL: But the United States will certainly bail out US banks first -- a distortion of competition that could put European institutions under more pressure than ever.

Steinbrück: That's an issue, of course. But I can't give you a shoot-from-the-hip solution. First we have to see what exactly the Americans intend to do.

SPIEGEL: And if things became serious in Europe, you would also have to butt heads with Brussels over intervention options.

Steinbrück: You couldn't be more right! And I have already pointed this out. The Americans are clearly faster when it comes to crisis management, because they aren't hampered by these aid procedures.

SPIEGEL: Nevertheless, you do have worst-case scenarios on the back burner.

Steinbrück: It doesn't make any sense to speculate publicly over something like this. A crisis can easily become a self-fulfilling prophecy that way.

SPIEGEL: You recently met with the top executives from the German banking and insurance industries. What was the mood like?

Steinbrück: Very serious and open. But discretion is needed to achieve any progress on this front.

SPIEGEL: The German state-owned banks, at any rate, are a prime example of a case in which government influence does not automatically guarantee more security. On the contrary. The amount of gambling that took place at institutions like SachsenLB was unbelievable. And taxpayers are the ones who end up footing the bill.

Steinbrück: The responsibility lies with the respective shareholders. Some of them, however, are showing signs of wanting to pass this responsibility on to the government. That's when I stop playing Mr. Nice Guy. They should kindly solve their own problems.

SPIEGEL: Some, it would seem, have failed to apply the rules that already exist in the German system.

Steinbrück: I cannot confirm that. The auditors can only examine what is in the financial statements and what is presented to them. IKB and SachsenLB simply outsourced tremendous risks. I also caution against taking a stop-the-thief approach. In one case, for example, a former department head from the finance ministry who was on the supervisory board of one of these banks has been severely criticized. In an effort to pass some blame on to me, it has been conveniently forgotten that half of the who's who in the German economy was on this same board.

SPIEGEL: Perhaps you should have simply allowed something like IKB to go bankrupt, instead of bailing it out with billions from the state-owned bank KfW and then essentially giving it away to an American financial investor.

Steinbrück: And what would have happened then? We had less then five weeks to conduct a thorough audit. We had 36 hours to decide what would be more costly -- stabilization or insolvency. That was the situation on July 28 and 29 of last year. What happens to the €25 billion ($36 billion) worth of deposits at the IKB? Are they supposed to vanish into thin air? What would have been the consequences for the overall German financial economy? The damage would have disproportionately higher. It's easy to be critical now.

SPIEGEL: And what about the fact that KfW just happened to transfer €319 million ($463 million) to Lehman Brothers, the US investment bank that declared bankruptcy that very same day? This sort of thing doesn't exactly create confidence in state-owned banks.

Steinbrück: That was an awful mistake, of course. A grotesque error. But it was a mistake made by bank executives, not the administrative board, which includes politicians among its members.

SPIEGEL: It proves that normal risk management procedures failed completely -- directly under the nose of the finance minister.

Steinbrück: No, it proves that an inexcusably wrong decision was made. Do you think I wasn't livid about this? The entire crisis we are talking about here is incomprehensible for the normal citizen. But such an idiotic transfer -- even my 89-year-old mother is outraged about it. All 80 million German citizens understand this…

SPIEGEL: …and suddenly you had the tabloid Bild calling the KfW "Germany's stupidest bank."

Steinbrück: Okay, okay. But it's also worth noting that KfW passed all tests and checks regarding its risk management procedures that were performed by the federal audit court and auditors last year. Of course, I know that the bottom line is that what happened was completely ridiculous. But even that has to be carefully examined. We cannot simply start shooting at random, just to flush out a few executives and keep the public happy.

SPIEGEL: At any rate, the failures and breakdowns among many state-owned German banks show that the government isn't exactly an effective banker.

Steinbrück: I never claimed that it was. The government is neither better nor worse as a banker. Financial transactions are not its core field of operations. The fact that many bankers working for state-owned banks clearly miscalculated is partly the result of their having lost sight of the relationships between risks and profitability. But let me say this once again: Lehman was no state-owned bank, nor was Bear Stearns, Northern Rock or IKB.

SPIEGEL: How dramatic will the effects of the financial crisis be on the German economy?

Steinbrück: So far, the only obvious outcome is that numbers are getting worse. At this point, no one can provide a credible estimate of how bad they will become. Of course, this crisis will also affect growth. However, some developments are currently moving in the opposite direction. The employment market is still strong. And we are still pleased with our tax revenues.

SPIEGEL: You were optimistic only two weeks ago. You said that there was no reason to expect cataclysmic scenarios, and that growth for the year would remain at 1.7 percent.

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Steinbrück: I object to your criticism. I have always been on the cautious side, and at the beginning of the year I stated that 2009 will be worse than 2008. I have no reason to revise my predictions for 2008. But 2009 will be significantly worse than the previous estimate of 1.2 percent growth.

SPIEGEL: Should German depositors be concerned about their savings?

Steinbrück: No. No one should be worried about savings accounts. We will see a tectonic shift in the global financial system. Entire types of banks and their business models will disappear, but that doesn't mean that anyone in Germany should be worried about their savings.

SPIEGEL: Is capitalism currently undergoing a general crisis?

Steinbrück: I don't think so. But the behavior of some elites is worth criticizing. We have to be careful not to allow enlightened capitalism to become tainted with questions of legitimacy, acceptance or credibility. This isn't merely an issue of excessive salary developments in some areas. I'm talking about tax evasion and corruption. I'm talking about scandals and affairs of the sort we have recently experienced, although one shouldn't generalize these occurrences. But they are the sort of thing the general public understands all too well. And when they are allowed to continue for too long, the public gets the impression that "those people at the top" no longer have to play by the rules. There have been times in Germany when these elites were closer to the general population. Some things have gotten out of control in this respect.

SPIEGEL: One cannot regulate morality.

Steinbrück: No, but that too is dialectics. The elites must understand that it is a matter of self-protection, of developing a sense of the right balance or allowing judgment to prevail.

SPIEGEL: Mr. Steinbrück, thank you very much for taking the time to speak with us.

Interview conducted by Wolfgang Reuter and Thomas Tuma

Translated from the German by Christopher Sultan"

"The source and focus of the problems are clearly in the United States," he told SPIEGEL in September.

TO BE NOTED: From Spiegel:

"'Bonehead' German Finance Minister Sends Invite to Krugman

Nobel Prize winning economist Paul Krugman has blasted Germany's Peer Steinbrück for his resistance to economic stimulus spending. Now the "boneheaded," "know-nothing" finance minister has sent Krugman an invitation to come to Berlin to discuss their differences.

Nobel Prize-winning economist Paul Krugman is used to addressing large audiences, whether in the lecture halls of Princeton University or from his prominent perch as a columnist at the New York Times. But, Krugman will soon receive an request to speak before an audience of one. Earlier this week, German Finance Minister Peer Steinbrück sent an official invitation to Krugman to meet with him in Berlin to discuss their differences on the financial crisis.

REUTERS

Finance Minister Peer Steinbrück wants to chat with Paul Krugman

It won't be the first time the two men have corresponded -- though until now, the communication has been one-sided and consisted mainly of Krugman making disparaging remarks about Steinbrück via his column and blog. Indeed, Krugman has repeatedly emphasized his belief that deficit spending is among the few bulwarks against a reprise of the Great Depression and he hasn't shied from pillorying those with a cooler attitude towards stimulus.

Steinbrück has been among his favorite targets. Krugman has blasted Steinbrück, who took office hoping to balance the German budget and together with Chancellor Angela Merkel has withheld his support for further European or national stimulus packages, for his " know-nothing diatribes" and " boneheadedness." Krugman's most painful insult of all may have been his suggestion that the criticisms of "crass Keynesianism" offered by Steinbrück, a member of Germany's center-left Social Democratic Party, most closely resemble the thinking of America's Republican Party.

What Krugman has depicted as economic ignorance, Steinbrück wants to see as a difference of opinion. The finance minister has said he wants to see the effects of Germany's previous stimulus measures -- the German parliament passed a €50 billion spending bill in January -- before endorsing another round of spending.

Furthermore, as Krugman himself has noted, strong social welfare programs, like those in Germany, mitigate the need for deficit spending in times of crisis. German economists, informed by the legacy of their country's experience with hyperinflation and national insolvency during the 1920s, are also generally more concerned about the risk of inflation than their American counterparts.

But, if Krugman takes Steinbrück up on his invitation, he may want to prepare to receive an earful. Steinbrück shares Krugman's penchant for straight-talk and he certainly hasn't hesitated to assign blame for the economic crisis. "The source and focus of the problems are clearly in the United States," he told SPIEGEL in September.

-- csa"

Treasury’s Gaffe du Jour

From Alea:

"Treasury’s Gaffe du Jour

Washington, DC – U.S. Treasury Secretary Tim Geithner met today with Russian Finance Minister Peer Steinbruck in Rome, Italy, the site of the G-7 Finance Ministers and Central Bank Governors meeting.

Press release

Me:

# 3 Don the libertarian Democrat Says:
February 13th, 2009 at 9:54 pm

Maybe he’d rather meet Kudrin, so as not to get a lecture from Steinbruck about overspending. Steinbruck is a barrel of laughs.

"policies that do not bring the trade surplus down sharply are inevitably going to cause trade friction, and that is a game China cannot play."

Here's a post that links two of the major "Saver" Countries in their possible responses to a Stimulus. From Michael Pettis on China Financial Markets:

"Earlier this week Ambrose Evans-Pritchard had an article in the UK paper The Telegraph which starts off with “For the first time in my life, I am starting to feel twinges of anti-German sentiment.” The article goes on to lambaste the German government, and especially German finance minister Peer Steinbrück, for what Paul Krugman earlier called “boneheadedness” in refusing to participate in the European fiscal expansion and, worse, for calling British and French programs “crass Keynesianism.” According to Krugman:

The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There’s a huge multiplier effect at work; it is multiplying the impact of German boneheadedness.

Evans-Pritchard explains why a number of European countries, led by France and England, are so angry:

Put bluntly, Germany is pursuing a beggar-thy-neighbour policy. It is not fulfilling its responsibilities as the world’s top exporter and pivotal power of Europe’s monetary union. It is leaching off global demand, even as it patronizes Anglo-Saxons, Latins, and Slavs. No doubt binge debtors in the Anglosphere are much to blame for this crisis. But Germany rode the boom too. It made those Porsches and BMWs driven by the new rich. Its banks are among the most leveraged in the world.

Nor should we not forget that the European Central Bank set interest rates at recklessly low levels early this decade to help Germany out of a slump. Can this be separated from the property bubbles in Club Med, Holland, Ireland, Scandinavia, and Eastern Europe now causing such grief? Within the EMU, Germany has gained a competitive edge against France, Italy, and Spain for year after year by screwing down wages. In pre-euro days the North-South rift did not matter. The D-Mark revalued. Balance was restored. In monetary union it is toxic.

The point he is making is that the imbalances were not created simply by “binge debtors in the Anglosphere” but also by those countries that subsidized directly or indirectly overproduction, which ultimately have had much to do with the very conditions that led to consumption binge. This includes not just Germany but any of the countries that created persistent and high trade surpluses ( THIS IS A VERSION OF MY QUOTE FROM DR. JOHNSON. THE LENDER AND BORROWER ARE BOTH AT FAULT ). Evans Pritchard makes the comparison very explicit:

Germany now has a current account surplus of 7pc of GDP. It is hollowing the industrial core of Latin Europe. Yes, Club Med needs to pull its socks up, but the flip side of the coin is that Germany is in breach of EMU’s implicit contract. The rules of the game are that surplus countries should boost demand. The Gold Standard collapsed in the early 1930s because they – then the US and France – refused to do so. The burden of adjustment fell on deficit states, who had to tighten yet harder.

The downward spiral dragged everybody into depression. Germany and China are today’s violators. Their trade surpluses over the last 12 months have been $283bn and $279bn, respectively. They are exporting excess capacity.

What does all this have to do with China? The reasons I bring this up is because it is, I think, a foretaste of the type of nasty battles that are likely to erupt between the trade-surplus ( SAVERS ) and trade-deficit countries ( SPENDERS ) as global demand continues to contract. The overconsuming trade-deficit countries cannot reduce their overconsumption except with a collapse in production (and sharply rising unemployment) if the overproducing countries do not also adjust. Furthermore, fiscal expansion aimed at generating employment in countries with large trade deficits will not be nearly as effective as they might be if they are not matched with programs in trade surplus countries (essentially demand boosting fiscal programs) that prevent domestic demand from bleeding out the trade account ( A VERY GOOD POINT ).

The French and the British (and much of the rest of Europe) are concerned that if their governments borrow to boost domestic demand and employment at home, they are also borrowing to boost demand and employment in Germany, which means that they bear the fiscal cost for the foreseeable future while Germany gets a substantial chunk of the benefit. This may be a great deal for Germany, but it is one hard for the rest of Europe to embrace.

In Europe it is clear to me that the economic debate is migrating rapidly towards consideration of the impact of trade, and it would be surprising if the debate does not quickly globalize ( TRUE ). If Europeans, nominally members of one country (sort of), can get into such an acrimonious debate among themselves, what hope is there for a polite and statesmanlike discussion that involves countries less tied together? I believe that in the US there is a much stronger commitment to free trade and, in spite of Mr. Bush, multilateral cooperation on economic issues, then elsewhere, but politics is politics, and rising unemployment in the US will inevitably lead to the same confrontational attitudes as they seem to have in Europe. ( VERY BAD )

By the way among the dozens of bankers, government officials, academics and businessmen I have met in the past few weeks to discuss trade issues, it seems to me that those of us who have spent the past several months warning about an imminent collapse in trade are getting more and more attention. This is undoubtedly going to become a hot issue next year.

It is not that China isn’t doing anything to address the problem. The slate of bad economic numbers this week and last (trade is down, we are racing towards deflation, investment and consumption growth is down, manufacturing output growth was only 5.4%, electricity consumption was down 8.6%) has confirmed what we all dreaded: things are slowing quickly. The government is trying to do all it can to boost the economy and, especially, employment, but I am afraid they still don’t understand their place in the global mayhem ( LIKE GERMANY ? ). They continue to see China as an innocent victim of the global crisis – not as one of the fundamental creators of the payments imbalance that led to the crisis – and much of their strategy seems to assume that China can adjust domestically without worrying about the impact on the global market. ( NOT LIKELY )

For example two days ago I was part of a panel that included a prominent Chinese economist and think tanker who I know and like very much, and as we discussed what needed to be done I got the impression that he hasn’t considered global implications at all (although as we discussed them he acknowledged many of my arguments). For example, much of his currency focus was on how China can retain export competitiveness without encouraging hot money outflows. But that is not the right way to think about it. China needs to think not only about the domestic impact of its currency but also about the global impact of its currency policy, and how that affects the adjustment that trade deficit countries are undergoing ( VERY GOOD POINT ). If it makes things worse for them, there is no reason to assume that they will remain indifferent to Chinese domestic policies, and there is even less reason that they will run policies that accommodate China’s needs.

China is making Herculean efforts to get out of this mess. It is doing everything it can to maintain growth and is clearly very worried about the pace of the slowdown. Bloomberg, for example, had this article today:" ( THEY TOO ARE PRAGMATISTS )

China’s government plans to lower taxes and reduce the lockup period for home sales to stem a decline in the nation’s property market. Home owners will be waived from paying a sales tax on properties sold after three years of purchase, compared with the previous term of five years, according to a statement today by the State Council, China’s cabinet. The tax will also be levied based on the profit from the sale, instead of the sale price, according to the announcement.

These are all good things because they are aimed at boosting domestic consumption, and to the extent they also affect production positively, they affect non-tradable goods. That is a start. But there must also be recognition that policies that do not bring the trade surplus down sharply are inevitably going to cause trade friction, and that is a game China cannot play. A collapse in trade would force a brutal adjustment here."

Read the rest.

I find this problem of getting the Saver Countries to spend a tough one.

Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jumpstart stalled economies

Gary Duncan on The Times with the head of the IMF's take on the EU Stimulus:

"Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday."

I guess you could say that this is one of my main concerns.

"Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out eurozone nations over what he attacked as an inadequate response.

The broadside from the IMF's managing director came as fears over a protracted global recession, and political fallout, mounted after China said that its factories' output registered the weakest growth in almost a decade last month.

Without swifter and more determined action by governments to boost economies, a world recovery could be delayed until late next year or early in 2010, with grave consequences, Mr Strauss-Kahn said. “A lot remains to be done, and if this work is not done it will be difficult to avoid a long-lasting crisis that everyone wants to avoid.”

I tend to agree with him.

"The IMF has called for governments in leading economies to spend a combined 2 per cent of global GDP, or $1.2 trillion (£1,075 billion), to try to fend off the danger from global recession.“If we are not able to do that, then social unrest may happen in many countries - including advanced economies,” Mr Strauss-Kahn suggested.

He also claimed that violent protests could break out in countries worldwide if the financial system was not reordered to benefit everyone rather than a small elite."

This is one of my main fears.

"Reinforcing anxieties over a global recession, the IMF chief said that the fund would probably cut its current 2.2 per cent forecast for world growth next year. He blamed governments' being unwilling or unable to use more public funds to bolster economic activity. At the same time, he also predicted that China's once red-hot pace of economic expansion was now set rapidly to run out of steam.

“We started with China at 11 per cent growth . . . China will probably grow at 5 or 6 per cent [next year],” he said. “The possibility of a global recession is real. We realise something must be done.”

Concern over China was heightened as industrial output growth from the Asian powerhouse slowed to an annual pace of only 5.4 per cent last month. That was sharply from 8.2 per cent in October and the weakest since 1999."

This seems to be occurring.

"Turning his fire on the European Union, Mr Strauss-Kahn put himself sharply at odds with Jean-Claude Trichet, President of the European Central Bank, who yesterday urged European leaders to stick to their fiscal rule books and keep a lid on state borrowing, even as they deliver packages of economic stimulus measures.

Mr Trichet called for European countries to stick by the EU's controversial Stability and Growth Pact that limits governments' borrowing and total debt. But Mr Strauss-Kahn said that existing rule books should be scrapped, and demanded new rules to match the scale of the economic threat he saw."

I understand Trichet's caution, but believe he underestimates the seriousness of the problem.

“We are facing an unprecedented decline in output and we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures,” he said, “What was decided by Brussels . . . 1.5 per cent of GDP in the form of stimulus, is a bit below what we need.”

His comments come amid continued wrangling and sharp clashes between European leaders over how they should react to the crisis."

I'm not convinced that it's all real

"Germany has expressed substantial doubts over the wisdom of pumping huge amounts of public money into economies to try to stimulate growth and has resisted pressures to contribute more to a joint EU effort.

Peer Steinbrück, the German Finance Minister last week delivered an outspoken attack on tax and spending-led stimulus measures generally, and Britain's in particular.

“The same people who would never touch deficit spending are now tossing around billions,” he told Newsweek, in an interview. “The switch of supply-side politics all the way to a crass Keynesianism is breathtaking.” Discussing Britain's cut in value-added tax, he added: “All this will do is raise Britain's debt to a level that will take a whole generation to work off.”

He's as good an act as Yosano.

"to draw up a “world risk map” of global financial institutions to allow financial authorities to quickly identify future trouble spots."

Actually, here's an idea I like, because it focuses on problem areas before they occur. It has the funnel approach I favor of looking for possible problems and then analyzing, instead of trying to micromanage with rules and regulations. From the FT:

"German chancellor Angela Merkel is set to push international leaders to draw up a “world risk map” of global financial institutions to allow financial authorities to quickly identify future trouble spots.

Unveiling the findings of a government-commissioned expert panel on Friday Mrs Merkel also proposed the creation a central body to oversee credit ratings agencies, an international register of major loans and the better alignment of managers’ pay to discourage short-term risk taking.

The chancellor and finance minister Peer Steinbrück are expected to lobby at the G20 world financial summit in Washington this weekend for all financial institutions, markets and jurisdictions to be made subject to proportionate regulatory control in order to eliminate “blind spots” in the financial system.

This supervision is intended to shed more light on the opaque workings of hedge funds and insurance companies, which the government believes have contributed to the severity of the current crisis.

The idea has found support in Europe, the US is thought to be hostile to what it views as a heavy-handed approach.

Ms Merkel said on Friday she was "somewhat surprised" about warnings against too much regulation before the crisis had been overcome."

I don't see the idea of supervision, or fact finding, as heavy-handed, as compared to actual rules. I'll try and find out more about this proposal and how it fares.

"The chancellor will go to Washington armed with a set of policy ideas prepared in the past two weeks by a six-strong panel led by Otmar Issing, a former European Central Bank chief economist.

Prof Issing said the panel had considered ways to reform the world's financial architecture in order to prevent a repeat of the current crisis which had left the financial system "on the edge of ruin".

Among the panel's suggestions isa global risk map which would highlight at a single glance areas where pressure is building up in the financial system.

The map would show all major international institutions and financial products, including credit insurance and asset-backed securities.

Similarly, the group has suggested setting up a cross-border credit register of major loans to provide greater transparency to businesses and governments seeking to evaluate risk.

Credit agencies, which have been criticised for dishing out spurious ratings in the pursuit of profit and failing to spot the build-up of risk, should be subject to a central supervisory body that would report annually on their work the report said.

Furthermore the fee structure of credit agencies must be reformed to incentivise the issue of a correct rating, for example by making agencies buy into the tranches of debt that they rate.

The group also proposed realligning management compensation schemes to motivate long-term performance.

A new compensation model could incorporate both bonus and malus components, similar to the system used in the car insurance industry,an idea favoured by Mr Steinbrück."

I still like it, especially the talk about credit ratings agencies, which Robert Waldmann on Angry Bear claims is basically a cartel.