Panic Speaks Louder Than Words

CNN Money is reporting Beige Book Finds 'Limited' Credit Hit Outside Of Housing.

The U.S. economy kept chugging along in August, with a credit crunch having only a "limited" impact outside housing, the Federal Reserve said in its beige book report Wednesday.

All 12 Fed districts reported that economic activity continued to expand, thanks in part to gains in manufacturing and services. Employment and wages grew modestly and retail sales were "generally positive," the beige book said.

But other reports Wednesday were gloomy. Private-sector job growth fell to a four-year low of 38,000 in August, according to ADP. (NYSE:ADP) And Challenger, Gray & Christmas said announced layoffs shot up 85% last month to 79,459, on housing market woes.

[See Mass Layoffs Soar for more information on ADP and Challenger]

The Fed said most districts reported housing woes worsening, with home prices flat or down.

However, "outside of real estate, reports that the turmoil in financial markets had affected economic activity ... were limited," the beige book said.

Let's stop right there. If this economic mess was indeed contained to housing and the economy is chugging along as the beige book song is singing, then why the panic discount rate cuts as outlined in Now we know who and why.

Chugging Along

• The stock markets are still positive for the year.
• Housing is contained.
• According to Treasury Secretary Paulson this is the strongest global economy ever.
• Unemployment is at record lows.

Given the panic rate cut by the Fed on options expiration Friday, insane housing proposals from every corner (See List of Absurd Housing Bailout Proposals and Still More Ideas To Fix Housing), a Fed promise to provide needed liquidity, and one month treasuries trading down to 1.4%, one might actually (and foolishly) believe that things are chugging along with limited impact from housing.

Panic Around the World

Australia Central Bank to Buy Mortgage Backed Debt

Bloomberg is reporting Australian Central Bank to Buy Mortgage-Backed Debt.

Sept. 6 (Bloomberg) -- Australia's central bank said it will buy debt backed by home loans to add cash to the financial system, after the U.S. subprime credit rout eroded demand for asset-backed securities and drove up interest rates.

ECB Holds Rates - Adds Temporary Repos

Reuters is reporting ECB holds rates, watches prices and markets very closely.

European Central Bank President Jean-Claude Trichet said on Thursday the ECB would monitor price risks and financial markets very closely, toning down his anti-inflation rhetoric after it left its key interest rate at 4.0 percent.

Trichet noted that volatility on financial markets in the past few weeks had raised uncertainty about the euro zone economy. "Given the high level of uncertainty, additional information is needed before further conclusions for monetary policy can be drawn," he told a news conference.

"The Governing Council will monitor very closely all developments on the basis of our assessments and by acting in a firm and timely manner we will ensure that risks to price stability do not materialize," he continued.

Trichet did not repeat the ECB's stance of "strong vigilance" on inflation risks, wording which has preceded most of the rate increases in the ECB's current tightening cycle, but said he would use the phrase again when the time was right.

Trichet said the ECB would hold an extra tender of longer-term securities to ease credit costs beyond the overnight market where the bank has intervened most heavily.

Highlighting tensions in money markets, the ECB lent banks an extra 42.2 billion euros in temporary overnight funds on Thursday after noting that money market volatility had increased, its first such emergency operation since mid-August.

You have to laugh at this for two reasons: Why bother with pussyfoooting around with phrases like "strong vigilance" when everyone knows full well what it means. My how fast we have gone from inflation worries to something quite different, all in a month. And what about all this emergency lending and bailouts of German banks?

ECB Announces Longer Term Refis

ECB to hold extra longer-term refi-Trichet.

Thu Sep 6, 2007 9:31AM EDT
The European Central Bank said on Thursday it will launch a supplementary long-term refinancing operation as it strives to improve liquidity in the money market.

"We have decided to launch a supplementary longer term refinancing operation. It will be carried out at a variable rate tender, with no pre-set allotment amount and we will apply the standard tender procedure," ECB President Jean-Claude Trichet said.

"We are up to our responsibility and I am very proud of that," Trichet added in his news conference, following the ECB's decision to leave official interest rates unchanged.

He gave no date for the supplementary operation.

On Aug. 29, the ECB lent out 50 billion euros for 91 days to cover banks' medium-term funding needs at its regular long-term funding operation. Banks bid for a total of 119.75 billion euros.

A special one-off three-month tender the previous week was also massively oversubscribed.

Trichet said the move had no bearing on the ECB's monetary policy stance. "These are two different things," he said.

If this has "no bearing on monetary policy" why was a rate hike scheduled a month ago cancelled? Who does Trichet think believes that story?

And what's with this nonsense about "We are up to our responsibility and I am very proud of that"? Exactly what is there in this mess that anyone should be proud of?

Hyperinflation in Venezuela

Bloomberg is reporting Venezuela's Overnight Rate Soars as Central Bank Suspends Loans

Venezuela's interbank overnight lending rate surged as high as 90 percent after the central bank suspended short-term loans to banks, traders said.

The overnight rate rose from an average rate of 22 percent yesterday. Government debt sales this week also drained cash from the financial system, leaving some banks scrambling for funds today, said Richard La Rosa, a trader at brokerage ActiValores Sociedad de Corretaje SA in Caracas.

Minyanville's Todd Harrison had a quick Buzz this morning on Venezuela.

Does this matter? You betcha, Minyans--in a globalized machination tied together by $500 trillion in derivatives, it all matters. It's just a function of what matters when and how much.

Paulson Flashback from SmartBrief:

"Looking over periods of stress that I've seen, this is the strongest global economy we've had."

Paulson is of course confusing strength with crack up credit booms. We are now on the back side of that credit boom, otherwise known as the start of a credit bust. It is foolish to believe the Fed or anyone else can contain it.

And as for the Beige Book where this post started: "outside of real estate, reports that the turmoil in financial markets had affected economic activity ... were limited" ... Sorry Ben Bernanke. No one buys it. If this was truly contained to real estate, we would not be seeing so much panic. And panic speaks louder than words.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/