Government Math

But administration officials are counting on a lift this summer from the $168 billion economic stimulus package that Congress passed last week and from the Federal Reserve’s recent decisions to reduce short-term interest rates....

Mr. Lazear rejected proposals by Democrats to offer an additional 13 weeks of unemployment benefits, for a total of 39 weeks, to people who lose their jobs. He said it would be unprecedented to extend jobless benefits at a time when the unemployment rate is only 5 percent, and he predicted that the stimulus package would create an additional 500,000 jobs this year.

$168,000,000,000/500,000 jobs = $336,000/job

And this is a stimulus plan? Just goes to show how much politicians want to avoid a recession in an election year.

The Investment Slowdown

Stephen Moore doesn't think the economic "stimulus" package will work because it targets consumers rather than investors. Hmm, where have I heard that before?

Yesterday, President Bush signed into law a $170 billion bipartisan "stimulus" package of tax rebate checks and housing subsidies to try to steer the economy clear of recession. The ink is hardly dry yet and Democrats are now agitating for a second "stimulus," in the form of infrastructure spending and welfare payments such as food stamps and longer unemployment benefits. All of this government check-writing is on top of the $3 trillion the federal government is already scheduled to spend this year.

Unfortunately, neither of these "free money" stimulus plans are likely to solve the nation's economic woes -- just as a similar economic rescue package of tax rebates and spending programs failed in 2001, the last time the economy slid into recession.

The current mortgage meltdown closely resembles what happened after the technology industry bubble burst at the end of the Clinton years. What Congress failed to understand, now as then, is that America is suffering from an investment slump driven by falling asset values, not a Keynesian consumption drought.

He points out the effects of the second of Bush's tax cuts which were targeted to capital:

The investment tax cuts had two positive effects on the economy. First, almost from the day the tax cuts were enacted the stock market capitalized the value of the lower taxes on corporate profits and capital gains. Within months, the Dow Jones Industrial Average rose nearly 10%. And, we now know, the investment slump was converted into an investment boom. Business capital spending, down 4.8% in 2001 and 6.1% in 2002, surged in 2004 by 7.4% and in 2005 by 9.5%. It was this investment spurt that financed job and GDP growth in recent years. In short, what we experienced was a classic supply-side recovery.

And he quotes Michael Darda about what may be inhibiting capital investment:

Why is investment declining? One explanation is that firms and investors know that there is a tax hike on the way when the Bush tax cuts expire in 2010. "The two big negatives for investment loom on the horizon," says economist Michael Darda, "higher tax rates and higher inflation due to easy money." Mutual fund data from the fourth quarter of 2007 confirm that a weak dollar and the risk of higher taxes are pushing capital overseas.

As Moore points out in the last paragraph, Say's Law tells us that consumption is dependent on production, not the other way around. Maybe someday politicians will learn but I'm not holding my breath.

Contrarian Indicator

Now here's the first really cheerful news we've heard from the stock market in quite a while: Big institutional money managers are miserable.

They are fearful, unhappy, and hoarding cash in case the market collapses still further. That's according to the latest monthly Merrill Lynch survey of fund managers world-wide.

"Fund managers and asset allocators are the most risk averse in more than seven years," reports Merrill on Wednesday. "A net 41% of fund managers say that they are overweight cash -- a level last seen in the aftermath of the '9-11' terrorist attacks. … Investment time horizons have almost shrunk back to extremes last seen in March 2003, while the number of investors adopting risk-averse investment strategies has hit new highs."

Merrill calls this "an unprecedented combination of high cash levels and low risk appetite."

This is a pretty good contrarian indicator. If these guys are sitting on cash, that means they've already sold. From a contrarian standpoint that means a lot of the big money is already out of the market - and will have to get back in at some point. This isn't a timing indicator though; there is no way to know when they'll start buying or what will trigger it.

Jobless Claims

Jobless claims for the week ending February 9th fell for the second consecutive week. Claims fell by 9,000, to 348,000, from an upwardly revised 357,000. The 4-week moving average rose 12,000, to 347,250. It's the highest level since October 2005.

John Ryding, the chief US economist for Bear Stearns, marked 375,000 as recession territory for the 4-week moving average. Anything above 350,000 usually signals weakness in the labor market.

US Trade Report - December

The US trade deficit decreased by 6.9% in December, according to a report released by the Commerce Department today. It fell to $58.8 billion, the largest monthly drop in the deficit since October 2006. Economists expected a number closer to $61.6 billion.

Exports rose 1.5%, to a record high of $144.3 billion for the month of December. Imports, on the other hand, decreased $2.2 billion, or 1.1%, to $203.1 billion. Imports dropped for the first time in 4 months, suggesting a slowdown in consumption.

For the year, the US trade deficit fell by 6.2%, to $711.6 billion, from a record $758.5 billion in 2006. We haven't seen a decline in the trade deficit since 2001.

See Full Report.

Auction Rate Securities

The auction rate security market has seized up and investors who bought these securities as cash equivalents are discovering that they own securities they don't understand and can't get rid of:

When M. Brian and Basil Maher sold their family's shipping business last July for more than $1 billion, they quickly put the money in a safe place.

Or so they thought.

The two brothers handed much of it to Lehman Brothers Holdings Inc. with marching orders to make only the most conservative, cashlike investments. Within weeks, however, they had lost access to more than a quarter-billion dollars.

"We didn't think we were taking risks," says Brian Maher, 61 years old. "We read about all the troubles in the credit markets and said, 'I'm glad we're not invested in that stuff.' It turns out, we were."

What are auction rate securities? Auction rates are long term bonds with variable interest rates that reset at regular auctions. As such many brokers and investors considered them short term cash equivalents. Unfortunately, these securities have long term maturities and if no one shows up for the auction, holders are left with long term securities.

Why do brokers sell these securities? That's simple; brokers make almost nothing on money market funds; usually only a few basis points. Auction rates allow brokers to increase their income on cash holdings to about 25 basis ponits. In the case cited in this WSJ article, because of the amount of money involved, it is a signficant difference.

I expect to see more cases like this as clients discover that brokers are not acting in their client's interest but rather their own. The Maher's have filed a claim against Lehman:

In their claim, the Mahers are demanding their $286 million back from Lehman, along with interest, and are seeking punitive damages of up to an additional $857 million.

As for what they learned about investing, "It's about trust," says Brian Maher. "We entrusted our money to Lehman believing them to be looking out for our best interests."

The mistake the Maher family made is brilliantly exposed in that last sentence. Brokers are not looking out for your best interests. As a Registered Investment Advisor, I have a fiduciary duty to my clients. Brokers have no such responsibility.

Fear Itself

The first paragraph of FDR’s first inaugural address contains the famous line about fear:

“I am certain that my fellow Americans expect that on my induction into the Presidency I will address them with a candor and a decision which the present situation of our people impel. This is preeminently the time to speak the truth, the whole truth, frankly and boldly. Nor need we shrink from honestly facing conditions in our country today. This great Nation will endure as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself—nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and vigor has met with that understanding and support of the people themselves which is essential to victory. I am convinced that you will again give that support to leadership in these critical days.”

I read this entire speech today and another quote comes to mind:

“The more things change, the more they stay the same.”

I have no idea who first uttered that phrase but I’m almost certain it was a reference to politicians. The politicians of today would feel perfectly comfortable debating economic policy in 1933. The solutions offered for our current economic problems are not materially different than those offered by FDR in this first of many speeches as President.

Faced with an economic slowdown at a perilous time, an election year, our current day politicians feel, as FDR did, that “this nation asks for action, and action now”. And so they have enacted an economic “stimulus” package that promises, as FDR’s programs did, an economic recovery “by engaging on a national scale in a redistribution”. The current redistribution differs only in details from the plan put forth by FDR to end the Great Depression. The myth that government can redistribute resources in our economy and cause growth is apparently one that has endured for many generations.

FDR’s redistribution involved a movement of people from cities back to the farms and “definite efforts to raise the values of agricultural products and with this the power to purchase the output of our cities.” FDR sought to redirect capital – in this case human capital – to areas that produced a lower return on that capital. Today, our politicians seek to redirect capital from producers to consumers in the mistaken belief that the path to prosperity is to be found through consumption rather than investment.

The Great Depression has been blamed by many on faulty monetary policy, most notably by the current Chairman of the Federal Reserve. Monetary policy is said to have been too accommodative in the 1920s and too restrictive in the 1930s. Mr. Bernanke has endeavored to do his part to prevent a repetition of those faulty policies by cutting interest rates aggressively. However, even FDR realized that there is a faulty logic at work here:

“Faced by failure of credit they have proposed only the lending of more money.”

Our economy, much like the one of 1933 America, is at a crossroads. Years of excessively accommodative monetary policy has produced a society that believes, as Ludwig von Mises said that “more credit expansion is the only remedy against the evils inflation and credit expansion have brought about”. If the US continues down this path to a virtual debtor’s prison, there will come a time when monetary policy is no longer effective in limiting the periodic slowdowns that are a necessary part of a healthy economy. When that happens we will face a decision much like the one that faced America and FDR in 1933.

Monetary policy had a great deal to do with getting us into the economic mess that became the Great Depression. However, it was governmental interference in the normal functioning of the economy that prolonged that routine economic contraction into the Great Depression. Speaking of economic recovery FDR said: “It can be helped by preventing realistically the tragedy of the growing loss through foreclosure of our small homes and our farms. It can be helped by insistence that the Federal, State, and local governments act forthwith on the demand that their cost be drastically reduced. It can be helped by the unifying of relief activities which today are often scattered, uneconomical, and unequal. It can be helped by national planning for and supervision of all forms of transportation and of communications and other utilities which have a definitely public character. There are many ways in which it can be helped, but it can never be helped merely by talking about it. We must act and act quickly.”

It is this idea that government must act to generate economic growth that we should fear. Just as FDR did in the early phase of the Depression, our politicians want to protect citizens from the consequences of their bad economic decisions. There is real pain involved in the unwinding from the excessive debt that plagues our economy, but the blame for that pain lies not with the businesses that merely followed the economic incentives provided by the Federal Reserve. The blame for that pain should be placed squarely on the shoulders of Alan Greenspan and his successor at the Federal Reserve. Sharing the blame should be politicians who enact policies solely because they fear the retribution of voters. Neither the Fed nor the Congress is acting in our best interests. They are acting in their own best interests, consequences to the long term health of our political economy be damned.

The US economy is a resilient system that depends on innovation and the creative destruction that is inherent in capitalist systems for growth. Left alone, the US economy will recover from the current credit crunch because we are a nation of optimists who find opportunity even in times of economic distress. A Federal Reserve that confronts every economic downturn with a dose of monetary elixir merely short circuits the process. Likewise, fiscal policy aimed at anesthetizing the public to the economic cycle merely prolongs the pain.

The only thing we have to fear is fear itself. Fear of capitalism. Fear of the normal economic cycle. Fear of ending our addiction to debt. Fear of allowing investors to face the consequences of their risky actions. Fear of the competitive nature of free trade. Fear of immigrants who come to this country with a work ethic we seem to have forgotten. If, and only if, we can overcome these fears will we reform our dysfunctional monetary system and start to repair the damage done to our economy.

January Retail Sales - Good news!?!?

Retail sales in January rose more than expected, up 0.3% for the month, after declining 0.4% in December. Economists had expected a drop in sales by 0.3%. Excluding the purchase of autos, retail sales were still up 0.3%, in line with expectations.

Auto sales rose a surprising 0.6% for the month, while gas purchases rose 2.0%. If you exclude both from the calculation, retail sales remain unchanged. Clothing, food and beverage, and health and personal care stores also reported strong sales.

Every other category was in the red. Hardest hit were department stores (-1.1%), building materials (-1.7%), and electronics and appliance stores (-1.0%).

See full report.

No Laffing Matter

Arthur Laffer deconstructs the "stimulus" package on the pages of the WSJ this morning. He thinks it will do more harm than good and explains it in a way that anyone can understand. Taking money from a group that saves and invests and giving it to a group that is likely to spend it sounds good for the short term but the longer term effects are negative.

But even though the income effects net to zero, the substitution effects accumulate, and they accumulate in a most unpleasant way. This should be obvious to even a person untrained in economics. Ask yourself why not a $40,000 rebate per person, indexed for inflation of course, if a $600 rebate is so good. Heck, why don't we give rebates equal to GDP, so that everyone who doesn't work and doesn't produce receives everything, and all those who do work and do produce receive nothing?

GDP would go to zero in a New York minute if workers and producers got nothing for their work effort. And, as fate will have it, any rebate will reduce output because it reduces incentives to produce output. The larger the rebate, the greater the reduction in the incentives to work and the greater the reduction in output. It's as simple as that. This $170 billion rebate camouflaged as economic stimulus will deal a serious blow to the economic health of the country.

But there's also collateral damage. Few in Congress understand or care. They think their actions either don't matter or that they would see a positive impact from their actions if only they did more. If the economy worsens and when their political sensors become alarmed, they'll up the dose, and goodness knows just how far this vicious cycle will take us. A quick glance back at the 16 years of presidencies of Lyndon Johnson, Richard Nixon, Gerald Ford and Jimmy Carter should give you pause. Whenever you observe bipartisan cooperation, hold on to your wallet and run to the basement.

I never watched That Seventies Show because I lived through that miserable time. I don't think I'll like the sequel any better than the original.

GM Earnings

NEW YORK (CNNMoney.com) -- General Motors posted better-than-expected financial results for the latest quarter, but indicated that its efforts to shave costs are not behind it as the automaker offered lucrative buyouts to 74,000 employees - its entire U.S. hourly workforce.

The nation's largest automaker reported improved fourth-quarter results from its overseas auto operations, which helped to balance out continued losses at its North American plants. But problems at finance unit GMAC, of which it still owns 49%, coupled with large charges taken in the third quarter related to tax credits, left GM with a company record $38.7 billion net loss for 2007.

If you strip out all the charges, GM reported a profit for the quarter. Is it possible that GM has actually turned the corner? GM is desperately trying to cut costs but the union contracts make it very expensive. And the cost cutting is just a survival technique. Ultimately, GM will need to design cars that people actually want to drive - something they haven't been particularly successful at lately.

That's Too Bad

TORONTO (Reuters) - A major outage hit BlackBerry users in North America on Monday, cutting off wireless e-mail for everyone from busy executives to political campaign staff on the eve of three U.S. presidential primaries.

The problem, which BlackBerry owner Research In Motion described as a "critical severity outage" affecting users in the Americas, once again raised concerns about the stability of the e-mail service 10 months after a widespread crash last April.

I must admit to a little schadenfreude about this. How fricking important do you have to be that you can't wait to get to your computer to check your email? Maybe blackberry users will actually be able to engage in a conversation - at least for a while.

Buffet's Offer to Bond Insurers

CNBC is reporting that Berkshire Hathaway's new bond insurer is offering to reinsure municipal bonds for the existing bond insurers. There are no details available yet about the deal, but this seems a better deal for the investors in insured munis than the bond insurers. MBIA and the other bond insurers are in trouble because of CDOs they insured that are turning out to be basically worthless. Their muni bond business has always been solid. A muni bond insured by MBIA is now trading as if the insurance didn't exist (who really thinks MBIA could pay off in the case of a default?) so existing owners of those bonds would certainly benefit. How the bond insurers themselves would benefit is a little more murky. I'll post more details when they become available.

You really have to give Buffet credit on this. He's a hell of a businessman. He set up this company after the bond insurers got in trouble and if they fail, he will get all future business in the muni bond insurance business. By making this reinsurance offer he is attempting to get some of the existing business as well. Investors will push the bond insurers to accept but if I were them, I'd pass. Why give away their good business? If they accept, they will have written their own death sentence.

France's Second Largest Bank to Sell Shares At A Discount

Societe Generale, France's second largest bank, will raise $8 billion by selling stock in a rights offer, with the purpose of replenishing working capital. A rights offering involves the raising of capital by giving existing shareholders the right to purchase new shares in proportion to their holdings. In this case, shareholders can buy one share for every four held. The shares are usually priced at a discount to market price. SocGen stock is being sold at a 39% discount to the February 8th closing price, much higher than what analysts had expected.

Is SocGen in dire need? Well, after a $7.16 billion trading loss from one, lone, rogue trader, and a $3 billion write-down linked to risky US mortgage-backed securities, it just might seem that way. The bank's corporate and investment banking units reported a loss of $3.2 billion in all of 2007, compared to a gain of $3.4 billion the previous year. Net income for 2007 fell to $1.4 billion from $7.5 billion in 2006.

Pierre Flabbee, from Kepler Equities in Paris, described the rights issue "a matter of life or death" to the survival of the company. Ouch.

A Change In The Dow Jones

The Dow Jones Industrial Average, one of the most closely watched stock indices in the US, is adding two new components to reflect changes in the US economic structure. Bank of America, symbol BAC, the world's biggest bank by market cap, and Chevron Corp, symbol CVX, one of the largest oil companies in the world, will be added to the 30-member index of blue chip stocks. This is the first change in the Dow Jones Industrial since 2004.

The tobacco company Altria, symbol MO, and diversified manufacturer Honeywell International, symbol HON, were both removed from the index to make room.

Back to the Future

Larry Kudlow, not one of my favorite commentators because he's so partisan, has an article at NRO with some good thoughts on monetary and fiscal policy. He starts by bucking up Bernanke:

Bernanke has taken a lot of criticism in the last year, and I think much of it is undeserved. Wall Street claims that he’s an isolated academic, unaware of the real-world difficulties of sagging capital markets, slumping stock prices, and slowing growth. But he moved aggressively once he saw the credit problem develop last summer. And new information obtained under the Freedom of Information Act reveals how he has been meeting with leaders in business, finance, and government all along. He has talked with John Chambers, the CEO of Cisco Systems, Sam Palmisano, the head of IBM, JPMorgan’s chief Jamie Dimon, former Senate banking head Phil Gramm, and international central bankers Jean Claude Trichet and Mervyn King. The street was wrong about Bernanke. He’s been on top of the situation. He took remedial action and the economy will be the beneficiary faster than people think.

But this is the part that really caught my eye:

At some point, the entire corporate tax structure should be thrown out, along with all the murky K-Street tax-earmark loopholes that litter the IRS code. We need to broaden the tax base and lower marginal rates. This is the key to maximizing future economic growth on the supply side. Without strong tax-reform measures to expand the production of goods and services, further Fed money injections are only demand-side “solutions” that will surely inflate prices and depreciate the currency.

Back in the 1970s, policymakers in Washington were obsessed with increasing aggregate demand, but they forgot about aggregate supply. Today’s short-term-stimulus rebate package is a throwback to that era. It’s not economic stimulus; it’s political stimulus. Congressmen up for reelection are trying to “do something” in response to primary-season exit polls that say Americans are totally unhappy with the economy. But these rebates are budget busters. And how will Congress attempt to pay down $400 billion in budget deficits? Higher tax rates, of course. And then we’ll really be back in the 1970s.

Kudlow wants fiscal policy to take all the blame for a depreciating currency but surely the Fed at least shares the blame. Of course, Kudlow is right about fiscal policy. The rebates are a waste of money; they won't stimulate the economy and they will add to the deficit and debt.

Explanation for Low Jobless Claims

Randall Forsyth has an interesting article on the low level of jobless claims, something I've cited here as being inconsistent with a recession. The argument is that the self employed, such as real estate brokers and mortgage brokers, are independent contractors and therefore not eligible to file for unemployment benefits.

That's important because the self-employed have become an increasingly large portion of the U.S. economy, and not just because of the E-bay entrepreneurs that Vice President Dick Cheney is fond of citing.

During the housing bubble, the army of mortgage brokers and realtors swelled. The barriers to entry into those fields are minimal. As the former head of mortgage operations of a major New York bank once told me, a mortgage broker is a used-car salesman with a better suit. (Apologies to used-car salesmen.)

In any case, thousands of people began to earn a living by getting a slice of the housing boom. But even when they went to work for a mortgage or real-estate firm, they remained independent contractors, not employees. That meant that they weren't on firms' payrolls (and not counted in the establishment survey of the monthly employment report.)

Their independent-contractor status also precludes their receiving unemployment benefits. The legions of freelancers extend beyond the salesmen and saleswomen who raked it in during the housing boom to those did the honest work in the construction trades, from electricians to carpenters, who worked for contractors (also entrepreneurs.)

Many of this corps that swelled and prospered during the housing bubble are out of work. But they can't file for unemployment insurance.

If the economy is in recession this would seem to explain the low level of jobless claims. Anectdotal evidence would seem to support this thesis as well. We all know someone who was a mortgage broker or real estate broker that is now struggling. You can also include other self employed individuals who benefited from the housing boom as well. What about the personal trainer with real estate related clientele who now can't afford the luxury of a personal trainer?

The counter argument is that many of the people who entered the real estate business during the boom were just looking for extra income. Real estate was more of a hobby than an actual career, a way to supplement income from other sources. That isn't true in all cases of course, but it is certainly true of some portion. Maybe they'll go back to selling used cars...

Buttonwood Says....Nothing

The Buttonwood column at the Economist.com asks if the stockmarket is a presenting a buying opportunity. And answers the question with a resounding....uh....well they don't actually have an opinion. First BWood says sentiment is pretty negative...or not:

One approach is to look at sentiment. The best buying opportunities occur when investors are most gloomy. Unfortunately, sentiment is hard to measure decisively. At the end of January, bears outnumbered bulls by nearly 19 percentage points in a survey of the American Association of Individual Investors. That sounds pretty depressed. But Richard Bernstein of Merrill Lynch points out that Wall Street strategists are recommending a much higher weighting in equities than they did for much of the 1990s.

Then he says valuations are cheap...or not:

There are, broadly speaking, two schools of thought. The optimists argue that shares are not expensive relative to either trailing or prospective earnings and are very cheap relative to government bonds. The pessimists argue that corporate profits are historically inflated and could have a long way to fall as the economy subsides.

Finally, BWood says it is this uncertainty that explains why markets are so volatile. Duh.

This uncertainty helps explain why markets have been so volatile lately. It is tempting to believe the economic and credit problems are a short-term blip and that Wall Street will be rescued by the Fed as it has been so often before. But every time that view seems about to take hold, something happens to make investors fear a more sinister possibility: that years of debt-financed growth are finally unravelling and that the Anglo-Saxon economies face as bleak a decade as Japan did in the 1990s. The market may not hit bottom until that fear recedes.

There was a time when I couldn't wait to receive my latest copy of The Economist and the first thing I did when it arrived was read the Buttonwood column. Not anymore.

This Can't be Good

The WSJ has an article about credit card delinquencies that sounds fairly ominous. Apparently, folks are not paying their bills on time:

The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy.

Such a pullback may already be taking shape. Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October. And it reflects the volatility in consumers' spending habits as economic growth sputters.

Oh my goodness. People aren't getting deeper into debt fast enough. Whatever will we do?

Something Sort of Positive

In my never ending quest to find anything positive about the economy, I found this blog entry by Greg Ip at the WSJ about a service sector index constructed by ISI. Their index did not show the plunge that the ISM survey did:

Not so fast, says ISI Group. The New York brokerage firm has its own service sector index that it puts together from weekly surveys it conducts of auto dealers, homebuilders, shopping guides, credit card companies, airlines, banks, restaurants, wine & spirit wholesalers, temp employment companies, trucking companies, shipping companies and commercial real-estate companies. While it has been trending down, it didn’t show the abrupt plunge in January that the ISM’s index did: the four week average has slipped to 46.5 in early February from 47.1 at the end of January and 48.5 at the end of December.

“We think the risk of recession is high, but the data in aggregate are not consistent with a US recession right now,” says economist Oscar Sloterbeck, who runs the surveys at ISI. Unemployment insurance claims aren’t high enough, the manufacturing ISM index is at 51 instead of recession levels of 41, the firm’s own diffusion index is still above recession territory and “the Company Surveys in aggregate aren’t low enough.” –Greg Ip

Okay I know it's thin gruel but at least it's not as negative as the ISM survey.

Now That's a Central Bank

After an FOMC policy meeting, the committee releases a statement which is usually less than a page in length. The public then spends the next few minutes trying to figure out exactly what the hell they really mean. By contrast, consider the European Central Bank. The President and Vice President of the ECB hold a press conference at which they read a very detailed statement - and then take questions! And what a statement. If Europe ever gets the rest of its economic house in order, they will be a force to be reckoned with. A few outtakes from the latest post meeting statement:

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to leave the key ECB interest rates unchanged. This decision reflects our assessment that risks to price stability over the medium term are on the upside, in a context of very vigorous money and credit growth. The current short-term upward pressure on inflation must not spill over to the medium term. The firm anchoring of inflation expectations over the medium and long term is of the highest priority to the Governing Council, reflecting its mandate.

They are actually more concerned about inflation than a slowdown in growth. Imagine that, a central bank worried about inflation!

That said, uncertainty about the prospects for economic growth is unusually high and the risks surrounding the outlook for economic activity have been confirmed to lie on the downside. Risks relate mainly to a potentially broader than currently expected impact of financial market developments on financing conditions and economic sentiment, with negative effects on world and euro area growth. Further downside risks stem from the scope for additional oil and other commodity price rises, concerns about protectionist pressures and the possibility of disorderly developments due to global imbalances.

That part in bold is a direct jab at the US and it's reckless central bank.

Risks to this medium-term outlook for price developments are confirmed to lie on the upside. These risks include the possibility that stronger than currently expected wage growth may emerge, taking into account high capacity utilisation and tight labour market conditions. Furthermore, the pricing power of firms, notably in market segments with low competition, could be stronger than expected. At this juncture, it is therefore imperative that all parties concerned meet their responsibilities and that second-round effects on wage and price-setting stemming from current inflation rates be avoided. In the view of the Governing Council, this is of key importance in order to preserve price stability in the medium run and thereby the purchasing power of all euro area citizens. The Governing Council is monitoring wage negotiations in the euro area with particular attention. Indexation of nominal wages to the consumer price index should be avoided. Finally, further rises in oil and agricultural prices, continuing the strong upward trend observed in recent months, as well as increases in administered prices and indirect taxes beyond those foreseen thus far pose upside risks to the inflation outlook.

With respect to fiscal policies, a discretionary fiscal loosening in EU countries should be avoided. There is ample evidence that activist fiscal policies were not effective in stabilising European economies but rather led to sustained increases in the ratios of government expenditure and debt to GDP. Allowing the free operation of automatic stabilisers in countries with strong fiscal positions and safeguarding the long-term sustainability of public finances are the best contributions that fiscal policy can make to macroeconomic stability. Countries with fiscal imbalances are urged to make further progress with consolidation, in line with the requirements of the Stability and Growth Pact. There is a clear risk that some countries will fail to comply with the provisions of the preventive arm of the Pact, thereby undermining its credibility.

And that's left cross to the US politicians rushing to enact a "stimulus package". Wouldn't it be great if Bernanke had the guts to tell Congress that their stimulus package was BS and would only increase the budget deficit?

Structural reforms help economies to adjust to adverse shocks, foster productivity growth and increase employment and competition, thereby also helping to reduce inflationary pressures. In particular, enhancing competition in the services sectors and network industries, as well as applying adequate measures in the EU agricultural market, would be conducive to price stability in the euro area.

I love this last part. What he's saying is that capitalism works and the Europeans ought to try it.

And finally there's this at the end of the statement:

We are now at your disposal for questions.

Wouldn't it be great to see Bernanke on the hot seat answering questions about monetary policy?