Amid market tensions, the ECB’s broad collateral policy - which has always included accepting mortgage-backed securities in exchange for central bank funds - has been a boon to markets and a model for central banks including the Fed and Bank of England, which have broadened their collateral policies in turn.

But amid suggestions some banks are exploiting the ECB’s generous policy, Mr. Trichet Thursday gave the most serious hint yet that policy makers are eyeing the bank’s collateral criteria. “Our collateral framework has served us very well,” he said in the press conference following Thursday’s interest-rate decision. “We are permanently examining and applying our rules with great care … If it is necessary to refine elements in our scheme … we shall see what we have to do.”

ECB executive board member Jose Manuel Gonzalez-Paramo said last month that the bank is studying whether the rules on collateral “may need to be refined.”

Separately, Mr. Trichet Thursday also warned euro-zone citizens that rising global prices might mean an unavoidable reduction in euro-zone living standards: “The shift in relative prices and the related transfer of income from commodity-importing countries to commodity-exporting countries have to be accepted,” Mr. Trichet said. Warning euro-zone consumers and firms to adjust their behavior accordingly, he also tossed a shot across the bow of oil suppliers.

“We also tell the suppliers that to the extent that part of the prices are coming from this cartel this is very, very abnormal,”he said, noting that, globally, “when we have a demand-driven increase in prices then it plays a role in the automatic stabilization of global growth. But if we have a supplier-driven artificial scarcity then it is very grave.” – Joellen Perry

So which had more of an impact, higher tolls or higher gas prices? Streetsblog examines the numbers, and leans in the direction of tolls. “Here’s why: a typical round-trip into the Manhattan CBD uses between 1.3 and 1.4 gallons of gas (based on an average 22.6-mile round-trip distance and a stop-and-start 17 miles per gallon). Nationally, gas cost $3.65 this April-May and $3.05 a year earlier, for a year-to-year increase of 60 cents a gallon or just 80 cents per trip. The toll increase was a good deal higher than this, even accounting for trips into town via the free bridges.”

In May, the Journal cited a study by International Business Machines researchers of 4,091 drivers in 10 U.S. cities, including Atlanta, Los Angeles and New York. With national gasoline prices averaging $3.67 per gallon at the time of the survey, 9% of drivers said they already were seriously considering other commuting options. At $4.50 a gallon, the figure jumps to 46%.

But this is far from being merely a plea to get rid of price controls. It is a call for wholesale moral, political, and economic reform, for in his view it was not enough to get rid of corrupt leadership but to completely purge the principle that the central state is in charge of the whole of society. A thorough de-Hitlerization would require dismantling the central state and restore the old city states, completely ending the monopoly on industry and education and medical care, and a restoration of sound money, not to mention free trade with the world.

It came out in 1945 in Switzerland, one year after Mises's Omnipotent Government and Hayek's Road to Serfdom. It is more sweeping than the former (in a policy sense) and more radical than the latter (in a policy sense). In fact, I'm not entirely sure why it is that I had never heard of this book, except to say that it seems like most of Ropke's writings from this period haven't received the attention they deserve.

We'll have this available in paperback soon, but for now, have a look.

All these peculiarities of the structure of modern tyranny, whose ugliest and extremest form was Nazism, are marked by the entire dissolution of the values and standards without which our society, or any other, cannot exist in the long run: a pernicious anaemia of morality, a cynical unconcern in the choice of means, which in the absence of firm principles become ends in themselves; a nihilistic lack of principle, and, in a word, what may be described literally as Satanism and Nihilism. Everything rots away, and finally there remains only one fixed aim of the tyranny, to which all moral principles, all promises, treaties, guarantees, and ideologies are ruthlessly sacrificed --the naked lust for domination, for the preservation of the continually threatened power, a power held on to for no other purpose than the continued enjoyment of all its fruits. The immorality of such a regime needs no arguing.

But the difference in mandates or even economic circumstances between the U.S. and Europe don’t quite account for the divide, Deutsche Bank economists say in a research note this week titled “ECB is from Mars and Fed is from Venus.” As chief economist Peter Hooper explains, “The two central banks are reacting to relatively similar economic and financial circumstances as if they are from different planets, with the ECB’s approach akin to a frontal attack on inflation that the Roman god Mars would have approved of, while the Fed is being more cautious and patient, in a manner the goddess Venus would have endorsed.”

The Deutsche Bank economists say the divergence comes from the two regions’ different historical experiences in dealing with the shock from deflating asset prices and rising inflation.

In the United States: “The traumatic experience of the deflation and extreme levels of unemployment that occurred during the Great Depression in the 1930s – and the Fed’s mistakes during this period — play a prominent role in the discussion of monetary policy by both practitioners and academics. Accordingly, Fed policy makers have been very sensitive to the risk of asset price collapses and debt deflation (note, for example, the Fed’s reaction to the 1987 stock market crash, the [Long-Term Capital Management] crisis, and the burst of the dot-com bubble).”

In Europe: “Probably the most prominent economic trauma in Europe were Germany’s hyperinflation after World War I and currency reform after World War II. Throughout its existence the Bundesbank was extremely sensitive to inflation pressures, and willing to take significant risks with growth to keep inflation in check (note, for example, the Bundesbank’s reaction to the two oil shocks of the 1970s and its reluctance to follow the Fed in 1987). German sensitivity to inflation risks of course had a strong influence on the institutional design of the ECB and more recently on the implementation of the euro zone’s monetary policy.”

Of course, Fed officials in recent weeks have ratcheted up their talk about “vigilance” of inflation and inflation expectations. But most policy makers appear inclined to wait as long as they can to give their rate cuts of the last year a chance to work. And the ECB won’t necessarily be following today’s rate increase with more tightening. The Deutsche Bank economists say the the transatlantic policy divergence will diminish when weaker growth in Europe lowers fears at the ECB and even leads to rate cuts in 2009, while the Fed remains on hold. “What now looks like the beginning of a new transatlantic divergence of monetary policy,” they write, “will in our view eventually look like a blip in the time-tested relationship of the Fed leading and European central banks following.” - Sudeep Reddy

[E]ven these dismal headline numbers do not tell the full story of the erosion in labor market conditions. Over the past year, the number of workers employed part-time for economic reasons has risen by 1.1 million and accounting for these workers and those who have given up looking for a job and left the labor force yields an unemployment rate of 9.9%, compared to 8.3% in June 2007. Also, job counts in many industries, most notably leisure & hospitality services, continue to be overstated thanks to the “birth-death” model employed by the BLS. It will not be until the annual benchmark revisions are released in January 2009 that the influence of the model … will be stripped out. – Richard F. Moody, Mission Residential

Today’s reports painted a consistent picture of weakness in the US labor market. … While tax rebates are currently plugging a hole in consumer finances, the continued deterioration in labor income growth and decline in household wealth suggests that healthy consumer spending figures are unlikely to be sustained. – Lehman U.S. Economics

This report, along with today’s jobless claims data [which rose by 16,000 to total 404,000, above the forecast of 385,000], suggest a significant pickup in the pace of deterioration in the labor market. The net job loss in June after factoring in revisions to April and May was 114,000, while the household survey showed a 155,000 job loss and no reversal of May’s sharp rise in unemployment — the unemployment rate in the 16- to 24-year old group fell back by only 1/5 of the amount it rose in May, suggesting that school-leavers are finding the summer jobs market challenging. – John Ryding, Conrad DeQuadros, RDQ Economics

Another report that underscores the increasing pressures on consumers from a weakening labor market on top of pre-existing woes of over-extended balance sheets, plunging housing prices, tight lending standards, and soaring energy prices. After the temporary and modest beneficial impact of tax rebate payments, consumers will have nothing left to fall back on, and the underlying trend of consumption growth will therefore weaken even further in the latter part of the year. – Joshua Shapiro, MFR Inc.

I have to count Garet Garrett among those writers. And I'm reminded of this after having read "Insatiable Government," the title essay of a new collection of some of Garrett's best writing, as edited by Bruce Ramsey. Actually I'm not entirely sure what it means to refer to his "best writing," since just about everything he wrote between The Driver in 1922 and The Wild Wheel in 1954. And yet this essay, which has been unnoticed for three quarters of a century, should somehow stand out.

It was written in 1932: as an attack on the Hoover administration. You know President Hoover, the guy about whom the textbooks say did nothing to stop the worsening depression. We are told that he didn't take the problem seriously and instead trusted market forces to work themselves out.

We are told that he let the banks fall, the unemployment lines lengthen, the business sector to collapse, and, stuck in his 19th century frame of mind, did nothing that he should have done. It took the white knight named FDR to show up and take charge, using emergency powers and Keynesian theory to save the day.

Ok, if so, consider this from Garrett in 1932. He presumes that Hoover is using every power available to him to do precisely what the historians claim that FDR started. More profoundly, Garrett observes that success in these endeavors would be far worse than failure, because it would establish the principle that government should grow without end.

I know that long quotes are not reader friendly but this is irresistible. Thank goodness for Bruce Ramsey for highlighting it and bringing it back to public attention.

Jean-Claude Trichet, President of the ECB,
Lucas Papademos, Vice President of the ECB
Frankfurt am Main, 7 July 2008

Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to today’s press conference. Let me report on the outcome of our meeting, which was also attended by the President of the Eurogroup, Prime Minister Juncker, and Commissioner Almunia.

On the basis of our regular economic and monetary analyses, we decided at today’s meeting to increase the key ECB interest rates by 25 basis points. This decision was taken to prevent broadly based second-round effects and to counteract the increasing upside risks to price stability over the medium term. HICP inflation rates have continued to rise significantly since the autumn of last year. They are expected to remain well above the level consistent with price stability for a more protracted period than previously thought. Moreover, continued very vigorous money and credit growth and the absence thus far of significant constraints on bank loan supply in a context of ongoing financial market tensions confirm our assessment of upside risks to price stability over the medium term. At the same time, while the latest data confirm the expected weakening of real GDP growth in mid-2008 after exceptionally strong growth in the first quarter, the economic fundamentals of the euro area are sound. Against this background and in full accordance with our mandate, we emphasise that maintaining price stability in the medium term is our primary objective and that it is our strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability. This will preserve purchasing power in the medium term and continue to support sustainable growth and employment in the euro area. On the basis of our current assessment, the monetary policy stance following today’s decision will contribute to achieving our objective. We will continue to monitor very closely all developments over the period ahead.

In its quarterly credit conditions survey, the bank also said that demand for secured lending for house purchases had declined in the second quarter by more than lenders had anticipated in the first three months of the year.

Taken in concert with dismal services sector data, analysts said that the results of the survey further reduce the possibility of the Bank of England raising interest rates this year. The U.K. bank rate currently stands at 5%, following reductions in April, February and December.

Alan Clarke, U.K. economist at BNP Paribas, described the survey as a “particularly bleak assessment.” He said, “Just because the markets and central banks’ primary focus has moved more heavily towards inflation is not to say that households’ and firms’ experience of the credit crunch has passed its worst - rather the opposite.”

“Falling house prices are aggravating demand and supply of credit. The effects on growth are likely to persist for some time to come,” he warned.

U.K. residential property sales have slumped and prices have fallen in recent months as a tightening in credit availability spurred by concerns about losses in the U.S. subprime market led U.K. banks to hike their mortgage rates and reduce their loans for house purchases. Even though the BOE has cut its main interest rate by 75 basis points since December, mortgage rates haven’t fallen in tandem due to the greater difficulty associated with obtaining credit.

The poll found that a net balance of 47.3% of lenders questioned said that default rates on mortgage loans had increased in the second quarter, up sharply from 28.6% in the previous period. A net balance of 50.4% expected default rates to increase over the coming three months, higher than 40.1% in the BOE’s last poll. – Natasha Brereton and Nicholas Winning

You can bet those folks never test-drove a(n East German) Trabant or Wartburg.