Geithner Scolds Europe for Light Regulation

By JASON DOUGLAS for Dow Jones for WSJ

LONDON—U.S. Treasury Secretary Timothy Geithner said he doesn't believe a controversial austerity program embarked on by the U.K.'s coalition government will hurt Britain's economic growth.

Critics of Mr. Geithner's U.K. counterpart, Chancellor of the Exchequer George Osborne, have warned that the Conservative-led government's program of tax rises and spending cuts will cripple a fragile economic recovery.

In a radio interview recorded at the weekend and broadcast on British Broadcasting Corp. on Tuesday, Mr. Geithner said he didn't see much risk that Mr. Osborne's strategy would compromise growth.

"I am very impressed, as one man's view looking from a distance, at the basic strategy he has adopted," Mr. Geithner said. "At a time when it was easier to make tough choices quickly, he locked this coalition into a set of reforms that were very good."

While the U.K. and most of Europe have embarked on austerity drives to tackle problematic public finances, the White House has continued with an economic-stimulus program and proposed a slower path of fiscal consolidation.

Mr. Geithner said this difference in strategy between the U.K. and U.S. reflects differing circumstances. The U.S. has a smaller deficit relative to its economy, better underlying growth dynamics and a smaller government, Mr. Geithner said.

"Our fiscal challenges are very different from what you face in the U.K. and Europe as a whole," Mr. Geithner said.

He said the U.S. and Europe share similar challenges in funding "unsustainably expensive" commitments on health care and pensions.

But he added, "Our demographics are better, our growth rates are higher and those commitments are less expensive for us than they are for most of Europe. "That's not a challenge for us of the next three years or five years. That's a challenge for us of the next 50 years."

Mr. Geithner also criticized the light-touch regulation of the financial system that existed in the U.K. prior to the financial crisis, saying it was deliberately designed to lure business away from the U.S. and Europe and ultimately proved "very costly."

Mr. Geithner said international change in the financial sector will be a very complicated long-term challenge. "We have to make sure we act on reform while the memory of the crisis is still acute," he said.

Article from WSJ

European Central Bank to Raise Interest Rates

By NICHOLAS WINNING from Dow Jones for WSJ

LONDON—Euro-zone private sector output is growing at the strongest rate for more than four-and-a-half years, but surging inflation suggests the European Central Bank may raise interest rates sooner than expected, the preliminary results of a survey by financial information firm Markit showed Monday.

The euro-zone economy could grow 0.7% in the first quarter, up sharply from the disappointing 0.3% expansion seen in the final three months of 2010 when activity was hit by severe winter weather, according to Chris Williamson, chief economist at Markit.

There are also signs that divergences between strong growth in Germany, Europe's biggest economy, and the smaller states at the heart of the currency area's debt crisis may be starting to narrow, he said.

"Less welcome are the signs of inflationary pressures building up. The jump in rates charged for goods and services was the largest ever recorded by the survey, highlighting the speed with which prices are being driven higher by rising food, oil and other commodity prices," Mr. Williamson said.

The flash reading of the euro zone's Composite Output Index, a gauge of activity based on partial results of a survey of manufacturing and services firms, rose to 58.4 in February from 57 in January, the highest reading since July 2006. A reading above the neutral 50 level indicates an expansion in activity.

The manufacturing Purchasing Managers' Index rose to 59.0 from 57.3 in January, the highest reading since June 2000, while the Services Business Activity Index rose to 57.2 in February from 55.9 the previous month, marking the strongest reading since August 2007.

Economists said the results of the survey increased the risk that the ECB could start tightening monetary policy earlier than expected. The central bank, which aims to keep inflation just below 2% over the medium term, has held rates at a record low of 1% since May 2009.

"Our forecast is for the first rise in rates to materialize in the fourth quarter this year, with various factors holding the ECB back, including a potential logjam in political discussions over bolstering the support mechanisms for countries in difficulty, and weak money and bank lending growth," said Ken Wattret, chief euro-zone market economist at BNP Paribas.

Growth in new orders gathered pace for the fourth month running and at the sharpest rate since June 2007. Manufacturing new orders grew at a rate equal to last March's 10-year high, with exports showing the largest monthly increase since April 2000. Services new business posted the strongest monthly gain since August 2007.

Employment rose for the 10th consecutive month in February as backlogs of work posted the largest monthly increase since July 2006, but job creation remained well below the pre-crisis peak, Markit said. Manufacturers took on staff at the fastest pace since June 2000, but a far more modest increase was registered in the services sector.

"Today's better-than-expected PMI data indicate that the euro-zone recovery is still in full swing, and remains little affected by the lingering sovereign debt problems in the region," said Martin van Vliet, an economist at ING. "This, coupled with signs of inflationary pressures building, reinforces expectations of a first ECB rate hike in the second half of this year."

WSJ Article

Euro-Zone Growth Weaker Than Expected

A crane operates behind a row of discarded refrigerators in Duisburg, Germany. German growth slowed to 0.4% in the fourth quarter from 0.7% in the third.

By NICHOLAS WINNING for the WSJ

LONDON—Euro-zone growth was slightly weaker than expected in the final quarter of 2010 as Germany was hit by severe winter weather, France's economy failed to accelerate, and Greece and Portugal contracted, preliminary official data showed Tuesday.

Euro-zone gross domestic product grew 0.3% for the second consecutive quarter in the period from October to the end of December, the European Union's Eurostat agency said. Economists were expecting quarterly growth of 0.4%, according to a Dow Jones Newswires' survey last week.

On a year-to-year basis, GDP was 2% higher than in the fourth quarter of 2009—up from growth of 1.9% in the third quarter but short of market expectations of a 2.1% expansion. For the year as a whole, the euro-zone economy grew 1.7% in 2010, following a record 4.1% contraction seen the previous year when the single currency area was in the grip of a severe recession due to the credit crisis and drop in global trade.

In the currency area's largest economies, German growth slowed to 0.4% in the fourth quarter from 0.7% in the third, France expanded 0.3% for a second consecutive month, while Italian GDP rose just 0.1%.

Among the smaller states at the center of the euro zone's debt crisis, many of which have introduced severe austerity measures, Greece contracted 1.4% on the quarter, Portugal shrunk 0.3% and Spain grew just 0.2%.

In a separate release, Eurostat said the 16 countries that shared the euro at the time had a combined global goods trade deficit of €500,000 million ($677,350) in December following a revised €1.5 billion deficit in November. Economists were, on average, predicting a €1.2 billion surplus.

The breakdown of the data showed euro-zone goods exports totaled €133.6 billion in December, a 20% increase annually, but imports grew 24% to €134.2 billion. However, exports were 5% lower on a monthly basis in December, while imports fell 5.6%. For the year as a whole, the euro zone's trade surplus shrank to €700,000 million in 2010 from €16.6 billion in 2009 as the rise in imports outpaced that of exports.

Exploiting Inflation to Advantage: Trade Play

Click to enlarge image

How to Play Expected Inflation From the TIPS Spread

By: Kirk Lindstrom

The “TIPS Spread” is a simple comparison between the yield of Treasury Inflation Protection Securities (TIPS) and the yield of conventional U.S. Treasuries with the same maturity date. You calculate the TIPS Spread by subtracting the current yield on TIPS from the nominal U.S. Treasury bond yield for the term in consideration.

The “TIPS Spread” tells you what Treasury bond investors, on average under normal conditions, expect for the average inflation over the term. Those who expect inflation to be higher than the spread will buy TIPS. Likewise, those who expect inflation to be lower than the spread buy regular U.S. Treasuries.

For example, today the 10-year TIPS has a base rate of 1.32%. When you subtract that from the 10-year Treasury yielding 3.63% you get a difference of 2.31%. This means Treasury investors "break-even" in TIPS vs. regular U.S. Treasuries if inflation averages 2.31% over the next 10 years. TIPS will do better if inflation is higher.

Likewise, the longest maturity available is the 30-year TIPS which has a 2.16% base rate. When you subtract that from the 30-year Treasury yielding 4.69% you get a difference of 2.53%. This means Treasury investors "break-even" if inflation averages 2.53% over the next 30 years.

This chart shows the historical base rates for TIPS with maturities of 5, 10, 20 and 30 years back to 2004 plus the "expected inflation" rate using the 10 and 30 year TIPS spread.

Exchange traded funds that invest in TIPS include:

• iShares Barclays TIPS (TIP)
• PIMCO 1-5 Year U.S. TIPS (TIPZ)
• Schwab U.S. TIPS (SCHP)
• Managed mutual funds that invest in TIPS include:
• Fidelity Inflation-Protected Bond (FINPX)
• Vanguard Inflation-Protected Secs Inv (VIPSX

DISCLOSURE:

The author owns a very small amount of gold hidden in the house for bribes if we see Armageddon but I own "treasury inflation protected securities" (TIPS) mutual funds (like the ETF TIP or managed funds FINPX, VIPSX) and Series I-Bonds as well as individual TIPS. He also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P500, for both inflation protection and income. Unless something major changes with the markets, he plans to buy the 30-year TIPS with the 2/15/2041 maturity date on the auction that closes on 2/17/2011 directly through a broker for regular and ROTH IRAs.

Argument to Abandon EU

http://www.ukipmeps.org
► European Parliament, Strasbourg - 24 November 2010

► Speaker: Nigel Farage MEP, UKIP, Co-President of the EFD group;
..................................

► Debate: European Council and Commission statements - Conclusions of the European Council meeting on economic governance (28-29 October)

Transcript:

Good morning, Mr van Rompuy,

You've been in office for one year and in that time the whole edifice is beginning to crumble, there's chaos, the money's running out - I should thank you; you should perhaps be the pin-up boy of the Eurosceptic movement.

But just look around this chamber, this morning. Just look at these faces. Look at the fear. Look at the anger. Poor old Barroso here looks like he's seen a ghost.

They're begining to understand that the game is up and yet in their desperation to preserve their dream, they want to remove any remaining traces of democracy from the system. And it's pretty clear that none of you have learnt anything.

When you yourself, Mr van Rompuy, say that the euro has brought us stability. I suppose I could applaud you for having a sense of humour, but isn't this, really, just the bunker mentality?

Your fanaticism is out in the open. You talked about the fact that it was a lie to believe that the nation state could exist in the 21st Century globalised world. Well, that may be true in the case of Belgium, who haven't had a government for six months, but for the rest of us, right across every member state in this Union - and perhaps this is why we see the fear in the faces - increasingly people are saying, 'We don't want that flag. We don't want the anthem. We don't want this political class. We want the whole thing consigned to the dustbin of history.'

And we had the Greek tragedy earlier on this year, and now we have this situation in Ireland. Now I know that the stupidity and greed of Irish politicians has a lot to do with this. They should never ever have joined the euro. They suffered with low interest rates, a false boom and a massive bust.

But look at your response to them. What they're being told, as their government is collapsing, is that it would be inappropriate for them to have a general election. In fact Commissioner Rehn here said they had to agree their budget first before they'd be allowed to have a general election.

Just who the hell do you think you people are?

You are very very dangerous people, indeed. Your obsession with creating this Euro state means that you're happy to destroy democracy. You appear to be happy for millions and millions of people to be unemployed and to be poor. Untold millions must suffer so that your Euro dream can continue.

Well it won't work. Because it's Portugal next, with their debt levels of 325% of GDP, they're the next ones on the list, and after that I suspect it will be Spain. And the bailout for Spain would be seven times the size of Ireland's and at that moment all of the bailout money has gone - there won't be anymore.

But it is even more serious than economics. Because if you rob people of their identity. If you rob them of their emocracy, then all they are left with is nationalism and violence. I can only hope and pray that the Euro project is destroyed by the markets before that really happens.

EU's Contribution to Economic Growth Questioned

EU leaders in better days

By PAUL HANNON from DOW JONES

Experience has taught us not to take the labels the European Union chooses to place on its many and various "pacts" at face value.

The Stability and Growth Pact was cooked up in 1996 and singularly failed to meet either of its two goals. Patently, the euro zone has neither been stable nor characterized by strong growth.

So it is with the new Competitiveness Pact, which German Chancellor Angela Merkel and French President Nicolas Sarkozy are trying to foist on their counterparts in the rest of the euro zone, so far without much success.

Few of the measures being proposed under the pact are likely to make the euro zone's members more competitive, either within the currency area or relative to other economies in the rest of the world.

Instead, they are intended to improve the public finances of the "peripheral" members by ensuring that they behave more like Germany. And on one issue—corporate taxation—the pact looks likely to damage rather than enhance competitiveness.

While it may not be what its authors claim it to be, many of the measures included in the pact are of value, such as raising the age at which workers are entitled to start claiming pension payments.

But the German and French governments haven't done a very good job of selling the pact, and that's partly down to the fact that while it involves pain and political risk for other euro-zone members, it ignores most of the problems that confront the bloc's two giants.

Finance ministers from the euro zone are working Monday and Tuesday to find compromises that will make a deal possible by the time European Union leaders meet at the end of March. But even if a deal can be reached, the euro zone may not have done itself many favors. Not for the first time, it has drawn attention to the fact that it needs to improve its long-term growth potential, without doing so.

Agreeing to raise the retirement age makes an awful lot of sense for the euro zone. Standard & Poor's estimates that without further reforms to state-funded pension programs, German government debt will rise to more than 400% of gross domestic product by 2050, French government debt to more than 403%, Italian government debt to over 245%, and Spanish government debt to over 544% of GDP.

And enshrining limits on borrowing and debt levels in national constitutions doesn't seem a bad way of restoring trust in the financial management of euro-zone governments, which don't have a great deal of credibility left.

But it's unclear how either of those two measures would directly boost competitiveness, or the ability of euro-zone businesses to produce world-beating goods and services at low cost.

The steady loss of wage competitiveness relative to Germany has been one of the troubling and underlying causes of economic difficulty for a number of euro-zone members since the launch of the single currency. Putting an end to wage indexation does look like a move that would help the competitiveness of the small number of countries that still indulge in the practice, which ensures that a relatively high inflation rate is inevitably translated into higher wages without any guarantee of increased productivity.

But the clearest sign that the Competitiveness Pact isn't about competitiveness is the proposal to set a minimum corporate tax rate, which would undoubtedly be higher than the lowest rates currently applied by Ireland, Cyprus and Hungary.

In a paper published last week, five economists from the Organization for Economic Cooperation and Development, working with Christopher Heady from the University of Kent in the U.K., examined the impact of tax changes in 21 developed economies over the past 34 years.

Their conclusions aren't ambiguous. If the goal is to boost growth, "corporate taxes appear to be the taxes that should be reduced most."

Ireland's 12.5% corporate tax rate has long rankled with German and French policy makers. Their main objection is that companies looking for access to the EU market set up in Ireland in order to minimize their Europe-wide tax payments.

Ireland gets the jobs, but at the cost of depriving other EU members of corporate tax revenue. And they argue that leaves Ireland with a narrow tax base and makes its public finances vulnerable to the collapse of a single sector—such as construction.

There is an argument to be had, and France and Germany may be right. But this isn't about competitiveness, it's about boosting tax revenue.

The EU did have a competitiveness pact: the so-called Lisbon Agenda, which was launched in 2000, ran until last year, and was intended to raise the bloc's long-term growth potential. It promised a great deal more than it delivered, and any serious attempt to make the euro zone more competitive would revisit the Lisbon goals and make sure they were met at the second time of asking.

The Lisbon Agenda had promise because it tried to compare EU members with other parts of the global economy, identify where they were weak, and where there were better ways of doing things.

Reviewing progress over the 10 years of the Lisbon Agenda, the Centre for European Reform awarded top marks to the Netherlands. And therein may lie a glimmer of hope.

Arriving at the meeting of Euro Group finance ministers Monday, Dutch Finance Minister Jan Kees de Jager made it clear his government has much to contribute.

"It's not a diktat as such, but we can't just accept the ideas of France and Germany," he said of the Franco-German pact. "The Netherlands has ideas about this too. We do need to discuss competitiveness and strengthening it is very important. But …this proposal is just a starting point for discussion."

Evidence Suggesting Source of Housing Crisis Not U.S.

A Freddie Mac study showing Western Europe had a more gaudy housing mania and collapse than the U.S. leads its authors to the conclusion that the bubble was not an American export. No mention is made of the role of the world's most powerful central bank holding rates at 1% for several years.

The Boom, the Bubble, and the Bust Abroad

By Chief Economist Frank Nothaft on February 14, 2011

The housing crisis this country has experienced over the past four years has been the worst since the Great Depression. That comes as no surprise to most Americans; as home prices fell, the country saw a vigorous debate about the crisis, and about the laws and regulations that have emerged to help prevent another one from happening.

What is surprising is how often the debate here characterizes boom-bust cycles in housing prices as though they are uniquely American. They aren't.

Real House Price Growth in Selected Countries 1996-2009
Country (Source)	1996 - Peak	Peak - 2009
Notes: Prices deflated using the standard consumer price index for each country
Germany (BulweinGesa)	n.a. (Prices fell over entire period)	-13%
United Kingdom (NBS)	152%	-17%
Ireland (ESRI)	182%	-25%
France (INSEE)	108%	-9%
Italy (Nomisma)	51%	-5%
Spain (MVIV)	115%	-10%
USA (FHFA)	47%	-15%

As the table above shows, most European countries saw a huge run up in real (inflation-adjusted) home prices followed by sharp declines.

In Europe, where the five-year, fixed-rate mortgage is king, middle-class families surged into the housing market as global interest rates reached historic lows and fast-rising home prices fueled a frenzy. A similar story unfolded in the U.S., especially in states like Nevada and Florida, where borrowers were more likely to eschew conforming conventional (i.e. 30-year fixed rate) mortgages in favor of 2/27's, 3/28's, and other short-term subprime and non-traditional mortgage products. On the other hand, the presence of the 15-30 year mortgage may be one reason the U.S. home price bubble did not reach the same stratospheric levels as in some other countries.

But the key question posed by the table above is this: why didn't German borrowers respond to low interest rates like the borrowers in the U.S., United Kingdom, or Spain? A few reasons suggest themselves.

First, the hurdles to homeownership are higher in Germany. While long-term prepayable mortgages with down payments of 20 percent or less are standard in the U.S., they are virtually unknown in Germany. Borrowers there can expect to make 30 to 35 percent down payments on mortgages with terms of 10 years or less, and also agree to stiff pre-payment penalties equal to the interest they would have paid had the loan amortized to full maturity.¹

Second, Germany's mortgage terms also reflect a housing policy that has primarily targeted public support towards middle-class rental housing as opposed to owner-occupied homes. The homeownership rate in Germany is 42 percent versus 67 percent in the U.S. and more than 80 percent in Spain.

Third, Germany did have a housing price bubble. But it took place a decade earlier, following re-unification. German home prices rose much faster than incomes as the country merged, and were coming off their peak at the start of the 21st Century. As a result, they are now back in line with neighboring countries.

Even so, Germany wasn't immune from the financial aftershocks that followed when the housing bubble popped in 2007, according to a recent report from the Congressional Budget Office.

"In some (European) countries, the government bailed out issuers of covered bonds, and in early 2009, the European Central Bank launched a €65 billion ($84.5 billion) program to purchase covered bonds in an effort to restore liquidity to that market," the CBO writes, and "Spain and Germany guaranteed another €300 billion ($390 billion) worth of covered bonds issued by mortgage lenders" to shore up their housing finance systems.²

The bottom line: just as a housing price bubble wasn't unique to the United States, neither was the coincident financial bust that followed.

¹ "The American Mortgage in Historical and International Context," Green and Wachter, Journal of Economic Perspective, Fall 2005.

² "Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market," Congressional Budget Office, December 2010, p. 50.

Italian Auction Bodes Well for Portugal

By Emese Bartha, WSJ

Italy Monday sold close to the maximum intended amount in five- and 30-year government bonds, known as BTPs, at somewhat higher yields than previously, confirming steady investor demand for the country's debt and sending a cautiously positive signal for Portugal and Spain, which will sell government debt later this week.

The Italian auction was "another confirmation" that the country doesn't face any immediate problems in funding itself, said Jan von Gerich, senior analyst at Nordea in Helsinki. "The successful Italian auctions pave the way for the Portuguese and Spanish auctions later this week, while these auctions shouldn't face any bigger hurdles either," he said.

Italy offered €3.75 billion ($5.08 billion) to €5.25 billion of the 3% Nov. 2015 and 5% Sept. 2040-dated BTPs, and sold €5.176 billion—the maximum planned €3.5 billion in the five-year BTP and €1.676 billion in the ultra-long one.

The yields increased from previous auctions, held Jan. 13, 2011 and Sept. 13, 2010, respectively, although the yield on the closely watched five-year BTP has only ticked up 0.1 percentage point to 3.77% from 3.67%. This increase reflects investors' new confusion over future bailout rules, rather than Italy-specific fears, analysts said.

The yield rise for the ultra-long bond was a bigger 0.71 percentage points, to 5.51% from 4.80%, but one has to bear in mind that the previous tender took place before the repricing of euro-zone debt in the autumn before Ireland's bailout.

The bid-to-cover ratios, which show how demand compares with the amount sold, came in at 1.4 versus 1.41 previously for the November 2015 BTP and 2.06 versus 1.73 for the September 2040 BTP.

The bonds on offer had been considered as cheap versus the two- and 10-year segments of the Italian curve, so offering incentives for potential buyers. Citigroup analysts had also noted that the Italian 5/10-year yield spread has flatted to historically attractive levels relative to Spain during last month.

"Some concession was given ahead of today's auction and it is likely to have supported total bids," said Annalisa Piazza, an economist at Newedge in London. She added that the "very good demand" for Italian paper is a sign that, despite renewed pressure on euro-zone peripheral issuers, "market dealers are still taking advantage of interesting spreads to buy relatively 'safe' peripheral debt."

Italian bond yields trade significantly below those of Portugal, still seen by many as a bailout candidate, despite its relatively smooth fund-raising this year to date and its advanced funding completion as well.

But Italian yields also trade below those of Spain. Deutsche Bank analysts say Italy's funding fears aren't currently a source of concern, although March and September will be the heaviest in terms of funding needs, totaling €67 billion and €69 billion, respectively, to fund government-bond and Treasury-bill redemptions, as well as the budget deficit.

"In terms of the sovereign funding needs, in our opinion, Italy should remain in a fairly manageable position throughout the year," said Deutsche Bank analysts, and doesn't need to "over-issue" in early 2011.

Portugal will sell €750 million to €1 billion of 12-month T-bills Wednesday, and the same day it will buy back bonds maturing in April 2011 and June 2011. These bonds have outstanding volumes of €4.532 billion and €4.958 billion, respectively.

Spain will auction the 4.85% Oct. 2020 and 4.20% Jan. 2037 bonds Thursday for an amount to be announced later Monday.

Portugal's Growth on Target

February 14, 2011

LISBON—Portugal's economy expanded in 2010 as exports to Europe increased. However Patricia Kowsmann of the WSJ reports that the country will fall into recesession, due to a fall in domestic spending that will likely start to outpace the rise.

Portugal's National Statistics Institute said Monday that gross domestic product likely grew 1.4% in 2010, as economic growth in its trading partners in Europe boosted exports. On a quarterly basis, however, GDP contracted 0.3% in the fourth quarter from the third, it said in its flash estimate.

The estimate doesn't include a statistical breakdown of growth, but the agency said export volume fell slightly from the third quarter, while domestic spending also slowed.

Filipe Garcia, an economist at Informacao de Mercados Financeiros, said the GDP figure for the fourth quarter was slightly lower than expected.

"Going forward, the budget consolidation will likely continue to depress public consumption," he said. He added that exports could also be hurt by rises in prices for electricity and raw materials.

Final GDP figures will be released March 11.

Portugal is raising taxes, cutting salaries and taking other measures to reduce its spiralling budget deficit, something the Bank of Portugal said will drive the country to a recession this year. Private consumption is expected to fall 2.7% this year, while unemployment should surpass the current 10.9% rate.

A recession will make public finances even more difficult to turn around, at a time when the country is desperately seeking to prove to investors it can tackle its persistent deficit on its own.

To date, the government has met its budget target, cutting the deficit to around 7% of GDP last year, from 9.3% in 2009. It needs to reduce the figure to 4.6% in 2011.

Billionaires Count in Russia

February 14 2011

Russia boasted 114 dollar billionaires at the end of last year, according to an annual ranking of the country’s richest 500 published on Monday by Finans magazine and reported in the Financial Times.

The new record, last achieved in 2007, when there were 101 billionaires, represents a comeback for this exclusive "club" that seemed endangered when Russia’s stock market hit rock bottom in February 2009. The recovery still has legs. The top 10 Russians in 2010 were together worth $182bn – up 30 per cent from $139bn in 2009, but still below 2007’s peak of $221bn.

Their resurgence is explained by a 20 per cent increase in the Russian stock market last year. It also reflects strong growth in Chinese demand for raw materials – still the root of the wealth of Russia’s richest.

The top of the list is dominated by Russia’s “steel kings” – owners, or sometimes ex-owners, of sprawling metals plants. Number one, as last year, is Vladimir Lisin, low-profile chairman of the board of NLMK Steel, based in Novolipetsk, with an estimated worth of $28.3bn.

Entering the top three is Alisher Usmanov, majority owner of Metalloinvest, another metals company, and a shareholder in London’s Arsenal Football Club.

Second is Mikhail Prokhorov, who sold his shares in Norilsk Nickel at the top of the market in spring 2008 – and thus was the only oligarch with any cash to spare when the markets collapsed.

Oleg Deripaska, head of aluminium company Rusal, which floated on the Hong Kong stock exchange last year, is fourth, with an estimated fortune of $19bn. That is a striking revival for an oligarch who entered the crisis particularly heavily leveraged.

Roman Abramovich, the Chelsea FC owner who sold his Sibneft oil company in 2005 but now has big steel holdings, was in fifth place – the first time Russia’s one-time richest man has been outside Finans’ top three since its rankings began in 2004.

The Finans list records one significant fall from grace: Elena Baturina, wife of former Moscow mayor Yuri Luzhkov, who was sacked from his post in September, fell farther than anyone – 47 places, to 94, with her fortune halved to $1.1bn.

Russia actually lost more billionaires than any other country during the financial crisis; the total, according to Finans, dropped to 49 at the end of 2008, before rising to 77 in 2009. This was mainly because of widespread use of shares as collateral for loans, which multiplied losses when the market soured.

Fannie Mae's Future Abruptly Terminated

WSJ REView and outlook:

the end of fannie mae

FEBRUARY 14, 2011

Treasury wants the company phased out but punts on how to do it.

It's enough to make you believe in miracles: The Obama Administration is now on record as saying that Fannie Mae and Freddie Mac should go out of business. It took a global financial panic and $140 billion in taxpayer losses, but on Friday there it was in black-and-white in the U.S. Treasury's report to Congress on reforming the mortgage market: The Administration will "ultimately . . . wind down both institutions."

This marks a break with decades of bipartisan support and protection for the two government-sponsored giants of mortgage finance. Fannie Mae has its roots in the Roosevelt Administration, and a phalanx of bankers, mortgage lenders, homebuilders and Realtors worked together to keep the companies growing and federal mortgage subsidies flowing. Now even some Democrats—though not yet those on Capitol Hill—admit their business model was a catastrophe waiting to happen.

***

Under the Administration's proposals, Fan and Fred wind down over five to seven years. The two mortgage giants would, in effect, gradually price themselves out of the mortgage finance market by raising guarantee prices and down payment requirements, while lowering the size of the mortgages they could securitize and guarantee. This sounds like a plausible set of first steps to lure private capital back into the mortgage market, where some 92% of all new mortgages are currently underwritten or guaranteed by the government.

The $5 trillion question, however, is what would replace Fan and Fred. And here the Obama Administration has punted, offering the "pros and cons" of three broad proposals without endorsing any one of them.

Door No. 1 is the best of the lot by our lights. Under this option, federal guarantees would be limited to Federal Housing Administration (FHA) loans for lower-income buyers and VA assistance for veterans and farm programs—each a narrowly targeted market segment. A Treasury official says this would reduce the taxpayer backstop over time to about 10% to 15% of the mortgage market.

The Administration puts the case for federal withdrawal from the broader housing market in compelling terms: "The strength of this option is that it would minimize distortions in capital allocation across sectors, reduce moral hazard in mortgage lending and drastically reduce direct taxpayer exposure to private lenders' losses." Bravo.

Treasury points to other benefits: "With less incentive to invest in housing, more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets. Risk throughout the system may also be reduced, as private actors will not be as inclined to take on excessive risk without the assurance of a government guarantee behind them. And finally, direct taxpayer risk exposure to private losses in the mortgage market would be limited to the loans guaranteed by FHA and other narrowly targeted government loan programs: no longer would taxpayers be at direct risk for guarantees covering most of the nation's mortgages."

Those two paragraphs more or less sum up 20 years of Journal editorials on housing.

So what's not to like? The Administration says this option could reduce access to credit for some home buyers, and that it would leave the government without the tools to intervene in a future crisis. As for the credit point, other countries have high rates of home ownership with far less government support. If the government stands aside, it would open the way for alternative forms of finance, such as covered bonds, that now can't compete in the U.S. because of government favoritism for the 30-year mortgage model. This would open options for borrowers by increasing the diversity of financing.

As for a future crisis, government intervention is less likely to be needed if the market isn't distorted by government subsidies in the first place.

Behind Door No. 2 is a rump Fan or Fred, one that would stay small in "normal" times but stand ready to step in with Uncle Sam's firepower in a future housing-finance crisis. But as the Administration acknowledges, it would be difficult both to stay small and retain the capacity to go large when needed. We'd add that the political pressure to expand any federal mortgage-lending program would be too great for lawmakers to resist. Within a generation, the winding down of Fan and Fred would be unwound.

But the greatest danger lies behind Door No. 3, which looks like Fannie in a new suit. Under this last option, the Administration envisages a group of tightly regulated, well-capitalized private mortgage insurers whose policies would be backstopped by government reinsurance. The government would charge premiums for this insurance, "which would be used to cover future claims and recoup losses to protect taxpayers." This reintroduces the lethal mix of private profit and public risk by other means.

The problem with Fan and Fred from the beginning was not—despite the Administration's claims—that the profit motive corrupted their benign goals. Rather, the political influence and financial power of the housing lobby ensured that the companies operated outside the normal rules of politics and financial discipline. Thanks to an implicit government guarantee, the market never put any limit on their growth, even as their liabilities climbed into the trillions. Few politicians had the nerve to challenge a housing lobby that would attack them for opposing home ownership. The same political flaws would afflict a future reinsurer and its coterie of putatively private insurers.

The power of the housing lobby is implicit even in the Treasury's refusal to pick a preferred reform. As with entitlement reform, the Administration is leaving the hard work to House Republicans, who will bear the brunt of the political blowback. A reasonable GOP fear is that the Administration, whatever its rhetoric now, will pounce with a veto when it's politically advantageous—in, say, 2012.

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Our view is that there should be no federal housing guarantee. If Congress wants to subsidize housing for the poor, it ought to do so explicitly through annual appropriations. One lesson—perhaps the most important—of the financial crisis is that broad policy favors for housing hurt every American by misallocating capital and credit. The feds created incentives to pour money into McMansions we didn't need while robbing scarce capital from manufacturing, biotech and other uses that might have created better jobs and led to a more balanced and faster growing economy.

We realize this is political heresy, but it is the beginning of wisdom in getting government out of the mortgage market. We're glad to see the Administration concede this rhetorically, even if it lacks the courage to embrace its logical policy conclusions.