Finance Blog number 1

Japanese Financial Services Minister Shizuka Kamei said the central bank should contemplate directly purchasing government debt, increasing political pressure for the policy board to overcome deflation.

“The central bank should consider underwriting debt to help the government create funds for fiscal stimulus,” Kamei said at a parliamentary hearing in Tokyo today. By law, the Bank of Japan is prohibited from buying debt directly.

Kamei’s remarks underscore the growing tension between the central bank and Prime Minister Yukio Hatoyama’s administration over how policy makers can fight price declines. Burdened by the largest public debt in the industrialized world, the government has little room to bolster spending and is urging the bank to take charge in beating the deflation that threatens the nation’s recovery from its longest postwar recession.

“The Bank of Japan is under siege with increasing government pressure and severe deflation,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work for the central bank. “The market knows that bond purchases won’t be a panacea for deflation and they would hurt the BOJ’s independence.”

Having the central bank underwrite debt would give the government more access to funds, though it could also heighten investor concern about the nation’s fiscal discipline and drive bond yields higher. The yield on benchmark 10-year government debt rose to 1.31 percent at 1:13 p.m. today.

Fiscal Policy Needed

Kamei said the central bank alone won’t be able to eradicate price declines and that fiscal policy is also needed. Finance Minister Naoto Kan replied by saying fiscal discipline must always be exercised even though spending can help prop up the economy.

“It’s necessary to provide funds for bold fiscal spending” with direct purchases of debt from the central bank, said Kamei, who heads a junior coalition party. “Without fiscal stimulus funds, Minister Kan can’t resolve the economy’s output gap payday loans. He’s not a magician.”

The bank currently buys 1.8 trillion yen ($20 billion) of government debt from lenders each month. Bank of Japan Governor Masaaki Shirakawa has said the purchases are to provide liquidity and aren’t aimed at paying for government projects.

Kamei, head of the People’s New Party, has championed that increased government spending is key to spurring growth. Last year, he forced the government to delay unveiling a stimulus package he said was too small.

‘Show Its Commitment’

“Japan can’t overcome this economic crisis unless the Bank of Japan shows its commitment by going as far as” underwriting debt to pay for government spending, Kamei said.

Kan, a member of the ruling Democratic Party of Japan, has put heat on the central bank to do more to halt price declines and last month indicated he wanted Shirakawa to implement an inflation target. The finance chief said he wants to stamp out deflation as soon as this year and reiterated that he wants the bank to target inflation of 1 percent or higher.

“Given that various efforts to overcome deflation have failed, I won’t say we can immediately overcome this in a few months,” Kan said. “If I were allowed to be ambitious, I’d say I want prices to rise within the year” adding that “that is just my hope.”

Consumer prices excluding fresh food, the central bank’s key gauge of inflation, slid 1.3 percent in January from a year earlier, an 11th straight decline, the government said last week.

Shirakawa, also speaking to lawmakers, said he is committed to keeping policy very accommodative and that having the benchmark overnight lending rate at 0.1 percent has helped lower borrowing costs for companies.

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Singapore’s consumer prices fell the least in eight months in November as food and transport costs climbed amid an economic recovery.

The consumer price index slid 0.2 percent from a year earlier, after falling 0.8 percent in October, the Department of Statistics said in a statement in Singapore today. The median forecast of six economists surveyed by Bloomberg News was for a 0.4 percent drop. Prices rose 0.4 percent from October, without adjusting for seasonal factors.

Rising commodity and food prices, coupled with an improving global economy, have sparked concerns that inflation will accelerate and derail Asia’s recovery. That’s prompted policy makers in Australia, Vietnam and India to start raising interest rates or signal they may remove monetary stimulus soon.

“As the economy is expected to continue its recovery, the outlook is for a moderate positive trend in inflation into next year,” said David Cohen, an economist with Action Economics in Singapore.

Singapore’s gross domestic product climbed an annualized 14.2 percent last quarter from the previous three months, the second consecutive expansion as the island exited the deepest recession since independence in 1965.

The central bank, which uses its currency rather than interest rates to manage price gains, forecasts inflation will be about zero this year. It said in October it will maintain a no-appreciation stance in its exchange rate policy, refraining from further monetary easing after opting for a de-facto devaluation of the Singapore dollar in April to counter collapsing exports.

Policy Changes

The Singapore dollar has gained about 3.2 percent in the past six months against the U.S. currency. It fell 0.5 percent to S$1.4119 against the U.S. dollar as at 12:55 p.m. local time.

Australia and Vietnam raised interest rates this quarter to contain inflation. In India, where wholesale food prices are rising at the fastest pace in 11 years, central bank Governor Duvvuri Subbarao said this month that monetary policy, while an “ineffective instrument” to rein in food costs, may be needed to damp inflation expectations.

Bank of Korea Governor Lee Seong Tae said this month the central bank shouldn’t wait too long before gradually raising interest rates, held at a record-low 2 percent since February.

Food prices, which make up 23 percent of Singapore’s consumer price index, rose 0.7 percent in November from a year earlier, after climbing 0.8 percent the previous month. Transport and communications costs climbed 2.4 percent, while housing prices slid 4.6 percent.

Consumer prices will probably rise 0.3 percent in 2009 and 2.8 percent next year, according to the median forecast in a quarterly survey of economists by the Monetary Authority of Singapore released Dec. 9. The central bank forecasts inflation will average 2.5 percent to 3.5 percent in 2010.

“We expect inflation to return modestly by year end and for it to continue climbing in the first quarter next year,” said Matt Hildebrandt, an economist at JPMorgan Chase & Co. in Singapore.

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Australian retail sales rose in October as households spent more at department stores and restaurants.

Sales climbed 0.3 percent from September, when they fell 0.2 percent, the Bureau of Statistics said in Sydney today. The result matched the median forecast of 19 economists surveyed by Bloomberg News.

Household spending is helping stoke an economic expansion forecast by the central bank to accelerate in 2010, extending 18 straight years of annual growth. Governor Glenn Stevens raised the benchmark interest rate this week by a quarter percentage point for an unprecedented third month amid a rebound in consumer confidence.

“I think we’ll have record Christmas” sales, Gerry Harvey, chairman of Australia’s biggest electronics retailer, Harvey Norman Holdings Ltd., said in an interview with Bloomberg television. “We’ve had very good sales figures in October and November and I can’t think of any reason why that won’t follow into December.”

Australia’s dollar maintained gains versus the U.S. dollar. The currency traded at 92.86 U.S. cents as of 11:49 a.m. in Sydney from 92.90 cents before the retail sales report and 92.48 cents yesterday in New York.

Spending at department stores rose 1.9 percent and restaurant sales gained 1.1 percent, today’s report showed. Consumers spent 0.2 percent less on clothing.

Consumer Confidence

Hardware store group Mitre 10 said yesterday that earnings before interest and tax of A$2.67 million ($2.47 million) in October boosted profit for the four months through Oct. 31 to A$6.44 million, compared with a loss of A$239,000 for the same period a year earlier.

Consumer confidence is close to its highest level in more than two years, boosted by an increase in employment in October and higher wages.

Central bank policy makers increased the overnight cash rate target to 3.75 percent from 3.5 percent on Dec. 1, citing evidence that the economy, which skirted the global recession, “is in a gradual recovery.”

Gross domestic product rose 1 percent in the first half of the year and is forecast by the Reserve Bank to climb 3.25 percent next year and in 2011. Third-quarter GDP figures will be published on Dec. 16.

Investors are betting there is a 46 percent chance Stevens will boost the benchmark rate by a quarter point to 4 percent at the central bank’s next meeting on Feb. 2, according to interbank futures on the Sydney Futures Exchange at 6:24 a.m.

Rate Threat

Still, some retailers say the central bank’s interest-rate increases in October, November and this month will prompt consumers to reduce spending in coming months.

This year’s interest-rate increases add about A$150 to monthly repayments on an average A$300,000 home loan, and may prompt consumers to trim spending that surged in the first half of the year after Prime Minister Kevin Rudd distributed more than A$20 billion in cash handouts to households.

The cost to some home borrowers will be even higher after Westpac Banking Corp., Australia’s second-largest lender, increased its standard variable home-loan rate by 45 basis points after this week’s central-bank decision. A basis point is 0.01 percentage point.

Christmas trading is expected to be “subdued” in New South Wales, Australia’s largest state, according to a quarterly survey published today.

“The last quarter has been disappointing for many small businesses in New South Wales, with most of the gains made during the previous quarter negated,” said Christena Singh, author of today’s Sensis Business index report.

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Lehman Brothers Holdings Inc has filed a lawsuit against Barclays Capital Inc alleging the British bank took control of excess assets in collusion with Lehman executives when it bought its U.S. brokerage business a year ago, court documents show.

Lehman filed for bankruptcy on September 15, 2008, in the largest U.S. bankruptcy in history. Its flagship U.S. brokerage business was sold to Barclays less than a week later in a hurriedly assembled deal.

Lehman said in September this year that Barclays Capital got an $8.2 billion “windfall profit” due to the fire sale of its business for an undisclosed $5 billion discount off the book value of securities transferred to Barclays.

“The windfall to Barclays was not disclosed to the Court, the Lehman Boards or Lehman’s lawyers so as to allow the transfer to Barclays of billions of dollars in excess assets, without consideration, in a manner designed to avoid judicial, corporate and creditor oversight,” Lehman said in a Monday court filing.

The charges come after Lehman received approval in June to probe whether Barclays got “too good of a deal” when it bought Lehman’s brokerage business, as the British bank was able to quickly book a $4 direct lender payday loans.2 billion gain on its $1.75 billion purchase.

Barclays said at the time that it did not expect the probe to result in any additional claims.

In the lawsuit, Lehman requested the court to order Barclays to “disgorge to Lehman any ill-gotten gains it obtained” and pay punitive damages.

A Barclays Asia spokesman said in an email that all queries on the lawsuit should be directed to its New York office. Barclays’ New York officials were not immediately available for comment, outside of normal U.S. hours.

The case is In re: Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555. (Reporting by Supantha Mukherjee and Ajay Kamalakaran in Bangalore; Editing by Muralikumar Anantharaman)

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China’s stimulus-induced lending binge probably propelled growth in the third quarter to its fastest pace in a year. Now, policy makers have to figure out how to wean the economy off state support.

The country’s rebound has been powered by 4 trillion yuan ($586 billion) of spending on railways, roads, power plants and public housing. The program ends next year, forcing Premier Wen Jiabao to find new ways to sustain the expansion with increased consumer spending and the financing of small businesses.

“This has been growth on steroids,” said Michael Pettis, a Peking University finance professor and former head of emerging markets at Bear Stearns Cos. “The question now is how to stop pumping so much money into the system without a sharp reduction in growth.”

State-directed support will make up more than four-fifths of growth this year, says the World Bank, spurring record iron- ore production at Rio Tinto Group and car sales in China at Volkswagen AG. An exit from the stimulus won’t be easy without unnerving investors: A plunge in July loan growth sent the Shanghai Composite Index down more than 20 percent in August.

Extending the stimulus for too long risks the diversion of funds into stocks and real estate, an erosion of bank asset quality and inflationary pressures, the Asian Development Bank said in a report last month.

‘Severe’ Reaction

“Such a scenario might trigger a round of severe monetary tightening in the medium term that would pull growth down again,” the lender said.

China’s cabinet late today said that it will continue with monetary and fiscal stimulus measures even after the economy exceeded officials’ expectations for the first nine months of the year. At the same time, the State Council signaled that inflation concern will be an increasing focus of policymaking as the rebound strengthens.

The recovery remains at a “critical stage” and China will “maintain the continuity and stability of macro-economic policies,” the State Council said in a statement on a government Web site. “The policy focus of the next few months is to balance the need to maintain stable and relatively fast growth, the need to adjust the economic structure and the need to better manage inflationary expectations,” it also said.

Policy Shift

“They are cautious about the speed at which inflation will return,” said Ben Simpfendorfer, an economist with Royal Bank of Scotland Group Plc in Hong Kong. “It’s not a change of policy tone yet, but I think we will get that change in the first quarter of next year.”      The state-driven credit boom, which led to a record $1.27 trillion in new loans in the first nine months, the stimulus plan and resulting growth in car and property sales will help the economy expand 11.2 percent in the fourth quarter, according to Frankfurt-based Deutsche Bank AG. That follows a 7.9 percent expansion in the second quarter of this year, the first acceleration in growth since the last three months of 2006.

The benchmark Shanghai Composite Index of stocks reached a two-month high today before tomorrow’s economic data releases, including gross domestic product. The gauge rose as high as 3,105.51 before trading at 3,087.84 as of 2:03 p.m. local time.

Industrial output probably grew 13.2 percent in September and investment in properties and factories surged 33.1 percent in the first nine months, pushing GDP growth to 9 percent in the third quarter. It was the fastest pace since the third quarter of last year, according to the median estimate of 34 economists surveyed by Bloomberg News. The data will be released tomorrow.

Inflation Gauge

Figures this week will probably show no signs of inflation, allowing the People’s Bank of China to keep in place what it calls its “moderately loose” monetary policy. China will stick to that policy, guide reasonable loan growth to boost domestic demand and further cement the nation’s economic recovery, the central bank said Sept. 29.

Consumer prices dropped an estimated 0.8 percent in September, according to the survey.

Retail sales rose 15.5 percent last month, the fastest pace since January, according to the data survey. Car sales surged 84 percent to more than 1 million units for the first time, putting China on course to overtake the U.S. this year as the biggest market for sales of new cars.

The stimulus, record lending, tax cuts and subsidies may help push China’s imports 30 percent higher to $313 billion this quarter, according to Zurich-based Credit Suisse Group AG payday loans with low fees. Iron ore imports jumped to a record 64.6 million metric tons last month while copper imports rose 23 percent.

Global ‘Locomotive’

China’s demand for goods from overseas can play “a critical role in some locomotive way for the world,” Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London, said in a Sept. 2 research note.

The lending boom, equivalent to about 50 percent of China’s GDP in the first half, drove public and private investment in factories and properties 33 percent higher in the first eight months, helping restore investor confidence in stocks and property after the start of the financial crisis.

The Shanghai index has soared 70 percent this year as government-influenced spending helped growth rebound from 6.1 percent in the first quarter, the slowest pace of expansion in almost a decade.

Volkswagen Sales

Wolfsburg, Germany-based Volkswagen, the biggest overseas carmaker in China, sold 150,000 cars last month, a monthly record, as sales for the first nine months surged 37 percent. Car sales were buoyed after the government halved sales taxes and announced 5 billion yuan in subsidies to help rural residents to buy vehicles. Volkswagen is investing 4 billion euros ($5.9 billion) to expand capacity in China through 2011.

“China is the steam engine of the world economy,” Volkswagen sales chief Detlef Wittig said in a Sept. 25 interview in Frankfurt. “The lust for mobility there seems almost bottomless. We’re very well positioned there and will keep investing to secure our share of the market.”

Iron-ore production at London-based Rio Tinto, the world’s third-largest mining company, rose 12 percent in the third quarter to a record 47.5 million tons on demand from steelmakers in China, the company said in an Oct. 14 statement.

China Mobile Ltd., the world’s biggest phone company by market value, reported that subscriber numbers rose to 508.4 million at the end of September, more than the populations of the U.S. and Japan combined.

World Bank’s Remedies

The effect of stimulus spending will taper off starting in mid-2010; the overall impact will be less than half what it was this year, said Wang Tao, a UBS AG economist in Beijing.

On the World Bank’s list for measures to reduce dependence on investment-led growth are: boosting spending on health, education and social welfare to aid low-income earners and reduce their reluctance to consume; providing greater funding for small- and medium-size enterprises; and allowing more flexibility for the yuan to appreciate, making imports cheaper.

“Keeping the Chinese economy growing is very important for employment generation and to avoid social instability,” said Yolanda Fernandez Lommen, chief China economist at the ADB in Beijing. “The easy part has been done. The real challenge is ahead.”

By developing service industries and ensuring easier access to consumer products and credit, China can boost domestic consumption by $2.2 trillion, or more than France’s annual output, by 2025, the McKinsey Global Institute said in an Aug. 21 report.

Driving Investment

Some areas of the economy may emerge as new drivers of growth even as stimulus and new lending slow. Net exports may contribute 0.5 percentage point to next year’s expansion after slashing more than 3 percentage points from this year’s GDP rise, said UBS’s Wang.

A rebound in property construction, which contributes about a quarter of urban fixed-asset investment, will also pick up some of the slack in 2010, said Wang. Property sales jumped 73.4 percent in the first nine months of 2009 from a year earlier to 2.75 trillion yuan.

China may still have to get used to a lower average annual growth rate as reduced demand from Western nations slows exports. The World Bank estimates 2 percentage points may be shaved off the average 10 percent yearly growth recorded over the past decade, the ADB envisions a trajectory of 8 percent to 9 percent and Pettis says the economy may have to adjust to a trend growth rate of 5 percent to 7 percent.

“The government has been postponing the difficult and painful reforms,” said Fernandez Lommen. “It’s a huge task ahead.”

–Kevin Hamlin, with assistance from Andreas Cremer in Berlin. Editors: Anne Swardson, Chris Anstey.

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Industrial production in the U.S. rose more than anticipated in September, putting manufacturing at the forefront of the emerging economic recovery.

The 0.7 percent increase in production at factories, mines and utilities exceeded every forecast of economists surveyed by Bloomberg News and followed gains of 1.2 percent in August and 0.9 percent in July, Federal Reserve figures showed today. Another report showed consumer sentiment dropped more than projected this month.

The recent burst of activity on factory floors, spurred in part by a rebound at automakers, will likely give way to more moderate and sustainable gains in coming months as companies rebuild inventories and exports grow. The improvement has yet to generate jobs, one reason consumers remain anxious and underscoring why Fed policy makers say they will keep interest rates low for a long time.

“Manufacturing is turning around from deep recession to strong growth in a very short time,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York. “It’s going to be one of the important supports to growth.”

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 69.4 from 73.5 in September, which was the highest in more than a year, the group reported today. Measures of expectations for six months ahead and current conditions both fell.

Stocks Fall

Stocks dropped, depressed by disappointing results at General Electric Co. and Bank of America Corp. The Standard & Poor’s 500 Index fell 0.8 percent to close at 1,087.68. Treasury securities rose.

Industrial production was forecast to increase 0.2 percent after a previously reported 0.8 percent gain in August, according to the median estimate of 77 economists surveyed by Bloomberg News. Projections ranged from a gain of 0.5 percent to a drop of 0.5 percent.

Manufacturing accounts for about 12 percent of the U.S. economy. The jump in production over the past three months was the biggest since late 2005.

Capacity use climbed to 70.5 percent last month from 69.9 in August, the report showed. It was estimated to rise to 69.8 percent, according to the Bloomberg survey median.

Economists track plant operating rates to gauge factories’ ability to produce goods with existing resources. Lower rates reduce the risk of bottlenecks that can force prices higher.

Factory Production

Factory output, which accounts for about four-fifths of industrial production, increased 0.9 percent after a 1.2 percent gain the prior month.

Motor vehicle and parts production climbed 8.1 percent following a 6.1 percent increase the prior month.

“Cash for clunkers,” which offered incentives of as much as $4,500 for consumers to trade in old cars for more fuel- efficient ones, helped automakers trim stockpiles as sales climbed in July and August. Industry data showed sales plunged in September after the plan expired on Aug. 24.

General Motors Co. and Toyota Motor Corp. have predicted sales gains for the fourth quarter. GM on Oct. 7 said it plans to boost output to 655,000 vehicles in North America during this quarter to match increasing demand.

The increases in output last month were widespread. Factory production excluding motor vehicles increased 0.5 percent, and the diffusion index gauging the number of categories advancing was 56.9 in September, exceeding the 50 breakeven level for a second month.

October Gains

Regional reports yesterday showed gains in manufacturing extending into October. The New York Fed’s Empire State index soared to the highest level since mid-2004, while the Philadelphia Fed’s gauge eased off September’s two-year high.

Winnebago Industries Inc., the motor-home maker, yesterday reported a fiscal fourth-quarter loss that was smaller than analysts had estimated. The Forest City, Iowa-based company said it’s seeing a pickup in demand.

“Dealer inventory is very close to reaching the bottom, and our dealer partners will need to start to replenish soon to satisfy retail demand going forward,” Chief Executive Officer Bob Olson said in a statement.

Inventories at businesses fell 1.5 percent in August, the biggest drop this year, bringing the value of goods on hand down to $1.31 trillion, the least since December 2005, according to Commerce Department data this week.

American factories may also get a boost as more than $2 trillion in government stimulus programs worldwide are reviving demand from Asia to Europe. Exports climbed in August for a fourth consecutive month to reach the highest level of the year, according to Commerce Department figures.

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President Barack Obama said recent data suggest the U.S. economy is returning to growth and the administration must avoid removing stimulus programs prematurely.

“All the indicators would tend to suggest that we’re starting to see growth,” Obama said today in a Bloomberg Television interview. “What we have to be careful of is taking the crutches away from the patient too early.”

The White House last week said it expects the $787 billion stimulus to add as many as 3 percentage points to growth in July through September, and it credited the initiative with creating or saving as many as 1.1 million jobs. Obama signed the fiscal spending package into law in February.

“We want to get out of some of these extraordinary interventions as quickly as possible but not so soon that the recovery doesn’t take place,” Obama said. “We have to make sure that we avoid” a second recession, he said.

Economists put the odds of a double-dip recession in the next 12 months at 25 percent, according to the median estimate in a monthly Bloomberg News survey taken from Sept. 3 to Sept. 10. The previous forecast called for a 20 percent chance of the economy backsliding after it expands.

The U.S. economy will grow at a 2.9 percent annual rate in July through September, the Bloomberg survey showed. Growth is projected to slow to a 2.2 percent pace during the last three months of the year as consumer spending weakens during the holiday shopping season, when many stores expect to reap half of their annual revenue.

Economic Contraction

The world’s largest economy contracted 1 percent from April through June, according to the Commerce Department. The drop was the fourth in a row, making it the longest contraction since quarterly records began in 1947.

The unemployment rate last month jumped to 9.7 percent, a 26-year high, from 9.4 percent in July, the Labor Department said. Economists surveyed by Bloomberg this month forecast the jobless rate will reach 10 percent by the end of the year.

“We’ve seen steady declines in the number of people who are losing their jobs each month,” Obama said. “We’re seeing a bottoming out and potentially we could start seeing some positive job growth.”

Since the recession began in December 2007, the U.S. has lost 6.9 million jobs. Payroll cuts peaked at 741,000 in January and have since subsided, with 216,000 job losses in August, according to the Labor Department.

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Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet said the world economy is pulling out of its deepest recession since the 1930s.

“Prospects for a return to growth in the near term appear good,” while “critical challenges remain,” including possible further losses for financial firms, Bernanke said yesterday. Trichet said “green shoots” aren’t enough for him to declare the recovery sustainable and that officials “have an enormous amount of work to do.”

The mixed outlook was one of the main themes struck on the first day of the annual central bankers’ symposium in Jackson Hole, Wyoming, hosted by the Kansas City Fed bank. Policy makers from South Africa to Mexico and economists dissected the causes of the financial crisis and debated how to prevent or mitigate the next one.

Economic reports this week showed unexpectedly strong signals of a rebound in the U.S., Germany and France. U.S. purchases of previously owned homes climbed 7.2 percent in July to the highest level in almost two years, indicating the housing crisis that crippled the world’s largest economy is easing.

U.S. stocks gained for a fourth day, with the Standard and Poor’s 500 Index rising 1.9 percent in New York to the highest level since October. Benchmark 10-year notes yielded 3.57 percent, up 13 basis points from Aug. 20.

Services Expanded

Following last week’s data showing the euro-area’s two largest economies pulled out of a recession in the second quarter, Markit Economics reported yesterday that German services expanded this month for the first time since September. Its gauge for French manufacturing rose to its highest in 15 months.

“There is a sense here that things have stabilized since the panic,” said John Taylor, a former U.S. Treasury official and now a professor at Stanford University in California, who attended the symposium. “But things still look pretty flat and nobody is saying there is going to be a sharp rebound.”

After giving welcoming remarks at a dinner the previous evening, Bernanke, 55, opened the formal part of the conference yesterday with a speech defending the Fed’s responses to the crisis over the past year and those of counterparts around the world. A “strong and unprecedented international policy response” averted “the imminent collapse of the global financial system,” Bernanke said.

On the Mend

Even with the economy on the mend, Bernanke said “strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit.” Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Bernanke’s note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries free credit report instantly.

At lunch, Bank of Israel Governor Stanley Fischer told attendees that “despite the encouraging signs of recovery, it is too early to declare the economic crisis over.” The former first deputy managing director of the International Monetary Fund also said the global banking system may require “radical restructuring” to avoid future crises.

While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery.

‘A Bit Uneasy’

Later in the day, Trichet, 66, spoke from the audience during a debate period, saying, “I am a little bit uneasy when I see that because we have some green shoots here and there, we are already saying, ‘Well, after all, we are close to back to normal.’”

“We know that we have an enormous amount of work to do and we should be as active as possible,” Trichet said without elaborating on a forecast.

Bundesbank President Axel Weber, speaking on CNBC, said at the gathering that it’s “too early to say it won’t be a bumpy road ahead.”

Separately, the Organization for Economic Cooperation and Development will next month upgrade its outlook for the economy of its 30 nations, which include the U.S. and Japan, Secretary General Angel Gurria said. The Paris-based group said in June that the combined economy of the world’s most-industrialized countries will shrink 4.1 percent this year and grow 0.7 percent in 2010.

‘Positive Trend’

“We’re confirming a positive trend but are still cautious,” Gurria said in an interview in Jackson Hole. “There are risks that are important.”

Economists forecast the U.S. economy will expand at a 2.2 percent annual rate in the third quarter, according to the median estimate in an August survey by Bloomberg News. The IMF last month predicted the world economy will grow 2.5 percent in 2010 after contracting 1.4 percent this year.

One academic paper presented at the symposium said large financial crises can impair long-term economic growth by increasing government debt and reducing tolerance for risk.

“Many systemic banking crises have had lasting negative effects on the level of gross domestic product,” Bank for International Settlements economist Stephen Cecchetti said in the paper, written with BIS economists Marion Kohler and Christian Upper.

Meredith Whitney, the analyst who predicted that Citigroup Inc. would cut its dividend last year, outlined one key risk to the recovery by predicting the number of U.S. bank failures will quadruple as lenders struggle with bad loans.

“There will be over 300 bank closures,” Whitney said in an interview with Bloomberg Television in Jackson Hole. “The small-business owner on Main Street continues to see liquidity come away.”

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The U.K.’s house-price slump will persist until 2012 and hurt consumer spending, the National Institute of Economic and Social Research said.

Home values will resume their decline because recent gains were driven by a lack of available homes and the number of mortgages remains 65 percent lower than before the financial crisis, the London-based institute said today. It also predicts gross domestic product will keep falling until the final quarter of this year.

“There has been talk of stabilization and some recovery in the housing market, but we don’t think this is the case,” Simon Kirby, an economist at Niesr, told reporters yesterday. “We only see growth in the housing market returning in 2012.”

The Bank of England said this week that mortgage lending may strengthen in coming months, while Nationwide Building Society says that house prices increased in June. The economy has yet to emerge from recession after contracting the most since 1958 in the first quarter.

“The temporary rise in prices is probably the result of limited supply,” the report said. The institute’s clients include the Treasury and the Bank of England.

Falling house prices will hurt consumer spending growth in the next two years, Niesr said. Together with rising unemployment, this will encourage an increase in the household savings ratio to the highest level since 1997 next year, the institute predicted fast cash loans.

Budget Deficit

Government borrowing will peak at 12 percent of GDP in the fiscal year ending March 2010, or 165.7 billion pounds ($273 billion), before shrinking to 7.5 percent of GDP in 2013-14, Niesr said.

GDP slumped 2.4 percent in the first quarter. Niesr estimates that it fell 0.4 percent in the second quarter. The median forecast of 32 economists in a Bloomberg News survey is for a 0.3 percent drop. The Office for National Statistics will release the data on July 24.

The economy will grow again in the fourth quarter, by 0.5 percent, the institute said.

“The recovery will be weak,” Kirby said. “We see continued contraction in consumer spending and business investment.”

Bank of England policy makers are spending 125 billion pounds of newly printed money on assets to help bolster the economy. Minutes showing how they voted at the July 9 meeting, when they decided to maintain the size of the current buying program, will be released today at 9:30 a.m. in London.

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Norman Chan, named today as the new head of the Hong Kong Monetary Authority, vowed to maintain the local currency’s peg to the U.S. dollar, while expanding business in Chinese yuan in the city.

Chan, who will replace Joseph Yam on Oct. 1, will be paid 32 percent less than his predecessor, taking home HK$6 million ($774,179) a year. That’s more than three times the salary of U.S. Federal Reserve Chairman Ben S. Bernanke last year.

The 54-year-old Chan takes over the city’s de-facto central bank at a time when the yuan’s 21 percent appreciation over the past four years against the greenback is testing the Hong Kong dollar’s 26-year-old fixed exchange rate. The authority is also considering tougher regulation of financial products after a scandal over the sale of securities linked to the failed Lehman Brothers Holdings Inc.

“There’ll be no change near-term to the peg,” said Callum Henderson, Singapore-based head of currency strategy at Standard Chartered Plc. “It’s served Hong Kong very well and will continue to do so for the foreseeable future. Once the yuan is fully convertible Hong Kong can think about an adjustment to the policy but that’s still many years away.”

Chan, a former deputy at the central bank who oversaw reserves management and international affairs, will return after four years at the office of Hong Kong’s leader, Donald Tsang. Yam, who will step down on Oct. 1, will hand over management of a $207 billion currency reserve pool, the world’s eighth largest.

“It’s crucial that the HKMA strikes to enhance the competitiveness of Hong Kong’s financial services sector,” Chan told a press briefing. “In this regard the development and deepening of yuan business in Hong Kong is an important aspect. I shall use my best endeavors to maintain Hong Kong’s position as a premier financial center in Asia.”

The Peg

Chan joined the civil service in 1976 after graduating from the Chinese University of Hong Kong with a bachelor’s degree in sociology. He was an executive director of the HKMA when it was established with Yam at the helm in 1993 and became deputy chief executive in 1996.

Yam, 60, is Asia’s longest-serving central bank chief, guiding the HKMA through Hong Kong’s final years as a British colony into its first 12 years of Chinese sovereignty. He started his career as a government statistician in 1971.

As head of the HKMA, Yam consistently backed the Hong Kong dollar’s peg to the U.S. dollar. The city’s currency was kept at HK$7.8 versus the greenback since 1983 and from 2005 was allowed to trade in a range of HK$7.75 to HK$7.85. It traded at HK$7.7501 today. Chan told a press briefing he had no plan to change the peg.

Financial Crisis

Yam steered Hong Kong through the late 1990s Asian financial crisis, responding to a speculative attack on the Hong Kong dollar with $15 billion in stock purchases, and other troubles including the outbreak of SARS in 2003.

The HKMA has injected more than HK$195 billion this year to maintain the currency peg as funds pour into the city. The aggregate balance, a measure of liquidity in the banking system, climbed to a record HK$257 billion on May 19 faxless payday loan.

Hong Kong may widen the local currency’s trading band versus the U.S. dollar in the next one to two years, enabling it to appreciate as China’s economic growth lures investment to the city, according to ING Groep NV.

“They’ll realize they’re fighting a battle that’s really leaning against a structural wind, not just a cyclical wind,” said Tim Condon, chief Asia economist at ING in Singapore. “They’ll determine that that’s not a fruitful activity and respond like in May 2005, when they first widened the band.”

Hang Seng

Hong Kong has a “distinct advantage” in helping China become more important in the global financial system, Yam said June 18. The People’s Bank of China approved on July 2 a trial for five Chinese cities to use yuan for settling cross-border trade with Hong Kong, encouraging companies to replace the U.S. dollar in their transactions.

HSBC Holdings Plc and Bank of East Asia Ltd. won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong from Chinese regulators. Yam said July 9 he hopes to have some of the city’s stocks denominated in China’s currency, according to The Wall Street Journal.

Hong Kong’s Hang Seng Index of shares has underperformed this year, rising 31 percent, compared with a 75 percent jump in the Shanghai composite index. The city’s gross domestic product fell 4.3 percent in the first quarter from the fourth, the most since at least 1990, official figures show.

Lehman Collapse

A blot on Yam’s legacy was a scandal involving so-called mini-bonds backed by Lehman. Investors, many of them elderly, say the bonds were marketed by banks as safe investments when in fact they were structured products that plunged in value after Lehman declared bankruptcy late in 2008. Critics pointed the blame largely at what they called lax regulation.

Regulators should “strike a delicate balance” between protecting investor interests and developing different kinds of financial products, Chan told the press briefing.

Yam’s compensation attracted criticism. In 2008, he received HK$11.9 million, compared with Fed Chairman Bernanke’s $191,300 and Bank of England Governor Mervyn King’s 283,564 pounds ($462,000) in 2007. Central Banking Publications described Yam last year as the highest-paid central banker in the world.

Albert Ho, a lawmaker and Chairman of the Democratic Party, said Chan’s appointment lacks “credibility,” Radio Television Hong Kong reported on its Web site. Chan was picked by a three- man committee consisted of former HSBC Holdings Plc chairman John Bond and Li & Fung Ltd.’s founder Victor Fung, Hong Kong’s Financial Secretary John Tsang told reporters.

“Chan’s strong connections on the mainland will enable the HKMA to further enhance its close relationship with the regulatory authorities there,” Margaret Leung, Chief Executive of Hang Seng Bank Ltd., the biggest Hong Kong-based lender by market value, said in an e-mailed statement.

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