Daily Sources 10/6

1. Germany decided on Sunday to guarantee all retail deposits in its banks, following on the decision in Ireland to guarantee six domestic banks and Greece's to do the same for the total amounts of all deposits. Britain has now decided to increase its guarantee on deposits from £35,000 to £50,000. Iceland's efforts to bail out its own financial system appear to have been overwhelmed by the size of the problem. This has led to more than one editorial calling for cooperation addressing the financial crisis in Europe, for example from The Economist, Wolfgang Münchau in the Financial Times, Daniel Gros and Stefano Micossi in the Wall Street Journal Europe as well as an editorial by the Wall Street Journal editorial board themselves. In an interesting counterpoint to all these calls for cooperation, former Fed Chairman Paul Volcker does not appear to think that increased international regulatory cooperation would necessarily be in our best interests.

2. Scott Lanman and Craig Torres at Bloomberg report that the Federal Reserve will double its auctions of cash to banks to as much as $900 billion.

To finance the Treasury's new plans, officials are considering changes to federal government debt sales, including a reintroduction of three-year notes. ... The Treasury also said that some of its cash-management bills may be ``longer-dated.'' ... In addition to the cash banks must hold at the Fed, lenders also sometimes place excess reserves. The central bank said today it will pay interest on those funds at the lowest targeted federal funds rate for each period less 75 basis points. That will put a floor under the actual fed funds rate each day and let the Fed `expand its balance sheet as necessary to provide the liquidity necessary to support financial stability.''

Michael M. Grymbaum of the New York Times reports that the DOW closed below 10,000 in response to all these efforts.

3. Freeexchange, a blog hosted by The Economist, has a very interesting piece noting that the past economic crisis which our current one most resembles might be that of 1873 and not 1929, according to financial historian Scott Reynolds Nelson. It began with a housing bubble which were complicated by investors relying on complex financial instruments and touched the globe. The blog piece suggests that what's in store for us now may be what was faced after the 1870s: robber barons and religious fundamentalism. (Watch out Bill Maher.)

4. Del Quentin Wilber at the Washington Post reported on Sunday that Xuighur Islamic separatists from China being in Guantanamo were being released to the United States, as sending them to China would likely result in their torture. The difficulties with the notion of an undifferentiated "war on terror," from the perspective of diplomacy, law, and just plain common sense, thus continue to wend their way through our lives.

5. Andrew Batson at Real Time Economics has a translation of the official statement of the People's Bank of China strongly endorsing the emergency financial rescue plan passed last Friday. It makes plain that the leadership in China believe their economic interests are closely entwined with the United States. It also has the following:

The People’s Bank of China will make financial and economic policies more predictable, targeted and flexible in order to maintain financial market stability and the sound and rapid development of the economy. The People’s Bank of China and relevant regulatory authorities have already drawn up plans to avoid and reduce the impact of the U.S. financial crisis on China.

An interesting sentence pair. You gotta wonder if it is good for the popular opinion of the plan in the US that the Communist government of China endorsed it.

6. Jose Llangari at Reuters reports that the Ecuadorian Oil Minister said that OPEC will analyze the effects of the financial crisis on the oil market and set production levels accordingly. Also today Ahmed Rouaba at Reuters reported that OPEC President Chakib Khelil said that he thought that oil prices would continue to fall next year. This is after several statements suggesting that OPEC was comfortable with $100/b, and then $90/b oil. This suggests to me that OPEC is slightly behind the ball here. Obviously, the real "decider" in OPEC is Saudi Arabia, and they have been worried about the high price environment for some time ... and it may well have been one of the precipitating factors in the current crisis. But I suspect that Riyadh is not likely to decide to put a high bottom on the price of oil in a climate where their two largest existing clients: the US and Europe (which together account for 45% of world oil demand) are broke and India and China (which have accounted for nearly all of the incremental demand growth in the last four or five years) have also lost their primary customers and, thus, the primary engines of economic growth in both.

7. Bracewell & Giuliani and Business News Americas' have released their Energy Outlook 2008, which includes the assessment that peak oil is likely 10 or fewer years away in Latin and South America and that most energy sector investors do not think that renewables will take up the slack. I did not purchase the report, but these two statements on their own are fairly significant. Given the new finds off Brazil's coast and the seemingly excessive mismanagement of Venezuelan oil production, I am somewhat surprised that the majority think that South and Latin America peak oil is so near. If so, they are likely right that renewables will not be able to meet the gap on its own ... and that nuclear will be one of the options South and Latin American leaders will be looking at. Which, in certain cases, will prove problematic.

8. Michael Evans at the London Times reports that two modern Russian capital ships, including a missile cruiser, sailed through the Strait of Gibraltar today on their way to Venezuela. (The ships being sent from the Russian naval base Severomorsk are evidently not of the same quality as these. It is also only the second time Russian naval vessels have passed through the Strait since the end of the Cold War.) In the meantime, Ellen Barry at the New York Times reports that Russia has begun to withdraw from its positions inside Georgia proper, five days before the agreed upon deadline. Nonetheless, hackles continue to be raised by the Russo-Venezuelan dalliance. Mary O'Grady, at the Wall Street Journal, who can always be counted upon for the most alarmist take-no-prisoners approach, noted, in contrast to most everyone else, that Venezuela announced last week that it was in talks with Russia to build nuclear power plants. Given the $/BTU cost of uranium versus oil or gas, this may make a lot of sense. But it obviously could provoke a more meaningful response in the US than what is taking place in Iran.

9. Tim Webb at the UK Guardian reports that Unilever, the gigantic food and consumer goods company, has come out against the biofuel mandates in the EU. Obviously, the are concerned about the increases to their input costs and have now publicly identified biofuel mandates as a significant cause.