Inflation Blame Mideast Money U S Bank Regulation Timshel

In a case of the pot calling the kettle black, the U.S. Federal Reserve, the European Central Bank and the Bank of England are telling their developing-country counterparts to get their respective economic houses in order and do something about growing inflationary pressures.

``In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability,'' Fed Vice Chairman Donald Kohn said last week.

China is growing at an annualized 10.6 percent; India is chugging along at 8.8 percent; and Taiwan's gross domestic product is expanding 6.1 percent, while the economies of Thailand, Malaysia, Singapore and Hong Kong are advancing between 6 percent and 7.1 percent a year.

No doubt, this fast growth is contributing to global inflation. Food and energy prices, which account for a much bigger share of developing-country consumer spending than in industrialized nations, are soaring. Crude oil for future delivery climbed to a record $1.4585 on July 3, while corn futures reached a record $7.99 a bushel on June 27.

Developing countries are notoriously inefficient users of energy, and many subsidize gasoline and other commodities, preventing higher prices from deterring consumption.

`Totally Unsuited'

What's more, many Asian countries pursue export-oriented growth strategies, a key feature of which involves directly or indirectly linking their currencies to the dollar. Because oil is priced in dollars, Middle East petroleum exporters do likewise.

``By maintaining too tight a peg to the dollar, some countries are led to largely `import' the U.S. monetary policy, which is often totally unsuited to their economic situation,'' said Christian Noyer, the Bank of France's governor and a member of the ECB's governing council. ``This situation may result in inflationary pressures that are difficult to contain, which then tend to spread to the rest of the world.''

Bank of England Governor Mervyn King added that ``monetary policy looks, on average, a little lax'' around the world.

Still, look at who is doing the lecturing. After cutting its key federal-funds rate seven times in as many months, the Fed finds itself battling 4.2 percent inflation with a 2 percent benchmark interest rate.

The ECB yesterday increased its benchmark lending rate a quarter-point to 4.25 percent. Even so, it had kept that rate at 4 percent for 13 months, while inflation in the 15-country euro area accelerated from 1.9 percent to 4 percent, a 16-year high.

Meanwhile, King last month wrote a letter to Chancellor of the Exchequer Alistair Darling, saying the U.K.'s 3.3 percent inflation rate -- already above the bank's 2 percent target -- was headed for 4 percent.

Maybe the big boys should learn that responsibility, like charity, begins at home.

* * *

Global status used to be a national airline. Now every country wants a stock market and world-class financial center.

In the race to become the Middle East's New York, Qatar's Doha Securities Market gained a partner in the battle with its two main competitors -- Dubai and Bahrain -- by agreeing late last month to sell a 25 percent stake to NYSE Euronext for $250 million. The proposed investment will also leave Qatar well- positioned to compete with other regional aspirants, such as Saudi Arabia, Kuwait, Oman and Abu Dhabi.

Saudi Arabia's stock-market value equals $476 billion, followed by the U.A.E. at $219 billion, Kuwait at $209 billion, Qatar at $120 billion, Bahrain at $31 billion and Oman at $28 billion, according to data compiled by Bloomberg.

The stock markets' free-floats -- that which is available for purchase and not held by governments, families, foundations and other companies -- are much smaller, though. Saudi's adjusted free-float is $144 billion, Kuwait's $66 billion, the U.A.E.'s $34 billion, Qatar's $15 billion, Bahrain's 5 billion and Oman's $7 billion, according to Morgan Stanley Capital International.

Preparing for the day the oil and gas runs out is important. Even so, regardless of its wealth, the Middle East needs only one major financial hub.

* * *

During the past two decades, the U.S. has repealed legislation that barred interstate banking, separated commercial and investment banking, and split lenders and insurers.

The result was the emergence of big financial conglomerates with an increasingly complex makeup as banks, securities firms and insurers entered each other's business.

Two Concerns

``We need to create a resolution process that ensures the financial system can withstand the failure of a large, complex financial firm,'' Treasury Secretary Henry Paulson said in a speech in London this week.

``Two concerns underpin expectations of regulatory intervention to prevent a failure,'' he said. ``They are that an institution may be too interconnected to fail or too big to fail. We must take steps to reduce the perception that this is so -- and that requires that we reduce the likelihood that it is so.''

Paulson is right. The challenge, though, is that the horse has already left the barn. Citigroup Inc. used to take deposits and make loans. Now it also has an investment bank, an insurance company and an asset-management arm. JPMorgan Chase & Co. is the product of at least six money-center bank mergers and several smaller institutions.

With banks already lobbying for no change, and regulatory turf battles to be expected, enlightened legislation may be too much to hope for.

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist

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Inflation Blame Mideast Money U S Bank Regulation Timshel