More money. More banks.

European banks signed up to borrow 530 billion euros ($712 billion) from the European Central Bank, the bank announced today, in the central bank’s new offering of 3-year loans. That’s up from the record 489 billion euros banks borrowed in December in the central bank’s first offering of three-year money.

The number of banks participating soared to 800 in this offering from 523 in December. That’s a result of more small banks deciding that they would participate in this round.

The increase to 530 billion euros was above the 470 billion euros projected by economists surveyed by Bloomberg. But it was well below estimates earlier this month that borrowing could surge to as much as $1 trillion euros. The Wall Street consensus in recent days has been that anything less than 500 billion euros would be a disappointment resulting from banks’ reluctance to take on the “stigma” of needing the cash. Left to weigh “stigma” versus cash, European banks took the money offered at 1%.

The rise in the number of small banks participating, speculation goes this morning, could mean that more of this round of borrowing could actually wind up as loans in the real economy. Read more

Fed surprise as central bank says it will keep rates exceptionally low through end of 2014

Actually something of a surprise from the Federal Reserve’s Open Market Committee today.

The committee decided to keep its target rate for short-term interest rates at 0% to 0.25%.

No surprise there.

But then it said it anticipated keeping rates at that exceptionally low level through at least late 2014. Previously the Fed had said “though mid-2013.” Read more

Maybe you think the “solutions” to the euro debt crisis being pursued by German Chancellor Angela Merkel and European Central Bank President Mario Draghi are totally wrong. Maybe you can’t imagine that these two leaders are seriously proposing to condemn the EuroZone to a year of recession followed by more chaos and, at best, slow growth again in 2013 and 2014. Maybe you think that Merkel and Draghi will cave in under pressure rather than see Greece default and rather than watch demonstrations sweep Madrid and Rome. Maybe you can’t imagine that EuroZone leaders will cling to a “fix” that has been so thoroughly rejected by bond markets.

Okay, but I think it’s time to take Merkel and Draghi at their word. They are wedded to a plan that consists of austerity, pain, and recession—and years of it. And on the evidence there is a good chance that Merkel and Draghi can actually make their plan stick politically. The Germans are the biggest and strongest economy in the EuroZone and the German government and the Bundesbank control the cash needed for any solution.

So let’s say that Merkel and Draghi are able to execute their plan—against all opposition and against whatever personal advice you or I would offer. What then does the EuroZone and the global economy look like?

Let me sketch in the most likely scenario here. And then I’ll suggest its effects on the financial markets. Read more

Federal Reserve does nothing and the markets aren’t happy

I guess financial markets were looking for the Federal Reserve to dump billions into bonds and stocks today.

At least that’s what I conclude from the drop in stock prices this afternoon after the Federal Reserve’s Open Market Committee gave no indication that it was about to open the floodgates.

I don’t think the markets had any reason to believe that the Fed would decide to unleash a wave of bond buying on the markets. But the lack of a reason has never stopped markets from dreaming. And right now most investors—I know I feel this—would like someone to do something to stop the pain.

The statement from the Open Market Committee actually sounded relatively optimistic. (Granted that when most voices are calling for the end of the world, it doesn’t take much to sound optimistic.) “Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth,” the Fed said. “The Committee continues to expect a moderate pace of economic growth over coming quarters”

Given that view, the Federal Reserve decided to stay on the current course. The Fed will continue its current policy of buying longer maturity Treasuries when short-term Treasuries in its portfolio mature. Read more

Lack of inflation in October leaves Fed free to act

Consumer inflation declined in the United States in October by 0.1%. That was the first drop since June. The core inflation number, which excludes food and energy, climbed 0.1% in October.

I wouldn’t make too much of this number—for reasons that I’ll explain later—but it is good news. A decline in inflation, for whatever reason, gives consumers a bit more spending power going into the holiday shopping season.

The absence of inflation also means that the Federal Reserve can concentrate on stimulating the economy—QE3 anyone?–without the constraints imposed by worries about letting inflation get out of control. And there’s certainly nothing in these numbers to endanger the Fed’s pledge to keep its benchmark interest rate near 0% until mid 2013.

You don’t have to look far for the reason for the October drop in inflation. Energy prices fell 2% in October from September. That’s largely an artifact of the way that the Bureau of Labor Statistics conducts its price surveys. The government statisticians examine consumer prices during a single week in the month. In September that week happened to correspond to a small surge in gas prices—the major reason that inflation rose by 0.3% in September from August. In October the sample week saw prices considerably lower than those in that week in September.

I don’t think, therefore, that you can use the October drop to conclude that inflation is falling in the long run. But I think it is safe to say that inflation isn’t about to run out of control—and that deflation isn’t a danger either at the moment.

What’s called headline inflation climbed by 3.5% from October 2010. But core inflation, the number the Federal Reserve watches, rose at just a 2.1% rate from October 2010. The Fed’s inflation target is 2% or less.