looks a lot like the recommendations Karim emailed to them:

An article in the Financial Times:

Fed officials have dusted down this proposal and adapted it to address the current credit market crisis.

Vincent Reinhart, a fellow at the American Enterprise Institute and former chief monetary economist at the Fed, says this kind of auction facility would allow the Fed to provide funds directly to a much larger group of banks than the limited number of primary dealers who participate in open market operations, against a wide range of collateral, without the stigma of the discount window.

“I think it would be very positive,” he says. Banks in need of liquidity could acquire funds relatively anonymously, while the large number of participants with direct access to Fed money would encourage arbitrage to exploit the gap between cheap Fed money and high interbank rates.

Moreover, the Fed could auction funds at whatever term it wanted to in order to target liquidity at particular term markets – for instance, the market for one-month loans. It would have the option of either auctioning a fixed amount of funds, or offering to supply whatever funds were needed at a target rate.

The intended interest rate spread over the Fed funds rate is not known. If the Fed decided to auction loans at or only slightly above the Federal funds rate, it would risk subsidising weaker banks, which normally pay a premium to borrow in the interbank market.

However, Mr Reinhart says this could be dealt with by varying the amount of collateral required in return for loans based on the creditworthiness of the bank seeking funds.

Oil - Rise in costs puts pressure on returns RISE IN COSTS PUTS PRESSURE ON RETURNS By Javier Blas in Abu Dhabi
Published: December 4 2007 01:08

Exploration companies need oil prices of $70 a barrel to match the returns they made at $30 a barrel just two years ago because of the sharp increase in costs and higher government licence fees, according to analysis by a leading consultancy. The research, from Wood Mackenzie, the Edinburgh-based oil consultants, helps explain why non-Opec oil production is failing to accelerate its annual growth significantly in spite of record prices. Oil prices have been above $70 a barrel only since September.

This article can be found at: http://www.ft.com/cms/s/11ca6bb6-a1cd-11dc-a13b-0000779fd2ac,dwp_uuid=81

Published November 14, 2007 in the Financial Times

From Mr Adrian Binks.

Sir, Warren Mosler (Letters, November 12), reveals the level of hysteria that affects even intelligent western economists when it comes to oil prices.

First, economists need to understand the facts. Saudi Arabian crude oil is sold at prices directly linked to market values. Sales to Asia are linked to the price of Oman and Dubai crude, with exports to Europe based on ICE Brent futures prices, and sales to the US ultimately linked to West Texas Intermediate crude price levels. The Saudis set monthly differentials to these benchmark market prices that reflect the different quality of their crude, taking into account their customers’ refinery configurations.

Mr Mosler is equally confused when he writes that President Vladimir Putin “seems to have gained control over pricing of Russian oil”. Most Russian crude oil is sold at market-related prices. In the case of the second largest private-sector Russian producer, TNK-BP, next year’s sales will be based on the average of market assessments by Argus and Platts, two international specialist reporting agencies.

The trend within Russia is to greater market-related pricing, not less. The Kremlin proposed that an oil exchange be established at St Petersburg to set the price of Russian oil, although this has not yet come into being.

Rather than producer price setting, the cause of the upsurge in oil prices is new demand in China and India, coupled with the inability of western oil companies to invest in new low-cost reserves because of state control of crude oil extraction in key exporters. This is nothing new. Saudi oil production has been closed to western oil companies since the 1970s.

What is new is the drive for cleaner-burning transport fuels that require massive investment by the oil industry in more sophisticated refining. At the same time, there is a huge increase in product demand in markets to which western companies have little access.

These are the facts that economists in western countries should be focused on, and not conspiracy theories about price-setting cartels.

Adrian Binks,
Chief Executive,
Argus Media,
London EC1V 4LW

Copyright The Financial Times Limited 2007

Published November 12, 2007 in the Financial Times

From Mr Warren Mosler.

Sir, As crude oil prices continue to rise, the media continue to assume that competitive market forces are behind the increase, including political tensions, weather, supply disruptions and demand pressures. Completely overlooked, however, is the fact that the Saudis post their offered prices for the oil they sell to their refiners, and let the quantity they deliver vary with demand. It is a simple case of monopoly price-setting. The Saudis are acting as “swing producer” and setting the world price.

As a point of logic, the Saudis have no choice but to set the price of oil. At the margin, they are in fact the sole supplier of about 8.5m barrels of crude that the world currently needs from them every day. As all economics students are taught, any sole supplier is necessarily a “price-setter”.
Of course, the Saudis boldly deny that they set prices. However, they do say they do not sell in the spot markets, but that they do (publicly) post their desired prices to the refiners who buy their oil.

The Saudis will continue as price-setter until net world supply increases sufficiently to cause Saudi sales to fall and production to drop to unsustainably low levels. This is what happened in the early 1980s and persisted until the last several years when a decrease in net available world supply put the Saudis back in the driver’s seat.

Additionally, President Vladimir Putin seems to have gained control over pricing of Russian oil, making him a world “price-setter” as well. This means that either the Saudis or the Russians can raise prices at will, and the rest of the market automatically follows.

The bottom line is that the price of oil will rise to the higher of any price Russia or the Saudis desire, with no relief unless there is a drop in net world demand that reduces the demand for both Saudi and Russian output to unsustainably low levels.

Warren Mosler,
Chairman,
Valance,
St Croix, USVI 00820
(Senior Associate Fellow, Cambridge Centre for Economic and Public Policy, University of Cambridge, UK)

Copyright The Financial Times Limited 2007