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Top 10 at 10: NZ household debt leverage near worst in world; Tobin tax possible?; Dilbert
Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please send suggestions for Monday's Top 10 at 10 to firstname.lastname@example.org 1. So we're OK then? - Reuven Glick and Kevin J. Lansin from the Federal Reserve Bank of San Francisco have written a paper on global household leverage, house prices and consumption that compares the effects of various bubbles bursting globally. They produced some great charts, one of which we've tweaked here to include New Zealand. It shows New Zealand households are much more indebted as a percentage of disposable incomes than the United States, the United Kingdom and Spain where housing prices have plunged. Here's what the Fed's experts say.
Going forward, the efforts of households in many countries to reduce their elevated debt loads via increased saving could result in sluggish recoveries of consumer spending. Higher saving rates and correspondingly lower rates of domestic consumption growth would mean that a larger share of GDP growth would need to come from business investment, net exports, or government spending. Debt reduction might also be accomplished via various forms of default, such as real estate short sales, foreclosures, and bankruptcies. But such deleveraging involves significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. As countries begin to emerge from the recession, it is important to consider what lessons might be learned for the conduct of policy. History suggests that asset price bubbles can be extraordinarily costly when accompanied by significant increases in borrowing. During the recent housing bubble, underwriting standards were weakened and credit extension rose at abnormally high rates, creating a self-reinforcing feedback loop that drove house prices upward. In the aftermath of a global boom-and-bust cycle in credit and housing, financial regulators should take the necessary steps to prevent a replay of this damaging episode.
This chart shows that the growth in our leverage was faster than in any other market that has since had a housing bust, yet we haven't had one....yet. We are extraordinarily lucky...
2. Chinese inflation - This is one global metric to keep an eye on. Figures out overnight show Chinese producer prices rose 4.3% in January from a year earlier, which is no doubt why the Chinese government is trying to cool some of the heat generated by a lending spree last year. They may have been quick enough on the brake, but it's a risk for the global economy and Australia in particular. Here's the NY Times' take on the jump.
The sudden acceleration partly reflected the very low level of commodity prices a year ago, during the depths of the global financial crisis, said Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland. But the rise in prices at the factory gate, together with a separate government announcement that bank lending had surged in January, indicated that China might be forced to continue tightening controls on bank lending, economists said. The Chinese government typically does this through some combination of administrative controls on the volume of bank loans and higher interest rates for bills issued by the central bank. Producer prices were up 4.3 percent in January from a year earlier, China's National Bureau of Statistics announced Thursday morning. In December, the increase from a year earlier was just 1.9 percent. As recently as last October, China was still suffering from gradual deflation at the producer level.
3. Value destruction rewarded - This is a fun piece of research by London thinktank NEF which showed investment bankers destroy 7 times as much value as they create, while hospital cleaners create 10 times as much value as they are paid. But the prize for the least value goes to tax accountants. They destroy 47 times as much value as they create. HT Arlyn Moleno via email.
A Bit Rich? demolishes a host of myths about pay and value. In particular, it challenges the claim that high pay does not matter so long as poverty is eradicated. High pay comes on the back of extraordinary profits, made possible because companies do not have to pay the full costs of their activities. Some of the costs of production may be hard to see, such as greenhouse gas emissions or the impacts of sweated labour, but someone is bearing them now - or in the future. A Bit Rich suggests that until the prices of goods and services reflects the true costs of their production, incentives will be misaligned. This means damaging activities will be relatively cheap and profitable, whilst positive activities will be discouraged.
4. Drain baby drain - The US Federal Reserve is preparing to withdraw the stimulus it pumped into financial markets through 2008 and 2009, including dumping a bunch of assets (toxic bonds and Treasuries) it has built up. The trouble is there is so much stuff clogging up its cupboards it is having to find a different class of buyer. Bloomberg has an exclusive that the Fed wants money market funds to buy its stuff. Essentially it is asking US savers to fund the US government deficit. Somewhere the parcel has to stop being passed along. The end result is rising interest rates globally.
The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions. The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York. The central bank has created more than $1 trillion in excess reserves in the banking system through its purchases of $300 billion of Treasury debt and $1.25 trillion of mortgage- backed securities. To put upward pressure on the federal funds rate, the Fed may need to drain as much as $800 billion, Abate estimates. One potential tightening tool is the interest rate on reserves that commercial banks keep on deposit at the Fed. By raising that rate, the central bank "will be able to put significant upward pressure on all short-term interest rates," Bernanke said.
5. Tobin Tax nearer - Gordon Brown reckons the G20 is close to agreeing on a global tax on banks, possibly similar to a Tobin Tax, the FT reports here. A lot of water has to go under the bridge, but something is brewing. I won't be holding my breath though. So many politically-well-connected vested interests are against this.
Mr Brown believes that opinion has shifted decisively in favour of a globally co-ordinated tax after President Barack Obama's move last month to raise $90bn (£57.7bn) from a US bank levy. The tax could cost the financial services sector tens of billions of pounds a year. The prime minister has strongly advocated some kind of charge on banks. "I'm interested in the way support is building up for international action," he said in an interview with the Financial Times. Last year, Mr Brown mooted a tax on bank transactions "“ a so-called Tobin tax "“ as one of a number of options to make sure the "contribution banks make to society is properly captured". The US immediately shot down that option, but the International Monetary Fund has been looking at other ideas. Mr Brown believes that the IMF will endorse a global bank levy before its April meeting in Washington.
6. What a US budget mess - Now it's hitting the states. The governor of New Jersey has declared a state of fiscal emergency that will allow him to freeze state government spending, Reuters reports. 7. What a Commercial Real Estate mess - The Congressional Oversight Panel have issued a report saying "The most serious wave of commercial real estate difficulties is just now beginning", FTAlphaville reports. Here's a few extracts from this report, which is a doozy and worth a read for those that way inclined.
Over the next few years, a wave of commercial real estate loan failures could threaten America"˜s already-weakened financial system. The Congressional Oversight Panel is deeply concerned that commercial loan losses could jeopardize the stability of many banks, particularly the nation"˜s mid-size and smaller banks, and that as the damage spreads beyond individual banks that it will contribute to prolonged weakness throughout the economy. Between 2010 and 2014, about US$1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present "•underwater"– "“ that is, the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates, which now range from eight percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties. The largest commercial real estate loan losses are projected for 2011 and beyond; losses at banks alone could range as high as US$200-US$300 billion. The stress tests conducted last year for 19 major financial institutions examined their capital reserves only through the end of 2010. Even more significantly, small and mid-sized banks were never subjected to any exercise comparable to the stress tests, despite the fact that small and mid-sized banks are proportionately even more exposed than their larger counterparts to commercial real estate loan losses. A significant wave of commercial mortgage defaults would trigger economic damage that could touch the lives of nearly every American. Empty office complexes, hotels, and retail stores could lead directly to lost jobs. Foreclosures on apartment complexes could push families out of their residences, even if they had never missed a rent payment. Banks that suffer, or are afraid of suffering, commercial mortgage losses could grow even more reluctant to lend, which could in turn further reduce access to credit for more businesses and families and accelerate a negative economic cycle.
Double dip anyone? 8. The Greek mess - This piece in BusinessWeek (HT Troy Barsten) explains the Greek problem nicely. There isn't an easy way out.
At this point, Greece and the European Union have no good choices left. It's hard to see how Greece can muddle through on its own. On Feb. 10, striking labor unions shut down schools, hospitals, and air travel in a challenge to Prime Minister George Papandreou's austerity plan, which is intended to win back investors' confidence. Yiannis Kelekis, 68, a retired construction worker who joined a demonstration in rainy Athens, complained: "The people that caused the crisis are now asking for others to make sacrifices." Noting the range of opposition, investors have concluded that Greece needs outside assistance to avoid default. If the European Union refuses aid, the government could find itself unable to issue $26 billion worth of debt as scheduled this spring. A Greek default"”still considered highly unlikely"”might trigger a run on the debt of Portugal and Spain. Like Greece, they belong to the PIGS"”a name coined to describe Portugal, Ireland (and sometimes Italy), Greece, and Spain as the financial weaklings of Europe. "If Greece were alone in this, then possibly they would have been kicked out of the euro zone," says Diego Iscaro, economist at IHS Global Insight in London. "But they can't do that, because Greece is not alone." Stephen L. Jen, portfolio manager of BlueGold Capital Management, a London-based hedge fund manager, says German banks' exposure to debt of the five PIGS equals 19% of German GDP.
10. Totally irrelevant video - My favourite muppet is Beaker. Now he has his own Youtube video...enjoy...I think...HT Simon Young via Twitter