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Top 10 at 10: Bernanke the hawk?; Listings shortage; Economic pathologies; Cocaine and gold;
Here's my top 10 links from around the Internet at 10 am. I welcome your additions in the comments below. I'm glad I'm not in sales or a rat... 1. Federal Reserve Chairman Ben Bernanke surprised a few people overnight when he came over all hawkish in testimony before Congress, saying the government couldn't keep borrowing forever and the Fed wouldn't help by 'monetizing the debt' (ie printing money to buy government bonds), the WSJ.com reported.
"Unless we demonstrate a strong commitment to fiscal sustainability in the longer run, we will have neither financial stability nor healthy economic growth," Mr. Bernanke said in prepared testimony to the House Budget Committee. (Read the full remarks.)
2. This link is probably a tad late, but it's actually better to link to it now because some of the discussion in the comments add significantly to its value. Alastair Helm at realestate.co.nz has interesting analysis of data from his site about listings. He points to a shortage of listings.
3. Hedge fund guru Julian Robertson, who also visits NZ regularly, has some very bearish views about money printing and inflation, Rolfe Winkler at OptionARMageddon points out. Robertson, who owns the Cape Kidnappers golf course, is worried about explosive inflation and a depression. He's not kidding. Here's his thoughts.
This is a crisis brought on by our collective profligacy, which manifested itself in too much spending, too much debt and no savings. The normal way to get out of a situation like that is to spend less, reduce borrowing and save more. I'm wondering why we haven't taken that approach "“ well, I know why, but I still question the response. I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we're doing now will either fail, or it will result in unbelievably high inflation "“ and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening.
4. William Buiter from the LSE has put out a monster white paper on why the financial crisis happened. It's well worth a read when a spare moment presents itself. Be warned. He is a not a man who likes short sentences.
The crisis is the product of a "˜perfect storm' bringing together a number of microeconomic/incentive pathologies, global macroeconomic developments and monetary policy errors. Among the microeconomic systemic failures were: wanton securitisation, fundamental flaws in the rating agencies' business model, the procyclical behaviour of leverage in much of the financial system, of mark-to-market valuation and accounting and of the Basel capital adequacy requirements, privately rational but socially inefficient disintermediation, and competitive international de-regulation. Reduced incentives for collecting and disseminating information about counterparty risk were a pervasive feature of the new financial world of securitisation and off-balance sheet vehicles. So was lack of transparency about who owned what and about who owed what and to whom. In many ways, the crisis can be seen as a failure of the transactions-oriented model of financial capitalism favoured in the US and the UK. Proximate local drivers of the specific way in which these problems first manifested themselves were regulatory and supervisory failure in the US home loan market.
5. You know people are worried about the value of the US dollar when cocaine traffickers start demanding gold insteady of US dollars, as The Telegraph has pointed out.
In a report entitled US Gold, Going, or Completely Gone? Rob Kirby, forensic analyst at Kirby Analytics, says almost 3,000 metric tonnes of gold compounds were exported from the US in 2008." Paul Mylchreest, of the Thunder Road Report, notes that a "very suspicious" 174 tonnes of gold compounds were exported to the Dominican Republican "“ "that well known hub of the world gold trade".
The more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn "” the turn that made crisis inevitable "” took place in the early 1980s, during the Reagan years. Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence. On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us. The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America's financial rules was Reagan's biggest legacy. And it's the gift that keeps on taking.
7. Harvard Professor Niall Ferguson picks a fight with Paul Krugman in this FT comment piece on the issue of inflation and deflation. Ferguson says the rise in long term interest rates proves the world's investors don't trust the US plan to borrow, spend and print. He says Krugman's sanguine view on inflation is wrong.
No doubt there are powerful deflationary headwinds blowing in the other direction today. There is surplus capacity in world manufacturing. But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank's latest quarterly report: "A policy mistake . . . may bring inflation risks to the whole world." The policy mistake has already been made - to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to endthe chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that "even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist". Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.
8. Mike "Mish" Shedlock at Global Economic Analysis argues forcefully, at length and with a whole bunch of juicy charts that the mortgage meltdown in the United States is far from over and house prices have further to fall.
Think that leverage is coming back? I don't. The Effect of Household Deleveraging on Housing, Consumption and the Stock Market is going to be far greater than most realize. This bubble will not be reblown, just as the Nasdaq bubble was not reblown after the tech crash. Peak Credit and her twin sister Peak Earnings have arrived.
9. ANZ CEO Mike Smith told FT.com he wants a coordinated global push to drop the government guarantees for banks.
"The guarantee has served its purpose and there is now a case to argue that it is in fact disrupting the market," Mr Smith said. ANZ, NAB and Westpac last month raised close to A$5bn by issuing non-government guaranteed domestic bonds, albeit at higher spreads. Other banks in Australia are sympathetic to lifting the guarantee. But Mr Smith has adopted the most vocal stance. "We have to get the [overseas] market to start taking paper which is not guaranteed by the government. Raising offshore debt would demonstrate that a degree of normality has returned to the market and the strength of the Australian banking system."
10. This one slipped by most people. Last Friday R.H. Donnelly, the largest publisher of Yellow Pages directories in the United States, filed for bankruptcy protection under US$12.4 billion of debt, Bloomberg reported.