Top 10 at 10: The over-blown Australian and Chinese economies; Spanish Caja flu; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12pm. I welcome your additions and comments below or please send suggestion for Thursday’s Top 10 at 10 to bernard.hickey@interest.co.nz We cannot declare martial law on this site, even though I'd quite like to some times... 

1. Class action ammo - Nick Gardner at News.com.au has found some secret bank documents that he reports show the Australian banks have made profit margins of up to 14,000% on exception and late fees. This will add more fuel to the class actions piling up in front of the Australian courts. 

BANKS have been making huge profit margins of up to 14,000 per cent on controversial exception fees levied on a variety of basic transactions. Confidential data from two banks, obtained by Your Money, has revealed the true cost to the banks when customers are overdrawn or exceed their credit limits. These profits could well boost the chances of the class action against the banks, which aims to recover excessive exception fees charged to customers over the past six years.

More than 85,000 people have signed up to join the class action and many more are expected to sign before the case begins next month. Some of the figures look difficult to justify. For example, if a customer exceeds an overdraft limit by $100 for one day, they can be charged a fee of $40. That's an annualised interest rate of more than 14,000 per cent, yet the cost to the bank for breaching the overdraft may be only a few cents.

2.  Poor man's casino - Andy Xie is a noted China watcher and has some sobering views about the stock market there and the Chinese government's ability to control its runaway real estate sector. The stock markets have already slumped. What's next? Here's Ed Harrison at Credit Writedowns with some views.

In the 1920s, the US ran a loose and expansionary monetary policy at the request of the British after a mid-decade slump. This set the stage for the blow-off top of speculation and corruption we witnessed in the Roaring Twenties. Today, it is China who has saved the world from a terrific clump with an awesome campaign of stimulus and equally impressive expansion of credit. We should remember that when things went horribly wrong in the 1930s, America suffered most.

Today, China is in it’s own blow-off top of speculation and corruption. But, all bad things must come to an end. And with the government attempting to engineer a soft landing, shares have already turned south.

3. Still bailing - The Australian government has pledged to keep buying Residential Mortgage Backed Securities there despite a stabilisation of the market, Bloomberg reports. There is a lot of talk in Australia that its housing market is coming off the boil. The Aussie government just can't resist a quiet bailout. 

The Australian Office of Financial Management has invested about A$8.7 billion ($7.2 billion) in 27 RMBS transactions under a program introduced during the financial crisis to stoke home- loan competition, it said in an e-mailed statement today. “Given the high credit quality of Australian RMBS and the program objectives, the AOFM is willing to invest at tighter levels,” according to the statement. “This will continue to be balanced with the desire to encourage continued private sector participation.”

The government invests in mortgage-backed bonds to increase competition in the nation’s home loan market to help smaller lenders fund loans. Australia’s regional banks and non-bank lenders, which were heavier users of securitization as a funding source, lost market share to the nation’s four largest banks after the U.S. subprime collapse shuttered global credit markets.

4. Land trust anyone? - Australian home buyers are so frustrated by sky-high prices they are looking at anything to cut costs. One option is to have a community land trust buy the land. This seems like 'end of the bubble' type activity to me. Here's the BusinessDay.com.au story on the idea.

Schemes in the US similar to the newly created, Bondi-based, Waratah Community Land Trust Association have halved the cost of buying a home, but the biggest obstacle to getting so-called community land trusts up and running is acquiring suitable properties in the first place, exponents admit. In Bondi median house prices are are running at well over $1 million, and units at more than $500,000.

Spearheaded by private citizens, Waratah plans to introduce the new form of owner-occupied, resale-restricted housing to the Sydney market which is being touted as a middle way between social housing, rentals and the private property market. Under the land trust model, the trust owns the land in perpetuity and members buy only the dwelling on it, dramatically reducing their mortgages. Owners pay a nominal lease for the land and may later sell the dwelling to other trust members so they can get equity back from the investment.

5. Here it comes - Australian economist Steve Keen warns again here  about the risks that a serious de-leveraging by Australian households could cause a crash in Australian house prices and a serious recession. This, of course, is well worth a close watch from here. Our banks are owned by the big four Australian banks, who would be exposed to such a slump. Australia is also our largest trading partner and largest supplier of tourists. Where she goes we go. There's a cracking chart below too.

Rising debt became increasingly important for sustaining economic activity, and a culture of addiction to credit began that lasted (despite major disruptions such as the late-1980s interest rate blow-outs and the early 1990s recession) until 2008. Australians became increasingly comfortable with high levels of mortgage debt, because house prices were also rising; but their ‘comfort’ resulted from increases in asset prices that were themselves caused by even larger increases in debt.

That process came to an abrupt halt as 2007 came to an end, and the sudden withdrawal of debt-financed spending is what really caused the GFC, both here and overseas. Most currently argue that the fundamentals in Australia are good – low unemployment, a strong recovery in equity markets (notwithstanding the 14 per cent sell-off in the past month), a significant number of companies’ results beating expectations and so on.

Now, as private deleveraging gathers pace, aggregate demand is plunging, meaning that nearly a fifth of Australia’s ‘income’ is in jeopardy because Australians are no longer willing to borrow to fund the additional spending. The First Home Vendors Boost—which caused the turnaround in private deleveraging that is evident in the data for 2009—and the increase in government debt stopped the debt contribution from turning negative (as it did in the USA).

Continuation of that trend is unlikely this year—and even if it did continue, we would be basing our continued prosperity on a return to the debt-induced growth that caused the GFC in the first place. The final, disturbing aspect of the chart below is how closely unemployment correlates with debt-funded demand changes: since 1980, the debt contribution to aggregate demand explains 90% of the level of unemployment.

While correlation does not prove causation—and there are more causal factors than just the change in debt—in this instance the causal mechanism that would lead to recession and high unemployment is so simple that only a neoclassical economist could contest it. Our economy is demand-driven; as debt’s contribution to demand falls, aggregate demand slumps, and the number of jobs that can be supported by aggregate demand will also fall.

The odds are that Australia is headed for a very painful deleveraging-induced recession. We can only hope that the problem is not amplified by the “external shocks” from the still-extant GFC.

6. Avoid the Mongolian fate - Now the Australian miners are saying Australia needs to avoid the fate that befell Monogolia, which tried and failed to introduce a similar 'super-tax' a few years ago, The Australian reports.

THE Rudd government should take heed of Mongolia's failed attempt to impose a hefty windfall profits tax on mining companies, Ivanhoe Australia said. Its Canadian parent company, Ivanhoe Mines, hit a brick wall with its massive Oyu Tolgoi copper and gold project in Mongolia in 2006 when the Mongolian government flagged a "windfall tax" of up to 68 per cent on mining profits, to be triggered when commodity prices reached certain levels.

The tax was announced amid protests against increasing foreign ownership of mineral assets. But in August 2009 the Mongolian government scrapped the tax after realising it was hurting the mining sector, including Erdenet Mining, jointly owned by the Mongolian and Russian governments, and this cleared the way for the development of Oyu Tolgoi. The Mongolian government instead later agreed to take 34 per cent of Ivanhoe Mines Mongolia Inc, the licence holder of the Oyu Tolgoi project, which is a joint venture between Ivanhoe Mines and Rio Tinto.

7. 'You ain't seen nothin' yet'- Bloomberg reports that the Financial Regulation going through Congress could further increase borrowing costs as credit ratings agencies downgrade various banks. LIBOR (London Interbank Borrowing Rates) have already doubled since March to 7 month highs on the European crisis. That will all trickle down to us here in the New Zealand in the form of slightly higher borrowing rates and tougher bank lending criteria. There's no suggestion of downgrades for our banks, given they really are too big to fail and have an implicit guarantee from the Australian government.

This is about de-leveraging of household and government debt in the developed world. We have plenty of the former here and it is held through our banks. It cannot be avoided or tricked away or bailed out. We are in for a couple of decades of grinding debt repayment and slow growth.

Bank borrowing costs may climb further after reaching the highest level since July as U.S. legislation threatens the credit ratings of lenders, according to Michael Pond, an interest-rate strategist at Barclays Plc. A provision in the financial regulation bill barring the government from rescuing failing banks may mean a cascade of downgrades and a surge in interest rates lenders pay, Pond said in an interview with Tom Keene on Bloomberg Radio.

“Rating agencies essentially keep two books of ratings -- one with an implicit government backing, one without,” Pond said. “To the extent that this regulation strips away government support and banks are left to stand on their own, there’s certainly concern and a possibility that if banks get downgraded, that has an impact on their ability to borrow at the short end of the curve, and that could push Libor up.”

8. Watch out for the Cajas - Spanish savings banks (a bit like building societies) went ballistic lending their heads off during the housing boom and are now facing massive losses. One was rescued on the weekend and now four of the bigger ones are huddling together to survive, Bloomberg reported. There is a saying about cripples leaning against each other to keep standing up. It's not sustainable. This is one of the reasons why so many French and German banks are worried about the future.

Four Spanish savings banks with more than 135 billion euros ($167 billion) in assets said they plan to combine, as regulators struggle to shore up the country’s financial system and revive economic growth. Caja de Ahorros del Mediterraneo, Grupo Cajastur, Caja de Ahorros de Santander y Cantabria and Caja de Ahorros y Monte de Piedad de Extremadura submitted a proposal to Spain’s central bank to pool their businesses and form the nation’s fifth- largest financial group, they said yesterday in a filing.

The Bank of Spain is urging mergers among “cajas,” the 45 banks run as foundations that boosted lending more than fivefold during Spain’s 10-year housing boom. The government is seeking to buttress the weakest banks and limit the cost of further bailouts amid investor concern about its budget deficit, forecast at 9.3 percent of gross domestic product this year. “Many of them are half-bankrupt,” Rafael Pampillon, head of economic analysis at the IE Business School in Madrid, said in an interview, referring to all the cajas. “They have loans to property developers and mortgages that have turned toxic, and by mixing them with other savings banks the risk is diluted.

9. Deflation or inflation - Some people are seriously worried about money printing causing inflation. I'm in the camp that says a series of balance sheet recessions similar to those we saw in Japan through the 90s and noughties will drag prices lower, rather than higher. Here Phillip Inman at the Guardian shares that view, even though there appears to be inflation building in Britain at the moment, mostly because of the lower pound. I don't agree with his conclusion that the solution is to simply fire up inflation to get rid of the debt. I'd prefer restructuring that destroys shareholders before depositors and does not wipe out the urge to save for a decade.

With no more QE and the effects of steep cuts in spending, it looks like the UK will quickly join those countries with falling prices. As the cuts bite deeper and more jobs are lost, demand in the economy will decline further. Falling demand will drag prices lower again. Consumers in a deflationary spiral wait before buying goods because next month they might cost less. Delayed purchasing decisions hit shops and businesses already suffering from a spending squeeze.More jobs will be lost. By next year the economy could be flat on its back.

How will the government react? It must delay the cuts and stimulate the economy or face strikes and social unrest. But why wait until the economy is tottering on another precipice, when another rescue operation appears more desperate than the last and shows the country is weak? Why not do it now.

Tell the investors who threaten to sell UK government bonds they can wait. They'll get their loans back, and their structural reforms, just not now. We have the flexibility of floating exchange rates and our own central bank to dodge and weave a way out of the crisis, but not if the deputy prime minister Nick Clegg and Osborne go back to the rhetoric of "broken Britain". We need growth and a modest dose of rising prices to cancel out our debts. Ministers should turn a deaf ear to pension funds worried about inflation.

Totally irrelevant - This really is totally irrelevant. It's a video about the 'Empathic Civilisation'. It's quite enlightening in a way. Not so much funny as thought provoking.