Top 10 at 10: Martin Wolf on Land taxes; Bryan Gould on high interest rates; Paul Volcker on his regrets; Dilbert

Here are my Top 10 links from around the Internet at 10 past 12pm. I welcome your additions and comments below or please send suggestions for Tuesday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. 'Why we must halt the land cycle' - Martin Wolf has written a brilliant piece at FT.com about land price speculation and how society must socialise the gains from land prices. He's really talking here about land taxes and capital gains taxes. He makes some very good points. He starts off by talking about the ten fold increase in his land value and how he didn't do any work to make that capital gain. I have bolded one line that resonates here in NZ. HT Giles and Darryl Best via email.

This system creates calamitous political incentives. In a world in which people have borrowed heavily to own a location, they are desperate to enjoy land price rises and, still more, to prevent price falls. Thus we see a bizarre spectacle: newspapers hail upward moves in the price of a place to live – the most basic of all amenities. The beneficiaries are more than land speculators. They are also enthusiastic supporters of efforts to rig the market. Particularly in the UK, they welcome the creation of artificial scarcity of land, via a ludicrously restrictive regime of planning controls. This is the most important way in which wealth is transferred from the un-propertied young to the propertied old.

Buyers rent property from bankers, in return for a gamble on the upside. A host of agents gains fees from arranging, packaging and distributing the fruits of such highly speculative transactions. In the long upswing (the most recent one lasted 11 years in the UK), they all become rich together, as credit and debt explode upwards. Then, when the collapse comes, recent borrowers, the financial institutions and taxpayers suffer huge losses. This is no more than a giant pyramid selling scheme and one whose dire consequences we have seen again and again.

2. A productivity conundrum - New Zealand's most famous former British Labour MP Bryan Gould has written an opinion piece in the NZHerald saying the poor productivity growth in New Zealand in recent years was due to unnaturally high interest rates. I tend to think it had a lot more to do with the growth of government and rising costs in the domestic economy, but worth a look. My view is we have/had high interest rates because we have a low savings rate. HT Les Rudd.

We have run, and have done for many years, a policy of perennially high interest rates and consequently over-valued exchange rates that has meant that our exporters are always fighting a head wind. They struggle to the starting line but are then weighed down, in price competition terms, by a dollar rate that cuts their margins and shrinks their markets.

Our narrowly focused macro policy may, in other words, be more than an obstacle to individual exporters, but the major factor in our productivity disappointments. The key to our economic salvation may be a willingness to think again.

3. 'Hitting a brick wall' - The New York Times reports on how the world's banks have to roll over US$5 trillion worth of bonds in 2012, with more than half of that roll over risk shouldered by European banks. And we worry about the wall of maturities hitting the finance company sector later next year... All this hits as governments are ramping up their borrowing. It will surely force the ECB and the Fed to print more money to buy those bank bonds and government bonds. Gold anyone?

The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.

The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is. Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor.

As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.

“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank. “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”

Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements. About $2.6 trillion of the liabilities are in Europe.

4. 'How to solve your problems' - Roger Bootle from Capital Economics has dangled the prospect of an economic rebound fueled by a euro breakup in front the Club Med countries that face years of grinding pain inside the euro. Here's the Bloomberg report. Right now the political elites in the euro countries are not considering such a thing. We'll see whether political pressure from the streets does it.

“The threatened breakup of the euro zone, which many see as a potential disaster, would actually open the door to renewed economic growth, not just for weaker members of the zone, but for Europe as a whole,” Capital Economics analysts including Roger Bootle in London said in a report released today.

Europe’s weaker economies face “years of economic pain” as they deflate costs and prices to regain competitiveness with Germany, which runs a large trade surplus and restrains domestic demand, Capital Economics said. Italy, Spain, Ireland, Portugal and Greece could quickly narrow the competitiveness gap if they returned to their own currencies, which would depreciate and allow exports to expand, it said. “This would offer them an escape route from their difficulties through economic growth, rather than depression,” the economists wrote.

A full abandonment of the euro would also help Germany as a restored deutsche mark would appreciate and make the government expand domestic demand to maintain jobs and growth, pushing up the German standard of living, according to the report. That, in turn, would further fuel imports from euro countries, helping to rebalance Europe’s economy.

5. 'A few regrets' - Central banking supremo Paul Volcker has a few regrets from his time in the 1980s, including not speaking out enough when his successor Alan Greenspan and his mates on Wall St were madly deregulating investment banking. The New York Times has a good interview, which suggest the great man thinks the reforms just passed by Congress won't be enough to stop another disaster. His Volcker rule to split off the proprietary trading desks (casino operations backed by Too Big To Fail government guarantees) from the commercial banks has largely failed to be enacted.

“There is a certain circularity in all this business,” he concedes. “You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis.” “People are nervous about the long-term outlook, and they should be,” he says.

THE financial bill has been routinely described in the news media and on Capitol Hill as the most far-reaching regulatory overhaul since the Great Depression, which in some aspects it may be. But it certainly falls short of re-establishing some of the strict boundaries that the earlier laws put in place.

Those laws, most notably the Glass-Steagall Act, forbade commercial banks (what are now, for example, Citigroup, JPMorgan Chase and Bank of America) and investment banks (like Goldman Sachs and Morgan Stanley) from mingling plain-vanilla products like savings accounts, mortgages and business loans with the more high-octane, high-risk endeavors of trading.

Such rules managed to keep the banks and the Wall Street investment houses — and the broader economy that depended on them — out of a 2008-style crisis for several decades.

But the gradual unwinding of those regulations began in the 1970s as Mr. Volcker rose to prominence, first as president of the Federal Reserve Bank of New York in 1975, and then as Fed chairman. Mr. Volcker says that most of the deregulation came after he left the Fed. His reluctance to deregulate contributed in part to his departure under pressure from the Reagan administration. His replacement, Alan Greenspan, openly campaigned to weaken and finally repeal Glass-Steagall, and President Bill Clinton signed the repeal into law in 1999.

In retrospect, Mr. Volcker regrets not challenging the widely held assumptions that underpinned much of this. “You had an intellectual conviction that you did not need much regulation — that the market could take care of itself,” he says. “I’m happy that illusion has been shattered.”

6. Fear the growth of state capitalism - Ian Bremner is a mega-consultant to governments and big corporations and has written a book called  The End of the Free Market: Who wins the wars between states and corporations?

He talks in this Telegraph article about how state run firms, particularly those in China, are getting stronger in relative terms as the Global Financial Crisis grinds on. He highlights a risk of 1930s style nationalism being expressed through these state owned enterprises. Here in NZ we have the rise of Landcorp, Kiwibank and the power companies. HT Andrew Wilson via email

Those who fear that China is going to be the global economic super-power bar none can also find solace in his prediction that China is "the biggest bubble we've ever seen". "The fact that I am very bullish on China for the next three to five years does not mean it's not a bubble," he adds. The bubble, he argues, is in part caused by the unsustainability of China's productivity and worker model – and there has been much reporting recently on worker unrest in China's massive factories – by its growing environmental problems, and the fact that companies – such as Google and General Electric – are becoming increasingly aggravated at the way China does business.

"You add all of that stuff up and you project 30 years from now, and you say this system will explode," Bremmer said. Once that happens – and Bremmer argues this is the same for all state capitalist countries – there is a choice to be made: a country either looks inwardly and opts for a "virulently nationalist" route, or it chooses to embrace the free market, and integrate with the rest of the world. Bremmer says that "it is clearly in the interests of the West, when we get to this point" that countries choose the latter option, but, he warns, "it is clearly more likely" that China and others like it will follow the former option if relations continue to deteriorate.

Bremmer has one final caution: "In the last 21 months, if you've learnt anything, it's that the state is back. If the free market fails, it's not because it's been defeated by state capitalism; the only people that can defeat the free market is us, we're the only ones who can destroy it."

7. 'The con of the century' - Zerohedge has stumbled over a broad explanation of the global financial crisis and its aftermath that appears to fit into the conspiracy theory camp. This piece from Charles Hugh Smith essentially says the banksters are arranging everything to transfer wealth from the masses to themselves. There is a compelling logic to it, but I usually end up as a cock up theorist rather than a conspiracy theorist. In this case, I tend to agree about the end result. The bankers in New York are making record bonuses again thanks to government guarantees and a failure to regulate Too Big To Fail. This may be happening by accident but it does seem to be happening. When are the masses in America going to wake up? HT Troy via email.

Since the Federal government could potentially inflate away these trillions in Treasuries, buy enough elected officials to force austerity so inflation remains tame. In essence, these private banks and corporations now own the revenue stream of the Federal government and its taxpayers.

Neat con, and the marks will never understand how "saving our financial system" led to their servitude to the very interests they bailed out. The circle is now complete: in "saving our financial system," the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer.

Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk. In effect, it's a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers.

No despot could do better.

 8. We're safe it seems - Edward Chancellor at fund manager GMO has written a long paper on the sovereign debt crisis, points out Felix Salmon at Reuters. It includes this chart below which seems to put New Zealand in the 'safe' camp by this measure. Phew...

There are still trillions of dollars invested around the world on the implicit basis that sovereign debt is risk-free. It isn’t, and as those investors wake up to the new realities, they’re going to do unpredictable things with their money. Which is a good reason to prepare not only for volatility in sovereign debt going forwards, but also for volatility in just about all other asset classes as well. It’s going to be a bumpy, unpredictable ride.

 9. The Minsky moment - Australian economist Steve Keen has written another missive talking about the 'Minsky moment' for the debt-laden developed world and when the debt is so much it triggers a depression. He's getting quite a following in America at the moment. He suggests that a Minsky moment isn't that far away and worries, in particular, that the US Federal Reserve may not be able to inflate away the debt with money printing even if it wanted to. I hadn't thought of that, but it makes sense when you look at what happened in Japan, where the Bank of Japan printed masses but couldn't get rid of deflation.

Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more. Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.

As Americans now seem to be realising, the financial crisis has not gone away, because the debt that caused it is still there. Having got ourselves into a debt-induced economic crisis, the only permanent way out is to reduce the debt–either directly by abolishing large slabs of it, or indirectly by inflating it away.

I have very little confidence in the ability of the Federal Reserve to do the latter, while the former will take a level of political fortitude that is far beyond our current politicians.

Steve Keen also produced an excellent post a few days earlier on the extent of the deleveraging in the US And Australian economies and produced this fascinating chart. He reckons Australian household deleveraging will be significant. This will make life difficult for New Zealand's  manufacturing exporters who often supply into the Australian consumer market.

So we have less deleveraging potential than the USA, and we haven’t even begun to do it yet–which is why the GFC has appeared to be a North Atlantic phenomenon. And if we can prevent deleveraging, then we won’t see the depths of the downturn that the North Atlantic has seen either. But there is a downside to no deleveraging. We have a household sector that is even more indebted than its US counterpart. The odds are that this sector will be debt-constrained in its spending, and the recovery will be stalled as a result.

10. Totally irrelevant video - Jon Stewart makes fun of the Queen of England. Our Queen. Good. Stewart reckons America should buy the Queen. They can have her. But they have to pay in gold...none of those US dollars.