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Thursday's Top 10 with NZ Mint: The insularity of the Fed; Nostalgia for the D-mark; China and Russia hunt for US$ alternative; Goldman's golden men; Dilbert

Posted in Opinion

Here are my Top 10 links from around the Internet at 10 to 7pm, brought to you in association with New Zealand Mint for your reading pleasure.

I welcome your additions and comments below, or please send suggestions for Friday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream.

1. The strange world of the Federal Reserve - This excellent piece from Greg Marx at RemappingDebate details how the US Federal Reserve runs and how it has become insular and arrogant in its thinking.

It's a classic case of a self-reinforcing institution that is so enmeshed in group-think that it can't see the wood for the trees.

This is important because what the Fed does will drive the whole global economy.

We can only hope our own Reserve Bank is more open and self critical.

Related Topics

I think it's done a reasonable job so far in bringing in new ideas such as the Core Funding Ratio.

But what about its thinking on the currency and the Policy Targets Agreement.

Is it really challenging itself?

Here's a hint of how the Fed operates.

It might seem obvious that the country’s most powerful economic institution would have a close relationship with people who hold formal training in monetary policy, banking, and its other areas of responsibility. But the extent to which the Fed is run by academics — and the extent to which the institution exerts influence in the academy — is a comparatively recent development.

The resulting dynamic between the Fed and academic economists may be self-reinforcing: an independent, technocratic central bank empowers economists, and empowered economists are persuasive in arguing for the necessity of an independent, technocratic central bank.  

2. A crucial summit - A summit overnight in Europe will debate the future of the euro. It's not rosy, as The Guardian reports. Some Germans hanker still for the Deutsche Mark.

Inside a freezing, derelict military barracks on the crest of a hill in the middle of Germany, Bernd Niesel single-handedly carries on with his labour of love. The 67-year-old retired serviceman oversees a shrine to the Deutsche Mark, the symbol of postwar German success, running a small museum devoted to the remarkable birth and lamented death of the currency.

The mark was born behind barbed wire in total secrecy in this barracks in 1948 in what became known as the "conclave of Rothwesten".

The currency met an early death at the age of 50 in 1998 (though notes and coins were in circulation until 2001). But as the German opinion polls show every week at the moment, 30%-40% are hoping for a resurrection  

3. What will burst the bubble? - John Hempton at Bronte Capital wonders here what might burst the bubble in Australian house prices.

A beach-town cafe in decidedly middle class Kiama – and without water views is now as expensive as a cafe on the Upper West Side of Manhattan. (The fish and chips are better in Kiama though.) Some of this price level is due to wage structure – but most of it is new. Australia is just expensive and getting more so – and the Central Bank (justifiably) feels the need to raise interest rates.

Australia is now a very expensive place to visit and I do not recommend it except for the very wealthy. It's hard to call the end of the Australian bubble – but the boom and prices have gone far beyond rational. I don't see what breaks it other than an end to the Chinese construction boom.  

4. The problem with Australian house prices - The Australian reports UBS analyst Jonathan Mott as saying the failure of an Australian bank is inevitable given the over valued state of the property market.

Mr Mott, seen as one of the nation's best banking analysts, has warned the Federal Government against feasting on risk in its desperation to induce competition in the banking sector. He said the nation's housing affordability crisis - not a lack of competition - was at the root of the debate on the state of banking in Australia.

"What is the symptom? Competition. What is the disease? Affordability," Mr Mott said yesterday, speaking at the Senate inquiry into banking competition. It was naive to assume Australia would forever be immune from the circumstances that led banks to fail elsewhere, he said, and banks should pay for the government guarantee on deposits.

"Eventually an ADI (authorised deposit-taking institution) in Australia will fail. It is inevitable at some stage. This will happen," he said.  

5. And British house prices keep falling - The Independent reports British house prices have fallen for the sixth month in a row.

New buyer inquiries slumped again in November and dropped at a faster rate than in October, according to the latest report from the Royal Institution of Chartered Surveyors (RICS). RICS spokesman Ian Perry said:

"Despite some better economic data, fears over how future spending cuts will impact on the jobs market are clearly still weighing heavily on potential purchasers' minds, with many deciding to 'wait and see' until the new year. "Meanwhile, the lack of mortgage finance continues to deter first time buyers."

6. Goldman's golden men - Bloomberg reports Goldman Sachs CEO Lloyd Blankfein and his top executives have just been paid bonuses of US$111 million for the good work they did in 2007 and 2009.

This investment bank was bailed out by the taxpayer in 2008 for the risks taken in 2007. It has gone on to make very high profits thanks -- at least in part -- to a government guaranteed line of credit from the US Federal Reserve. When are the peasants going to revolt in America?

Blankfein, 56, is poised to receive about $24.3 million in January, based on yesterday’s share price, while President Gary D. Cohn, 50, will get about $24 million, company filings show. The payouts, just a portion of the $67.9 million bonus awarded to Blankfein for 2007 and the $66.9 million paid to Cohn, reflect a 24 percent decline in the stock’s value since it was granted at $218.86.

Within a year after the bonuses were approved, Goldman Sachs took $10 billion from the U.S. Treasury, converted to a bank and was borrowing as much as $35.4 billion a day from Federal Reserve emergency programs. This year the firm paid $550 million to settle U.S. regulators’ fraud charges related to a mortgage-security the company sold in 2007.  

7. Chinese inflation worries - Bloomberg reports that Chinese consumers are more concerned about inflation than at any time in the last decade. The key question now is when will the Peoples Bank of China increase interest rates to slow the economy down?

One theory is the authorities are delaying the inevitable because many exporters have such small profit margins that any hike in rates would push them over the edge. When it comes there is a risk of lower demand for the raw materials and food that Australia and New Zealand export to China.

Authorities have held off on adding to October’s interest- rate increase, instead ratcheting up banks’ reserve requirements and using tools such as sales of food reserves to tackle inflation. The Commerce Ministry said today it will “closely monitor” prices over the next quarter, especially during holiday periods, and keep releasing stores of pork and sugar.

“Interest-rate normalization is the best option,” Yao Wei, an economist at Societe Generale SA, said in Hong Kong today. Inflation is “eroding purchasing power” and encouraging consumers to shift savings into assets such as stocks, she said.  

8. Europe divided - Bloomberg reports the Germans are feuding with the European Central Bank over the size of the bailout fund. This is not going to end well. German voters are saying "Nein!" to more bailouts. No one else can afford them. Which leaves the ECB to be the lender and bailout merchant of last resort. How long before the ECB is printing too? ECB boss Jean Claude Trichet is already bandying around the quantitative word.

“The consequence is a stalemate that leaves us with a familiar sense of déjà vu,” Ken Wattret, chief euro-area economist at BNP Paribas SA in London, said in a note to investors. “Market tensions are likely to resurface, as governments remain very publicly divided on the appropriate way forward.”

Trichet said euro-area governments need to put more money on the table to halt the crisis instead of depending on the central bank to soothe markets by buying the bonds of distressed governments. “We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters.

9. Meanwhile the hunt for something else goes on - Bloomberg reports Russia and China are looking for alternatives to the US dollar at every opportunity, including trading with each other in Renminbi/Yuan and Roubles.

Moscow’s Micex exchange started trading the yuan against the ruble for the first time today, as Russia and China seek to reduce the use of dollars in trade. 

Both China and Russia have called for the dollar’s role in global trade to be diminished since the global financial crisis, and Russia is promoting the ruble as a reserve and trading currency within the former Soviet Union. China is allowing greater use of the yuan, which is not yet fully convertible, in international transactions as it seeks to reduce its reliance on the greenback.

Asian exchanges that trade palm oil derivatives and gold are starting to accept yuan for payment and collateral.

10. Totally Muppety video - Pigzz in Space... Gonzo is Darth Vader. Miss Piggy's hairdo is fantastic. Warren and Tarquin would approve

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment in the box on the right or click on the "'Register" link at the bottom of the comments.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

24 Comments

Further to the Goldman story.

Further to the Goldman story. Why didn't the Americans change this ludicrous system?

http://www.reuters.com/article/idUSTRE6BE60120101215?WT.tsrc=Social%20Media&WT.z_smid=twtr-reuters_biz&WT.z_smid_dest=Twitter

Despite the weak U.S. economy, this year could be the second most profitable for New York City's securities industry, and the average bonus may top last year's because so many bankers and brokers have been laid off.

"Wall Street earned $21.4 billion during the first three quarters of 2010," state Comptroller Tom DiNapoli said in a report on Wednesday.

"While much less than last year's record of $61.4 billion, which was fueled by federal assistance, the securities industry is on track in 2010 for the second-highest level of profitability on record," he said.

 From the Harald......for

 From the Harald......for your entertainment...we bring you

"My accommodation arrangements are within parliamentary rules. There is no rort here,"

Goofy the Pig.

That's because its now

That's because its now legalised rorting .. there is a difference you know ;-p

Bernard - #1, you say: "We

Bernard - #1, you say:

"We can only hope our own Reserve Bank is more open and self critical.

I think it's done a reasonable job so far in bringing in new ideas such as the Core Funding Ratio.

But what about its thinking on the currency and the Policy Targets Agreement.

Is it really challenging itself?"

How can it challenge itself rigorously if it believes, "there is no alternative" (TINA) and it is executing, "world best practice"?

Answer - well, they just are.

Counter answer - had a look at the feckin' world lately boys? Can't you do better - for a small open enconomy with a 'real' trading imperative? Rather than cling to beliefs founded on ignorance appropriate for a large, closed economy and where national and economic sovereignty doesn't matter. Efficient allocation of resources can be like that.

Cheers, Les.

www.mea.org.nz

but how fast can you change

but how fast can you change Les without causing a (say) housing collapse?  I think too many ppl in power are of the neo-classical economists mold.....they thought they were doing fine and even if they didnt the Pollies didnt want the boat rocked....events have proved them wrong.....its either that or they could see it coming and didnt or were not allowed to do anything.  I certianly think HC etc deserve a good bollocking for not trying to fix the housing issue gradually over their 9 years....they could have very gently and very easily...

Right now though its a potential crisis of confidence, if they move to fast there is a real risk the housing market could implode/drop.....it looks like it is in OZ....if that happens our banks and us are in serious doo doo....

One thing they could do and I think they should do is set a 80% limit on a mortgage, I think they could do that today and vary it as needed in the future, say 75% or 85%....such a limit looks like it can work.

regards

The reasons they did Steven,

The reasons they did Steven, pfft, at one level I'm bewildered, at another I'm with Wally. However, in terms of fixes and speed, two answers:- 1) Slowly, but meaningfully. This would give the right signals long term and allow a phased-in adjustment. 2) Quickly. Implement said prudential tools (I like the idea of LVR too), but offset with drop in OCR. This takes the heat of externals and internals to a degree, excepting the imported inflation, which would have temporary effect until earnings caught up. As for crisis of confidence, the agencies would see we mean business about non-tradeables inflation control and allowing the real economy to earn our way out of the hole. Throw in some public sector cutting and both prongs means we'd not see the Vigilantes.

Cheers, Les.

Crisis in confidence as in

Crisis in confidence as in the PIs running for the hills and exasperating the decline of the housing dip and turn it into a collapse. The housing market strikes me as like the share market it consists of fear and greed....problem I see is we have a theory (implimenting tools and drop the OCR say) but these might have a reverse/perverse effect, or too big or un-expected....hopefully this year's budget will do some more correcting, but its election year and the PIs are National supporters by and large I believe.....just by reading some of the posts here its clear that either some ppl dont see the need for change, or it ruins their "business" or pension plans or they dont want any govn interference as thats simply wrong....while the latter as too small a number to care about the former is a % mind you jsut where do they go? to ACT? to Labour? 

regards

pfttt...well the reasons why

pfttt...well the reasons why could be important.....but I alwyas go with dont assume intelligence and planning where stupidity will do it..........

regards

Fair one Steven, I'm keen on

Fair one Steven, I'm keen on root cause analysis too and there's been heaps of that kind of discussion on this site. Some of the thinking below this comment might be getting close to the truth, also see:

http://www.interest.co.nz/news/have-your-say-housing-minister-others-benefit-rents-paid-government

Alex did a job on poly's and property. There was an earlier article too, but before I started commenting on Int.co. (Alex could probably find the link for you.)

See in particular the last 20 or so comments on link above. About 5% (ish) of the population involved in property investment, but about 60% of parliamentarians, at least as declared under  the pecuniary interest lists, where only direct involvement is declared. Plus you'll find it's not just Labour into it, surprisingly. Got any idea as which party has most interest in this area? Strange, we are expecting parliament to vote on stuff that restrains the property ponzi?

I've also come to the point where I quite like LVRs as a supplement to the OCR because it's simple to understand the prudent principles behind it and how that can translate to restraining debt growth in a way that OCR does not and in a way that would be beneficial to NZ Inc.

http://www.interest.co.nz/opinion/opinion-why-australian-government-and-its-banks-are-crucial-if-new-zealand-were-be-judged-bankrupt#comment-593088 

It's not a tax, it doesn't increase costs, it's promotes saving and prudence, it would help improve affordability, especially if we varied LVR per asset and purchase type, for instance tighter for investment property. A major push back would be the individual  freedom of choice arguement. However, as a 'whole' we live with speed limits, drink driving limits, age limits etc, so isn't it time we realised some limits on the speed of debt growth would be useful, for similar reasoning? Another push back would be unintended consequences, eg. the RB stuffing up the levels. I don't think so, they are not stupid, far from it. The critisism they do get, from people like me, is as much down to the constraints and shape of the Act, PTA, as not having the mandate and access to use more appropriate tools to complete their work. 

Sure we have a fiscal problem now, but it would be less of a problem if more of that private debt we just racked-up was engaged in producing 'real' earnings.

As for implementing any such solution, whether slow or quick, it would need to be carefully managed, I believe it could be done. Looking at LVRs say, RB could say that from X point in time we will be specifying them and varying them from that point on to help restrain debt growth. If they left OCR as is, X needs to be further out so as not to spook the horses. However, they could drop OCR and X could be brought forward - and in both scenarios monetary conditions could pretty much be the same and if done with clear robust communication, there'd be no need for a stampede. But where is the will, anywhere, to grasp the nettles and deal to the problem, status quo? Am all for dealing to the fiscal problem, but it's a much as symptom of private debt growth as it is government'eneering. If we don't get something that works to properly quell private debt growth standby for 'Ground Hog Day'.  

Cheers, Les.

www.mea.org.nz

 

House prices are falling of

House prices are falling of their own accord. But how many houses did (or does) Helen Clark own? Something like 14, I was told. It's no wonder then that politicians didn't even try to put an end to the property bubble.

I thought 4 or 5.... regards

I thought 4 or 5....

regards

It'll take a government

It'll take a government with-out there own vested interests to do what's right for this country. Pumping up the house bubble further is adding fuel to the fire. Shame really.

Not wanting to defend Helen,

Not wanting to defend Helen, however checking LINZ records, it looks like only 3 properties are owned by 'Helen Elizabeth Clark's.  Two of those are other Helens.  The third is a flat near Parliament (could be our Helen?).  I note she must own Cromwell St in a trust of which she is not a trustee.  She doesn't appear to be shareholder or director in any companies.  I understand she owns nextdoor at 6 Cromwell Rd via a trust with Constantine Anastasiou as trustee (according to NZH http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10653168 ).

So if she does own a lot of properties she does her best to hide the ownership, it would be interesting if she did own lots of property in trust though wouldn't it?

PS Bernard must be thankful he shaved his soupstrainer, otherwise the comments would've been flying over today's Dilbert!

 

Malarky - house prices

Malarky - house prices falling in NZ?  I think you're reading old newspapers.

Quite possible FYI. The banks

Quite possible FYI. The banks are out lending again pumping a little beet more air into the bubble.

http://www.interest.co.nz/property/weekly-mortgage-approvals-hit-highest...

But at what point do we realise the nation can't afford it and we're deluding ourselves?

cheers

Bernard

Perhaps things are hanging in

Perhaps things are hanging in by the skin of their teeth in Paritai Drive and the like, but in most of the rest of the country prices are falling.

Classic - Leader of the

Classic - Leader of the Opposition can't sell his rental property 'cause;

He insisted he was still trying to sell the flat, but wanted to be sure he and his wife got the best price possible. "The housing market is pretty flat at the moment. This is part of my superannuation and my wife's superannuation."  

Or, like so many boomers he isn't prepared to accept a market price (read: loss).

Sell now Phil, or your kids will be taking that loss for you AND it'll be far bigger than the hit you'll take today.

Better yet - hang onto it - you might be the first ex-Cabinet member in foreclosure.  The free press would be substantial. 

I sincerely hope he holds on

I sincerely hope he holds on to it , and tells more lies and in doing so enforces what we already know-:

"that there is no-one within the current labour party with any morals at all"

Given it's not tenanted at

Given it's not tenanted at present - I'd like to hear his explanation as to why he doesn't move himself back into it as a way to save the taxpayers the subsidy we're paying on his present rental accommodation in Welly.

With each day that passes voting Green becomes the choice for those wanting to end the rorts.

 http://www.stuff.co.nz/national/politics/4468042/Goff-accuses-Nats-of-sting-over-apartment 

 

#3: "I don't see what breaks

#3: "I don't see what breaks it other than an end to the Chinese construction boom. "

The big question is what would end the Chinese construction boom.

     If Chinas wealth is held

     If Chinas wealth is held mostly in American Bonds..and The shtf..early in the new year after the Xmas fantasy wears thin...Suddenly China will realise its broke as well.That would finish the property boom.I guess that would be called "Boom Doom".

No:1 The US FED, yes either

No:1

The US FED, yes either they are complete morons or corrupt to the core, OR BOTH!