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

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.

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