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Monday's Top 10 with NZ Mint: Security arms race; Joseph Stiglitz; gold as currency; urban planning for dummies, student loans; Dilbert
Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.
Bernard Hickey is still on vacation, but he will be back on Thursday.
I welcome your additions in the comments below or via email to email@example.com.
I am still keen to get your suggestions for suitable cartoons. If you notice a really good one, please email me.
1. New 'security' arms race
The granting of approval by the RBNZ for local banks to issue 'covered bonds' is part of a corrosive trend. Investors are giving rising importance to 'secirity' when they make their investments, and a senior official at the Bank of England has warned about a 'safety' arms race. Unsecurred depositors are being pushed further back in the claims ranking by the emergence of more senior and more specifically secured borrowing instruments being launched worldwide by banks.
The traditional 'negative pledge' arrangements we have all relied on are being eaten away. And you would want higher returns for your more risky position, wouldn't you? The full copy of the BofE remarks are here », and this is a key part of what he said: (its a .pdf. see page 9)
The larger the existing fraction of secured financing, and the greater the uncertainty about this fraction, the greater will be their incentive to seek security. Not to do so runs the risk of other creditors leapfrogging ahead of them in the seniority queue. Creditors’ incentives are very similar to those during a bank run, except with investors now seeking security rather than immediacy.
As with a bank run, this dynamic risks becoming self-fulfilling. The greater the level of, and risk around, encumbrance levels, the higher the return unsecured creditors will demand given the risks of subordination. And the higher this cost, the greater banks’ incentives to finance instead on secured terms. Both banks and their individual investors have incentives to encumber the balance sheet by progressively - and self-fulfillingly - larger amounts. There is an arms race spiral.
He is no fan of politicians either, especially European ones. Here he is in a recent interview in The European:
Academic economists played a big role in causing the crisis. Their models were overly simplified, distorted, and left out the most important aspects. Those faulty models then encouraged policy-makers to believe that the markets would solve all the problems. Before the crisis, if I had been a narrow-minded economist, I would have been very pleased to see that academics had a big impact on policy. But unfortunately that was bad for the world.
After the crisis, you would have hoped that the academic profession had changed and that policy-making had changed with it and would become more skeptical and cautious. You would have expected that after all the wrong predictions of the past, politics would have demanded from academics a rethinking of their theories. I am broadly disappointed on all accounts.
"Trade deficits cause fiscal deficits"
3. 'We need more deficit spending'
Fiscal austerity is 'not working' in the Eurozone. This is a problem because fiscal looseness (irresponsibility) cause the problem in the first place. The issue is that no-one wants to acknowledge that economic pain is a price that has to be paid for that irresponsibility. Some people think that because a solution causes pain during the rebalancing, it is not working. Some columnists support the idea that 'rebalancing pain = failure". Martin Wolf is one and he has the charts to prove it.
I have this sense that we have seen it all before. The NZ finance company collapse was fuelled by 'investors' who wanted high returns, no risk, and no work. A whole bunch of companies sprung up to indulge them. And when it went horribly wrong, those 'investors' pointed their fingers forecfully. Mainly they wanted someone else to mitgate their pain.
In Europe, we have something similar, but on a far grander scale. The whole idea that a sustainable recovery can come about painlessly from here through the magic of moneyprinting mystifies me. Here is Paul Krugman in the NY Times (he is also a Nobel Prize winner):
For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.
4. History lesson
Louis Hyman at Bloomberg reminds us that mortgage-backed securities have failed before. We took a long time to forget the consequences, but we did. And then we made the same mistakes again.
Time magazine reassured readers in 1926 that "real estate bonds are by no means jeopardous investments. In fact, they should be the best of all securities, for they are backed by tangible buildings and real estate."
Such reasoning reassured investors then, as now, about the inevitability of rising house prices.
Banks loved the new invention because it allowed them to skirt regulations. Although the Federal Reserve regulated the proportion of savings that could be lent as mortgages (half of savings deposits) there were no restrictions on mortgages funded by bonds. These bonds, however, had a maximum length of five years, forcing the mortgage debt to be refunded, at minimum, every five years. But since the balloon mortgage, so popular in the 1920s, was refinanced every three to five years, there shouldn't have been a problem as long as more investors could be found.
5. Can gold really be used as currency?
Felix Salmon, a Reuters blogger, tried to buy stuff using a gram of gold as the medium of exchange. He reports "it worked, kinda". The problem was he had to find some store person who only knew vaguely about the issue and someone who could be convinced on the spot that they were getting a 'good deal' - ie better than paper money. And he had to pay 50% more for his actual gold than the paper money equivalent. Not very convincing.
I think the only thing he really proved is that gold is more like play money.
Most interestingly, however, at least to me, was how much it actually cost us to obtain that gram of gold. For the purposes of the video, I was using the value of one gram of gold based on its market price per ounce. But if you go out and attempt to buy a gold bar, you’ll never be able to find one for a mere $53. In fact, my producer wound up paying double that, in Manhattan. Even if you do a lot of searching online, you’ll be hard pressed to find one for less than $80. We didn’t try to sell the gold — we wound up getting a delicious lunch instead — but my guess is that in most cities the effective bid/offer is absolutely enormous. And much bigger than for any major global currency.
Yes! Absolutely. And who do you think is doing it already anyways? That's the point. If the people who are already involved in planning did things just a little bit better and had a little bit more of an opportunity to make those dialogs work and more people came to the table, I think that provides the opportunity to do things with cities, especially the really hard things, like saving energy and putting things closer together and doing transit oriented development. Big issues change a lot of peoples' lives, and that makes them hard to do. A lot of professional planners, I think, are very gunshy because if you propose big things you have to deal with a lot of people. There are many opportunities to get a good combination of big picture and little picture issues out there. Having more dummies planning cities is, in fact, what we want because that’s who lives there and that’s who needs to be on board if we're going to make the really big changes that we need to make.
7. Pandering to a [very] privledged class
Helping people with student loans has bipartisan support in the US - Barack Obama and Mitt Romney both support it. It's pretty popular in New Zealand too - in fact we make such loans interest-free. You can't get any more supportive than that, except by writing off those loan, and there are folks in New Zealand who want that too.
It's classic middle-class welfare - giving benefits to voters and underpinnig unions, rather than to those who really need it. Invented by the left, retained by the right who are too scared to reform.
Here's a journalist who reckons its just plain wrong:
As a class, we've already benefited from subsidies to higher education, we've acquired human capital and a credential that sets us apart from most people on the planet, and we're certainly not the Americans in most dire need of help, though we are more politically influential than the less fortunate. "If we think it more important to spend this dough on education," says Will Wilkinson, "then we should hand out the $6 billion in the form of scholarships to deserving prospective collegians of modest means, to help them earn their degrees without having to take out any loans at all."
And, here's another perspective. The Americans are talking about an US$6 bln subsidy. In New Zealand, our subsidy is NZ$1.6 bln for student loans in addition to NZ$2.0 bln that the taxpayers pay directly for the courses. On an equivalent per-capita basis as the US, we are spending about twelve times as much. Make sense to you? You really think the educational and social outcomes are better here than the US, let alone twelve times better?
8. What's about to happen with fixed mortgage rates?
Changes in wholesale money costs have an approximate relationship to the pricing of mortgage rates. Recently, we have seen quite a sharp fall in NZ swap rates - they are down some 40 bps points in the past month or so. Maybe the reductions will keep going if the Aussies reduce their official rates as expected tomorrow. Anyway, you would expect that such a fall in wholesale costs would open up the prospect of pricing reductions for fixed mortgage rates.
But as you can see, that fall followed a 60-70 bps rise since the start of the year, one that did not result in rising mortgage rates. Do you think a fall in carded fixed mortgage rates is coming? Are the banks hungry enough for market share, or desperate enough to protect the size of their mortgage book? If one small one (Kiwibank?) moves will a big one follow?
9. China is being buried alive in copper
Some people think the Chinese are hoarding copper. Their stocks of the metal seem far in excess of what they may need. The reasons may be strategic, they may be psychological, or there could be a weird regulatory incentive. Here is the FT to help you choose:
According to Wikipedia, compulsive hoarding is a disorder characterized by the excessive acquisition and inability or unwillingness to discard large quantities of objects that would seemingly qualify as useless or without value.
We’d like to make the case that China is suffering from this disorder and that we’re at the stage where a psychopharmacological intervention needs to be organised by China’s friends and family. If not China’s hoarding tendencies could destroy the world as we know it.
10. The last laugh
Homer does an ad for Mastercard.