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Monday's Top 10 with NZ Mint; Paul Volker; Tom Friedman; rare earth innovation; Iceland; history's biggest property bubble; Nouriel Roubini; Dilbert

Posted in Opinion

Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.

Bernard Hickey is in Hamilton today covering the Fonterra TAF vote. He will be back with his version tomorrow.

As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

See all previous Top 10s here.

1. New big bank theory
Credit-rating downgrades for the world’s biggest banks suggest that, four years after the financial crisis hit, they remain a major source of instability. But they also maintain as much clout over the world’s economies and political systems as ever. What can be done to improve banking practices around the world? Is global financial reform possible? Paul Volker is worried. If Volker is worried, perhaps we all should be.

Nowadays there is ample evidence that financial systems, whether in Asia in the 1990’s or a decade later in the United States and Europe, are vulnerable to breakdowns. The cost in interrupted growth and unemployment has been intolerably large.

But, in the absence of international consensus on some key points, reform will be greatly weakened, if not aborted. The freedom of money, financial markets, and people to move – and thus to escape regulation and taxation – might be an acceptable, even constructive, brake on excessive official intervention, but not if a deregulatory race to the bottom prevents adoption of needed ethical and prudential standards.

Perhaps most important is a coherent, consistent approach to dealing with the imminent failure of “systemically important” institutions. Taxpayers and governments alike are tired of bailing out creditors for fear of the destructive contagious effects of failure – even as bailouts encourage excessive risk taking.

2. The rise of popularism
Politics is tough, and getting tougher. We need our lawmakers to be intelligent and make sensible compromises in order to get things done. But we are getting more cynical about the process of lawmaking. We often want them to change their minds, but if they do, the scorn is deafening. The lawmakers themselves see what the public responds to, and keeping the role is a natural instinct. Talk to a retiring politician and you will get an honest analysis. But still, we voters say we want 'leadership' but give all the signals that what we really want is 'followership'. As always, Tom Friedman has some intelligent insight:

Why does it feel like so few leaders are capable of inspiring their people to meet the challenges of our day? There are many explanations for this global leadership deficit, but I’d focus on two: one generational, one technological.

Let’s start with the technological. In 1965, Gordon Moore, the Intel co-founder, posited Moore’s Law, which stipulated that the processing power that could be placed on a single microchip would double every 18 to 24 months. It’s held up quite well since then. Watching European, Arab and U.S. leaders grappling with their respective crises, I’m wondering if there isn’t a political corollary to Moore’s Law: The quality of political leadership declines with every 100 million new users of Facebook and Twitter.

The wiring of the world through social media and Web-enabled cellphones is changing the nature of conversations between leaders and the led everywhere. We’re going from largely one-way conversations - top-down - to overwhelmingly two-way conversations -  bottom-up and top-down. This has many upsides: more participation, more innovation and more transparency. But can there be such a thing as too much participation -  leaders listening to so many voices all the time and tracking the trends that they become prisoners of them?

3. Labour's paradise lost
John Maynard Keynes thought that most people by now would have to work only 15 hours a week to produce all that they needed for subsistence and comfort. What Keynes did not foresee was that the lion’s share of the productivity gains achieved since the 1980's, when working hours stopped falling, would be seized by the well-off. Robert Skidelsky - a British professor and a member of the UK House of Lords (that is, a British toff) - has been trying to think through what we can do about this. It really is a big problem.

Apart from its moral implications, such a society would face a classic dilemma: how to reconcile the relentless pressure to consume with stagnant earnings. So far, the answer has been to borrow, leading to today’s massive debt overhangs in advanced economies. Obviously, this is unsustainable, and thus is no answer at all, for it implies periodic collapse of the wealth-producing machine.

The truth is that we cannot go on successfully automating our production without rethinking our attitudes toward consumption, work, leisure, and the distribution of income. Without such efforts of social imagination, recovery from the current crisis will simply be a prelude to more shattering calamities in the future.

4. Of morals and markets
Back in April, I highlighted Harvard philosophy professor Michael Sandel's new book "What money can't buy" - he questions our faith in markets. But not everyone thinks his argument is sustainable. Edward Hadas thinks the issue is much more subtle than the Sandel view: its not one or the other.

I blame the influence of Karl Marx, not as the founder of communism but as the great prophet of economic alienation. He warned that society would be torn apart by capitalism’s “cash nexus”, which used money to express values, and its “commodity fetish”, which treats all things as being up for sale as long as a price can be agreed.

Marxist claims still resonate, in part for good reasons. The expression of any human relationship in monetary terms is potentially dehumanising. Money really cannot buy love, should not buy sex and may damage the creative efforts of artists. Market reasoning adds selfishness to the picture – in the world of supply and demand it is each man for himself.

However, money and markets also have a good side, which Marx grudgingly admitted and Sandel blithely ignores. Buying, selling and the assignment of prices are effective and reasonably just tools for tying together the economic activity of strangers. The monetary system does not always create the best bond – unpaid voluntary efforts and compulsory arrangements can sometimes be better – but the global economy could not work without it.

The retreat of market reasoning shows that Marx underestimated the popular ability and desire to resist the commodity fetish. Marx also underestimated the future accomplishments of the industrial prosperity which the cash nexus helps create. These gains – modern societies feed the hungry, house the poor, spread knowledge and provide much interesting labour – far outweigh any losses from monetary alienation.

5. Scarcity drives innovation
The latest examples flow from China's rare-earth export policies. Prices surged, but buyers worried more about long-term security of supply. Innovation in the use of materials has long been a commercial imperative. Leading manufacturers don't get that way by standing still, or looking backwards. Here is a story focusing on the issue electric car battery makers face and how they are responding.

GM is looking at reducing its overall use of rare earths by eventually replacing permanent magnet motors, but that will take time, said Yucong Wang, manager of GM's Department of Materials Technology.

"We know that permanent magnets are still the best magnets and we want to use (them)," he said. "But then how can we, from a materials standpoint, reduce the usage of the rare earths?"

GM is not alone. Japanese media reports say Toyota Motor Corp has found a way to make electric cars without rare earths, while Renault SA has started producing cars with electric motors that do not need permanent magnets. Two months ago Hitachi unveiled an electric motor that does not require any rare earths at all, but it will not go into commercial production for two years.

Carmakers are also rethinking other design elements, like the tiny electric motors that move seats and side mirrors, to see if those can be made with fewer rare earths, or none at all. Bob Wolf, head of sales at magnet supplier Alliance LLC, counts more than 100 permanent magnet applications in a modern car.

6. After banks collapse
Remember Iceland? Its banks went bust, right? Well it's roaring back. It has just repaid the IMF some US$500 mln, its second such repayment following on from an earlier initial US$900 mln repayment. And this second repayment has been made early. Not bad for a country of only 320,000 people. The UK Telegraph reports:

Iceland's main commercial banks collapsed in the space of a week as the global financial crisis struck in late 2008, imploding under the weight of huge debts built up during an aggressive overseas expansion.

But the country's rebound has been equally surprising. Iceland's economy expanded in the first quarter at its fastest pace since its near-meltdown, powered by a surge in exports, tourism and domestic consumption.

7. Targeting nominal GDP
Bernard highlighted the work of Harvard economist Jeffrey Frankel in his "Move the goal posts" opinion piece on Sunday. Frankel wrote an obituary to inflation targeting. He has also highlighted an alternative for monetary policy makers - targeting nominal GDP.  Here's Frankel on why he thinks this should become the focus:

Fans of nominal GDP targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks.    Nominal GDP targeting stabilizes demand, which is really all that can be asked of monetary policy.  An adverse supply shock is automatically divided between inflation and real GDP, equally, which is pretty much what a central bank with discretion would do anyway.

In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target).   But why has it suddenly gained popularity at this point in history, after two decades of living in obscurity?  Nominal GDP targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world:  Its proponents see it as a way of achieving a monetary expansion that is much-needed at the current juncture.

8. Tiger head, snake tails
In the past decade, China has invested US$4 trillion in housing. But 65 million homes are vacant. Behold history’s biggest ever property bubble. Rosemary Righter says it is 'decision time' for China. She asked some questions when she was there recently:

I asked the businessman what was to prevent the bubble actually bursting, in a spectacular financial explosion?

His answer was that it wouldn’t happen. A lot of these empty apartments, he said, had been bought by Chinese families as investments, and they would patiently hang on to these speculative purchases because interest on savings was derisory. Secondly, although some developers would go to the wall, the bubble would simply not be allowed to burst for fear of public anger as well as economic chaos. China had massive reserves if need arose, he said, and would not hesitate to bundle nonperforming loans off into a state “bad bank”. Its plans to build 36 million “affordable” homes by 2015 would also help to offset faltering private sector demand. When in a hole, in other words, the Party keeps digging.

Then the businessman added: “Look, I don’t lose too much sleep over China’s economic troubles; but I do worry, tremendously, about a political explosion tearing the place apart”. The dramatic political destruction in March of Bo Xilai, one of China’s most thrustingly ambitious and charismatic regional Communist Party bosses, has set off that explosion. The shockwaves are convulsing China at a crucial political juncture.

9. 'We are doomed'
While the cloud over the eurozone may be the largest to burst says Nouriel Roubini, it is not the only one threatening the global economy. Batten down the hatches.

Compared to 2008-2009, when policymakers had ample space to act, monetary and fiscal authorities are running out of policy bullets (or, more cynically, policy rabbits to pull out of their hats). Monetary policy is constrained by the proximity to zero interest rates and repeated rounds of quantitative easing. Indeed, economies and markets no longer face liquidity problems, but rather credit and insolvency crises. Meanwhile, unsustainable budget deficits and public debt in most advanced economies have severely limited the scope for further fiscal stimulus.

Using exchange rates to boost net exports is a zero-sum game at a time when private and public deleveraging is suppressing domestic demand in countries that are running current-account deficits and structural issues are having the same effect in surplus countries. After all, a weaker currency and better trade balance in some countries necessarily implies a stronger currency and a weaker trade balance in others.

Meanwhile, the ability to backstop, ring-fence, and bail out banks and other financial institutions is constrained by politics and near-insolvent sovereigns’ inability to absorb additional losses from their banking systems. As a result, sovereign risk is now becoming banking risk. Indeed, sovereigns are dumping a larger fraction of their public debt onto banks’ balance sheet, especially in the eurozone.

10. The last laugh
This is my 'must watch' today; you will learn something important here. Dan Ariely, a professor of behavioral economics at Duke University, presents examples of cognitive illusions that help illustrate why humans make predictably irrational decisions.

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.

34 Comments

The rich are often just rent

The rich are often just rent seekers (in the economics sense of the word rent).  They are stealing the excess from both workers and entrepeneurs.

Are you relying on facts or

Are you relying on facts or myths as the basis for the claim you make re artists and poverty? (By the way facts do not equal anecdotal tales.)

You make it sound like the

You make it sound like the poor are the ones who have borrowed all this money and are responsible for all this mess??
 
These are the people who don't have a mortgage and who struggle to provide a decent life for their children.  As a result they are more likely to succumb to drugs or crime but those of us more privileged shouldn't be so sure we wouldn't also take these paths of despair under the same circumstances.
 
The ones that call the shots and shape the world are of course the wealthy not the poor. 
As they accumulate all the land and wealth generating assets they reduce the chance of the less well off ever being able to get out of poverty or own their land to grow food for their families.
As they outsource the manufacturing jobs to China to boost profits they further rob the poor of opportunity to provide for their families. 
As they lobby government and employ the best legal and financial advisors to pay lower tax rates they further feather their own nest at the expense of others.
 
So tell me again how the World is broken because the poor have stuffed it all up?

The poor aren't saints, you

The poor aren't saints, you know. They're arseholes just like everybody else.

Marie Antoinette inspires

Marie Antoinette inspires dentists to inaction.
 
 
And right on cue a NewZealand dentist proves how out of touch with reality our professions are  www.radionz.co.nz/national/programmes/ninetonoon/audio/2523044/the-cost-of-dentistry.asx.
 
Apparently Dr Shepperson believes the plebs are at fault for paying taxes, rates, energy, housing and food bills instead of tootling off to the dentist for multi-thousand dollar courses of treatment.
 
Let them eat cake, indeed.

Soros on the

on

in a funny way the poor are

in a funny way the poor are actually better off than the wealthy.
they weren't the ones who purchased over priced cars,houses,tv stereo ,cell phones'restaurant food etc .
it was the wealthy who purchased all this rubbish  and now their overpriced houses are full of overpriced junk.
oh did i mention that they also purchased rare breeds of dogs so they could look good walking down the street

I think you might be talking

I think you might be talking about the poor and the squeezed middle. The rich are different. The prices of the stuff that they buy- London, Paris, New York Property etc all hold up just fine.

Re # 7 - I hate to dispel the

Re # 7 - I hate to dispel the new found enthusiasm for this measure of economic/performance measurement. But professional bond traders have always bench marked themselves against this measure when financing a third party position. Covert default is well documented and avoided unless the cash and carry trade is attractive in and of itself for proprietary return purposes.       

“Housing: A problem beyond

“Housing: A problem beyond politics” – David Killick – The Press

 
A very thoughtful article by The Press Feature Writer Mr Killick......

 
http://www.stuff.co.nz/the-press/opinion/perspective/7162864/Housing-is-a-problem-beyond-politics

 
Hugh Pavletich comments extensively at cantabrians Unite Facebook –

 
http://www.facebook.com/CantabriansUnite
 
...also comments just posted above on the wobbly Aussie housing market from todays www.macrobusiness.com.au articles, the Census houseold numbers fiasco and discussions with colleagies there.

 
Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
www.cantabriansunite.co.nz
www.PerformanceUrbanPlanning.org
 
 

Iceland:   They did something

Iceland:   They did something different.  When the banks went bad the Icelandic government let them.  They did not shovel that debt onto the taxpayer.
The rest of the Europeans were enraged and issued threats but the Icelandic goverment stood firm. 
Ireland:  Well the government (read taxpayer) took on the banks debt.  Insanity.  Why would you.  Also - that seems to be the mainstream solution being touted elsewhere.
And what has been the outcome.

Iceland:   They did something

Iceland:   They did something different.  When the banks went bad the Icelandic government let them.  They did not shovel that debt onto the taxpayer.
The rest of the Europeans were enraged and issued threats but the Icelandic goverment stood firm. 
Ireland:  Well the government (read taxpayer) took on the banks debt.  Insanity.  Why would you.  Also - that seems to be the mainstream solution being touted elsewhere.
And what has been the outcome.

"Tom Friedman has

"Tom Friedman has some intelligent insight:"
Doubt it. To paraphrase someone way better than me - platitudes posing as wisdom.
Both Friedman and his colleague David Brooks are apologists for the elite and, given what a difficult job that is right now, have resorted to some fairly simplistic notions of the relationships between leadership positions and the wider populace.
You probably have to go back to Rome in 458BC to find a true leader: Cincinnatus. The quasi-democratic Senate gave him totalitarian powers to beat off invaders. As soon as he had done that he immediately (are you listening, Frank Bananarama?) resigned his powers and went back to farming.
Leadership is earned not granted - when we have true leaders in elite positions they will get a good hearing. Until then we will have to continue to use the internet to get things done.

I will check that out, care

I will check that out, care to enlighten us some more?

Only a scarfie would

Only a scarfie would recognise the benefits of a proper education at the University of Otago.
 
WIkipedia has a short biography of Cincinnatus.
 
Any airport book will drone on about the difference between leaders and managers. It's not that hard: leaders lead. They know where they want their world to go, they communicate it clearly and people are inspired to follow without a gun pointed to their heads. Managers are everyone else who finds themselves in charge. They manage risk and sign off invoices and allocate tasks and handle problems; it's not an easy job but their ability to influence comes from their job title not who they are.
 
Are their any "leaders" out there who didn't get where they are through some form of inside running (right school, right family). Are there any who would even admit a mistake. David Cameron and George Osborne should be saying right now "Man did we screw up with that austerity thing. Time for us to grow lilies instead". They are not leaders. I have no sympathy for them at all.
 
Couple of great articles pointed to in The Browser lately illustrate the point nicely. The first is one of David Cameron (search for 'chumocracy') and his apparent total lack of any political vision. Compare him with President Lyndon B Johnson who apparently managed to implement most or all of JFK's manifesto often having to humble himself to do so.

Sadly they don't do

Sadly they don't do Architecture at Otago and my handle comes from the jibing I received from former colleague. I agree that we have a leadership vacuum and have posted to that effect before. I suspect Hugo Chavez is probably about the best in the world today but hard to know how he really measures up. I am reminded of the comment by Dale Carnegie, that the only way to get a person to do something is to make them want to do it. Thank anyway, it is always good to know about great historical figures.

#3  Lloyd George had the

#3  Lloyd George had the answer:
In the 1909 budget, Lloyd George
introduced taxation of land values, to be implemented when a land valuation register was
ready. It was this aspect of the budget that most inflamed the dukes and that provoked Lloyd
George’s finest oratory:
[A] fully-equipped Duke costs as much to keep as two Dreadnoughts – and they are
just as great a terror – and they last longer.
Anticipating (and helping to provoke) the House of Lords’ rejection of the budget, Lloyd
George went on
11
The question will be asked “Should 500 men, ordinary men chosen accidentally from
among the unemployed, override the judgment – the deliberate judgment – of
millions of people who are engaged in the industry which makes the wealth of the
country?” That is one question. Another will be, who ordained that a few should
have the land of Britain as a perquisite; who made 10,000 people owners of the soil,
and the rest of us trespassers in the land of our birth[?]… These are the questions that
will be asked. The answers are charged with peril for the order of things the Peers
represent; but they are fraught with rare and refreshing fruit for the parched lips of the
multitude… (At Newcastle upon Tyne, October 10, 1909, quoted by Jenkins 1968, p.
94).
These were perhaps the most memorable speeches ever made by a Chancellor of the Exchequer. They are in direct line of descent from Paine, Ricardo, and Henry George. And
not only Lloyd George took up the message in that administration. In reading the quotation
below, note not only who first said it in 1909, but who revived it in 2003
www.nuffield.ox.ac.uk/politics/papers/.../McLean%20Land%20tax.p..

"It’s held up quite well

"It’s held up quite well since then"
 
Nup. It had to slow then stop - you need a conductor, separated from another by an insulator. At the point where you get molecular cross-talk, that stops. Given that the low-hanging fruit was picked first (it always is) the slow-down is a Seneca event.
 
http://www.gotw.ca/publications/concurrency-ddj.htm
 
Permanent magnets? You can easily have motors/generators without them, they've been around forever. . You just need an exciting coil instead - but your power output is slightly less and your start-up needs a kick. I had a pre-war 10kva 230 volt AC generator here, with a DC exciter tacked on the end, not new........
 
Of course, if one consulted an economist, they'd state that at a certain price there will be a substitute found, and the process will grow exponentially and forever. The rest of us try and relate to a real world.

GDP as a measure.   GDP

GDP as a measure.
 
GDP measures activity both good and bad.  The perversity of GDP is if you destroy something of worth - bulldoze a perfectly good house for example - then GDP goes up.
 
Until we separate good economic activity from bad activity using it as a measure isn't a good idea.

“Bailouts cant make Euro

“Bailouts cant make Euro work” – Roger Bootle UK Telegraph

 
All the bail-out systems under the sun cannot make the eurozone work - Telegraph
 

The Q should be asked why do

The Q should be asked why do we need bling, ie motors to drive seats? justification for over-pricing?
regards

Steven - there's the

Steven - there's the dissonance, right there.
 
Someone is prepared to laud efficiencies, inasmuch as they alleviate resource depletion. Also prepared to accept a 'doubling time' regime which clearly has to cease.
 
But - that someone hasn't related it to the number of cars, the amount of copper needed to displace the magnets.......
 
You always need the whole picture, lack of perspective has to be the biggest failure of journalism. And that looks like getting worse - lose the culture of traditional editorship (truth-seeking, albeit varying degrees of 'compromised') and you're in wish-list territory. Will be read and believed by those who need to believe. Same with voting for politicians who promise what we want to hear, rather than what can be delivered.
 
We haven't evolved all that far, methinks....

I just love the design at 

I just love the design at  earthship.org...showed it to my wife who thought it was a great step back in standard of living....and yet she thinks she's a Greenie, me I'd love a house like that, minimal damage to the environment to build and low cost and damge to run... 
"We haven't evolved all that far, methinks..." It strikes me more and more that it seems no one is prepared to compromise on what they have, it just has to be other ppl....NIMBYs seems a classic example and the Green party is infected. They seem to thinl more homes are needed, but unless they contain significant elements of the above work they are dinosaurs......I find it very strange.  Im beginning the think the fight over the shrinking pie is going to be vicious to say the least....
Anyway Im ordering quite a bit of his work to read/watch, looks a good advance on what my degree contained.  My eldest loved the docos, I'd like to get him out there on an Internship one day if he does aim for archtiecture....not a bad [applied] skill set for the future....
regards
 

Saw the earthship link posted

Saw the earthship link posted here yesterday and I've been reading and re-reading all parts of the website and related information as much as I can.
Seriously looking at how to attend an internship myself (if I can juggle parenting and work responsibilities).
 
 

Cool, Im still going through

Cool, Im still going through the info myself....a lot of info there....I dont know if there is anyone in NZ.....OZ seems the closest.
regards

There are a couple of NZ

There are a couple of NZ based websites and a lot of talk about the founder (Mike Reynolds) coming to NZ but it appears that initial costs may be a little prohibitive.  There is a video on the earthship website about a family based in Ngaruawahia that have built their own earthship.  Various expats and people around NZ seem to be showing interest/attempting to do their own as well & some are running up against local councils in different parts of the country.
As much as the concept appeals to me, building a single one in complete isolation doesn't.  I think as part of a community enhances the overall concept.

Bill Dunster is here in NZ

Bill Dunster is here in NZ this week. He's doing and has done some pretty cool work in the zero energy housing field. We tried to bring him to Christchurch last year for TEDxEQChCh and he sent some interesting design proposals for affordable and sustainable housing.
Interest from the council = Zero. 
http://www.nzgbc.org.nz/index.php?option=com_jevents&task=icalrepeat.det...

Cool, thanks for the

Cool, thanks for the insight.
regards

Community, yes

Community, yes agree....really we are a society based organism...
Ive been looking at his plans and actually if you had a shallow hillside in the right aspect you could step/stack them....the human waste would run into the plain at the bottom for a large communial garden...If same hill had a river/stream there is a low tech power supply, hard to justify on a one on one basis but say 2 x 5 groups of houses...
I can understand the councils problem or that councils are the problem.  As was mentioned he got sued a few times from ppl who really shouldnt have bought that sort of property....you know "oh its 60F when the design is 70F" is mad when you look at it how its achieving that.  This would of course be seen as a risk by the council, just look at leaky homes and who is being left to carry the can....As PDK says though I think in the future such regs will simply go bye bye. It will dawn on ppl that they cannot afford to have what the think they want so will have to decide what is the most important...and the rest live with the compromise....really cheap energy and he welfare state have insulated ppl from having to make such "hard" choices....
regards