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Thursday's Top 10 with NZ Mint: The US banking 'untouchables' that were 'too big to jail'; French PM wants 'strong' euro 'managed lower; Central banking bed wetters; Peak olive oil; Dilbert

Posted in Opinion

Here's my Top 10 links from around the Internet at midday in association with NZ Mint.

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.

My must reads today are #3 and #6 about Too Big to Fail and Too Big to Jail banks, who want to continuing leveraging up and paying themselves big bonuses while simultaneously accepting a free bailout assumption from taxpayers. Talk about privatising the profits and socialising the losses.

1, Currency wars? - What currency wars.

Plenty of people are still in denial about currency wars, saying the various central bank actions to print money and artificially lower interest rates (UK, US and Japan) are just responses to weak economies.

Now French Prime Minister Francois Hollande is calling for the euro, which has strengthened in recent months on a calming of financial markets, to be managed lower to help exporters.

This fiction that the world's currency markets are free-floating reflections of underlying economies is just that -- a fiction.

They are now battlegrounds for national interests.

Comments from the likes of Hollande and Japan's PM Shinzo Abe are forcing the likes of the Bundesbank's Jens Weidemann and others to worry about currency wars.

When will our government realise the rest of the world is talking about this and, in many cases, acting to protect their own exporters' interests?

Here's Hollande via AP:

French President Francois Hollande is calling on eurozone nations to help control the value of their shared currency.

The euro has been rising against other currencies in recent weeks, hurting exporters in the 17-country bloc. That's partly because central banks in the U.S. and Japan are pursuing monetary stimulus, which has the effect of weakening their currencies.

Hollande says Tuesday that governments ''must look at the midterm for an exchange level that we consider the most realistic, the most compatible with our real economy."

The view contrasts with that of the European Central Bank, which maintains that the euro's value should be defined by markets.

2. And ze Germans zay Nein! - The German government's spokesman rejected the comments from Hollande.

But the Germans are cheeky buggers on this. They have been one of the biggest beneficiaries over the last five years of the euro's relative weakness because of the various Euro crises.

The Germans want more 'competitiveness', which means internal devaluations in other countries through falling wages. Down that path lies Depression, deflation and political revolts.

But the Germans are determined. Here they talk via Bloomberg.

“Exchange-rate policy isn’t an appropriate instrument to boost competitiveness; it relies on short-term stimulus through targeted depreciation,” Seibert told journalists in Berlin. “Sustained competitiveness can’t be achieved in this way.”

The clash comes as investors shake off concern about the European debt crisis, with the euro climbing 10 percent in the last six months to as high as $1.37 on Feb. 1. Hollande broke with Germany’s market-based approach to say the 17-member currency area must use the currency as an export-promoting tool, as the U.S. and China do.

“We have to act at the international level to assert our interests,” Hollande told reporters at the European Parliament in Strasbourg yesterday.

3. 'The untouchables' - Simon Johnson writes at Bloomberg about why the American government decided some bankers were 'too big to jail'

He starts off talking about US Assistant Attorney General Lanny Breuer, the head of the criminal division at the Justice Department and the man responsible for determining whether anyone should be prosecuted for the financial crisis of 2008.

In an on-camera interview, which aired recently, Breuer stated plainly that some financial institutions are too large and too complex to be held accountable before the law. Bipartisan pressure is now being applied on the Justice Department to reveal exactly how this determination was made. Breuer, however, has announced he will leave government March 1. Good luck unraveling the cover-up that must already be in place.

Breuer made the comments for a documentary aired by the PBS program “Frontline.” The investigative report, titled “The Untouchables,” asked why no senior Wall Street executive has been prosecuted for apparently well-documented illegal acts, such as authorizing document forging, misleading investors and obstructing justice. Breuer was shockingly candid.

“Well, I think I am pursuing justice,” he said. “And I think the entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against Institution A, and as a result of bringing that case, there’s some huge economic effect -- if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are affected badly -- it’s a factor we need to know and understand.”

America’s past was dramatic and not always glorious. Our present is sordid. Financial shenanigans damaged the economy, and now a handful of powerful executives and their companies have received get-out-of-jail-free cards.

It’s official. The Justice Department said it loud and clear: No megabank will ever face meaningful prosecution. Very big banks should be broken up immediately. That won’t happen.

4. The start of the reblancing? - China needs to ramp up consumption and switch its economy from being so heavily weighted on construction and investment. That would be good for New Zealand because we're gearing ourselves up to sell protein (milk and meat) and provide tourism experiences to China's growing middle class. It's not so good for Australia, which has provided the raw materials (iron ore and coal) for all that construction and investment.

Yesterday China announced tax reforms designed to increase middle class incomes and start rebalancing the economy.

Here's Kate McKenzie at FTAlphaville with an analysis of the changes. There's a lot of work to do.

That (gini) number, as it currently stands, indicates a very real risk, as the FT’s Simon Rabinovitch writes:

China’s Gini coefficient – the most widely used gauge of income disparity – rose to 0.474 in 2012, above the 0.4 mark often cited by analysts as a threshold for social unrest.

Last year researchers at the Southwestern University of Finance and Economics in Sichuan province published a survey, which they said showed the Gini reading had spiralled to 0.61, putting China almost on a par with some of the world’s most unequal countries.

5. Ireland's bank debt woes far from over - BBC reports Ireland has decided to liquidate the successor to Anglo Irish bank.

Liquidation may mean that Dublin can delay the repayment of debts associated with the bank's bailout by many years. Another case of 'extend and pretend'.

If the Irish Republic gets ECB approval for the liquidation, IBRC's loans would be transferred to the National Asset Management Agency (Nama), the Irish "bad bank" responsible for recovering the value of problematic loans made by other Irish banks.

A so-called promissory note, under which Dublin must pay 3.1bn euros (£2.7bn; $4.2bn) a year until 2023, would be turned into sovereign bonds that may not have to be fully repaid for up to 40 years.

6. No substitute for equity - Banks are squealling all around the globe over regulators' demand that they have more of their own capital in reserve and therefore be less leveraged.

Here's two economics professors arguing via Bloomberg that more equity is the only solution.

Wouldn’t it be nice if there was a way to make banks safer, healthier and able to lend more? There is a way, and it’s called equity.

If banks were less heavily indebted and relied more on unborrowed money, also called equity or capital, to fund their loans and other assets, they could avoid getting into financial trouble if they incurred losses. They would be better able to continue lending. And the financial system would be less fragile.

Yet bankers fight regulation that would require them to have more equity. They routinely claim that having more equity would lower their return on equity. A lower return, they say, would harm their shareholders and could make investment in their shares unattractive relative to other industries. The suggestion seems to be that society should be concerned with the banks’ return on equity and that, unless some specific return is delivered to banks’ shareholders, we would all suffer. This line of argument is fundamentally flawed.

Governments often step in to support banks using taxpayer money, particularly when many banks are in trouble.

Risks to taxpayers are especially large when bank managers follow similar strategies, so that many banks may experience losses at the same time. Such herding behavior can be attractive because it provides a way to deflect blame when things go wrong. Excuses like “we all made this mistake,” or “we aren’t immune to a crisis in the overall system,” are meant to reduce personal responsibility. When many banks experience losses, the government might feel compelled to provide support, making herding behavior even more attractive.

Risk taking isn’t problematic if those who take risks bear the full consequences and the risks don’t harm others. Such is not the case in banking. Bankers are the main beneficiaries of excessive borrowing and risk, benefiting at the expense of others, without bearing the full consequences. Most important, excessive borrowing and risk taking by banks are costly to taxpayers and make the financial system fragile, endangering and harming the public unnecessarily.

7. A special tax zone for Northern Australia? - SMH.com reports that's the suggestion from Australian opposition leader Tony Abbott. Or more accurately, from a leaked discussion paper he is now pouring cold water on.

Tony Abbott has played down a leaked discussion paper which reveals Coalition plans to create a new economic zone in northern Australia and to move thousands of public sector jobs to north of the Tropic of Capricorn.

''It's not our policy,'' Mr Abbott said. ''It's a draft discussion paper which had a reasonably wide circulation and obviously someone's decided to share it with the media.

''We certainly have no plans and it would be unconstitutional to civilly conscript public servants''.

While reiterating he could not force public servants to move from one state to another, Mr Abbott said: ''It's not a bad thing to have Commonwealth facilities in different parts of Australia''.

8. Peak olive oil? - Economonitor reports Olive oil prices are going through the roof, despite depressed demand from Europe. The problem is a bad season in Spain, which is the biggest producer, and a ramp up in demand in China and America, which apparently wants to eat healthier foods...

9. Central banking and bet wetting - Bess Levin at Dealbreaker reports on a particularly colourful description of the currency wars.

“Devaluing a currency,” one senior Federal Reserve official once told me, “is like peeing in bed. It feels good at first, but pretty soon it becomes a real mess.” In recent times, foreign-exchange incontinence appears to have been the policy of choice in capitals from Beijing to Washington, via Tokyo. The resulting mess has led to warnings of a global “currency war” that could spiral into protectionism.

10. Totally Jon Stewart on Facebook.

 

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?

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8 Comments

Re: 3. 'The

Re: 3. 'The untouchables'
 
Here a nice little bit of satire re the interview aired on PBS.
 
http://www.youtube.com/watch?feature=player_embedded&v=FHWTsDPaCXk

Very funny, but I bet it's

Very funny, but I bet it's not too far away from the truth.  What's the odds that he will finish up at one of the big U.S. banks.

Point 9 looks like a likely

Point 9 looks like a likely event. Unless the USA addresses its debt and actually pays down its debt then the US dollar will continue to depreciate over the long term when its true value will be realised as worth zero.Currency crisis, protectionism, sovereign debt default could be on the cards at some point.

When Peak Electrons roll

When Peak Electrons roll around, BH, dis 'ere Blog is in deep scheisse.

THE NZDMO has just

THE NZDMO has just successfully tendered NZ$200 million of the 2% 20/09/25 Inflation-Indexed Government Bond at a weighted average yield of 1.5014%.
 
Interpolating the 10 and 12 year swaps against the current 2023 issue yield to create an extrapolated 12.611 year govvie yield @ 3.8482% prices inflation expectations around  2.35%.

Stephen, Interesting,

Stephen,
Interesting, thanks.
Presumably this is roughly a week's worth of new borrowing? Do you know who are the prime purchasers? Is it the main commercial banks, domestic investors or foreign investors? If the immediate or downstream purchasers are foreign, presumably the transaction lifts the exchange rate further, all else being equal.
If so, you could only conclude that the Treasury are not talking to the Reserve Bank, or if they are, that neither really believe what they say. 
If mostly it is domestic investors, then all good.

StephenL , I suggest you

StephenL , I suggest you direct your questions to Andrew Hagan, Acting Head of Portfolio Management - I sought answers to similar questions from Andrew Turner, his predecessor, without result. Commercial sensitivity is a significant barrier to truth.

Bernard is right !!  #3 and

Bernard is right !!  #3 and #6 are beauties.