Friday's Top 10: The real reason for China's crackdown on shadow banking; The 5 myths of QE; The problem with open plan offices; Clarke and Dawe's shadowy cabinet; Dilbert

Here's my Top 10 links from around the Internet at midday today.

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 read today is #1 on the myths of QE.

1. QE myths and the expectations fairy - Frances Coppola at Pragmatic Capitalism has written a nice piece about the current version of Quantitative Easing (QE) being used in America, Japan and Britain.

She runs through the various myths about it including;

1. QE creates inflation (it hasn't so far...)

2. QE stimulates the economy by forcing banks to lend (It hasn't worked because of a lack of demand and the banks' need to rebuild their balance sheets)

3. QE stimulates companies to invest (It hasn't because they've used the cheap money to buy back shares or roll over debt)

4. QE encourages households to spend (It hasn't because they are still in debt up to their eyeballs)

5. QE debases the currency (It doesn't work in the long term without inflation)

It's well worth a read.

The 1930s recovery was led by massive housebuilding programmes, and the 1980s recovery by radical supply-side reforms. In contrast, the main feature of the years since 2008, after a brief period of fiscal stimulus early on, is fiscal consolidation coupled with what the UK’s Chancellor terms “monetary activism”. The last five years have seen what the FT describes as the“largest economic experiment in history”. And the results are stagnant economies, falling real incomes, increasing insecurity and uncertainty for the majority of people (especially the young), and a catastrophic drop in both private and public sector investment in many developed countries. The “vision” is an illusion. That is why there is no lasting recovery.

The Expectations Fairy is no more real than the Confidence Fairy, the Inflation Monster or the Bond Vigilantes. It is time for all of them to be consigned to the realm of mythology, and for monetary and fiscal policy to be grounded firmly in reality and redirected towards achieving the best quality of life for ordinary people.

2. An exit turning into a stampede - The collapse in bond prices (and the resulting surge in yields) has shocked many.

It seems a lot of people borrowed short term and 'invested' long term in bonds. Now they face margin calls... Twas ever thus...

Here's the NYTimes with a look at the stampede.

In the current fear-soaked atmosphere, market participants are looking over their shoulders, seeking to identify which firms or funds are sitting on big losses and might be forced to sell large lots of bonds. The most obvious contenders are those that bought bonds with borrowed money. In Wall Street parlance, that is called leverage. It can magnify returns when rates are low and prices are rising, but unwinding leveraged trades can deepen losses.

“The fact that we’re seeing these violent moves is a reflection that there was leverage there,” George Goncalves, a fixed-income strategist at Nomura, said. “This is definitely more than a hissy fit. Some people are being forced to sell.”

3. China's shadow banks - The WSJ has a detailed piece on the problems inside China's economy with shadow banks. 

Economists inside and outside China worry that shadow lenders are introducing risks reminiscent of America's subprime-mortgage boom by backing projects that may never pay off, failing to disclose fully what they are asking investors to fund and appearing to give banks a way to get rid of problem loans—without really doing so.

The central bank felt it had to act now to keep financial problems from getting out of hand, says Charlene Chu, senior director of Fitch Ratings Inc. in Beijing. "The bigger the problem becomes, the less manageable it is."

Shadow lenders get money both by borrowing it from traditional banks and raising it from wealthy individuals looking for higher yields than what they could get stashing their money in a bank. As traditional banks struggle to get funding, they have less to dole out to shadow lenders. In addition, the credit squeeze could make investors think twice about putting their money in institutions considered less secure than banks.

4. Problems in Greece - Another major Greek asset sale is in deep trouble, the FT reports. Keep an eye on Greece. It could do what it did in 2010 and 2012, which is trip up global financial markets. 

5. British banking lobbyists - Outgoing Bank of England boss Mervyn King has taken a parting shot at banking lobbyists. 

6. Pay attention to the politics - That's Bill Bishop's message in this NYT Dealbook piece on the shenanigans in the last 10 days in China's credit markets. 

Unless the government either allows defaults and failures, or arrests some bankers, how can it force the banks to improve their risk and liquidity management and really start channeling financing to more productive parts of the economy?

Actually, China arrested a few bankers this year as part of an investigation into shady practices in the interbank market. The crackdown has been led by Wang Qishan, a financial markets expert who is now the Party’s anti-corruption czar.

It is possible that those arrests are unrelated to last week’s interbank market stress. We should, however, consider the possibility that these moves, along with a State Council announcement on June 19 of a package of financial reform proposals, are part of a larger plan to lay the groundwork for the painful and desperately needed reform proposals reportedly up for approval at the Third Plenum of the 18th Party Congress that is expected to meet in October.

As I wrote in the China Insider column of May 28, it is sometimes hard to understand Chinese economics without paying attention to the politics

7. The problem with open plan offices - WSJ has a look.

8. Falling US wages - David Cay Johnston details the real problem with America's economy. 

Wages fell at the fastest rate ever recorded during the first quarter of this year, the government’s Bureau of Labor Statistics reported.

Hourly wages fell 3.8 percent in the first quarter, the biggest drop since the BLS began tracking compensation in 1947. Productivity rose half a percentage point. The result was that what economists call “labor unit costs” fell 4.3 percent.

In plain English, that means paychecks overall shrank, but work output grew. If you are a business owner, that is news worthy of a toast with a bottle of the finest Cristal champagne, which at $595 is more than the $518 that a median-wage worker earns in a week.

9. The Tipping Point - Bill Gross' latest monthly missive is in, and it's another cracker. 

10. Totally Clarke and Dawe on what Tony Abbott's cabinet might look like. A shadow cabinet minister is very shadowey.