Wednesday's Top 10 at 10: UK to encourage 95% mortgages (seriously);A 'Wage-mark' for good employers?; Goldman's aluminium shuffling lark; A real European money printing plan; Dilbert's mining for bertcoins

Here's my Top 10 links from around the Internet at 10 am  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 #4 on Goldman's aluminium shuffling 'metal go-round'. These Too Big To Fail banks need to be put back in a very safe box. With a closed lid. 

1. Could this possibly end well? - Just as New Zealand's Reserve Bank is about to restrict growth of low deposit mortgages in an attempt to slow rampant house price inflation in Auckland, the British government is announcing it's going to increase subsidies to low deposit lenders to try to pump some air into its housing market.

Sigh.

The initial version of Britain's 'Help to Buy' scheme has already sparked a mini-boom in parts of Southern England, particularly around London.

Chancellor of the Exchequer George Osborne has announced plans overnight to expand the scheme to encourage 95% mortgages...

It's true that Britain's economy is in a mess and the British government is increasingly desperate.

But is creating a housing bubble a legitimate tool to create economic growth?

This might not end well.

Here's Reuters with the news and the obligatory warnings:

Osborne says the scheme will boost construction, noting that house purchases are well below pre-crisis levels.

But critics argue a mini-boom in house prices is already underway due to an earlier government scheme to boost mortgage lending, and data from the British Bankers' Association on Tuesday showed the most mortgage approvals since January 2012.

"There is serious concern that the Help-to-Buy mortgage guarantee scheme could eventually fuel a housing price bubble," said Howard Archer, economist at IHS Global Insight.

"While we suspect that this is unlikely to occur in the near term at least given the current pressure on households, it is clearly something that policymakers will need to keep a very close eye on," he added.

2. Here's a plan for Europe - Economists Biagio Bossone and Richard Wood write here at Economonitor that European central banks should lend money to its heavily indebted governments and promise not to ask for the money back. This is money printing in its purest form. They make a strong case for Europe, which is in a world of pain.

The plan is "Outright Monetary Financing" or OMF. They even detail how it could be structured to get around the article 123 of the European Union's Treaty of Lisbon, which currently bans outright central bank financing of government deficits. Nifty.

OMF can take place without generating new public debt, and without breaching Article 123:

1. The central bank communicates to the government its readiness to finance, through money issuance, a fiscal package to achieve a pre-determined nominal demand (growth) target.
2. The government issues new debt to be sold to the central bank in exchange for money. The central bank purchases the new debt and commits to holding it in perpetuity, rolling over the portion of it that reaches maturity, and returning the interest income to the government. Alternatively, the government issues to the central bank a non-interest bearing and never- redeemable note in exchange for newly issued money.
3. The launch of the operation is accompanied by a central bank’s communication explaining that     OMF will not raise debt sustainability issues since the government securities will not be redeemed or sold to the market, will not pay interests, and will not give rise to government liabilities.
4. At some future time, when economic growth and public finances will have been restored, the government may agree with the central bank on a plan for a (gradual) re-purchase of the note, if necessary. This would reduce the (ex ante and ex post) cost of OMF operations for central bank through money allocation.

Since no debt service burden will arise from OMF, no future tax revenues will be required and no (Ricardian) offsetting savings would take place.

3. A US shift from wages to profits - Here's Rebecca Wilder at Economonitor writing about the secular shift towards profits and income in America. How can the world's largest economy, which is still based on consumption by wage earners, grow very fast when that wage share is collapsing?

This is a crisis of labor income. Where and when will the redistribution occur away from corporate profits and retained earnings and toward employee wages? I hope some miraculous investment in labor occurs soon, but the current state of the labor market doesn’t portend that a shift is imminent. 

4. 'A merry go-round of metal' - A New York Times investigation has found Goldman Sachs has been playing silly buggers with aluminium storage in a way that increases the cost of beer by a tenth of cent a can.

Perhaps Goldman could buy Tiwai Pt to save all those jobs... ;) It could refine the metal and then shuttle it back and forth from Bluff to Invercargill. Jobs galore.

The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.

This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back-and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal. It also increases prices paid by manufacturers and consumers across the country.

Tyler Clay, a forklift driver who worked at the Goldman warehouses until early this year, called the process “a merry-go-round of metal.”

It's a full service strategy. No wonder the US Federal announced late on Friday in a one paragraph statement it was reviewing the exemption for banks trading commodities. This might explain why:

By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal.

5. '7% is our bottom line' - Bloomberg reports Chinese Premier Li Keqiang saying 7% is the lower bound for Chinese GDP growth this year. Stimulus seems to be in the offing. 

Expansion below 7 percent won’t be accepted because China needs to achieve a moderately prosperous society by 2020, according to a commentary published July 21 by the official Xinhua News Agency and credited to reporter Wang Yuewei. Li said at a recent meeting with economists that 7 percent is the “bottom line” and the nation can’t allow growth below that, the Beijing News reported today.

6. 'It still won't work' - China expert Michael Pettis explains on his blog why yet more Chinese stimulus won't work in the long run. Yet more can kicking.

It seems to me that the reason why simply “provoking a stimulatory policy response” won’t help China has been explained many times, even recently by former China bulls. Of course more stimulus will indeed cause GDP growth to pick up, as Grenville notes, but it will do so by exacerbating the gap between the growth in debt and the growth inn debt-servicing capacity. Because too much debt and a huge amount of overvalued assets is precisely the problem facing China, it is hard to believe that spending more borrowed money on increasing already excessive capacity can possibly be a useful resolution of slower Chinese growth.

7. Wagemark - Here's detail on a Canadian product labeling scheme (a bit like ethical or fair trade or organic) for companies which shows they don't overpay their CEO and underpay their workers. 

Wagemark-certified organizations commit to capping top compensation at eight times the wage of their lowest paid decile of employees. The Wagemark Standard has been in development for more than a year and builds on recent research concerning the link between fair compensation, workplace morale, worker productivity and long-term competitiveness.

"Wagemark is about establishing a new moral standard for companies that want to see a better world." says Richard G. Wilkinson, Emeritus Professor of Social Epidemiology at the University of Nottingham, and co-author of the international best-seller, The Spirit Level: Why More Equal Societies Almost Always Do Better. 

8. A speculative epidemic - Bob Shiller, who is one of the guys behind America's Case-Shiller real estate price index, discusses the issue of identifying 'bubbles' in this Project Syndicate piece. He even questions the use of the word. He has other words.

It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

This is what happened in the bull market of the 1920’s in the US, with the peak in 1929. We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a sudden turning point and a major and definitive crash. In fact, a major boom in real stock prices in the US after “Black Tuesday” brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash.

Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

9. Ubran sprawl and social mobility - Paul Krugman writes here in his NYT blog that 'sprawly' cities seem to entrench poor people as poor. HT Kumbel in the comments of Friday's Top Ten. Yes I do read them.

10. Totally Mad Saudi Arabians changing the wheels on a car.