Monday's Top 10: Too big to regulate?; The Volker Rule; 'global collapse'?; economists agreeing; deflation; Clarke & Dawe; Dilbert, and more

Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.

Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

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

See all previous Top 10s here.

1. A dominance problem
BlackRock is the world's largest asset manager. It has US$15 trillion in assets on to a single risk-management system, a huge achievement. Is it also a worrying one? asks the Economist.

Just to put that into perspective, the world's annual GDP is about US$60 trillion; the US's GDP is just a bit over US$15 trillion.

Despite my view that capitalism in a democracy is a good thing (see #4 below), I despise monopolies, and am deeply uncomfortable when firms get too big. Too big, to me, means too big for regulators to oversee, too big when it means too much power to be confronted. BlackRock may be one of them. It got there doing its job well. And most of those 'assets' (US$11 trillion) belong to others; they are just in their risk management system.

All the same, their success has propelled them into a worryingly strong position. They now 'control' (manage/have in their system ?) 7% of the world's financial assets. Their success was born in the cauldron of an early failure and systems built to prevent it happening again. Their systems meant they did not get caught up in the 2008 GFC. So they have earned respect for that. But they are still too big, with out-sized influence.

Ask conspiracy theorists who they think really runs the world, and they will probably point to global banks, such as Citigroup, Bank of America and JPMorgan Chase. Oil giants such as Exxon Mobil and Shell may also earn a mention. Or perhaps they would focus on the consumer-goods firms that hold billions in their thrall: Apple, McDonald’s or Nestlé.

One firm unlikely to feature on their list is BlackRock, an investment manager whose name rings few bells outside financial circles. Yet it is the single biggest shareholder in all the companies listed above.

It owns a stake in almost every listed company not just in America but globally. Its reach extends further: to corporate bonds, sovereign debt, commodities, hedge funds and beyond. It is easily the biggest investor in the world, with $US4.1 trillion of directly controlled assets (almost as much as all private-equity and hedge funds put together) and another $US11 trillion it oversees through its trading platform, Aladdin.

2. The Volker Rule
On Wednesday, the Americans are to publish the final details of what is known as the 'Volker Rule'. This is the part of their Dodd-Frank Act that’s designed to prevent banking entities from engaging in "proprietary trading" - transactions in which a bank uses its own capital to assume the principal risk in order to benefit from short-term price movements. Or, in plain English, it removes the parts of banks that gamble and act like hedge funds, because those parts can blow up quickly.

The Volcker Rule isn’t, however, supposed to interfere with "market-making", or those activities in which a bank either matches buyers with sellers or acts as an intermediary by using financial instruments.

The rule also isn’t supposed to mess with a bank’s ability to hedge against risk. The tricky part for regulators is figuring out how to tell the difference between "proprietary trading" and these latter, legal activities.

So when the final rule comes out, how will we be able to tell the difference between a strong rule and a weaker one?

It's a good question, posed by Mike Konzcal at the Washington Post. He has laid down some markers that will enable us to tell if the new rule will be a tough one, or easy for the banks to get around.

The recent signs are that it will be fairly tough. Foreign banks won't be able to avoid it.

3. We don't know how lucky we are #93
If you are German, getting access to credit is easy - and it's cheap. If you are Spanish, it's not worth even trying. You are locked out. This situation is a nightmare for the ECB. Mario Draghi and the ECB has an enormous problem. His standard response - cheap credit for banks so they could on-lend has backfired in many countries. Many banks used the cheap money to purchase loans that had been issued at significantly higher interest rates in their home countries. For banks and the countries, it was a lucrative business, but it wasn't an intended side effect.

What to do now? Well the answer to that thorny question is, all the things they said they wouldn't do. Things like severe financial repression - negative interest rates. In reality, that means punishing savers by charging them for their deposits, rather than paying them interest. Can't imagine Kiwi savers would be happy with that; and euro savers may flat-out revolt - especially German savers.

Or bond buying (QE).

Spiegel Online survey the options.

4. 'Capitalism's march toward global collapse'
Many Europeans are depressed. Some of their economies are mired in failure. They invented communism and socialism, but neither took hold as they originally imagined - although you could argue perhaps that a form of socialism has taken root in many countries. But it hasn't resulted in the gains they expected. And they are angry that capitalism has succeeded where their cherished ideas haven't. A new idea is bubbling out of a spent Europe - active undermining of capitalism. Apparently the idea now is to discredit it too. The vehicle? - environmentalism.

Maybe it is a low bar to say capitalism has succeeded. But it is doing way better than the alternatives, most of which are euro-centric. Capitalism comes in many shades* - some not very attractive - but there is no doubt it is 'winning' the international challenge.

The problem the socialists face is that their systems, by definition, need to be delivered via communal consent, and they are prone to ossification and slow reaction times. Capitalism is delivered by private, motivated organisations that can adapt quickly. Failure rids the system of, well, failure. Even though modern society is highly critical of flaws, this ability to adapt quickly is the critical attribute that means private drive will always trump public hand-wringing.

The Europeans aren't giving up, however. They have a new approach - undermining capitalism. In echoes of earlier Germans, social psychologist Harald Welzer describes the latest effort. Here he is in Spiegel: It's worth a read in full, if only to show how bereft of original ideas the Europeans have become.

This means we need a method of searching for new strategies that can't be coopted by the sleek, but unfortunately destructive, principle of capitalism. Imagine, for example, what might happen if a large number of businesses make the improvement of the common good - instead of an increase in their profits - the goal of their commercial efforts.

There are in fact already more than 1,400 companies, if small ones, in German-speaking countries that have made a commitment to the concept of the "economy for the common good," an idea developed a few years ago by Christian Felber, the Austrian co-founder of Attac. Around one third of these companies have annual balance statements to show it.

In the medium term, the "economy for the common good" movement aims to make such accounting legally binding. The principle is that the more common-good "points" a business achieves, the more legal benefits it should enjoy. For example, companies with a positive common-good balance could benefit from lower taxes, obtain loans from national banks at lower interest rates and be given priority in public purchasing and the awarding of contracts. This reversal of the existing incentive system would serve to make products and services that are produced and traded fairly, and are environmentally sustainable, cheaper than ethically problematic products and nondurable, disposable items.

Another, even more effective, instrument for creating this sort of change is the "Fossil Free" divestment campaign launched last year by American environmental activist Bill McKibben. This movement is based on the simple idea that entire industries' commercial foundation can be destroyed if funds are withdrawn from them. Private financial investment alone already amounts to a considerable sum. But serious clout could be achieved if the endowments of American colleges and universities, the assets of church organizations and city budgets, were no longer invested in companies that destroy the foundations of future human survival.

* I think it works best when constrained by democratic oversight and regulation - despite its apparent current success in Singapore and China.

5. Label debate
Defensive, Conservative, Moderate, Balanced, Growth, Aggressive. They are among the labels given to KiwiSaver funds. But what do they really mean? They are some sort of code for 'risk'. But the problem is that each analyst uses different criteria for these labels. And we are no different.

Our labeling is (we think) a nuanced assessment - part objective, part subjective, and part common-sense. This issue is live now because Sorted have published their criteria which is substantially based on the levels of equities and property in a Fund. But we think that can give some head-scratching results.

We have built a comparison of our labels with those or Sorted, and Morningstar. You can find it here. KiwiSavers have much to absorb as their fund balances grow to significant levels.

6. Rivals agreeing?
Economists are arguing a lot these days about 'causes' and different approaches to get out of the economic funk most of the big developed world economies seem to be stuck in. Larry Summers recently threw his hat into the debate with some widely respected contributions. Paul Krugman argues his staunch Keynesian viewpoint from the safety of his NY Times bully pulpit. Ken Rogoff has been on the other side of these debates, mixing it up forcefully.

But maybe Rogoff is sensing a coalescing of ideas - perhaps not with Krugman, but certainly with Summers.

These debates are actually important because the options thrashed out in them become the basis of policy that gets presented to voters via politicians - and some (many) ideas get exposed well before they make general public discourse. Here's Rogoff with some elements of agreement:

The important point is that the case for expanding productive infrastructure investment does not rest on one narrow ideological viewpoint or economic theory. Whether Summers is right about secular stagnation in advanced economies, or whether we are still mainly suffering the aftermath of the financial crisis, it is time to break the political gridlock and restore growth.

But Summers is certainly right that productive infrastructure investment is the low-hanging fruit. Of course, governments should be concerned about the long-term trajectory of public debt, all politically charged and polemical nonsense to the contrary. But productive infrastructure investment that generates long-term growth pays for itself, so there need not be any conflict between short-term stabilization and risks to long-term debt sustainability. With today’s ultra-low interest rates and high unemployment, public investment is cheap and plenty of projects offer high returns: fixing bridges and roads, updating badly outmoded electricity grids, and improving mass-transportation systems, to take just a few notable examples.

It is also far from clear why virtually all infrastructure needs to be publicly financed. There are still huge pools of private wealth sitting on the sidelines that can be rapidly mobilized to support productive infrastructure. The government needs to help with rights of way before construction, and with strong regulation to protect the public interest afterwards.

7. Going for gold
Tim Groser has his fans. He's a dogged, determined, relentless character, someone who won't appeal to the fuzzy and wooly types. But he gets stuff done (which is another reason negative types don't like him). NZ Herald editor John Roughan is one of those fans, and he thinks Groser is about to pull off an exceptional deal in the TPP.

The rest of the world has woken up to what is happening in the Pacific. When the US joined the TPP as part of President Obama's "pivot" to Asia, Europe decided it wanted a Trans-Atlantic Trade and Investment Partnership. Those talks are suspended while Europeans get over the shock the US spies on them, but they will resume in earnest if the breakthrough comes in the TPP this weekend.

Even at the WTO in Geneva there has been a sign of life. The organisation summoned trade ministers to Bali this week to consider a draft deal on a couple of the easier issues in the Doha Round.

Global trade agreements, embracing poor countries as well as rich, are still the holy grail but the TPP is proving regional agreements can be an alternative path to the same place.

The American attitude to China has given its Pacific partners greater negotiating leverage. As Groser has put it, "The ability of the US to lead the TPP initiative will answer at least some of the important questions before us about leadership in the first quarter of the 21st century."

The omens are good for a deal that will strike a good balance between US business interests and the rights of global consumers. The US should get the copyright protection it seeks for movies and music. It should not get restrictions on parallel importing. Exclusive distribution channels and exploitative country pricing are not free trade.

Any changes to public purchasing systems such as Pharmac must not stop it buying generic medicines and selecting the supplier of best value.

Free trade agreements are not as vital as before, and for that reason they can be better than before. New Zealand's negotiators have consistently said they will not settle for a cosmetic deal. They are going for gold.

If they keep their eye on the prize this weekend then, succeed or fail, they will deserve a parade. They have done us proud.

8. Still climbing out of a hole
Over the weekend, markets got excited about the fall in the US unemployment rate, the rise in employment, and the [surprising] rise in the participation rate. All positive results and all pointing to a more interesting Fed decision on December 19 when they next meet. Will they taper their bond purchases then, or wait to see that the employment improvements are sustained?

Lost in this assessment by many observers is just how far behind the American employment levels still are. This chart gives you the scale of their problems. Progress, yes, but millions more were employed in 2007.

9. Deflation
The US Fed may be trying to prevent deflation, but they have an internal deflation issue of their own (!) HT Craig.

10. Today's quote
"Money and women. They’re two of the strongest things in the world. The things you do for a woman you wouldn’t do for anything else. Same with money." - Satchel Paige