Top 10 at 10: The Botox Economy; It's bonus time; Swiss whistlers; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please send suggestions for Tuesday's Top 10 at 10 to bernard.hickey@interest.co.nz 1. The Botox economy - Sydney based derivatives expert Satyajit Das has written an evocative piece at eurointelligence.com arguing that the global economy is frozen like an old woman's face pumped full of botox. Yikes. HT to Andrew Patterson who has an interview with Satyajit on Radio Live.

The effect is temporary and can have significant side effects. The global economy is currently taking the "botox" cure. A flood of money from central banks and governments "“ "financial botox" - has temporarily covered up unresolved and deep-seated problems.

He includes some scary detail about the refinancings necessary from 2011 to 2014.

Borrowers face significant refinancing risks. Over the next 5 years over $4,200 billion of debt will need re-financing, including $2,700 billion of CRE loan (peaking in 2011) and $1,500 billion of leveraged loans (peaking in 2014). Securitisation (CMBS and CLO ("Collateralised Loan Obligation")) markets were crucial in funding CRE and private equity transactions remain troubled. According to one estimate, if the CLO market remains closed and half 2012-14 leveraged loan maturities were re-financed in the high-yield bond markets, then issuance volume would need to be double 2006 peak in high-yield bond issuance to accommodate this requirement. Similarly, the equity injection needed to re-finance commercial real estate debt maturing by 2014 is estimated at between $200-750 billion.

2. Here's the second part of the Botox economy piece. It's also long but well worth the read. Here's a taste. He makes a good point that many governments are hoping inflation will relieve them of their debt burdens. But it may not happen.

At best, governments are hoping that loose money will create inflation allowing reflation of asset prices alleviating the worst of the problems. The morality of punishing savers and rewarding excessive borrowing has not been debated. The reflation hypothesis itself may be flawed. Inflation probably needs convergence of several conditions "“ excessively loose money supply, active lending by banks to increase the velocity of the money and an imbalance between supply and demand. Loose money supply by itself may not be sufficient to create inflation. In Japan, years of loose monetary policy and quantitative easing have not prevented significant deflation over the last two decades. The second and third conditions are not currently observable. Problems within the financial system have slowed the velocity of money. Capacity utilisation is generally low and over capacity exists in many industries. Governments and central banks continue to inject liberal amounts of botox to cover up problems, at least, while supplies exist. In absence of any definite solutions, policymakers are deferring dealing with the problems, rolling them forward. This means that the unavoidable adjustment when it occurs will be more severe and more painful. The ability of policymakers to cushion the adjustment will be restricted by constrained balance sheets. In the words of David Bowers of Absolute Strategy Research: "It's the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments' assumption of banks' debts]. There's nobody left to pass it to in the future."

3. 'It's not our fault' - There's a new idea doing the rounds in the United States that much of the blame for the global financial crisis should be placed on foreign investors who bought too many US toxic mortgages and treasuries. This apparently forced American mortgage brokers and investment banks to do the dirty deeds they did. Time reports on some research by economist Ricardo Caballero, the head of MIT's economics department no less.

How to prevent a similar crisis from happening again is the question that Caballero thinks we are getting wrong. He believes reforming the U.S. financial system is only part of the answer. Foreign investors, he says, need to change their behavior as well. Specifically, Caballero believes the U.S. needs to encourage foreign governments to hold a range of U.S. investments, instead of just funneling all of their money into say Treasuries or mortgage bonds. One way to do that is to require foreign governments or investors who only buy Treasuries or mortgage bonds to place a certain portion of their U.S. investments in an account at the Federal Reserve. Rather than park their money at the Fed, Caballero contends that many investors will choose to put their money into riskier U.S. investments.

Brilliant. More sovereign wealth funds buying risky US stocks is just what the world needs. 4. It's bonus time - This excellent Wall Street Journal Graphic shows that US banks are expected to pay their workers compensation and bonuses of US$146 billion or 32.4% of revenues in the 2009 year, which is up from the US$123.4 billion paid out in 2008... Here's the story to go with it. No wonder Obama is riding a wave of public revulsion with his US$120 billion tax plan.

An analysis by The Wall Street Journal shows that executives, traders, investment bankers, money managers and others at 38 top financial companies can expect to earn nearly 18% more than they did in 2008"”and slightly more than in the record year of 2007. The conclusions are based on an examination of securities filings for the first nine months of 2009 and revenue estimates through year-end.

5. Chicago got it wrong - Brent Wheeler points to an interesting interview by The New Yorker's John Cassidy with Richard Posner. In it Posner says the Chicago school of economics essentially got it horribly wrong.

Q. What is Chicago macroeconomics? And what went wrong with it? A. Going back to Milton Friedman, there was the idea that the Great Depression was a product of inept monetary policy and could have been avoided if only the Fed had not tightened the money supply. That remains very controversial, but also it didn't prepare anybody for what has happened recently. The concern then was that the Fed had raised rates prematurely during the Depression. But now the concern is that the interest rates were too low during the early 2000s, and that is what precipitated all the trouble. For that, the monetarists were unprepared. When the crisis began Bernanke reduced the federal funds rate essentially to zero and nothing happened. That was the point at which Friedman's macro theory, along with Lucas's macro theory, did not have a clue as to what had happened. That was pretty bad. Also, and more interesting to me, it called into question a whole approach to economics"”one that is very formal, making very austere assumptions about human rationality: people have a lot of information, a lot of foresight. They look ahead. It is very difficult for the government to affect behavior, because the market will offset what it does. The more informal economics of Keynes has made a big comeback because people realize that even though it is kind of loose and it doesn't cross all the "t"s and dot all the "i"s, it seems to have more of a grasp of what is going on in the economy.

This is one of a series of interviews with Chicago economists carried in the New Yorker. Thanks Brent for the tip. 6. 'We've only just begun' - McKinsey has written an extensive report full of juicy charts saying the debt reduction in the developed world has only just begun. The consultancy looked at 45 episodes of deleveraging since 1930. HT David via email. 7. Swiss whistleblowers - The Swiss banks face a bunch of problems at the moment, not the least of which is a bunch of whistleblowers stealing data and giving it to the US Internal Revenue Service. Here's the New York Times on Rudolf Elmer, who ran Julius Baer in the Caribbean and is now helping global tax authorities with their inquiries.

Now back in his native country, he continues to disclose the inner workings of Julius Baer "” one of many Swiss institutions that investigators say help clients evade billions of dollars in taxes by routing money through offshore havens in the Caribbean and Switzerland. "It is a global problem, and I am only the messenger who provides the bad news, or even better, the truth," Mr. Elmer, 54, wrote in a recent e-mail message. "Offshore tax evasion is the biggest theft among societies and neighbor states in this world." He said that he would fly on Tuesday to Düsseldorf, Germany, where the tax authorities are putting him up in a five-star hotel as he prepares to divulge client secrets.

8. More mortgage problems - The WSJ reports that the Federal Housing Administration, which has lent big time in the last couple of years, is facing problems.

One of the raft of measures Mr. Stevens is considering to protect and replenish the agency's reserves is raising the minimum down payment. The current minimum of 3.5% is far lower than what private lenders offer, making FHA-backed loans one of the last low-down-payment options left. Last year, through August, nearly seven in eight new FHA-backed loans carried down payments of less than 5%. Home builders are worried. "It would be a game changer for the industry" if down payments were raised, says Eric Lipar, chief executive of LGI Homes, a Texas-based builder of entry-level homes. Not everyone believes that such low down payments are good. In markets where home values are still falling, buyers who put little money down could see their equity wiped out quickly. The FHA is "just manufacturing more upside-down homeowners by the truckload in Arizona, California, and Nevada," says Brett Barry, a Phoenix real-estate agent who specializes in selling foreclosed homes. If the agency were to raise down payments sharply in those markets, price declines would become a "self-fulfilling prophecy," says Mr. Stevens. "If you stop lending, you're going to perpetuate the declines."

9. 'It won't help' - Simon Johnson and and Peter Boone reckon Obama's tax on banks will not stop the doomsday cycle in this FT.com comment piece.

First, we must sharply raise capital requirements at leveraged institutions, so shareholders rather than regulators play the leading role in making sure their money is used sensibly. This means tripling capital requirements so banks hold at least 20-25 per cent of assets in core capital. Second, we need to end the political need to bail out every institution that fails. This can be helped by putting strict limits on the size of institutions, and forcing our largest banks, including the likes of Goldman Sachs and Barclays, to become much smaller. When the Soviet Union disintegrated, it took tough leaders and clear thinkers, such as Boris Yeltsin and Yegor Gaidar, to pick up the pieces and push for reform. It would have been easier and less messy if genuine reform had started before the collapse. In the past few months it has become clear the US and UK don't have sufficiently strong political leaders. There are good tough people around: Paul Volcker stands out in the US, as so does Thomas Hoenig, head of the Kansas City Fed, and Mr Angelides. In the UK, Lord Turner, Mr Haldane, and even Mervyn King are showing at least intellectual inclination towards more serious reform.

10. Totally irrelevant video on airport security.