Top 10 at 10: Gareth Morgan targets RBNZ for reform; Diversify into women and sheep; Dilbert

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please email your suggestions for Monday's Top 10 at 10 to bernard.hickey@interest.co.nz 1. RBNZ partly to blame - Gareth Morgan has written a column in the NZHerald detailing the proposed reforms by the Capital Markets Development Taskforce and the Tax Working Group. He is a member of both. He departs from the script though to place some of the blame for our unbalanced economy and capital markets on the Reserve Bank of New Zealand's rules that encourage bank lending on housing by allowing less capital to be put aside to back those loans. Morgan also criticises trustees and financial advisers for looking after themselves rather than investors. Fair enough.

New Zealand's economic well-being has long suffered from a gross over-investment in property - inspired primarily by strong bias in Reserve Bank rules that incentivise banks to prioritise mortgage lending over all other forms, and supported by inappropriate tax loopholes for that asset class. So long as banks are encouraged by their central banks to favour mortgage lending over all other forms, the barrier to better sustainable economic performance remains formidable. The one taskforce missing in 2009 was one on our Reserve Bank's management of prudential supervision.

2. Who will pay? - The Deputy Governor of the People's Bank of China, Zhu Min, has pointed out in this Reuters article there aren't enough US dollars in circulation outside the United States to allow foreign central banks and investors to buy all the US Treasury bonds being issued to fund the US government's monster deficit. Yet somehow US Treasury yields remain near record lows. We'll see whether that lasts. The pressure is on.

"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible." "The U.S. current account deficit is falling as residents' savings increase, so its trade turnover is falling, which means the U.S. is supplying fewer dollars to the rest of the world," he added. "The world does not have so much money to buy more U.S. Treasuries."

3. The global debt picture - The Economist's Buttonwood column has a truly excellent interactive graphic on debt levels globally which can be reached by clicking here. Unfortunately I can't embed it.

4. 'It's not our fault' - The New York Federal Reserve, which is part of the Federal Reserve System, has done a study into why it seems banks are not lending out their reserves. It seems the problem is circular and not the Fed's fault...or anyone's fault...and the massive buildup in reserves won't create inflation...

We argue that the concerns about high levels of reserves are largely unwarranted. Using a series of simple examples, we show how central bank liquidity facilities and other credit programs create"”essentially as a by-product"”a large quantity of reserves. While the level of required reserves may change modestly with changes in bank lending behavior, the vast majority of the newly created reserves will end up being held as excess reserves regardless of how banks react to the new programs. In other words, the substantial buildup of reserves depicted in the chart reflects the large scale of the Federal Reserve's policy initiatives, but says little or nothing about the programs' effects on bank lending or on the economy more broadly. We also argue that a large increase in the quantity of reserves in the banking system need not be inflationary, since the central bank can adjust short-term interest rates independently of the level of reserves by changing the interest rate it pays on reserves.

5. Yet we see this - Vince Veneziani at BusinessInsider reports from some Morgan Stanley research that US bank lending to non-bank corporates has slumped despite steady or growing money supply. The chart tells the story. Morgan Stanley is worried about a W shaped recession.

It is too early to amend our forecast of an anaemic developed economy recovery just yet. However, given trends in money growth and lending we would expect the monetarists to be warning about the risks of a W-shaped recession. With that in mind, there is a danger that markets and authorities become obsessed about the fiscal implications of the crisis at a time when the real worries should still focus on private sector access to credit and money. What is there for Monetarists to worry about? We show below charts of the growth rate (year-on-year) of bank lending to the private sector and broad money for the US, Eurozone, Japan, UK and China (Exhibits 1 to 5). What this shows is a rapid implosion of growth rates of lending from normal to negative in the UK, US and the Eurozone, and declining lending growth in Japan (and very high lending growth in China).

6. It's all over now - The US Federal Reserve is ending its special liquidity facilities for US banks because it believes the crisis is over, but this chart from ZeroHedge points out that much of it has been replaced by bond buying/quantitative easing/money printing.

What has been the outcome of this bailout orgy: simple, and you can see it in widening sovereign CDS spreads every day. Essentially the Fed has transferred private market risk for public sector risk. The associated "benefits" with this transaction we all know: a collapsing dollar, surging gold, balooning deficits which will be funded only so long as America agrees to be China's vassal state, increasingly disadvantageous trading terms for America with its key trading partners, and a disappearing middle class. What will be the cost? Nobody knows yet, however tens of trillions of budget shortfalls over the next decade is a sovereign crisis waiting to happen. As America has no hope of every funding these shortfalls organically, it will depend on financing more and more, and in a vicious circle, even more debt will need to be raised merely to fund the ever increasing interest expense, and yes, zero interest rates can only last so long.

7. Basel II with bells on - The Reserve Bank's core funding ratio to force banks to raise more locally and for longer terms looks like it will be adopted by the global coordinator of bank regulators. The Bank for International Settlements' Basel committee on banking supervision has released its proposals to strengthen global banks. They include the introduction of a leverage ratio and a liquidity policy that looks similar to the Reserve Bank's core funding ratio. The devil will be in the details that bankers will be reading closely, but the RBNZ deserves congratulations for leading the pack. Here's the FTAlphaville reportage of the first reaction with some detail.

The numerator of this ratio is roughly equivalent to "core funding", as defined in the Reserve Bank of New Zealand regulations and in our recent note "More important than Tier One?", 27 November.

8. Line in the sand - Talk that Greece, Spain and Ireland could somehow pull out of the euro is exercising minds oop north, but central banks and everyone with official hats on have said 'Nein!' Bruce Krasting at Naked Capitalism says we should all watch Greece because lines in the sand can often become targets.

The Central Banks have drawn a line in the sand for good reason. They do not have a choice. The countries that are at risk have issued mammoth amounts of debt in Euro's. If some form of two-tiered Euro were the result the cost of revaluing the debt for both the public and private sector would be devastating. The flip side is that the countries that are suffering have no policy options available to them. They can't provide a meaningful stimulus because of the Euro link and limitations on budget deficits that the link mandates. At some point this will become untenable. The argument that a two tiered Euro would stimulate both the tourist and industrial economies of Greece, Spain and Ireland (Italy too) becomes compelling. I don't see a soft landing. At an extreme where could this go? It leads to global financial instability, it could be very deflationary. Precisely what the global economy does not need. Greece is a bit like Sub Prime. By itself, it truly was containable. But it exposed other weaknesses. If one was looking for something to upset the applecart, Greece could very well be it.

9. The size of the task - This chart below from Rolfe Winkler at Reuters shows just how much deleveraging has to happen in America has to happen to get back to something like normal. It has only just started. At least 100% of GDP needs to be lopped off. That's over US$16 trillion. That's an awful lot of non-consumption over the next couple of decades. Click on the chart for a bigger version.

10. Congress lifted the US debt ceiling limit a couple of days ago. This cartoon says it all.

11 (bonus). Totally relevant video - Stephen Colbert at The Colbert Report joins up with other right wing talk show hosts to promote gold. It seems you need gold, but you should diversify with investments in women and sheep. They will keep you warm at night and can be eaten, in that order respectively. "Gold is the only investment that will never lose its value because it's gold, but only gold can only take you so far." Sheep's wool keep you warm, their bones can be made into tools and if you run out of women... New Zealand is truly a rich country...