Top 10 at 10: Cactus Kate on tax reform; Bernanke safe?; Daily Show; 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 Wednesday's Top 10 at 10 to bernard.hickey@interest.co.nz 1. Never. Never. Never. Raise. Taxes  - Sorry I missed this yesterday. Cactus Kate has written a considered argument against the recommendations in the Tax Working Group. I don't agree with much of it, but it's worth a read. Her point about landlords leveraging up (even more) to avoid an RFRM tax is fair enough. Her solution appears to be to do nothing (because a new tax is never a good thing), apart from slashing government spending). I agree on cutting spending, but I don't think it's the answer to every question.

New Zealanders seem to be stuck in a pre-historic myth that rental housing stock owners are evil and not only distort housing prices for the "good guys" (ie. themselves) but involve tax avoidance. Those stuck there all have one thing in common. Envy. Most either do not own property or only have an owner-occupied home, usually terminally geared to ensure they live a miserable existence for the rest of their lives. The rest derive their income from the workings of funds and the stockmarket. The prime reason for the alleged fascination with property in New Zealand is detailed in the report in the irony of wishing to apply the RFRM (risk free rate of return method). On page 53 this is outlined. Why is housing deemed appropriate to be taxed at a risk-free rate? Well it is based on this silly New Zealand phenomenon that house prices will keep increasing. Worse is that the RFRM in the example on page 53 encourages excessive leveraging as it calculates based on equity. I can think right now of a fabulous tax structuring product you could sell to strip equity out of these homes. It's just a bad, bad, bad incentive for loading debt that people cannot afford to have currently, let alone in the future.

2. David Farrar at Kiwiblog responds to Kate here. He attacks her view on depreciation in particular.

Depreciation is a necessary tax loss, when the asset really does depreciate, as it allows you to fund the cost of replacement. But when we have decades of evidence that residential buildings appreciate, not depreciate, I'd rather not give out interest free loans to property owners to claim a depreciation that doesn't exist.

3. Bernanke no done deal - Chris Whalen at Zero Hedge reckons the reappointment of Bernanke in the Senate is no done deal, despite all the noises that came out of the Democratic leadership in Congress and the White House over the weekend. It ain't over until the bearded lady sings about interest rates...or something.

"As of this morning, our contacts in the GOP leadership say that the White House is just shy of 50 votes in favor of the reappointment of Fed Chairman Ben Bernanke. The positive media headlines on this count are being driven by a relentless, all weekend long push by the White House, including personal telephone calls from President Obama." "There are still at least 10 more votes to be won before Bernanke's nomination is ready for floor action and, even then, our sources in the Democratic leadership say that they do not want to bring the matter to the floor unless there are a couple of extra votes in the back pocket in case Senators who have indicated support for the nomination change their minds." "The White House spin in the media today is "overly optimistic" according to our GOP sources, who say that one more public revelation regarding the Fed or Bernanke himself could kill the nomination."

For those who might be wavering here is Steve Keen's economic case against Bernanke. 4. Economic black hole - Here's 20 reasons from theeconomiccollapseblog (yikes) why the US economy is dying and is simply not going to recover. There is a certain 'the world is ending and you need to take the hills with guns, ammo and baked beans' feel about this piece, but the carefully selected facts are somewhat alarming. HT Gertraud via email.

The problem is debt. Collectively, the U.S. government, the state governments, corporate America and American consumers have accumulated the biggest mountain of debt in the history of the world. Our massive debt binge has financed our tremendous growth and prosperity over the last couple of decades, but now the day of reckoning is here. And it is going to be painful.

5. Bernanke's scam - Former Citigroup Head of Macro Research Arun Motianey writes in this piece on Roubini Global Economics that Federal Reserve Chairman Ben Bernanke is a magician and his trick looks like failing. Well worth a read. HT Colin Askin via email.

Let's unpack the magic. The central bank and Treasury planned a stealth takeover not of our banks but of the function of banking. The banks for now are just shells, large trading desks that have been given a license to make money by "playing the carry" of a steep yield curve, using cheap funds from depositors, and sometimes directly from the Federal Reserve itself, to invest in higher yielding longer-term US Treasuries and certain other fixed-income securities and produce profits from the difference in the returns. The Fed and Treasury are doing the rest. Something happened around mid-September 2008. In the midst of all the turmoil that engulfed the markets the US Federal Reserve discovered the power of magic. In a bland and technical announcement about paying interest on bank reserves it gave itself the power to expand its balance sheet without limit. It then also proceeded to cut rates to close to zero per cent so that within weeks it was giving itself unlimited and costless funds. We were told that the money was needed to increase the size of the liquidity support measures. But this was only a diversion -- the "pledge" in the magic trick -- to distract us from what was really being planned. By late November, three weeks after the US presidential elections elections, it was using its balance sheet to buy and hold government and agency debt as well as mortgages. It had gone from being lender of large resort to banks and primary dealers to being the investor of first and last resort in the obligations of the federal government and the agencies that were guaranteeing mortgage borrowing. The purchase of other securities backed by credit card debt, auto and student loans under the TALF program would follow. The incoming Obama Administration was happy to play its part. It became the other end of the double-handed saw, creating immense quantities of Treasury and agency-guaranteed debt which the Fed, aided by a banking system that was too scared to lend to anyone else, would buy. For all the public talk of retaining the confidence of international investors as Treasury and other contingent liabilities soared no one in Washington was losing any sleep over it. The Fed stood ready to replace foreign buying several times over if necessary with its infinite and costless overdraft facility. It has come through on that assurance. Within months of that announcement it increased its balance sheet by $1.7 trillion, greater than all the US securities holdings in China's fabled foreign exchange reserves. This was the "turn" "“ the second part of the magic trick. Why does this matter? Because by doing this the US central bank has extended its remit to control interest rates along the full length of US Treasury yield curve. Much of the term lending and borrowing that happens in the US economy and in fact in many other parts of the world are based on these rates. The Fed has exercised iron-clad control of these longer yields so that they are kept just high enough for the banks to make money, but not so high that they would crimp the demand for mortgages and other kinds of credit (of which, once securitized, the Fed is the main buyer in any case). Vast swathes of the most important financial market in the world have therefore ceased to be a market in all but name. It is little exaggeration to say that what we're seeing is a simulacrum of the American economy and not the real thing. Here the US government is the support for much of the domestic demand, the banking system intermediates the borrowing and the US Fed is the dominant and in many cases the sole buyer of those investments. The Fed and the US Treasury have gamed the system and from that has emerged something like weak growth. This is the "prestige", the third part of the trick, but on the grandest scale. And so that is the recovery we have been given "“ worthy of a centrally-planned economy, while the Fed's self-serving supporters like Warren Buffett (not to mention the reprobate bankers) pay lavish lip service to the ideology of free markets and American capitalism and are rewarded handsomely for it. Bernanke's "noble" lies that the economy is returning to health and that we are at the start of a self-sustaining recovery had as much truth as anything that came out of Dick Cheney's mouth on Iraq. His "“ and the Fed's "“ prestige (in both senses) will stand or fall on how things turn out when the magician exits the stage, which is why he is suddenly looking for an excuse to stay.

6. 'Scam offer' - The Press reports that Marchmont Securities Trust has made a cash offer of 10c in every dollar for debentures in Strategic Finance, but the offer has been labelled a 'simple scam' by Kapiti Coast broker Chris Lee.

Lee said the offer was "a simple scam ... they have simply bought or got hold of the Strategic registry. ... By law they are allowed to get hold of it. Strategic made it a condition they didn't contact clients [but Marchmont] have selected those people they believe are vulnerable to offer them a stupid amount of money for their debentures."

7. The Withdrawal method - 2010 will be the year when we work out if the global economy (and the US economy in particular) can cope without all the monetary and fiscal stimulus pumped in over the last couple of years.  The initial signs aren't good and there's more withdrawal to come. Overnight data showed US existing home sales slumped a worse-than-expected 17% after the withdrawal of a tax rebate, while the Washington Post is reporting that the government is looking to end support for low mortgage rates.

For more than a year, the government pulled out the stops to revive home buying by driving down mortgage rates. Now, whether the housing market is ready or not, the government is pulling out. The wind-down of federal support for mortgage rates, set to end in two months, is a momentous test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. The stakes for the economy are massive: If the market again falls into a tailspin, homeowners could face another wave of trouble, and it would deal a body blow to President Obama's efforts to get the economy on track.

8. Expensive, dumb and tragic - This story is about how governments waste money. A British fraudster managed to sell 'bomb detection wands' (pictured below) to the Iraqi government for US$85 million, BBC's Newsnight reports exclusively. HT Troy via email 9. Relevant video - Jon Stewart from The Daily Show captures the mood in America on big bank bonuses nicely.

10. Totally irrelevant video - Cute video of dolphins killing fish in an unusual way. 11. Second totally irrelevant video - This video is of an experiment where a bunch of kids were put in room with a marshmallow and told they should wait for a while for mum to come back with another marshmallow. If they didn't eat it they would get another one. If they did, no second marshmallow. Guess what happened. It says something about our human nature's need for instant gratification, our urge to save and our urge to consume. There is way too much sugar in the world, the way. The hyperactive twins are hilarious. They are itching for sugar. Oh, The Temptation from Steve V on Vimeo.