Top 10 at 10: Chinese trade tensions; US real median incomes fell in last decade; Polish bond failure; Dilbert

Here are my Top 10 links from around the Internet at 10am (My apologies for lateness. Cleaning up after yesterday's MPS excitement). I welcome your additions and comments in the comments section below or please send suggestions for Monday's Top 10 at 10 to bernard.hickey@interest.co.nz Interest.co.nz is a pigeon free zone. 1. This will be interesting to see how the markets cope . The United States has signalled it wants to start unwinding its bank support programmes. Treasury Secretary Tim Geithner said it was time to move from 'crisis response to recovery', the FT reported. Hallelujah. We'll see if the US financial system can cope with some sort of normality and even the remotest sniff of moral hazard.

Pointing to evidence of a healing in financial markets, which only a few months ago had been paralysed by a retreat from risk and banks' reluctance to lend to each other, Mr Geithner said the US would allow its guarantee for the $2,500bn money market mutual fund industry to expire on schedule later this month. He also backed a review by the Federal Deposit Insurance Corporation that is likely to lead to funding guarantees for banks either ending completely or being restricted to emergency cases. "As we enter this new phase we must begin winding down some of the extraordinary support we put in place for the financial system," said Mr Geithner, who said the improvement in markets was in large part due to the actions taken by the Obama administration.

But...let's not too excited

The Treasury secretary made no mention of an "exit strategy" from fiscal and monetary stimulus. Instead, he said "we must continue reinforcing recovery until it is self-sustaining and led by private demand" and vowed not to "put on the brakes too early".

2. Yves Smith at Naked Capitalism has a useful roundup of the various trade tensions involving China, including news that America is considering banning Chinese made tires. HT Troy Barsten via email.

When trade volumes tanked in the later part of 2008, quite a few observers expected a rise in protectionism. We haven't seen a Smoot-Hawley analogue, a wide ranging measure that elicits retaliation. But that does not prevent policy makers from more targeted forms of gamesmanship. Trade has retreated from front-burner coverage due to the modest recovery in activity. However, what is noteworthy is that most other surplus countries have seen a much greater fall in their surpluses than China. Moreover, some argue that the stabilization and improvement in trade activity is due to government stimulus, and as those programs tail off (and some are even now), trade volumes could give up their recent improvement. So the situation is more fraught than it might appear. It should therefore not be a surprise that there is a fair bit of jousting on the trade front. One is a proposal is a de facto ban on Chinese tires. I would be surprised if this gets done, but then again, the Bush administration backed steel quotas. From ChinaDaily

3. US mortgage foreclosures are still growing fast and are now not expected to peak until late next year, Reuters reported Realtytrac as saying I just don't buy the US recovery story. If housing is still collapsing, unemployment is still rising and consumer spending is still falling, how can there be any sort of sustainable recovery? HT Eugene via email

"The pipeline of early stage foreclosures and delinquent loans is still probably going to overwhelm the system's ability to quickly modify" terms so struggling homeowners can make their monthly mortgage payments, said Rick Sharga, senior vice president at Realtytrac said. "We had been thinking that this year would be the peak, but at the rate things are going right now, it's appearing more likely that late 2010 might be the peak year before things start to moderate," Sharga said. Foreclosures that were delayed by various state and federal moratoria that mostly ended in March have been pushing through the system in the summer.

4. This a very old link I've stumbled across thanks to Felix Salmon. It was written in late 2002 by Paul Krugman for the New York Times and writes about the death of the American middle class. It strikes a few chords and explains, I think, why such a big swathe of Americans went on such a debt-driven real estate frenzy from 2002 to 2007. They were trying to recover that middle class dream of a house in the suburbs even if it meant going into debt. Krugman was writing in the immediate wake of Enron and talking about the rise of the imperial CEO and the extreme bonuses on Wall St. This inequality only got worse after that.

We are now living in a new Gilded Age, as extravagant as the original. Mansions have made a comeback. Back in 1999 this magazine profiled Thierry Despont, the ''eminence of excess,'' an architect who specializes in designing houses for the superrich. His creations typically range from 20,000 to 60,000 square feet; houses at the upper end of his range are not much smaller than the White House. Needless to say, the armies of servants are back, too. So are the yachts. Still, even J.P. Morgan didn't have a Gulfstream. As the story about Despont suggests, it's not fair to say that the fact of widening inequality in America has gone unreported. Yet glimpses of the lifestyles of the rich and tasteless don't necessarily add up in people's minds to a clear picture of the tectonic shifts that have taken place in the distribution of income and wealth in this country. My sense is that few people are aware of just how much the gap between the very rich and the rest has widened over a relatively short period of time.

5. Along the same lines, Felix Salmon at Reuters covers the latest US census data showing real median incomes fell and poverty rose massively. Real median US incomes actually fell over the decade from 1998 to 2008, the first time ever. What happened to all that real GDP growth between 1998 and 2008? The top 5%, including a bunch of banksters and CEOs, took it. When is there going to be a revolution in the United States?

Real median household income fell 3.6% between 2007 and 2008, from $52,163 to $50,303. That's a drop of over $1,800: real money. Naturally, the pain was concentrated in the poorer parts of the US: incomes in the South fell by 4.9% to $45,590, while incomes in the Northeast were unchanged at $54,346. Oh, and the number of people in poverty increased by a whopping 2.5 million, to 39.8 million: 13.2% of the population, the highest poverty rate in over a decade.

6. Former IMF chief economist Simon Johnson at BaselineScenario can't see any meaningful reform of global financial systems to come out of recent talkfests by the G20 and others.

There will be some minor changes, and these will be much trumpeted.  But what will really change in or around the power structure of global finance "“ as it plays out in the United States, Western Europe, or anywhere else? Nothing "“ and you know this because otherwise the CEOs of all our top financial institutions would be mounting massive PR campaigns against the proposals, with op eds, Internet ads, innumerable cable appearances, and a virtually constant presence at Treasury. Just think back to how active they were earlier this year, when FDIC-type resolution for big banks was on the table. Unless and until our biggest financial players are brought to heel, we are destined to repeat versions of the same boom-bust-bailout cycle.  If you find a government willing to state this problem clearly and really take action to confront the relevant powerful people, let me know.

7. Following on from Geithner's comments above, Chris Martenson explains why unwinding the bank supports will be very difficult, if not impossible.

The lessons here are clear:

• At every step of the way, bankers are going to resist the loss of their free money.
• The bankers tactics will be to toss out dire warnings of "roiled markets" and "destabilizing the system" and other such veiled threats that translate into, "When our industry is unhappy, you're unhappy."
• The removal of stimulus, when it does begin, will be exceedingly gradual and delicate.

For my part, I have serious doubts that all of the "assets" purchased by the Fed can ever be completely unwound.  Either the counterparties no longer exist, or if they do, some will decline (read: refuse) to buy the assets back, because doing so would bankrupt them (due to the fact that the assets are worth a lot less than the price the Fed bought them for). Adding to this story are the immense borrowing needs of the federal government over the next year.  How can the government possibly find enough cash to borrow if the Fed is busy withdrawing cash from the markets? No, it would seem that the Fed's thin-air money program (called "quantitative easing" in fancy parlance) is going to be with us for a while. Unwinding is not going to be easy.

8. We like to keep an eye on Eastern Europe, which is shaping up as the next source of financial market grief. ZeroHedge points out a failed bond auction in Poland.

In its first bond auction since announcing its budget deficit was set to double in 2010 (talking a massive $20 billion here, nothing as puny as $9 trillion over the next 10 years), the Polish government sold only half of the PLN2 billion of the 5.75% bonds due 2011 it was hoping to offload to investors to plug the hole. It appears, unlike Tim Geithner, Polish Finance Minister Jacek Rostowski does not have Wen Jiabao on speed dial. Then again, after they have taken over America, who knows where Chinese interests will look next: that Bison grass vodka sure is a strategic asset. Subsequent to the auction, BNP had some less than encouraging words for holders of Polish bonds:

"This is a direct consequence of a very dangerous fiscal outlook presented in the 2010 budget draft. We recommend selling Polish bonds across the curve." This merely reinforces Zero Hedge's view of the U.S. exemption from economic reality: after all, like any aggressive distressed bondholder, China is merely preparing for the inevitable debt-for-equity swap. If there are no other bidders (aside from the debtor itself of course), so much the better. Unfortunately for Poland, it does not have a comparable exemption.

9. Here's a Cole Porter song about debt reduction. "We're delinquent, we're defaulting, we're deleveraging..." 10. Here's a barber shop quartet pleading for Ben Bernanke to 'send them some green.'