Top 10 at 10: Euro house prices falling; 'Not enough pain'; Shrinking revolvers; Dilbert

Here's my Top 10 links from around the Internet at 10am. I welcome your additions in the comments below or send any suggestions for tomorrow's Top 10 at 10 to bernard.hickey@interest.co.nz. Our victories feel much better than winning a government contract. 1. The Goldman Black Box heist story gets juicier and juicier. Now Goldman's lawyer is worried that someone might take the box's programming and manipulate the market. Woops. So Goldman is now admitting the Black Box can be used to manipulate the market? Tyler Durden from Zero Hedge is onto it, as is Bloomberg Here's the smoking gun quote.

At a court appearance July 4 in Manhattan, Assistant U.S. Attorney Joseph Facciponti told a federal judge that Aleynikov's alleged theft poses a risk to U.S. markets. Aleynikov transferred the code, which is worth millions of dollars, to a computer server in Germany, and others may have had access to it, Facciponti said, adding that New York-based Goldman Sachs may be harmed if the software is disseminated. "The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways," Facciponti said, according to a recording of the hearing made public today. "The copy in Germany is still out there, and we at this time do not know who else has access to it."

2. William Pesek at Bloomberg argues it would be a big mistake for America to assume that Asia will keep picking up the tab for all the debt issuance that Barack Obama is doing.

It's become the world's biggest Ponzi scheme, really. The dollar isn't crashing because those invested in it are propping it up and adding to their holdings. After all, the magnitude of Asia's foreign-exchange holdings means it can't dump the dollar without shooting its economies in the foot. Asia should indeed be plotting how to reduce its dollar holdings. Those trillions of dollars would be better used in Asia to pay for better roads, bridges, airports and power grids and improved education and health care. Until then, the U.S. needs to reassure Asians they won't suffer massive losses on their dollar holdings. It can start by circulating a credible exit strategy from today's massive stimulus efforts. The White House also needs to convince Asia that devaluing the dollar at some point to boost U.S. exports isn't on the table. Obama and Geithner should plan to increase financial diplomacy efforts, traveling to Asia often. Asia has a $4.5 trillion dollar decision to make, and it's up to the U.S. to help the region make the right one. Taking Asia's money for granted would be a disastrous way to go.

 

3. European house prices fell even faster in the first quarter of 2009 than in the disastrous December quarter of 2008, FT.com's European house price index shows.

Annual price declines averaged 3.5 per cent in the eurozone, compared with a drop of 0.8 per cent the quarter before, while decreases in all of Europe hit 5.1 per cent, more than double the rate of 2.3 per cent seen at the end of 2008. Countries such as the UK or Spain, which have high home-ownership rates and a US-style housing market, once again fared worse than countries like Germany, where renting is still more popular than buying a house or flat. Economists warned that falling house prices could still slow construction investment, dent private consumption in some countries, and burden banks "“ just as the eurozone, at least, showed signs of shaking off recession. "The two Achilles heels of the eurozone economy "“ the banks and private consumption "“ will be hit at a time when many are hoping for first signs of recovery," said Marco Annunziata, an economist at Unicredit. "Some countries "“ Spain or Ireland "“ do have markets that are closer to the US model, and do show a link between consumption and house prices," he said, cautioning national trends could hamper any regional recovery.

4. Matt Nolan from TVHE points to Infometrics' view that consumers haven't hurt enough in this recession and New Zealand's economy hasn't made the structural changes necessary to avoid some calamity at a later date. Matt's own view is more nuanced than the one apparently reported on in this stuff article on Gareth Kiernan's comments.

Infometrics seems to be of the opinion that once the crisis is over, fundamental imbalances in the domestic and global economies will drive us back to high current account deficits and a worse net debt position. Once this happens, a global economy that has recently been stung by risk loving behaviour will punish us "“ forcing us to take on an adjustment that we didn't complete during the current crisis. Now I buy that reasoning.  But my only question (which isn't covered in the newspaper article) is, what are the structural factors in the New Zealand/global economy causing this imbalance.  Is it our artificially high exchange rate (against fixed Asian currencies), is it artificially low interest rates, is it no capital gains tax, is it poor financial education, is it an inherent bias towards housing as an investment vehicle, is it poor investment decisions by firms, is it uncertainty surrounding policy? Without an answer to this question, how are we supposed to know what New Zealand is supposed "to learn"?

I'm sure Matt has his tongue firmly in his cheek. He works for Infometrics. 5. Liam Halligan at The Daily Telegraph makes a compelling case that the Bank of England's quantitative easing is not working to free up bank lending and is instead just filling the black holes inside toxic bank balance sheets. HT Barry Ritholz

Over the past three months, the Bank has spent £106bn of QE funny money. By the end of July, it will have purchased the £125bn of assets it has so far been authorised to buy. At this week's meeting of the Monetary Policy Committee, interest rates will be held at 0.5pc. But, with the original QE "pot" almost gone, the Treasury and Bank could well signal there's more to come. I accept the start of QE caused share prices to rally and business sentiment to improve. But that sugar rush has gone. The harsh reality is that despite the huge inflationary dangers posed by QE, the credit crunch is getting worse. The Bank of England has more than doubled the monetary base since March, yet mortgage approvals remained at 43,000 in May "“ consistent with house prices falling at double-digit annual rates. Lending to non-financial companies contracted 3pc last month. Banks are keeping the QE cash on reserve or lending it to their own off-balance sheet vehicles (the ones stuffed with sub-prime toxic waste). So rather than helping solvent firms and households access credit, QE is re-capitalizing, by the back door, banks that are otherwise insolvent and should be going bust. Gilt yields haven't come down either. The 10-year yield remains where it was before QE began, having been much higher in the interim. Around a third of the Bank's QE purchases are, anyway, from overseas investors "“ doing nothing to ease credit in the UK. Such sales by foreigners reflect mounting concerns about the UK's wildly expansionary policy stance and sterling's related medium-term fragility. As someone who spends a lot of time talking to overseas asset-managers, I can't tell you how often I'm asked: "Liam, why this money-printing? Have your politicians gone mad?" I can only reply that I ask myself the same thing. There is, in extremis, an argument for QE, but only to buy commercial paper, not sovereign debt. When used to re-purchase gilts, QE allows governments to carry on borrowing like crazy, rather than facing up to the reality the country must balance its books. When QE was announced, the emphasis was on the commercial debt purchases the authorities would make. In the event, gilts have accounted for a staggering 99pc of the total. That's why QE will inevitably lead to high inflation "“ whatever nonsense is spouted about "withdrawing the monetary stimulus".

6. There's a new movie documentary coming out called American Casino that talks about the housing bust. Here's the trailer. Worth watching for the vibe. American Casino movie trailer from Leslie and Andrew Cockburn on Vimeo. 7. Matt Taibi's scream of an article at Goldman Sachs ("a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money") is beginning to resonate. Here's Robert Johnston, a former Soros fund manager who is now a director of the Roosevelt Institute. He essentially says Americans are not angry enough about what has just happened and Taibi is helping fill that void.

Such evocative imagery will surely be discounted by some as hysterical or exaggerated, particularly by those whose senses are deadened by the business press or CNBC-style babble. Rather than engage in a dissection of the details, I would like to explore why Taibbi is screaming and ask why he is screaming for all of us in a way we are not seeing elsewhere in the media. In addition to screaming for us, I wonder whether he is also screaming at us. One thing is certain: he is screaming in a way that a healthy press would do in a hysterical time. Goldman Sachs' uncontested success blurring the boundaries between market and state is symbolic of a tremendous malfunction in finance, politics and civil society. That the firm is well-managed by all measures and that some fine, well-meaning individuals work there is beside the point. Taibbi is telling us that the rules are rigged. That we are being abused. This is a time for vivid outrage. Taibbi's rage is filling an emotional void. It is a reaction to what is missing after this profound speculative episode that the IMF suggests will cost over US$4 trillion in losses on balance sheets and untold trillions in lost output. It is fury over a crisis that is, by any measure, the most profoundly damaging episode since the 1930s (and the Bank for International Settlements Annual Report released this week strongly suggests that the burden on stockholders is far from over).

Taibi has in interesting video here talking about the story. Apologies but I can't embed it. 8. Morgan Stanley's chief US economist Richard Berner describes America's Fiscal Train Wreck in this piece.

Some are concerned that our reckless fiscal policy will trigger a downgrade of the US sovereign debt rating, making the financing of our burgeoning deficits more difficult.  While worries that the US will default on its debt are illogical, global investors and officials are concerned about the credibility and the sustainability of our fiscal policies.  So am I.  They fear that we will adopt policies that will undermine the dollar and the domestic value of dollar-denominated assets through a combination of risk premiums and inflation.  I worry about that too, although such policies probably would be accidental rather than deliberate.  As a result, interest rates may have to rise significantly to compensate investors, including reserve portfolio managers and sovereign wealth funds, for such dangers.  While the dollar will for now retain its reserve-currency status, such concerns put it at risk.

9. Revolving lines of credit for American companies are being wound back at an alarming rate, Vincent Ryan at CFO.com points out. This is very important for any New Zealand company supplying or exporting to an American company. Has that company just had its 'revolver' cut? HT Yves Smith at Naked Capitalism.

Why are changes to revolvers so important? The refinancing issues with revolvers affect more than just banking relationships, says Pam Krank, president of The Credit Department. For one thing, when a bank reduces or revokes a line of credit, "it's a trigger" for aggressive action on the part of unsecured trade creditors, Krank says. "If bank availability goes down, it makes the unsecureds very nervous." As a result, they cut the amount of trade credit granted a customer or put the customer on hold altogether, she says. "It has a huge impact."

10. Ed Harrison at Naked Capitalism explains what the recent Swedish move to an OCR at minus (yes minus) 0.25% means.

Here's the problem. I take a fairly Austrian School tack here. Punishing savers by lowering interest rates to zero and printing money is not going to solve the problem. The problem was low interest rate and easy money to begin with (and a lack of regulatory oversight never hurts too). This created a binge of reckless lending. We are now seeing the result of that lending worldwide, Sweden included. What Sweden needs is more capital in its banking system. Remember the whole song and dance about the Swedish solution? Supposedly, the Swedes were brave enough in the early 1990s to bite the bullet and nationalize insolvent banks in order to re-capitalise the banking system and get lending going again. Everyone and his sister was sayingthis is what America needed to do (including me). I still say this is what needs to be done: punish reckless lenders by liquidating zombie undercapitalized banks but provide enough liquidity at normal interest rates to keep the system intact. And, I am sure taxpayers would be a lot more willing to pony up under these circumstances than under the present policy of giving the reckless lenders free handouts. If you want to prevent systemic collapse, it is the banking system, not the banks, which is important. But, apparently, everyone just wants easy money and no one wants the Swedish solution "“ not the Americans and certainly not the Swedes.