Here's my top 10 links from around the Internet in the last day or so. I welcome your favourite news and blog links on hot topics in the comments below. Just paste in the URLs directly. They'll work without fancy code. Now even Toyota needs help Japan is planning to use its US$1 trillion of foreign reserves, the second biggest pot in the world after China's, to lend directly to Japanese companies struggling to get loans in overseas markets. The first Japanese company off the rank to use the fund was the previously unbreakable Toyota, which is asking for US$2 billion to help it get by in the brutal American market. Here's the FT.com's version. Your prices are going up ANZ Chief Executive Mike Smith reportedly told a dinner for 100 of ANZ's biggest corporate borrowers last week that ANZ's lending margins would expand for the foreseeable future. The Australian reported from sources at the meeting that: "This was due to higher funding costs, as well as the repricing of loans to reflect greater risk following a spate of internal ANZ downgrades of customers due to deteriorating business conditions." Reserve Bank Governor Alan Bollard warned last week of growing corporate anger at the way banks had increased margins and toughened lending criteria in recent months. Bankers here have responded that some businesses' debt levels were no longer sustainable at previous margins and the banks have no choice. The issue of bank margins for business lending looks set to be a hot topic in the months ahead as cash-constrained businesses look for the interest rate relief offered by Bollard to be passed on to them. It frustrates many given the low rates, tightening margins and increased lending being offered to mortgage customers.
And we're going to make bigger profits Former Westpac CEO David Morgan has predicted that Australasia's big four banks would emerge from the financial crisiss with increased pricing power, The Australian has reported. "Morgan said the core of the domestic banking system was "very healthy", with foreign banks retreating, second-tier lenders disappearing and higher funding costs generally able to be passed on to customers, The Australian reported Morgan as saying. The result was a reduction in competitive intensity, and an ability to price more appropriately for risk, offset by a greater tendency for the federal Government to use moral suasion to keep lending rates relatively low, he was reported as saying. Here's the key quote. This means we have not seen, in my judgment, the full impact of the new-found pricing power of the major banks. Given also my judgment that the return of foreign financiers -- and a new tier-two of financiers -- to Australia is likely to take a long time, I believe we have seen a fundamental, very significant structural shift that augurs well for major bank profitability in the future. Car sales tank in US Car sales fell 41% in the United States in February from the same month a year ago. GM's sales fell 53%, Ford's fell 48% and Toyota fell 40%. It's just brutal over there at the moment. Here's WSJ.com on the slump. Why Thrift is a good idea I'll post more at length about this later, but I liked this piece by Northern Trust economist Paul Kasriel which debunks the 'Paradox of Thrift' idea. The theory is that spending less simply creates a death spiral of less consumption, less employment, less income, less spending etc. It is partly blamed for the Great Depression. He basically says saving is simply a redistribution of spending, because the bank will lend out the saving to another business or person who spends the money, as long as the saver isn't hoarding it under the mattress or the bank sits on the money (that's another issue). Here's a taste.
Thrift or saving does not necessarily mute aggregate demand in the short run or the long run. As any economist of the Austrian school will tell you, saving simply implies one economic agent cutting back on its current spending andtransferring its spending power to another economic entity. For example, suppose a household decides to cut back on its current spending in order to purchase an about-to-be issued corporate bond. The household is transferring its purchasing power to the corporation. Presumably, the corporation does not intend to simply sit on the proceeds of its bond sale. Rather, the corporation likely borrowed funds in order to spend now on some capital equipment or R&D. So, the act of increasing its saving on the part of the household does notlead to a reduction in aggregate spending in the economy, just a redistribution of spending.
The real story behind that crazy Iceland thing Michael Lewis, the guy who wrote Liar's Poker, writes an excellent piece from Reykjavik on the amazing boom and bust in Iceland. His conclusion of sorts is that macho Icelandic men went crazy. Iceland now has a Lesbian Prime Minister. Here's a taste of Lewis' piece in Vanity Fair. It's long but well worth reading. It should cure John Key or anyone else of wanting to become the Zurich of the South Pacific.
For the past few years, some large number of Icelanders engaged in the same disastrous speculation. With local interest rates at 15.5 percent and the krona rising, they decided the smart thing to do, when they wanted to buy something they couldn't afford, was to borrow not kronur but yen and Swiss francs. They paid 3 percent interest on the yen and in the bargain made a bundle on the currency trade, as the krona kept rising. "The fishing guys pretty much discovered the trade and made it huge," says Magnus. "But they made so much money on it that the financial stuff eventually overwhelmed the fish." They made so much money on it that the trade spread from the fishing guys to their friends. It must have seemed like a no-brainer: buy these ever more valuable houses and cars with money you are, in effect, paid to borrow. But, in October, after the krona collapsed, the yen and Swiss francs they must repay are many times more expensive. Now many Icelanders"”especially young Icelanders"”own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them. To the Range Rover problem there are two immediate solutions. One is to put it on a boat, ship it to Europe, and try to sell it for a currency that still has value. The other is set it on fire and collect the insurance: Boom!
The parallels are frightening This chart from Columbia University Professor David Beim is another version of a chart we've come to know and love that shows US debt levels were at 1929 levels vs GDP in 2006/07, which implies the bust will be just as big as in the 1930s. Hat tip to NPR's Planet Money. Here's what Beim concludes from the chart.
That chart is the most striking piece of evidence that I have that what is happening to us is something that goes way beyond toxic assets in banks. It's something that has little to do with the mechanics of mortgage securitization, or ethics on Wall Street, or anything else. It says: The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us. We have overborrowed. We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen.
Couldn't have said it better myself. Although the investment bankers on Wall St and in London are far from blameless. There's no money in the bank Ukrainians can't get money out of the bank any more. We won't have to wait long for the riots. This excellent piece in the FT.com explains why. The gory details in the Madoff fallout This story in Vanity Fair is interesting for the detail of the lifestyle and type of people who invested with Bernie Madoff. I'm so glad none of my money was anywhere near that black hole of an Island in the Hudson River. It's a very beautiful cesspool with great "Sex in the City" PR. I'd like to go on holiday there but I wouldn't give my money to these social climbing parasites for a second. What a run on insurers might look like Now we know the real reason why AIG was rescued by the US government for the 3rd or 4th time to the tune of US$180 billion. Aaron Ross Sorkin at the New York Times explains.
In the United States, A.I.G. has more than 375 million policies with a face value of US$19 trillion. If policyholders lost faith in A.I.G. and rushed to cash in their policies all at once, the entire insurance industry could falter.
Now I really won't sleep tonight...