Top 10 at 10: Germans grumpy at French; IMF sees more house price falls; New Euro bank losses; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12pm. I welcome your additions and comments below or please send suggestions for Thursday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Watch the regulators - I like to keep an eye on the various reforms of bank capital rules going on around the world because ultimately they will decide how severe and long the necessary de-leveraging process will be for the developed and indebted countries, including New Zealand.

If regulators force tough controls on leverage and liquidity then the de-leveraging process may be short and sharp, while easier controls risk storing up problems for the future and lengthening any process into a Japanese-style couple of decades of zombie-like staggering along.

The debate is going on at a high level within the Basle III process led by the gnomes of Basle. There's also an intense debate going on in the US Congress between supporters of tougher rules, which include the Federal Deposit Insurance Corp's Sheila Bair, and those wanting softer rules, which include the usual suspects such as Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Tim Geithner.

Bernanke and Geithner seem to be in the group that wants banks to extend and pretend while governments borrow and hope. At some stage the debt overwhelms everybody.

We would be better off facing up to it now with managed defaults where bank shareholders take big hits and banks can start lending again.

One idea mooted at the very depths of the crisis was the biblical idea of a debt jubilee, where all debt was forgiven every 50 years.

Here the Wall Street Journal's RealTimeEconomics blog has a useful insight into one of the skirmishes between the Bair camp and the Geithner/Bernanke camp. I'm cheering for Bair.

The global war over new bank capital requirements for banks is intensifying, with a clash between powerful U.S. regulators drawing widespread international attention. The latest salvo comes from Federal Deposit Insurance Corp. Chairman Sheila Bair, who penned a sharply worded May 21 letter ( Read the letter) in defense of a controversial amendment to the financial overhaul bill that would limit the Federal Reserve’s ability to lower capital requirements.

The Fed and Treasury Department are trying to kill the amendment, written by Sen. Susan Collins (R., Maine). Whether or not it stays in any final bill, it has sparked a bitter feud just as U.S. and global regulators prepare to set new capital rules. The Collins amendment would essentially force bank holding companies to hold more capital and limit the Fed’s ability to set lower capital requirements.

It would also discount certain things that bank holding companies currently consider capital, like trust preferred securities. This could force banks to raise much more capital than they hold now.

2. Tensions in Europe - There's been a lot of talk about the tensions between the Germans and the Southern Europeans (Portugal, Italy, Greece and Spain) over the mass borrowing done by the profligate Club Med nations using low German interest rates, via the euro. But there's tension brewing too between the Germans and French. Der Spiegel has a nice piece on how the Germans suspect the French head of the ECB, Jean Claude Trichet, decided to break decades of convention and allow the ECB to buy government debt just so the French banks could be rescued.

Just what we need. The Germans and French at each others throats.

The European Central Bank has been buying up Greek bonds by the bucketload, even though Athens is already getting money from an EU rescue fund. German central bankers suspect a French plot behind the massive buy-up -- after all, it gives French banks the perfect opportunity to get rid of their Greek assets. By buying up Greek debt, the ECB keeps the prices of the bonds artificially high. French banks, in particular, benefit from this policy because it enables them to sell their Greek bonds to the ECB, as an inexpensive way of cleaning up their balance sheets.

France's banks and insurance companies have a total of about €80 billion in Greek government bonds on their books. German banks, on the other hand, are not potential sellers, because they have made a voluntary commitment to Finance Minister Wolfgang Schäuble to hold their Greek bonds until May 2013. Thus, in a roundabout way, the Bundesbank, by spending €7 billion to purchase the Greek securities, has already made a substantial contribution to bailing out banks in neighboring France.

3.Trans-Atlantic grumpiness - Every publicity-seeking US politician is jumping on the bandwagon to thump "British (they emphasise the British) Petroleum over the Gulf of Mexico oil spill. BP's share price has fallen 40% and its market value has fallen around US$70 billion. Luckily for our own NZ Super fund, it only had NZ$8.4 million invested in it at the end of June last year, which would mean losses of only around NZ$3 million, assuming its position was unchanged and not taking exchange rate moves into account.

But the fallout is ugly on both sides of the Atlantic. The Telegraph's Ian Cowie points out that many British pension funds are exposed and the resentment over the US screaming is growing, particularly given the parallels with the Piper Alpha disaster in 1988. HT Gareth via email.

When the Piper Alpha rig exploded in the North Sea in July, 1988, no fewer than 167 workers died and environmental damage pushed insured losses to £1.7bn. It was the worst offshore oil disaster in the world at that time and feelings ran high in Aberdeen, where many families suffered bereavement and financial loss.

But I do not recall Margaret Thatcher seeking to make political capital out of that tragedy by using inflammatory language about having her boot on the throat of Occidental Petroleum, the American oil giant which operated Piper Alpha. Oxy, as it was known because of the Los Angeles-based company’s New York Stock Exchange ticker, did not become the target of any government-sponsored hate campaigns in Britain.

4. Oh Canada- The Bank of Canada's rate hike overnight seems to have dampened rather than heightened expectations about future rate hikes there because of the dovish comments in the bank's statement. This is worth watching here because Canada is the first G7 country to hike rates and the timidity of the move suggests there is real fear about a global double-dip recession. I also love that it calls its currency the Loonie. Almost as good as the Kiwi, and often moving in the same direction because it is seen as a commodity currency. Canada, like Australia, is also benefiting from the boom in Chinese demand for commodities. The Globe and Mail has the story.

Economists interpreted the Bank of Canada’s statement as a bucket of cold water on any remaining expectations for an aggressive tightening campaign, as policy makers nervously monitor economic and financial-market developments in the weeks leading up to their next decision on July 20.

“Those looking for a clear roadmap (or GPS) for the Bank’s tightening path will be sorely disappointed by today’s cautious statement,’’ said Doug Porter, deputy chief economist at BMO Nesbitt Burns in Toronto.

``The Bank has left its options wide open even on the July rate decision.’’ Markets clearly took the same message, with bond yields dropping and the Canadian dollar slipping after the decision, “definitely not standard fare for a rate hike day,” Mr. Porter noted. The loonie fell 0.8 per cent against the U.S. dollar as of 9:45 a.m. in Toronto, while the yield on two-year Canadian government bonds retreated to 1.71 per cent from yesterday’s 1.82 per cent.

5.  No worries. Just default - The movement in the United States for homeowners to deliberately and happily default on their mortgages to punish the banks is growing a head of steam. Here is a New York Times piece which portrays a couple of happy defaulters. The social stigma in the United States is nearly gone, it seems. Moral hazard seems a risk in the long run. No one ever seems to pay the bill. Until everyone does. HT Troy Barsten via email.

The chart below (click on it for a bigger version) showing the average time between foreclosure and actually leaving the house in the United States has jumped to 418 days nationally and 561 days in New York state. The article is a fascinating read into psyche of a bankrupt and broken nation.

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of. Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by. This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can.

Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

6. Second wave of losses - RTE reports the European Central Bank has warned in its financial stability report of a 'second wave' of writedowns worth another 195 billion euros. HT Gertraud via email. This European financial crisis is far from over and poses the real risk of hobbling any global recovery.

In its latest Financial Stability Report, the ECB said public finances posed the biggest threat to the region's financial steadiness as high debt and deficits continue to unsettle investors. It also said floods of new government bonds could hamper companies' and banks' access to market funding.

The ECB estimates banks will need to make provision for further losses of €90 billion in 2010 and €105 billion in 2011, the first time it has given an estimate for next year. This comes on top of the estimated €238 billion already written down to cover bad loans by the end of 2009.

7. Now that's unaffordable - The average price per square metre of a new apartment in Beijing has doubled to US$3,100 in the last year. That is slightly more for one square metre than the entire average per capita income in China of around US$2,900. That means Beijing apartments cost at least 40 times average wages. AFP has the story on how affordability in China is now much, much worse than it ever got in the United States before the bubble burst. Speculative bubble anyone? HT Gertraud.

China's housing market problems are worse than those in the United States before the global downturn as they could stoke public discontent, a central bank adviser has warned. The comments were made before China's State Council, or cabinet, announced it would "gradually reform the real estate tax" -- the first official sign of a possible annual levy on residential housing aimed at reining in soaring prices.

"The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and UK before your financial crisis," said Li Daokui, a member of the bank's monetary policy committee. "It is more than (just) a bubble problem," he told the Financial Times in an interview published Tuesday.

8. Just wait a bit - An IMF economist has warned that developed countries' housing markets have much further to fall, going on the past history of what happened after previous bubbles, the WSJ's RealTimeEconomics reports. By the way, the IMF picked out New Zealand and Australia as the OECD economies with house prices furthest out of line with fundamentals...just sayin...HT Gertraud. I have attached the economist's paper below.

International Monetary Fund economist Prakash Loungani presented his analysis of housing busts since 1970 in the countries that make up the Organization for Economic Cooperation and Development. His prediction: Home prices will fall much farther and for much longer. On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough.

By contrast, the current (US) housing slump has lasted only 14 quarters, during which prices have dropped just 15%. But the latest boom was so much bigger than the previous ones that it’s logical to anticipate an even more brutal downturn, Loungani argued. Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms.

Loungani likened the current cycle to a rollercoaster which has roared up a steep hump and now needs to come down again.Loungani marshaled other evidence that home prices are still inflated. He found that prices in OECD countries in 2009 were substantially out of whack with rents and incomes in those countries compared with average values from 1970 to 2000.

In the long run, he argued, incomes and rents will act as weights on home prices, bringing them back to earth. Price-to-rent and price-to-income ratios were well above historical values in all OECD countries except Japan, Germany and Switzerland, according to Loungani’s analysis. New Zealand, Australia, the Netherlands and Belgium saw the biggest misalignment with historical price-to-income values, while Canada, Sweden, Norway and Australia saw the largest gaps in price-to-rent values.

9. Those crazy Icelanders - Iceland was affected first and the most by the Global Financial Crisis. Now the voters in Iceland are a very cynical bunch about the powers-that-be. So cynical that they have just voted in a joke party called the 'Best Party' to the Reykyavik City Council, suchsmallportions.com reports. A key part of the 'Best' party's campaign was this video with the Party's song to the theme of Tina Turner's Simply the Best (geddit...?). Worth watching for a good giggle at democracy and politicians who like to say things that other people like. John 'Smile and Wave' Key may recognise himself.

Party leader and comedian Jon Gnarr, who is set to become the mayor of Reykyavik even kisses some babies. He wants a polar bear for the Reykyavik zoo. My favourite bit is around 1 minute 49 in when a big bearded guy calls for people to repeat after him B...E...S...T. HT Brodie Davis via email.

It starts with this line: "We want a city that's cuddly and clean and cool"

10. Totally irrelevant videos - Here is some classic Muppets videos produced by Jim Henson for IBM as conference break videos. He produced them decades ago in between Sesame Street gigs. Hilarious, if technically ancient. My favourite is the cookie monster eating the coffee machine. Many thanks to Stepehn Harlow on twitter for the tipoff.