Top 10 at 10: Australia's negative gearing problem; Inflation comic book; Dilbert

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

1. The negative gearing issue - Leith van Onselen at Unconventional Economist has a close look at the history and impact of negative gearing in Australia and comes up with some fascinating conclusions (and charts). It is a must read I reckons. Here's a taste below. Big HT to Darryl Best via email.

There is clearly little merit in Australia's tax concessions for property investment. Negative gearing and the CGT concession do not provided any incentive to invest in new housing because they are available for both existing homes as well as new ones. And since these concessions do not increase housing supply, they also do not put downward pressure on rents.

Rather, the increase of investment in existing dwellings has merely significantly added to housing demand, reduced housing affordability, and displaced potential owner-occupiers, forcing them onto the rental market.

While the cost to the taxpayer is immense, the costs to younger Australians, in particular, from reduced housing affordability and increased debt levels is even greater. The situation that has arisen in Australia, where a substantial part of the population never own their own home or have to go deep into debt to achieve home ownership, makes a complete mockery of claims about 'rising living standards' and Australia having a 'strong economy'.

Successive governments have allowed an appalling situation to develop in Australian society, and new approaches are desperately needed. despite the Government and many mainstream economists arguing that Australia's high house prices have been caused by a 'lack of supply' (housing shortages), the truth is that prices have risen largely because of speculation from housing investors combined with easy credit from Australia's lenders.

And no government wants to spoil the party or have the bubble burst on their watch, despite pretending to be concerned about housing affordability. Instead, I am left wishing that I could buy a time machine, travel back in time, and reverse those two fateful policy blunders - the reintroduction of negative gearing in 1987 and the CGT reduction in 1999. Then, maybe, Australia's house prices would still be affordable, households would be less indebted, and a large chunk of the population currently stuck in rental accommodation would be home owners instead. If only...

2. Chinese buying Treasuries again - Bloomberg reports China has started buying US Treasuries again, despite criticising America's fiscal profligacy less than a year ago. No worries then...

“If history’s any guide they will keep buying,” Nomura’s George Goncalves said. “Global imbalances don’t turn on a dime. We don’t know how robust this recovery is. There are only so many places China can put its money.” In five of the last six years, China has made its largest purchases of U.S. debt in June, Treasury data show. The Treasury is selling $108 billion in two-, five- and seven-year notes over three days starting tomorrow.

“I don’t think it’s really in China’s economic interest to distance itself from its economic ties with the U.S.,” said Carl Lantz, head of interest-rate strategy in New York at primary dealer Credit Suisse Group AG. “We borrow pretty cheaply from them, we buy their goods. Our country, despite some of the turmoil, still offers deep and liquid capital markets.”

3. Vee haf zee vays of making you cut your deficit - European Central Bank President Jean Claude Trichet has suggested governments that breach the European Union's fiscal rules be stripped of their votes in the European Union, Bloomberg reported. Sounds like a German idea to me...even though Trichet is French.

“A wider spectrum of financial sanctions needs to be considered, along with non-financial and procedural sanctions, such as more stringent reporting requirements or even a limitation or suspension of voting rights,” Trichet told lawmakers in Brussels today.

The ECB’s chief also said that governments could consider changing the euro’s founding treaty. EU officials are devising new fiscal rules to prevent a repeat of the European sovereign debt crisis, which was sparked when Greece’s budget spiraled out of control and forced it to seek an EU-led bailout. European leaders plan to outline the strengthened enforcement system by October after hammering out a $929 billion rescue program last month.

4. Germany vs US - The Americans want everyone else to print and spend too. The Germans can't forget the hyperinflation of the Weimar Republic which led to the election of a short Austrian with a small moustache. Some bad stuff happened after that. Germany is rejecting Barack Obama's calls ahead of the G20 meeting to forget about fiscal restraint for a teeny weeny year or two, Bloomberg reports. Obama talks about the 'medium term' a lot. Everything will be fine in the medium term.

“Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis,” Finance Minister Wolfgang Schaeuble told reporters in Berlin today alongside Merkel. “That’s why they have to be reduced.”

Germany is holding to G-20 commitments on exit strategies from fiscal stimulus, and “not violating international requirements for a coordinated strategy for sustainable growth,” Schaeuble said. “We will face up to the international debate and I think we can do that with a great deal of self- confidence,” he said.

Five days before G-20 leaders meet in Toronto, the economic-policy divide between Europe and the U.S. is hardening. President Barack Obama, in a letter to his G-20 counterparts dated June 16, urged a focus on economic growth, saying order to public finances should be restored in the “medium term.”

5. Do as I say, not as I do - The New York Federal Reserve has produced a comic book about the evils of inflation, Zero Hedge points out. The cartoon is embedded below. HT Gertraud via email. Oh, the irony.

The FRBNY has published a comic book, full of the misadventures of the infamous Darth Inflation. With such zingers as "By discouraging saving, inflation can harm the US economy. That's because the economy needs a supply of savings to provide the funds for people and business to borrow so that they can invest in the things that help the US economy grow"

It is now clear that the entire FRBNY Board is comprised of lunatics, as apparently these people have not heard of ZIRP, QE, 0% interest on money markets and savings accounts, and must have Apple gizmos.

Comic Inflation[1]

6. A cliffhanger - America's economic problems just won't go away, as seen by the action overnight on the stock market, where an initial surge was followed by doubts. Here Karen Maley at BusinessSpectator puts her finger on the issues. HT Rob via email.

John Hussman of Hussman Funds says that the US economy is in a real “cliff-hanger” situation. In fact, if this were an action novel, we’d be at the point where our hero – the US economy – was hanging over a steep precipice, clutching onto a rock of uncertain strength. We readers would be hoping that things would turn out well for our hero, but we’d be fearing the worst.

As Hussman notes, “it's possible that things will resolve sufficiently well, but we have to consider the possibility that they will not”. Hussman says the latest reading from the Economic Cycle Research Institute (ECRI) reinforces this uncertainty. The ECRI weekly leading index – which points to where the economy is heading – fell last week to a -5.7 per cent annual growth rate. The decline in the ECRI index is worrying, because it suggests the economy is rolling over.

7. 'A Golden era is ending' - Richard Gluyas at The Australian has a great story about Australian bank profits and the end of a very profitable era, according to National Australia Bank's (BNZ) chief financial officer Mark Joiner. He is essentially pointing out how reliant the banks are now on a bloated Australian housing market. I bet this creates some debate around a board bank board room tables.

"I find the national sport of bank bashing a bit ironic because it tends to focus on fees and the passing on of higher funding costs, when the real windfall relates to neither of those issues," Mr Joiner told The Australian.

Mr Joiner said adoption of the Basel II accord in 2008 had doubled the industry's average return on equity (ROE) for a home loan from about 22 per cent to a stunning 45 per cent. "There are super profits in mortgage lending because the banks, with the transition to Basel II, took more than half the capital off the table and the margins never adjusted down to reflect that."

But he predicted home lending ROEs would revert to past levels, helped by planned federal government reforms to cut expensive mortgage exit fees, making it easier for clients to switch banks. NAB, unlike the massive home lending books of CBA and Westpac following their acquisitions of Bankwest and St George Bank respectively, is relatively overweight in business lending. It is trying to change the dynamics of retail banking and home lending by slashing fees, and discounting its standard variable rate well below those of its rivals.

"If you get a 45 per cent ROE in home lending, why would you do anything else, particularly when the industry is looking at a period of constrained balance sheet growth?" Mr Joiner said. "Australia should have a balanced economy; not a big skew to mortgage or business lending."

8. Totally relevant video - John Clarke and Bryan Dawes do their thing with the BP oil spill. Hilarious in a Fred Dagg impersonating a BP executive sort of way.

9. Dead on arrival - Simon Johnson from Baseline Scenario has been watching the banking reforms grinding their way through the US Congress as close as anyone. He now reckons they are dead on arrival. If anyone wonders why I (and many others) describe Obama as a liar and a fool then have a look at this. 

Simply claiming that the president is “tough” on big banks simply will not wash. There are too many facts, too much accumulated evidence, pointing exactly the other way. The president signed off on the most generous and least conditional bailout in world financial history. This is now widely understood. The administration has scrambled to create some political cover in terms of “reform” – but the lack of substance here is already clear to people who follow it closely and public perceptions will shift quickly.

The financial crisis of fall 2008 revealed serious dangers have developed in the heart of the world’s financial system. The Bush-Obama bailouts of 2008-09 confirmed that our biggest banks are “too big to fail” and the left, center, and right can agree with Gene Fama when he says: “too big to fail” is perverting activities and incentives. This is not a leftist message, although you hear people on the left make the point.

But people on the right also increasingly understand what is going on – there is excessive and abusive power at the heart of our financial system that completely distorts markets (and really amounts to a hidden, unfair and dangerous taxpayer subsidy). This administration and this Congress had ample opportunity to confront this problem and at least wrestle hard with it. Some senators and representatives worked long and hard on precisely this issue. But the White House punted, repeatedly, and elected instead for a veneer of superficial tweaking.

Welcome to the next global credit cycle – with too big to fail banks at center stage.

10. Totally irrelevant video - Here's some clandestine footage taken of the Italian Football Team's training camp. This explains why they are they are the world champions.