Top 10 at 10: The inexorable pressure of deleveraging; UK house price slump Part II; Dilbert

Here are my Top 10 links from around the Internet at 10 to 11am. I welcome your additions and comments below or please send suggestions for Friday's Top 10 at 10 via email to bernard.hickey@interest.co.nz

1. Another housing slump - Here it comes. Britain's housing market bounced last year when interest rates were cut. Sound familiar? Now it's going into another downturn, The Independent reports. Sound familiar? This is all about a decade(s) long period of deleveraging for the developed world that will drive asset prices lower and suppress economic growth for a long time. Debt just got too high. Now we're choking on it.

A potentially lethal combination of stagnant living standards and declining mortgage approvals is threatening to send the housing market into a precipitous slump. In separate warnings yesterday, it emerged that British consumers face a four-year wait for an improvement in their living standards, while a "double dip" recession in the housing market is now "more likely than not", according to City economists.

Bank of England data released yesterday suggests that the revival in property sales seen during the second half of last year has gone firmly into reverse, with every indication that prices will fall by next year, as lending remains so sluggish.

2. A big, big weight - Brian Fallow at NZHerald rightly warns about the depressing impact of household debt on developed economies around the world, including New Zealand's. Here's a chart below we cooked up earlier showing how indebted New Zealand households are compared to the rest of the world. Brian's piece is well worth a click and a read. Here's a sample.

At home the long process of shedding debt and repairing balance sheets grinds on. Credit growth is at a standstill: the net increase in bank debt over the past year was zero. Lending to the household sector, which makes up 60 per cent of the total, as of May was up 2.5 per cent on May last year, which in turn was up just 2.6 per cent on a year earlier.

But business lending was down nearly 10 per cent from its peak in January 2009 and at its lowest level since February 2008. And even with export commodity prices at record highs, lending to the agriculture sector was up a scant 3.3 per cent on May last year. That contrasts with average year-on-year growth of 16 per cent over the previous five years. This needs to continue.

Relative to incomes, household debt levels have become very stretched by historical standards and as interest rates climb so will the share of income needed to service that debt. Meanwhile the torpid state of the market suggests dairy land prices have got too high as well. Much of the growth of the last decade was borrowed.

Now we face the bill.

3. 'Too much profit' - One Australian analyst is worried that Australian regulators (and voters) will revolt over unreasonably high profits banks are making on mortgage lending, The Australian reports.

Investment bank Morgan Stanley sounded the warning bell on regulatory intervention yesterday after comments by National Australia Bank chief financial officer Mark Joiner in The Australian last week. Mr Joiner said the industry's average return on equity (ROE) for a home loan had doubled to a stunning 45 per cent, due to the adoption in 2008 of a new global accord on capital.

This had enabled banks to hold less capital against safer home lending due to lower historical loss rates. "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," Mr Joiner said.

Morgan Stanley analyst Richard Wiles said in yesterday's report that such high ROEs risked regulatory intervention. "We note numerous instances where stakeholders have raised concern about rates and charges on retail products," Mr Wiles said.

"In fact, former prime minister Kevin Rudd accused the banks of gouging." Mr Wiles also cited NAB's price-based retail strategy, with its discounted standard variable home-lending rate, as a downside risk to industry profitability. He said retail banking accounted for 22 per cent of group profit at NAB, rising to 33 per cent at ANZ Bank, 42 per cent at Commonwealth Bank and 46 per cent at Westpac.

4. Oiled up - Steven Noel Perkins, a (very) former oil futures trader in London, has been barred from working for 5 years after causing the oil price to spike and losing US$10 million for his firm after trading heavily while heavily drunk, the NYTimes reports. HT Andrew Patterson and Tony Field via email.

Mr. Perkins had just returned from a liquor-soaked golf weekend with colleagues in June of last year when he sat down in front of his laptop at his home east of London and started to place bets on Brent crude futures, according to a report by the Financial Services Authority.

He continued to drink and place bets through the night, and by the morning of June 30, Mr. Perkins had placed more than $520 million worth of trades, at one point pushing the price of oil to $73.05, an eight-month high. The trades by Mr. Perkins were the main reason the price gained about $1.65 a barrel in just over two hours in the middle of the night, according to the report.

Just before 7 a.m., Mr. Perkins realized what he had done and tried to unwind his positions. To gain time he sent a text message to his boss at PVM Oil Futures saying that a relative was ill and he would not be in the office that day. When a back-office clerk called Mr. Perkins at 7:45 a.m. on June 30 to ask for details about the trades, Mr. Perkins lied and said he made them on behalf of a client.

PVM takes commissions on fulfilling orders from its clients, which are banks and other institutions, and does not trade for itself. But by 10 a.m., PVM, where Mr. Perkins had worked since 1998, had discovered that his trades were unauthorized and suspended his access to the trading system.

5. Just fed up - A senior economist at the US Federal Reserve believes economics bloggers without a PHD in economics (that would include me) should just shut up. Ambrose Evans Pritchard does his thing in the way only he can, pointing out the failure of economists at institutions like the Fed. HT Nicholas Arrand.

The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did. Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.

They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.

They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have.

Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have.

And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.

6. Feel the fury building - The Congress had to strip the taxes out of the banking reforms to get the reforms through after a last-minute hiccup, Reuters reported. Congress is utterly out of touch with US voters. Their time will come. November's mid-terms look like being a complete blood bath in the democratically non-literal sense for incumbents and Democrats in particular.

Though a supposedly final version of the bill had been hammered out last week, Democrats called a fresh negotiating session after support for the bill appeared to be waning. Heeding the concerns of moderate Senate Republicans, they axed a $17.9 billion tax on large financial institutions that was added to cover the bill's costs in the wee hours on Friday as lawmakers wrapped up an all-night bargaining session.

7. No police - Councils and states across America are cutting essential services such as police and parks to make ends meet, Bloomberg reported. Most of these local governments are forced to run balanced budgets while the Federal government can (and does) print and spend.

The trouble is one is offsetting the other, leaving America's economy in a quagmire. Local government gets no credit for austerity and the central government gets no traction from its spending. The worst of both worlds.

San Carlos, a Silicon Valley suburb that calls itself the City of Good Living, will hire contractors to maintain parks and negotiate with county officials to take over policing, becoming the latest California community eliminating basic services to close budget deficits.

About 70 percent of U.S. municipalities are cutting jobs to cope with declining tax revenue, according to a survey published last month by the National League of Cities in Washington. One in five communities cut public-safety spending and revised union contracts, and almost one-quarter reduced health care.

8. Rubinesque Mess - Christopher Whalen at The Institutional Risk Analyst is one of the toughest critics of the big bank/big politics nexus in Washington. Here's what he has to say about the way former Goldman Sachs CEO Robert Rubin is still pulling the strings in Washington and what it might mean for the US dollar.

 The end result of financial reform is inconvenience for the financial services industry and more expense for the taxpayer and the consumer. But it should be noted that, once again, Wall Street has managed to blunt the worst effects of public anger at the industry's collective malfeasance. The banks can now start to focus their financial firepower on winning back hearts and minds on Capitol Hill. All it takes is money.

Notwithstanding anything said or done by the Congress this year, operating through trained surrogates such as Geithner, Summers and others, Robert Rubin is still pulling the economic and financial strings in Washington. The fact that there is a Democrat in the White House almost does not seem to matter. President Obama arguably has a subordinate position to Rubin because of considerations of money.

If you differ, then ask yourself if Barack Obama could seek the presidency in 2012 without the support of Bob Rubin and the folks at Goldman Sachs. Case closed. For America's creditors and allies, the key question is whether the Democrats around Rubin are willing to embrace fiscal discipline at a time when deflation in the US is accelerating.

That roaring sound you hear is the approaching waterfall of the double dip. With the US at the moment eschewing anything remotely like fiscal restraint and the rest of the world going in the opposite direction, to us the next crisis probably involves U.S. interest rates and the dollar.

9.  Volcker Rule a joke - It's now emerging that the Volcker Rule designed to disconnect big commercial banks from their derivatives trading divisions may now take more than a decade to happen, Bloomberg reported. Obama is a liar and a fool. Congress is no better.

Goldman Sachs Group Inc. and Citigroup Inc. are among U.S. banks that may have as long as a dozen years to cut stakes in in-house hedge funds and private- equity units under a regulatory revamp agreed to last week. Rules curbing banks’ investments in their own funds would take effect 15 months to two years after a law is passed, according to the bill. Banks would have two years to comply, with the potential for three one-year extensions after that.

They could seek another five years for “illiquid” funds such as private equity or real estate, said Lawrence Kaplan, an attorney at Paul, Hastings, Janofsky & Walker LLP in Washington. Giving banks until 2022 to fully implement the so-called Volcker rule is an accommodation for Wall Street in what President Barack Obama called the toughest financial reforms since the 1930s.

The Glass-Steagall Act of 1933 forced commercial banks such as what is now JPMorgan Chase & Co. to shed their investment-banking units in less than two years.

10. Totally irrelevant video - I think I've put this one in before, but it's worth a retread. It's Eddie Izzard impersonating Darth Vader and the guy who works in the canteen on the Death Star. All in Lego. Enjoy.

11. Bonus Totally relevant video - This book from Justin Brown called Myth New Zealand could be fun. I had a chat with him about intergenerational equity and he listened. Apparently it's in the book.