Thursday's Top 10 with NZ Mint: Two tiered Swiss currency; Wolf savages Basel III 'mouse'; China-US trade tensions; Dilbert

Here are my Top 10 links from around the Internet at 10 to 7am, brought to you in association with New Zealand Mint for your reading pleasure.

Nice and early today before I go into the lockup in the Reserve Bank for the Monetary Policy statement due out at 9 am. 

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. I'll pop any surplus suggestions I get into the comment stream under the Top 10.

1. It's getting hairy again - Japan intervened to sell the yen again overnight, pushing the Australian and New Zealand dollars higher. This is a new phase in the money-printing-race-to-the-bottom competition between central banks trying to find something (anything) to get their economies going ahead.

The next step to watch will be the Fed's meeting next week and whether it sets sail with a new round of Quantitative Easing.

We may be in for a rocky few weeks ahead.

See below the problems too in China and Ireland.

November's congressional elections in America are shaping up as a reality check for America's elite. Those pesky Tea Party types keep winning primary elections. Something is brewing oop north.

2. China's banking problems - Bloomberg reports China’s banking regulator may require the nation’s biggest lenders to boost their capital adequacy ratios to as high as 15 percent by the end of 2012.

China seems to be very serious about slowing down its economy.

China’s rules would be stricter than capital requirements announced Sept. 12 by the Basel Committee on Banking Supervision in response to the global financial crisis.

The country has moved to rein in risk-taking among banks this year after last year’s record $1.4 trillion of new loans fanned concerns about the financial system’s ability to withstand future stress.

3. China vs US trade tensions rising -  Ambrose Evans Pritchard at the Telegraph reports China has warned Washington that the US will come off worst in a trade war if it imposes sanctions against Beijing over the two nations' currency dispute.

Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over $1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar. China's authorities seem split over how to respond to moves on Capitol Hill for legislation to punish Beijing for holding down the yuan.

The central bank has ruled out use of its "nuclear weapon", insisting that it would not exploit its $2.45 trillion of foreign reserves for political purposes. "The US Treasury market is a very important market for China," it said. However, the mood is hardening on both sides of the Pacific.

The dispute risks escalating if China's trade surplus with the US climbs further and more US jobs are lost. US Treasury Secretary Tim Geithner, who has taken a softly-softly line in the past, said on Friday that China had done "very little" to correct the undervaluation of the yuan since ending the dollar peg in June.

4. The mouse that did not roar - Martin Wolf writes at FT.com about how inadequate the new Basel III rules are. He tears them to shreds.

A must read for anyone who cares about these things. Which should be everyone. HT John Walley

The regulators are trying to make the existing financial system less unsafe, incrementally. That is better than nothing. But it will not create a safe system. The world cannot afford another such crisis for at least a generation. By these standards what is emerging is simply insufficient. This mouse will never roar loudly enough.

5. The other problems with Basel III - Felix Salmon from Reuters is similarly sceptical.

Basel III is essentially a bold new layer built over the old Basel II architecture, in much the same way that early versions of Windows were layered on top of DOS. And just as early versions of Windows shared some of the weaknesses of DOS, so has Basel III inherited some of the problems of Basel II.

The main one is the whole concept of risk weighting: the idea that some assets are riskier than others, and that banks should hold more capital against risky assets (unsecured loans to people with a 550 credit rating, say) than they do against much safer assets, like loans to the US government. That makes a certain amount of sense, but there are two main problems with it.

For one thing, it’s backwards-looking: it reckons that the securities which have been risky in the past are the same as the securities which will be risky in the future. That obviously isn’t true. And secondly, it’s easy to game.

He points out one big weakness remains. Banks will concentrate on buying government bonds. Bond bubble anyone?

Basel III effectively doubles down on Basel II. Banks will need to hold more common equity than ever—against their risk-weighted assets. That massively increases the incentive to find low-risk-weight assets with some return, since these assets can be leveraged much more highly than risky assets.

Unless I’ve missed something, lending to AA-rated sovereigns still carries a risk-weight of zero. So one result of Basel III could be to encourage banks to increase their lending to sovereigns at the margins of zero-risk-weight status. If that happens, anyone want to guess where the next crisis will crop up?

6. Longer, slower and lower - Carmen Reinhart and Vincent Reinhart have written at Voxeu about what happens after major financial crises. Essentially, house prices fall in the following decade, growth slows and economies deleverage. Everyone ready for this? I'm not the only one talking about a long, slow and grinding recovery dominated by deleveraging. It's that or something altogether more explosive, complete with new financial blowups, mass money printing and hyperinflation.

Real housing prices for the full period is available for ten of the fifteen financial crisis episodes. For this group, over an eleven-year period (encompassing the crisis year and the decade that followed), about 90% of the observations show real house prices below their level the year before the crisis. Median housing prices are 15% to 20% lower in this eleven-year window, with cumulative declines as large as 55%. The observations on unemployment and house prices, of course, may be related, as a protracted slump in construction activity that accompanies depressed housing prices may help to explain persistently higher unemployment. Another important driver of the cycle is the leverage of the private sector.

In the decade prior to a crisis, domestic credit/GDP climbs about 38% and external indebtedness soars. Credit/GDP declines by an amount comparable to the surge (38%) after the crisis. However, deleveraging is often delayed and is a lengthy process lasting about seven years. The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises as well, credit restraint will damp employment and growth for some time to come.  

7. Two tiered currency? - Zerohedge points to some talk from Swiss unions about a two tiered currency to protect Swiss exporters from a rush to the last safe haven on the planet now the Japanese are selling yen. This is what happens when everyone tries to race to the bottom. It all ends in talk of capital and currency controls. Then the inevitable trade wars. See number 3 above.

The Swiss Trade Union, “SGB” is calling for the Swiss National Bank to either step up its intervention efforts or establish a two tier exchange rate system. From NZZ today: The monetary authorities should intervene directly in the foreign exchange market, SGB representatives demanded on Wednesday before the media. Export companies should also switch to a special rate euro against Swiss francs.

8. Ireland's deep, deep problem - Simon Johnson and Peter Boone write at Project Syndicate about the major problems with Ireland and why eventually a Latin American 'Brady Bond' solution may be required.

Either banks need to default on their senior obligations, or the government will need to default alongside the banks. In either case, new austerity measures are needed, and Ireland will require substantial bridge financing. Irish and EU politicians should take the lead in making these tough decisions, but the current leadership will not.

Instead, the EU, the ECB, and Ireland have reached a Faustian bargain that keeps Ireland liquid (i.e., it gets euros), but does nothing to halt the growing likelihood of insolvency (i.e., its increasing inability to pay back those euros in the future).

9. The need for a living will - Two years on from the collapse of Lehman Bros, the corporate undertakers are still unwinding the morass and cleaning up the mess. There are still 800 people working on the carcass. The Guardian has a nice story. HT Brendan via email.

Some 300 PwC staff are now located in two floors at 25 Canada Square in Canary Wharf, near the former head office of Lehman, from which staff of the collapsed investment bank were pictured walking away with their cardboard boxes as the crisis shook the banking system. A further 500 or so Lehman staff and contractors are also working on the administration, including Tom Bollard, formerly chief risk officer of Lehman's European operations. Their job is to sieve through all the "assets" they can find – be they shares in firms or art works, which will be auctioned on 29 September with an aim to raise £2m.

To help explain the complexity of the challenge they face in getting billions of pounds back to creditors, Jervis reveals that the team continues to find new Lehman ventures on a "regular basis". To date about 1,300 have been found and include special purpose vehicles of the kind that faced scrutiny as the credit crunch began in the late summer of 2007.

10. Totally relevant video - Jon Stewart at The Daily Show talks about the American 'Summer of Recovery.'