Thursday's Top 10 with NZ Mint: Why the euro's future is threatened; Australia's real problem is debt; The 'put-back timebomb; Dilbert

Here are my Top 10 links from around the Internet at 10 to 2 pm, brought to you in association with New Zealand Mint for your reading pleasure.

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.

1. 'The Euro doesn't have a future' - China expert and global macro guru Michael Pettis explains why the Euro doesn't have a future unless the powers-that-be move very fast and in a large way to rescue the situation.

The politics of Europe are turning sour quickly and the powers-that-be should move quickly to avoid being overtaken by events.

Ie. Watch out for riots and changes of government.

December 7 when the Irish parliament votes on the latest austerity budget dictated by the Europeans to save the European banks would be an obvious first port of call for politics to overtake economics.

The resolution of Europe’s crisis will inevitably involve a difficult political debate over apportioning the cost of the resolution. In one of my favorite history books (The Financial History of Western Europe), Charles Kindleberger argued that the political structure of Europe after the First World War guaranteed that different economic interests would necessarily struggle over income distribution. When it came to deciding how countries would adjust to currency and debt misalignments of the 1920s and 1930s, the main issue, according to Kindleberger, was “whether deflation and unemployment would saddle a major share of the load on the working class, as contrasted with the rentier.”

He goes on: “Keynes observed in 1922 that the choice between inflation and deflation comes down to the agonizing outcome of a struggle among interest groups.” We need to remember what Kindleberger and Keynes meant by this. As everyone knows, markets are very, very nervous about currency and sovereign debt crises in Europe. How to adjust But this nervousness will soon pass.

I have no doubt that enormous amounts of scotch tape, paper clips, and chewing gum are going to be deployed quickly to hold the whole thing together, and that perhaps in a week or two we will be all throwing sighs of relief as policymakers firmly announce that Europe was put to the ultimate test and proved itself manfully. But does that mean we can stop worrying – was this really the ultimate test? No, of course not. If previous history is any guide, this crisis will re-emerge in different places every few months until it is truly resolved, and increasingly the crisis will manifest itself in the political realm. 

2. Contagion spreads to the core - Bloomberg reports on why the ECB is preparing to push the 'nuclear' button with wholesale buying of sovereign bonds. Contagion is spreading to Belgium and Italy.

Europe’s sovereign crisis is spreading to the heart of the 16-nation bloc as investors question Belgium’s ability to cut the euro region’s third- highest debt load, overshadowing its economic performance. The extra yield investors demand to hold Belgian 10-year bonds instead of benchmark German bunds of similar maturity has more than doubled in the past four months and widened to 139 basis points yesterday, the most since at least 1993.

The Italian spread climbed to a euro-era high of 186 basis points. The European Union’s 85 billion-euro ($111 billion) rescue package for Ireland has failed to quell market turmoil as investors shift their focus from peripheral states to countries such as Belgium, whose capital of Brussels is home to the EU’s political institutions.

While the country’s economy has been among the region’s growth drivers this year, inconclusive elections have left it without a government, raising concerns on its budget outlook.  

And here's a chart showing the yield on Italy's government bonds sprinting higher. This is the one that is really scaring people. It's the seventh largest economy in the world with

3. Securities Commission 'nodded off' - Patrick Smellie at BusinessDesk reports Bell Gully Chairman Roger Partridge as telling Parliament's Commerce Select Committee that the Securities Commission had plenty of powers to deal with problem finance companies, but just didn't use them aggressively enough.

The "perceived regulatory failure" in relation to finance companies reflected existing laws not being used rather than a lack of laws, Partridge said, noting the Securities Commission had reported on its concerns about finance companies in 2005, and stated they would be keeping investment statements under review for breaches of the Securities Act, including failure to declare related party transactions.

"The Securities Commission seems then to have nodded off." While the commission had a difficult job, "from my perspective, the regulators have had all the powers they need for certainly the last decade and for longer.  

4. Here's the Taiwanese animators having a go at the Irish bailout scandal. The protestors at the end are hilarious. This is best with the sound down.

5. Australia's real banking problem is not a competition  - It is debt. That is Steve Keen's conclusion in this must read submission to the Australian senate inquiry into banking.

He says, rightly that margins have actually improved from a consumer's point of view, but all it has done is encourage more indebtedness.

This is the real reason Australians are screaming about higher interest rates. It's not bank profiteering. It's household indebtedness. Tough message for a populace that loves to hate their banks.

The major problems of the financial sector are macroeconomic and related to the level of debt, rather than microeconomic and related to the price of debt.

These are that:

1. Banks have an innate desire to issue more debt than is good for the economy as a whole, and increased competition tends to exacerbate this tendency rather than control it;

2. As a consequence of (a), debt has grown inexorably relative to incomes until the financial crisis began. This expansion of debt caused the apparent boom prior to the crisis, while the slowdown in the rate of growth of debt is the predominant cause of the crisis itself;

3. Banks are lending too much to households and too little to business; and 4. Lending has been oriented towards financing speculation rather than investment and the working capital needs of business.

Increasing competition once again, without ensuring that lending is restrained relative to incomes, and that it is directed away from households and speculation and towards business and investment, would only exacerbate problems caused by earlier introductions of unbridled competition in the 1980s and 1990s.

6. Ignoring the experts - BBC reports US President Barack Obama's deficit reduction panel is recommending massive deficit cuts and has made plenty of suggestions.

The proposal would cut defence, social security, and other spending, slashing a total of $4.1 trillion (£2.62tn) from the budget deficit by 2020.

But analysts say the panel is unlikely to ratify the plan with a vote, calling into question whether the US Congress will act on its recommendations.

"The solution will be painful," the plan reads. "There is no easy way out." Democratic Congresswoman Jan Schakowsky panned the report, claiming it disproportionately cuts social programmes, and Republican Congressmen Paul Ryan and Jeb Hensarling blasted the proposed tax increases.

7. US dollar's role in danger - US Federal Reserve hero and sometime Obama-advisor Paul Volcker worries in this Bloomberg piece that the US dollar may lose its role as the world's reserve currency. He talked about the need for leadership but didn't mention Obama.

“The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night. The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.

Volcker offered no prescriptive solutions as he spoke in broad terms of the country’s loss of stature.

“This is a troubling time for America, a troubling time for the world,” Volcker said in remarks to Common Cause, a civic group. He said the U.S. is facing its most difficult economic crisis since World War II. “If ever there were a need for clear-headed, confident leadership, nationally and internationally, that time is now.”

8. Even the Democrats are revolting - In this piece Robert Reich slams Barack Obama's refusal to tell the American public the true story of why they're in such a mess. The very rich have made themselves even richer at the expense of the poor and the middle classes through the Recession and are using their political influence to make it even worse.

I think Reich is right, apart from the stuff about not reducing the deficit. That unfortunately has to be done too, but not by making poor people poorer. It should be done by making obscenely rich people just rich.

Reich challenges Obama and the senior Democrats to tell the real story.

They’d tell the nation that income and wealth haven’t been this concentrated at the top since 1928, the year before the Great Crash. They’d be indignant about the secret money funneled into midterm campaigns. They’d demand Congress pass the Disclose Act so the public would know where the money comes from. They’d introduce legislation to curb Wall Street bonuses – exactly what European leaders are doing with their financial firms.

They’d demand that the big banks, now profitable after taxpayer bailouts, reorganize the mortgage debt of distressed homeowners. They’d call for a new WPA to put the unemployed back to work, and pay for it with a tax surcharge on incomes over $1 million.

9. The put-back time bomb - Holders of toxic US mortgage bonds are about to try to 'putback' the bonds to the banks who securitised the mortgages in the first place, costing the banks US$180 billion they don't have. Here's Euromoney with the detailed story.

10. Totally French video - The power of a good story.