Thursday's Top 10 with NZ Mint: Britain's Zombie borrowers; Chinese shoppers hit Vegas; Wikileaks' peak oil scoop; Citigrouper spills the beans; Dilbert

Here are my Top 10 links from around the Internet at 10 to 4 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 tomorrow'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. A flood of a different kind - More than a quarter of US mortgage borrowers owe more on the loan than the value of their home, CNBC reports.

Yet house prices are still falling.

The shock to American net worth from the housing crisis is much worse than the equivalent shock to US net worth during the Depression of the early 1930s when housing made up a much smaller portion of total net worth.

This shock to American savings is now playing out as a multi-year slowdown in economic growth that is effecting everyone.

People wonder why things just won't fire up again.

It's because the debt is too big.

It's like trying to flog a horse back to a gallop when it is carrying tonnes of lead in its saddle.

The only choices for the America are restructure or inflation. It has chosen the second option.

Here's CNBC's Diana Olick. HT Andyh in 90 at 9:

The number of borrowers who owe more on their mortgages than their homes are worth took a huge leap in the fourth quarter of 2010. A full 27 percent of borrowers are now “underwater” on their mortgages, up from 23 percent in the previous quarter, according to a new report from Zillow.

Foreclosure moratoriums and falling home prices are to blame. Adding to a slew of negative reports on home prices, Zillow found home values posted their largest quarter-over-quarter decline, 2.6 percent, since the beginning of 2009. The home buyer tax credit, which inflated home prices artificially in the first half of the year, resulted in a Fall hangover. Home prices plunged 5.9 percent compared to the fourth quarter of 2009.  

And here's the raw report from Zillow and their chart on US house prices.

2. Practical men are slaves to defunct economists - Robert Samuelson has some sensible and insightful things to say about the Global Financial Crisis over here at Wilson Quarterly.

The great delusion of the boom was that we mistook the one-time benefits of disinflation for a permanent advance in the art of economic stabilization. We did so because it fulfilled our political wish. Ironically, the impulse to improve economic performance degraded economic performance.

This happened once before, in the 1960s and ’70s, when academic economists—among them Walter Heller of the University of Minnesota, James Tobin of Yale, and Robert Solow of MIT—sold political leaders on an ambitious agenda. Despite widespread post–World War II prosperity, there had been recessions every three or four years. Invoking John Maynard Keynes, the economists said they could—by manipulating budget deficits and interest rates—smooth business cycles and maintain “full employment” (then defined as four percent unemployment) most of the time.

They couldn’t, and the effort to do so created the inflation that crippled the economy for 15 years. We still haven’t forsaken the hope for perfected prosperity. After the recent crisis, both liberals and conservatives offered therapeutic visions. Liberals promoted expanded regulation to curb Wall Street’s excesses. Conservatives wanted a less activist government that would let markets perform their disciplining functions. Both may achieve some goals.

The trouble is that, like generals fighting the last war, we may be fighting the last economic crisis. Future threats to stability may originate elsewhere. One danger spot is globalization. Economies are intertwined in ways that are only crudely understood. Supply chains are global. Vast sums of money routinely cross borders and shift among currencies. Countries are mutually dependent and mutually vulnerable through many channels: Supplies of oil and other essential raw materials may be curtailed; cyberattacks could cripple vital computer networks; manipulated exchange rates might disrupt trade and investment flows.

Economic activity has grown more international, while decision making remains largely with nation-states. Although the global economy has remained basically stable since World War II, there is really no good theory as to why it should stay so—and there are some signs (currency tensions, for instance) that it may not.

Overcommitted welfare states pose another threat. Most affluent nations face similar problems: High budget deficits and government debts may portend a loss of investor confidence, but the deficits and debts have been driven higher by massive social spending—on pensions, health care, unemployment insurance, education—that people have come to expect. Economics and politics are colliding. If the debt and deficits aren’t controlled, will investors someday desert bond markets, jolting interest rates upward and triggering a new financial crisis?

But if many countries try to control deficits simultaneously, might a tidal wave of spending cuts and tax increases cause a global depression? (The United States, Europe, and Japan still constitute about half the world’s economy.) These are all good questions without good answers. The underlying problem is that economic change seems to have outrun economic understanding and control. It’s widely believed that the financial panic and Great Recession constitute a watershed for global capitalism, which has been (it’s said) permanently discredited. Around the world, the political pendulum is swinging from unfettered competition toward more government oversight.

Markets have been deemed incorrigibly erratic. Greed must be contained, and the greedy must be taxed. These ideas reflect a real shift in thinking, but in time that may not be seen as the main consequence of the economic collapse. These ideas imply that capitalism was unsupervised and untaxed before. Of course, this is not true. Businesses everywhere, big and small, were and are regulated and taxed. Future changes are likely to be those of degree, in part because countervailing forces, mobile capital being the most obvious, will impose limits. Countries that oppressively regulate or tax are likely to see businesses go elsewhere. What looms as the most significant legacy of the crisis is a loss of economic control.

Keynes famously remarked that “practical men” are “usually the slaves of some defunct economist.” By this he meant that politics and public opinion are often governed by what economists (living and dead, actually) define as desirable and doable. In the years after World War II, the prevailing assumption among economists, embraced by much of the public, was that we had conquered the classic problem of booms and busts.

Grave economic crises afflicted only developing countries or developed countries that had grossly mismanaged their affairs. This common view is no longer tenable. It has been refuted by events.

3. 'Lord make me chaste, but not yet' - Jeremy Warner writes at the Telegraph about the conundrum facing the Bank of England and much of the rest of the developed world mired in housing debt. Consumers are so stressed that they can't handle higher mortgage rates. But inflation is taking off, forcing central banks to think about higher interest rates...

Eventually the debt is going get these economies...or the inflation will get rid of the debt...and if that happens we can give up on saving for another generation...

Ultra low interest rates have become a life sustaining prop for Britain's over indebted households. At the trough of the banking crisis, nobody either in or outside the Bank of England would have dreamt that nearly two years later bank rate would still be close to zero, still less would they have imagined that with the inflation rate bounding away towards 5pc, there might be a perceived need for yet more quantitative easing.

What was intended as emergency therapy has become the new normality. So seriously entrenched in the nation's psyche has ultra loose monetary policy become that it is now quite widely assumed the economy couldn't withstand almost any rise in interest rates without triggering mass household insolvency and another recession.  

Warner makes a very good point about incentives for savings.

Substantial numbers of homeowners look set to be plunged into negative equity. We've already seen a roughly 18pc nationwide fall in house prices since the peak. Market derivatives indicate that in nominal terms, house prices will be the same in six years time as they are now, which implies a real terms peak to trough correction of well in excess of 30pc. That's much bigger than occurred in the early 1990s, when millions found themselves in negative equity. Rising unemployment would deliver the final coup de grace.

I'm not saying this analysis is wrong, but I do question whether the maintenance of ultra low interest rates is the best way of insulating the economy from the consequences. Everyone agrees that the root of the crisis was borrowing too much and saving too little. To respond by forcing savers to offer a negative rate of interest to distressed borrowers just seems perverse. When you consider that most households in Britain are actually net savers, the policy looks more debatable still. The thrifty majority is being forced to pay for the sins of the profligate minority.  

4. Let's go to Vegas! - Shanghai Daily reports on a tour group of 800 rich Chinese visitors who hit Vegas at Chinese New Year. A sign of the new world, who is charge and how what they're up to.

This is what you can do with printed money. Launder it through the slots and shopping malls. HT Reece via email.

One woman, surnamed Hong, from Guangzhou, Guangdong Province, splashed out more than US$1,700 on skin care products in the department store. "The price is so cheap, half what I'd pay in China," she said. A couple from Guangzhou spent more than US$7,000 in Las Vegas, the second stop of their tour. The wife had to buy three large cases to pack the bags, shoes and skin care products they had brought.

The department store didn't have a sales figure for Saturday, said Tracy Anderson, a manager of Macy's. However, there had been a huge influx of Chinese tourists, at around 4,000 to 5,000, during the past week, added Anderson.  

5. Wikileaks' biggest story - Forget all the kerfuffle over the condoms and Qadaffi's nurse. The biggest Wikileaks scoop has come out on whether we have peak oil or not, courtesy of the Guardian. HT Kiwidave

Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil". Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

One cable said: "According to al-Husseini, the crux of the issue is twofold. First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray."

6. Bailout pork - Bloomberg reports on how US government bailout money has been used to build flash hotels and other lurks that simply make existing companies and employees wealthier, rather than creating jobs...

Since 2003, some of the world’s biggest financial companies, including Goldman Sachs Group Inc., U.S. Bancorp, JPMorgan Chase and Prudential, have taken advantage of a federal subsidy that will cost taxpayers $10.1 billion -- and most of the public has never heard of it.

Investors have used the program, called New Markets Tax Credits, to help build more than 300 upscale projects, including hotels, condominiums, office buildings and a car museum, on streets far from poverty, according to Treasury Department records released through a federal Freedom of Information Act request. Against Intent Money spent on high-end development could have been used to build more than 1,000 job-training centers, medical clinics and schools.  

7. The link between debt and growth - The IMF has produced this useful chart series and this instructive (if a bit ploddy) video on the relationship between debt and growth. The conclusions are not pleasant for the indebted developed countries (like ours).

8. We're as big as Kansas - Some may have seen a version of this chart before showing how big each US state's economy is relative to other nation states. Here's the latest version courtesy of the Economist. New Zealand is as big as Kansas.

9. Mea Culpa - Or in cruder language OMG. This Citigroup trader called Omer Rosen has spilled his beans at Boston Review on what was really going on inside Citigroup's trading desk over the last decade.

The cynicism and corruption bursts off the page. A stunning must read.

Our clients were non-financial corporations, the Deltas and Verizons of the world, which relied on us for advice and education. Our directive was “to help companies decrease and manage their risks.” Often we did just that. And often we advised clients to execute trades solely because they presented opportunities for us to profit. In either case, whenever possible we used our superior knowledge to manipulate the pricing of the trade in our favor.I never heard this arrangement described as a conflict of interest. I learned to think we were simply smarter than the client. For unsophisticated clients, being smarter meant quoting padded rates.

For the rest, a bit of “legerdemath” was required. Most brazenly, we taught clients phony math that involved settling Treasury-rate locks by referencing Treasury yields rather than prices. If a client requested verification of our pricing, we volunteered to fax a time-stamped printout of market data from when the trade was executed. One person talked to the client on the phone while another stood by the computer and repeatedly hit print. The printouts were sorted, and the one showing the most profitable rate for the bank was faxed to the client, regardless of which rate was actually transacted.

If a rate for the client’s specific trade was not on the printout, we might create rigged conversion spreadsheets for them to use in conjunction with the printout. Other sources of profit lay in details that clients thought were merely procedural but in actuality affected pricing as well. Once, a client called after his interest-rate swap was completed and asked to change a method of counting days. Unbeknownst to him, this change should have lowered his rate. I made the requested change but kept his rate the same, allowing us to realize unwarranted profit. This was standard practice. My coworkers knew what I had done, as did the traders, as did the people who booked trades. I even tallied the “restructuring” as an achievement in a letter angling for a higher bonus.  

10. Totally irrelevant Jon Stewart video - Because I'm in a hurry.