Tuesday's Top 10 with NZ Mint: The problem with China's banks; America's 'sugar rush' recovery; IMF wants Tobin 'Robin Hood' Tax; 'Laissez faire no-nothingness'; Dilbert

Here's my Top 10 links from around the Internet at 10 am (!) in association with NZ Mint.

I'll pop the extras into the comment stream. See all previous Top 10s here.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

Huzzah! Two days in a row on time

1. A dangerous vacuum - Chris Trotter is an astute observer of the Left in New Zealand politics.

I was his editor for a period at The Independent and always found him willing to call a left leaning spade a spade, or not.

He may be a leftie, but he's an honest one willing to put the boot in where necessary.

Here in his column at The Press today he inserts the steel toe cap deftly into the derriere of not just Phil Goff but the Labour Party.

It's well worth a read.

If only to understand how much of a vacuum there is in opposition politics.

If, over the next seven months, the Greens and NZ First are able to present coherent, practical alternatives to the Left- leaning half of the New Zealand electorate, I'm convinced Labour's share of the party vote will plummet. Increasingly the election will become a contest between a nascent coalition of parties offering a radical Left alternative to the Government's bleak neoliberal austerity, and a National Party hell-bent on securing 50 per cent plus one of the party vote.

This will not be a healthy development.

A country dominated electorally by two large and reassuringly pragmatic political parties can anticipate a high degree of ideological, economic and social stability. A country which finds itself locked in an all-or-nothing struggle between two intensely antagonistic ideological blocs should expect none of these things.

This is the true measure of Labour's failure as an Opposition. It has encouraged the most extreme elements in the National Party and Government to believe they can pursue their radical economic and social agendas without fear of adverse electoral consequences.

There is no law of nature - or politics - which requires a vacuum to be filled by pleasant things.

2. The problem with China's banks - Beijing professor Michael Pettis is a close observer from the inside of China's monetary and financial systems. He's not confident it can avoid a bust at some stage.

Here's why.

Much of China’s most obvious investment has been identified and funded over the past three decades, and in the last ten years the combination of socialized credit risk, very low interest rates, state-directed lending and tremendous pressure on the part of SOEs and local and municipal governments to generate employment and growth in the short term has increased the probability that the Chinese financial system may be misallocating capital on a dangerous scale.　 The growth in bank assets, in other words, would be less than the growth in bank liabilities if both were correctly valued as a function of discounted expected cash flows.

 Why am I so sure?　 Aside from the many studies I’ve cited showing that profitability in many of China’s largest companies is substantially less than the value of the financing and other subsidies, and anecdotal evidence of unnecessary real estate and infrastructure projects, just imagine what would happen to banking deposits and stock prices if the government credibly removed all guarantees on loans extended by the banks, and furthermore removed interest rate controls.　 I suspect most investors and depositors would assume, correctly in my opinion, a surge in non-performing loans that would wipe out the banks’ capital base, and so would sell their stocks and withdraw their deposits.

The fact that this is unlikely to happen is irrelevant.　 It just means that the losses are hidden and transferred to the state, and via the state, to households.　 If that is the case, then since the banking system can no longer easily identify economically viable projects and is in fact wasting money, the usefulness of the bank-as-fiscal-agent model is much reduced.　

3. Here's an idea - BusinessDay's Eric Johnston reports Australia's insurers are trying to cope with surging reinsurance costs by issuing their own catastrophe bonds or 'cat' bonds as they are known.

The bonds are relatively short term, mostly having maturities of between two and four years. Insurance Australia Group is believed to have run the numbers over its cat bond issue, while Suncorp Group is also weighing up tapping the market. Any issue would form part of their overall insurance risk management, sitting alongside existing reinsurance contracts.

A senior executive at one of the big two insurers said the rising cost of reinsurance made the pricing of the bonds relatively attractive.

While reinsurers are usually the biggest users of the bonds, general insurers can issue the bonds as part of their overall risk management strategy. Local insurers are facing rises in reinsurance costs of between 10 to 15 per cent after heavy payouts linked to a string of natural disasters.

4. America's Sugar rush - The Telegraph's Liam Halligan comments on the sustainablity of America's recovery which everyone is now so excited about.

He hits the nail on the head. HT Kokila

The latest “flow of funds” data from the Federal Reserve shows that “deleveraging is over”. In other words, banks are now lending again. During the final three months of 2010, while consumer credit fell by a net $20bn, this was more than offset by a $99bn rise in net corporate borrowing.

For Wall Street’s commission-based optimists, many of them with a mountain of stocks to sell, and their own home loans and credit card bills to service, such credit growth is Exhibit A when it comes to making the case that America is now out of the economic woods.

If only it were so. The trouble with this latest US recovery is that it amounts to little more than an economic “sugar-rush”. The recent growth-burst is built on monetary and fiscal policies which are wildly expansionary, wholly unsustainable and will surely soon come to an end. When the sugar-rush is over, and it won’t be long, the US will end up with a serious economic headache. Investors should keep that in mind.

As somebody with extensive personal and professional ties to the US, I’m fully aware of the dangers of under-estimating the grit and determination of the American people. It is undeniable, though, that the latest wave of euphoria to have spread across corporate America, and into the echo chamber that is Wall Street, is ultimately based on quantitative easing and a series of unaffordable tax cuts.

5. Long term jobless out of luck - Bloomberg's Chart of the Day shows America's long term jobless (over 26 weeks) are not benefiting from the (albeit stuttering) return to jobs growth seen in recent months.

The blue line is the unemployment rate for short term jobless. It is now dropping reasonably sharply. The red line is for long term jobless. Is is not dropping much.

While the jobless rate dropped for the fourth consecutive month in March, the number of people going more than six months without work rose to 6.12 million. That’s more than four times the average since 1970, the period covered in the chart.

Those who exceeded the six-month threshold account for only 13 percent of the drop in unemployment since December, when the rate started shrinking. Their number fell by 206,000 as people out of work for shorter periods tumbled by 1.36 million

6. Fresh Brazilian - Brazil is at least trying to control its currency and is now planning new capital controls, Bloomberg reports.

Why aren't we at least trying?

Here's the detail:

Brazilian Finance Minister Guido Mantega said he’s considering steps to reduce “excessive” dollar inflows after taxes on foreign investment in local markets failed to stop the real from rallying the most in more than 20 months last week.

“The more solid the Brazilian economy becomes, the more it tends to attract foreign investment and dollars, which at the moment is kind of a problem,” Mantega said. “The government will continue to take measures to contain the excess of dollars.”

7. Even the IMF wants a Robin Hood tax now - IMF boss Dominique Strauss-Kahn delivered a fascinating speech overnight, in which he supported the so-called 'Robin Hood' tax on financial transactions.

Here's a few juicy bits from the speech, which is really quite startling from the boss IMF. He says the Washington consensus is over too...

Mind you he will step down next year to run for the leadership of France's 'Socialist' Party. Sacre bleu.

In designing a new macroeconomic framework for a new world, the pendulum will swing—at least a little—from the market to the state, and from the relatively simple to the relatively more complex.

The new global governance must also pay more heed to social cohesion. Don’t get me wrong—the old pattern of globalization delivered a lot, lifting hundreds of millions out of poverty. But this globalization had a dark side—a large and growing chasm between rich and poor. While trade globalization is associated with lower inequality, financial globalization—the big story of recent years—increased it.

The tendency was to downplay inequality, to see it is a necessary evil on the road to riches. But the crisis and aftermath have fundamentally altered our perceptions. The lethal cocktail of prolonged high unemployment and high inequality can strain social cohesion and political stability, which in turn affects macroeconomic stability.

The financial sector needs some major regulatory surgery. The crisis originated in a culture of reckless risk-taking, a culture that is unfortunately still alive and kicking.

There have been some positive steps, but these are only first steps. The Basel III accord on banking regulation should improve the quality and quantity of bank capital. But we need to extend regulation to the “shadow banking system”. We need better supervision as even the best rules are worthless without proper implementation. We need better resolution mechanisms to end the scourge of too-big or too-important to fail—including along the critical cross-border dimension. We need a tax on financial activities to force this sector to bear some of the social costs of its risk-taking behavior.

8. How a Robin Hood tax works - I've put this in before, but it's a nice video done by Bill Nighy and the Working Title mob which explains the Tobin Tax.

9. Laissez faire no nothingism - Epicurean Dealmaker is an anonymous investment banker in New York with a surprising take on the world. Informed and urbane, he often suprises, including with this comment about the lack of regulatory response in America to the financial crisis.

Remember, the Congress spent four times as much investigating Bill Clinton's links to Monica Lewinsky than it spent investigating the Financial Crisis.

Apparently Alan Greenspan says global financial markets are too complicated and 'magical' to regulate.

Here's Epicurean, who knows exactly how complicated these magical markets are:

We need a well-funded, serious, permanent agency devoted to understanding as much as we can about the elements, interconnections, and vulnerabilities of financial markets and their participants. In addition, I would suggest that the constant mutability of this system argues strenuously for the implementation of a plan like that suggested some time ago by Economics of Contempt.

Stationing a sufficient number of experienced, knowledgeable ex-market participants in regulatory oversight positions at the largest and most systemically important financial institutions would not only provide necessary close supervision (and perhaps help nip developing crises in the bud), but would also support the development of true boots-on-the-ground insight into the day-to-day workings of financial entities and markets. This type of knowledge would be invaluable to helping regulators develop a robust, dynamic understanding of global financial networks and players.So let us have no more willful ignorance, no more worship at the self-interested shrine of laissez-faire Know-Nothingism. The acknowledged difficulty of getting to grips with the global financial system is no argument against trying to do so.

Rather, it is an argument for the urgency of beginning forthwith.

The Pecora Commission investigation into the sources of the 1929 stock market crash began two and one-half years after the event, lasted over two years, and helped shape the regulatory environment for decades. In contrast, the underfunded, marginalized Financial Crisis Inquiry Commission lasted one year, at a time when the size, complexity, and interconnectedness of the global financial system has grown exponentially from 1934. In terms of academic interest, regulatory concern, and social impact, understanding the sources of the recent financial crisis must rank as one of the most important socioeconomic research projects of our time. From my perspective, it's time to stop dicking around and start trying to understand it.

10. Totally entertaining song and dance on Saturday Night Live with Stephen Colbert