Tuesday's Top 10 with NZ Mint: Map of London burning; The 2nd Great Contraction; 'Stop the banks lending to governments'; London riot videos; Cartoons galore; Dilbert

Here's my Top 10 links from around the Internet at 12 midday in association with NZ Mint.

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

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

This will be short and sharp today because all sorts of hell is breaking loose on global markets and elsewhere.

1. 'Just stop the banks lending' - Professors Amar Bhide and Edmund Phelps write at Project Syndicate about how encouraging banks to lend to governments has enabled irresponsible governments and endangered banking systems.

Bhide and Phelps recommend banks be stopped from lending to governments outside of their own country.

That might cause a few problems for New Zealand...and America...and most of Europe if it ever came to pass.

The more grief we see in Europe the more likely this sort of thing is.

The desperation to bail out various European countries is largely about avoiding the sort of haircuts for banks that sovereign debt crises cause.

Lending to states thus involves unfathomable risks that ought to be borne by specialized players who are willing to live with the consequences. Historically, sovereign lending was a job for a few intrepid financiers, who drove shrewd bargains and were adept at statecraft. Lending to governments against the collateral of a port or railroad – or the use of military force to secure repayment – was not unknown.

After the 1970’s, though, sovereign lending became institutionalized. Citibank – whose chief executive, Walter Wriston, famously declared that countries don’t go bust – led the charge, recycling a flood of petrodollars to dubious regimes. It was more lucrative business than traditional lending: a few bankers could lend enormous sums with little due diligence – except for the small detail that governments plied with easy credit do sometimes default.

Later, the Basel accords whetted banks’ appetite for more government bonds by ruling them virtually risk-free. Banks loaded up on the relatively high-yield debt of countries like Greece because they had to set aside very little capital. But, while the debt was highly rated, how could anyone objectively assess unsecured and virtually unenforceable obligations?

Bank lending to sovereign borrowers has been a double disaster, fostering over-indebtedness, especially in countries with irresponsible or corrupt governments. And, because much of the risk is borne by banks (rather than by, say, hedge funds), which play a central role in lubricating the payments system, a sovereign-debt crisis can cause widespread harm. The Greek debacle jeopardized the well-being of all of Europe, not only Greeks.

The solution to breaking the nexus between sovereign-debt crises and banking crises is straightforward: limit banks to lending where evaluation of borrowers’ willingness and ability to repay isn’t a great leap in the dark. This means no cross-border sovereign debt (or esoteric instruments, such as collateralized debt obligations).

2. Here's a great live Google Map of the riots in London - HT James Saft from Reuters. Click on the image to get to the map.

3. The PPProblem with PPPs - An Financial Times analysis shows Britain would be much better off without Private Finance Initiatives or Public Private Partnerships (PPPs) as we call them.

A Financial Times analysis published today estimates how much the outstanding PFI projects cost the taxpayer to fund, over and above what the state would pay if it borrowed in its own name and built the infrastructure without private finance. The findings are troubling. The extra funding cost amounts to a startling £20bn-£25bn on projects with a capital cost of £53bn and a lifetime of between 20 and 30 years. On top of that, the state has paid perhaps £4bn to consultants to get these projects up and running over the past decade.

Of course, the fact that PFI projects have higher funding costs is a given, and reflects the need to attract private capital. The hope is that these will be offset by fewer budget over-runs and lower lifetime costs. But what the analysis highlights is quite how substantial these savings would have to be for PFI to make sense as a funding option. It stretches credulity to believe that in each and every case this is really the best-value way to deliver the schools, hospitals and roads that Britain needs.

3. What it will cost - Bloomberg reports the European Central Banks' bill for its Italian and Spanish bond buying is likely to top 1.2 trillion euros.

While investors and economists say tighter fiscal ties and increased transfers to the financially weak euro states will be needed to end the financial contagion, purchases of Italian and Spanish debt that Royal Bank of Scotland Group Plc estimates may eventually reach 850 billion euros ($1.2 trillion) threaten fresh political fault lines.

“This huge-risk pooling exercise will not come easily and the risk of political fallout will be large,” Jacques Cailloux, chief European economist at RBS, wrote in a note. “This might be the necessary and painful step required to pave the way for the creation of a common debt instrument, the quid pro quo for this might be the loss of fiscal sovereignty.”

4. Banks are falling over in Nigeria - Bloomberg reports Nigeria plans to inject US$4.5 billion into three banks nationalised by the government three days ago.

Beware of official looking emails asking for your assistance.

5. Money, money everywhere - But not a dollar to invest in job creation. Bloomberg reports investors flooding cash into US bank accounts to avoid carnage in Europe. Welcome to the new hoarding.

Cash held by U.S. banks surged 8.4 percent to a record $981 billion during the week ending July 27, the Federal Reserve said in an Aug. 5 report. That’s more than triple the amount firms had in July 2008, before the collapse of Lehman Brothers Holdings Inc. almost froze bank-to-bank lending.

Even more money may be deposited with U.S. lenders if investors pull away from European banks amid concern the Greek debt crisis may spread to Italy or beyond, said Brian Smedley, a strategist at Bank of America Merrill Lynch in New York. Those funds may not be so welcome: With few opportunities to lend them out profitably, U.S. firms may have to slap fees on depositors to keep returns from eroding.

“It becomes a loser to hold these excess deposits,” said Bert Ely, a bank-industry consultant in Alexandria, Virginia. “At the margin they have to think, ‘What can we do with $50 million of deposits?’ The answer is not much.”

6. The second great contraction - Harvard economist Kenneth Rogoff tells it like it is at Project Syndicate.

Too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

A more accurate, if less reassuring, term for the ongoing crisis is the “Second Great Contraction.” Carmen Reinhart and I proposed this moniker in our 2009 book This Time is Different, based on our diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression, as emphasized by Anna Schwarz and the late Milton Friedman. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete.

7. Here's what the riots look like - This is overnight in Liverpool

8. Australian banks cut fixed rates - AAP reports Commonwealth Bank of Australia and Westpac have cut their fixed mortgage rates in Australia today. Australia's housing market is in trouble.

Steve Keen was right.

9. Clapham Junction looting - Fresh video this morning. 'We're getting our taxes back'

10.Totally a song from The Clash that was slightly prescient.