Wednesday's Top 10 with NZ Mint: How the Fed might kick the can further down the road; Why China's new stimulus is struggling; What the G20 Euro 'rescue' deal means; Germans eye 'north Euro' and 'south Euro; Feta Accompli; Dilbert

Here's my Top 10 links from around the Internet at 12.30 pm today in association with NZ Mint.

We welcome your additions in the comments below or via email to

See all previous Top 10s here.

My must read today is #9 on the problems in Europe. They are monstrous. Bon Appetit!

1. So many ways to kick the can down the road - The whole world is now expecting the US Federal Reserve to step in again to resuce the markets and try (with the emphasis on the word try) to  boost activity in the world's largest economy. We should know more from 6am Thursday morning.

Debate is raging about exactly how it could be done and what would be most (or least) successful.

The US Federal Reserve has already done two rounds of Quantitative Easing or money printing to buy government bonds. The problem is much of this cash has just circulated back through the banking system to end up on deposit back at the US Federal Reserve. Or it's sitting in government bonds at increasingly low interest rates.

US banks can effectively borrow from the central bank at nearly 0% and then put the money into shorter and longer term bonds at 1.5% to 3%. They don't have to take many risks and can build up their profits and capital over time.

US Federal Reserve Chairman Ben Bernanke spoke in 2002 about how to boost an economy once short term interest rates were cut to zero. He spoke of figuratively flying a helicopter over the economy and showering consumers with cash, who would then pick up the money, spend it and then get activity going again.

Unfortunately, all Bernanke has done so far is print the money, put it in his helicopter and dump it in pallets on the front lawns of the banks, who have then put in the garage. The money has not circulated. There's a couple of reasons why not. Banks are reluctant to lend to riskier businesses and many of the stronger and larger businesses already have plenty of their own cash they're unwilling to invest. Households are also reluctant to borrow more. They're busy repaying previous debt or may be under water with their existing assets.

Here's FTAlphaville with the possible options for Fed action, none of which seem very effective:

1) Extend Twist

– Perhaps for only a few months rather than through the end of the year

– Possibly combine sales of short-end Treasuries with purchases of Agency MBS along with Treasuries

2) Quantitative Easing via outright expansion of its balance sheet

– How much: we’ve estimates all over the place, up to $600bn

– Composition: Treasuries vs Agency MBS

3) Change the “rates exceptionally low” language in the statement, push back to 2015

– Could create further confusion depending on how the individual forecasts of the FOMC members shift

– Might also just change the language to be more dove-ish generally

4) Telegraph future easing through changes in the statement (thanks to Robin Harding for reminding us of this possibility)

– Emphasise here again that this could be done in combination with one or more of the other options

All of the above are real possibilities. The next few are less likely but can’t be ruled out entirely. …

6) Cut the interest on excess reserves

– Doubtful, as the Fed likely believes that this is crucial for orderly functioning of money markets, which are having enough problems as it is

7a) Cut the discount rate (now at 0.75 per cent), aka the primary credit rate that American banks have to pay if they tap the Fed’s discount window

7b) Lower the swap rate for foreign central banks – Meh.

Long shot: introduce an improvement to its new communications approach (see Robin’s post from April for some ideas, and ours for why it might help)

– We haven’t seen this possibility reported or discussed much lately, so we really doubt it.

9) Even longer shot: Make it clear that the Fed would tolerate a period of higher-than-target inflation until unemployment declines further

– Note that this is different from temporarily raising the inflation target, which stays the same: indeed keeping the 2 per cent target would (in theory) help to keep inflation and inflation expectations from running away during the temporary period of catchup inflation. Bernanke actually might have leaned in that direction at the last presser more than we’d initially realised (minus the “make it clear” part).

2. Greed is good, but good is better - Here's a farewell column from David Weidner at MarketWatch about how Wall St operates. He's a long time observer.

Simple is better: For 60 years, a 37-page document kept the financial system relatively safe. It was called Glass-Steagall. In the 13 years since it was repealed in the name of modernization, we’ve seen a tech bubble and the greatest financial crisis since the stock-market crash of 1929.

3. The problem in China - All our attention in New Zealand and Australia should really be on how successful China's attempts to fire up its economy again are.

Will it be able to repeat the remarkable 4 trillion yuan spurt of infrastructure investment it carried out in 2008 and 2009? That softened the blow of the GFC for Australia and New Zealand.

But now China is struggling to repeat that quick burst of spending. There's a once-in-a-decade political leadership transition going on that is slowing decision making. Also that infrastructure spending burst unleashed a housing boom that the leadership are trying to cool down.

Here's Westpac's closely watched Phat Dragon report (courtesy of Marcobusiness) looking at what's happening with credit supply and demand in China. It suggests China has opened the credit taps, but not nearly enough want to drink it in because of falling apartment prices and low profits.

This chart tells the story, as does Phat Dragon here:

The June quarter observation for“loan demand” (bankers’ assessment) fell to 12% below average,lower even than the Dec-2008 reading, even as the “lending attitude of banks” (corporate assessment) rose for a second straight quarter and the ‘easiness’ of the monetary policy stance (bankers’ assessment) rose to 21% above average.  This combination argues that policymakers are finding it difficult to re-energise demand, despite their willingness to loosen the monetary trammels they imposed last year.

These moves have of course included a rate cut, with some of the gap between borrowers and lenders presumably related to the widening spread between benchmark and actual lending rates as banks were able to pad their margins with less competition from shadow financiers. Interest rates aside, Phat Dragon puts the bulk of the weak demand for credit down to the depressed state of asset prices and the emerging belief among the citizenry that the administration is really serious about staring down the housing industry.

4. G20 failure - Ambrose Evans Pritchard at The Telegraph describes the apparent and still murky deal hammered out at the G20 meeting overnight as a half baked rescue.

Chancellor Angela Merkel and President Francois Hollande have to do something. The market reaction to Spain's €100bn EMU rescue for its banks has been calamitous. Monday's explosive rise in Spanish two-year bond yields was a warning that Spain's crisis would spiral out of control within days, taking Italy with it.

Yet the deal explored over ceviche and mango at Los Cabos in Mexico remains murky. Any plan will backfire horribly unless conducted in the right way, and with overwhelming force.

From what we know, the eurozone's leaders aim to deploy the European Stability Mechanism (ESM) to cap borrowing costs for Spain and Italy by purchasing sovereign bonds on the open market.

Unfortunately, the ESM fund does not yet exist. It has not been ratified by Germany and Italy. When it does come into being, it won't have much money. It has a theoretical limit of €500bn -- a nice wish -- but its paid up capital will start at just €22bn.

5. North Euro and South euro - Ambrose also points to a debate now going on within Germany about breaking out of the current euro into a north and south euro.

Unease over escalating euro rescues is building by the day in Germany. Forty economists and professors have written a joint letter to Mrs Merkel proposing a break-away "Northern Euro", exhorting her to step back from the brink before making the "even greater error" of ratifying the ESM.

The group said Berlin must clarify exactly how much Germany could stand to lose from the ECB's internal payments system, known as Target2. The Bundesbank claims on fellow central banks have exploded to €699bn, or 27pc of German GDP. The arcane issue of Target2 has fueled a hot-tempered debate in Germany over who foots the bill if monetary union falls apart.

The professors called for study laying out the pros and cons of a return to the D-Mark, or the creation of a new currency or "North Euro" led by Germany, the Netherlands, and like-minded states.

The idea of a North Euro -- or "Thaler", the coin of the late Holy Roman Empire -- was first nooted by the former chief of the German Industry Federation, Hans-Olaf Henkel.

It would let southern EMU states to keep the euro and uphold euro debt contracts. The region could reflate and regain trade competitivenes with a weaker exchange rate.

While the letter is unlikely to sway thinking in Berlin, such radical proposals are gaining a wider hearing. Georg Schuh, chief investor of Deutsche Bank's DB Advisers, said the crisis is terminal. "A break-up of the eurozone is very likely. Capital markets have already priced it it. I think we are in the end-phase," he said.

6. More on the G20 bailout plan - The says the Eurozone is edging towards using the European Stability Mechanism to buy Spanish and Italian bonds directly, possibly by the ESM borrowing directly from the ECB.

Eurozone members of the Group of 20 leading economies will commit to driving down borrowing costs across the single currency area, according to a leaked draft of the communiqué from the summit in Mexico on Tuesday.

According to officials briefed on the discussions, Mario Monti, Italy’s prime minister, raised the possibility of using the eurozone’s €440bn rescue fund to buy peripheral bonds on the open market. But Angela Merkel, Germany’s chancellor, was non-committal about the idea during a formal session on Monday night.

However, officials said Ms Merkel had subsequent conversations on the sidelines of the summit which led her interlocutors to believe “she may be willing to do more,” said one European official. The official cautioned, however, that Ms Merkel was not yet ready to commit to any definite course of action.

7. The problems in Christchurch - The Press reports New Zealand builders in Australia are reluctant to return home to Christchurch to help with the rebuild because they've given up waiting for things to get started.

James Bunn, who is in his mid-40s, commutes weekly to work in Australia, along with more than 30 other Cantabrians. He said many had originally planned to return to take part in the rebuild but had since changed their minds.

"The impression over here is that the rebuild is struggling to get under way, primarily due to too many unqualified, inexperienced councillors riddled with internal politics," he said. There was "no comparison" with the rebuild of Christchurch and that of flood-hit Queensland.

"Kiwis over here are asking what's going on back home. It's not a good impression."

8. Spanish bank audit delayed - The more the experts look under the covers in Spain's banking system the uglier it gets. Reuters reports another delay in a closely-watched audit was announced last ngiht.

A second and more detailed audit of Spanish banks will be delayed to September after originally being scheduled for completion on July 31, a source at the Bank of Spain said on Tuesday.

"The decision to delay the second part of the audit of Spanish lenders has been made by the assessment committee. The reason is to gather more information on the loan books on an individual basis and this will delay ... the whole process to September," said the source, who did not want to be named.

9. The scale of the mess - Wolfgang Munchau writes brilliantly in this FT column about the scale of the mess in Europe. A fiscal union is required, as is a banking union and a political union. Within 10 days.

The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union. They have 10 days to disentangle that knot.

The obvious solution to a sequencing problem is to have it all: a banking union, a fiscal union and a political union. That may well happen. But I somehow did not have the impression that Ms Merkel was kidding when she rejected any proposal that could solve the crisis. So 10 days before the next European summit, my optimism is restrained.

What if there is no deal or another fudge? In that case, I would expect Italy and Spain to leave the eurozone. If a banking union is a necessary prequisite for a monetary union, and you are told that a banking union is politically unacceptable, then one must sadly conclude that the monetary union is unfeasible. I do not say this lightly. A break-up would be catastrophic.

In the absence of a deal next week, I would expect to see an acceleration of a slow-motion bank run. Why should citizens leave their money in their local banks, when foreign investors are pulling out and when even the EU is making preparations to impose capital controls? Market interest rates will rise further and it will only be a matter of time before both Italy and Spain are cut off from market funding.

10. Totally Jon Stewart on the Greek crisis. He's calling it Feta Accompli. Geddit? Stewart also interviews Drachma and Lira. The Pound makes an appearance.


We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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I think the debacle happing in Christchurch is directly related to NZ “safety first” mentality. Everyone is so scared of screwing the rebuilding process up that they have become petrified and too afraid to even get the shovels and pitchfork’s going. It shouldn’t be “safety first” the mantra should be “safety third”. The first thing should be “just build it!”

Crap Troy....go spin that to those who lost family and friends inside shite buildings that SHOULD NEVER HAVE BEEN BUILT...
The place is a drained swamp on top of sedimentary rubbish several hundred metres thick...and the political system both central and local is several yards too thick
Throw in a sick building standards system that operates as a "work in progress"...and you get what chch has got.

See comment below...

Australian housing starts had their lowest quarter since 1996 ! .......
... NSW housing starts dropped 37 % from the same quarter ( Jan-March ) one year ago .....
....... the trend is ........... gurgle gurgle .... oh dear ..... Governor of the Reserse Bank acted too slowly again ....
Still , the " Sandgropers " are doing well over in WA , Julia can hang her government's reputation on that ...

and if it falls on your head?  I expect you will acept the excuse from your grave that the builder decided to "just build it"
Actually it isnt much to do with safety...regualations maybe....but thats different to safety.

So, how many ppl were killed with Unlicensed Building Work?  Because, m8, anywhere up to 2/3 of Chch houses have never had a modern style building inspection:  certainly those pre 1970's.  Residential deaths (a handful were down to Cliffs, Chimneys and Bricks.  Simple as that.  Zero from structural failures from DIY.
By the time you add up the cost of Council consents, Engineering Certicates, scaffolding, fencing, land rorts, licensed building practitioner bum paper, none of which Ever used to happen, you get some idea why the residential 'rebuild' isn't a Happening Thang.....
The road to Hell is paved with Good Intentions.
Enforced by Minions with ClipBoards....

That is my point we should adopt a solid inspection plan but then lower the barrios to entry so ppl can get building again! If it’s not up to code let the inspectors and builders sort it out not some clueless suit in a tower.

...mmm,  not so sure Waymad.  The 10 year old townhouses that had their ground floors completely implode (such as 462 Durham St):
That was 3 stories becoming 2.
Here's some photos of 2 becoming 1:
Two of those are unreinforced brick but one was partially reinforced concrete block.
I think we need some regulation.

It's not the 'safety'. It's the "who is paying for this?" A BS monetary system backed up by a fraudulent insurance system..........bound to end in tears

"A fiscal union is required, as is a banking union and a political union. Within 10 days"
Bernard, remember my post late November last year. I predicted
"The powers that be will bring Europe to it's knees then the people will be begging for a solution, any solution. Then the people will accept the 'United States Of Europe'
I predicted this will happen by the end of this year.
I haven't changed my mind, let's see if i was correct.

Political union in the EU?  Given the history, that seems rather unlikely to me.

The United States is the worlds biggest economy because it is the biggest abuser and waster of resources.
Everyone is clammoring for America to get back to being a consumer and waster so we can all get back to being consumers and wasters.
If the only solution to our problems is to be consumers and wasters then should'nt we take another good look at ourselves?

Mike B...appreciated your summation..... but weight loss, rehab, funeral etc are growth industries too you know.
 The developed world could stand to lose a little weight ,... but nobody wants to go first.

Mike definitely has it wrong. It is always someone else that is the consumer and waster never ourselves. 

As we all know, there are only two choices with debt. You either pay what you owe or you don't. It's as simple as that.
Yet all the worlds brains think there are other ways. So they try printing munny, they try lending more munny, QE 1,2,3....., bailouts, rescue packages, and all kinds of fancy names and ABC's. but the problems persist. Hmmm, i wonder why?
You get the flu and go into hospital
One doctor studies why your nose is running and produces all kinds of graphs showing flow rates from the nose and so on. Then writes a report.
The next doctor studies your cough and produces all kinds of charts ans graphs etc.
And on and on, but none stand back and see you have the flu.
Well, that is exactly how economists work.

As we all know, there are only two choices with debt. You either pay what you owe or you don't. It's as simple as that.
Yet all the worlds brains think there are other ways.
Including our own estimable Fran O'Sullivan, who made the following observation in her article concerning the woes of Fairfax Media.
But putting a hard-nosed businesswoman into the box seat may do more to ensure the Fairfax Media empire's survival than this week's announcement that the company has sold another stake in a profitable asset to retire debt.
Fairfax now has just 51 per cent of Trade Me after raising A$160 million from flicking more shares to institutional investors on top of the 34 per cent it floated in last year's IPO.
As I noted here last week many businesses have little choice but to retire pre-existing high cost debt in a rapidly falling interest rate environment.
Bond dealers, new competitors are continuously eating their lunch. 
And you can just about bet the ranch if you assume Mr Kirk borrowed the whole purchase price of Trademe on Fairfax's behalf.  
Remind me of his whereabouts. Maybe he should have stuck to his knitting.  

That is no excuse….sitting the with your thumb up your butt insisting that “it’s too hard” is total BSI It’s a simple fix just go and hire the guys that do this for a living…Both San Diego and the LA basin are both liquefaction soil and they seem to be able to build earthquake resistant buildings there. Why do kiwi’s insist on reinvent the wheel when the regulations and applicable slandered already exist and have been proven to work?

Troy - weren't you one of the ones complaining about leaky buildings? It's that kind of feedback which drives the rules and the controls. Don't blame the retro-rulemakers. Blame the slack societal arrogance that failed at several levels.
Rain has always fallen down, flashings have always had to go down-out-down, wet climate eaves evolved for a reason, etc.

Yes i was. And if you recall i said stop arguing about leaky buildings or who is to blame...get the relevant codes, hand out the necessary cash, and fix it. I'm saying the same thing here. I also said that if we don’t figure out a way to expedite the leaky building crisis then when there is a major catastrophe, exactly like this, then the current bureaucracy would cripple any recovery. Man I hate it when I’m right sometimes.

Where does the necessary cash come from?  I think its 5billion or more? 
That is the argument.
I dont see, as a tax payer and someone who bought a home based on my own know how that I should bail out clueless ppl who asked for in-appropriate designs (think mexican bungalows in NZ weather) employed clueless architects (who gave it to them for a 4% fee), and bodgy builders (who build anything as badly as they can as long as they are paid) who used crappy cheap materials supplied by the building supplier industry.
"right" no not in my book....

Which describes precisely 2-5% of the residential builds in Chch.
The rest have Eaves, Flashings and Sensible builder-driven designs.
So once again local knowledge demolishes shibboleths and slogans....

I wouldnt use builder driven design, historic learning for what works in the climate, yes.  

Based on that logic it’s safe to assume you have the same spiteful attitude towards the clueless ppl how build their homes in ChCh with in-appropriate deigns and employed clueless architects and dodgy builders and used crappy materials supplied by a shoddy building industry. Right? Not in your book right? Caveat emptor and all that!
This is not the time to be wondering where every cent comes from because by doing that type of attributed it’s going to cost all of us even more in loss productivity. Sure you might save a few billion telling everyone to pack sand but you’re defiantly going to lose $20-30 billion in the long run by doing that.

Moral hazard comes to mind, most in here talk about personal responsibility and the Govn should keep out of ppls business.....
I agree in this instance with the above, why does the govn and hence myself have bail out other mistakes?......the builders, architects and suppliers should be sued.....
It is the time to consider it we are not talking cents but Billions.
How and from whom do you measure productivity? How can you say when you look to put up my tax by 3% that that is a good return on productivity? 
In terms of leaky homes and National productivity I cant see the direction connection to fixing or not leaky homes.
If I have to contribute 3% to re-building that is no gain in productivity, in fact its rewarding the very ppl who substantially caused the mess in the first place.  If on the other hand I save or invest that 3% in a productive endevour that is a real good and a real gain for NZ.

Jesus don't let tribeless hear you say that.

steven may think that he is our lord & master , but there's no need for you to feed his delusions of grandeur by calling him " Jesus " ....

LOL.......but in this instance I think its true...
and indeed others...for instance in Russia I think they still have state owned toothbrush manufacturers, I mean why?????
There are some things a Govn does best and some things a business does best...and they are probably mutually exclusive.  For instance there is a difference between minimal cost to produce and spare capacity.  As an example electricity so the options are businesses each have their own generator or the Govn makes sure there is sufficient spare capacity that a business doesnt need to...that saves the business cost.....and polution and sourcing deisel if there is a blaackout....etc.
The SOE model looks a good compromise as long as the Greens dont shove their fingers in....which they want to....which will screw them up.

...... that's an interesting thought , I wonder if the combined might of the NZ government could establish an SOE to manufacture toothbrushes of an acceptable quality ?
With the Greens input , the handles would be untreated pine , and the bristles native flax fibres ......
Every single  toothbrush would have to be blessed , & then tested on a Marae ....
...... and they'd cost  $ 17 . 50  each .....

And Flax Floss...a whole industry just waiting for a pinky green to invest those hard won benefits.

Well some ppl think baking soda is THE why wouldnt untreated pine work....better yet re-cycle those icecream thingies sticks....

Muppet News Flash !
Steven and Kermit finally agree on something.

No I think your are mistaken.....we couldnt agree.....just couldnt.......

No , ..  you are mistaken ....

Go on know you want to.

Hey come on Kermie..! you know that's my pick up line on Stevo 4sure........

Wrong Troy...Californian land subject to turning to shite in a shake is the result of infill...chch land is layers of silt mud gravel shite silt gravel mud for several hundred metres with an ancient volcanic spewup through the middle...
I say it's not too hard...I say it's bloody important chch does not end up with rubbish bashed together to fit some fools agenda.

Actually LA is shit clay and San Diego is even shittier and...and ChCh is supper shit mud and they all react the same under vibrational shear stresses so what is your point? Somehow Chch is an outlier and nobody could possibly understand the complexity of the soil there? BS!!

Granted but beneath the clay and in places the oil, you will find base rock....that is what the foundations reach down to chch there is no base rock unless you drill down and down.....and down...pointless exercise.
The volcanic muck left to the south is no more stable than the sides of any other similar volcanic mound...
How far down do you drill to place the much concrete...steel....sooner or later the cost factor brings to a head the need to govern the weight and footprint of the building to the cost of the foundation.
Who makes the decision Troy?
The safest residential structure you could have, is probably a Yurt

maybe you never heard of the motorway flyovers that fell on the cars underneath?
and actually NZ tends to lead the world on earthquake engineering....

Yeah and i was actually there. Where you? Californian learned a lot from both the 89’ and Northridge quakes. Was the engineering perfect at the time? No! Did we learn our lessons and rebuild? Yes! They went and retrofitted and reinforced all the susceptible freeway overpasses and bridges because of that. My point is that the system wasn’t paralyzed by a perfection cycle hoping everything is perfect BEFORE we started rebuilding. We rebuild it based on new available evidence and got on with it!

Im not aware that the system is so paralysed here ie awaiting perfection. What it is stopping on is the likelyhood of 4 or 5 years of continued significant shocks....hence there is a real risk of no [re-]insurance and hence total losses by ppl and businesses, let alone loss of lives.
Now for myself if someone said if you rebuild you carry the losses from earthquakes yourself then I'd say give me the money and I will go live elsewhere....even before considering the stress and risk to life of 4 or 5 more years of shakes.....

 "They have 10 days to disentangle that knot."...
Idiots believe it's possible! doh
Batten down your own hatches because your govt will prove to be as useless as tits on a bull when she blows.

Yes Ostrich , as you know i've said no QE3 for the last ...oooh quite a while, and do think there is a good case for some wait and see (or as we know it Bolly's Mantra) here, but I think there will be pressure on Bernake to throw the Capital markets a bone of some description, I just think it will take the form of directional stimulus, see my response to your inquiry this morning on 90 at 9.
Cheers really good post by the way. 

Yes good post Ostrich. A lot think America is the done dog, but I still think they will be the number one player for a while yet. 

Perversely a stock market rout starting tomorrow would do more for Obamas re election chances than the Federal reserve limply offering more electronic hopium.
Ostrich I am not so sure. Corporate equities remained a significant contribuor to US households rising financial wealth in the 1st Quarter. This and stable gasoline prices will probably underwrite Obama's re-election chances more than anything else. See document page 68 L100 report.- Acrobat reader page 75.
Which leads me to think today's significant reduction in local gasoline prices cements no near term action by the Fed. (surely these boys are close to the action) And as noted ROW fear flow into the US should sustain stock market indices. 

"US banks can effectively borrow from the central bank at nearly 0% and then put the money into shorter and longer term bonds at 1.5% to 3%. They don't have to take many risks and can build up their profits and capital over time."
So.........Bernard......what sort of rate is our own government via the RBNZ getting via the US FED? Maybe you should ask?

"extend-and-pretend squared is the road to the poor house."
Germans will not accept changes that raise the cost of German debt...they will not subsidise club med.
How much borrowed money is Bill English about to give the piigs..!