Thursday's Top 10 with NZ Mint: Why Europe needs a Federal Reserve; The chart the 1% fear most; Christchurch's rental affordability crisis; John Key's specious NZ Super spin; Dilbert

Here's my Top 10 links from around the Internet at 2.30 pm today in association with NZ Mint.

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

See all previous Top 10s here.

My must read today is #8 on alternatives to inflation targeting regimes. New Zealand needs one.

1. Europe needs a Federal Reserve - US economist Aaron Tornell and German economist Frank Westermann have called on Europe in this NY Times Op-Ed to give Federal Reserve-type powers to close banks and print money to the European Central Bank.

That's all very sensible and what is needed.

But to do it properly Germany would have to agree to it (no sure thing at the moment).

Also, there would have to a fiscal and political union.

Germany would also have to agree to those.

I just can't see an easy, fast or painless way out of the euro mess at the moment.

We face years of perma-crisis punctuated by periods of relative calm where zombie banks and governments stagger on thanks to the increasingly grumpy largesse of the Germans.

Meanwhile, Europe's economy will struggle to grow, or worse. Remember, Europe is China's largest export destination.

Here's Tornell and Westermann with one of the best explanations of the problem I've seen in a while.

What ails the euro zone is not a Teutonic allergy to inflation, or a timidity about extending loans, but what economists call the tragedy of the commons. Here’s an example: A group of people go for a drink and agree to split the tab. They tend to drink a bit more than when each goes alone. Each person gets to enjoy 100 percent of the marginal benefit of an additional drink, yet she is responsible only for a portion of that drink’s cost. So she has an incentive to outdrink her friends and exploit the common pool of money that will be used to pay the tab.

The central bank system in Europe is akin to letting the government of California issue bonds, pledge them as collateral at the San Francisco branch of the Fed, and then get fresh dollars to pay for its budget deficit. If this were reality, imagine the strong temptation for California to tap Fed resources to indulge imbalanced spending and borrowing.

If the system isn’t fixed, it will lead to another financial crisis.

2. The chart that scares the 1% the most - Zerohedge has pointed to this paper by a couple of academics about the global financial crisis and the connections between the increasing wealth of the 1% and the increasing proportion of the adult population in prison.

It has a certain Marxist (come the revolution!) tone to it, but interesting none-the-less.

The authors fear that, peering into the future, the '1%' realize that in order to maintain (or further increase) their distributional power (their net profit share of national income - which hovers at record highs) they will have to unleash even greater doses of social 'violence' on the lower classes.

The high level of force already being applied makes them increasingly fearful of the backlash they are about to receive (think Europe to a lesser extent) and nowhere is this relationship between the wealthy capitalists and social upheaval more evident than in the incredible correlation between the Top 10% share of wealth and the percent of the labor force in prison. In order to have reached the peak level of power it currently enjoys, the ruling class has had to inflict growing threats, sabotage and pain on the underlying population.

3. Targeting the Target 2 balances - This chart below from an excellent New York Times graphic (HT Dan Bell) essentially shows the extent of the wholesale run on Italian and Spanish banks seen over the last year. The Target 2 balances show how much is owed to the Bundesbank by the Bank of Spain and the Bank of Italy.

The situation in Europe might be worse were it not for a system that was created to clear transactions between central banks. That system is now providing loans to central banks of countries whose banks are suffering withdrawals. The money comes from the central banks of nations with healthier banks, like Germany, the Netherlands and Luxembourg. Germany already has substantial exposure to the weaker economies, which is one reason it has been reluctant to agree to issue pan-European bonds.

4. The real problem is affordability - The Press reports on how landlords in Christchurch are stunned at how difficult it is to rent out houses with higher rents.

There is this remarkably persistent view among landlords that rent increases higher than wage increases will just happen ad infinitum. Affordability matters.

Here's The Press:

Where are all the desperate tenants? That is the question some Christchurch landlords are asking as they struggle to rent their houses.

While a shortage of cheaper homes in the city is attracting attention, mid-priced and dearer houses are sitting empty.

Property manager Agnes White, of Rosevear Wing and Associates, said the rental market was mixed, with shortages of cheaper homes, furnished houses and homes in some school zones. Otherwise, there were "plenty of houses out there."

Some tenants had ruled out the east side of town because of cracked houses and neighbourhoods perceived as damaged. White advised landlords with vacant houses to make sure homes were warm and in good condition.

If there was nothing wrong, the only options were to either wait or reduce the rent, she said.

5. The best graphic I've seen in a long time from the New York Times, which captures the great economic and social themes of the last 100 years. Click through for a full version.

6. Ignore the ratings agencies - Bloomberg reports on how America and Britain's credit ratings were downgraded, yet their bond interest rates fell. Why do we care what the bond vigilantes think anymore?

“I don’t think we should be slaves to the ratings agencies,” Mervyn King, governor of the Bank of England, told lawmakers on Feb. 29. “What we’ve seen is, the action they took recently did actually have no impact on the yield that people in the market were willing to lend to the U.K. government at.”

It’s not just Britain. After Standard & Poor’s stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose. For investors and policy makers, predicting the consequences of a rating change by S&P or Moody’s -- the dominant issuers of debt scores -- may be little different from flipping a coin.

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P.

7. China's party is about to end - American Enterprise Institute Scholar Michael Auslin has written at the WSJ that China has more than a few problems.

For a while it seemed as if China would never look back. But it's clear now that the easy part is over and that the next 20 years will be harder for the Communist Party to manage. The country's looming problems have never looked as sharp in the past two decades, which spells not only an economic deterioration, but also a possible collapse for the Party.

The problem started late last decade, when President Hu Jintao concertedly changed tack, from privileging the private sector to the public. State-owned enterprises became more dominant than they were, while local governments became emboldened especially after a post-crisis lending spree—these entities together swallowed most of the available credit. The small- and medium-sized companies, the engines of job growth, stalled. This is part of the reason growth is slowing, the government recently revising its estimated growth for the current year down to 7.5%.

The current poor management of the economy comes on top of long-term issues that the Party has ignored. Not only have wages been rising enough to start affecting Chinese companies' competitiveness, there is a shortage of labor in the coastal belt, the heart of economic growth. The shortage is due in part to more opportunities inland, but the biggest problem is the working-age population has peaked.

8. The death of inflation targeting - Harvard Economics Professor Jeffrey Frankel does a nice job of declaring the death of inflation targeting here at Project Syndicate and suggesting its replacement with a nominal GDP target or his own idea of a Producer Price target.

Fans of Nominal GDP Targeting point out that it would not, like Inflation Targeting, have the problem of excessive tightening in response to adverse supply shocks. Nominal GDP Targeting stabilises demand, which is really all that can be asked of monetary policy. An adverse supply shock is automatically divided between inflation and real GDP, equally, which is pretty much what a central bank with discretion would do anyway.

In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target). But why has it suddenly gained popularity at this point in history, after two decades of living in obscurity? Nominal GDP Targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world: Its proponents see it as a way of achieving a monetary expansion that is much-needed at the current juncture.

 9. 'Key's Super stance mostly specious spin' - That's the verdict from Brian Fallow in the NZHerald. I agree entirely. Click on it and read.

10. Totally Jon Stewart on Jamie Dimon in 'Bank Yankers'. Watch it and realise that America really is a corporate run Plutocracy that we shouldn't be even thinking of doing a 'free' trade deal with.