Tuesday's Top 10 with NZ Mint: Corporates sitting on US$4 trln of cash; US bankers want to 'throw off the wet blanket of regulation' to unleash their 'animal spirits'; 'Just cancel the debt'; Dilbert

Here's my Top 10 links from around the Internet at 3.00 pm today in association with NZ Mint.

As always, we welcome your additions in the comments below or via email tobernard.hickey@interest.co.nz.

See all previous Top 10s here.

My must read article today #9 on how a candidate for the job of Governor of the Bank of England is seriously suggesting canceling all the government bonds the central bank is buying...not so wacky now is it...

1. 'Get rid of the wet blanket' - William D Cohan writes at Bloomberg about the push coming from many on Wall St to throw off the 'wet blanket' of regulation that is 'suffocating' the animal spirits of the US economy.

There are growing calls now from US CEOs and CFOs sitting on cash hoards and arguing they have no confidence to invest.

If only they were given more government incentives such as lower corporate tax rates or lower tax on high incomes, then they would invest, they argue.

Cohan, himself a former investment banker, skewers the thinking in this excellent piece.

It's titled: 'How to crash an economy and escape the scene.'

It's the ultimate financial hit and run story.

Cohan talks about recent comments from JP Morgan CEO Jamie Daimon:

Dimon said the new regulatory environment is holding back economic growth. He said he had discussed the topic with business owners and executives around the country: “They all say it’s terrible. So it’s not just banks. We’ve done it to ourselves, folks. We’re shooting ourselves in the foot and we’re doing it every day. Get rid of that wet blanket and this thing will take off.”

Even Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group Inc. (GS), has started to make noise again after a few years of laying low. As part of what the press has nicknamed his No Apologies Tour, which has taken Blankfein to forums and media outlets across the country, he has also called for jettisoning the wet blanket. “Getting rid of some regulations and rules that are impairing people from investing vast pools of liquidity that are on the sideline, that are not owned by the government, that are theirs to invest but are just sitting on the sideline” will help get the economy humming again, he told CNBC.

And here's Cohan's conclusion:

No one -- no one -- on Wall Street has paid a serious price. The one criminal prosecution -- of the Bear Stearns hedge-fund managers Ralph Cioffi and Matthew Tannin -- failed miserably. Every bank has received its slap on the wrist, has had its insurance carrier or its shareholders cough up a few hundred million dollars -- the cost of doing business, don’t you know -- and moved on. And governments, most recently New York State, have decided to milk the banks for badly needed cash rather than charge the miscreants themselves.

Once upon a time, prosecutors were vigilant about prosecuting bad financial behavior on Wall Street. According to the Financial Times, during the savings-and-loan crisis of the mid 1980s, some 3,500 bankers were jailed for their transgressions. I still haven’t heard a good reason why the number of successful prosecutions in the wake of our most recent financial crisis remains at zero.

2. Cash, cash everywhere, but not a drop to invest - Hogan Lovells have put together an excellent interactive graphic from Bloomberg data showing how much cash corporates have on their balance sheets.

Corporates are cashed up, but very reluctant to invest, hire and grow.

US and Canadian firms have US$1.85 trillion of cash to invest, British firms have US$147 billion, European firms have US$837 billion, Latin American firms have US$71 billion, Middle Eastern firms have US$31 billion, and Asia Pacific firms have US$1.1 trillion. That's a total of US$4 trillion of cash sitting on the sidelines ready to go.

Why isn't it being invested?

What are companies worried about?

One argument is they are uncertain about the government spending outlooks and see the incomes of their customers (particularly the middle to lower income groups) as flat to falling. They also see the debt levels of their customers, particularly if they are households, as too high to spend a lot on consumer goods. 

So how do you deal with this problem. Either find new customers (maybe it's government) or wipe the debt and start again. 

3. Japanese exports to Europe - Everyone was looking at the slump reported yesterday in Japanese exports to China in September because of the street protests in China and boycotts of Japanese products.

But FTAlphaville points out Japanese exports to Europe fell by just as much (26%). The only bright spot (or the least dark spot) is America.

Japan’s preliminary September trade data tell a story not dissimilar to China’s — exports to Europe are slowing (unsurprisingly) by a lot, down 26 per cent for the month, year-on-year. Asian exports also fell, by 8.3 per cent. But US exports rose 0.9 per cent. The six months between April and September show a more striking contrast: exports to North America rose 16.6 per cent; while for Asia they fell 4.7 per cent and for Western Europe, there was a 20.8 per cent decline.

4. Finally, some support for Bo Xilai - This is curious and surprising, given the lid on dissent in China.

BBC reports on how 700 Chinese academics and former party officials who have called on the government to give disgraced former Chongqing Mayor Bo Xilai a chance.

A group of Chinese leftists have written an open letter asking parliament not to expel disgraced Communist party official Bo Xilai. The letter, signed by more than 700 academics and former officials, was carried on the left-wing Chinese-language website Red China.

It said the move was legally questionable and politically motivated. China's leftists are a small but vocal group to whom Mr Bo's populist policies appealed. 

5. Currency manipulation - One of the big items (no doubt) in tonight's final Obama vs Romney debate will be whether to declare China a currency manipulator.

Ezra Klein writes here at Washington Post why declaring China a manipulator could be a waste of time. He also points out there are many others doing much worse, including in this handy table.

6. Here's Hugh Fletcher talking on Radio New Zealand on Friday about the failure of New Zealand's Laissez Faire drive of the last 30 years or so.

He's worth listening to. He has only just retired from the boards of Fletcher Building and the Reserve Bank of New Zealand. He was around before and after the Grand Experiment and worked at extremely high levels. He knows the issues, the characters involved and he knows the outcome. 

I agree with him. I didn't use to, but the Global Financial Crisis has exposed the weaknesses of unrestrained capitalism and banking in particular. New Zealand's obsession with letting the market decide and letting the capital flow where it will is naive and dangerous.

He makes a good point about how our tax system makes it very profitable for foreign owned companies to buy companies with strong cash flows here and load them up with debt.

7. The sliding global economy - This chart shows the relationship between global trade and industrial production. It suggests another downturn.

8. Credit bites back - Economists Moritz Schularick and Alan Taylor write at VoxEu about the role of credit in the histories of financial crises and concludes America is actually now doing better than expected.

The central part played by credit in the deep downturn and weak recovery fits a recurring historical pattern. Financial crises correlate with more painful recessions. This column takes a close look at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. In short, credit bites back. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected.

9. 'Just cancel the debt' - Here's an idea. All the government bonds being bought by central banks could be just canceled by those central banks after they've been bought. This would be fairly unrestrained central bank financing of government spending. 

This seems like heresy, but it's being openly discussed in senior policy making circles in the Northern Hemisphere.

Here's Gavyn Davies writing at FT.com about the idea put forward by the IMF.

One radical option which is now being discussed is to cancel (or, in polite language, “restructure”) part of the government debt that has been acquired by the central banks as a consequence of quantitative easing (QE). After all, the government and the central bank are both firmly within the public sector, so a consolidated public sector balance sheet would net this debt out entirely.

This option has always been viewed as extremely dangerous on inflationary grounds, and has never been publicly discussed by senior central bankers, as far as I am aware [1]. However, Adair Turner, the Chairman of the UK Financial Services Agency, and reportedly a candidate to become the next Governor of the Bank of England, made a speech last week that said more unorthodox options, including “further integration of different aspects of policy”, might need to be considered in the UK.

Two separate journalists (Robert Peston of the BBC and Simon Jenkins of The Guardian) said that Lord Turner’s “private view” is that some part of the Bank’s gilts holdings might be cancelled in order to boost the economy. Lord Turner distanced himself in public from this suggestion on Saturday. However, the notion will now be widely discussed. It is easy to see how the idea could appeal to a finance minister facing the need to tighten fiscal policy during a recession in order to bring down the public debt ratio.

Why is this such a radical idea? No one in the private sector would lose out from the cancellation of these bonds, which have already been purchased at market prices by the central bank in exchange for cash. The loser, however, would be the central bank itself, which would instantly wipe out its capital base if such a course were followed. The crucial question is whether this matters and, if so, how.

The central banks have now purchased so much government debt that the effects of such an action could be large. This is the situation in the UK, where the Bank of England holds 25 per cent of all outstanding government debt. And this is the situation in the US, where the Fed holds 10 per cent of outstanding Treasury debt:

Furthermore, the effects would be increased even more if, instead of just cancelling past debt, the central bank were to co-operate with the government, agreeing to directly finance an increase in the budget deficit by printing money. We would then be genuinely in the world of “helicopter money”, with no pretence of separation between fiscal and monetary policy [2].

Outside of wartime, developed economies have not been normally been willing to contemplate any such actions. The potential inflationary consequences, which are in fact signalled by the elimination of central bank capital which this strategy involves, have always been considered too dangerous to unleash.

For me, that remains the case. But others are more worried about deflation than inflation. This genie might soon be leaving the bottle.

10. Totally Jon Stewart on the second Presidential debate