Monday's Top 10 with NZ Mint: Think like a Norwegian economist; Charles Evans; Too big to jail; Bailing out corruption; France on wrong track; Politics more important than economics; Dilbert

Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.

Bernard is on his summer break and will be back in late January 2013, probably from Wellington.

As always, we welcome your additions in the comments below or via email to

See all previous Top 10s here.

1. The man who occupied the Fed 
I admit, until the last Fed statement, I had no idea the US central bank was operating on a strict "unemployment + inflation" mandate. I suspect few others did too. It is the work Charles Evans, who seems to have won over all the FOMC members bar one (Jeffrey Lacker). Remarkably, Evans is only an alternate member of the FOMC. Matthew O'Brien has the story.

Some revolutionaries wear Guy Fawkes masks and talk about the 1 percent, and some revolutionaries wear suits and talk about policy thresholds. Chicago Fed president Charles Evans is one of the latter.

A year ago Evans was the rare dovish dissenter at the Fed. He didn't think it was taking the unemployment half of its dual mandate seriously enough, so he proposed a new, eponymous rule for it to do better. He certainly wasn't the first Fed president to have his own ideas about monetary policy, but a funny thing happened on his way to heterodoxy - his ideas quickly became the consensus.

Now, just a year later, the Fed has fully embraced the so-called Evans rule by linking interest rates to the unemployment rate. Ain't no revolution like a monetary policy revolution.

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2. Too big to jail
The British agree - some banks are just too big to prosecute. We all need a Haldane limit, urgently. Or the British need a new regulator.

The largest banks have become too big to prosecute because of the impact criminal charges would have on confidence in them, Britain’s most senior bank regulator has admitted. In a variant of the “too big to fail” problem, Andrew Bailey, chief executive designate of the Prudential Regulation Authority, said bringing a legal action against a major financial institution raised “very difficult questions”.

Mr Bailey told The Daily Telegraph that some banks had grown too large to prosecute. “It would be a very destabilising issue. It’s another version of too important to fail,” he said, “Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see ... this is not an ordinary criminal indictment,” he said.

3. Countdown
The terrible Connecticut shooting has pushed the fiscal cliff negotiations to the background, but did you realise that the US debt ceiling will probably be breached first? Apparently before the end of December. Then the creative accounting begins. Sometime in February or March the game will be up, if no 'solution' is found.

4. Why Politics is now more important than Economics
Here's Chrystia Freeland at Reuters explaining why businesses need to be consulting political scientists rather than economists.

Here are seven reasons that in the coming year politics will matter as much as economic projections for anyone running a business:

•Europe: This is the prime example of how, as Mr. Roubini puts it, the developed markets are “submerging,” or reverting to an emerging-markets-style world in which politics drives almost everything. Mr. Bremmer calls it “Europe’s existential moment,” and that is ultimately a matter for politicians.

•China: The world’s dominant emerging market, and maybe before too long its dominant economy full stop, also happens to be a communist state in which politics explicitly steers all business and economic decisions.

•The United States: In Toronto, there was a lot of discussion of the fiscal cliff and how it has politicized the U.S. economic outlook — one of the American visitors, a leading financier, devoted most of his presentation on the U.S. economy to the politics of the Beltway.

•The Global Balance of Power: As Mr. Bremmer put it, “We are living in a time of geopolitical creative destruction. Geopolitics are suddenly in play in a way that for the last half-century they haven’t been.” We are moving from the brief, post-Cold War Pax Americana to a new age of Metternich, and the economic implications are vast, fast changing and hard to figure out.

•The Old Economic Tools Don’t Work Anymore: This was the argument of another smart and influential American speaker in Toronto. He believes the world economy operates in 60-year cycles, and that we are entering a new one, which is why the old rules no longer apply. Mr. Roubini makes a similar point. He argues that the familiar macroeconomic toolkit isn’t working anymore. That means we need to create a new one, an inevitably political process.

•Return of the Regulators: A dominant theme — or, more accurately, lament — in Toronto was that financial regulation is back. That is true — although perhaps both less than the bankers fear and than liberals would like — and it is another reason politics matters.

•Inequality: Income inequality is rising in most of the world and is being talked about everywhere, from China to Europe to the United States.

5. 'Think like a Norwegian economist'
Fracking isn’t just going to change the energy business; it could change every business. And that’s pretty scary says Adam Davidson in the NY Times.

Many economists say that fracking will soon fundamentally shift global economic logic to uniquely benefit the United States. Ed Morse, an influential energy analyst at Citigroup, argues that the natural-gas industry will bring around three million new jobs to the United States by the end of this decade. He also expects that fracking will add up to 3 percent to our G.D.P. and trillions in additional tax revenue. Along the way, it will turn around perennial stragglers, like steel and manufacturing. For millions of workers, there could not be any better news.

It doesn’t necessarily have to end badly. In the late 1960s, Norway’s economy was immediately transformed when it discovered massive crude deposits off its North Sea shores. Back then, Farouk al-Kasim, an Iraqi-born Norwegian petroleum engineer, warned that all that sudden easy money could create “so much pressure that it will completely overwhelm environmental concerns; the force can undermine moral, ethical barriers.” The money available to the industry and government was so ample, he told me recently, that people soon began to say, “I don’t care, I’m getting rich, to hell with everybody else.”

Norway avoided the curse, and America will, too, Kasim said, because it has a huge, diverse economy. Still, as oil-rich states have shown, it’s possible for even a relatively small extractive industry to cause severe damage. In fact, the best thing that any U.S. environmentalist can do is to start thinking like an economist - particularly a Norwegian one.

6. Bailing out corruption
Greece is in trouble - no news there. The country is about to receive €50 bln in EU assistance to avoid a debt collapse. But here's probably what is irking the Germans so much. It's public accounts currently have €50 bln in unpaid taxes, if they would only collect it. It's economy may be shrinking, but in 2011 it had GDP of US$294 bln.

Now the EU tax chief has said that just by clamping down on the black economy, they could raise 5% of GDP in additional taxes. 5% of US$300 bln is US$15 bln, or €20 bln per year. And that is before doing essential tax reforms. It is the Greek people who are their own worst enemy. Hard to feel sorry for a society where 25% of transactions are in the 'shadow economy'. I think I would have been tougher than Merkel.

Experts estimate that a shadow economy lying outside Greece's tax system amounted to more than a quarter of annual output in 2011, the highest level in the European Union. It is common in the country for small business owners to under-report sales and pay lower value-added tax. The self-employed such as plumbers and electricians often get paid in cash, avoiding receipts.

"According to our estimates at the Commission, out of the 53 billion euros in (overdue) taxes owed to the Greek state, 15 to 20 percent could be collected," EU tax commissioner Algirdas Semeta told newspaper Kathimerini in an interview. He said the country's tax system needed an overhaul with simple and easily applicable rules.

7. "Hold more capital"
The US Federal Reserve is proposing to bring foreign banks with large US operations under their regulatory oversight - pretty much along the lines of how the RBNZ did it with Westpac in New Zealand. It will make them operate under a local "intermediate" holding company. The proposed US$50 billion assets rule will catch a lot of them. It will capture banks like Barclays, HSBC and Deutsche Bank.

Seems fair enough to me especially as these banks "utilised" the Fed's discount window when things were tough. I suspect the Fed will be tougher on them than their home regulators are. I am also surprised to learn that US regulation does not apply to them presently.

8. Are longer dated, higher yielding bonds better?
As regular readers will know, we have comprehensive NZ bond market details on this site. There are very few NZ bonds on offer with maturities beyond 2020 and those that are offer modest yields. So the options are to look offshore. The NY Times has some stuff to think about - especially if you believe the future will not be as bad as commonly predicted.

The US Fed last week gave the first hint of what would cause it to allow interest rates to rise. It promised to maintain low rates until the US unemployment rate - at 7.7 percent last month - falls to 6.5 percent, so long as inflation also remained quiet. Fed officials do not think that will happen until late 2015, but they could be overly pessimistic. A year ago, they thought that the rate would not get as low as it is now until 2014. The prolonged low level of interest rates — both short-term rates that are administered by the Fed and longer-term rates that are more subject to market forces - has caused many investors to search for yield by purchasing longer-term bonds. For a bond market investor now, the choice is to stick to shorter-term bonds, and get very low yields, or to move to longer-term ones that pay higher interest rates but that could lose market value if the interest rate offered on new bonds rose.

One startling fact jumps out from the graphic with this story - the amount of bond issuance going on in China.

9. France still on the wrong track
Brigitte Granville thinks France is in a "death rattle' - a very strong opinion. But France has chosen the course of deficit spending plus high taxes on employment. It is a recipe for disaster, she thinks. Germany must be worried.

Far from signifying a pro-business shift, Hollande’s government’s response ... reflects the French elite’s enduring interventionist mentality. Instead of implementing deep and permanent cuts in payroll taxes on businesses, the government will give companies a €20 billion income-tax credit over the next two years. And, with companies required to apply the rebated cash to investment and job creation, the government has portrayed the measure as a cut in taxes on labor that will boost employment.

But a temporary tax break cannot change incentives. Furthermore, companies will not receive the cash until 2014-2015, owing to the complexity of France’s tax administration. And, when they do get it, the state cannot possibly know that reinvesting in the same enterprise will be more beneficial than, say, paying out dividends that shareholders could then use to finance a new venture.

Once again, French lawmakers are acting on the conviction that they know better than market participants. Apart from promises to reduce employment regulation, all of the new measures boil down to officials directing state money and subsidies to companies and projects of their choosing. So the death rattle of the French economic model continues. What remains to be seen is how the end will come. And, whether it comes in the form of a capital strike by foreign bondholders, or of domestic labor strikes and wider social and political unrest, France’s leaders remain entirely unprepared for the inevitable.

10. Certainty: the enemy of science, the reason for politics
Believe those who are seeking the truth. Doubt those who find it. Andre Gide

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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Fonterra director election results are in. Newcomer to the Board, Blue Read, will join John Wilson and Nicola Shadbolt.  Well done to all. :-)

Also a big shout out to Vaughan Templeton my old Boy's Brigade leaderand good Southland bloke who will be representing Western Southland on the council. Well done Vaughan.

"But France has chosen the course of deficit spending plus high taxes on employment. It is a recipe for disaster, she thinks. Germany must be worried."
When up against the zero bound, this is classic keynesian economic response. The only Q is will it be enough or, could it be enough......I'd suggest its to late now....

"The Old Economic Tools Don’t Work Anymore:"  No, the 30-40 year old voodoo economic tools we had invented dont work anymore, just like the last set we invented.  Getting out of a Depression is classic Keynesian in that it was Govn spending in the lead up to WW2.
Looking at Minsky and Keen however I think the keynesian theory will be / is simply overwelmed. Especially if we leave it to pollies like we have for the last two periods, ending in disaster.
Whats left is take our medicine and lump it.

Hugh great to see you still promoting the good cause
Surely the CCC finances are suffering massively with huge drop in the rating base both the residential red zone and CBD?
Who is going to be the next Chch mayor?
In the absence of any serious new contenders Parker seems to favored by the Ipredict punters

Brigette Granville must be totally wrong , surely , for it wasn't so long ago that our own Bernard Hickey lauded the French economic model of high taxes , and a big central bureaucracy controlling all things .......
... back when Bernie had his meta-fiscal-economics re-think , and concluded that his previous belief in the free market mechanism was wrong , he praised France from on high , for the great happiness of her citizens , and their compliance to a 50 % tax rate .....
Well , 75 % tax rate now .... but who's complaining ..... apart from Gerard Depardieu of course , returning his passport ..... Sacre Bleu !

G-g-g-g-g...grrranville. I aven't heard the t -the t , I aven't heard the t -t -cash register ! ringing in a while, on yer bike n see where all me k- k-cus customers ave gone.

2 things
1) There is no real evidence that a tax rate up to about 70% on the highest tax band is detrimental to the economy.  This possibly because the "rich" dont spend but re-invest in hedge funds which are parasitic.  Lots of right wing opinion on that "evidence" which you gleefully parrot mind.
2) Raising tax rates probably has a <1 fiscal impact, ie raise tax by 1% has a less than 1% impact on the economy, unlike austerirty that has a 1.7 multiplier...

2 things : Current estimate has it that the French government's tax department has already lost $US 8 billion in revenues ( just 6 months after implementation of the 75 % tax rate ) , as high income earners have bailed out on socialist France , and shifted  to more accommodating jurisdictions within the Eurozone , such as Belgium & Denmark ....
..... secondly , that Derpardieu guy is one lucky dude , anyone who gets to hob-nob with Catherine Deneuve has my undying admiration ....

Maybe Brigette Granville should base her economics less on her personal existential crisis over what happens when Gerard Depardieu doesn't want to be French any more.

Over tax those with the means to run and run they will.
Reminds me of a story I was told about the European Parliment in Brussels, except when it moves to France each month. A local farm consultant was introduced to a young burecrat who told him that everyone had two hours for lunch and no matter how badly they stuffed up they where never fired or even offered less renumeration just moved to another department. Ah to dream the great middle class socialist dream of a salaried position which never terminates and renumeration can only increase.
I wonder how low the tax rate would go if the tax system was a little less complicated and 'employed' fewer people?

Update on the Higher Ed Bubble (and y'all thought t'was only Housing, Land and suchlike as were Bubbular...).
After all, when via Coursera, right now, you can get access to MIT or Harvard, why would ya bother with the local lot, and especially why wouldja raise a swingeing student loan to live off while you imbibe what passes for Instruction locally?
And poor BH thought the great Productivity Rise was Ovah!
Just imagine how much more Productive we could be if we get this trifecta:

  • Tip out the second-string teachers and lecturers into exporting positions like assembly-line work, graperies, or udder-tugging - instant conversion from Tax Consumers to Tax Producers.  The good ones will become Researchers, of course.
  • No' mo' Loans!  Learn while working - another round of Pay as yer Go with great savings to the poor hard-pressed Tax Producer.
  • No' mo' deferment of homemaking:  instead of waiting to the end of a four-year degree then a few years of work then start the Fambly, why not start now, work now, learn now.  Instant catch-up in the housing starts, and cut out a whole lot of ancillary education staff for productive lives on some export assembly line or vineyard as aforementioned.

A second Great Disintermediation is underway.....and it doesn't depend on the Gumnut in any way.  People will vote with their - well, if not Feet, their Mouse, Touchscreen, Swipy Tablet Thingy or other Approved Human Interface Device.
Students of GodZone, yez have nothing to lose except yer chains I mean loans, second-rate credentials, deferred families and wasted lives....

Hi Waymad,
I'ld also suggest that skills and knowledge are gained and should be assessed in the workplace rather than a peice of parchment gained though regurgitation after exam cram.

This Houston obsession is way out of control.
Seek professional help ASAP.

It's probably the hot weather, maybe Hugh's dreaming that he woke up in Texas this morning...
But then with Christchurch at 33 in the shade and too hot to do any real work maybe we should just let Hugh go back to his siesta and daydreams...

"He believes the world economy operates in 60-year cycles",
David - surely you can differentiate between content and crap?
60 years ago, there were 2.6 billion people on the planet.
60 years ago there was nearly 1 trillion barrels of oil in-ground, which have been burnt since.
Cycles on that basis?  You might as well report tea-leaf peerers.
Or Houston-worshippers.
Or those who think that eliminating Govt, student loans, or indeed any thing at this point, will make a blind bit of difference.

Grandad's old Raleigh is still going strong ..... I don't mind riding a 60 year cycle ....
...... it's got a fixed pedal , bloody funny as all hell , 'cos you can go backwards on it .....  And it's economical , nothing breaks on the old bugger , built them to last in those days , the bicycle too ...
Yup , nothing wrong with an economical  60 year cycle .....

Yep, I had a fixed-wheel once, went like the clappers, particularly down hill .. got picked up by a traffic cop once for doing 60 mph down campbell rd, one tree hill, cos I had my feet of the pedals .. stopped me when I got down the bottom

Another trick was to spin the seat around , and ride the thing facing the wrong way , with the arms stretched behind , trying to steer ......
...... that always ended badly , with an assortment of contussions , abrasions .... and half a bottle of dettol ....
You know , PDK is a darned fine sport to come up with these interesting topics for us . Well done , bravo !

My brothers and myself spent weeks restoring Grandad's old bike which we found petrified under a pile of thrush guano at the back of a shed. Great fun that thing. Pretty sure he rode it to work for decades before it was retired then resurected as a paddock basher.
Maybe PDK could find one and hook it up to a dynamo to power his computer and do his bit for energy production while getting fit thus avoiding the first world plauge of a sedentary lifestyle.
The great question of whether it is possible to peddle and type could be answered by this peice of definative research.

PDK it is astounding the amount of confidence in ones fellow man you possess.

He is a little ray of sunshine , isn't he !
.... another trick with the economical 60 year cycle was to balance on one side of the bike ..... you needed to get up a little speed first , then place one foot on one pedal only  - leave the other to trail behind - and to bob up & down as the fixed pedal rotates and lifts you up and down .....
Great training for gymnasts and stuntmen ...

BruceH - again, divest yourself of the preconception.
This time, it's the old 'power of the human brain' nonsense'. It can - in energy terms, and remember no activity is possible without energy - only make things more efficient, or be more clever about triage. There are absolute limite to both. There would have been Mensa-level intellects who succumbed to the Holocaust, there's a limit to the magnitude of what you can think yourself out of.
Pedalling? I'm away ahead of you. (We don't need to pedal for power here, a Gentle-Annie w/m motor/pelton wheel fed by 1 litre/sec @ 80ft, drives most of our stuff. I could match it's output for perhaps 30 minutes, perhaps an hour, but the food-energy required has to be part of the equation of course.
But - I ride a linear-pedal recumbent, which develops full torque at TDC, carries it for 90deg, then tails off as per the r/h half of a conventional sine-wave. 230deg of total power, vs 180 for conventional crankshafts/pedals/conrods. Pushed that efficiency track 20 years ago - ran into the 'reducing returns' limit, just use it now.

spin tends to originate from cranks

Great pun.

"The Insurance Council did not reply to a request for comment." fairfax
Perhaps John Key will enter this farce and's too busy.
Can't crimp insurance company profits old boy...might mean thinner fat bonus handouts for the bosses and even less for the share owners.
The way is wide open for an 'honest' insurance company to step up to the write policies without sneakout clauses that benefit them and screw us.