Thursday's Top 10 with NZ Mint: NZ most popular destination for China's fleeing rich?; Bill Gross' survey of haircuts; How much bank leverage is too much?; NZ is just sooo special because our house prices will never fall; Dilbert

Here's my Top 10 links from around the Internet at 11 am today in association with NZ Mint.

As always, 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 is #6 from Joe Stiglitz on tax and inequality.

1. It's all about leverage - The US Federal Reserve is looking at putting hard caps on leverage and capital for banks.

It's also getting more sceptical about using the fancy Basel II/IIIstyle risk weighted asset calculations for capital.

This is important for New Zealand because one of the drivers of increased bank leverage here over the last decade was the Basel II rules that meant banks didn't have to hold so much capital against mortgages because they hardly ever go bad...so far...

Our Reserve Bank has already looked at toughening up those capital rules by forcing the banks to hold more capital for the most leveraged mortgages. 

Ultimately, many of the asset bubble problems seen over the last decade around the world are about leverage. Here's David Chaston's excellent leverage table for New Zealand banks. Ours are not as leveraged as most overseas and less leveraged than they were. Currently they have capital of around 8% and therefore leverage of around 12.5.

It's still less than the 15% capital that US Congressional leaders are now pushing for for the biggest banks.

Here's the FT with the latest push to reduce leverage:

According to people familiar with the matter, Fed officials have discussed increasing the amount of equity capital banks are required to hold, setting the bar higher than the 3 per cent of assets level agreed internationally. The move is being considered amid growing scepticism about the Basel III capital accords, which impose higher capital requirements on banks around the world but allow them to vary the amount depending on the riskiness of individual assets. Officials are concerned that some banks are gaming the system.

In Congress, a proposal to impose a 15 per cent leverage ratio on the largest banks has secured bipartisan support. Analysts calculate it would require the likes of JPMorgan Chase and Bank of America to forego dividends for years to retain a total of $1.2tn of equity.

------------------------------------------------------------------------------------------------------------------------------------------

Keep it safe. Keep it in a New Zealand Mint safety deposit box. Details here »
------------------------------------------------------------------------------------------------------------------------------------------

2. Here comes deflation - Ambrose Evans Pritchard at The Telegraph has the latest exciting news from Europe, and its apparent slide towards Japanese-style inflation.

“The eurozone is tracking the experience in Japan in mid-1990s. there is a very high risk of a slide into deflation,” said Lars Christensen, a monetary theorist at Danske Bank.

While eurozone core inflation was slightly lower in the aftermath of the Lehman crisis, the current figure is distorted by the one-off effects of VAT increases and levies linked to austerity. Adjusting for these taxes, the rate is now running at 0.4pc.

“The European Central Bank [ECB] should be concerned. If there is another severe shock, the eurozone faces a much bigger risk of falling into a deflationary trap,” said Julian Callow, global strategist at Barclays. “The danger is when deflation combines with high debt and deleveraging and becomes toxic. That raises the risk of a debt-deflation spiral. There are already signs of this in southern Europe.”

------------------------------------------------------------------------------------------------------------------------------------------

New Zealand Mint. Experts in gold & silver bullion, commemorative coins and jewellery. Details here »
------------------------------------------------------------------------------------------------------------------------------------------

3.There will be haircuts - Bill Gross' monthly newsletter is always well worth a read. 

Gross rightly points out it's going to be very difficult to achieve significant debt reduction without haircuts at some stage, particularly with so little inflation. How is this all going to end?

 Carmen Reinhart has said with historical observation that we are in an environment where politicians and central bankers are reluctant to allow write-offs: limited entitlement cuts fiscally, no asset price sink holes monetarily.Yet if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced. Granted, the ability of central banks to avoid a debt deflation in recent years has been critical to stabilizing global economies. And too, there have been write-offs, in home mortgages in the U.S., for example, and sovereign debt in Greece. But the cost of these strategies, which avoid what I simplistically call “haircuts,” has been high, and their ability to reduce overall debt/GDP ratios is questionable.

Even IF QEs and near zero-bound yields are able to refloat global economies and generate a semblance of old normal real growth, they will do so utilizing historically tried and true “haircuts” that rather surreptitiously “trim” an asset holder’s money without them really knowing they had entered a barbershop. These haircuts are hidden forms of taxes that reduce an investor’s purchasing power as manipulated interest rates lag inflation. In the process, governments and their central banks theoretically reduce real debt levels as well as the excessive liabilities of levered corporations and households. But they represent a hidden wealth transfer that belies the vaunted phrase “good as money.”

------------------------------------------------------------------------------------------------------------------------------------------

Available now. Our brand new 1 oz Taku gold bullion coin. Details here »
------------------------------------------------------------------------------------------------------------------------------------------

4. European unemployment - Here's The Economist with its report on this horrible economic car crash in Europe. Full-on money printing by the European Central Bank is now inevitable.

Individual country numbers inspire their own brand of horror. Greek joblessness topped 27% in January (the most recent month for which data there are available), while Spanish employment has risen to 26.7%. Joblessness in France rose by slightly more in the year to March than it did in Italy. And did you know that Dutch unemployment rose by 1.4 percentage points over the past year? German unemployment, of course, has held steady at 5.4% since last summer.

It is the youth figures that are most remarkable, however: 59.1% of those under 25 are unemployed in Greece, 55.9% in Spain, 38.4% in Italy, 38.3% in Portugal, 26.5% in France—3.6m youths in all.

The euro area needs a jolt to expectations, targeted credit easing designed to improve peripheral liquidity, and broad quantitative easing. Mario Draghi has surprised markets before. Hopefully he will do so again. Because at the moment, the ECB is behaving as though the main economic failure in the 1930s was the world's pathetic inability to grit its teeth and endure the costs of tight money.

5. Really? - The Atlantic reports on a viral infographic from Chinese news portal Sina that apparently (I can't read Chinese) shows that New Zealand is the most popular destination for very rich Chinese fleeing the poor food safety, pollution and bad infrastructure in China. It says NZ is even more popular than Canada, the US or Australia.

I don't know if it's true, but it might explain some of the house purchase prices in Auckland in the last year or so.

A recent viral infographic compiled by Chinese news portal Sina shows that more than 150,000 Chinese citizens emigrated from China in 2011, or about 1/10 of the population of Philadelphia. Top destinations were New Zealand, which attracted 13 percent of emigrants, followed by Canada, Australia, and the United States. Investment immigration, skilled immigration, and study abroad enabled most to make the move, while some chose to make the move in less orthodox ways.

It is not hard to understand what may have pushed this group of Chinese away from their hometowns, given recent news about pollution, food safety, quality of life, education and infrastructure in China. Even the inconvenience of carrying a Chinese passport, which makes international travel a nuisance, can drive some people to seek passports of a more convenient color.

6. Inequality and taxes - This is a theme we'll all be coming back to time and again in the decades to come.

How will income be redistributed to avoid economically and damaging inequality?

Here's Joe Stiglitz musing in a NYTimes blog about the subject:

Traditionally, economists have focused less on issues of equality than on the more mundane issues of growth and efficiency. But here again, our tax system comes in with low marks. Our growth was higher in the era of high top marginal tax rates than it has been since 1980. Economists — even at traditional, conservative international institutions like the International Monetary Fund — have come to realize that excessive inequality is bad for growth and stability. The tax system can play an important role in moderating the degree of inequality. Ours, however, does remarkably little about it.

One of the reasons for our poor economic performance is the large distortion in our economy caused by the tax system. The one thing economists agree on is that incentives matter — if you lower taxes on speculation, say, you will get more speculation. We’ve drawn our most talented young people into financial shenanigans, rather than into creating real businesses, making real discoveries, providing real services to others. More efforts go into “rent-seeking” — getting a larger slice of the country’s economic pie — than into enlarging the size of the pie.

Research in recent years has linked the tax rates, sluggish growth and rising inequality. Remember, the low tax rates at the top were supposed to spur savings and hard work, and thus economic growth. They didn’t. Indeed, the household savings rate fell to a record level of near zero after President George W. Bush’s two rounds of cuts, in 2001 and 2003, on taxes on dividends and capital gains. What low tax rates at the top did do was increase the return on rent-seeking. It flourished, which meant that growth slowed and inequality grew. This is a pattern that has now been observed across countries. Contrary to the warnings of those who want to preserve their privileges, countries that have increased their top tax bracket have not grown more slowly. Another piece of evidence is here at home: if the efforts at the top were resulting in our entire economic engine’s doing better, we would expect everyone to benefit. If they were engaged in rent-seeking, as their incomes increased, we’d expect that of others to decrease. And that’s exactly what’s been happening. Incomes in the middle, and even the bottom, have been stagnating or falling.

7. How Wall St defanged bank regulation - Here's the Nation with the truly depressing story about how US bank lobbyists took all the sting out of plans to regulate US banking.

After Dodd-Frank’s passage, lobbyists for the big banks and industry trade groups divided themselves into eighteen working groups, each organized around a different element of the new law. “That’s when the real work began,” Talbott tells me. One working group focused on derivatives reform, including the requirement that these complex financial instruments now be sold on open exchanges in the fashion of stocks and bonds. Another focused on efforts to hammer out the so-called Volcker Rule, which would limit the ability of federally insured banks to wager on risky ventures. A third tackled the new Consumer Financial Protection Bureau (CFPB), created to protect ordinary consumers from Wall Street deceptions involving mortgages, credit cards and other major profit centers for the banks.

In the months leading up to Dodd-Frank’s passage, the big story was the staggering sums of money being spent by the industry to defeat the bill—more than $1 billion on lobbying alone, according to one estimate. Yet, incredibly, the financial sector dramatically increased its spending after Dodd-Frank was signed. Whereas commercial banks such as Wells Fargo, Citigroup and JPMorgan Chase, along with their trade groups, spent $55 million lobbying in 2010 (the year Dodd-Frank became law), they would collectively spend $61 million in 2011 and again in 2012, according to OpenSecrets.org. The twenty-eight lobbyists Talbott has on the payroll at the Financial Services Roundtable makes it relative small fry. The American Bankers Association has ninety-one lobbyists representing its interests, while the US Chamber of Commerce has 183. Goldman Sachs has fifty-one lobbyists, JPMorgan Chase sixty, and even the obscure-sounding Securities Industry and Financial Markets Association is armed to the teeth, hiring the services of forty-nine lobbyists.

8. Just ditch Basel - Here's more from Bloomberg BusinessWeek on the push to just dump the Basel III rules and force the Too Big To Fail banks to have 15% capital. It's a type of end-run attempt around the mess that is now Dodd Frank. Good luck with that. A Democatic Senator, Sherrod Brown, and a Republican Senator, David Vitter, are leading the push.

By the end of the summer, Brown and Vitter had co-signed an eight-page letter to Bernanke. The letter urged the Fed to do two things. First, it should draw a clearer distinction between large regional banks, which lend proportionally more money to businesses, and “money-center” banks, which are much more likely to trade and underwrite securities and derivatives. Second, Vitter and Brown asked that the U.S. see the international capital standard known as Basel III as a minimum to be raised, not a maximum to be met.

Now the romance has borne a bill, the Terminating Bailouts for Taxpayer Fairness Act. It’s short. It’s simple. Its 24 printed pages, if ever passed into law, would have far greater consequences for the money-center banks than the 848 pages of Dodd-Frank.

Banks with assets greater than $500 billion would have to hold equity capital of at least 15 percent. There’s no cheating allowed: Equity-like instruments such as contingent capital won’t count. And the complicated, modeled assessments of different assets known as “risk-weighting” won’t count, either. A dollar at risk will be a dollar at risk. “Capital standards struck me as one of the things that would be more effective,” says Vitter. “It’s a good predictor of survivability, and it would have an impact without coming down like a hammer, like an absolute size limit [on banks].” Size is not risk. Risk is risk.

The bill marks a departure from Basel III, which allows contingent capital and risk weighting, and asks for equity capital of 4.5 percent. The bill also says, in so many words, that U.S. agencies will be “prohibited from any further implementation of any rules” that come out of Basel. Asked whether this means pulling out of the Basel negotiations completely, Vitter says “Yes, and trying to lead the world … we think Basel II and Basel III are hopelessly complicated. And risk weighting, it’s too easy to be gamed, certainly the versions I’ve seen.”

9. The real reason the US housing market went bust - New US Federal Reserve research has found the real reason was that home buyers thought house prices would NEVER fall and they just did the rational thing, which was to buy and buy and borrow and borrow until it stopped.. It wasn't necessarily the bankers' fault or the market structure's fault, they say.

Now where else have we seen that assumption that house prices will NEVER fall...

But it's different here. And it's different this time. And you can't lose with property maaate...

New Zealand is the exception.

We're so exceptional.

We have Hobbits.

And Cows. 

We're soo special. ;) It will never happen here...

And repeat after me....

Here's the Boston Globe on the research, and the research itself. 

Since 2008, Willen, a mortgage specialist, has pored over troves of data and emerged with a powerful, counterintuitive conclusion: that the real reason everything ended so badly wasn’t adjustable rate loans, or government housing policy, or esoteric financial instruments. Rather, it was a single underlying assumption that almost everyone in the market, from bankers to home buyers, shared: that American house prices would continue to go up indefinitely.

Willen has spent the past four years trying to persuade people of what he sees in the data: that everyone in the drama acted perfectly rationally. Under the assumption that the real estate market would continue its steady rise, it made sense for families to buy homes they couldn’t afford, and it made sense for bankers to buy up subprime mortgages. This belief —Willen thinks of it as a mass delusion—fueled an immense bubble that could not be reliably identified for what it was.

10. Totally Stephen Colbert on forced tank spending