Wednesday's Top 10 at 10: Central banks go Gangnam style with bubble popping tools; China's Vietnamese-sized credit hole; Steve Keen vs neo-classical economists; How Econ 101 is killing America; Dilbert

Here's my Top 10 links from around the Internet at 10 am today.

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 today is #4 on the various macro-prudential tools being deployed around the world, and how successful they are.

1. A Vietnam-sized hole - Bloomberg estimates the credit squeeze seen in China recently will have created a hole in Chinese credit the size of the Vietnamese economy.

This will be fascinating to watch in the months ahead.

How much will this squeeze slow down the Chinese economy and cascade on through Australia to us? 

Australian business confidence figures yesterday were awful. Even Michael Hill had to warn about how downbeat Australian consumers are.

But the Chinese slowdown might have a sliver lining for us. If it causes a switch in China's economy from steel and concrete-heavy infrastructure investment spending to food and tourism-heavy consumption spending then that would in theory help New Zealand.

The problem is it will hurt Australia, which has powered large amounts of that steel and concrete with its iron ore and coal. That will filter through to us, given Australia is still our largest trading partner (just) ahead of China.

Here's Bloomberg's analysis:

China’s money-market cash squeeze is likely to reduce credit growth this year by 750 billionyuan ($122 billion), an amount equivalent to the size of Vietnam’s economy, according to a Bloomberg News survey. The number is the median estimate of 15 analysts, whose projections last week ranged from cuts of 20 billion yuan to 3 trillion yuan. The majority of respondents also said they approve of the government’s handling of the credit crunch and said the episode reinforces their expectations for policy reforms such as loosening controls on interest rates.

Companies and local governments at the financial system’s “margin” will find it more difficult and expensive to get credit, said Kuijs, previously a World Bank economist in Beijing. Local government investment projects and small companies “are going to be the hardest hit by a clampdown on financial activity,” he said.

2. Deposit that cheque - This is an hilarious story from Patrick Combs via the FT about how he deposited one of those fake Readers Digest style 'You have won the lottery' cheques into his bank and actually got the money. I won't spoil the ending, but it's a fascinating story. 

Even long days later the lottery-like amount was still there and I visited the bank where an employee told me that the funds were now all available for cash withdrawal. All $95,093.35 was mine for the taking. All I had to do was ask. Windfall money begs us to take it and run. But I restrained myself. And gave the bank another two excruciatingly long weeks to do their job, catch up with their mistake, and bounce the cheque.

But at the end of three hellish weeks, during which I hourly resisted the urge to take the money and run to Mexico, where it would be worth twice as much, I was told by my branch manager, “You’re safe to start spending the money, Mr Combs. A cheque cannot bounce after 10 days. You’re protected by the law.”

3. This is bound to have an effect - Paul Krugman points out with this chart below how quickly US mortgage rates have risen and what impact that might have on the US economy.

The interest rates that matter most for the economy are not the rates at which the government can borrow, but the rates facing private investors — and above all, mortgage rates, for housing is the most important transmission mechanism for monetary policy. And here’s what we see for mortgage rates since the talk of tapering began:

4. Tools for popping house price bubbles - David Wessel does a nice job vis WSJ and Yahoo of surveying the variety of tools being created by central banks to (try to) pop housing bubbles without putting up interest rates. It's all very topical now given our Reserve Bank is in the final stages of honing its own tool -- a limit on growth of low equity mortgages.

I had no idea there was actually a place called Gangnam. Or that Indonesia banned no-deposit loans to buy motorbikes.

In Seoul's upscale Gangnam neighborhood, made famous by pop star Psy's viral music video,government curbs on real-estate lending froze a market in which home prices had been rising as fast as 25% a year. In Toronto, housing prices reversed their rapid rise and fell for five months after the government changed rules to effectively increase monthly payments on new loans.

But in Tel Aviv, home prices kept right on climbing—up 11% over the past year for a three-bedroom apartment—even after the central bank boosted minimum down payments and made mortgage lending less attractive to banks.

Central bankers everywhere else are watching these experiments closely, among them Ben Bernanke, chairman of the U.S. Federal Reserve. He and his counterparts around the world, seared by the worst financial crisis in 75 years, are searching for ways to halt borrowing binges before they morph into bubbles, and to push lenders to shore up their defenses before the next crisis arrives.

Some central bankers are experimenting with targeting only pockets of financial excess. Because financial bubbles so often involve real estate—and because that sector was at the center of the last crisis—many are focusing on ways to control booms in housing prices by curbing mortgage lending.

That's not the only focus: Indonesia last year outlawed zero-down payment loans for motorcycles, for example, and South Korea has imposed levies to discourage banks from short-term dollar borrowing. Thus far, the results trickling in from around the world are distinctly mixed. In some places, the experiments are producing the desired effects, while in others, they aren't.

5. Falling baby formula prices - Bloomberg reports foreign baby formula importers in China have cut their prices from 10-20% in the last week after Chinese authorities announced a price-fixing inquiry. Wouldn't it be great if Fletcher Building and Carter Holt cut their timber prices in Auckland after the Commerce Commission launched its price fixing inquiry...

6. 'Econ 101 is killing America' - Here's Michael Atkinson and Robert Lind at Salon arguing that neo-classical economics has been disastrous for America. 

We can see from the current dismal state of economic affairs, economies are incredibly complex systems, and policymakers who are forced to act in the face of this uncertainty and complexity want guidance. And over the last half century, neoclassical economists have not only been more than happy to offer it, but largely been able to marginalize any other disciplines or approaches, giving them a virtual monopoly on economic policy advice.

But there are two big problems with this. First, despite economists’ calming assurances, we still know little about how economies actually work and the effect of policies. If we did, then economists should have sounded the alarm bells to head off the financial collapse and Great Recession. But even more problematic, even though most economists know better, they present to the public, the media and politicians a simplified, vulgar version of neoclassical economics — what can be called Econ 101 — that leads policymakers astray. Economists fear that if they really expose policymakers to all the contradictions, uncertainties and complications of “Advanced Econ,” the latter will go off track — embracing protectionism, heavy-handed “industrial policy” or even socialism. In fact, the myths of Econ 101 already lead policymakers dangerously off track, with tragic results for the economy and everyday Americans

7. Steve Keen and the neo-classicals - Australian academic economist Steve Keen writes here at BusinessSpectator about the failure of neo-classical economics to predict or even react to the Global Financial Crisis. He also produces an interesting chart that focuses on the rate of change in debt.

Figure 1 shows the sudden rise in unemployment and the collapse of inflation into deflation that neoclassical models completely failed to anticipate – along with the key causal variable those models exclude, the rate of change of private debt.

8. The pain in Spain - This New York Times piece on the fallout in Spain from the sale of convertible bank bonds to ordinary savers is well worth a read. 

Among the unhappiest investors are those who had their money in the seven failed savings banks that were merged into Bankia, a new nationalized bank. Last month, the bank exchanged their hybrid products for shares in the new bank, discounting them by 38 percent as dictated by the terms of the bailout. But once these shares went on the open market, their value plunged to 18 percent of their original value.

Hundreds of these shareholders have taken to protesting every Thursday night in the Puerta del Sol here, in front of a Bankia building that still bears the signage of the now defunct Caja Madrid savings bank. They chant accusations of fraud, their anger and despair close to the surface. Some are unemployed, behind in their mortgage payments or scraping by on state pensions, badly in need of the cash they had painstakingly saved.

9. No wonder Chinese home buyers like Auckland - The LA Times reports on a study showing heavy air pollution in Northern China has reduced life expectancy there by an average of 5.5 years.

The researchers found that a seemingly arbitrary Mao-era economic policy on coal-fired boilers for winter heating created dramatic differences in air quality within China.  North of the Huai River, the government provided free coal, while people to the south were essentially denied central heat.

This policy essentially created two groups that could be compared with each other, allowing the impact of burning coal on air quality – and on health – to be isolated and quantified.

“We will never, thank goodness, have a randomized controlled trial where we expose some people to more pollution and other people to less pollution over the course of their lifetimes,” said MIT’s Michael Greenstone, one of the authors. “It’s not that the Chinese government set out to cause [a negative effect on health]. This was the unintended consequence" of the policy at the time.

Greenstone and his coauthors found that north of the river, total suspended particulates, or TSPs, were over 500 micrograms per cubic meter, or 55% higher than levels in the south. Life expectancy in the north was 5.5 years lower – almost entirely because of higher incidences of cardiorespiratory deaths. 

10. Totally irrelevant but fascinating stop motion video about the History of Typography. A bit nerdy, but that's what I'm like...

(Updated spelling of Gangnam!)