Monday's Top 10: A law with teeth; if it doesn't work, what then; men; Wong; collateralising redux; the size and cost of houses; Dilbert, and more

Here's my edition of Top 10 links from around the Internet at 10:00 am today. We now have a Monday-Wednesday-Friday schedule for Top 10.

Bernard will be back with his version this Wednesday. We will have another guest posting on Friday.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

See all previous Top 10s here.

1. From anonymity to scourge of Wall Street
The architect of a recent legal crackdown on Wall Street’s dubious mortgage practices was not the attorney general, a United States attorney or a rising star in the Justice Department.

Instead, it was Leon Weidman, an unassuming 69-year-old career prosecutor, toiling away in anonymity 5,000 kms from New York. Peter Lattman and Ben Protess at Dealbook have uncovered a fascinating story.

Weidman is using an obscure law that almost everyone overlooked - although it does raise the question about how anyone is supposed to know every clause in every law. I'm cheering for him in this case, but slightly uncomfortable that there may be a technical law or regulation out there just waiting for some smart-arse lawyer to take me on. You don't know what you don't know. Lawyers and judges love the 'ignorance is no excuse' line just because it puts them front-centre-and-hands-in-your-pocket in any dispute - and they back each other up. The legal profession seems like a collusive monopoly to me.

(But really; I love and deeply appreciate them. I really do, Judge.)

In this case, it is reassuring to know that there is at least some law that can hold these TBIF institutions to account, even if it is arcane, obscure, and made for another purpose. It's ok to use it against 'them' - just don't use it against me.

That case [against S&P] hinged on Firrea (the Financial Institutions Reform, Recovery, and Enforcement Act of 1989). Enacted in the late 1980s after risky lending practices imperiled the savings and loan industry, the law created a powerful tool to punish fraud committed by banks and their executives.

Firrea is unusually crafted, as it requires a criminal violation like wire fraud or mail fraud to set off the law’s penalties. But because it is a civil statute, it requires a lower burden of proof than criminal charges - finding guilt by a preponderance of the evidence versus beyond a reasonable doubt.

That broad authority has alarmed some defense lawyers, who have argued that the Justice Department has stretched the application of Firrea far beyond its original intent.

The wave of cases has ignited a legal controversy, raising the question of whether federal prosecutors, in dusting off an old statute, are misapplying the law. So far, judges have blessed the government’s tactics.

2. Bubbles in the broth
We just had an RBNZ OCR review. And we are about to have (November 13) a Financial Stability review. The official interest rate is used to control inflation, while the FSR macro-prudential tools are used to  keep our financial system stable. Most central banks are now doing both duties and using tools like the LVR speed limits more aggressively these days.

But some people are still not convinced the split will work. Here's Nouriel Roubini, who is one of the sceptics:

Some policymakers – like Janet Yellen, who is likely to be confirmed as the next Chair of the US Federal Reserve – argue that we should not worry too much. Central banks, they argue, now have two goals: restoring robust growth and low unemployment with low inflation, and maintaining financial stability without bubbles. Moreover, they have two instruments to achieve these goals: the policy interest rate, which will be kept low for long and raised only gradually to boost growth; and macro-prudential regulation and supervision of the financial system (macro-pru for short), which will be used to control credit and prevent bubbles.

But some critics, like Fed Governor Jeremy Stein, argue that macro-pru policies to control credit and leverage – such as limits on loan-to-value ratios for mortgages, bigger capital buffers for banks that extend risky loans, and tighter underwriting standards – may not work. Not only are they untested, but restricting leverage in some parts of the banking system would merely cause the liquidity from zero rates to flow to other parts of it, while trying to restrict leverage entirely would simply drive the liquidity into the less-regulated shadow banking system. According to Stein, only monetary policy (higher policy interest rates) “gets in all of the cracks” of the financial system and prevents asset bubbles.

The trouble is that if macro-pru does not work, the interest rate would have to serve two opposing goals: economic recovery and financial stability. If policymakers go slow on raising rates to encourage faster economic recovery, they risk causing the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession. But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage. So, unless macro-pru works as planned, policymakers are damned if they do and damned if they don’t.

For now, policymakers in countries with frothy credit, equity, and housing markets have avoided raising policy rates, given slow economic growth. But it is still too early to tell whether the macro-pru policies on which they are relying will ensure financial stability. If not, policymakers will eventually face an ugly tradeoff: kill the recovery to avoid risky bubbles, or go for growth at the risk of fueling the next financial crisis. For now, with asset prices continuing to rise, many economies may have had as much soup as they can stand.

3. 'We need to get men back in the workforce'
We get our unemployment stats this week, and closely watched will be the Participation Rate. In New Zealand it is about 74% for men (which has declined from about 90% in the 1950s), and about 63% for women (which has risen from under 30% in the 1950s).

American labour force participation rates are significantly higher there - by about 10% - but that is not stopping them worrying about the fall-off. More from William Galston in the WSJ:

What we do know is that the start of the third millennium marked the end of a long cycle in the U.S. employment market. In the early 1960s, labor-force participation among men ages 25 to 64 began a slow steady decline from 95% to about 84% today, a trend masked by the surge of women into the labor force. But women's participation in the labor force peaked in 2000 and has since declined by two percentage points. Unless men re-enter the job market, prospects for the resumption of vigorous growth in the U.S. labor force are dim.

Some analytical modesty is in order. Men have been withdrawing from the workforce for five decades—in good times and bad, in tight and slack labor markets, in periods of Keynesian stimulus and green-eyeshade austerity. No one is sure why.

Neither do we know whether a 73% participation rate represents a permanent ceiling for women, or just the most they feel able to do in the face of social policies that do little to counteract the tension between family responsibilities and work outside the home.

But we do know that prospects for robust growth and shared prosperity are dim unless we can devise more effective labor-market policies. It is hard to see how that can happen as long as our political system remains obsessed with issues that matter far less.

4. Foreign capital 'key to agriculture'
One of the most senior figures in the Australian Labor Party has come out in favour of more foreign investment in Aussie agriculture.

Senator Penny Wong has conditions, of course, but she is backing more investment from offshore. Policies like this line up curiously different in Australia; the 'left'/Labor is for FDI, whereas the 'right'/Coalition is instinctively anti - especially when it comes to agriculture. Here, the 'anti-foreigner' attitudes tend to come from the 'redneck left'. More from The Australian:

Senator Wong said foreign investment had helped accelerate Australia's growth and development, citing the rapid development of the resources industry.

She said foreign investment would also be a key to the expansion of agricultural sector.

"If we are serious about becoming the food bowl of Asia, we have to front up to the reality and necessity of foreign investment in our agricultural sector.

"As a nation that exports two-thirds of its total food production, it is inconceivable that we will be able to develop and scale-up production to enable us to fully tap into the growing consumer markets of Asia without foreign investment."

5. Ignoring history
Here's a bad idea - aggressively expand collateralising core assets, effectively getting a chain of manufactured 'assets' out of one base asset. Done that; failed spectacularly. But blind to history, the Chinese are about to embark down that road. This will not end well, methinks. More from Reuters:

Chinese regulators have expanded a pilot plan allowing banks to package loans into tradable securities to include foreign banks, sources said.

Chinese policymakers see securitization as a tool to shift risk away from the banking system to reduce the chances of a financial crisis as economic growth slows and bad loans rise.

Securitization would also help satisfy voracious investor demand for alternatives to the chronically weak stock market and frothy property sector.

Chinese Premier Li Keqiang told a cabinet meeting in late August that China would aggressively expand the securitization of credit assets.

6. What we are building
It will probably come as no surprise to learn that the houses we are building are getting bigger. The building consent data shows that 2013 houses are on average 196 sq m; that's 44% larger than 1990 dwellings which averaged only 136 sq m.

2010 was 'peak house' in New Zealand, when the average was 200 sq m. Since then, they have been getting smaller.

The size of house we are building changes in spurts. Back in the 1970's we were building houses of only 110 sq m average. But this grew to 125 sq m and settled thereabouts till 1990. Then there was the McMansion spurt seeing them grow to 175 sq m and by 2010 reaching 200 sq m five years later.

Part of the reason for rising house sizes is 'affordability'. As low interest rates and abundant credit pushed prices for pre-built houses higher, and councils added their various restrictions, only the well-off tended to be able to afford a new build and they built the size they wanted. The averages rose because the first-home buyer started to get squeezed out.

Perhaps the peak was achieved in 2010 because after that we started seeing more 'apartments' being built, and increasing numbers of these are for the fast-rising retirement home chains. This influence may grow as the boomer generation's needs push them into this smaller type of accommodation.

We can put this into an international perspective using the data in #9 below:

This data is from a BBC story (we've added the NZ data), and believe it or not "the average new British house is roughly half of the size of a new house built in the 1930s, before planning laws were brought in."

7. What its costing us
Back in the 1970s regional variation in new build costs were low, and average house building costs were $120 sq m. Today there seems to be a 15% difference between Auckland and Wellington, with the capital being more expensive (and building the smallest dwellings in the main centres).

And it now costs almost $1,600/m2 to build.

That means, for a 196 m2 house, the raw build cost is now $307,400. Of course, that doesn't include the fitout, the landscaping, or the land itself. Today, your average new house doesn't come cheap, which may be why there is competition for existing, already built houses. 

Interestingly, in Auckland, the 2013 average is $305,100, in Wellington its $351,800 (not a typo), and in Christchurch its now $312,300. Who would have thought Auckland would have come at the bottom of this 3-city list?

Who is building and what they are building will have an impact here; my suspicion is that the relatively well-off are increasingly featuring in the new-build stats over time, and that is pushing this data up.

The Productivity Commission has looked into these costs and made recommendations (see Section 10). Readers can infer their own conclusions from the chart below as to the timing and availability of cheap credit on these costs.

8. Celebrating a success
In the past ten years, there have been nine months where road deaths were less than 20 per month. However four of those months have occurred in 2013.

A combination of better driving, much better road engineering, lower alcohol consumption, better enforcement policies, and better weather conditions have all resulted in 14% fewer deaths than last year, and 38% fewer than 5 years ago. Over ten years, that is 960 people alive today that wouldn't have been without this progress.

9. 'The insanity of the UK's housing market'
Daniel Knowles has 15 reasons "why you will never be able to buy a house" in Britain. I have lived in Australia, the US, the UK and New Zealand each for many years (UK the shortest) and I can certainly sympathise with British frustrations. But it is the worst, so I expect that is understandable. Their problem is that they don't seem to have the will to do anything practical to fix their issues; they seem to have the DNA to fight over everything so progress is glacial in this area. We don't know how lucky we are, despite our issues.

For the first time pretty much in recorded history, home ownership is falling. The private rented sector meanwhile - yeah, that’s just getting bigger and bigger.

Margaret Thatcher’s government stopped councils from building new houses themselves and she made it easier for people to get mortgages. But she didn’t make it much easier for private developers to build new houses on green fields. So all of the new borrowed money just pushed prices up and up.

The same planning laws which stop us from building new houses on fields also stop us building taller buildings in central London. It is illegal to build anything that blocks the views of St Paul’s cathedral from several key points - one is a hole in a hedge 10 miles away in Richmond Park. That view is apparently more important than people having somewhere of an OK size to live at a reasonable price.

So what’s the solution? Well, we can change the law.

According to the London School of Economics, if we let London expand by one mile into the scrubby green belt within the M25, we could add 1m new homes. Doubling the density of some of zone 2’s neighbourhoods by making it easier to build upwards could have a similar effect. Both would upset people who already own homes nearby - but it would make London’s housing cheaper and more spacious for everyone else.

10. Today's quote
"If all the economists were laid end to end, they’d never reach a conclusion." - George Bernard Shaw