Top 10 at 10: Zombie bank regrets; Crypto money printing; Dilberts

Here are my Top 10 links from around the Internet at 10 am. I welcome your additions and comments below or please email suggestions for Tuesday's Top 10 at 10 to bernard.hickey@interest.co.nz We have experience and hope in abundance at interest.co.nz 1. 'I told you so' - Nobel prize winner Joseph Stiglitz has emerged to say the US economy is suffering now because it failed to nationalise the biggest banks, Bloomberg reports. These zombies are failing to lend, he points out. It turns out Obama and Geithner are also now whingeing about the banks not lending. The fundamental problem is that the US economy has to deleverage. The collective decision to allow the zombies to live on last year means America now faces a Japanese-style lost decade (s). HT Alex

"If we had done the right thing, we would be able to have more influence over the banks," Stiglitz told reporters at an economic conference in Shanghai Oct 31. "They would be lending and the economy would be stronger." U.S. Treasury Secretary Timothy Geithner, appearing yesterday on NBC's "Meet the Press" program, said the country's economic recovery hinges in part on banks taking more risk and restoring the flow of credit to businesses. "The big risk we face now is that banks are going to overcorrect and not take enough risk," Geithner said. "We need them to take a chance again on the American economy. That's going to be important to recovery." President Barack Obama said on Oct. 24 that the nation's lenders, supported by taxpayers in the crisis, need to "fulfill their responsibility" by lending to small businesses still struggling to get credit.

2. Failure Friday - US regulators closed 9 more banks over the weekend, taking the total closed since the financial crisis to 115, AP reported. This was the most closed in any one weekend since the crisis started. HT Gertraud via email.

Failures have been especially concentrated in California, Georgia and Illinois. While the pounding from losses on home mortgages may be nearing an end, delinquencies on commercial real estate loans remain a hot spot of potential trouble, regulators say. If the recession deepens, defaults on the high-risk loans could spike. Many regional banks, especially, hold large concentrations of these loans. Also on Friday, agencies including the FDIC, the Federal Reserve and the Office of Thrift Supervision issued guidelines for banks modifying troubled commercial real estate loans. They emphasize the principle that modifying loans in a prudent manner is often in the best interest of both the bank and the creditworthy commercial borrower. The 115 failures are the most in a year since 1992 at the height of the savings-and-loan crisis. They have cost the federal deposit insurance fund more than $25 billion so far this year, and hundreds more bank failures are expected to raise the cost to around $100 billion through 2013. To replenish the fund, the FDIC wants the roughly 8,100 insured banks and savings institutions to pay in advance about $45 billion in premiums that would have been due over the next three years.

3. 'Seriously delinquent - Just in case anyone was wondering how much trouble the US economy and its financial system is still in, check out the 'seriously delinquent' rate at Fannie Mae, the biggest home lender. Zerohedge has the story and the chart. HT Gertraud via email.

The FNM "seriously delinquent" rate has gone parabolic, increasing by roughly 5% sequentially and just under 300% YoY. As mere text will simply not do this metric justice, please enjoy this chart of the dataset from Blytic. It tells you all you need to know about the Fed's containment of the housing problem.

4. New thought - George Soros is spending US$50 million to create a new Institute for Economic Thought, reports Anatole Kaletsky in the Times. HT Ross Palmer via email.

INET, funded with an initial commitment of $50 million from George Soros and backed by a phalanx of distinguished academic economists, could lead to a flowering of original thinking in a profession whose creativity has been stifled by the intellectual monopoly of orthodox academic funding bodies. It could promote a much more serious debate about what governments can and cannot do to regulate the market. Eventually it could re-create an academic discipline capable of explaining reality and offering useful advice to policymakers facing unexpected events. The dirty little secret of modern economics is that the models created by central banks and governments to manage the economy say almost nothing about finance. Policymakers who turned to academic economists for guidance in last year's crisis were told in effect: "The situation you are dealing with is impossible: our theories prove that it simply cannot exist."

5. Profit share - Bank executive pay and bonuses are so crazily high because bank profits are a much bigger share of the US economy than before, Floyd Norris from the NYtimes writes.

Why were those profits so high? And did society get its money's worth out of them? If those surging profits reflected the financial industry's success in helping the real economy, we might be jealous but not contemptuous. You don't hear a lot of carping about how Bill Gates and Steve Jobs became so wealthy. There is no doubt that the allocation of credit "” a primary function of the financial industry "” is a crucial function, particularly in an economy undergoing change. If the finance business has done a great job of that, of directing money to where the new opportunities are, then there is no reason to begrudge them their wealth. Unfortunately, there is little evidence that the financial industry's success has done much for the rest of us. Capital was not well allocated during the recent bubbles, to say the least. The fact we had bubbles testifies to that. Moreover, Robert Barbera, the chief economist of ITG, points out that in the middle of this decade there was a surge in borrowing by the rest of us "” households and nonfinancial businesses "” that was much larger than the simultaneous growth in the economy.

Norris says the best way to fix this is more competition and more capital.

Rather than have a pay czar try to determine fair compensation for bailed-out banks while others can do as they please, Congress could look at changing the environment that produced this mess. One way to do that is to encourage more competition. The impulse last year to have bigger banks take over failing big banks now looks exactly wrong, even before remembering that the regulators thought Citigroup and Bank of America were good acquirers with solid balance sheets. The new regulatory system also needs to force banks to hold a lot more capital, and it needs to keep them from using tricks to take the same risks while appearing to need less capital. If the regulators can do that, it would reduce bank profits by tying up capital. One Wall Street executive I know suggests that would, in turn, bring down compensation by stimulating shareholders to demand more of the profits for themselves.

6. Watch Eastern Europe - Mish at Global Economic Analysis reckons Eastern Europe should be watched closely for the next big bang in the global economic crisis, citing Professor Mark Bloudek.

The Eastern European currencies (Ex. Hungarian Forint, Czech Krona, and Polish Zloty) remind me of the subprime loans of 2006. A crisis here likely will start a flu that will spread ultimately to the major countries. Why do I draw the analogy between Eastern Europe and subprime loans? Because subprime borrowers were the weakest type of borrowers and the least able to deal with adverse consequences (They defaulted first as a result). This is similar to the Eastern European countries who are the most fragile countries in terms of staying power on the fiscal front right now (Witness the massive budget deficits in those countries).

7. The next big crash - Renowned (and aged) investors Wilbur Ross and Carl Icahn believe the next big crash will be in US commercial property, FTAlphaville points out.

"All of the components of real estate value are going in the wrong direction simultaneously," said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. "Occupancy rates are going down. Rent rates are going down and the capitalization rate "” the return that investors are demanding to buy a property "” are going up."

8. 'Crypto QE' - Rolfe Winkler at Reuters points to something called 'crypto QE', which is where central banks force other banks to buy government bonds as part of capital adequacy or liquidity reforms. This essentially means banks are forced to pay high prices/lower yields than would otherwise be the case.

Some reform plans for the banking sector (so-called "narrow banking" being the most extreme) would have banks invest more deposits in government paper in order to keep them safe. To the degree such plans get traction, that could keep a lid on yields despite rising government spending.

Winkler points to some research at 'Variant Perception' which shows how disconnected 10 year government bond yields and commodity prices have become. Essentially, US government bond yields are not a true reflection of inflation expectations because banks are buying the bonds willy nilly.

Mandated purchases of government bonds by banks and other financial institutions "“ crypto-quantitative easing "“ could persist long after official QE comes to an end, keeping bond markets supported for longer than many think.

9. Happy Anniversary? - Steve Keen at Debtwatch points to eerily familar news reports coming out of the United States at about this time of the year in 1930, which suggested people thought the worst was over and the outlook was good...sound familar.

It seems that only in retrospect was it realised that 1929 was a watershed in world history: few living at the time actually understood that"”and none of them had their prognostications published by the Wall Street Journal. One year later, though the far-fetched had become somewhat harder to dismiss, the general tenor of economic and business commentary was that the worst of the crisis was over, and that 1931 would be a bumper year for the market and the wider economy.

Keen points out that, contrary to urban myth now,  Hoover and the US Federal Reserve actually did a lot to boost the US economy in 1929 and 1930.

Yet the view that dominates conventional economic thinking today is that the Depression was caused by a disengaged government and bad monetary policy"”if only the Fed hadn't tightened in 1930, everything would have been fine. In fact, if the Fed did tighten"”and the evidence on that is mixed"”it was because they, like today's Fed, believed they had already done enough to avert catastrophe. Bollocks to that: the problem in 1930 wasn't the tightening of fiat money, but the preceding failure to constrain the private debt bubble that financed Wall Street's speculative excess of the 1920s. Yet armed with the misguided belief that there wouldn't have been a Great Depression had the Fed not tightened in 1930, the Fed of the 1980s-2007 ignored an even bigger bubble in private debt than its predecessor ignored in the 1920s.

10. Bank run - These are two words financial journalists dread. Should you report them? Is it the chicken or the egg? It turns out there were big bank runs on some of the US banks that later collapsed. The Puget Sound Business Journal reported that Washington Mutual had a run in July 2008 it barely survived. Another one a few months later pushed it over the edge. HT Rolfe Winkler. The truth on what happened in September and October in New Zealand has also yet to be written. I personally believe we were not that far off some similar catastrophe and were only saved by Kevin Rudd's intervention in mid October.

These interviews show that WaMu suffered through not one but two bank runs in its final months. The first run was many times larger than the run that felled California lender IndyMac in July 2008, though neither shareholders nor the public knew about it. WaMu survived that run, and the second run was tapering off when regulators moved in and shut the bank, citing the run as the reason.