Top 10 at 10: Don Brash as Productivity Commissioner?; The capital gains tax elephant in the room; Ratings agencies sued; Dilbert

Here's my Top 10 links from around the Internet at 10 am. I welcome your additions in the comments below or please send me your links to bernard.hickey@interest.co.nz I am a little barrel-shaped... 1. Fran O'Sullivan at the NZHerald has a good close look at the proposal bubbling up from the National-Act coalition for an Australian-style Productivity Commission in New Zealand. It looks like a good idea and would help drag some of the often polarised political debate about reform into a more rational, almost academic area. We need to do something to close the gap.

Minister for Regulatory Reform Rodney Hide favours former Reserve Bank Governor and now company director Don Brash. The National-Act agreement spelt out the two parties' joint aspirations for greater prosperity for New Zealanders - with Australia as the benchmark. Attaining the "concrete goal" of closing the income gap by 2025 would require a sustained lift in New Zealand's productivity growth to 3 per cent a year or more.

2. The NZHerald itself has pounded out an editorial titled: Risky property cycle needs to be broken. It meanders along the right track, but fails to come with possible solutions, in particular the idea of some sort of capital gains or land tax. Who is going to talk about the elephant in the room?.

Unless something is done to discourage a resumption of property price inflation we are all too likely to climb back on the merry-go-round of borrowing to invest in second or third homes. Confident of untaxed capital gains we will again feel wealthy enough to splurge on imports and travel made cheaper by the dollar's export-punishing exchange rates. The Government knows it ought to break this cycle before a recovery gathers pace. But its strategy, outlined by Mr English and again by Prime Minister John Key yesterday, is fuzzy. Rather than simply attacking the problem with its most effective weapon, taxation, it talks about six solutions. These are: regulatory reform, infrastructure investment, public sector savings, better education and skill training, assistance for business innovation and taxes. All of these could be helpful to export industries but only the last is capable of quickly tackling the fundamental misalignment of national investment.

3. Another cracking cartoon from Rod Emerson in the NZ Herald which talks about the consequences of focusing on property rather than exporting. 4. Gregor.US has a insightful look at the problem facing America's states and how their budget cutting is going to wipe out the benefits of the first federal stimulus. He makes the point the level of civic grumpiness is growing. HT Blair Rogers.

Washington is bluffing that it will not bail out California, and every other state suffering from collapsed revenues and massive job losses. If cuts in police and schools don't force DC off from its current position, then the math will. Because in many states the aggregate revenue losses and looming cuts to state payrolls will largely render the intended effects of federal stimulus as moot. Frankly, unless Washington prints money and bails out every state that needs capital, including California, federal power will decline amidst this severe economic recession, and the process of a soft American devolution will begin. If you think this idea is outrageous, then you've still not come to terms with a core reality of our current situation: the structure of this financial crisis is wholly different than any in our post-war era. This isn't a recession. This is collapse.

5. Here's Eliot Spitzer talking sensibly about Goldman Sachs on Bloomberg and that 'vampire squid' article. The public anger in America is growing over the Goldman bonuses just months after the big bailout. 6. Calpers, the giant Californian state pension fund, has announced it will sue the ratings agencies Moody's, Standard and Poor's and Fitch over nearly US$1 billion losses suffered after the agencies gave AAA ratings to sub-prime bonds that later failed spectacularly, Reuters reported.

By giving these securities their highest ratings, the agencies "made negligent misrepresentations" to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, "proved to be wildly inaccurate and unreasonably high."

7. The Wall St Journal has an excellent editorial saying the various bailouts and guarantees are producing super profits for some and consigning others to death. It refers to the imminent bailout of CIT and Goldman's super profits. It even suggests (shock horror) a new tax to address the inquities and new risks. There must be something truly wrong in the world when Wall St's cheerleader proposes a new tax.

If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime. One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.

8. Goldman Sachs may not be increasing its leverage, but it has increased the riskiness of its activities, as measured by the sometimes controversial Value at Risk (VAR) measure. Felix Salmon at Reuters points this out with help from a colleague. The chart below tells the story. When will the madness end? Is it going to require a revolution in America? Obama and Geithner have no idea how much damage they have done. The government is effectively guaranteeing an institution that is 'too big to fail', which is then using that guarantee to make a killing in bonuses for its employees and managers. The incentives are wildly asymmetric. There are no negative bonuses when they make a loss. The taxpayer pays. How could an intelligent bunch of bureaucrats and politicians allow such a massive socialisation of losses and privatisation of profits. Here's Felix's view.

I guess Goldman Sachs worked out how to generate profit growth in a world that no longer tolerates high leverage. It just increased the amount of capital it puts at risk every day

9. This research from Canada's Sprott Asset Management on the massive US budget deficit and bond issuance problem is a must read. It says global interest rates will rise as the US nears default on its debt. Sprott says there isn't enough money in the world to pay for the US deficits and its looming Medicare and Social Security crisis as baby boomers retire. HT Tyler Durden at Zero Hedge All this means the New Zealand dollar is set to keep rising if the US dollar falls. Longer term interest rates are likely to rise too. Eventually the credit rating agencies will notice our own vulnerabilities. After reading stuff like this I'm tempted to lock in low mortgage rates for as long as possible and repay debt as soon as possible. It's going to be a long recession and a rocky ride.

...the future solvency of the United States as a nation state is currently in jeopardy. It is in far deeper trouble than the mainstream press cares to admit. There are simply not enough new buyers of debt on this planet to support the spending programs of the United States government - and it appears that current holders of debt are beginning to sell. Because it is impossible to balance the budget from outside sources of capital, the only source of funds left for the US, in all reality, is continued money printing. The Federal Reserve's policy of Quantitative Easing is failing. The US budget is ludicrous, spending is out of control, spending promises are out of control, the world knows it - and we know it. For all the pundits who see the economy improving over the next year, we invite you to explain to us how this debt crisis will resolve itself without significant turmoil.

Sprott June 2009 10. Here's a Jon Stewart video on a famous baseball player who became a financial adviser (!)  and who is now bankrupt. Watch until the end. A feud is renewed.