Top 10 at 10: 'Extend and Pretend'; Pork not so golden; Dilbert

Here are my Top 10 links from around the Internet at 10 pm. I welcome your additions and comments below or please send suggestions for Monday’s Top 10 at 10 pm to bernard.hickey@interest.co.nz 1. 'Just a Ponzi scheme' - Greg Easterbrook writes at Reuters about how the Eurozone bailout is a Ponzi scheme on a scale that would make Charles Ponzi blush. It's an exhilarating read.

Many commentators are pointing out that it is fundamentally absurd to respond to excessive debt, whether in Greece or on the part of U.S. homeowners who signed gimmick mortgages, by offering more debt. It is absurd. But this absurdity sustains the illusion of currency – it continues the Ponzi scheme. (See below on other unsettling aspects of borrowing-based bailouts.) Political-elite fear must run deep in order for $1 trillion to be offered as a gift. When Congress bailed out American banks and mortgage-holders, at least the funny-money was flowing to constituents of the legislators making the decision. In this week’s European bailout, voters in Germany and France are being asked to sacrifice to sustain a spoiled, unproductive lifestyle in another nation, possibly in several. Why would Germans who work hard sacrifice so that Greeks can continue to work little, perhaps so that Spain and Portugal can take the afternoon off with pay? Because money itself is at stake. German and French politicians are sure to be hammered by angry constituents who don’t like being compelled to subsidize Greece. But Germany and France benefit because at least the illusion of currency is sustained. That’s what is in the deal for the European nations providing the $1 trillion. “We’ll just borrow more” cannot, logically, go on forever. But sustaining the notion that government-issued bonds are valuable allows today’s politicians to avoid hard choices, passing them along — with more problems added — to tomorrow’s politicians. And after handing out free money, the second-favorite activity of politicians is avoiding hard choices.

2. 'Extend and Pretend' - US banks are extending bad loans and pretending their underlying values haven't fallen, Bloomberg reports.

The trend is called “extend and pretend” by people such as Randall Zisler, managing director of Zisler Capital Associates LLC, who say lenders may be postponing inevitable losses on owners swamped by debt taken on during the commercial real estate boom of 2002 to 2007. “We engorged ourselves, and now we’re passing the bill around the table,” Zisler, whose investment and advisory firm is based in Marina del Rey, California, said in an interview at Bloomberg’s Los Angeles offices. Lenders and owners restructured $10.5 billion of troubled debt during the first quarter, up from $2.2 billion a year earlier, according the Ben Thypin, senior market analyst at Real Capital Analytics Inc. in New York. Such deals accounted for 49 percent of newly troubled and foreclosed commercial properties in the first quarter, compared with 13 percent in the first quarter of 2009. While hotels have been a main beneficiary of lenders’ willingness to redo loan terms, a 40 percent decline in commercial real estate values since the 2007 peak is also squeezing owners of office buildings, malls and apartments.

3.Show me the growth - The Wall St Journal points out here that Italy needs growth to service its debts, but the Eurozone now looks like a no growth zone. This does not compute.

The stakes in a potential Italian debt crisis are much larger. Italy's outstanding public debt is 1.7 trillion euros, seven times the size of Greece's. Italy "is a big systemic piece," said François Chauchat, an economist with GaveKal, a Stockholm-based economic advisory firm. "If Italy cannot refinance its debt than it's the end of the euro." Tax revenue is stagnant due to low growth, as manufacturers leave northern Italy for lower-cost labour markets in China and eastern Europe. In the past decade, Italian GDP has increased at a meagre annual average of 0.54 per cent, and the Treasury forecasts just a 1 per cent rise in 2010 after a 5.1 per cent drop in 2009. Attempts to raise revenue through tax increases have been undermined by widespread evasion. The problem will come when growth in tax revenue can't keep up with the cost of debt service. "If the interest you're paying on debt is higher than the rate of growth, you end up in a death trap, where you're adding to the debt all the time," says Gabriel Stein, an economist with Lombard Street Research, a London-based economic advisory firm. "I don't know if Italy is in a death trap right now."

4. Now it's serious - The Wall St Journal reports that New York Attorney General Andrew Cuomo is investigating Bank of America, Merrill Lynch, Citigroup, Deutsche, Goldman Sachs, UBS, Credit Suisse, Standard and Poor's and Moody's about whether the banks misrepresented the risks of toxic sub prime bonds to get better credit ratings. Now it's not just Goldman in the spotlight. HT Gareth via email.

5. Even in Australia - Class action law suit lawyers in Australia love a good banking scandal. Now they're looking to sue Goldman Sachs there for A$15 million over claims it misrepresented complicated derivative contracts, The Australian reports. HT Gareth via email 6. Hasta la vista - Here's 16 reasons from TBI why Arnie's California is the next Greece.

6. The Muscial! - The NewYorker has the exclusive on a new piece of musical theatre called "Goldman Sachs: The Musical". It's worth a read.

7. Qualitative easing and the inevitability of money printing - FT.com's Alphaville points out that eventually the ECB's sterilised quantitative easing will have to turn into full-blown money printing if they are to have any effect. They are already a form of 'qualitative easing' as toxic bonds are swapped for good ones.

Both the Fed and the BoE began their forays into unconventional monetary policies via sterilised asset purchases. The difficulty for the Fed, however, was that excess reserves began outpacing the rate at which the Fed could sterilise them by, say, issuing Supplementary Finance Program (SFP) bills. As the crisis raged on in November 2008, the Fed eventually decided to end the SFP, moving it one step nearer to non-sterilised QE. At that point, however, the Fed was still able to partially sterilise its liquidity operations via banks’ deposited excess reserves. Those expanded from about $7bn on average to a trillion worth — a hefty dose of sterilisation. But there was a price. The Fed funds rate (overnight lending rate or interbank interest rate) dropped to zero; the central bank effectively lost control of monetary policy. Massive excess reserves also meant banks weren’t really lending to each other — a liquidity trap. Cue unsterilised bond-buying from about March onwards.

8. A long, long walk - Aussie economist Steve Keen, who lost a bet that house prices there would fall, gives his account on his long walk up a hill in 'payment' for losing the bet. Of course, the long walk turned into a protest about house prices.

The Walk was supposed to be a “Walk of Shame”, as several headlines termed it , for me being “hopelessly wrong on house prices” (“Walk of shame for professor who tried to burst house bubble”; “Walk of shame for economist”). Instead, it turned into a successful protest against the housing bubble, whose existence even RBA Governor Glenn Stevens recently (and bravely) acknowledged on prime time television (“Rates to rise, property speculation a ‘mistake’”).

9. Not so golden - Joe Weisenthal at TBI has found a chart measuring lean hog prices in ounces of gold. It's not a pretty picture.

It's trading near all-time lows. It's obvious investors have COMPLETELY lost confidence in hogs, the proof being their price in the ONE TRUE CURRENCY.

10. Totally irrelevant video - Air NZ CEO Rob Fyfe takes an interesting swipe in a Youtube video at a critical editorial in The Listener. Is this the new face of public relations? If so, bring it on. Although it has to be pointed out that Air NZ is a mightily sensitive large company. It has in the past not shied away from placing all sorts of pressure on media companies who publish unfriendly pieces. I know of at least one media outlet that lost millions in advertising revenue because Air New Zealand snubbed them after an unfavourable story.