Friday's Top 10 at 10 with NZ Mint: Debate rages within Fed over QE II; Bond vigilantes dormant for now; The Big Basel III Backdown; Dilbert

Here are my Top 10 links from around the Internet at 10 past 1pm brought to you in association with New Zealand Mint for your afternoon reading pleasure.

I welcome your additions and comments below, or please send suggestions for Monday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.

I'll pop any surplus suggestions I get into the comment stream under the Top 10.

1. The drums are beating - It's just a matter of time, it seems, before the US Federal Reserve starts massive money printing again in the form of buying US Treasury bonds with money created out of thin spreadsheets.

Here St Louis Fed President James Bullard (with a U not an O) is reported by Bloomberg as saying America must start fire up QE II (the second round of Quantitative Easing).

Here's Bullard's full speech on the 'Seven faces of the peril', referring to the risk of a Japanese style deflation for the US economy.

“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper released today about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

Fed policy makers are considering what actions to take, if any, to spur growth and reduce unemployment should the economy weaken further. Chairman Ben S. Bernanke told Congress last week the Fed could use communication to plot the path of interest rates, cut the rate it pays banks on excess reserves or purchase more bonds.

The Fed signaled last month that Europe’s debt crisis may harm U.S. growth and repeated a pledge to keep interest rates near zero “for an extended period.”  

2. A couple of useful quotes from a long time ago - Some of you will have seen these quotes from Thomas Jefferson, but they are worth repeating. HT David via email.

"I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

"The end of democracy and the defeat of the American Revolution will occur when government falls into the hands of lending institutions and moneyed incorporations"

3. When will the penny drop? - The bond vigilantes are dormant in America right now. The US 10 year Treasury bond is at 3%. But what happens when Mr Market wakes up and starts punishing the US for its profligacy.

The drums are beating here too, with Moody's, that paragon of virtue, telling Dow Jones that America's AAA rating will come under scrutiny unless someone (anyone please) comes up with a credible plan.

He said the U.S. appears to have "no plan" to deal with its fiscal situation and much will depend on the domestic political reaction to recommendations due by December from President Barack Obama's commission on fiscal responsibility.Measures which could be proposed include cuts to social security and medicare and the possible introduction of new taxes, Hess said.

"The question then is can they get the votes in Congress to implement any of them, so there is political uncertainty over the ability of the government to actually stabilize the debt levels or reverse the debt trajectory," he said.

He cited examples such as New Zealand, Sweden, Ireland and Canada which in previous decades succeeded in pulling down their debt levels.

"Can the United States do it is the big question right now and we are not sure either way. We will wait and see what happens in the next couple of years on this front."  

4. Some curious demographic projections - Just imagine a world in 2050 where Pakistan, Indonesia, Indonesia and Bangladesh had combined populations of 1.2 billion, making them the 4th, 5th, 6th and 7th most populous in the world behind India, China and America. That's the forecast in this Population Reference Bureau report. Fascinating reading with big implications.

Big population growth is expected in developing countries, particularly Muslim ones, while populations are likely to fall in developed economies. Mass migration anyone?

5. The Big Basel Backdown - Floyd Norris writes in the New York Times about what really happened in that meeting in Basel this week to decide on tougher rules for banks. Last year the Basel committee promised a crackdown. This week they delivered more backdowns than crackdowns.

It seems to many to be an anticlimax. There was no solid countercyclical proposal. There were backtracking and delay on major parts of the December proposals. The concessions appeared to be aimed at pacifying upset bankers. In December, the Basel committee said that some kinds of dubious “assets” simply could not be counted as part of capital. High on that list was something called “deferred tax assets.” If you don’t understand what that means, it basically is the money a bank will save on taxes when it earns profits in the future.

It is hard to think of an asset that would be less useful in a crisis, but there are others that could be of little use, like nontraded stock in a related financial company. Mortgage servicing rights — the value of a bank’s rights to collect and pass on mortgage payments — also could be hard to monetize in a crisis. In December, none of those assets were to be counted in capital. Now all can be, albeit to a limited extent. Apparently Japanese banks really needed to count the deferred tax assets, Europeans were eager to get credit for shares in related insurance companies, and American institutions wanted to count their mortgage servicing rights.

When it comes to liquidity rules, the revisions greatly soften the assumptions the previous rules made about how severe a crisis might be, and therefore make it easier for banks to appear to be perfectly liquid. The long-term liquidity rules, aimed at dealing with a prolonged downturn, may never see the light of day. They are to be studied and pondered and delayed. If details are ever agreed, they are to take effect in 2018. By then, if history is any guide, there will have been a new, and different, crisis to deal with.  

6. Financial reform 'Whack a mole' - The Economist reports here on how Goldman Sachs plans to get around the Volcker Rule passed through the US Congress just weeks ago. The rule was supposed to stop investment banks like Goldman Sachs from using their 'To Big To Fail' government guarantee to gamble on the markets on their own account through their proprietary trading desks.

Now they have a solution... These guys aren't paid the big bucks for nothing.

The firm will basically move its proprietary trading team to its asset management division where traders will have access to Goldman's clients. By reclassifying traders as asset managers and allowing them to take positions on behalf of clients, even one client, the bank circumvents restrictions around proprietary trading.

As Charlie Gasparino says: "Goldman’s move also underscores the weakness in the Volcker Rule, which was designed to reduce the same type of risk-taking activities that led to the 2008 financial meltdown. Simply by labeling a trade “customer related” the firm can still make large market bets, and thus engage in some of the same risk taking the rule was designed to eliminate. "

With the right incentives, markets will always figure a way around restrictions. But this seems a little too soon.  

7. No more shitty deals - Goldman Sachs has banned the use of profanities in emails, The Wall St Journal reports.  They're not paid all that money to be rude, it seems. They're paid a lot of money not to say embarassing things that eventually end up in the hands of legislators after discovery.

THERE will never be another "shitty" deal at Goldman Sachs Group, at least not in writing. The New York company is telling employees that they will no longer be able to get away with profanity in electronic messages.

That means all 34,000 traders, investment bankers and other Goldman employees must restrain themselves from using a vast vocabulary of oft-used dirty words on Wall Street, including the six-letter expletive that came back to haunt the company at a senate hearing in April.

“(B)oy, that timberwo(l)f was one shitty deal,” wrote Thomas Montag, who helped run Goldman's securities business, in a June 2007 email that was repeatedly referred to at the hearing.

Mr Montag, who couldn't be reached for comment, wouldn't be allowed to send that e-mail under Goldman's sanitised communications policy, which is being enforced by screening software. Even swear words spelled with asterisks are out. In the spirit of the times, there is no written directive specifying which curses are now officially cursed. But screening tools being used by the firm would detect common swear-words and acronyms. 

8. Burning a waka full of cash - Telecom CEO Theresa Gattung famously said once that she had burnt her waka on the beaches in Australia, suggesting Telecom was in Australia for good. Of course, Telecom is now selling AAPT. I couldn't help but remember this song below when reading about AAPT. The Australian reports that Telecom looks like it has lost around A$2 billion in its 10 years in Australia.

That is only partly offset by the bumper NZ$2.2 billion it received two years for its other dog, Yellow Pages, which is now likely to fetch around NZ$700 million in the fire sale being organised at the moment by the banks to the private equity firms that was managing money from the poor old Ontario Teachers Pension fund.

9. Wondering what might happen to interest rates in the next couple of years - Have a look at what the Economist is saying the European banks will have to raise in the next couple of years.

Does anyone really think this can be done without longer term interest rates for bank debt rising globally?

Even confident investors, however, may balk at how much debt they will soon be asked to buy. Euro-zone and British firms have €3.3 trillion of bonds to refinance by 2015, three times more than America’s banks. That reflects in part the European banks’ greater size, but also the fact that many countries have more loans than local deposits and some banks’ habit of owning dollar-denominated assets without gathering dollar deposits to fund them.

In the boom it was easy to fill the gap by tapping American money-market funds or securitisation markets.

But they won’t recover their appetite any time soon. Making matters worse, some banks are now competing against their governments, which need to sell piles of debt too.

10. Totally relevant video - Samantha Bee from The Daily Show flirts with a banker and asks some fund managing nuns and priests about Goldman Sachs doing the work of god.