Wednesday's Top 10 with NZ Mint: 'Just forgive the debt'; Why the Fed's 'Twist' won't work to create jobs; Goldman's China doubts; Animal and Beaker sing Yellow; Dilbert

Here's my Top 10 links from around the Internet at midday in association with NZ Mint.

I welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.

I'll pop the extras into the comment stream. See all previous Top 10s here.

The Muppets are still there at number 10. Animal and Beaker do a Coldplay song. Yes!

1. Forgive the debt - Bloomberg writes an editorial calling on the US government to allow (now state-owned) Fannie Mae and Freddie to write off the principal on millions of under-water home loans.

The idea is it will encourage a bunch of zombie consumers to go out and spend.

Fair enough. But apart from the fact this is another state bailout of individuals, the real problem is a lack of income for America's middle classes.

Something much deeper is required that involves a shift of profit share back to employees in some way.

That requires (politically difficult) tax increases and some form of income transfer.

Or some form of wage increase and profit reduction directly.

The last time this happened was the first 50 years of the 20th century and it took a long time. There was a couple of world wars. And capitalists got a little bit worried about the rise of Communism before they gave back some of the profit share.

Here's Bloomberg:

A better strategy -- one that would truly be in the best interests of lenders and mortgage investors -- would be to avert foreclosures by writing down the principal on loans. Consider, for example, a $100,000 loan on a house that’s now worth $60,000. A 50 percent writedown, assuming it made the loan affordable to the borrower, would leave the lender with an asset worth $50,000 and a homeowner motivated to invest time and effort in increasing the house’s value.

That’s a lot more than the lender would probably recover by ultimately selling the house after years of foreclosure costs and further depreciation. As of August, recoveries on defaulted loans made in 2006 and 2007 without government guarantees averaged 34 percent of the original balance, and were headed down, according to data compiled by Amherst Securities Group LP.

If done on a grand scale, principal reductions would go a long way toward eliminating the debt burden that is hindering the recovery. To give a sense of magnitude, some 13.3 million U.S. mortgage borrowers owe almost as much as or more than their homes are worth, according to data provider CoreLogic. Writedowns for all of them could cut the country’s ratio of household debt to disposable income from the current 115 percent to a more sustainable 100 percent.

2. Dumping the euro is not as easy as it sounds - FTAlphaville reports UBS reckons the economic and political costs of carving up the euro zone would be enormous.

They suggest the odd war and a 50% drop in GDP for those countries that leave...

Here's a taste:

Past instances of monetary union break-ups have tended to produce one of two results. Either there was a more authoritarian government response to contain or repress the social disorder (a scenario that tended to require a change from democratic to authoritarian or military government), or alternatively, the social disorder worked with existing fault lines in society to divide the country, spilling over into civil war. These are not inevitable conclusions, but indicate that monetary union break-up is not something that can be treated as a casual issue of exchange rate policy.

The UBS team point out that, economic modelling is not much use for a currency break-up and there are few historical references. Nonetheless, they have come up with a very rough estimate of the cost of the departure from the euro.

For a southern European country they put the initial cost at €9,500 to €11,500 per citizen, rising to €3,00 to €4000 per person each year thereafter because of higher risk premia and trade stagnation. To put those figures into perspective that equates to a range of 40 per cent to 50 per cent of GDP in the first year.

3. Goldman doom mongering - Goldman Sachs' hedge fundie types presented a slide pack to investors last week that included plenty of food for thought, including some big doubts about China. Someone should send this to John Key. HT Zerohedge.

GS_StateOf the Markets

4. What's the point?- Bloomberg reports the much talked about 'twist' strategy likely to come out of the Fed later this month will do little to create jobs.

The theory is the Fed will sell short term Treasuries and buy long term Treasuries to push long term rates even lower. Remember they're under 2% for the 10 year Treasury yield already so you have to wonder what an even lower rate would achieve...

But here's the thinking via Bloomberg:

The Fed may decide at its Sept. 20-21 meeting to replace short-term Treasury securities in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, said economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc. The Fed’s influence on the economy will probably be muted as sagging consumer confidence, depressed home values and 6 million workers unemployed for six months or more weigh on demand.

“The problem is that rates have been low for three years now and that isn’t spurring people to buy,” said John Silvia, chief economist at Wells Fargo in Charlotte, N.C. “Companies won’t hire unless demand is there. The Fed can lower the cost of credit, but it can’t force companies to create jobs.”

5. Direct oil payments - Here's an idea. CNN reports economists are suggesting making direct payments of Libyan oil revenues to individual Libyans to avoid another Gaddafi and his mates capturing it and putting it into gold plated jacuzzis on private jets.  It would be similar to the Alaskan solution where oil cheques go direct to Alaskans.

One idea is to credit mobile phone accounts. Wow. That would be some serious texting you'd be able to do.

Giving direct payments to Libyans, Subramanian and Moss argue, is a way for a new government in Tripoli to foster closer economic ties with its citizens - through taxes.

Taxes create an incentive for the government to make broad improvements across the economy to increase government revenues. And, as the Tea Party phenomenon in the U.S. shows, taxes create a populace that is deeply interested in how government spends its cash. "They are going to watch the government like a hawk," Moss said. "If one year people get a $500 check (from oil revenues) and the next year they get $400, they're going to wonder why."

"People think (an oil find) is Manna from heaven, so you don't need to tax," Subramanian says. "But that severs that two-way relationship between the governed and those who are governed."

Two practical problems to giving away oil cash: Convincing leaders it's in their best interests, and the modalities of getting that cash to citizens. "The latter is actually the easiest ... there's been a lot of advances in biometrics, such as iris scanning and fingerprinting, along with e-banking through cell phones," Moss said.

6. Australia's resource curse - The Australian reports China's Ansteel has dropped plans for a steel plant in Western Australia to process local iron ore because of Australia's high currency.

Shock and horror, but it turns out it's cheaper to export it raw to China and use Chinese steel mills. That's what happens when Australia has a free floating currency and China pegs its currency to the US dollar.

When will we ever learn? We naive Australasians believe the world's trading and capital flow systems are flat and fair. They are not.

It is every man for himself and the sooner we realise that the better.

The Australian has been told that Ansteel never seriously pursued the idea of building the integrated iron and steel plant and rolling mill, which would have been fed with magnetite iron ore from Ansteel's half-owned Karara project in the Mid-West.

Industry sources said it would be cheaper for Ansteel to ship iron ore from Karara back to its steel mills in China rather than process it into steel products in Australia.

7. Earlier perfect storm - Bloomberg reports Nouriel Roubini, the economist who predicted the Global Financial Crisis in 2008, has pulled forward his forecast for a perfect storm in 2013 and says massive stimulus is needed or there will be another Great Depression.

Hmmm. Debt-fueled growth. Good idea? It might make sense if the spending was on high quality infrastructure that lifted the long term growth rate of the economy, otherwise we're just passing on even bigger debts to the next generations with a slow growth rate as well.

“I thought a few months ago that the perfect storm would be 2013,” Roubini said in an interview in London today. “But now, the economic weakness in the U.S., euro zone and the U.K. is front loaded. So we’re going to double dip earlier. The climax of it could be 2013, or it could be already earlier. It depends on what policy tools are available.”

“You need to restore economic growth, not five years from now, you need to restore it today,” Roubini said. “In the short term, we need to do massive stimulus, otherwise there’s going to be another Great Depression. Things are getting worse and the big difference between now and a few years ago is that this time around we’re running out of policy bullets.”

8. An insider's deeply pessimistic view - Congressional Republican staffer Mike Lofgren has retired after 28 years in Congress and written this startling piece of whistle blowing at Truth-Out about his own party and Congress in general.

Any New Zealand Free Trade Deal negotiators who think America's system of politics and government is remotely fair or good needs to read this. We need to be very wary of American public policy. It has turned deeply toxic to itself and others.

This is today's must read via Truth-out: HT Troy via email.

To those millions of Americans who have finally begun paying attention to politics and watched with exasperation the tragicomedy of the debt ceiling extension, it may have come as a shock that the Republican Party is so full of lunatics. To be sure, the party, like any political party on earth, has always had its share of crackpots, like Robert K. Dornan or William E. Dannemeyer. But the crackpot outliers of two decades ago have become the vital center today: Steve King, Michele Bachman (now a leading presidential candidate as well), Paul Broun, Patrick McHenry, Virginia Foxx, Louie Gohmert, Allen West. The Congressional directory now reads like a casebook of lunacy.

It was this cast of characters and the pernicious ideas they represent that impelled me to end a nearly 30-year career as a professional staff member on Capitol Hill. A couple of months ago, I retired; but I could see as early as last November that the Republican Party would use the debt limit vote, an otherwise routine legislative procedure that has been used 87 times since the end of World War II, in order to concoct an entirely artificial fiscal crisis. Then, they would use that fiscal crisis to get what they wanted, by literally holding the US and global economies as hostages.

The debt ceiling extension is not the only example of this sort of political terrorism. Republicans were willing to lay off 4,000 Federal Aviation Administration (FAA) employees, 70,000 private construction workers and let FAA safety inspectors work without pay, in fact, forcing them to pay for their own work-related travel - how prudent is that? - in order to strong arm some union-busting provisions into the FAA reauthorization.

9. No Texan miracle - Paul Krugman does a nice job of pointing out that Texas' economic miracle isn't that much of a miracle and it's not something Texan Governor Rick Perry can use to ride to glory as Republican Presidential candidate next year. Krugman does say, however, that the lack of restrictions on new housing developments helped keep housing costs low. Hugh P will be pleased.

The rest of Texas' policies aren't so smart though.

Here's a taste:

So where does the notion of a Texas miracle come from? Mainly from widespread misunderstanding of the economic effects of population growth.

For this much is true about Texas: It has, for many decades, had much faster population growth than the rest of America -- about twice as fast since 1990. Several factors underlie this rapid population growth: a high birth rate, immigration from Mexico, and inward migration of Americans from other states, who are attracted to Texas by its warm weather and low cost of living, low housing costs in particular.

And just to be clear, there's nothing wrong with a low cost of living. In particular, there's a good case to be made that zoning policies in many states unnecessarily restrict the supply of housing, and that this is one area where Texas does in fact do something right.

10. Totally my Muppet Favourites (Beaker and Animal) do a great version of Yellow by Coldplay