Wall Street blues

They came so close on Capitol Hill. Ignore the tosh about Pelosi’s pre-vote speech. If that’s all it took to put the Republicans off voting to try to save their financial system from imminent meltdown… Country First, anyone?

Yes, it is all about stopping the financial system imploding and the credit from drying up altogether. We can expect more bank failures now, and not just in the US. If we’re — yes, we’re in this too — lucky, the collapse of credit world-wide won’t precipitate a major recession. And we’ll get a revised version of the failed plan before too long, as Robert Reich suggests. If we’re lucky. (Hat-tip Daily kos.)

If we’re unlucky we get a full-blown depression. But we don’t know about that, because there aren’t a lot of models for a situation this extreme.

It’s not about the fat cats. But for many ordinary people, the idea that the fat cats would benefit was repugnant. (Initially at least. Rasmussen reported today that “Opposition to bailout plan falls dramatically”.) And there being an election in a couple of months, some congresspersons put saving their ass before saving their country.

Hell, who do you think finds the idea of giving money to the rich most objectionable? The liberals, or the people who skew tax-cuts to the super-rich?

Okay, there were the Republican Study Committee conservatives who came up with the idea of insuring the toxic debts (mortgage-backed securities not already insured) and somehow magicking away the cost. The proposal was a one-pager.

At the end of the day, any banking system collapse requires recapitalisation to avoid credit drying up and economic disaster, as the IMF’s study of 124 banking crises and responses shows.

I personally don’t think that buying toxic assets is the best solution, but then, what do you expect from Bush? There are other models, and the best outcome would be for the US legislators to consider some of the others. But quick. And without the spoiler interfering again.

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The truth about NZ business regulation

I have a mate who theorises that one reason NZ businesses do so poorly in Oz is that they don’t know how to handle regulation when they have to work in a properly regulated business environment. He lives across the ditch and studies these sorts of things, so what would he know?

Clearly not as much as the National and ACT parties, who are always banging on about how NZ business is over-regulated and over-burdened with compliance costs. It would be funny if the business press didn’t reinforce this dopey nonsense at every opportunity.

But wait. Once again, NZ has been ranked second in the world for ease of doing business by the World Bank/International Finance Corporation survey of 181 economies. (Full report — pdf: 7.2 MB — here.) It’s rated 1st or 2nd in each of the six years the surveys been done.

Brian Easton on what politics in NZ is really about

In his column just posted, Brian Easton argues what I have long thought; that politics as we know it in NZ is largely a zero-sum game. He says that:

“Although the rhetoric of economic debate is about accelerating economic growth, the reality of politics is mainly about redistributing income.”

He gives a couple of examples. Assuming an economic gain of $50m from privatising ACC (ignoring PricewaterhouseCoopers, who say no gain), and Merrill Lynch gains $200m as they think, then the rest of us would be $150m worse off. But Merrill Lynch and the recipients of their donations are happy.

Likewise Rogernomics/Ruthanasia set NZ back 15% compared to the rest of the world in lost growth, but the top-bracket tax payers were still better off. Who could blame them for wanting more of the same?

He cites a recent Ministry of Social Development report which finds that the real incomes of the wealthy rose in most years between 1984 and 2007, but that those for the bottom deciles rose hardly at all. There’s a neat little graph in the report that shows how the deciles did in terms of real income over the period 1988-2007:

Note that this is despite the bottom 5 deciles doing much better than the top five under Labour-led governments of the last nine years. For example, Real equivalised household incomes (BHC): changes for top of deciles 1-9, 2004 to 2007:

Easton concludes, “In New Zealand, the economic rhetoric in elections is about improving the economy; the economic dog whistles are about what is in it for the voters.” It’s hard to disagree.

Gibson vs. Clydesdale — the race to the bottom

Stargazer raises some questions about the response to John Gibson’s attack on public servants’ wages. I posted on this on Friday.

A comment at stargazer’s asks why…

“there hasn’t been as much media fuss about this “research” as there was about the Massey researcher’s recent statement that a Pacific underclass was present in New Zealand. Other academics, as well as interest groups, leapt on the bandwagon then to pick holes in the quality of the latter research – but where are they when some discussion is needed on Gibson’s anti-public sector union conclusions?”

This had occurred to me, so here are my thoughts.

Regulation for growth

Brian Gaynor makes a powerful case for improved regulation of NZ’s finance system in this morning’s Granny. He concludes:

“Our financial system will remain small, dominated by the four main Australian-owned banks and limited in its ability to provide development funding for the productive sector until we introduce a modern best practice regulatory regime that enforces honesty and encourages widespread investor confidence.”

Noting the dominance of the finance system by the Australian-owned banks and its relatively small size and exposure to the domestic housing market, Gaynor contrasts the highly regulated Australian financial system to the light-handed disclosure and self-discipline regime here. And it is light-handed. Gaynor quotes a 2004 IMF study:

“New Zealand regulators do not carry any duty to protect individual depositors or policyholders, or to safeguard individual institutions, unlike many other jurisdictions.”

The recommendations of the IMF team calling for action on the inadequate disclosure of the finance company sector seem to have been ignored. Haynor seems to suggest that the continued downplaying by the Reserve Bank of the importance of the finance company sector meltdown betrays a lack of understanding of reputational effects on the finance system as a whole.

In the interests of balance, I should note Liane Dalziel’s response to Gaynor’s open letter, on which I posted recently. Arguing that, “We’re building a solid regulatory framework”, Dalziel lists “three bills currently before Parliament that have been designed to address the regulatory challenges you highlight in your letter”, along with a number of other initiatives in recent years: a Takeovers Panel code, a “co-regulatory framework for supervising registered exchanges”, continuous disclosure obligations, strengthened rules relating to insider trading, market manipulation, and disclosure requirements for investment advisers.

Yes, progress, albeit modest. We still don’t have the twin peaks that the Aussies do and that Gaynor details in this week’s article. Dalziel’s reply quickly descends into bureaucratic platitudes like, “the private sector can partner with government to seek solutions that will enable our capital markets to grow.”

The finance company and mortgage fund meltdown shows that our market disclosure and self-discipline regime has failed. We need to be doing more about it. Liane Dalziel seems to have dropped the ball, but the Nats and especially ACT would be ideologically opposed. Sad, for all of us.

Roger goes bonkers

Over on kiwiblog this week, Farrar retails a Salient interview with Roger Douglas that raises some serious questions. But they’re questions about Douglas’s mental faculties. And Farrar’s understanding of economics.

Read this!

Forget Peters for just a moment; he’s probably a goner by the end of next week, but we won’t know until Tuesday at the earliest.

Instead, read Brian Gaynor’s “Open Letter to Lianne Dalziel.” It’s dynamite.

It’s not just that the Capital Market Development Taskforce announced this week is too little, too late. He says it’s probably the wrong people, with the wrong agendas, and we can’t afford to wait and find that out sometime at the end of next year anyway.

Interest rates coming down!

At last. For the first time in 5 years, the Reserve Bank has cut the Official Cash Rate. The 25 basis points cut takes it to 8%.

Opinion on this will vary. (Remember the old joke about laying all the economists in the world head to toe? They’d circle the globe 3 times but never come to a conclusion.)

But the move will ease pressure on ordinary working folk, under great stress thanks to global rises in prices of oil and other commodities, and assist the economy as a whole weather the current economic and financial storms.

For too long, in my view, we have taken a faith-based approach to monetary policy. We’ve had below OECD-average inflation, and some of the highest interest rates around. Recently, the “non-tradeable” component of our inflation (i.e., the stuff that we’re responsible for) has dropped well below tradeable inflation.

It’s hard to see this cut, and the ones that I hope will follow in the coming months, proving inflationary. For one thing there are a lot of fixed-rate mortgages coming up for renewal at higher rates. And consumer spending on non-essentials appears to be tanking. So, a good thing. We are in a recession, damn it!

[Update: ASB have announced a .25% drop in their mortgage rates. Yay!! Good for me later in the year, and good for the Labour Party too. For the economy, we’ll have to wait and see.

Matt Nolan a.k.a. The Visible Hand in Economics provides a good summary of the case against a rise, based on inflationary expectations.]

Finance melt-down continues

Another finance company goes under today. $554 million frozen. Hanover is/was one of NZ’s biggest finance companies, and had a respectable (though not quite investment grade) rating from an international ratings agency.

As I posted a few weeks ago, the finance sector is in meltdown. Even well run and long-established companies have been caught by an unprecedented pincer of collapsing reinvestment rates and cancelled credit lines on the one hand, and a tanking property market on the other.

Using our brains, for a change

On his recent visit, Professor Lord Robert Winston added his voice to the chorus advocating greater emphasis on science if NZ wants economic growth.

Our research spending — both public and private — is pathetic. (Except, most recently, for some agricultural research.) We spend a little over 1% of GDP, or $700 million odd, on research. This is well below most other advanced economies — half the OECD average and a third of some OECD countries — and is often cited as a reason for our poor relative economic performance.

We’re in the same league on funding/GDP as Spain, Italy, Turkey and Greece. Yup, the same group we’re part of on the GDP per capita table.