By Matt Nolan
There has been some discussion of deposit insurance, the open bank resolution plan, and the types of risks being faced by New Zealand savers. This is actually a hugely important issue, and as a broad matter of principle I actually find myself agreeing more with Labour and the Greens than National and the Reserve Bank.
My view is that deposit insurance should be announced, it should be explicit, there should be certainty around it, and it should be treated as a form of “compulsory insurance” with the payment of an associated “insurance levy on debt financing” for financial institutions over a certain size. Of course, even with this the OBR still has a place (it is actually a very separate issue) – and that is why the RBNZ was right in saying this.
In order to see why this is the conclusion I’ve drawn, one that differs from current policy, let’s have a brief look at my thought process through a post.
Political equilibrium, credibility, and expectations
Bailouts are a topic that the government, Treasury, and the RBNZ are justifiably wanting to avoid talking about too much in public. Why this is justifiable, but the reason why we may need to be more transparent about it, comes from thinking about the expectations of people both within and outside of a bank run.
Governments and central banks are perceived by people in the economy to be the lender of last resort – due to a view on bank runs.
Having a functioning lender of last resort means that, in the worst case scenario, these institutions will act as a lender of last resort. In this way, the NZ government is expected to bail out large financial institutions (in the NZ case banks) if they fail.
Now on the face of it we might not like this. We don’t bail out other large companies. And with an implicit backstop, financial institutions will take on too much risk (and the people funding these institutions will assume there is far less risk) – this is the problem of moral hazard. In this way, the expectation of a bailout creates a difference between the “full social riskiness” associated with lending and the risk that private individuals and firms face when deciding to lend and borrow between each other, through a bank.
The Treasury, government, and RBNZ acknowledge this moral hazard issue – and so they want to introduce the open bank resolution policy settings as a way of avoiding bank runs (which is why we have deposit insurance in the first place), insuring the bankruptcy is orderly for financial institutions (to make the costs to everyone involved, from negotiating about who gets what, as small as possible), and limiting the number of situations where “bailouts” will really be required.
This is good, this is exactly what they should do. However, the scheme lacks three things when it comes to thinking about “expectations”:
1) Clarity about how losses are determined and split in a typical situation that requires bankruptcy – an issue that will be solved soon.
2) Clarity around how this links to the lender of last resort function of the central bank.
3) The political incentives to bail out banks.
Let us be honest here. The government will not let a bank fail. They will not let depositors lose money. It is in the government’s interest during a bank failure to have taxpayers pick up the tab. People know that the government will do this (or at least form expectations based on this) as so will lend to banks in a way where they are seen as riskless! There is an implicit deposit guarantee scheme for banks at the moment! This is the key point – even if we aren’t admitting it, there is a deposit guarantee running at present that we aren’t acknowledging.
As a result, it makes sense to turn around and make this explicit. Note: If the government thinks it can costlessly credibly commit to not bailing out institutions, and the RBNZ can solve the issue of bank runs without full deposit insurance, then this is good. But we do not have that right now, not in the slightest, and it should be admitted as policy-relevant.
This doesn’t seem particularly fair on the taxpayers
No it doesn’t. The taxpayer is essentially subsidising loans. The subsidy is then split between depositors, the banks, and the borrowers due to relative elasticities, information, and bargaining positions. Overall “too much” is invested due to what is socially optimal … this is where we have the “too much debt” business.
If we make the deposit guarantee explicit instead of implicit and we completely remove the loss from default – if anything it will exacerbate the moral hazard issue issue! So what do we do?
Deposit guarantees are a form of insurance. Generally, you pay for insurance with an insurance levy. If we have an explicit guarantee scheme on deposits, then there should be a levy on those deposits.
Yes this will reduce investment, yes this will see lower returns to depositors, but without doing this we have a deposit guarantee scheme that just costs everyone in NZ and in turn makes the entire financial system more unstable.
The kicker with all this is that the insurance scheme will have to be compulsory for all institutions over some type of nominal size. The type of bank failure we are concerned about, and which will lead to bailouts, stems from an episode where there is systemic risk to the banking sector as a whole.
In that case the incentive to take on the insurance for an individual firm does not match the full social return associated with it. Furthermore, if the bank decides to take on insurance it may be seen as a signal of weakness (given asymmetric information) making banks unwilling to take on the insurance for signaling reasons. Finally, the political eqm argument suggests that a government may well bail out the bank irrespective of whether they have taken on the insurance – making a bank unwilling to pay for insurance they can expect to get anyway.
Conclusion
At the moment there are two ways forward when thinking about banking policy in NZ:
1) Explicit deposit insurance, with an associated deposit levy.
2) A credible commitment by government that it won’t guarantee deposits combined with RBNZ regulation that can avoid bank runs.
Current policy is trying to push towards the second (which is admirable), but in the current environment I do not believe it is credible given the idea of “political incentives”. Which is why I find the idea of explicit deposit insurance combined with a deposit levy to be the best way forward.
Note: Concern about levies is a fair point. If we are the only country “not subsidising”, what does that mean for us? I’d note that the big runs here come from trying to introduce this during a crisis – it doesn’t rule out the effectiveness of the policy outside of a crisis. In a number of ways this would be similar to the FDIC – just with appropriate insurance premiums (which are ex-ante pretty danged hard to determine), and with an appropriate scale to ensure that the government can commit to no more additional bailouts.
Note 2: Good post by Eric Crampton stating why he thinks the government can commit.
RBNZ cannot bind future governments. But setting up the regime well in advance of a bank failure specifying that, no matter what else happens, the equity and (subordinated) bond holders get burned first gives those agents reasonable expectation that they should try to make sure that doesn’t happen. If some future government defects by bailing out depositors, I’d expect it to happen only after burning through the equity and bondholders.
Note 3: The Economist points out research by the IMF that shows explicit deposit insurance makes the moral hazard problem more acute – this is a pretty easy to understand idea, and we mentioned the concept above (just under our second subtitle). This is why we both require a levy, and have to accept that it is “inefficient” relative to a situation where the government commits to not bailing out banks AND we have a way to prevent bank runs (where by this I mean optimally reduce the probability of a bank run so the expected cost of it happening is equal to the expected cost of introducing preventative measures). If we can do that second bit – then do it, and scrap the compulsory insurance.
Matt Nolan is a senior economist at Infometrics. You can contact him here »
This article was first published on TVHE and does not necessarily represent the views of Infometrics as an organisation.
65 Comments
News Flash News Flash News Flash
- ¾ of properties not selling under hammer.
- Price correction coming very soon.
- Negotiate a fair and reasonable deal from now on. No need to panic buy.
- Only a few hotspots still getting silly prices.
- Rest of market falling flat and wheels falling off.
- No shortage of stock in Auckland 11660 properties for sale at present
- Politicians don’t have finger on pulse.100 years of building in the southeast to Bombays and northwest Waimauku to Orewa.
- Major shortage of funding for new builds. Banks won’t fund this manipulating and controlling market.
- Doing the same with farming major, major crash coming here very soon.
- Bankers and Real-estate industry are the only people talking it up.
- Bankers trying to protect their future losses by getting power to steal money off clients when it all goes wrong
- Creative accounting of sales numbers by real-estate industry.
- Keep your hands in front pocket and money in back pocket
- Follow the trend STOP BIDDING AND BUYING AT AUCTION other wise this will cost you up to $440000 over the term of your 20-year mortgage.
- Buyers have power to take control back don’t be pushed into corners by bankers and real-estate industry.
- Take action on all of this now.
Well if the for sale signs followed by sold on them in but a few weeks in my street is any indication buyer and seller are doing deals...
While I see the prices are way over value, what I dont see is what the trigger will be and a date ie "soon" to cause a major crash. Drops will come IMHO but anytime in 5 years...could be the fallout from cyprus next month say of course or something else...so how come you can say real soon with such confidence?
regards
Steven
In the market at the front lines have seen this happening over the last 3 weeks. All info you get reported to you with media is 2 months old.
Lots on friends down on dairy farms been doing it tuff for long time drought will tip lots of them bankers will help them over.
This is up to the min info not 2-3 months old.
Yeah Im just walking for exercise in my area in the evenings so I see that signs blossomed this summer, followed by sold slapped on many not to long afterwards. I dont know how realistic the deals are mind, but sold I see....is it healthy or significant, I dont know.
Farms yes different ball game, no idea on that market.
regards
You would have to have rocks in your head to buy in the current market.
This is where your opportunities will come Kiwi in the next 6-12 months these buyers doing dumb purchase now.
Be fearful when others are greedy. Be greedy when others are fearful.
Warren Buffet
Yup , as they say in investment circles and cocktail parties at Goldmunny Sacks , you should " sell low and buy high " ........
...... hang on a mo' , I've buggered that up , it should be the other way around ......of course , silly me ...
You should " buy high and and sell low " ..... ... that's better ....
Earlier, the ECB elected to leave the key refinancing rate unchanged at 0.75 percent and the deposit rate unchanged at 0.0 percent read article
It's really working out well for all concerned, right?
Matt - Under OBR the shareholders equity and unsecured bondholders money is taken first before depositors money is touched. Why did the RBNZ allow banks to issue covered bonds which separates their best mortgages from being touched, which keeps them whole in the case of a bank failure. I strongly feel that depositors money should be the last to be taken.
There is no doubt that this is a diffiult problem to resolve but as has been demonstrated in the U.S. deposit insurance just encourages banks to take ever larger risks. My preferred solution would be to abolish the central banks as they have proven to be useless in their regualtion of commercial banks and just put CAVEAT EMPTOR on all financial accounts. Then everyone has to take responsibility on where they deposit their money. i believe this would force depositors to be a lot more careful where they put their money.
My preferred solution would be to abolish the central banks as they have proven to be useless in their regualtion of commercial banks and just put CAVEAT EMPTOR on all financial accounts. Then everyone has to take responsibility on where they deposit their money. i believe this would force depositors to be a lot more careful where they put
Not going to happen while the shadow banking system is leaking equity.
This article really demonstrates just how complex banking has become these days.
Who owns depositors funds? I have always felt that I the depositor owned them, and i was loaning them to the bank. The bank then used those funds and paid me a fee for that use (call it interest). Isn't the capital required to be held supposed to cover those funds? As we have seen banks risk that capital by ratios of 30:1 or more.
Lets not kid ourselves. The bank takes depositors funds and makes big money off them by loaning them out again in often short term high interest commercial loans. The issue here is that the banks have become a law unto themselves, and too many vested interests influence any regulation. They need to be more accountable, depositors funds need to be protected, and any losses covered by bank assets.
We need to get back to basic fundamentals. Banks are private profit making institutions, and as such they should be made to carry the same degree of accountability as any other. They should also be limited in how they are able rort their customers through fees. With luck the upcoming class action will have long reaching impacts.
"Isn't the capital required to be held supposed to cover those funds?"
Nope, if it was, how could they have anything to lend?
Short term loans are possible but much of it seems to me mortgages of long periods....unless you can provde info//data?
Sure they are a law unto themselves but its your money, dont like how they act, dont deposit it with them, its not compulsory.
I dont agree on funds being protected, not cart blanche anyway. ie I fail to see why I as a tax payer should bail overseas investors or even domestic investors who chose to deposit with a shoddy bank...
regards
This seems to be the most sensible idea so far ...instead of the Bank oweing you money, you should owe the Bank money......If you owe enough you actually own the Bank !!!
On a more serious note, when has Banking become "just another business risk " to depositors ?? If that is the case, we might actually do better lending our money to our corner dairy shop. At least there we know the operators and can actually visit and see how their business is doing however imperfect this might be.
The very fact that Banks are "supervised" by RBNZ is supposed to make the Banks "safe".
that is the reason why we are willing to put our money into the banks, If the Banks fail, is it not the regulator's fault as well? And if the regulator being a goverment entity fails is it not the Goverments responsibility as well?
What happens when a bank goes bust?
A bank does not go bust as though an act of nature transpired - abject human neglect and deceit are the usual suspects added to egregious self interest.
Wouldn't you take a haircut?
Possibly - but collectively we would have to manpower those in a regulatory/oversight capacity into the nearest forestry gang for the rest of their lives.
Matt, it is clear that you think things through before you put pen to paper and that is why i like your opinions so much.
On this issue, if i am correct in my thinkig of how it all works, i have a different approach again from yours.
Imagine third party car insurance is compulsory, but with a twist.
You are driving along and some reckless nut crashes into you. OK you have third part insurance. The twist is, your third party insurance is to pay, not for your car, but for the wreckless drivers car.
Isn't that the same with insuring deposits. The lenders and borrowers can behave in a reckless manner and it is the depositor that has to be insured or take a haircut.
We all know that any solution put forward must be agreeable to the banksters, otherwise our corrupt government and their officials wont act on on it.
My proposal, which i think would be acceptable, is this
When we take out a mortgage the lender insists that we take out mortgage insurance. Why not extend this further, such that ALL loans, credit cards, hire purchase, personal loans and so on, MUST be coverd by insurance. If the borrower cannot get insurance to cover a loan then the loan is illegal. Any loan not coverd by insurance is not binding. That is, you dont have to pay it back.
Nice idea Mike B. Finance companies tried it but unfortunately not that simple. The commerce commission prosecuted a number of businesses where they were insuring against loss of employment. Some clients were receiving benefits. Supposedly guaranteed income. Finance company argued 5 year loan. Insurance is for duration of loan "sure debtor may be on state assistance for a period, but not for duration?"
Problem is read the stats and successive governments have been asleep at wheel. sadly 40% of our population are either long term beneficiaries or dependent on the state for one reason or another.
The system is basically broken.
The philosophy of OBR versus or as well as Deposit Insurance is interesting of course. However given all of these wise words I ask myself what do you do. Even starting from the premise that the return of money outweighs return on money, I'm not keen on a box under the bed.
Informed comparative analysis could be a great help in making informed decisions whatever unfolds and needs to go a bit further than being academically interesting.
How about a bank risk comparison with an explanation of how the risks are calculated to accompany the interest rate charts here? The bland AA+ etc doesn't cut it.
How about an examination comparing Kiwisaver funds and returns including their related party lending, effect of covered bond investment, effect of an OBR event, interbank investment and degree of unitisation opaqueness?
Is it legal for an employer to insist that you MUST be paid by direct credit to a bank account?
I am old enough to remember signing for the little brown envelope of notes and coins.
Direct credit is very convenient for both parties, but in the situation Cyprus is in with the banks (all of them) closed, the supply of cash for daily expenditure must now be in short supply.
Around $63 of digital money for every $1 of physical cash.
Yes. Once upon a time most if not all employers had a pay-office and a paymaster, and once a week they would distribute wages in lttle brown pay-packets. Employees would take out the notes and put them in the wallets or hip-pocket. They would live their lives in a cash-based society, paying cash for living expenses, rent, travel and so on. At the end of the week, if there was anything left they banked it.
Then one day then banks came to town and introduced direct crediting of wages to a bank account. Good for employers. Less staff. No handling of cash. Credit cards and cheques and time spent in speed queues to get your cash needs and weekly living expenses out.
But, the banks had the full measure and benefit of your weekly wages right up-front. Think about the increase in their daily float. They got it at the start of the week instead of the dregs at the end of the week. We're talking hundreds of $ millions if not a $ billion or two.
Then there is welfare payments. All go directly into a bank account now. Before you get access to it. The bank has the use of it before you do. Lots of it.
Now imagine if a couple of banks had to close their doors.
Do any employers have any contingency plans in place?
Don't suppose there is much they can do if they cant get the cash to pay wages.
Does the Government have any contingency plans in place for welfare recipients?
The time has come for the Government to set up a non-banking operation outside the control of the banks. It does one thing only. Holds money. Registrants can have their wages and welfare payments directly credited to it and you can go to the local post office and draw cash out. Banks of ATMs in post offices. No overdraft facilities. No loan Facilities. No cheque facilities. No credit cards. No Debit Cards. One account per person. Internet banking only for transfers out to other retail banking institutions. Deposits accepted via internet-banking transfers in. Pays Government bonds rates of interest.
Call it "Peons National Cash Repository" It's not a for-profit-bank, just a transfer-station or repository.
Your non-bank payment system could but would need to change as follows:
It can't pay any interest on savings unless the funds are deposits into RBNZ (I assume that what you mean by paying Govt Bond rate).
I assume that there would be no fees (?) so some of interest would need to be used to cover costs which it still would have (ATM network as cash has high costs to store, transport etc, IT costs, statements etc).
If you paid no interest on deposits and no fees on accoounts and were able to lend funds to Govt (hence having a Govt guarantee attached to to your funds) then as a pure payment, no risk but no return concept it could have merit.
Money Man. Thanks.
Yes, you are right. Forget the interest. Yes, the overnight float would be held by the RBNZ. Yes there would be costs and I figure there are several ways these could be met. There is both a social cost and a financial cost. I would look to the government for some subsidy towards the social cost. Call it a deposit guarantee insurance for want of a better word. But, on a different tack, I have frequently advocated here that the Government (a) could (b) should and (c) needs to charge an annual licence fee to the major banks as the price of doing business in New Zealand. How about $½ billion each bank. That would bring in $2 billion per year, more than enough to underwrite the costs of the operation.
Of course many recipients of one-off weekly payments (welfare beneficiaries and wage earners) would represent a serious leakage away from the retail banks and these retail banks could reduce their annual licence fee to the government down to $¼ billion by making their ATM network available to the non-banking network. The RBNZ settles up the cash with the retail banks overnight. After the event. Nice huh?
Dont know if you know of the old bank consortium called "Databank Systems Ltd" set up by the retail banks many years ago. They are not shy about collaborating when it suits them. I think there is still some wikipedia info available about it.
Gee you could throw up the pmts/funds transfer on a mobile phone network, Like the low cost things in Africa.
http://techland.time.com/2012/08/16/the-secret-of-africas-banking-boom-…
Millions of Africans are using mobile phones to pay bills, move cash and buy basic everyday items. So why has a form of banking that has proved a dead duck in the West been such a hit across the continent?
http://news.bbc.co.uk/2/hi/business/8194241.stm
As Cyprus ended its sixth day without open banks on Thursday, the economy was on a crash cash-based diet, with people's purchasing power increasingly limited to the amounts they are able to withdraw daily from ATMs.
Businesses have stopped accepting cheques and doubts are mounting about debit- and credit-card payments connected to accounts in troubled banks.
From Wall Street Journal
You would have to have rocks in your head to buy in the current market.
This is where your opportunities will come Kiwi in the next 6-12 months these buyers doing dumb purchase now.
Be fearful when others are greedy. Be greedy when others are fearful.
Warren Buffet
...... a contrarian Kiwi could buy residential property investments cheaper in the UK or Europe right now , than in Auckland .....
And if the $NZ comes back down to reality , in a year or three , you stand to make a tidy exchange rate profit on top of a capital gain on the investment ....... Win / Win !
"Now on the face of it we might not like this. We don’t bail out other large companies."
What's to like about monetary corruption exactly?
"Let us be honest here. The government will not let a bank fail. They will not let depositors lose money. It is in the government’s interest during a bank failure to have taxpayers pick up the tab. "
What a load of BS! Depositors WILL lose money and that has been made quite clear by Key and Joyce! Plus,........the obvious point seems to be missed by everyone around this . Government bailouts of ANY private organization means WE ALL are paying regardless!
What moron misses that point exactly? Bailing out any institution means cronism has won the day. Where's the confidence in that going forward? YOU really think ANYONE would be dumb enough to bank again with a failed institution that was bailed out? You would have to be a complete mug!
Yeah........i'm looking at you BNZ account holders
Its shocking that we are even having this discussion, we never should have to, its a failure by the regulators, who are meant to protect our savings, currency and economy.
What a giant stuff up, our own government is going to vote for OBR because it failed to protect the peoples savings, money which in many cases represents a life times work. This type of failure in the past, often ended with leaders on the end of a bit of rope.
In the mean time banks cotinue to make huge profits, futher weakening our economy, house prices continue to climb and banks have crazy LVR's, where are the regulators ,they should be acting, Cyprus is a big flashing warning light.
Did any one read this weeks Price report? I can post the whole thing if anyone wants it, this is the guts of it.
regards Aj
Brussels is playing with fire
Economist Michael Bordo lists the following common factors behind financial crises and how fears of contagion between banks tend to become self-fulfilling prophecies:
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There is a widespread change in expectations on the part of investors associated with fear of a change in the economic environment;
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The fear of insolvency of some financial institution(s);
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An attempt to convert real as well as illiquid financial assets into money;
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Threats to the solvency of otherwise sound commercial banks and financial institutions;
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Bank runs that could lead to a general bank panic and to...
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...a reduction in the money supply;
- Finally, the whole process could be arrested at the outset by the timely intervention of some authority (typically the central bank, the lender of last resort) that lends freely at a penalty rate or engages in open market operations.
I had expected to be writing about the UK Budget this week. But events in Cyprus have overshadowed everything else. The German / Cypriot government’s proposals to “tax” the funds of depositors in its banks have led to little more than acrimony and mass confusion so far. But the plan is a desperate development in our financial crisis. How does the Cypress plan fit with Michael Bordo’s list, above? The plan:
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Has caused a change in investor expectations leading to a change in the broader economic environment;
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Was sparked by, and will also exacerbate, fears of insolvency on the part of major Cypriot (Greek) banks;
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Has led already to attempts by investors in Cyprus to convert bank deposits (thus far suspended) into realisable cash;
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May well lead to concerns about the solvency of other banks and financial institutions in the region and further afield;
- May conceivably lead to a bank run within the periphery of the eurozone that could lead to a more generalised bank panic.
Your bank deposits are at risk
It is difficult to put into words just how stupid, ham-fisted and outright dangerous these proposals are. Whether or not the “levy” on deposits under €100,000 goes through the proposal has let the genie out of the bottle: bank deposit seizures are now part of the eurozone bailout menu.
Cyprus’s banking system had massively outgrown the size of its economy. So its deposit guarantee was always dubious. That should sound familiar to the British - our banking system has also far outgrown the ability of our government to backstop banks’ liabilities. Dr Tim Morgan of Tullett Prebon agrees:
“Whilst few states would risk an open, Cypriot-style smash-and-grab, the transfer of assets from the citizen to the state already happens, and is likely to accelerate across much of the developed world. If the likelihood of expropriation is linked to the degree of trouble in which a government finds itself, British citizens should be very worried indeed.”
Every time Brussels, the ECB and the IMF announce emergency measures they are described as “unique”. This week was no different. What was undoubtedly different this time, though, was that this week marked the first time in the eurozone crisis that depositors were forced to share the pain.
Sir Mervyn King himself once said that it was not rational to start a bank run, but rational to participate in it once it was underway. Wolfgang Münchau for the Financial Times pointed out on Monday that the finance ministers of the eurozone may well have started a bank run already.
The people of Cyprus will ask why their deposits were fair game, when no other bailout country has been targeted in that way. Russell Napier of CLSA has asked whether such unequal treatment of eurozone investors even works politically.
The euro is a creation of a tiny Brussels elite. If the people of the eurozone start to believe that the euro stands for repression and unfairness it wont last. The loss of democracy and the rule of law will outweigh any of the euro’s already dubious economic benefits.
Napier, a historian of financial markets, puts the week’s gloomy events into a broader historical context and suggests that
“..the bending of the rule of law to prevent [the euro’s] economic collapse brings arbitrary and unfair outcomes which peoples have always rebelled against... When the history books are written, the Brussels-imposed sequestration in Cyprus will be seen as the tipping point when the citizens of the euro system realised that the socio-political sacrifice needed to sustain a single currency was just too great.”
Just one other observation about this week’s eurozone farce: Brussels takes on Russia, the source of much of those Cypriot deposits, at its peril.
What this means for your investments
Latest from Golem
http://www.golemxiv.co.uk/2013/03/cyprus-the-nuclear-option/
End of democracy as we know it? - goodbye John Key - hello Grant Spencer.
The risk, as always, is that by explicity extending the right to rule to the consultant class we end up with supposed masters that fit the proverb - Those who can, do; those who can't, teach. A situation more disastrous than we already endure.
This government is all about management by consultants. Sent my students along to the recent round of MFE consultation regarding their discussion document on changes to the RMA.
The insight they gained that they found most interesting? The person from the Ministry who was (supposed to be) answering questions - kept referring folks back to the TAG (Technical Advisory Group) consultancy report for the answers.
Says it all. They will all be spending the weekend googling those taskforce members to find out just who is really making decisons for the country these days :-).
http://www.scoop.co.nz/stories/PA1207/S00066/report-major-assault-on-the-rma.htm
They will all be spending the weekend googling those taskforce members to find out just who is really making decisons for the country these days :-).
It has become a social responsibility to pin down those who operate behind the shadows and know who they really represent - increasingly it is not joe doe citizen - prior expectations that politicians and their so called public servants acted in the collective best interest of society are long in need of review and public discussion.
I increasingly find that the majority are held in contempt by the incompetent few.
I quote a couple of theorists in environmental politics regularly - their thesis suggests that modern democracies have come to be justified by ‘the superior wisdom of responsible rather than representative governments’.
I think we should start up the 'Of the people, by the people, for the people Party'.
If nothing else it would require the words to be said over and over and over again.
The concept of central banks being the lender of last resort is exactly what lead us up to this mess in the first place. The government is certainly the borrower of last resort, but guess who is the payer of last resort?
Say the banking system "turns turtle," and one has all of ones' money in real estate, what will ones' net worth be? The rent payable in kind? Bricks and mortar, or the value of the timber?
One reason we have a bubble in real estate prices, is because if prices stayed constant no one would borrow to purchase a home, and the banksters would be out of business.
Today we are paying 6 or 7 times the average annual salary to purchase a woden box with a tin roof. Considering that it takes a crew a few months to build a house, and the availability of timber in NZ, one has to wonder the senselessness in borrowing money from an institution whose only cost is printing it.
And these are the people that are supposed to saveguard our money? Please...!
HGW
Just want to make a distinction between transactional accts and term deposits.
in my view there is a massive difference between deposits in transactional accounts and terms deposits..
My money that is in my cheque acct. is NOT a loan from me to the bank.. It is MY money held by the bank ...to be used by me when I feel like it.
On the other hand ...Money that is on term deposit is a loan to the Bank... I get much higher interst rates on that ... because of the risk.
It is a travesty that Banks can take the money from transactional accts and lend it out ...( this is the ultimate borrow short term ...lend long term senario ).
So... I would make2 points...
1/ Since the State has legalized the use of transactional accounts...by Banks... to use as they please ... then it would make sense for the state to have some kind of deposit guarantee on those transactional accounts ..( it is inherently risky to lend out funds that can be withdrawn at any moment )..AND ..in the first instance it is the States job to make sure the Banking System is fundamentally sound.
2/ to give transactional accounts a "haircut" in terms of the OBR is simple theft.... Really.. transactional accounts should rate above all other forms of creditors..... in my view.
With the OBR... the Reserve Bank/Government wants to hold a good "poker hand"...
Why could they not have gone down the road of simply making the Banking industry more robust and immpossible to fail.... since they already are toooo Big to Fail.
The onus is on the Reserve Bank.... because without Central Banks.... ALL Banks would eventually fail.
They _don't_ offer transaction services. They would charge a lot more if that's what they were doing.
Of course they do.. that is what a chq acct is. ... That is what the whole "payment system" is all about.
With my business I am charged over $400/mth in fees... fees for "transactions ".. and I'm happy to pay that.. ( well.. not really)
Can u elaborate as to why u think Banks don't offer transaction services ???
Of course the Bank "has my money".. In that regard....I am captured and could not conduct my business without the use of a transactional acct. and the Reserve Bank payment system.
Check your contract.
Mist, I did not sign a contract, but ceratinly received a Term Deposit Investment Statement tied to the General Terms and Conditions
Roelof and SH, mist is correct. There is no distinction between a transactional account and a TD from a banks perspective in terms of security. The total sitting in chequeing accounts is huge, banks are hardy going to ignore it! On the flip side they are now required to keep a certain level of funds on TD to meet RBNZ criteria. At call rates of 8% of yesteryear are highly unlikely to return again in our lifetimes. Bank balance sheets look markedly different now than 4 or 5 years ago, particularly on the borrowing side. The asset side is still heavily skewed to the residential mortgage market. This is fundamentally where the risk is , and has always been in our small one dimensional market. My personal view is that we are horribly exposed to a wholesale drop in housing confidence, and price aka the bursting of our housing bubble. Has it not occurred to anyone here how carefully and craftily the market has been manipulated by the central bank? Restricting credit has reduced supply hence prices have been very stable and risng. Providing immigration has held the central bank has taken a punt that the market would hold. It has but the imbalances are artificial. People, we have all been taken for a masterful ride.
Businesses in Cyprus have been insisting on payment in cash, rejecting card and cheque transactions. "We have pressure from our suppliers who want only cash," Demos Strouthos, manager of a restaurant in central Nicosia, told AFP news agency.
http://globaleconomicanalysis.blogspot.com/#OWsGH5HfuIrPcAoT.99
Cash in the pocket...in the floorsafe...under the bed....in the freezer...anywhere but in a bank seems to be gathering steam. The only way to sidestep govt theft of your savings. What goes for Cyprus will become the norm across Europe and for all of us.
That plus bartering of goods and services. Count on it.
And what else will we witness?...expect your govt to spend your taxes advertising the dangers of not putting your cash in a bank....expect the IRD and the fool Dunne to orchestrate anti bartering legislation...criminal punnishment for not using the taxable systems...oh yes these items are on the table.
Time to realise the banking system is the govt system...avoid it...keep cash on hand...forgo the pennies in interest and enjoy the buying power. Learn to keep a low profile. Learn how best to hide your pile. Others will learn how to expand their bartering lifestyle. My labour on your property for those native hardwoods..good deal...and I will use my mobile mill to slice and ice the wood...and then swap it for stuff I need...like meat and spare parts....no gst...no govt theft.
You have to admit it Wolly , the Cyprus situation is a good antidote to those folk who " hoard money " , as Bernard Hickey phrases it ( " prudent savers " me old grannie would've called them , but she wasn't a paid up patriotic member of the consumer society ....... she grew her own apples , darned holey socks , and never had a cell-phone ) .......
...... and Cyprus is only 0.2 % of Europe's GDP ! ...... given the IMF / ECB's goof , I can only quote Captain Berteroni ( 'Allo 'Allo ) " What a mistaka to maka " ....
I got some hazelnuts to trade , you got any fresh road-kill ? ...... need a possum or rabbit , gonna bake a People's Republic of Christchurch meatloaf for lunch ...
That post hunter gatherer physical money/barter development works fine when the currency of acceptance is not indigenous to Cyprus, but one backed by the ECB - read Germany.
Little old New Zealand's paper currency under the weight of a similar scenario that's evolving in Cyprus would probably not light the billy fire due to impregnated flame retardants.
Not much roadkill round lately Gummy Bear...ppl been grabbing what they can for the pot...because too many ppl are using pot...alot....!But not to worry cos in Marlborough I'm told the local coppers harvested a heap just the other day..imagine that...so much hard yacka and one more week to reap the loot...along comes the old bill to stuff it in a boot.
If an investor wishes to invest money with a bank, I agree that there needs to be a degree of caveat emptor or buyer beware, but most people are not investors they are only depositors who have no choice but to deposit their wages with a bank. Don't agree? Try asking for your pay in cash these days! Moving banks can be a fruitless exercise as most are so similar that little is achieved. This debate is more about how to protect ordinary people from the un restrained greed and manipulation of banks in fleecing their ordinary customers.
They have created an environment where we have little choice but to use their services, and then charge us for the priviledge! There must be a limit, or at least an alternative.
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