The Calibre of the Modern Politician

Behold the Wonders

The calibre of politicians leaves much to be desired.  We suppose in democracies a society tends to get the politicians it deserves, but nevertheless we tire of our representative pontificating with sonorous solemnity about things they know very little.

In New Zealand the independent Reserve Bank (made independent to prevent politicians meddling with the money supply in a self-interested attempt to garner public support) is charged with the integrity and solvency of the banking system.  To that end it has recently stipulated that mortgage lending banks require house buyers to put down equity of 20 percent of the purchase price or more, for 80 percent of their mortgage books. This effectively stops reckless lending by banks in its tracks.

New Zealand escaped the worst of the debt and housing crisis in the global financial crisis of 2008 and onwards.  But its housing market is overvalued now by prudent measures, and the market is showing signs of overheating in large population centres.  Some banks have been behaving recklessly.  Hooray for the RB.

Enter stage left the empty principled, void minded politician.  They realise immediately that this new policy will hurt some people–in the sense that an injection at the doctor’s might hurt.  It causes some pain to prevent much worse afflictions in the future.  Hah–time to whip up some electoral support.

Labour leader David Cunliffe ramped up pressure on the Government with a public meeting with Kanik Mongia, 23, an IT consultant, who had mortgage pre-approval for a 90 per cent loan cancelled by ASB because of the LVR changes. He was seeking $450,000 for an investment property.

Cunliffe said there was need to cool the property market, especially in places like Auckland, but the new lending rules would have “unintended consequences” on first home buyers. “Unfortunately they are taking it out on the hide of first home buyers like Kanik, and that’s not what we want. We want young people to be able to get into their homes and we don’t want young speculators driving prices through the roof,” he said.(Stuff)

Lots of commentators have mocked the stupidity of choosing a “first home buyer” as poster boy who actually wanted to make a speculative investment, not purchase a house to live in.  But if banks were allowed to continue their reckless lending of requiring only a 10 percent deposit from house buyers, it is precisely the “first home buyers” who would likely end up with negative equity and forced mortgagee sales when the housing market turned down–as it eventually will.  What then would Cunliffe turn to?

Would he let the speculative home purchasers watch their houses being repossessed by mortgagee sales?  Would he nationalise the banks?  Would he doll out socialist dollars to inject fresh equity into houses underwater with debt?  Would he scrap the Reserve Bank Act and make the Reserve Bank once again subject to the whims and venal lusts of politicians?  All of the above, no doubt, would be on the table.

And all this, because Cunliffe failed to exercise basic moral precepts of integrity and demonstrate true leadership when it was needed.  Why has he thus failed?  Because of his lust for power, and because his moral compass is not calibrated so as to direct him away from bribery and corrupting the electorate, and because he does not have the smarts to realise that he would risk turning New Zealand into Spain, or Italy, or Greece.

Ignorance and corruption.  Behold the modern politician.  What wonders secular humanism has wrought.

Integrity in the Bank

Populist Hogwash

The Reserve Bank of New Zealand has moved to restrict speculative lending by banks.  The predictable backlash has seen high dudgeon from the Commentariat which has been speaking up for those poor erstwhile “first home buyers” who are going to be shut out of the market because they cannot marshal the (now) requisite 20 percent deposit.  Populist rubbish.  But it sells newspapers and stirs the pot.

Spare a thought for the Reserve Bank.  It is charged with maintaining the solvency and stability of the New Zealand banking system.  It can only do this if the banks continue to maintain prudent practices with respect to lending.  And therein lies the rub. 

During the global financial crisis–largely precipitated by reckless housing lending in the United States, the UK, and Europe–the New Zealand government was moved to guarantee bank deposits for a time.  Without such a guarantee, it was argued, international creditors would no longer be willing to stump up capital to pay for the country’s foreign borrowing.  A precedent was set and a moral hazard was unleashed.  We all learned that in a systemic credit crisis the government would bail out the banks. 

The government is now trying to back off that implicit state guarantee of bank liabilities.
  One key strategy is for the independent Reserve Bank to ensure that bank credit ratios are prudently maintained.  But banks also have learned the underlying lesson.  Why bother to be prudent when in the end the government will bail you out with taxpayers’ funds?  After all, banks are required by shareholders to make profits; moreover market share considerations mean that each bank must compete against others to get the punter’s business.  Thus, if one bank is requiring a 20 percent deposit for lending on a house purchase, one can hoover up business if one’s offer is to require only a 10 percent deposit.  Consequently, New Zealand has seen a rush by some banks into low equity loans, way beyond the constraints of prudence. 

No wonder the Reserve Bank is forcing banks to be less reckless and more prudent.  All the populist rhetoric in the world is worth diddley squat when a systemic banking collapse looms.  And, to be sure, if it were to eventuate those same populists would be screaming about the recklessness and imprudence of  the banks, baying for blood, railing against fat corporate greed, and so forth.

In a more perfect world, senior managers and directors of banks would put prudence ahead of profit.  Nor would there be a moral hazard of an implicit government guarantee of bank deposits.  There would be no need for Reserve Bank preventative intervention.  Full marks to the RB for taking the steps it has.

Will it “cool down” the housing market?  Unlikely.  Will it force banks to be more prudent?  Yes.  That is the real objective–and it is a worthy one. 

As to those first-home buyers who cannot amass the requisite 20 percent deposit in a housing market already showing signs of overheating, we have three pieces of advice.  Firstly, be prepared to purchase a less-than-dream-home in less desirable suburbs.  There are plenty of less expensive homes available, if folk are prepared to compromise.  Secondly, be patient–and in the meantime, keep saving. Thirdly, be willing to consider moving to less expensive cities.  While there may be fewer job opportunities, the competition for positions is much less than the bigger, more popular cities.   

The Second Global Financial Crisis, Part III

Nursing our Malice

When the Global Financial Crisis hit many pundits argued that Western capitalism had failed.  They had a point.  Half a point.  Capitalism is essentially the private ( as opposed to government) manufacture and trading of goods and services.  But such a non-government, free trade system cannot survive unless it is built upon a foundation of integrity, honesty, and the prevention and punishment of theft. Capitalism only prospers and benefits the majority if it cares deeply about the sovereignty of other people’s property, believing that what God has given, let not man take away.

The Second Global Financial Crisis, Part II

Meeting Obligations, Or Not

In a previous post we argued that little of any significance has been accomplished effectively to regulate investment banking.  There is no doubt whatsoever that global investment banking, which had been dominated by US companies, had been responsible for the Global Financial Crisis.  As a result of government actions, risk is now concentrated in that sector more than ever before.  If institutions then were too big to fail, there are bigger now investment banks.  Moreover there are less of them.  Risk is therefore exacerbated and arguably more acute than 2008.

Why do size and number of investment banks matter?

The Second Global Financial Crisis, Part I

Defalcation on a Unimaginable Scale 

We are nearly four years on from the Global Financial Crisis.  It has achieved the status of its own acronym (GFC)–a sure sign in modern parlance that it “means something”.  Its effects are still with us and some assert they will ripple out for a further decade. Has the problem been solved?  Far from it.

In short the regulatory changes made, particularly in the United States, have been both inadequate and even those passed, ineffectually policed.  The causes of the original crisis were manifold; the solutions, however, appear straightforward.  They have largely been ignored.

Letter From the UK (About Spain)

The European Disease Virulent in Spain

The systemic corruption now coming to light within the Spanish banking system is breathtaking.  But, as is always the case, such large scale, systemic graft and corruption can only exist and (temporarily) flourish if the state and politicians run interference and cover. 

Doubtless the ignorant critics will decry the evils of capitalism.  They will call for more social controls and political direction, declaiming capitalism (or the economic system based upon the rights of private property) as hopeless flawed due its spawning greed and exploitation.  The reality is that the “capitalism” of Spain (and the West in general these days) is not free market or private property based.  It is crony capitalism, where the political authorities and the government act as patrons of favoured businesses and certain monied barons who pay. 

The Guardian exposes just how corrupt the Spanish banking system has become.
 

Spain’s savings banks’ culture of greed, cronyism and political meddling 
The behaviour of executives at Spain’s savings banks or cajas is now coming under scrutiny as the sector prepares to seek taxpayer bailouts

Attempts to investigate Bankia, the country’s fourth largest lender that absorbed a number of savings banks, have been blocked by the ruling People’s party. Photograph: Sergio Perez/Reuters

As European taxpayers prepare to rescue Spain’s ailing banks, anti-corruption prosecutors, academics and regional parliaments are uncovering a tale of greed, cronyism and political meddling that has brought many of the country’s leading savings institutions to their knees.

With the fourth biggest lender, Bankia, demanding €19bn (£15.4bn) and authorities now admitting a further €9bn is needed by two former savings banks – CatalunyaCaixa and Novagalicia – concern is focusing on both the mushrooming bill and the way banks have been run.  Court investigators are also scrutinising payments to former senior executives and the part-flotation of Bankia, in which 350,000 small investors saw two-thirds of their money wiped out.

The bill that Europe’s rescue funds must pay has been increased by the multi–million euro payoffs taken by some senior executives shortly before their banks collapsed and decisions taken by unqualified board members who admit they were incapable of analysing the banks’ books. Boards were stuffed with political placements or people who had little idea about banking – including, in one case, a supermarket checkout worker.

They often rubber-stamped decisions. In some cajas they were rewarded with well-paid positions on the boards of subsidiary companies as well as with luxury foreign trips and soft loans.  Trips to India, China or Chicago and the hundreds of millions of euros in loans to executives, board members and their families formed part of the gravy train of political favouritism and cronyism.

Chairmen were often unqualified politicians, with academic investigators finding a close relationship between the size of a bank’s bad loan book and the inexperience, lack of qualifications and degree of politicisation of the chairman.

A committee in the Valencia regional parliament is looking into how the Caja de Ahorros del Mediterraneo (CAM) – described by the Bank of Spain as “the worst of the worst” – collapsed last July.  “Did I check through the accounts?” asked José Enrique Garrigós, a small businessman who was a CAM board member. “Look, I’m an average businessman, I don’t have the time or the training to do that.”

He said that other board members at the savings bank, based in Alicante,, eastern Spain, included a checkout worker and a sociologist. A dance teacher, an artist and a university psychologist were also reportedly on the board.  “The things we have been hearing are surreal,” said Mireia Mollà, a regional MP for the leftwing Compromis party. “We still don’t know what payments senior management took with them when they abandoned the ship.” . . .

 How did such surreal inanities comes to pass?  Whole swathes of people and institutions have to be willingly complicit in order for this to proceed.  The law, the courts, the political authorities all are involved.  At best they have to maintain a “see no evil, hear no evil” ostrichesque perspective.

Analysing the accounts would have required her to be a superwoman, complained one CAM board member. “I didn’t have sufficient financial, legal or accountancy skill… board members were not legally required to have any sort of qualifications or experience,” agreed fellow board member Juan Pacheco.

This left control of CAM in the hands of chairman Modesto Crespo, director general Roberto López Abad and a few senior executives, they said, with the board effectively rubberstamping their decisions.
“There was barely any debate and votes were … unanimous,” said Pacheco.  “One board meeting a year was held abroad,” said Navarro. “I refused to go on principle.” But he admitted attending a meeting hundreds of miles away in San Sebastian with some 50 other people: “Obviously I went with my wife, and the rest of the board took their partners too.”

Over six years, board members and senior executives – or their families – received €161m in loans, often at soft interest rates, according the Workers Commissions trade union. Senior executives doubled their salaries over the same period. . . .

The fact that many of the banks were non-profit community savings banks (or cajas) exacerbated the problem. The governance in such institutions is often notoriously weak.  Unfettered by the need to make a profit and deliver a return to shareholders, very quickly such non-profits begin to exist to satiate the greed and lust of senior management and their patrons. 

Part of CAM’s senior management had opted for early retirement as the bank headed towards disaster, with six members, including director-general López Abad, estimated to have left with payoffs jointly totalling more than €10m.  Similar stories of multimillion euro payments are emerging from other cajas, which have now been forced into takeovers or mergers to form commercial banks – with the savings banks as shareholders.

Bankia, for example, paid executive Matías Amat €6.2 m for taking early retirement. Bancaja, one of the seven cajas that merged to form Bankia, reportedly owes executive Aurelio Izquierdo €14m.  CAM was nationalised and sold for €1 to Banco Sabadell after receiving €3bn from Spain’s bank restructuring fund – which now looks incapable of meeting the financing of other former savings banks.

Attempts to investigate Bankia have been blocked by the People’s party in the national parliament and the Madrid regional assembly, but Spain’s attorney general has admitted that it is under investigation. Twelve of the 45 cajas that existed three years ago are reportedly being looked at by anti-corruption investigators.  On Thursday, the Catalan parliament agreed to set up a committee to look at banking problems as a whole.  “If we really knew the truth about Bankia and the other cajas, the two big parties – the People’s party and the socialists – would explode,” said Arsenio Escolar, editor of the 20 Minutos newspaper.  (Emphasis, ours).

The corruption has gone way beyond a few rogue directors.  It appears widespread and system, and crony relationships with politicians and political parties are part of the picture.

Without a widespread social ethic of personal integrity, honesty, truth-telling, and respect for other’s property and their property rights, free-market capitalism cannot survive, let alone prosper.  There is no magic in “capitalism”.  

Delicious Irony

Life Outside the Beltway

The folly of Kiwibank, along with its parent NZ Post, is becoming more and more obvious by the month.  Both alike face a long, lingering death.  Neither can overcome the commercial challenges facing them.

Let’s consider NZ Post first.  It has long been part of received wisdom that the government must ensure a functioning reliable, inexpensive postal service.  Consequently, most postal services around the world have been government owned and operated.  New Zealand took a gigantic step forward some years ago when it was decided that NZ Post needed to run along commercial lines.  It was made a State Owned Enterprise, which meant that it had to function as an independent commercial entity and make a profit for its owner, the government.

It did.  So far so good.
  NZ Post became a model for the deregulation of monopoly postal services around the world.  NZ Post discovered a nice little earner in being hired as an expert consultant to governments around the world looking to go down a similar path.  Then came e-mail.  An elephant walked into the room.  The traditional letter and postal communication service is now going the way of the dodo.  It is as inevitable as the passing of the horse and buggy.

The Chairman of NZ Post, Dr Michael Cullen (former Labour Finance Minister) made the case bluntly, according to Stuff.

In a toughly worded letter to State-owned Enterprises Minister Tony Ryall, NZ Post chairman Michael Cullen said most short-term fixes had been exhausted.  Cost-cutting and new products could no longer match the falling mail volumes. In the letter, released under the Official Information Act, Cullen said 2012 “must be the year in which we take the first steps in making fundamental changes to our operational models”. . . .
However, mail volumes are in free fall. It had forecast a drop of 5 per cent a year as the long-term trend to electronic mail bit. But in the six months to the end of December 2011 the decline had steepened to 7 per cent; the fastest ever, “which may be the new norm”, Cullen said. “The trend will not reverse and cannot be ignored.”

The only way forward is to cut costs by cutting mail delivery services.  In other words, NZ Post must downsize to the point where it can eventually be sold off or shut down.  This is no-one’s fault.  It is commercial reality.  NZ Post operates in a sunset service industry.  Nothing can be done, except a rapid sell-off (which is politically impossible) or a long, lingering wind-down.  Wind-down it will be. 

Kiwibank, owned by NZ Post, is more problematic.  It is the product of socialist ideology.  The idea was that New Zealand needed a state owned bank to keep the capitalist banks honest.  The people’s bank was the brainchild of one Jim Anderton whose commercial vision of the future did not extend beyond his nose.  Ironically, Kiwibank has been wildly popular amongst the commercially naive, in particular one Dr Michael Cullen, who ardently defended the bank in his day. Now he is having to face the very same commercial reality  he blithely ignored when Minister of Finance.  The irony is delicious. 

In order to develop, Kiwibank needs more capital.  As we know, socialism and socialist projects eventually run out of other people’s money.  That time has come.  The government has little appetite to put more money into its own bank as it runs up national debt to the levels approaching the entirety of annual GDP.  Very, very low on the priority list is the people’s bank. 

We are confronted with a sight rarely seen.  A former politician is faced with the task of cleaning up a mess substantially of his own making.  This time around, however, Dr Cullen will be subjected to rigorous commercial disciplines.  Welcome to the real world.

The former Minister of Finance, who once infamously boasted that he had spent all of the nation’s fiscal surplus, is now having to face up in some small way to his own gargantuan recklessness.  Hoist on his own petard indeed.

>Too Important to Fail

>Dumb-Ox Taxpayers on the Hook Again

New Zealand has a state-owned bank.  It was set up by socialists and greens as a populist and nationalistic move to counter the dominance of all our major high-street banks, all of whom just happened to be owned by Australian high street banks.  The current centre-right government has continued the policy.

Kiwibank has proved very popular with what we call the “cardigan brigade”–the elderly, the welfare dependant, the average bureaucrat and state employees.  But commercial reality is biting.  Once it had hoovered up all those high-transaction, low balance, loss-making accounts from its competitor high-street banks–by offering higher deposit rates and lower fees–Kiwibank hit a commercial rut.  To grow further, Kiwibank needed more capital.  Its shareholder, the gummint refused to pony up–being itself severely cash strapped and deeply in the red.

Faced with competitive marginalisation–no growth, eroding margins, weakening profits, bad debts to be written off–Kiwibank had few places to go.  The configuration of the tea-leaves in the latest mandatory General Disclosure Statement for Kiwibank portends trouble ahead.

>KiwiBank Must be Sold Off

>Terms of Sale Are Critical

Well it looks as if the New Zealand Government is serious about seeking a mandate at the next election to sell off non-core government owned businesses. The opposition socialists are salivating at the prospect of campaigning on this because they believe the public is viscerally opposed to selling state owned companies.

They may be right. Kiwis tend to be neither intelligent nor rational when it comes to economics and the legitimate role of civil government. We are all socialists now–at least 99.99% of us. But it is possible that if the National-led Government identifies the assets to be sold in advance of the election and commits to restricting its sales activity to those identified, then a more rational discussion can be had come election campaign time. The Government has already built up credibility of keeping its word on at least this issue. The socialist opposition will be forced to argue why company X ought not to be sold, and why it is essential for the government to own it. Forcing them to argue thus binds them into the principle of selling state assets when appropriate.

And it continues to baffle us why we-the-people need a state-owned airline, state-owned dairy farms, and a state-owned vehicle testing business.

At the head of the list for sale is likely to be KiwiBank. This is a strange malformed child. It is the spawn of arch-chardonnay-socialist Jim Anderton. Its raison d’etre is a malformed mix of economic populism and nationalistic romanticism. KiwiBank has positioned itself as the only New Zealand owned bank. The rest of our high-street banks are all Australian owned. Anderton prattles on about profits from KiwiBank staying in New Zealand, whereas (those rapacious) profits from every other high-street bank go offshore to the dirty Aussies.

When the register of assets owned by MPs was published the other day it was a bit embarrassing for Anderton to have to disclose that he continues to be a shareholder in the Commonwealth Bank of Australia. He is aiding and abetting one of those nasty foreign owned banks–he owns it in part. All of which highlights the economic ignorance parleyed by Anderton, disguised through a heavy cloak of simplistic populism. If he really is concerned about “all those bank profits” being repatriated to Australia, then surely he ought to be out front cajoling New Zealanders to buy shares in Commonwealth, Westpac, ANZ, NAB, etc. Then those profits are going to circulate right back to New Zealand shareholders. Jolly good, right?

But, no, Anderton’s infantile populism requires that the government own a bank. Somehow that fits with the New Zealand psyche–and, on this, we have to admit he is right. The evidence for this is the large number of New Zealanders who have voted with their chequebooks and opened bank accounts at KiwiBank. Anderton has clearly tapped into a deep vein of nationalistic romanticism cocooned in a profound ignorance of economics. Now we should hasten to add that the other (Aussie) high-street banks have quietly celebrated the emergence of KiwiBank. A significant proportion of bank customers are actually unprofitable: KiwiBank has resulted in a large number of those unprofitable customers to move and become KiwiBank clients, to the benefit of “those Aussie banks”, making their business in New Zealand stronger as a result. The smart Aussie banks have cried crocodile tears as customers closed accounts and headed over to open them at KiwiBank, all the while rushing to show them the door. Ah, the law of unintended consequences!

Right from the start, KiwiBank has been protected from competitive market realities. Owned by NZ Post, its earnings have been subsidised through piggy backing on NZ Post. Without shovelling some revenue which used to be in NZ Post’s Profit and Loss account across to KiwiBank, it would have been a persistent loss making business. So the “profitability” of KiwiBank has been a sleight-of-hand. But now NZ Post is facing economic constraints of its own now, under the onslaught from electronic communication and fierce competition in the courier industry. Snail mail is fading away, going the way of the horse and the cart.

If KiwiBank is to grow it needs more capital–which its ultimate owner, the NZ Government, does not have. It is here that Anderton economics unravel. Like all socialists, Anderton’s “bright business idea” using other peoples’ money is going eventually to run out of money.

So, it needs to be sold off. Anderton froths at the mouth at the mere mention of the “crime”. He predicts that his beloved KiwiBank will be bought up by those dirty Aussie banks (which he must secretly be hoping for since he will likely benefit personally through his CBA shareholding). No doubt thousands upon thousands of KiwiBank depositors and customers will feel the same.

This is why how Kiwibank is to be sold is really important. The process will either spike Anderton’s populist guns or it will provide him with blustering high-explosive ordnance. We advise the Government to state its strong preference that KiwiBank remain in New Zealand ownership. Then, it should announce a process of up to four sale tranches, with shares-on-offer being spread across all four.

The first tranche should be to existing KiwiBank customers. This would help ensure that KiwiBank’s ownership would remain in the hands of mom and pop Kiwis. KiwiBank customers could subscribe for as many of the shares as they wished. The second tranche, say a month later, would be made available to all employees on the government payroll (including teachers, public health employees, and so forth), and all current and former MP’s. Once again, there would be no limit upon subscription, whilst unsold shares-on-offer remained.

The first two tranches would spike the populist anti-sale, knee-jerk reaction. If it really is a genuine concern amongst New Zealanders that KiwiBank be kept in Kiwi hands, then the cardigan brigade would have had the opportunity to put their money where their mouth is. We expect that Anderton would become a big shareholder–but then again, maybe not. Socialists as a rule are full of “do as I say, not as I do” bluster. And we note that when Anderton has been asked about shares being sold to mums and dads he has dismissed it, arguing that eventually these Kiwis would become turncoats and would sell their shares off to the Aussie banks. Ah–how ante-diluvian socialists despise and mistrust the people whom they profess to care so much about.

The third tranche, again about a month later, should be offered for sale exclusively to KiwiSaver funds. Then, finally, the fourth tranche of any shares left unsold would be offered to all remaining New Zealand residents and NZ registered financial institutions.

If, after this sale process, the required stipulated minimum number of shares had not been subscribed, the Government should wind KiwiBank down, and eventually liquidate it. Clearly, New Zealanders would have demonstrated that they do not want to own a local bank. But if the minimum number of shares had been bought, then we would wish the new shareholders well.

There is no justification whatsoever for the New Zealand government to own a bank.