Institutional Blinkers

Purblind Central Bankers

The causes of the Global Financial Crisis are complex and multi-valent–as expected.  One individual who shares a good deal of the blame, however, is Alan Greenspan, former chairman of the US Federal Reserve.  Greenspan deliberately kept interest rates low in the US (and thereby in much of the world) during the critical period of 2000 to 2004.  It was during this period that house prices began to inflate rapidly.

In May 2000 the US federal funds rate (set by the Federal Reserve) was 6.5 percent.  Then the dot-com crash happened.  Internet and IT companies had been a hot item on the stock market, trading well above their intrinsic value.  Suddenly, as is often the case, the mood of the market changed:

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)

A Cautionary Tale

Debt Fuelled Boom Ends in Spectacular Bust

The abridged article below illustrates why some large Spanish banks are under such stress.

Spanish property: Polaris golf resort homes crash to a third of original price

The Guardian

They were once Europe’s most ambitious holiday homes projects, vast developments financed by supersized loans from Spain’s cajas and banks. The properties were widely advertised on television in the UK to entice investors chasing the good life in the sun and hoping to profit from the property boom.

But five years on, the Polaris World holiday dream of sun-drenched apartments overlooking golf courses designed by Jack Nicklaus has turned sour. Apartments that once sold for €200,000 (£160,000) are struggling to fetch €60,000. The last resorts built are now ghost villages.

Welcome to Murcia, the very heart of Spain’s property boom and bust, where repossessions are sweeping the region and where losses are straining balance sheets of almost every Spanish bank.
  The drive along the dual carriageway from Murcia airport into desert-like scrub of the hinterland is a journey through the hubris of the credit-fuelled building boom, back to a time when more cement was mixed in Spain than in every other European country combined. Either side of the road lie unfinished and repossessed, golf resort developments.

Good roads complete with zebra crossings built to link homes that have never been constructed, simply stop in the middle of nowhere. Conference centres lie unused on the edge of vacant developments. Stores, restaurants and sports facilities have failed to materialise as the developers have run out of cash. Those who bought “luxury’ villas for €1m in the good times would be lucky to get a third for them now – if, that is, they could ever find a buyer happy to tolerate living on an unfinished complex.

At the heart of the boom was Polaris World, which built seven resorts on the Costa Calida, and inspired a number of copycat developments in what was once one of the poorest regions of Spain. The group, backed by cheap euro loans bought acres of agricultural land to build self-contained, gated holiday resorts each constructed around a golf course.

Promoted with a memorable TV campaign fronted by Jack Nicklaus and a very slick sales operation, Polaris convinced thousands of buyers – many from the UK – to pay top prices for property in the desert.
Many put down large deposits on more than one property hoping to cash in on rising values. At the peak of the market some made a profit, but as the financial crisis began to unfold in 2008, prices began to fall. The company kept building despite the slump in the prices of its existing developments. By 2010, Polaris World was forced to relinquish most of its assets – the golf courses and unsold properties – to a consortium of banks led by CAM Bank (Caja de Ahorros del Mediterraneo), the leading lender behind the Murcia building spree.

In December last year, CAM was sold to Banco Sabadell for just €1 – after Spain’s deposit guarantee fund injected €5.25bn into the stricken lender. . . .

At the massive La Torre resort this week, the golf courses were looking well-tended, – but no one was on them. The bars and restaurants except one, were closed, communal pools lie unused and a five star Intercontinental Hotel is bereft of visitors. For sale signs abound. . . .

The newest of the Polaris World resorts, El Valle, is perhaps the most surreal. The development, the furthest from the coast, comprises several hundred homes, but on the day of our visit, there were just four people on site – three of whom were staff. Everything is complete, and in good condition. And almost totally devoid of life.

At the Mosa Trajectum resort next door, one almost expects to see tumbleweed blowing down the main street. Here the golf course looked dry and less well-tended. The houses that had been started looked finished, but immaculate roads just stop as if someone had decided mid-project that enough was enough. The sales office, typically a vital feature of such developments was long abandoned..I called in At Polaris World’s glass-clad HQ for an explanation of what had gone wrong, when I revealed I was reporting for The Guardian. The spokeswoman said: “There’s nothing I can tell you. I don’t know anything.” the spokeswoman said.

Greedy Capitalists, Venal Politicians, and Voters

 Have Some More Money

J P Morgan, the biggest bank in the US, has lost a couple of billion dollars on a bad trade.  What’s the odd billion amongst friends, eh?  Oh, no.  Gasp!  Horror.  Something must be wrong within the innards of what President Obama has described as “one of our better run banks”. 

A phalanx of police and federal officials has descended upon the once-shining-knight, now tarnished JP Morgan to investigate what happened.  No doubt it will add to the swelling chorus for more regulation, controls, rules, and compliance that failed the last time in 2008 and have failed in their object ever since. 

The truth appears much, much more simple, yet sinister.
  But we can guarantee the root of the problems, the original cause, will not be addressed.  The reason?  The root of the cause gets far, far too close to the regime of US government itself.  It seems that Reagan’s dictum still holds true: government is not the solution to the problem, it is the problem.

Chriss W. Street has written the background piece which explains what appears to have happened in one of the “better run banks”.  Granted, it is early days yet, but his diagnosis has a ring of truth about it. 

After five years of miserable unemployment and virtually no growth, it seems clear the Federal Reserve’s $2 trillion increase in bank lending at zero interest rates has been better at expanding the international derivatives markets than expanding the American economy. The Federal Reserve owns much of the blame for this phenomenon. By keeping interest rates so low, banks were unable to make a rate of return above their cost of capital on traditional lending.

In an effort to stimulate the economy, the Fed has created out of thin air billions upon billions of dollars at near to zero cost to the wholesale borrowers.  The inane and naive idea was that these lovely banks would borrow the money from the Fed at little or no cost.  They in turn would rush out into the US heartland and on-lend that money to businesses and consumers at a low, but reasonable cost.  The end result?  Business would expand, employment would pick up, economic recovery would be underway.  The Fed has been following the classic Keynsian playbook.  When the pump is dry, to get re-started it needs to be primed with water, allowing it to turn over, which in turn creates the pump’s suction will actually start to pump “real” water.  Then away it goes.  Hey presto–an economic recovery bursts forth. 

But banks have a duty to generate a return for shareholders. This classic Keynsian play forgets one little detail.  Those that borrow billions from the Fed’s free money spigot are human beings.  They are animal spirits, with, strangely enough, an overwhelming desire to maximise returns and profits for their owners. That’s what they are paid to do, and they get paid well when they are successful.  So, instead of taking the Fed’s “free” money and thinking let’s invest in mainstreet Ohio businesses or rust-belt Detroit battlers–which is a long, risky, low-return, granular strategy–where can we get the biggest bang for the billions of bucks the Fed has just created?  We owe it to our shareholders and to our bonuses to find an answer to that question.  JP Morgan asked the question, and got an answer.

The answer was in the form of a “big macro picture”.  The world was stabilising after the global credit crunch of 2008.  Gummints were back in control.  They had removed most of the risks.  All would be well going forward.  (Doubtless the billions of new dollars floating around in the JP Morgan vaults gave strong supportive testimony to this “big picture”.)  So, interest rates were going to fall.  Particularly in Europe where the Euro was stabilising due to the sterling work of Merkel and Sarkozy and the European Central Bank.  We can make quick money off this.  Quick money beats slow, risky money every time.

Achilles Macris, J.P. Morgan’s CIO in their London office, began using the bank’s access to cheap capital from the Fed to amass a huge over-the-counter derivative gamble that high yield and sovereign debt interest rates would fall, after MF Global suffered a $1.2 billion loss on similar bets and was forced to file for bankruptcy last October 30th. Morgan’s gamble became very profitable after December 21 when the European Central Bank (ECB) began making $640 billion of three year loans at 1% interest, referred to as “Long Term Refinancing Operations” (LTROs), available to the banks of Portugal, Ireland, Italy, Greece and Spain (PIIGS). By the end of December, J.P. Morgan’s total derivative exposure was $70.2 trillion on just $1.8 trillion of bank assets, according to the U. S. Controller of the Currency.

Morgan is reported to have continued heavy derivative buying in January and February. Its profits soared again when the ECB announced LTRO2 as another $714 billion in three year low-interest loans to PIIGS banks.

The plan was working.  Now at this point, we need to dismiss as utterly fabricated the notion that a few rogue traders were at fault.  There is no way that such a huge exposure would be kept hidden from executives.  The bank’s internal regulations, risk management, reporting and controls would make that impossible.  We have no doubt that the senior executives would be up to this to their eyeballs.  They were booking the profit of the strategy to their accounts daily–as all the investment banks do. Their behaviour at the time lends weight to this:

The stock of J.P. Morgan vaulted from $29 per share in December to $45 a share in March as rumors swirled that Achilles Macris and his London team of 6 had already made $2-3 billion as high yield and sovereign debt interest rates continued to fall. A jubilant Jamie Dimon announced that J.P. Morgan would increase its dividend and buy back $15 billion of its stock.

But the problem with “big macro picture” strategies is that they always oversimplify reality.  In the oversimplification, risk becomes far more concentrated.  So, when a few uppity Greek voters began to make it clear they thought their government had taken austerity a step too far, suddenly risk returned to the debt markets in Europe.  Interest rates began to rise. 

Everything seemed rainbows and unicorns for J.P. Morgan until two weeks ago, when France and Greece elected hardcore leftist candidates who want to abandon austerity spending cuts and increase social welfare spending. Interest rates on the PIIGS sovereign debt shot back up and J.P. Morgan appears to have suffered a $4-5 billion loss. It also appears the bank has been unable to limit its losses to $2 billion by selling out of their enormous derivative positions.

The Fed provided the easy money capital for US investment banks once again to speculate at will.  Worse, the provision of this easy money confirmed the “big macro picture” which they developed as quick a money making strategy. 

Jamie Dimon tried to dismiss the losses by promising heads will roll, but Congressional hearings will soon illuminate to American taxpayers that the Fed has provided the capital that has allowed America’s three largest banks to engage in $173 trillion in leveraged derivative speculation:

JP Morgan Chase Bank
Derivative Position $70,1517,56,000,000
Total Assets $1,811,678,000,000
Leverage Ratio 38.5

Citibank National Bank
Derivative Position $52,102,260,000,000
Total Assets $1,288,658,000,000
Leverage Ratio 40.3

Bank of America
Derivative Position $50,102,260,000,000
Total Assets $1,451,890,000,000
Leverage Ratio 33.4

Of course the Fed’s “free money” was itself leveraged up many, many times over to create gargantuan derivative positions.

The derivative exposure of these three banks alone exceeds 11 times the American economy and 2.7 times the economies of all the nations on earth. On December 30th, the derivatives leverage ratio of these three banks stood at 37 times. Menacingly, this leverage ratio exceeds the average leverage ratio of 32 times assets for Lehman Brothers, Bear Stearns and Merrill Lynch, shortly before the shock of their collapse instigated the start of the Great Recession in 2008.  (Emphasis, ours)

Have these investment banks not learnt, we hear you ask?  Nonsense.  Of course they have learnt very well the lessons of 2008 and 2009.  They have learnt that in the end the bigger you are, the more you become sacrosanct to the state–too big to fail.  The Treasury and the Fed will always come to the party and bail you out–that’s the real lesson, and they have learned it all too well.  Meanwhile the Fed happily continues to throw money at them, pouring gasoline on the smouldering fire of animal spirits.

Kansas City Federal Reserve Bank President Thomas Hoenig in a recent interview warned that an extended period of ultra-low interest rates invites speculative behavior: “When you have zero rates that go on indefinitely, you are inviting future problems.” The recent J.P. Morgan derivatives fiasco has demonstrated that the Fed’s zero interest rate policy has encouraged risky financial speculation that is highly dangerous and potentially destructive.

The fundamental, systemic problem here is not the investment banks.  It is those governments which give them billions upon billions of cheap, easy, electronic money, zero cost money to play with with the ultimate protection of a government bailout.  All in a vain, completely discredited Keynsian attempt to get the economy moving again. 

Reagan was right: virtually without exception the gummint is the problem, or at best, it makes the problem far, far worse. 

(Postscript: some will point out that big investment banks were allowed to fail in 2008,9 and their shareholders and bondholders took not just a haircut, but a scalping.  True.  Then the government lost its nerve and recommenced the big bailout.  President Obama ran up 6 trillion dollars of debt, and the Fed exploded its liabilities in an historic manner to accomplish it.  The result?  The big investment banks that survived are even more of an oligopoly than before, risk is more concentrated, and the systemic problem has worsened.)

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.

The Great Bank Run of 2011

Silent Paralysis

We read recently about the “secret” bank run in Greece.  Folk have been taking their money out of bank deposits in Greece and (literally) putting the money under mattresses.  They don’t trust the solvency of banks any more.  Better to get their money out before its too late.  But it appears that this is not just a Greek problem.  Europe-wide the “folks” are taking their money out of European bank deposits and putting the money . . . where?  In US banks, it would appear.

This fear-driven phenomenon would indicate a coming recession/deflation rather than recovery.  When people store their money rather than investing it, deflation usually stalks the land.

Here is Larry Kudlow’s take:

>NZ Post and Kiwibank

>Chained Naked to a Horse-and-Buggy

Sometimes you can see things coming down the pike. You just know what is going to turn out. Most folk knew way ahead of time that the horse-and-buggy transport system was going to become extinct. This, despite the horse-and-buggy preservation society’s sterling work, despite the emotional speeches in Parliament evoking the nobility of the horse and the debt Western civilization owed to it, and despite the Government investing in a horse-and-buggy transport company called Cobb and Co, appealing to nostalgia and national pride.

At the time there were bitter mutterings at the economic sabotage being wrought by automobile companies. People were purchasing motor vehicles that were manufactured in faraway places like the UK and the US and the money was going overseas. Strict import licensing rationed how many cars were allowed to come into the country, so as to restrain the sabotage to respectable levels. All that overseas exchange being lost. If only we weren’t so stupid as to give up on the horse-and-buggy.

Yet most people could see the outcome a mile off. The horse-and-buggy was going to go the way of the dodo–and in the end it was only Greenpeace that was left protesting the environmental devastation that was coming from the internal combustion engine. The Auckland Star reported how they stripped naked and chained themselves to the last buggies in the country, shutting down Broadway for a time. At least until the police–far less tolerant of socio-political antics in those days–unchained the naked miscreants, harnessed them to the buggies, and whipped them away down the Great South Road. They were never seen again.

Well, it is all so clear now. The horse-and-buggy was a goner. Sometimes economic innovation and market forces do that. Well, actually they do it all the time. But that does not stop modern day Canutes striving mightily against the tides of economics and history. Just today, for example, we have been treated to another gasp of another long, lingering death. Yet everyone knows the death is inevitable, being just a matter of time.  But everyone is too polite to say so. 

The New Zealand Post is close to commencing the palliative care stage. Like the horse-and-buggy companies, its revenues face a long, slow, lingering decline. It is inevitable. It is irreversible. As the decline hastens, it is also inevitable that our politicians, cheered on by postal workers and society’s nostalgics, will in a few short years vote taxpayer’s money to subsidize the business. We will be told in sonorous tones about how NZ Post is not just an icon–no, it is a vital national and strategic resource to be kept alive at all costs, even though life support is horrendously expensive.

But we will all know the real story. It is only a matter of time, and how much taxpayer’s money will be flushed down the sewer as our nation goes through the futile motions of preserving obsolescence.

E-mail, electronic communication, and efficient market-driven courier companies have coalesced into an unstoppable economic force to make mail services obsolete. Ergo, NZ Post’s revenues are steadily declining. This in the front page of The Herald:

A number of New Zealand Post workers are set to lose their jobs as the company looks to cut costs by closing outlets. NZ Post chief executive Brian Roche would not say how many shops would close down, but said it was likely to be fewer than 20.

The move was sparked by falling mail volumes as more people used the internet. “Our mail volumes have been declining for 4 to 5 per cent a year,” Roche told Radio New Zealand. “We have to address that problem, if we have got less volume and the same level of fixed costs the two don’t go well together.”

For a while there, NZ Post thought it had a winner. Exploiting the largesse of economic nationalists-cum-politicians it was made the owner of a nationalised bank, Kiwibank. Since banking was a growth industry, and since NZ Post already had a nation-wide branch network, hey presto politician-cum-business gurus decided that could disworsify NZ Post into banking, thereby securing NZ Post’s future. It seemed to work for a while–but now, once again, economic reality is emerging from beneath the fizz and pop. Kiwibank took all the cardigan-brigade’s accounts–loss making accounts–from their competitors; then they discovered that they had grown so fast, and their margins were so bad, they needed more capital. The government, by this time, restrained by its own huge, ballooning deficits, declined the generous invitation to stump up with more borrowed money. Poor Kiwibank was forced to borrow offshore–thereby once again disguising for a time its high cost base and poor margins. But no longer.

In what amounts to a delicious irony, Dr Michael Cullen–former Labour Party deputy Prime Minister and Treasurer, now Chairman of NZ Post–long a champion of Kiwibank, is having to clean up the mess he largely created. Now “we spent it all” Cullen is having to cut, cut, cut.

NZ Post chairman Michael Cullen last month told a parliamentary commerce committee difficult trading conditions and a flat economy continued to negatively affect business. “One of the issues is that Kiwibank has been staffed and organised on the assumption of very strong growth,” Cullen told the committee.

“At any particular point in time it’s staffing is reflecting the anticipated needs for the growth of the next phase rather than it’s current service delivery profile. As a consequence its actual cost ratio is actually quite high by banking standards. “This period of slow growth, which is going to be inevitable for Kiwibank over the next year or two, is probably an opportunity to address more firmly that issue of cost reduction within Kiwibank itself.”

“Organised on the assumption of very strong growth”?  Just like you ran our national accounts, Michael. You thought you could spend, spend, spend to infinity, on just such an assumption of permanent economic growth. “A cost ratio quite high by banking standards”? You mean your competitors are leaner, meaner, and more efficient than the government bank–despite repatriating all those profits back to Australia, Michael?

Our prediction remains. NZ Post will continue to decline, eventually to the point of inevitable shuttering the shop. It is a horse-and-buggy service. Its subsidiary, Kiwibank will end up being sold off as a lemon to the private sector.

And that, as they say, will be that.

The moral of the story: never let the state get anywhere near a commercial business. For politicians capital is always cheap and virtually inexhaustible (being extorted via the taxation system from the citizens). State owned and operated businesses are inevitably overcapitalised, inefficient, and pathologically bent towards a high cost base. That’s what happens when capital is free and inexhaustible. Until it is not–and of course it never really is. It only appears that way for a decade or so.

Some will object that New Zealand’s “state owned enterprise” model refutes this sweeping judgment. It does not. It merely provides yet another example of its truth. The SOE model appears to work for a time because the government relinquishes the responsibilities and privileges of ownership, requiring that the companies run as stand-alone commercial businesses with independent boards and management.

But in the end this, too, breaks down. Governments cannot resist appointing their commercially inept mates to SOE boards as a sinecure for favours rendered. Moreover, when taxpayer’s money dries up no government wants to pony up capital for reinvestment in the businesses. Rather, government tries to strip out the maximum in dividends and payments from their tame corporations. When it finally dawns on politicians that, were they to continue in this vein, the businesses will be run into the ground they then decide that selling them off is the better route. And that’s where we are right now.

The moral remains valid: never let the state get anywhere near a commercial business. If any politician were even to moot the idea, harness him naked to a horse and buggy and whip him down the Great South Road.

>Woeful Economic Ignorance

>No-One Owes Us a Living

Bernard Hickey, writing in the NZ Herald, recently pointed out that NZ banks have tightened up on their lending criteria to businesses recently, despite early signs of economic recovery in this country. Banks are more cautious than ever, it would seem, when it comes to lending to NZ businesses.

But why? Well, apparently the usual suspect is the Reserve Bank’s new requirement that a greater proportion of the banks’ funding be sourced from New Zealand, rather than those large, hot international wholesale money markets. Then, secondly, Aussie banks appear to be losing their ardour for New Zealand, preferring to expand their business in Asia. So, capital is not as freely available, as it once was.

So far, so good. “Houston, we have a problem” is now an apt status report. But if you go to the comments section of Hickey’s article your heart will likely sink at the diatribe of economic ignorance, blameshifting, and populist ignorance that is on offer. An example of the erudition displayed:

What sort of an idiot thinks they can order our now completely Internationally owned banks to suddenly start lending to little old, “flea on the dogs tail NZ” business? (Whats left of it) This ridiculous situation is of the Reserve Banks and our Politicians own making and now they think they can bully international business’ into financial risk taking on the bais of our wonderful economic performance.

Hullo? Am I on another planet?

Free market means, free to lend or free not to lend, either way Banks are now free to do what they want, and we are not. Rogernomics always stood for “you will be Rogered in no time at all” and global free market stood for, 3 winners, 191 losers. Why do no economists see what is a very obvious systematic failure. You all sound like Monty Python, This Parrots dead. “No its not, its just pining for the fiords”.Ahh, no its dead!

You are just a huge club of bumbleing fiddeling Nero’s. Shame on the lot of you.

Yes, dear chap. We are forced to the conclusion that you are indeed on another planet. And another coruscating contribution:

It seems that you suggest that our capitalism without capital should continue. One more decade and again the “capitalists” will run away with cash and WE will have to bail-out the banks again. These “financial experts” must be blind.

The most significant competitor to banks for capital in this country is the government. It is borrowing $240m per week. It is the elephant which is squeezing every body else out of the room. Strange that people always seem to forget that money is subject to demand and supply constraints and that since the Government became a huge borrower, everyone else has become squeezed and capital supply reduces enormously. The banks are no exception. They are being forced to attempt to raise more money in New Zealand while the Government has muscled to the front of the queue and is slobbering at the table, leaving only crumbs for everyone else.

And let’s not forget that the insatiable slobbering of the Government for more borrowed money is to maintain a bloated, nannying, regulating, stifling, exorbitant, state-sector bureaucracy–and to maintain welfare hand-outs to middle-class New Zealand. And the Government is “driven” to do this to survive politically. There is no fury to match an electorate when its “entitlements” and hand outs have been cut. New Zealand is one big Ponzi scheme, of the same style as Greece or Spain or Hungary.

Now the Government is hoping that sooner or later the private sector economy will stage a recovery, tax revenues will rise, government borrowing can be pegged back, and we can all move on to better things. But every expansion of Government activity results in weakening the private sector economy by a ratio of roughly one to two, according to Milton Friedman. Thus, every dollar of new Government activity results in a loss of two dollars of economic activity in the private sector. All private lending institutions in New Zealand are choking because the Government is sucking out all the monetary oxygen.

Secondly, railing against “Australian banks” is stupid, populist nonsense. Of course Australian banks–or any bank for that matter–when considering whether to focus investment in Asia versus New Zealand are likely to choose Asia. Why? Because capital is global and mobile and it will flow to where it can get the best risk-adjusted return. And Asia beats us in spades.

The reality is that New Zealand is a very business-unfriendly place. The costs of doing business in this country are very high and getting higher by the day. The vast majority of people who are in business in this country would love to be able to sell up and get out. Red-tape, compliance costs, taxes, rules, regulations, restrictions, environmentalism, not to mention the smothering ETS, all mean that businesses in New Zealand are largely very small, low-margin, high risk, low growth concerns. And that means that capital will remain very scarce in this country. It means that businesses will struggle to get credit. Capital will flow elsewhere to other more positive offshore investment opportunities.

It also means that when banks do lend to businesses they will want to secure their lending against tangible assets, such as property because business is so tenuous and risky here. This generates a vicious circle where businesses feel the need to tie up capital in owner/operated commercial premises to ensure access to operating capital via banks–which has to be one of the most inefficient uses of capital imaginable.

It’s no wonder that so many businesses fail in New Zealand. It’s no wonder that banks are tightening their lending criteria for businesses. These things are not cyclical–they are structural. They are symptomatic of a far more serious and intractable problem. Either we shrink the government and its smothering regulations fast, or else. If not, would the last person please turn out the lights.