web analytics

Brian Fallow: words of warning on bailout

Written By: - Date published: 9:34 am, October 30th, 2008 - 11 comments
Categories: uncategorized - Tags:

Feeling attracted to the idea of getting your mortgage covered should the sky fall in? Brian Fallow comments on the perils of Key’s policy plans:

“We are in the mess we are in because of a cavalier attitude towards debt and risk by households and their bankers, both here and in more important economies overseas. Yet the prevailing view seems to be that the solution is to be equally reckless with the taxpayer’s money. Having privatised the gains, it’s time to socialise the losses. That doesn’t just relocate the problem. It makes it worse by creating a disconnect between actions and consequences.

The latest example of this is the National Party’s proposed “rescue package” for people who lose their jobs and consequently struggle to meet their loan obligations. It sounds compassionate. It might even be seen as a pragmatic measure that would limit further downward pressure on house prices.

But that is a thin coating of sugar around a bitter pill, made of a substance called moral hazard.

It heightens the risk that we will entrench, rather than reduce, the very structural problems which underlie the credit crunch.”

11 comments on “Brian Fallow: words of warning on bailout ”

  1. I very much agree with his article.

    I would note that the current deposit insurance scheme in NZ creates a similar moral hazard problem – both parties are putting forward solutions without thinking of long-term consequences, which is disappointing.

  2. vto 2

    Couldn’t agree more. But it applies to intervention by any shade of govt.

    Dislocate the action and consequence (as he puts it) and the responsibility flies out the window. A bit like dads fleeing the solo mums thanks to the dpb providing the back-up.

    The recent rash of world-wide govt interventions has resulted in distortions from here to contortionland. And it will not divert the current stampede – only way to deal with a stampede is to let it run out of puff.

  3. cocamc 3

    Matt – i agree with your comments – the deposit scheme was rushed by the govt and now we have change after change – first the limit now of $1m, then the managed funds. What next?

    Also – Aren’t labour coming out with a similar policy to that of National?

  4. Matthew Pilott 4

    Aren’t labour coming out with a similar policy to that of National?

    I’m afraid so – it looks that way anyway. Pork for all, huh. I’ll wait and see what theirs looks like, but the National plan seemed set to ensure banks got their mortgage payments, and no more. Corporate socialism dressed as social empathy…

    I’m not quite sure how to say this, and what the real-world result would look like, but corporations should not be allowed to take a risk that will have negative consequences far beyond those who are among the risk takers.

    Take the sub-prime crisis. There are those who took silly loans, and those who made them. There are the law-makers who allowed them to do so. Beyond that, the world as a whole is suffering from the results. That is inherently wrong.

    How do you restrict the risk to those who take it? The inverse is that the field of those who benefit from a risk, if it is not realised, is wider than those who take the risk.

    Not sure how the two can be managed – it’s not a concept I’ve really been able to get very far with, I’d be interested if anyone’s got any idea what I’m on about, and any thoughts about it.

  5. higherstandard 5


    “How do you restrict the risk to those who take it? The inverse is that the field of those who benefit from a risk, if it is not realised, is wider than those who take the risk.”

    Aye a very good question.

  6. vto 6

    MP I suspect there is no way of doing such. All people can do is manage their own situation to avoid risk relative to others. i.e. if it becomes apparent that debt is being sprayed around willy-nilly then one should move out of that arena.

    Lordy knows how people would know to do this and recognise such an arena though. One thing I am clear about though is that govt intervention to aim for such goals would almost certainly fail, and most probably exarcerbate the problem (as it is now).

    In the most simple terms, what I see here, as mentioned above, is a stampede pure and simple. A more relevant question may be – how does one control a stampede?

  7. Aj 7

    National’s lurch to a policy like this is astounding, coming frrom the party of ‘personal responsibility’
    I’d have thought their platform would have been to encourage savings or insurance for job loss.
    Certainly it will discourage repayment of debt and encourage spending

  8. rave 8

    Key’s solution is to be expected from a bankster. He doesnt care about Moral Hazard as he and his class just want to make more money and download any losses onto the sorry losers. So his interest is to reward the big spenders and speculators and make the savers pay. There is no mystery about social welfare for the rich, its normal. It called redistribution upwards as in privatisation of assets and savings.

    Labour’s approach could be different if it had the guts to follow through. It has started reasonably well.

    Labour’s deposit guarantee is to maintain confidence in NZ banks by NZ depositors up to $1 million. It hasnt yet been extended to a wholesale guarantee which would be to abandon Moral Hazard for the Aussie parent banks. This would be a huge mistake and major concession to the banksters. Aussie banks have ripped out billions from NZ if they want them to remain cash cows they should fund their subsidiaries themselves.

    The interim measure by the RB to offer 70b immediate cash to NZ banks (and a 15 b from the US Fed) is being taken up in exchange for mortgage securities. I take it that these mortgages are real kiwi mortgages and not some mixed junk instrument originating in the USA.

    That is where the Moral Hazard should be exercised. First, those mortgages should be revalued down to the market value making the banks take the loss for the bad debt. This would mean Aussie banks getting a few billion less in profits next year. They might even offer more of their devalued assets to the RB. That’s OK its called nationalisation which I favour (coincidentally with Winston).

    Second, marked down assets would mean the mortgage holders would have their mortgages reduced but retain their equity and avoid the hardship of foreclosures. The Moral Hazard of being bailed out is shared out equitably according to risk taking.

    This would be the way for Labour to deal with this problem making the risk takers pay without exposing those most in need to loss of housing and loss of savings. Far better than Key’s socialism for the rich and the middle class.

    Somehow I doubt that Labour would have the guts to take on the Aussie banks in this crisis situation, so we will see a wholesale guarantee shortly and with it a few million free lunches to the Aussie banks and NZ property speculators funded by NZ taxpayers.

  9. Matthew Pilott 9

    Hmm, The Standard ate my homework (well my previous response). Shall try again, apologies if this pops up twice.

    vto – those stampeding should be free and merry to stampede to their hearts’ content – so long as it is not the rest of us they trample.

    HS and vto – my real problem is this: when someone takes a great risk, there are usually great rewards. Those rewards are always concentrated in the hands of the risk-taker, with what little ‘trickle-down’ effect as can normally be expected to benefit the rest of us.

    When the risk is realised, the costs are generally shared equally among us – but that matters little to the person who has already waltzed off with all the cash

  10. vto 10

    interesting MP and would be keen to respond – especially as my field of business has involved just such a perceived huge risk / return. Unfortunately I have to leave in 2 minutes for whitebait country (and hector dolphins).

    But super quick – everyone is stampeding. I recommended to family some weeks/months ago to get their cash out of aussie-owned banks. Mums and Dads stampeded from finance companies. Others stampeding out of investment properties. Etc. In fact the only ones not stampeding are those with salaries and those with really near super-conservative investment positions.

    As to the costs falling to those other than those who actually took the risks – big subject. Unfortunately that does happen sometimes. But there is some trickle down via for example employment by those who take the big jobs / risks. Costs arise when the risk sets and jobs are lost. Waltzing off with the cash though generally happens when crooks are involved. And there are crooks in most every field of human endeavour.

    And when the risk sets the costs are on average absolutely not shared equally.

    As I said above, I don’t think what you are getting at can in fact be resolved. It is simply way too complex and human nature has as some of its many components speculation and risk-taking and crookedness. Difficult to control human nature. But good luck.

    Rough post. Gotta fly.

  11. Matthew Pilott 11

    Waltzing off with the cash though generally happens when crooks are involved.

    Not exactly. What if you had made millions selling poor people mortgages they couldn’t realisticly service. Nothing illegal – and you still happily walk off wih a packet. This stuff happens time and time again.

    Everyone is stampeding, but that’s because the experts started to do so, and told everyone else to run like hell. It’s not ethical, it’s not sustainable.

    Good luck? Macroeconomics isn’t my specialty, and this seems to be beyond the ken of those for whom it is!

Recent Comments

Recent Posts

  • Tokelau Language Week reminds us to stay united and strong
    Staying strong in the face of challenges and being true to our heritage and languages are key to preserving our cultural identity and wellbeing, is the focus of the 2020 Tokelau Language Week. Minister for Pacific Peoples, Aupito William Sio, says this year’s theme, ‘Apoapo tau foe, i nā tāfea ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • NZ announces a third P-3 deployment in support of UN sanctions
    The Government has deployed a Royal New Zealand Air Force P-3K2 Orion (P-3) maritime patrol aircraft to support the implementation of United Nations Security Council (UNSC) resolutions imposing sanctions against North Korea, announced Minister of Foreign Affairs Winston Peters and Minister of Defence Ron Mark. “New Zealand has long supported ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Pacific trade and development agreement a reality
    Pacific regional trade and development agreement PACER Plus will enter into force in 60 days now that the required eight countries have ratified it. Trade and Export Growth Minister David Parker welcomed the announcement that the Cook Islands is the eighth nation to ratify this landmark agreement. “The agreement represents ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Securing a pipeline of teachers
    The Government is changing its approach to teacher recruitment as COVID-19 travel restrictions continue, by boosting a range of initiatives to get more Kiwis into teaching. “When we came into Government, we were faced with a teacher supply crisis,” Education Minister Chris Hipkins said. “Over the past three years, we ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Border exceptions for a small number of international students with visas
    The Government has established a new category that will allow 250 international PhD and postgraduate students to enter New Zealand and continue their studies, in the latest set of border exceptions. “The health, safety and wellbeing of people in New Zealand remains the Government’s top priority. Tight border restrictions remain ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • First COVID-19 vaccine purchase agreement signed
    The Government has signed an agreement to purchase 1.5 million COVID-19 vaccines – enough for 750,000 people – from Pfizer and BioNTech, subject to the vaccine successfully completing all clinical trials and passing regulatory approvals in New Zealand, say Research, Science and Innovation Minister Megan Woods and Health Minister Chris Hipkins. ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • International statement – End-to-end encryption and public safety
    We, the undersigned, support strong encryption, which plays a crucial role in protecting personal data, privacy, intellectual property, trade secrets and cyber security.  It also serves a vital purpose in repressive states to protect journalists, human rights defenders and other vulnerable people, as stated in the 2017 resolution of the ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Ministry of Defence Biodefence Assessment released
    The Ministry of Defence has today released a Defence Assessment examining Defence’s role across the spectrum of biological hazards and threats facing New Zealand. Biodefence: Preparing for a New Era of Biological Hazards and Threats looks at how the NZDF supports other agencies’ biodefence activities, and considers the context of ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020
    New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020 Hon David Parker’s response following Thomas Piketty and Esther Duflo. Good morning, good afternoon, and good evening, wherever in the world you might be. I first acknowledge the excellent thought provoking speeches of Thomas Piketty and Esther ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Kaipara Moana restoration takes next step
    A Memorandum of Understanding has been signed today at Waihāua Marae between the Crown, local iwi and councils to protect, restore and enhance the mauri of Kaipara Moana in Northland. Environment Minister David Parker signed the document on behalf of the Crown along with representatives from Ngā Maunga Whakahī, Ngāti ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • New Zealand and Uruguay unite on reducing livestock production emissions
    Agriculture Minister Damien O’Connor and Uruguayan Minister of Livestock, Agriculture and Fisheries Carlos María Uriarte have welcomed the launch of a three-year project that will underpin sustainable livestock production in Uruguay, Argentina, and Costa Rica.  The project called ‘Innovation for pasture management’ is led by Uruguay’s National Institute of Agricultural ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • 3100 jobs created through marae upgrades
    Hundreds of marae throughout the country will be upgraded through investments from the Provincial Growth Fund’s refocused post COVID-19 funding to create jobs and put money into the pockets of local tradespeople and businesses, Regional Economic Development Minister Shane Jones and Māori Development Minister Nanaia Mahuta have announced. “A total ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Health volunteers recognised in annual awards
    Health Minister Chris Hipkins has announced 9 teams and 14 individuals are the recipients of this year’s Minister of Health Volunteer Awards.  “The health volunteer awards celebrate and recognise the thousands of dedicated health sector volunteers who give many hours of their time to help other New Zealanders,” Mr Hipkins ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community COVID-19 Fund supports Pacific recovery
    The Minister for Pacific Peoples, Aupito William Sio says a total of 264 groups and individuals have successfully applied for the Pacific Aotearoa Community COVID-19 Recovery Fund, that will support Pacific communities drive their own COVID-19 recovery strategies, initiatives, and actions. “I am keen to see this Fund support Pacific ...
    BeehiveBy beehive.govt.nz
    2 weeks ago
  • Community benefits from Māori apprenticeships
    Up to 50 Māori apprentices in Wellington will receive paid training to build houses for their local communities, thanks to a $2.75 million investment from the Māori Trades and Training Fund, announced Employment Minister Willie Jackson today. “This funding will enable Ngāti Toa Rangatira Incorporated to provide its Ngā Kaimahi ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • Training fund supports Māori jobseekers
    Rapidly growing sectors will benefit from a $990,000 Māori Trades and Training Fund investment which will see Wellington jobseekers supported into work, announced Employment Minister Willie Jackson today. “This funding will enable Sapphire Consultants Ltd. to help up to 45 Māori jobseekers into paid training initiatives over two years through ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • Ruakura Inland Port development vital infrastructure for Waikato
    The Government is investing $40 million to develop an inland port at Ruakura which will become a freight super-hub and a future business, research and residential development for the Waikato, Urban Development and Transport Minister Phil Twyford, and Māori Development Minister Nanaia Mahuta announced today. The funding has been has ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • Appointments made to Defence Expert Review Group
    Defence Minister Ron Mark announced today the establishment of an Expert Review Group to review a number of aspects of the New Zealand Defence Force’s (NZDF) structure, information management and record-keeping processes.  The Expert Review Group’s work arises out of the first recommendation from the Report of the Government’s Inquiry ...
    BeehiveBy beehive.govt.nz
    3 weeks ago
  • No active community cases of COVID-19
    There are no active community cases of COVID-19 remaining in the country after the last people from the recent outbreak have recovered from the virus, Health Minister Chris Hipkins said today. “This is a big milestone. New Zealanders have once again through their collective actions squashed the virus. The systems ...
    BeehiveBy beehive.govt.nz
    3 weeks ago