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

    Mat

    “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

  • Justice Minister represents New Zealand at Berlin nuclear disarmament summit
    Justice Minister Andrew Little will travel to Berlin tomorrow to represent New Zealand at a high-level summit on nuclear disarmament. This year, the Nuclear Non-Proliferation Treaty (NPT) celebrates 50 years since it entered into force. “New Zealand’s proud record and leadership on nuclear disarmament is unwavering, so it’s important we are present ...
    BeehiveBy beehive.govt.nz
    12 hours ago
  • Prime Minister to visit Fiji and Australia
    Prime Minister Jacinda Ardern will visit two of New Zealand’s most important Pacific partners, Fiji and Australia, next week. The visit to Fiji will be the first by a New Zealand Prime Minister in four years and comes during the 50th anniversary of Fijian independence and diplomatic relations between our ...
    BeehiveBy beehive.govt.nz
    1 day ago
  • Next steps in Criminal Cases Review Commission announced
    Justice Minister Andrew Little and New Zealand First MP Darroch Ball, have today announced the appointment of the Chief Commissioner of the Criminal Cases Review Commission (CCRC), the location, and the membership of the Establishment Advisory Group. Colin Carruthers QC has been appointed Chief Commissioner of the CCRC for an ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Horticultural Ahuwhenua Trophy finalists announced
    Māori Development Minister Hon Nanaia Mahuta and Agriculture Minister Hon Damien O’Connor co-announced the first horticultural finalists for the Ahuwhenua Trophy celebrating excellence in the Māori agricultural sector.  The three finalists are Ngai Tukairangi Trust from Mt Maunganui, Otama Marere Trust from Tauranga, and Hineora Orchard Te Kaha 15B Ahuwhenua ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • New support for students with dyslexia
    A new kete of resources to strengthen support for students with dyslexia will provide extra tools for the new Learning Support Coordinators (LSCs) as they start in schools, Associate Education Minister Tracey Martin announced today. The Minister launched the kete in Wellington this morning, at the first of three induction ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Rental reforms progress to select committee stage
    The Government continues to make progress on a fairer and more secure rental market for renters and landlords with the First Reading of the Residential Tenancies Amendment Bill and its referral to the Social Services and Community Select Committee.  “Now is the opportunity for landlords, tenants and others who want ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Papua New Guinea Prime Minister to visit New Zealand
    Papua New Guinea’s Prime Minister Hon James Marape will visit New Zealand from 21-25 February, Prime Minister Jacinda Ardern announced today. “New Zealand and Papua New Guinea have a warm and friendly relationship. I look forward to welcoming Prime Minister Marape here and strengthening the relationship between our two countries,” ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Free school lunches served up to thousands
    Thousands of children have begun receiving a free lunch on every day of the school week, Prime Minister Jacinda Ardern said. The Government’s free and healthy school lunch programme is under way for 7,000 students at 31 schools in Hawke’s Bay / Tairāwhiti and Bay of Plenty / Waiariki, extending ...
    BeehiveBy beehive.govt.nz
    2 days ago
  • Social Wellbeing Agency replaces Social Investment Agency with new approach
    The Minister for Social Development Carmel Sepuloni today announced a new approach that continues to broaden the Government’s social sector focus from a narrow, investment approach to one centred on people and wellbeing. Minister Sepuloni said redefining the previous approach to social investment by combining science, data and lived experience ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Government to strengthen protections for whistleblowers
    The Government is strengthening the Protected Disclosures Act to provide better protection for whistle blowers, Minister of State Services Chris Hipkins said today. “The Protected Disclosures Act is meant to encourage people to speak up about serious wrongdoing in the workplace and protect them from losing their jobs or being ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • PM speech at Parliamentary Chinese New Year celebration 2020
    Nǐn hǎo (Hello in Mandarin). Xīn Nián Kuài Lè (Happy New Year in Mandarin) Néi Hóu (Hello in Cantonese). Sun Nin Fai Lok (Happy New Year in Cantonese) Tēnā koutou, tēnā koutou, tēnā koutou katoa. Thank you for your invitation to attend this celebration today. I would like to acknowledge ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • IPANZ Annual Address
    Kia ora. Ngā mihi nui ki a koutou katoa. Nau mai haere mai ki te Whare Pāremata. E ngā mana whenua ki tēnei rohe Taranaki Whānui, Te Upoko o Te Ika, Ngāti Toa Rangatira, Ngāti Raukawa – kei te mihi, kei te mihi, kei te mihi. E ngā mana, e ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • 2020 IPANZ Annual Address
    Kia ora. Ngā mihi nui ki a koutou katoa. Nau mai haere mai ki te Whare Pāremata. E ngā mana whenua ki tēnei rohe Taranaki Whānui, Te Upoko o Te Ika, Ngāti Toa Rangatira, Ngāti Raukawa – kei te mihi, kei te mihi, kei te mihi. E ngā mana, e ngā ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Tougher penalties for gun crime a step closer
    Tougher penalties for gun crime are a step closer with the passage of firearms reform legislation through another stage in Parliament. The Arms Legislation Bill has tonight passed its Second Reading. “The changes have one objective - to prevent firearms falling into the wrong hands,” said Police Minister Stuart Nash. ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Arms Legislation Bill: Second Reading
    Introduction Mr Speaker We all know why we are here today. It has been a long journey. The journey did not actually begin on 15 March 2019. It began on 30 June 1997. Almost 23 years ago, Justice Sir Thomas Thorp told us what was wrong with our firearms legislation. ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • New era for vocational education
    The Government’s work to put trades and vocational education back on the agenda took another major step forward today with the passing of the Education (Vocational Education and Training Reform) Amendment Bill, Education Minister Chris Hipkins said. “This is a watershed day for trades and vocational education. These law changes formalise ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Bill to Amend the Greater Christchurch Regeneration Act
    Speeding up the return of Christchurch regeneration activities to local leadership is behind the Greater Christchurch Regeneration Amendment Bill introduced to Parliament today by Minister Megan Woods. “As we approach nine years since the February 2011 earthquake in Canterbury, and with the transition to local leadership well underway, the time ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Milford Track to partly reopen after storm damage
    Hundreds of New Zealanders and international visitors will be able to get back out into nature with the Milford Track partially reopening next week, after extensive assessments and repairs, the Minister of Conservation Eugenie Sage announced today. The popular Great Walk has been closed since 3 February after an extreme ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • Government drives low-emissions transport momentum
    Up to 110 new EV chargers nationwide in cities and regions 50 electric vehicles for ride-sharing The Government is helping deliver more infrastructure and options for low emissions transport through new projects, Energy and Resources Minister Dr Megan Woods says. Tauranga, Nelson, Levin, New Plymouth and Oamaru are just some ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Kiwis better off under Coalition Government
    New Zealanders are increasingly better off under this Government as wages rise and families have more disposable income, Finance Minister Grant Robertson says. Stats NZ reported today that average household disposable incomes after housing costs rose 4.9% in 2019. This was the highest rise in four years and came as ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Another step towards restoring rights for screen production workers
    All New Zealanders need to have their voices heard at work to ensure we have an inclusive and productive economy. Today we introduce a Bill to do this for workers in the New Zealand screen industry, Workplace Relations and Safety Minister Iain Lees-Galloway says. “The Screen Industry Workers Bill will ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Enhanced Taskforce Green for Southland and South Otago
    The Government has announced further help for the Southland and Otago regions to speed up recovery efforts from the floods.  “I’ve approved Enhanced Taskforce Green (ETFG), making $500,000 available to help with the clean-up in Fiordland, Southland, and the Clutha district in Otago,” Minister for Social Development Carmel Sepuloni said.  ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Employers and Industry take the lead to connect students to vocational education
    Following the announcement that more than 340 schools will be funded to run events promoting vocational education, the Government has announced it will fund a further 257 events to be run by employers and industry. “These industry-run events will allow more than 30,000 students to connect with more than 2,000 ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Rental reforms a step closer with the introduction of the Residential Tenancies Amendment Bill
    Today the Government is making progress on a fairer and more secure rental market for renters and landlords with the introduction of the Residential Tenancies Amendment Bill in Parliament.  “This Bill includes a series of reforms to improve the wellbeing of the 609,700 households that live in rented homes, and ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Biosecurity Minister announces world first eradication of pea weevil
    A Government programme to wipe out pea weevil has achieved a world first, with Biosecurity Minister Damien O’Connor today announcing the successful eradication of the noxious pest from Wairarapa. This means the nearly four-year ban on pea plants and pea straw was lifted today. Commercial and home gardeners can again grow ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Temporary Accommodation Service activated for Southland flooding
    Southland residents hit by flooding caused by heavy rainfall can now access help finding temporary accommodation with the Government activating the Temporary Accommodation Service, Minister of Civil Defence Peeni Henare announced today. “The Temporary Accommodation Service (TAS) has been activated by the Ministry of Business, Innovation and Employment to help ...
    BeehiveBy beehive.govt.nz
    5 days ago
  • Bridges: Over-hyped and under-delivered
    “Is that it?” That’s Finance Minister Grant Robertson’s response to Simon Bridges’ much-hyped economic speech today. “Simon Bridges just gave the most over-hyped and under-delivered speech that I can remember during my time in politics,” Grant Robertson said. “It’s not surprising. Simon Bridges literally said on the radio this morning ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Police to trial eye in the sky in Christchurch
    A trial deployment of the Police Eagle helicopter in Christchurch will test whether the aircraft would make a significant difference to crime prevention and community safety. “The Bell 429 helicopter will be based in Christchurch for five weeks, from 17 February to 20 March,” said Police Minister Stuart Nash. “The ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Momentum of trade talks continues with visits to promote Pacific and Middle East links
    The Government has kept up the pace of its work to promote New Zealand’s trade interests and diversify our export markets, with visits to Fiji and the United Arab Emirates (UAE) by Trade and Export Growth Minister David Parker. Building momentum to bring the PACER Plus trade and development agreement ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Coalition Govt’s investment in Customs nets record drugs haul: 3 tonnes stopped at borders in 2019
    The Coalition Government’s investment in a strong border and disrupting transnational organised crime produced record results for stopping drugs in 2019, says Minister of Customs Jenny Salesa. The illegal drugs were seized at the New Zealand border by Customs, and overseas by Customs’ international border partners before the drugs could ...
    BeehiveBy beehive.govt.nz
    6 days ago
  • Separated scenic cycleway starts
    Transport Minister Phil Twyford today kicked off construction of a separated cycleway alongside Tamaki Drive. A two-way separated cycleway will be built along the northern side of Tamaki Drive, between the Quay Street Cycleway extension and Ngapipi Road. There will be a separate walking path alongside. Phil Twyford said giving ...
    BeehiveBy beehive.govt.nz
    7 days ago
  • Earthquake-Prone Building loan scheme: eligibility criteria announced
    Owner-occupiers of unit and apartments living in earthquake-prone buildings will have certainty about the financial support they’ll be eligible for with the release of criteria for an upcoming assistance scheme, Minister for Building and Construction Jenny Salesa says. The Residential Earthquake-Prone Building Financial Assistance Scheme will help unit owners facing ...
    BeehiveBy beehive.govt.nz
    7 days ago
  • Travel restrictions to remain in place as coronavirus precaution
    Temporary restrictions on travel from China will remain in place as a precautionary measure to protect against the spread of the COVID-19 coronavirus. The restrictions which prevent foreign nationals travelling from, or transiting through, mainland China from entering New Zealand have been extended for a further 8 days. This position ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Over $1 million to help Tairāwhiti youth into employment
    Employment Minister Willie Jackson announced today that Tairāwhiti rangatahi will benefit from an investment made by the Government’s He Poutama Rangatahi (HPR) scheme. The funding will go to the Tautua Village, Kauneke programme and the Matapuna Supported Employment Programme which will fund 120 rangatahi over two years. “Both programmes work ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • School attendance has to improve
    All parents and caregivers need to ensure that their children go to school unless they are sick, Associate Education Minister Tracey Martin said today. “The school attendance results for 2019 show, across the board, a drop in the number of students going to school regularly,” the Minister says. “Apart from ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Crown and Moriori sign a Deed of Settlement
    A Deed of Settlement agreeing redress for historical Treaty claims has been signed by the Crown and Moriori at Kōpinga Marae on Rēkohu (Chatham Islands) today, Minister for Treaty of Waitangi Negotiations Andrew Little has announced. Moriori have a tradition of peace that extends back over 600 years. This settlement ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Waikato Expressway driving towards completion
    Transport Minister Phil Twyford today with Māori King Tuheitia Pōtatau Te Wherowhero VII officially opened the country’s newest road, the $384 million Huntly section of the Waikato Expressway. The 15km four-lane highway with side and central safety barriers takes State Highway 1 east of Huntly town, across lowlands and streams ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • 3400 New Zealanders treated in first year of new hepatitis C treatment
    The rapid uptake of life-saving new hepatitis C medicine Maviret since it was funded by PHARMAC a year ago means the elimination of the deadly disease from this country is a realistic goal, Health Minister David Clark says. Hepatitis C is a blood-borne virus which attacks the liver, proving fatal ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Kaupapa Māori approach for homelessness
      Kaupapa Māori will underpin the Government’s new plan to deal with homelessness announced by the Prime Minister in Auckland this morning. “Māori are massively overrepresented among people experiencing homelessness, so, to achieve different outcomes for Māori, we have to do things very differently,” says the Minister of Māori Development ...
    BeehiveBy beehive.govt.nz
    1 week ago
  • Government steps up action to prevent homelessness
    1000 new transitional housing places delivered by end of year to reduce demand for emergency motel accommodation. Introduce 25% of income payment, after 7 days, for those in emergency motel accommodation to bring in line with other forms of accommodation support. Over $70m extra to programmes that prevents those at ...
    BeehiveBy beehive.govt.nz
    1 week ago