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9:34 am, October 30th, 2008 - 11 comments
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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.”
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.
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.
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?
“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.
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.
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?
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
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.
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
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.
“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!