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BLOG: $150 billion: we're good for it

Personal Finance Blog: David Chaplin

Friday 17th October 2008

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For a brief moment, in the days after the September 11 terrorist attacks, banks were nice to each other. Or that’s what some big-wig from a Swiss financial institution told me once.

He explained that instead of the usual cut-throat inter-bank lending practices - where any perceived weakness in a rival was met with high interest rates or a refusal to lend - the competitors eased off the pressure, handed over billions to each other more or less free of charge with a ‘we know you’re good for it’ handshake.

My Swiss friend claimed the temporary suspension of capitalism averted a systemic credit crunch.

Capitalism resumed shortly after and whatever inter-bank solidarity forged in the post-terror crisis has been forgotten. Wracked with debt paranoia the world’s banks now lie in the intensive care unit hooked up to permanent ‘liquidity’ drips and periodically ‘pumped’ up with government cash.

To continue the medical analogy, the latest round of nationalisation and deposit guarantees are the financial equivalent of defibrillation. The central bank doctors are now watching anxiously for the heart monitor to start beeping again.

The New Zealand government reluctantly applied its own emergency procedure. And you can see why it was reluctant. The rapidly evolving Reserve Bank deposit guarantee scheme has already distorted market operations. For example, the NZ Treasury cancelled a government debt-raising exercise this week due to lack of demand.

The latest changes to the scheme, announced Wednesday night, seem more sensible. Finance companies no longer have blanket coverage; a concept of risk has been reintroduced.

There is more change to come. Rewriting the rules of capitalism is a tricky business.

But for the next two years at least New Zealand taxpayers will have to carry an $150 billion ‘contingent liability’ on their books. The government ‘guarantee’, for what it’s worth, is a promise to ourselves that if we go broke, we’ll pay ourselves back.

We’re good for it.

Business writer David Chaplin blogs on personal finance. David is the editor of ASSET Magazine and also writes for Good Returns.



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