Sigh, more like SCF?
So this isn’t what I wanted to hear:
Mr Key also warned that other finance companies may go under and the government would continue to look after investors by keeping the guarantee on investments in place.
I think he meant:
Mr Key also warned that other finance companies may go under and the tax payer would continue to take on all the risk for investors by keeping the guarantee on investments in place.
Look. I had no problem with the idea that we needed to do something in wholesale markets during the credit crisis to prevent an effective “bank run”.
But the two problems with keeping this going now is that:
- This problem is gone now,
- Given the fact that funds flooded into risky assets after the guarantee there is a definite case that we should have done less.
Contrary to what Kiwiblog said that “It is easy in hindsight to say that one should not have had the guarantee scheme, but in late 2008 the wordl financial system was on the brink of possible collapse, and pretty much every OECD country did much the same as a stability measure” I think it is perfectly fine to critique the scheme.
Why? Well we KNEW there were issues with our finance firms, and we stuck them into a scheme rapidly without doing due diligence on a whole lot of the stuff. And we made this f’ing critique AT THE TIME – so we are allowed to make it now 😉
Lets just think here for a second. Effectively government was taking on all the risk, so why weren’t the insurance premiums insuring that all the return also went to government?
If it is hard to observe the price, couldn’t we have just said that people who entered the scheme couldn’t increase lending – this would have allowed the scheme to protect deposits without leading to the “increased risk taking” that has taken place.
Bah.
What I don’t get is how we get from Treasury recommending charging rates that varied with credit ratings, to the mess we got when it was implemented.
Because it was an opt-in scheme – as advocated by Treasury – and the finance companies wouldn’t have joined if they’d had to pay anything like the true price for the risk they were offloading.
But isn’t that the point of an efficient price?! Jesus.
Hey,
Not too many tears for the Government – us – please. For years the government has taxed the full nominal interest paid out to lenders, including the risk premium, but it has never allowed individuals to deduct losses if their loans went sour. Now they have backed themselves into a scheme where they take all the losses on the downside but only 20 – 33% (ie tax) of the risk premium on the up side. Two wrongs don’t make a right, but the long term fiscal exposure of the government to the finance companies has been not nearly so bad as the short term position. And, with a modicum of justice, the taxes earned on the premiums are proportional to the premiums.
The biggest losers are of course those who lent the money in the past. paid taxes on the interest premiums, and then got no bail out when their loans went sour.
Andrew
Here’s a thought: why not provide only a part-guarantee for second tier finances?
Say, 80%. Enough to make sure the system doesn’t collapse, but still enough to make it more risky.
@Eric Crampton
Hey, you asked for the reason. I never said it was a good one.
What I can’t understand is why the treasury thought that finance companies had to be covered if banks were, due to redemption risk.
There was always a massive gulf between the risk on bank deposits and that on (most) finance company deposits. The change to zero/government debt risk on bank deposits surely wouldn’t change this much. It is like saying motorcyclists would start taking the bus if only buses were fitted with seat-belts.
Well swan, the premise for the guarantee in the first place was that if we didn’t match Australia’s move then people would shift their money from NZ banks to Aussie banks (taking on a huge wodge of exchange rate risk in the process). If you were gullible enough to believe that, then it’s no stretch to believe that people would shift their money from NZ finance companies to NZ banks.
@Miguel: That last bit clears a lot up. Thanks.