Matt Nolan

Responsible credit?

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Kiwiblog has an interesting post on the Credit Reforms Responsible Lending Bill.

The post tackles the four main outcomes of the policy. I agree with what David Farrar has to say – and would only add that the maximum interest rate cap is very stupid, as it is the same as setting a lower than market price for some types of credit, which will lead to a suboptimal amount of lending to people who value short-term credit very highly.

My interest lies with what such a bill is missing. Education and information.

The current issue in New Zealand credit markets is illustrated by the recent Morningstar ratings that gave NZ’s fund management industry a D-. A big problem here was a lack of transparency and information.

If the government pushed organisations to provide clear, concise, and easy to digest information on risks then it would greatly reduce abuse in the whole industry.

For example, when these firms say “only 8% interest” they are confusing people – as they are charging 8% per week, when people are used to hear about the amount of interest per year. The best way to fix this is the make it that firms HAVE TO write down interest charges in per annum terms.

Education and information are far better solutions than price caps and restrictions on the ability to enforce contracts – and that is why this responsible lending bill should be heavily changed from its current format.

Update:  Paul Walker takes the interest rate idea to task here – completely agree with him.

Matt Nolan

NZ budget 2009: Most important since 1984?

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Kiwiblog brings up some great points about the importance of this years budget.

It turns out that the head of Treasury stated that this was the most important budget since 1984.  Wow.

So he’s saying that this is more important than the “mother of all budgets“.  When National came to power in the early 1990’s they faced threats of a credit rating downgrade and forecasts of huge budget deficits – which forced them to cut spending sharply.  In conjunction with HIGH interest rates (even in real terms, we are talking like 8% real!!), a lift in petrol prices because of the gulf war, and weak other commodity prices, this saw the New Zealand economy suffer a huge contraction and unemployment went over 11%.

Now, real economy prospects aren’t quite as bad this time.  Unemployment is at 5%, relative to 7% at the start of the 1990’s.  Real interest rates are very low (hitting at around 1-2%).  Some of our commodities are doing well, and even though some have experienced a sharp fall in price oil prices have also tumbled.

However, obviously there is a feeling that the threat on the currency from government policy is at its highest level since we floated the currency – intense.

Matt Nolan

iPredict return on investment

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iPredict just added a “return on investment” ranking – so that we can see who made the most out of their limited capital.

Although I am not on the list (Note: I wonder why, was my initial investment too low to be included?), I noticed that “Economist” is number 1. Furthermore, I’m relatively sure that the person currently in 3rd place is an economist.

Constantly economists are put down for their lack of forecasting ability – however they seem to be doing pretty well when their is money on the line 😉

Update:  The next day it was updated to include Goonix and myself.  Goonix is 8th, and I’m 19th.  I wasn’t involved in the election trading though so I’m not taking this as evidence of me being the worst economist 🙂

Matt Nolan

So tired …

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Of productivity talk.  On dicussing the NZIER report (which we discussed here) Kiwiblog mentions:

Productivity growth is all important.

Productivity is a ratio – I could increase it right now by shooting half the population.  It is the output that matters here, and how much we have to sacrifice to get it.  Increasing output (which we value) while sacrificing things we don’t value as much as the output is key – not productivity growth persee.

This distinction is important because “productivity growth” is going to fly up over the next couple of years – as unemployment will rise.  This isn’t necessarily a good thing, and it is not because of any parties polices.

When Labour was in power I was annoyed that output, and productivity, were ignored – as they ignored that in order to gain these “other things” like equality we were sacrificing some output.  Now everywhere I turn ALL I HEAR is productivity.

Why don’t we just learn to look at the trade-offs associated with policies and then do what is in societies interest – instead of targeting arbitrary ratios.

I’ve already talked about this here and in the Dom BTW.  I need a drink.

Matt Nolan

The durable drop and timing

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So according to the Stats NZ figures, the quantity of durable consumption goods (cars, appliances, furniture, drills etc) purchased fell very quickly during the March quarter. Now they have been dropping for a while – but this drop was off the charts.

Durable goods are seen as a “leading indicator” (in combination with durable investment products). It appears that the sharp falls for durable consumer goods have only just got kicking, while the sharp falls in durable investment goods started only mid-late last year. Since the recession started in the March quarter of 2008 this is all a bit surprising.

Given that unemployment has only hit 5%, and non-residential building has yet to fall (both lagging indicators), as well is this indicating that the recession is only really beginning for NZ. Has the past 15 months been some type of rebalancing that wasn’t really a recession – and is the recession coming now.

I think that is the worst case scenario we could pull out of recent data – if we really wanted to 😉

Matt Nolan

Does attacking bank profits makes sense?

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I was surprised to hear Bill English come out and tell banks to reduce their profitability.  This statement is ridiculous – it is like telling people to go out and cut their wages.

However, Bernard Hickey bet me to the punch in criticising this.  This quote sums up how I feel:

I actually like that our banks are profitable. The alternative is unprofitable banks that collapse at the slightest breeze

There is one more issue though.  The RBNZ feels that banks are not being competitive.  [Note:  I am not bringing up the deposit guarantee scheme.  If the government is not charging an appropriate fee for the guarantee then they are being silly – we shouldn’t attack the bank’s for that.]

Now, if there is a competition issue there could be scope for intervention.  But wait a second, Kiwibank and PSIS are offering lower floating rates (5.99% and 5.75% respectively) – why isn’t the existence of this competition driving down prices?  If we believe that people are willing to pay a margin on their floating rate if they go with a big bank then we have to ask “do we think Kiwibank and PSIS are being uncompetitive” – as they are setting the floor for interest rates.

I’ll tell you why floating rates are so much higher than near term fixed rates – uncertainty.  People are willing to pay a premium on floating as they are uncertain about the degree with which rates will fall in the future, so they value the flexibility.  Furthermore, the return on floating rates will be volatile (as they can change at any moment) so banks want to charge a premium – as they are facing uncertainty (people value a certain return above an uncertain return).  I don’t see what is unfair here.

If we force the banks to cut rates (with the same cost structure), they will reduce lending FFS.  Is that really what we want in the middle of a long-recession?