Woeful Economic Ignorance

No-One Owes Us a Living

Bernard Hickey, writing in the NZ Herald, recently pointed out that NZ banks have tightened up on their lending criteria to businesses recently, despite early signs of economic recovery in this country. Banks are more cautious than ever, it would seem, when it comes to lending to NZ businesses.

But why? Well, apparently the usual suspect is the Reserve Bank's new requirement that a greater proportion of the banks' funding be sourced from New Zealand, rather than those large, hot international wholesale money markets. Then, secondly, Aussie banks appear to be losing their ardour for New Zealand, preferring to expand their business in Asia. So, capital is not as freely available, as it once was.

So far, so good. "Houston, we have a problem" is now an apt status report. But if you go to the comments section of Hickey's article your heart will likely sink at the diatribe of economic ignorance, blameshifting, and populist ignorance that is on offer. An example of the erudition displayed:

What sort of an idiot thinks they can order our now completely Internationally owned banks to suddenly start lending to little old, "flea on the dogs tail NZ" business? (Whats left of it) This ridiculous situation is of the Reserve Banks and our Politicians own making and now they think they can bully international business' into financial risk taking on the bais of our wonderful economic performance.

Hullo? Am I on another planet?

Free market means, free to lend or free not to lend, either way Banks are now free to do what they want, and we are not. Rogernomics always stood for "you will be Rogered in no time at all" and global free market stood for, 3 winners, 191 losers. Why do no economists see what is a very obvious systematic failure. You all sound like Monty Python, This Parrots dead. "No its not, its just pining for the fiords".Ahh, no its dead!

You are just a huge club of bumbleing fiddeling Nero's. Shame on the lot of you.

Yes, dear chap. We are forced to the conclusion that you are indeed on another planet. And another coruscating contribution:

It seems that you suggest that our capitalism without capital should continue. One more decade and again the "capitalists" will run away with cash and WE will have to bail-out the banks again. These "financial experts" must be blind.

The most significant competitor to banks for capital in this country is the government. It is borrowing $240m per week. It is the elephant which is squeezing every body else out of the room. Strange that people always seem to forget that money is subject to demand and supply constraints and that since the Government became a huge borrower, everyone else has become squeezed and capital supply reduces enormously. The banks are no exception. They are being forced to attempt to raise more money in New Zealand while the Government has muscled to the front of the queue and is slobbering at the table, leaving only crumbs for everyone else.

And let's not forget that the insatiable slobbering of the Government for more borrowed money is to maintain a bloated, nannying, regulating, stifling, exorbitant, state-sector bureaucracy--and to maintain welfare hand-outs to middle-class New Zealand. And the Government is "driven" to do this to survive politically. There is no fury to match an electorate when its "entitlements" and hand outs have been cut. New Zealand is one big Ponzi scheme, of the same style as Greece or Spain or Hungary.

Now the Government is hoping that sooner or later the private sector economy will stage a recovery, tax revenues will rise, government borrowing can be pegged back, and we can all move on to better things. But every expansion of Government activity results in weakening the private sector economy by a ratio of roughly one to two, according to Milton Friedman. Thus, every dollar of new Government activity results in a loss of two dollars of economic activity in the private sector. All private lending institutions in New Zealand are choking because the Government is sucking out all the monetary oxygen.

Secondly, railing against "Australian banks" is stupid, populist nonsense. Of course Australian banks--or any bank for that matter--when considering whether to focus investment in Asia versus New Zealand are likely to choose Asia. Why? Because capital is global and mobile and it will flow to where it can get the best risk-adjusted return. And Asia beats us in spades.

The reality is that New Zealand is a very business-unfriendly place. The costs of doing business in this country are very high and getting higher by the day. The vast majority of people who are in business in this country would love to be able to sell up and get out. Red-tape, compliance costs, taxes, rules, regulations, restrictions, environmentalism, not to mention the smothering ETS, all mean that businesses in New Zealand are largely very small, low-margin, high risk, low growth concerns. And that means that capital will remain very scarce in this country. It means that businesses will struggle to get credit. Capital will flow elsewhere to other more positive offshore investment opportunities.

It also means that when banks do lend to businesses they will want to secure their lending against tangible assets, such as property because business is so tenuous and risky here. This generates a vicious circle where businesses feel the need to tie up capital in owner/operated commercial premises to ensure access to operating capital via banks--which has to be one of the most inefficient uses of capital imaginable.

It's no wonder that so many businesses fail in New Zealand. It's no wonder that banks are tightening their lending criteria for businesses. These things are not cyclical--they are structural. They are symptomatic of a far more serious and intractable problem. Either we shrink the government and its smothering regulations fast, or else. If not, would the last person please turn out the lights.