Why the Left Protests and Shouts So Much

Invincible Ignorance and Shouting

The studied ignorance of some folk, whom one would expect to know better, leads to much head shaking at times.  The latest disappointment is Bryan Gould who is a former UK Labour MP and former vice-chancellor of Waikato University.  Sadly, Mr Gould has offered an unintended explanation of why the Left is held in such disrepute these days.  

Mr Gould has ventured into print to expose his ignorance of the banking system and how it works.  For these schoolboy errors he has been taken to task by Dr Don Brash, who has had a long career in the banking system.

But Mr Gould went further . . .  He said banks like to pretend they provide a useful service to the community by channelling resources from those who have no immediate need for them (savers) to those who do need them (borrowers), charging a modest spread for rendering that service.

But, said Mr Gould, this "benign view of [bank] operations is inaccurate and misleading. The banks do not lend you mortgage money deposited with them by someone else. They lend you money they themselves create out of nothing through the stroke of a pen or, today, a computer entry. The banks make their money, in other words, by charging interest on money that they themselves create". [NZ Herald]

One suspects that Mr Gould is reflexively drawing upon old-fashioned Marxist dogmas, commonly believed in the nineteen sixties.

Institutional Blinkers

Purblind Central Bankers

The causes of the Global Financial Crisis are complex and multi-valent--as expected.  One individual who shares a good deal of the blame, however, is Alan Greenspan, former chairman of the US Federal Reserve.  Greenspan deliberately kept interest rates low in the US (and thereby in much of the world) during the critical period of 2000 to 2004.  It was during this period that house prices began to inflate rapidly.

In May 2000 the US federal funds rate (set by the Federal Reserve) was 6.5 percent.  Then the dot-com crash happened.  Internet and IT companies had been a hot item on the stock market, trading well above their intrinsic value.  Suddenly, as is often the case, the mood of the market changed:

The Second Global Financial Crisis, Part III

Nursing our Malice

When the Global Financial Crisis hit many pundits argued that Western capitalism had failed.  They had a point.  Half a point.  Capitalism is essentially the private ( as opposed to government) manufacture and trading of goods and services.  But such a non-government, free trade system cannot survive unless it is built upon a foundation of integrity, honesty, and the prevention and punishment of theft. Capitalism only prospers and benefits the majority if it cares deeply about the sovereignty of other people's property, believing that what God has given, let not man take away.

The Second Global Financial Crisis, Part II

Meeting Obligations, Or Not

In a previous post we argued that little of any significance has been accomplished effectively to regulate investment banking.  There is no doubt whatsoever that global investment banking, which had been dominated by US companies, had been responsible for the Global Financial Crisis.  As a result of government actions, risk is now concentrated in that sector more than ever before.  If institutions then were too big to fail, there are bigger now investment banks.  Moreover there are less of them.  Risk is therefore exacerbated and arguably more acute than 2008.

Why do size and number of investment banks matter?

The Second Global Financial Crisis, Part I

Defalcation on a Unimaginable Scale 

We are nearly four years on from the Global Financial Crisis.  It has achieved the status of its own acronym (GFC)--a sure sign in modern parlance that it "means something".  Its effects are still with us and some assert they will ripple out for a further decade. Has the problem been solved?  Far from it.

In short the regulatory changes made, particularly in the United States, have been both inadequate and even those passed, ineffectually policed.  The causes of the original crisis were manifold; the solutions, however, appear straightforward.  They have largely been ignored.

Letter From the UK (about Spain)

A Cautionary Tale

Debt Fuelled Boom Ends in Spectacular Bust

The abridged article below illustrates why some large Spanish banks are under such stress.

Spanish property: Polaris golf resort homes crash to a third of original price

The Guardian

They were once Europe's most ambitious holiday homes projects, vast developments financed by supersized loans from Spain's cajas and banks. The properties were widely advertised on television in the UK to entice investors chasing the good life in the sun and hoping to profit from the property boom.

But five years on, the Polaris World holiday dream of sun-drenched apartments overlooking golf courses designed by Jack Nicklaus has turned sour. Apartments that once sold for €200,000 (£160,000) are struggling to fetch €60,000. The last resorts built are now ghost villages.

Welcome to Murcia, the very heart of Spain's property boom and bust, where repossessions are sweeping the region and where losses are straining balance sheets of almost every Spanish bank.

Greedy Capitalists, Venal Politicians, and Voters

 Have Some More Money

J P Morgan, the biggest bank in the US, has lost a couple of billion dollars on a bad trade.  What's the odd billion amongst friends, eh?  Oh, no.  Gasp!  Horror.  Something must be wrong within the innards of what President Obama has described as "one of our better run banks". 

A phalanx of police and federal officials has descended upon the once-shining-knight, now tarnished JP Morgan to investigate what happened.  No doubt it will add to the swelling chorus for more regulation, controls, rules, and compliance that failed the last time in 2008 and have failed in their object ever since. 

The truth appears much, much more simple, yet sinister.

Delicious Irony

Life Outside the Beltway

The folly of Kiwibank, along with its parent NZ Post, is becoming more and more obvious by the month.  Both alike face a long, lingering death.  Neither can overcome the commercial challenges facing them.

Let's consider NZ Post first.  It has long been part of received wisdom that the government must ensure a functioning reliable, inexpensive postal service.  Consequently, most postal services around the world have been government owned and operated.  New Zealand took a gigantic step forward some years ago when it was decided that NZ Post needed to run along commercial lines.  It was made a State Owned Enterprise, which meant that it had to function as an independent commercial entity and make a profit for its owner, the government.

It did.  So far so good.

The Great Bank Run of 2011

Silent Paralysis

We read recently about the "secret" bank run in Greece.  Folk have been taking their money out of bank deposits in Greece and (literally) putting the money under mattresses.  They don't trust the solvency of banks any more.  Better to get their money out before its too late.  But it appears that this is not just a Greek problem.  Europe-wide the "folks" are taking their money out of European bank deposits and putting the money . . . where?  In US banks, it would appear. 

This fear-driven phenomenon would indicate a coming recession/deflation rather than recovery.  When people store their money rather than investing it, deflation usually stalks the land.  

Here is Larry Kudlow's take:

NZ Post and Kiwibank

Chained Naked to a Horse-and-Buggy

Sometimes you can see things coming down the pike. You just know what is going to turn out. Most folk knew way ahead of time that the horse-and-buggy transport system was going to become extinct. This, despite the horse-and-buggy preservation society's sterling work, despite the emotional speeches in Parliament evoking the nobility of the horse and the debt Western civilization owed to it, and despite the Government investing in a horse-and-buggy transport company called Cobb and Co, appealing to nostalgia and national pride.

At the time there were bitter mutterings at the economic sabotage being wrought by automobile companies. People were purchasing motor vehicles that were manufactured in faraway places like the UK and the US and the money was going overseas. Strict import licensing rationed how many cars were allowed to come into the country, so as to restrain the sabotage to respectable levels. All that overseas exchange being lost. If only we weren't so stupid as to give up on the horse-and-buggy.

Yet most people could see the outcome a mile off. The horse-and-buggy was going to go the way of the dodo--and in the end it was only Greenpeace that was left protesting the environmental devastation that was coming from the internal combustion engine. The Auckland Star reported how they stripped naked and chained themselves to the last buggies in the country, shutting down Broadway for a time. At least until the police--far less tolerant of socio-political antics in those days--unchained the naked miscreants, harnessed them to the buggies, and whipped them away down the Great South Road. They were never seen again.

Well, it is all so clear now. The horse-and-buggy was a goner. Sometimes economic innovation and market forces do that. Well, actually they do it all the time. But that does not stop modern day Canutes striving mightily against the tides of economics and history. Just today, for example, we have been treated to another gasp of another long, lingering death. Yet everyone knows the death is inevitable, being just a matter of time.  But everyone is too polite to say so. 

The New Zealand Post is close to commencing the palliative care stage. Like the horse-and-buggy companies, its revenues face a long, slow, lingering decline. It is inevitable. It is irreversible. As the decline hastens, it is also inevitable that our politicians, cheered on by postal workers and society's nostalgics, will in a few short years vote taxpayer's money to subsidize the business. We will be told in sonorous tones about how NZ Post is not just an icon--no, it is a vital national and strategic resource to be kept alive at all costs, even though life support is horrendously expensive.

But we will all know the real story. It is only a matter of time, and how much taxpayer's money will be flushed down the sewer as our nation goes through the futile motions of preserving obsolescence.

E-mail, electronic communication, and efficient market-driven courier companies have coalesced into an unstoppable economic force to make mail services obsolete. Ergo, NZ Post's revenues are steadily declining. This in the front page of The Herald:

A number of New Zealand Post workers are set to lose their jobs as the company looks to cut costs by closing outlets. NZ Post chief executive Brian Roche would not say how many shops would close down, but said it was likely to be fewer than 20.

The move was sparked by falling mail volumes as more people used the internet. "Our mail volumes have been declining for 4 to 5 per cent a year," Roche told Radio New Zealand. "We have to address that problem, if we have got less volume and the same level of fixed costs the two don't go well together."

For a while there, NZ Post thought it had a winner. Exploiting the largesse of economic nationalists-cum-politicians it was made the owner of a nationalised bank, Kiwibank. Since banking was a growth industry, and since NZ Post already had a nation-wide branch network, hey presto politician-cum-business gurus decided that could disworsify NZ Post into banking, thereby securing NZ Post's future. It seemed to work for a while--but now, once again, economic reality is emerging from beneath the fizz and pop. Kiwibank took all the cardigan-brigade's accounts--loss making accounts--from their competitors; then they discovered that they had grown so fast, and their margins were so bad, they needed more capital. The government, by this time, restrained by its own huge, ballooning deficits, declined the generous invitation to stump up with more borrowed money. Poor Kiwibank was forced to borrow offshore--thereby once again disguising for a time its high cost base and poor margins. But no longer.

In what amounts to a delicious irony, Dr Michael Cullen--former Labour Party deputy Prime Minister and Treasurer, now Chairman of NZ Post--long a champion of Kiwibank, is having to clean up the mess he largely created. Now "we spent it all" Cullen is having to cut, cut, cut.

NZ Post chairman Michael Cullen last month told a parliamentary commerce committee difficult trading conditions and a flat economy continued to negatively affect business. "One of the issues is that Kiwibank has been staffed and organised on the assumption of very strong growth," Cullen told the committee.

"At any particular point in time it's staffing is reflecting the anticipated needs for the growth of the next phase rather than it's current service delivery profile. As a consequence its actual cost ratio is actually quite high by banking standards. "This period of slow growth, which is going to be inevitable for Kiwibank over the next year or two, is probably an opportunity to address more firmly that issue of cost reduction within Kiwibank itself."

"Organised on the assumption of very strong growth"?  Just like you ran our national accounts, Michael. You thought you could spend, spend, spend to infinity, on just such an assumption of permanent economic growth. "A cost ratio quite high by banking standards"? You mean your competitors are leaner, meaner, and more efficient than the government bank--despite repatriating all those profits back to Australia, Michael?

Our prediction remains. NZ Post will continue to decline, eventually to the point of inevitable shuttering the shop. It is a horse-and-buggy service. Its subsidiary, Kiwibank will end up being sold off as a lemon to the private sector.

And that, as they say, will be that.

The moral of the story: never let the state get anywhere near a commercial business. For politicians capital is always cheap and virtually inexhaustible (being extorted via the taxation system from the citizens). State owned and operated businesses are inevitably overcapitalised, inefficient, and pathologically bent towards a high cost base. That's what happens when capital is free and inexhaustible. Until it is not--and of course it never really is. It only appears that way for a decade or so.

Some will object that New Zealand's "state owned enterprise" model refutes this sweeping judgment. It does not. It merely provides yet another example of its truth. The SOE model appears to work for a time because the government relinquishes the responsibilities and privileges of ownership, requiring that the companies run as stand-alone commercial businesses with independent boards and management.

But in the end this, too, breaks down. Governments cannot resist appointing their commercially inept mates to SOE boards as a sinecure for favours rendered. Moreover, when taxpayer's money dries up no government wants to pony up capital for reinvestment in the businesses. Rather, government tries to strip out the maximum in dividends and payments from their tame corporations. When it finally dawns on politicians that, were they to continue in this vein, the businesses will be run into the ground they then decide that selling them off is the better route. And that's where we are right now.

The moral remains valid: never let the state get anywhere near a commercial business. If any politician were even to moot the idea, harness him naked to a horse and buggy and whip him down the Great South Road.

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.