That's a nice juxtaposition on your main page Bernard - an RBNZ chart claiming to show that floating mortgage rates are too high because term deposit rates are less than 4%; followed by "Kiwibank raises deposit rates to 4.6%". Buh-bye, margins...

Lets face it business lending from banks is around 10% ,seems to me with the OCR 2.5% THE BANKS ARE GOUGING BIG TIME.

jill - yes:

http://www.interest.co.nz/ratesblog/index.php/2009/06/16/inside-the-fina...

See information Bernard pointed out to me.

"try a bit harder" - about as much use as the Jobs Summit. (Sad thing the last lot were no better.)

"There's also an argument to say it's a price worth paying for" For the floaters? yeah right, thanks for that...

I mean where is the risk to the banks in a floater? they can raise the rate anytime they want, so little risk. Fixed interest rates are funded short term for longer terms....inherently there is risk there....more risk I would contend than in floating, therefore the spread should be larger in fixed, instead its "about right"....I really dont see why a flaoter should be paying 75 to 100 points (at least) to carry all the risk....

Jill: "Lets face it business lending from banks is around 10%" depends on how its lent...if its short term overdraft for fairly small amounts then yes, seems a bit OTT....however lending long term loans going into a bad recession with large cash flow problems and greatly (debt) over-geared businesses? Also look at the business bonds, they are paying 8+%. These are rates the businesses themselves are willing to pay investors to get capital....(and I think giving capital to someone to fund operational costs is nuts).....

John Kelly: Kiwibank has run out of money to do significantly more mortgages....it needs a cash injection....but its about the lowest at 5.99%....TSB isnt bad either.....but the days of 80%+ loans are gone....many ppl are in that boat, they cant move.

Les: How many households and businesses might be under water by November? - depends on a lot of things...houses with neg just have to sit tight, its small businesses who are in turn employers I am worried about....cash flow is always bad, and bigger companies tend to use smaller ones as free piggy banks....

Steven

Yes, Kiwibank have had to introduce a 'quota' for floating rates. So will any other bank that reduces their floating rate. There is only a very limited amount of NZ deposit funds that are prepared to accept <5% interest, so there is only a very limited amount of mortgage money around at <6.5%. It's not rocket science.

"This is the time to start moving to solutions. If the Reserve Bank has some, let's present them to the Government," Mr Key said.

The Aussie cartel won't play ball on long term rates because they are pissed Labour terminated their tax rort. They have a perceived loss to recoup. John Key is waiting for RB to suggest he strengthen local kiwi banks with additional low cost capital.

http://business.smh.com.au/business/peoples-bank-to-break-the-big-four-2...

http://www.stuff.co.nz/the-press/business/2575927/Kiwibank-model-would-w...

Yeah right = too right, cobber.

C'mon along now move along the bus.....

Selwyn
Did you check out the terms of that deal in the UK? Currently mortgage interest rates range from 2.75 - 9+%, a huge variation that is determined by perceived risk. The sub 4% deals are usually for those with more than 40% equity/deposit (think 60-70% in 2007 terms), secure paid employment (hmmm), spotless credit history (no late payments ever) and considerable other risk lowering factors (like keeping 50K on term deposit with that bank). As you will quickly be able to work out, only a tiny % qualifies for these deals and the ones that do probably don't need it. Banks are still not lending here - all that QE money has gone into big black hole called the banking industry. Banks are now exacerbating their own exposure to the malaise in the general economy (which they created). You can only imagine how taxpayers are feeling. Bankers currently share the social status of paedophiles with MP's (left & right) bumping along the bottom of the social ranks. I guess what astounds me is that Aussie banks are still lending in NZ, although I do assume they have strategy to suddenly pull the plug. They can't be that stupid - can they? I vote former G S's employee Aleynikov - most ethical player of the year. The irony is he will end up in jail.

Joe - you said "The Aussie cartel won't play ball on long term rates because they are pissed Labour terminated their tax rort. They have a perceived loss to recoup. John Key is waiting for RB to suggest he strengthen local kiwi banks with additional low cost capital."

I would suggest you got the first bit right but the put up or shutup comment by JK to the reserve bank was less about give me something to fight the international banking network as it was about shut up and except what is generally accdepted worldwide best practice.
Because incase everyone hasn't figured it out just quite yet, he works for them, not for us. He is here to ensure what is left of our national assets ends up in private hands. Kiwibank will not be used to protect, but will be one of the first to go as it give us a means to distribute our own money supply in quick time should the sheoples of this nation realise we have the sovereign right in existing legislation to do so.

"John launched his investment banking career in New Zealand in the mid 80s. After 10 years in the New Zealand market he headed offshore, working in Singapore, London and Sydney for US investment banking giant Merrill Lynch. During that time he was in charge of a number of business units including global foreign exchange and European bond and derivative trading. In 1999 John was invited to join the Foreign Exchange Committee of the Federal Reserve Bank of NY and on two occasions undertook management studies at Harvard University in Boston."
http://www.beehive.govt.nz/minister/john+key?bio=1
Career
Investment banker, New Zealand for 10 years
Investment banker, Merrill Lynch 1995-2001
Member, Foreign Exchange Committee of the Federal Reserve Bank of New York 1999-2001
http://www.parliament.nz/en-NZ/MPP/MPs/MPs/b/e/f/49MP78101-Key-John.htm
John Key - The Unauthorised Biography
Weekend Herald Sat July 19 2008
Into the big time
Bellotti made him global head of foreign exchange and he revolutionised the "blue blood" investment banking sector. "There was this massive opportunity to cross-sell the firm," says Key.
"We'd go to these fund managers and we'd talk to them about equities, but we wouldn't necessarily leverage foreign exchange - and when we did, they'd say our capability wasn't that good.
"So I wandered up to London and said, 'we're going to go interbank FX - make prices to the other banks'. Morgan Stanley, Goldman Sachs and Merrill Lynch, the blue-blood investment banks, didn't do that," he explains. "We actually took on the big banks, Citibank, Chase, then we went and hired their staff and went to their clients and told them 'look, we've got all those same capabilities as Citibank in FX and options. Plus we had this beautiful thing going because we were the first to supply margin trading to big hedge funds. We had the capability to cross-sell them several products using one bit of margin."....................Back in the late 1990s Key was in his element, working at the centre of the universe for FX. He presided over around 140 dealers trading billions of dollars a day. The Asian markets came in in the morning and New York in the afternoon. "Within two years we went from being 43 in euromoney to number three," Key says...............Geoff Massam, a New Zealander then running the IT part of Merrill Lynch's FX business, now with Deutsche Bank in Connecticut, remembers how Key would be on the phone to the Governor of the Reserve Bank, Don Brash: "Though he wouldn't do it in a name-dropping way - he was talking to people like that all the time."
Massam believes Key's knowledge of the global economy would give him a "huge advantage" in running the country.

Yet JK claims claims he never had a clue of the global impending global economic turmoil and is now using it as an excuse to renege on most everything they campaigned on and is now brought back the asset salesmen under instruction from our receivers, his banker brethren.

Selwyn the man claims that what caused the current global credit crunch happened after his watch at Merrill and FED, but on radio live interveiw with Willy and JT he said that the blame sits with decades of bad banking practice out of Wall St;
John Key - The Unauthorised Biography
Weekend Herald Sat July 19 2008
Into the big time
Remembers Bellotti: "I brought him to London and he shot the lights out there too. Within three to four years Merrill Lynch, London, was regarded as one of the premier businesses."
Key explains: "I had a whole lot of people working for me who were at the cutting edge of delivering quite complex and new and innovative products. They tended to either be a new product or into a new market, usually the emerging markets, Russia, Brazil, Argentina. I wasn't the guy sitting there dreaming it all up, but I was the guy who was responsible for those people." Did he foresee the problems which resulted in the sub-prime crisis? "Was it hard to predict? Not really."
The products which underpinned the sub-prime boom - then bust - were hatched in 2004-2005, long after Key had left Merrill. Indeed, he says when he went back to London in 2007 he was "horrified" at the level of risk Merrill was running. "It was enormous and I just didn't think that enough had changed to warrant that level of risk."

Willy Jackson and John Tamahere interveiwed John Key on afternoon of 5 Nov 2008. Here is an answer given by John Key re what caused the credit crisis. It should be remembered that at about this time in the election campaign he was batting away questions from Labour in regard to his career at Merril Lynch 7 years ago as being that long ago there is no way he could be tied to having any contribution to the current Credit Crisis;
Caller Matty asked John Key what he thought got the world into this position(Credit Crisis) John Key replied;
"Relatively quickly, you had a massive expansion of credit over the last decade or two, so basically the banks have gone and leant miles of money engaged in very risky behaviour, they have done it to to much of an extreme and whats happened is that eventually the chickens have come home to roost and its all imploded and yup, you know Wall St its got to take rensponsibility for its own excesses and its got it wrong, the good news is from New Zealands point of view is our banks haven't really engaged in that kind of behaviour and dont have exposure to the kind of counter parties that fell over, but unfortunately Mum and Dad owe a lot of money, not the government, the governments not at all indebted really, but Mum and Dad are and whats happened is that liquidity to fund their borrowing is drying up".
John Tamahere asks;
"Ok, oh, exposure to the Australian banks".
John Key replied;
"Yeh, look I tell you the thing with the Australian banks is, it, um we need to, ah in one sense weve got a bit of strength funnily enough, I know people, I mean I support KiwiBank, we are not selling it, we never going to sell it, but, but I do support the fact that because the Australian banks have quite a big part of our market, because they a bigger, theyre just bigger organisations thay can actually weather these storms a little bit, theres some upsides, I know a lot of people dont like them, but there are some upsides to having them in our economy. Secondly, we just got to make sure that, that wholesale guarantee which allows the New Zealand subsidiaries in their own name to be able to raise capital to be able to operate and weve got work with, not because we are trying bailout the banks, no one should be under that illusion, but if they cant borrow they cant lend and our economy is going into depression if that is the case."

I am not out to nail anyone in this nation who does not deserve it.
Both the major parties in this country are holding a phoney war as they both cant debate the real issues in public because they are both complicate in the cause of our ever increasing subservence to foreign lenders, acceptable if those foreign lenders did something to earn what they loan and lend it in good faith with consideration for both sides of the contract, but completely unacceptable when they are abusing the conditions of credit surrounding a credit creation mechanism and making something that should work to improve the lifes of all only work to improve the lifes of a tiny few.

Have a nice day, I am off to get back on the hamster wheel to earn my 35c after debt servicing portion of tax, rates and debt priced into goods and services.

Bollard wants banks to front up over rates

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1058...

"Government MPs voted against an inquiry into banks' variable rate mortgage margins this month despite hearing from Reserve Bank Governor Alan Bollard that an explanation from them would be "very helpful".

Funny that, eh...

"When asked by Labour Party finance spokesman David Cunliffe how he felt, "in the full light of inquiry" if Parliament were to "seek to shine some sunlight on banks' accounts", Dr Bollard said: "It would be very helpful if the select committee were to hear from the banks on this."

Funny that, eh....

"In its report published yesterday, the committee urged banks to reduce their short-term lending rates further.

Urged to "try a bit harder" - this is funny, quite laughable in fact - dream on dudes....

"Unduly high interest rate costs could lead to the closure of businesses that may be fundamentally sound but may be experiencing short-term liquidity problems due to the current economic environment."

Not so funny, eh....

Who is running this country?

It's not an ex-plumber is it?

http://www.interest.co.nz/ratesblog/index.php/2009/07/06/rbnz-says-fixed...

Yeh Wally, there'll no doubt be some like that.

However, the kinds of businesses I'm thinking of are typically more conservative, because they know they are up agin it most of the time anyway - taxation and resultant investment dynamics in no way favour them, just as mon. pol (NZD vol.) does not; eg. sme (even some larger) techs. and exporters. My concern is that if banks are effectively charging 'gouge' level rates, instead of 'market' rates, they get canned unnecessarily - when these are typically the kinds of businesses we need to nurture to help broaden and re-risk our export mix. If they get canned at 'market' rates - yeh, tough, that's Mr Market doing the evolutionary adaptive thing. Which is why I'd not advocate 'subsidisation' beyond gap closure in market-failure situations, hence the banging of another drum around asset taxation and asking people to consider the damage done to the wider productive sector (as well as NZ Inc) by 'the subsidy that got away'.

It's the "Unduly.." bit that is the concern - and Dr B seems to be sending smoke signals loud and clear - so why can't the plumber and the drain-layer get some water on the fire to dampen things down a bit?

"Banging of another drum around asset taxation and asking people to consider the damage done to the wider productive sector"

Les, would you agree that shifting or widening the tax burden increases local inflationary pressures?

In addition to the bank margin argument, perhaps there is an opportunity where banks could offer additional types of mortgage products to be competitive. One thing I would like to see is more published discounted rates based on the amount of capital the home owner fronts up with. I know some banks partially offer this (with a little "*" by the rate), but typically this is something that needs to be negotiated.

This could be good for the economy as it would encourage homeowners not to over commit, and encourage them to reduce their debt to get better rates.

However I guess there is a valid reason why we don't see this in NZ (perhaps the market is too small?).

When they become available the bank disclosure statements for the full year (June 09) should tell an interesting story that is not evident just yet. ;-)

Les, here is something to ponder - A more cost effective way to divert investment funding into production.

Speculation needs funding and a more cost effective way to ensure investment funding is diverted into the productive sector is by addressing the funding itself.

To correct the imbalance, the financing of funds needs to be prioritised. Loans for production that targets offshore revenue should be favoured as opposed to funding speculation.

Chairman - "a CGT is not guaranteed to stop speculation and could have the opposite effect with some or all of the tax burden being added to the price of housing as vendors try to recoup costs."

Consider this from this paper 'Asset Tax and Productivity - updated, 26 Nov 2008' that I referred you to at:

http://www.interest.co.nz/ratesblog/index.php/2009/06/26/bernard-hickey-...

"The absence of tax would see investment flow to the most productive areas of the economy, and all investment decisions would be driven by the anticipated tax-free return. In the presence of taxes, investment returns must take tax into account, which alters the investment choice between different classes of assets, distorts decisionmaking, and often acts as the critical element that determines a particular investment."

Given our enconomy is a bit like a three-legged milking stool:- primaries - with low value add component and some operators dependent on asset cap. gains to make it worthwhile; tourism - again, asset laden; property investment - say no more. So with no effective asset taxation, where would you invest funds, in an economy like NZ's? Change that and watch the apparent value of said assets normalise to more rational levels consistent with their ability to generate returns from productive activity.

"We would all like to see a lower tax rate but not if the larger picture simply means we'll be paying more elsewhere to cover the shortfall."

Why not? Why should individual income earners and businesses that derive their income primarily by productive efforts subsidise those not being taxed on capital gain? The subsidisation effect must be significant to equate to a flat tax of 23% across ALL revenue streams - don't y' think?

"There is also concern about the benefits of the tax shift heading offshore."

I covered that in the thread linked above.

"To correct the imbalance, the financing of funds needs to be prioritised. Loans for production that targets offshore revenue should be favoured as opposed to funding speculation."

Which brings me to:

"Assuming tax will always be with us, the objective could be to minimise the taxation impact on investment decisions, or perhaps to encourage the behaviours that might lead to more desirable investment outcomes in the medium term, including spill-over benefits. In general, taxation distorts investment decisions, so the question is should tax policy seek to minimise distortions or should certain distortions be targeted as desirable?" From the paper mentioned above.

Forget targetted loans and grants - it's better done by tax crediting 'winning behaviours', given if they ain't making the revenue with good market focused products and services, they ain't winning in the market - don't support em'. If Mr Market has picked em' as winners, because they are behaving in winning ways - let em' keep more of the revenue they generate to re-invest in doing more of the same. In this regard I'd also tax credit private 3rd party funding that support companies engaging in 'winning behaviours'. Again, Mr Market decides - and Mr Market is better at these decisions than civil servants and indeed certain types of lenders who have no skin in the game because they are only using OPM with zippo consequence to them.

Cheers, Les.

Israel,

IMO I think grants to FHB's would result in a direct increase (inflation of) the market floor price, by the value of said grant/grant's effect, and therefore have a neutral, if not, reducing effect on affordability.

With specualtion deterred in the FHB market, affordability would improve, likewise the same if we can simply we keep more of our own cash to do with what we choose, (23%) which for some would be investment in productive activity, of increased/increasing value, meaning returns and incomes improve, thereby addressing both ends of the affordability ratio. Add in effective monetary policy and appropriately deconstrain land supply and the only Grants we'll need is on the rocks with a good cigar.

Cheers, Les.

Regulation?

Indeed, when correcting imbalances balanced regulation is needed.

Selwyn, there are times when private sector interest needs to be brought into line with the overall national interest.

If this was done long ago we wouldn't be facing half the problems we face today.

MP's deliver banks another wet bus ticket slap

http://www.sharechat.co.nz/article/387bd5a0/mp-s-deliver-banks-another-w...

"The select committee that baulked at holding an inquiry into whether trading banks are unduly holding up interest rates has issued a report expressing deep concern about the banks' behaviour."

Hmmm, funny that.... Move along that bus...

Talks held on growth of Kiwibank

http://www.stuff.co.nz/national/politics/2580792/Talks-held-on-growth-of...

"The Government has discussed expanding Kiwibank amid calls for it to beef up the state-owned bank to help push interest rates lower.

Kiwibank spokesman Bruce Thompson confirmed discussions had taken place between Kiwibank parent company NZ Post and the Government on its progress and growth."

"The Reserve Bank has repeatedly urged banks to cut rates, after they ignored a 50 basis-point cut to the official cash rates in April, taking it to 2.5 per cent.

Analysts have pointed to Kiwibank's influence last year, when it led rates cuts and aggressively competed for business, suggesting a capital injection from the Government could spark another round of cuts."

Analysts? Any plumber or drain-layer could have come to this conclusion - but will No.1 and No. 2 see how to deal with the leak?

(Never say never I guess.)

Bernard, good article.

Can't see brick wall for houses

http://blogs.nzherald.co.nz/blog/show-me-money/2009/7/11/cant-see-brick-...

"but few people are looking at how much the banks are lending and connecting that to what is happening in the housing market."

Maybe it is as they say, they are not profiteering at the margin and so to make a decent crust simply have to ramp up the volume? What other reasons could there be. They can of course because monetary policy is ineffectual with has no effective money volume control.

"Egged on by the Reserve Bank's record cut in the OCR, banks are pumping up the housing bubble again with low fixed mortgage rates. New Zealand has learned nothing in the past two years of hand-wringing about over-valued housing and how unbalanced the economy has become."

Yep, ineffective monetary policy....

English defies the evidence on monetary policy, 20th Feb 2009, see here:
http://www.mea.org.nz/media/pressreleases.aspx

"Yet again, the New Zealand obsession with borrowing money to buy property has trumped any shift to invest in productive assets that will grow the nation's wealth and incomes over the long run."

"Meanwhile the domestic, consuming, uncompetitive parts of our economy continue to forge ahead of our productive, competitive parts of the economy."

"When will it stop? Eventually our ability to repay our foreign debt will overwhelm us and finally be noticed by a ratings agency which won't be sweet-talked by a Prime Minister."

Not to worry, they'll probably just tell us to, "try a bit harder" - it seems to be working for some.

Who is running this country?

Les, as your link suggested, an effective capital gains tax coupled with additional tools to restrict the access to credit would meet the desired objective. Putting an end to the "subsidy that got away"

A land tax however, is akin to robbing Peter to pay Paul. In New Zealand, many skilled people and business operators are also landowners. Will they buy into this musical tax (a new land value tax on land owned to see income tax reduced)?

Placing the tax burden on New Zealand landowners while reducing (foreign owned but locally operated) company tax won't help the balance of payments.

Is a musical tax (a shift to a land value tax) really the best we can come up with?

Will it really produce the overall desired results?

Scoring points from left-field

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=1058...

"To the Finance Minister's retorts that there was little to be done and an inquiry by backbench MPs was not going to bring down interest rates, Cunliffe fairly pointed out that if banks did not pass on OCR cuts then monetary policy was not working and perhaps it was time to ask whether the OCR was the appropriate tool.

The exchange had been triggered by a question from the floor about how, if at all, the Government could address the volatile kiwi dollar - one of the major concerns of Mood of the Boardroom survey respondents.

One has to admire English for his honesty, but "we're open to suggestions" is possibly not what business wanted to hear."

Oh Bill puleeze, pull the other one....

You're right Les, I'm not suggesting that. Nevertheless, capital flight (in the form of profit heading offshore) is significant. It's detrimental to our economy and growing annually. The last thing we can afford to do is to inanely add to its growth, therefore should not be overlooked in the parliamentary process.

"Care would need to be taken not to cause perversion of the rebalancing objective"

Indeed.

Selwyn - "Have an inquiry along the lines of the 1956 Royal Commission and let's identify "accurately" what the problems are and then we can progress to solutions and you can carry the entire country with you."

Sounds like a good idea. Given recent performance however Bill might need some help to get this off the ground.

I reckon a CIR could help him out - because I don't see it happening any other way, and because such are not binding, it may not happen even with a CIR. However, election results are binding ....

1) Anyway, who would be up for signing a petition for a CIR to initiate the kind of inquiry into NZ's banking system mooted above?

(Note - the recent NZMEA banking survey sat at 86% in favour on the related question in that work.)

86% support inquiry into financial sector - survey, 2nd July 2009, here:

http://www.mea.org.nz/media/pressreleases.aspx

2) Any other suggestions for an appropriate referendum question/s?

3) Would you like to be a signature collection co-ordinator?

If so indicate your commitment here on Interest .co.nz and via:

http://www.mea.org.nz/contact.aspx?subject=Feedback

Put 'Volunteer CIR signature collection co-ordinator' in the text box and if we need to go this route we'll get back to you.

Don't forget our real problem is not Bill E, John K, David C, Phil G, Alan A, the 4 Auzzie Banks - it is our own APATHY.

Please pass this comment on via email to folk you think might want to help and ask them to respond to the three questions I've asked here.

Cheers, Les.

Les

I'm not a fan of parliamentary inquiries or commissions or CIRs.
Happy for a debate, but I don't want my money spent providing a platform for embedded interests to yell at each other.
I also think our banking system is not broken.
Our tax system is broken.
Our economy is unbalanced.
We'll be forced to rebalance by a credit rating downgrade.
A pity. But the market has a way of working itself out.

cheers
Bernard

Les, incentives for "˜winning behaviours' don't necessarily have to be tax incentives. But yes, we do need to further develop our export sector.

This is where I think government participation is needed. The government is better placed (having the resources) to help get some new productive investment ventures off the ground.

I'm sure you heard the talk about listing SOEs, giving mum and dad investors something to invest in. Well, instead of selling us something we already own and trying to capitalise off ourselves (paying more for power so we can earn a better return), we need to be looking at new exporting ventures.

This will not only widen the scope of investment but will give many more an opportunity to earn capital offshore.

Bernard says....

1. I also think our banking system is not broken.
2. Our tax system is broken.
3. Our economy is unbalanced.
4. We'll be forced to rebalance by a credit rating downgrade.
5. A pity. But the market has a way of working itself out.

Well Bernard the banking system working (or not) is an opinion based statement. 2, 3 we agree on and 4 and 5 may are probable after JKs less than stella speech today. All Hat and no Horse I think is the saying.

Banks are working as it always have, except that we now have huge global's able to play games with small economies like New Zealand.

Small local banks are our friends (in days of old) as they ate from the same rice bowl. Economy bad, they do bad, economy good they do good, that's not the case today.

Perhaps we should replace your opinion (and mine) with qualified debate. We have a lot of beliefs in New Zealand and I just want some solid facts from an independent source so I would strongly support an enquiry of any kind.

Les, totally relying on the private sector to pull us through is flawed ideology.

As has clearly been shown before, the interest of the private sector doesn't always align with the national interest, therefore cannot totally be relied upon.

Letting them keep more of the revenue they generate doesn't necessarily mean they will use it for reinvestment.

Remember what you said: "Care would need to be taken not to cause perversion of the rebalancing objective"

What's stopping a company we help get established (through tax cuts) from later laying off staff and heading offshore or selling out to foreign owners?

With government as a major stakeholder and mum and dad investors, there is no chance of them heading offshore and if they did sell out we all get to share in the return.

Before even considering a tax incentive to divert investment, the charade (link below) will need to be addressed if you want market perception to ever change.
http://www.stuff.co.nz/business/opinion/blogs/stirring-the-pot/2568458/K...

People will feel far more confident investing with the government involved.

The banking system isn't broken, it's just their interest doesn't happen to align with the national interest - that's the problem.

Chairman - "The banking system isn't broken, it's just their interest doesn't happen to align with the national interest - that's the problem."

Monetary policy is meant to effect that alignment. It has failed and the structure of it will continue to fail us. An inquiry into the banking system would help identify solutions.

What do you think Bernard?

Bernard: "I also think our banking system is not broken."

In part I agree. At least we haven't had the excesses of Wall St but then that was due to human greed let rip. The banking system is working exactly as it was designed to work. Unfortunately for us.
Money is created out of thin air. It is issued as "credit" in the form of loans to you, to me. But it is all debt. Privately owned trading banks create it, for profit, when this could be for a public service. Yes, you can read how trading banks purchase up to 40% of their money off-shore but from wherever they purchase it, a bank (parent bank?) has created it out of thin air. And banks have a monopoly.
Privately owned banks create money when you sign that contract and have $10K put into your account. You have to pay it back of course, but with interest. Unfortunately no money is ever created by banks to cover the interest. So all of those people with their $10K loans are having to find the money to pay back $10K plus interest"¦.someone HAS to lose. Someone will go bankrupt and this need not have anything to do with poor business practice etc. The fact is, there is not enough money. Money is scarce. Recognise that thought? It's designed that way. It fosters (excessive) competition (and exploitation) because if there is not enough to go around, then you had better get plenty in case you're the one who misses out.
If all the bank loans were paid back tomorrow there would be no money in existence apart from the 3% issued by our Reserve Bank. That money is issued debt free. Put another way, every dollar in your wallet, your bank account, is a debt owed by someone.
But it gets worse. I deposit $1 in the bank, which becomes the reserve and the bank can issue 9 times that sum, out of thin air. It is accepted into the economy but that money "steals value from existing money, diminishing the value of each dollar." This is inflation, and inflation is a hidden tax. Google Modern Money Mechanics for the Youtube movie about the fractional reserve banking system. It's 10 mins long and forms part of Zeitgeist Addendum the first 45 mins of which is well worth watching. Also google Money as Debt, 47 mins. Money as Debt part 2 has been issued but is not yet available online.
James Robertson has estimated, year 2000, that this system was worth UK49 billlion pounds and US$114 billion annually. Remember the figures Jim Anderton reeled off to Federated Farmers the other week? 11.7 billion left NZ last year bound for overseas owners. And their contribution to NZ's real economy?
Apologies for the length but I haven't seen fractional reserve banking taken into account in comments above.

Sue - "I deposit $1 in the bank, which becomes the reserve and the bank can issue 9 times that sum, out of thin air."

Something that continues to perplex me, perhaps because of years of, I guess programming as it were, is that when bank people describe their funding systems it always seems that they only have available to lend out, what they have taken in by savers deposits or from overseas lenders. So it seems their arguement to justify not being able to pass on the full scale of OCR rate cuts, is indeed quite plausible when they complain that funds from overseas lenders are costing them more - BUT, if they can just 'fractionate' money out of thin air, as it were, that complaint seems a lot less valid - or am I missing something?

As for fractional reserve banking not being mentioned above, it has been questioned elsewhere:

http://www.interest.co.nz/ratesblog/index.php/2009/06/23/poll-result-45-...

Cheers, Les.

Selwyn - "Isn't it interesting that it's our desire for debt that allows banks to create the money, to fuel property inflation, creating capital gain and justifying the original debt. It's a virtuous circle for some and some want to protect it for obvious reasons."

"Its not hard to work out how banks make superior profits no matter what's happening in the economy..."

I guess not.

As I've commented elsewhere on Interest .co, there are of course those who derive their wealth from inflation, and therefore have no interest in effectively controlling it. So I guess that might be another reason this key problem receives so little interest from some, and is so definitely resisted by others.

As we know, having an effective credit/money volume control (pushing back against profligate fractionation) would help enormously, but why would the banks want that?

Good question 'roelof' - "The question that I ask is, How was money supply ever allowed to grow at rates like 15% "¦???" From:

http://www.interest.co.nz/ratesblog/index.php/2009/07/15/economic-weathe...

So we can suggest all we like Bill:

"The exchange had been triggered by a question from the floor about how, if at all, the Government could address the volatile kiwi dollar - one of the major concerns of Mood of the Boardroom survey respondents.

One has to admire English for his honesty, but "we're open to suggestions" is possibly not what business wanted to hear."

(See my comment here July 15th, 2009 at 9:45 am)

But we know, that you know, that we know, you won't, or maybe can't change:

English defies the evidence on monetary policy, 20th Feb 2009, see here:

http://www.mea.org.nz/media/pressreleases.aspx

Who is running this country?

No wonder you don't want an inquiry, and as Iain Parker points out, especially with the expansive, far reaching communications available today, who knows what people might think?

http://www.interest.co.nz/ratesblog/index.php/2009/07/15/have-your-say-k...

Thinking - nearly as powerful as communication.

Admittedly, there is an imbalance (tradable - non-tradable) that needs correcting; therefore New Zealand needs to further develop its exporting sector. Sadly, many property investors (if your relying on them to divert) wouldn't have a clue how to go about it. Many are currently working and haven't the time to be hands on, and many simply don't trust the casino known as the market (NZX)

Due to a lack of financial knowledge, a punitive tax in property to reward productive investment may merely see many more investors going broke. That won't help the recovery.

This is why the government needs to get involved. They need to lead the way, building investor confidence, giving guidance, and bringing the public on board.

With interest rates down (discouraging savings) and banks restarting the housing bubble, now would be the time for the government to act. Regulate the banks and provide some exporting opportunities for investors to participate in.

This will help correct the imbalance while also generating new offshore revenue streams for the government itself (meaning the less they have to tax us locals "“ no musical tax required)

Big government?

The term big government is so often used in a derogatory way (such as controlling communist states) but lets closer examine what the term really means and what the alternatives are.

The better the democratic system the better government it will produce. Government should not be something to be afraid of (if it is, then you've merely produced a bad government, which comes back to public astuteness or a flawed democratic system) but admittedly, we don't want them involved in every aspect of our lives. (Big brother/nanny state)

I see a lot of people advocating Kiwibank, which is government participation in the market and was a product of an improved democratic system.

There are certain vital sectors within the economy that need to be in public control. Banking is indeed one of them and really tops the list.

What would enhance the benefits of government participation in the market is the structural set up and service model of the enterprise supplied. Locally, providing a public service model thereby reducing inflationary pressures and improving our international competitiveness. Internationally, our sights should be set on maximising gains.

Yes, New Zealand is a prime example (the New Zealand experiment) of how things have gone drastically wrong.

Level playing fields are not created through free markets; they are regulated, allowing market participants to freely operate within those balanced regulations.

I think it's great you keep yourself informed and agree with a lot of what you say. However, I find some of your comments conflicting. You say you prefer small government yet seem to understand that small government has in fact created many of our current underling structural problems - banking for one.

Take away big government and it will be quickly replaced by big business. And when big business interests fail to align with the national interest you are left with little recourse "“ sound familiar?

There is not much difference between a tax cut and a grant. If a tax cut is tied to incentives for specific activities; then it's a targeted cut and not an overall cut, which in this case, an overall cut is far less effective in achieving the desired results.

Come on Bank Manager, wake up to the rort going on. The Beehive inhabitants have but one goal in mind and it is to own the Beehive 9th floor. NOTHING else matters and anything else that is a threat to the 'one goal' must be sorted. To the extent that the economy is 'SEEN as being' a disfunctional manure pile of debt, represents a threat OK,
so the decision has been made to deal with the fact that the economy is 'SEEN this way'. QED, convince the peasants that the govt has a strategy to make everything right. Once that new image is created and cemented into the peasant grey matter, the problem no longer exists! See, easy stuff.

Theory and policy needs to match reality otherwise it will fail when put into practice.

"The role of the state is to create an institutional framework that supports the evolutionary mechanisms that underpin markets, striking a balance between cooperation and competition while best shaping their character to serve the needs of society."

Yes, while that sounds good it overlooks reality. The damage created by the lost of public control of vital sectors within our economy and the lost of the public service model is directly behind many of the roadblocks our productive recovery faces today, which explains why government participation is needed in this area.

And New Zealand's makeup (described above, mum and dad property investors, weak market perception, lack of exporting know how etc...) strongly suggests the need for government participation in other areas as well.

"˜Left-wing Utopias and Free Market Fantasies' - It's about striking a balance.

Economics is not a complete science and the reason why so many get it wrong is simply because they fail to take into account all the variables. That's why these debates are good, they help to widen people's scope.

Yes, ultimately the market decides who's going to win or lose, but you need to be in to win. And there is clearly a need for government to get into the game.

It is good to see bank capital reserve ratios being brought into this discussion by Sue et al. There are some good concise descriptions of the various tier definitions and ratios on Wikipedia.

Recently Rabobank paid me over 8.7% to provide them with some Tier 1 funds. From memory, BNZ were prepared to offer 9.1% last year for something similar. Westpac called and offered me 6.5% for a 5year deposit.

With these sorts of interest rates available, it seems unlikely that many Kiwis will be prepared to put their savings in a term deposit earning less than 5% per annum. So borrowers can forget cheap floating mortgages. Unless that is, the banks decide to fund floating mortgages differently, which would present an interesting dilemma for the Reserve Bank.

I agree with Wally, too. Unless there is another wave of seriously bad news, which is quite possible, the international cost of credit is likely to rise, and rise significantly.

Kiwibank need to move quickly to become competitive. They must be losing market share at present which is a shame, as they've been a success story to date, and many of us hope they represent the future for NZ banking.

On a somewhat different tack, I keep wondering what if anything the RBNZ can do about the banks' habit of borrowing from Belgian Dentists to lend to Kiwi property purchasers. Clearly such an arrangement was not envisaged in historical governance models. Do the NZ authorities have a practical way to reduce this practice?

Hmm - finally it is good to see Les (NZMEA) fired up a little bit - talking about the real economy = manufacturing and it's gain/potential for NZ !

In my home-country Switzerland running a business myself, I and many Swiss are surrounded by a manufacturer spirit - it is part of culture.
First of all it is about developing a culture - not about taxation. The NZMEA should be constantly on the nose of the media educating and encouraging.

How ideas originate.

A well functioning market is competitive, and true competition not only promotes efficiencies but also helps foster inspiration and innovation.

Sadly, New Zealand's local economy lacks competition. However, internationally,competition is mounting.

The opportunities to add value and advance our position through science and technological advancements mustn't be ignored.

"˜Winning behaviours' need to be fostered as well as being supported. But there are different ways to achieve this.

Firstly, creating a culture of understanding needs to be promoted at an early age. If we wish to take the nation forward we need the public to be onboard. If one plants good seeds they will grow.

While government participation is needed, we also need an environment that encourages entrepreneurship to flourish, installing a mindset capable of spotting tomorrow's opportunities in a world that is fast-paced and highly uncertain.

Rather than giving away grants (which can create a dependency on government handouts) government should get involved. Prudently taking a share holding (by providing capital or other resources a company may need to help get it off the ground or expand) so as the government can also fiscally benefit from any potential return.

In some cases, tax cuts can reduce a company's incentive to improve returns, why work harder when you know taxpayers are going to improve your return?

Yes, we must encourage adaptive behavior that leads to growth enabling pluralism, but ultimately private businesses must be able to stand on their own two feet when participating in the market.

If they can't, then there should be an avenue for them to see if government wants to come on board.

We can't afford to have private business becoming reliant on public handouts but if they have a sound business plan but need a little helping hand, then government should at least be prepared to look at it and should be willing to come onboard if the plan has sound investment potential.

Tax is also a tool that evens out the distribution of wealth. The pervious boom saw a large number of company profits soar (with a significant amount heading offshore) while wages lagged behind. Effectively, our internationally low incomes have been subsidising company profits for sometime now. Which is another major imbalance that needs correcting.

Given the circumstances (low incomes subsidising company profits) giving these companies more taxpayer handouts is rather questionable. Moreover, given the current slowdown it's hard to see incomes improving. With wages being allowed to lag behind in the pervious boom, it's highly unlike that tax cuts up top will trickle down in the bust.

The trickle down theory is flawed; wealth trickles up and once at the top becomes consolidated. Cuts at the top are rarely passed down. If wealth really trickled down the number of starving people at the bottom wouldn't be increasing.

Although we don't want to punish productive investment with a punitive and imbalanced tax system, we have to be extremely careful how we go about correcting the tax balance.

Even with a more balanced tax system, at the end of the day, private companies have to make it on their own abilities. Though, government should be there to help (educate and guide with policy structures that allow adaptive behavior, help with international marketing and opening international gateways, and in some cases even getting onboard) but it's the market place that will ultimately be the one who decides who's going to win.

Chairman - some great slogans and I'm glad to see you are using the language of CAS.

"Rather than giving away grants (which can create a dependency on government handouts) government should get involved. Prudently taking a share holding (by providing capital or other resources a company may need to help get it off the ground or expand) so as the government can also fiscally benefit from any potential return."

OK, so we must be talking about private companies now. The closest I want to see govt. to private companies in the investment space is a lower tax and incentives for 'winning behaviours'. Having govt. involved in such a direct way would no doubt come with the same kinds of strings as grants and again, we are back to picking winners, as in who to and who wouldn't they not invest in? One way I think govt. could be more directly involved (and I use the word directly very loosely) is by backing privately run venture/investment trusts, see idea in Number 6 here:

http://www.interest.co.nz/ratesblog/index.php/2009/04/15/opinion-how-tou...

"In some cases, tax cuts can reduce a company's incentive to improve returns, why work harder when you know taxpayers are going to improve your return?"

What, huh, your'e kidding me right? Anyway, if you are equating cuts to incentives, nope, they only get the 'cut' (as I think you are terming it) if they exhibit the appropriate behaviour, ie. investment in people*, product development, (ie R&D), patents, process and plant (faster depreciation). *Leadership educatation focusing on market 'pulled' product/service development.

"Yes, we must encourage adaptive behaviour that leads to growth enabling pluralism, but ultimately private businesses must be able to stand on their own two feet when participating in the market."

Yep, hence the point about them reinvesting their own cash generated from their own efforts in said market - what is not "standing on their own two-feet" about that?

"Although we don't want to punish productive investment with a punitive and imbalanced tax system, we have to be extremely careful how we go about correcting the tax balance."

I agree, we just need to be very, very careful we include effective asset taxation and head toward a broad, flat tax of low to mid-20's. Add in the 'winning behaviour' incentives and hey presto, more legs on our three-legged milking stool of an economy.

Cheers, Les.