Bernard,

Can we start the debate that needs to be had by identifying the root cause of the coming depression. I am going to be pedantic and ask a) for a single cause and b) that at this point responsibility and symptoms be kept separate from cause.

Bernard,

Attached is an issue I mentioned several months ago that needed investigation and exposure and you responded it was being examined.

http://www.stuff.co.nz/4822469a13.html

We were caught badly five years ago when a fund dropped in value ...we lost 10% of the capital invested smalll change compared to current losses but annoying as it was rather devious bank tactics that caused money that had been been safely deposited at 6% for several years to be eroded and would have sat there had not the bank staff convinced us their investments account was a better option.

These so called 'Bank Advisors' had access and knowledge of clients term deposits.

The first approach was a teller telling us we should speak to one of their 'financail advisors' as to a better way to use our deposits with the bank. (obviously a setup that staff were party to ...probably bank policy). After that we were 'worked on' even getting calls to our home at dinner time from a bank staff member saying they would like us to discuss our investments with them. Unfortunately we agreed to talk to them.

A few months laterI was astounded to note while waiting for the bank to open one morning the staff were engaged in American styled group Ra Ra! Ra! motivation tactics.

I later discovered (not disclosed) that these bank employees were paid commision when clients agreed to allow them to put your safe term deposits into their 'managed fund accounts'. Many elderly were ripped off as the bank employees knowing full wel l how much you had on term deposit and saw it as more commission incentive .

We tried to take action via the Banking Ombudsman regarding the unethical bank practice but to no avail.

I'm sure many are now hurting as a result of such trading bank practice, Its needs full exposure. The man on u tube is a tip of the iceberg.

Iain, am I right to assume then that you do not believe our borrowing boom here in NZ was funded by Japanese housewives and Belgian dentists - but rather the major corporate elites, particularly in the Japansese case?

Yes Kate, the old Japanese Housewife and Belgain Dentist, Johny Keys and Cully's favourite friends.

I some how missed this article by Ellen Brown in Dec 2008;

http://www.webofdebt.com/articles/newdeal.php

It is one of the very best I have seen from one of the worlds very best economic historians re causes and alternatives for fixing this mess.

Steptoe,

Or yet another way:
Compound consuming more than we produce for 35 consecutive years.

So when are we going to start asking how taking on even more debt can possibly be part of the solution?

The inevitable result is taxpayers now and in the future will have to pay for this extra spending, often many times over once interest payments are included. In the desperation to avoid a long and deep recession, policy makers are choosing to spend now and deal with the consequences later.

This may be the right thing to do, given the fallout from a deflationary depression and economic collapse would be much deeper and longer-term than the big rise in public indebtedness. But it is a debate that should be had.

Bernard - I agree that a debate is needed, but I would like to see the maths behind your assumption that deflation would be worse than a big rise in public indebtedness.

In the next weeks/ months life for most of us is just going to change forever.

I think not maths, but a new orientation of life in general and in business in particular is needed - morality, ethics - new values are required- also with the help & participation of the government.

To minimise the impact of the current world- wide recession, first of all a possible stimulus package from the government should only be injected, where those values are fulfilled & respected.

Three thoughtful comments:

W. Kunz

In the next weeks/ months life for most of us is just going to change forever.

I think not maths, but a new orientation of life in general and in business in particular is needed - morality, ethics - new values are required- also with the help & participation of the government.

In addition I would like to see:
A new orientation of the government and public service in particular - integrity and a public service ethic - new values are required - with the help & participation of the public.

Janet,

Can I interpret what you are saying as: While we have excessive debt we are going to have to accept ever lower standards of living - until we start producing more than we consume?

I certainly think more assets will end up being sold, but more immigration will require increased exports to balance the higher import needs of a larger population. We already have a large current account deficit and fail to produce enough exports to meet the living standards demanded by our current population.

Rob,
I agree about the shift in wealth from West to East. The means though has been through debt on the part of the former funded from savings on the part of the latter. Isn't that a cultural failure, but still one leading to NZ having excessive debt?

Iain,

Thanks for the Ellen Hodgeson Brown article .
http://www.webofdebt.com/articles/newdeal.php

It so well sums up how banks have built the now festering debt burden based on surreal mickey mouse fantasy money.

Pity it could not be a feature in an NZ newspaper.

I seem to remember reading a post a couple of months ago about the proportion trading banks in NZ created above capital base ...was it PeterR? At the time I was surprised at his money creation right (or it spelt rort) that the Treasury and NZRB sanction.

Things getting bad in Japan as company after company dive into loss situations and jettison workers...many are talking of job sharing reduced wages etc. Some who reduced staff have now fallen over. I suspect it is beyond statistics or hard data to analyse the extent out the economic rout and where and how it hits next. THe government itself in freefall self destruct mode.

I could not resist buying a Canon camera yesterday at a too good to be true price....no not using my credit card! The usually hectic huge shop in central Osaka where frantic frenzy purchasing takes place on Sat and Sunday afternnoons ....It was was visibly quieter and there was room to move and a sales person quickly attached themselves if you showed interest...I did not have to stand in a long queue at the cashier counter.Last week I was in another super stadium sized mall ..my son remarked that few were hauling filled carrybags....I watched for a while ....he was right, normally you see the rampant consumerists loaded up with carry bags (no you don"t run to the car and put them in the boot) you carry the laden bags home on the train or have larger items delivered. Anyone like some yen? Bet NZ banks and Bollard would but the Japanese are now clinging to it for dear life.

Trust our John enjoyed his holiday in Hawaii as nz's plimsol line sank further below the surface. The do fest could quickly become... doh! the ship is foundering ,overloaded with wet milk powder and has debt writs tacked on the mast.

Iain - Thanks for the link. That is a great article, well worth passing onto others who are interested. Really brings to focus what the finance industry is asking of the humble tax payer:

"Not only are banks merely pretending to have the money they lend to us, but today they are shamelessly demanding that we bail them out of their own imprudent gambling debts so they can continue to lend us money they don't have"

What I can't understand is, if the fiance sector is so badly burdened as everyone suspects. Is it going to be possible for Government to Nationalize so much? If not - how does it pick and choose?

waymad - reinventing the banking system is perhaps exactly what Bernard's opening question begs in response.

Are you proposing that the banking system is the root cause of the world's economic collapse?

It is.
Many people are writing about the possible solutions.

IMO everyone would benefit from reading this book written by a Kiwi:

Healthy Money, Healthy Planet: Developing Sustainability through New Money Systems
by Deirdre Kent

The book can be ordered for $35 (includes postage within New Zealand.) (you can pay direct into Helen's account)
Please contact Mrs Helen Dew, 12 Costley St, Carterton
Ph/Fax 06 379 8034. helend@contact.net.nz

http://www.le.org.nz/tiki-index.php

A radio interview recorded with Deirdre Kent and broadcast on 12 Nov 2008.
http://www.odeo.com/episodes/23611429-Deirdre-Kent-and-the-Financial-Cri...

Steve

PeterR

You succinctly encapsulated the root of problem when you identified it as:

"Compound consuming more than we produce for 35 consecutive years"

As we all now know this is represented by our net foreign debt ~ NZD 165.00 bn and rising. And of course a large percentage of the current A/C deficit represents the debt servicing costs of this liability.

The current sharp net increase in government borrowing is largely needed to replace that which is maturing in the form of Uridashi , Eurokiwi, Kauri bond issuance and not being rolled over.

Failure to do so will lead to an excess of unwanted NZD being sold in the foreign exchange market which will in turn collapse the currency. Further inhibiting borrowing by the government or anybody else.

We cannot afford to redeem the net foreign liability so we blunder on or face default and the ignominy of IMF aid and all that goes with it. 18 % interest rates in the case of Iceland.

None of which negates the horror of compound interest and the attendant growth of our liabilities. Peonage is certainly looming as Andrewj said.

Waymad,

Agree with you regards not re-inventing banking.

I disagree regards root cause. I well understand that identifying a single root cause tends to be counter intuitive - it is always easier to complicate rather than to simplify, but qualified my original request by excluding responsibility. I would have been better to have requested identification of the 'core problem'. In that respect I came across the following this afternoon in an article on US debt:

What we are all witnessing - and unfortunately subject to - is a FAILED UNDERSTANDING OF THE CORE PROBLEM. It's widely known in the consulting world that, until the core problem is identified and fully understood, no proper or workable solution will likely be found. Identifying the core problem is obviously step one in any resolution process.

The full article is here: http://www.haasfinancial.com/?p=1200

Waymad, I believe five of the six causes you list contribute to a situation of excessive debt.

We have had three propositions put forward as to the root cause of the world's economic collapse:
1. Excessive debt
2. The banking system
3. Complex plural causes

Concentrating on addressing which if any of these will have the best medium term economic outcome (say the next 3-15 years)?

An example from 2005 on The Debt-Peonage Society;

http://www.nytimes.com/2005/03/08/opinion/08krugman.html

In answer to your question PeterR, no, the banks are not the root cause (though they, through the market/monetary system are delivering the fatal blows) but it's the regulators that gave them this mandate.

Perhaps crony capitalism and neoliberal market ideology is the root cause. Weak and/or lack of regulation of financial markets, coupled with other legislative initiatives, such as above (which are specifically directed at eroding the role of the state in the lives of its citizens) are the things we need to look critically at. I mean, Greenspan recently said his theoretical/ideological view was wrong - so why the heck are we staying the course on this fundamentally wrong path?

I suspect it does require a paradigm shift in thinking, if that is, any government actually wants to change the course for its highly indebted populus.

If I had to finger one single aspect (all right, complex causes etc, see above) it would be the lack of transparency/deliberate opacity of many financial instruments and indeed, entire companies dealing with them.

If y'all have been following the Torygraph biz pages, you'll know that a movement is building to have a coordinated global exposure of all toxic instruments, currently hidden away in off-balance-sheet entities, or on them but in Level 3 assets (the VooDoo Bucket).

Hasn't got a hope in hell as a global action (imagine the UN trying to make this work) but may fly as part of say IMF etc.

The theory being that until all toxicity is out in the open, counterparties identified, and a great netting off can be done, it is next to impossible to find out what the residual liabilities are. Nobody currently knows, as PeterR puts it, what the core problem is, what the distribution of the bad stuff is, and what local responses are thus possible.

As Basil Fawlty said as he marched to the kitchen, where Sybil was locked up in the freezer:

' Now, for the tricky bit...'

NZ is an absolute pawn in this Great Game: we're the size of Melbourne, have no 'captive' banks, and a short-term bolstering of resilience (in the John Robb/Global Guerillas sense) is about the best we can muster as a useful response, IMHO.

This is what we should be doing here:
The top government salaries will fall 12 percent to 20 percent in 2009 and "may be subject to further adjustments given the volatility of the economy," Teo Chee Hean, the defense minister who's also in charge of the civil service, said in parliament today. The reductions are deeper than the pay cuts the government said it was planning in November.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaSJ5d9DuXkc

Now I have a minute I would like to take up a couple of points with Waymad and answer the question of Steven Hulme re how would public credit get its moneynis.

Firstly Waymad, I suspect from this - "I also rather like W Kunz's notion that Things Will Change - that the New Deal will involve a hierarchy of values rather than the unsustainable fiction that every system or every culture is equal. Maggie T used to say that "˜the facts of life are conservative'." - that you would be a law of the jungle Caveat Emptor, Laissez faire type of guy.
Banking has been around for thousands of years. The corruption of the social intent of money has stunted the human development of a common good. The debate of credit reform has been recorded in history as far back as 17-1800 BC. The current modern privately controlled banking system is far from the normal you make it appear. It along with international commerce once again being dominated and corrupted by the slaveminded few is the current common denominator in most every upheaval facing societies today.

You said-
"The linked article is pop-fi: missing the essential point of fractional-reaserve banking - that loans depend not on existing deposits, but on future cash flows - a movement across time rather than across accounts."

The debt slavery comes of course when the private owners of the created credit system issue more debt than there is the resources to ever be converted to currency to ever repay the loans. There control is further amplified when they use the proceeds of the scam to monopolise the necessities of life of most of the planet then proceed to charge you more than you earn for those necessities in order that you have to borrow more of their created credit.

Stephen Hulme, to answer your question and complete WayMads answer, our own debt free money would be injected into the money system the exact way that the foreign owned created credit that we borrow at interest is now. That is as govt services, Roading, Education, Health, Sustainable energy projects, anything that was desired and the sustainable human and physical resources existed to have it happen. The ability of the internal trading banks to create credit would be removed. They would then only be able to relend deposits as everyone thinks they do now at the same margins, but at a far less or regulated rate at simple interest as opposed to compounding interest. Our on money would be backed by the utilisation of our own resources, by the water flowing through our hydro lakes, by the power created by our thermo power stations, by our own fossil fuel sources, by our own wind turning our own wind turbines.
We pay down our central bank debts with our own truly backed money as it comes into circulation, thus reducing the massive amounts of our tax revenues currently wasted paying these bogus loans. There is a growing number of nations that have realised just what a con this current system is and are investigating credit reform. From what is occurring I believe an alternative clearing house for trade based on fair trade as opposed to free trade is not all that far away at present. It will of course face threats and sanctions from the current heads of the organised crime, but although there is much to fear, there is nothing to lose, but everything to gain.
Make a stand for the diplomatic revival of common decency or sleepwalk back to serfdom. I know what I choose.

The banking system is NOT the root cause.
The question is why has a proven banking system that has been around many centuries failed horribly about every 70 or 80 yrs?
There is a traditional ratio, 1/3 ownership to debit, be it a bank or ones own mortgage
The reason for banks failure is because of an inherent human egotistical nature to consider that each new generation of economist thinks they have the real answer and it is better than archaic theories of the past that are written off simply because they are several generations old.
As those who lived thru the previous crisis in convienently die off, their influence dies with them
The politicians then free up restrictions on banks to work within proven long term stable guide lines, and everything then repeats.
So who is to blame?
The politicians? Those who lived thru previous depressions for dieing off? the lastest generation human ego, "they know best"? or a legislative system that cannot work in the same many as say the American Constitution ..eg the right to bear arms...and permanently install a 1/3 ratio into economics and banking
When looking to to find the cause of any problem, when you think you have it, again ask "so why did that happen" till there is no answer.

Raf,

I think you are getting close to it with the "nature of credit creation, compound interest and debt", but I am with Steps in "The banking system is NOT the root cause".

We come back to a cultural propensity to on average consume more than we currently produce. To do that requires taking on debt - an obligation against future production. The banking system can make this very easy to take to excess, but only with the complicity of society - politicians, central bankers then economists being first in line.

If we didn't have a banking system, would some of us still be able to consume more than we produce? I am sure we would find ways.

The current crisis is as you say severe because as Steps infers our culture (politicians and economists to the fore again) believes it is smarter than those of the past, can ignore history, and avoid the debt creation process going into reverse. The latter in defiance of maths and science - something which I have previously politely alluded to as divine omnipotence.