Questions please on our banks, interest rates...anything really

Posted in News October 10, 2008 - 07:35pm, Bernard Hickey

There seems to be an enormous appetite for up to date information about New Zealand's banks, other financial institutions and our economic outlook in the midst of the worst Global Credit Crisis since the Depression. People are asking which financial institution is safe? What might happen to interest rates? Will banks keep lending? What will happen to house prices? Is our economy going into recession or depression? I am now regularly being called and emailed for information. These are hot topics and we're keen to help answer those questions. I'm just a journalist so I'm not in a position (and wouldn't want to be in a position) to give financial advice. I certainly don't sell any products. All I do is report and comment on banks, finance companies, the economy, interest rates, monetary policy and global markets. Interest.co.nz makes money by selling advertising and by selling news and data to other media companies. I have no role in the advertising part of the business. My aim is to provide independent, reliable and useful news and commentary for people who are saving or borrowing from banks, finance companies and building societies. I have criticised finance companies before who also advertised on this site so I am not beholden to advertisers. I am always thinking about the 2 million or so New Zealanders who have to roll over or lend their term deposits and debentures (NZ$100 billion), or who roll over or take out fixed rate mortgages (NZ$170 billion) every 6 to 18 months. They want to know what might happen to interest rates so they choose to borrow or lend short or long. They want to know which finance company or bank is safe enough to invest in and who is offering the highest term deposit rate or lowest mortgage rate. I'm happy to answer questions about these things in the best way I can. Again, I can't provide financial advice. But hopefully I can shed some light with accurate, up to date information. I also welcome any information from other commenters on this blog. Often they know a lot more about specific subjects than I do. Also please point out if you think I'm wrong and I'll correct if I agree. Fire away using the comments facility below. I'll do my best to answer them in a timely fashon in the comments on the blog. But first to get things started, here's five of the questions I get asked regularly and my answers.

Are the big banks safe ? I agree with the Reserve Bank that our major Australian-owned banks (ANZ, ASB, BNZ, National Bank and Westpac,) are sound and are in a much stronger position to cope with the Global Credit Crunch. They are well capitalised, hold plenty of cash, have strong credit ratings (all are AA rated) and are not materially exposed to the US Sub Prime mortgage debacle. Here's more on why our banks are different from the US and European banks. Here's why they are generally safer. But they are not immune from the catastrophic events in Europe's and America's banking systems in the last couple of weeks. The British government promised this week to spend 50 billion pounds to buy a 1/3 of its banks to ensure they had enough capital to survive. Last week the US government set up a US$700 billion fund to buy toxic bonds from banks to help them cope. This week it said it may use the fund to buy control of its major banks and may offer a temporary blanket government guarantee on all bank deposits. Banks in the Northern Hemisphere have stopped lending to each other because they fear that other banks will collapse, leaving them with debt that is worth a lot less and impossible to trade. Some European countries (Germany, Austria, Greece, Denmark and Ireland) have also announced blanket government guarantees on bank deposits. Things are very serious up North and could get much worse. New Zealand's banks have borrowed heavily on short term foreign debt markets and then lent that money to us for a mortgage-fuelled property binge over the last 5 years. These banks owe NZ$60 billion to foreign lenders that may have to be repaid over the next 40 days, various measures show. Most of that will be to their parents in Australia or to other Australian banks. That should be fine because the Australian inter-bank market is still working. A worst case scenario is that some of that NZ$60 billion owed to non-Australian foreign banks would have to be repaid immediately. The Reserve Bank of New Zealand is ready if needed to lend to the banks if they need to repay those short term debts. The Reserve Bank would lend to the banks in exchange for mortgage backed bonds. This would effectively mean a good chunk of New Zealand's home borrowers owed the Reserve Bank instead of the big four banks. But it would ensure stability. It would however require political approval, given this adds significant new liabilities to the Reserve Bank's balance sheet. It may also mean these big four banks curtail new lending significantly. This would mean getting new home loans, particularly 'riskier' 80% plus and 'low doc' loans would be much harder. Credit card limits would be cut, overdrafts may be cut and many businesses would find it harder to get new loans to invest. Some higher risk borrowers may be asked to repay some or all of their loans early. Our banks have to right to demand repayment on any mortgage at short notice, although it is unthinkable they would do this in any widespread way. The system would keep functioning. It's also likely the Reserve Bank will cut the Official Cash Rate by 100 basis points to 6.5% on October 23 to help soften the blow for the banks of higher funding costs and give them some breathing room to pass on some rate cuts to borrowers. It's also possible the government and the Reserve Bank could announce some form of government guarantee or deposit insurance on bank deposits if the situation worsened substantially. I support such a move. Here's more on my call for a deposit insurance scheme on Monday. The crunch point comes when the Australian banks who own our banks have to repay or roll over the A$100 billion they owe to banks in the Northern Hemisphere. The way the Reserve Bank in Australia and the Australian government deal with this is crucial. So far they have been very proactive in widening their ability to lend to banks in various ways and the government has already lent to the banks directly through its Future Fund, which is a type of Cullen fund. In the event of some sort of catastrophic event in Northern Hemisphere markets and a signficant threat to the system here in Australasia I believe either the New Zealand or Australian governments (or both) would step in to make sure the big four banks did not collapse. They would engineer a takeover by another bank, engineer a nationalisation themselves or manage a shutdown in a way that meant depositors, who are always first in line to receive funds in any collapse, would not lose money. No government or Reserve Bank would ever say this, but I believe these big 4 banks are too big to fail and it would be politically unacceptable for any one of them to collapse in a way that lost depositors' money or froze the payments system (ie EFTPOS, bill payments, salary payments). Other banks operating here, including Kiwibank and Raboplus, also have either some form of government backing or a very strong credit rating. Kiwibank is AA minus rated by Standard and Poor's and is owned by NZ Post, which is a State Owned Enterprise that guarantees deposits at Kiwibank. However, NZ Post has the right to withdraw that guarantee with 90 days notice. Raboplus is owned by the Dutch-based cooperative Rabobank, which has the highest possible credit rating of AAA and is therefore seen as safer than the New Zealand banks. Here is the latest ratings report for Rabobank. What's going to happen to interest rates? Short term interest rates for both term deposits and mortgages are likely to fall over the next couple of months because the Reserve Bank of New Zealand is widely expected to cut the Official Cash Rate (OCR) quite sharply. The OCR is the interest rate that the Reserve Bank charges the banks to lend to them overnight. It sets the base for all interest rates and eventually it pulls down or pushes up all the interest rates that banks offer and charge to their borrowers and depositors. But it has the most effect most quickly on short term rates, particularly at the moment. That's because longer term interest rates, particularly for 1, 2, 3 and 5 year fixed rate mortgages, are based at least partially on what's happening in the international wholesale credit markets. Right now the cost of that credit to the banks has skyrocketed to around 10% for longer term debt, if they can find it. That has significantly increased the funding costs for the big 4 Australian banks who operate here because they fund about a third of lending through these international money markets. The Reserve Bank of New Zealand is expected to cut the OCR by 100 basis points to 6.5% on or before its scheduled announcement on October 23. Some believe the OCR may be cut to 5.5% by the end of the year. That means deposit rates for 1 to 6 months are likely to drop to around 5.5% to 6% by the end of the year. That means if you can place it on term deposit at a bank now for around 7-8% you'll be in good shape. See our list of all the term deposit rates on offer here now from zero to 12 months. Currently the highest short term rate on offer by any of the big banks or Kiwibank is a special offer of 7.8% from ASB for a 5 month deposit. Longer term deposit rates are also likely to fall from around 7% now to around 5 to 5.5% by the end of the year. So lock in now if you want to keep a high savings rate. See our list of all the term deposit and debenture rates on offer here now for 1 year to 5 years. Currently the highest longer term rate on offer from the big banks and Kiwibank is a special offer of 8% for 18 months from ANZ. Mortgage rates are dropping too, but not as fast because of those high overseas funding costs. Not all of the 100-200 basis points of OCR cuts will be passed on in fixed mortgage rates. Currently the big banks are offering around 8.4-8.7% for their two year fixed rate mortgages, which are usually the most popular. Kiwibank is offering 7.99%, but it has that government backing and funds almost completely from the local term deposit market. I think it's likely the 2 year fixed rates offered by the big banks will drop to around 7.5%. Kiwibank may be able to drop to 7%. Currently the lowest mortgage rate offer from any of the banks is Kiwibank's 7.99% for 2 years, although it is only open to borrowers wanting less than 80% of the value of the home. The lowest offer from the big banks is National's 8.3% special for 2 and a half years. If we see the OCR drop to 5.5% or even lower, it's possible that variable mortgage rates could start to become competitive at around 7-7.5%. They are currently around 9.7% to 10.5%. Borrowers hoping to take advantage of lower mortgage rates should fix for shorter periods, potentially as short as 6 to 12 months. A variable mortgage may be more attractive by mid 2009. What's going to happen to the economy and unemployment? The economy has been in recession all through 2008 and I think it is likely to remain that way all through 2009. This is more pessimistic than most economists. The shock to the global economy from this global credit catasrophe is already driving down the prices of the commodities we rely on for export receipts. Dairy commodity prices have fallen more than a third in the last three months. Disruptions to global trade from the credit crunch are already showing up. Some goods are being left on docks because letters of credit cannot be obtained. China's economy is slowing fast. The US and European economies are probably already in recession. Meanwhile, back at home, the slump in the housing market and tightening of credit from banks is slowing consumer spending and business investment. An initial rebound in business and consumer confidence in August and September has evaporated in the last week as the scale of the Global Credit Crunch becomes clear to everyone. Tax cuts have just kicked in and there will be more over the next year or two, but it won't help that much. I had thought that unemployment would not rise much given New Zealand employers are more likely to 'hoard' workers, given their experience over the last 5 years that good people were hard to find. There are also some demographic factors (emigration of our young workers and an ageing population) that made me think unemployment wouldn't rise much. I think now unemployment is likely to rise well above 6% in the next two years because of the length and likely depth of the recession, but that's still not as bad as in 1991 when unemployment nearly hit 11%. What's going to happen to house prices? We at interest.co.nz forecast back in February that median house prices were likely to fall 30% over the next couple of years from their November 2007 peaks. We think it will take until 2018 before the median house price gets back above the NZ$352,000 peak it reached in November 2007. This was a very pessimistic forecast at the time and was widely ridiculed. We are sticking with this forecast. We estimate it still takes over 70% of take-home pay for someone on a median income to afford an 80% mortgage on the median house price. This interest cost portion was vaguely affordable at around 45% of takehome pay in late 2003. We think prices will have to fall around 30% to become affordable again. We think the extent the credit crunch and the collapse going on in the property investment market will ensure that a generation of New Zealanders will come to loathe property investing in the same way that a generation of New Zealanders loathe stock market investing because of the 1987. We are seeing the 2008 property crash. Property prices will not recover for a decade. Will this recession be as bad as the depression of the 1930s? No. The world's central banks and governments appear not to be repeating the fundamental mistakes made in the early 1930s. Back then central banks withdrew money from the banking system and governments reduced spending, thinking this was the way to deal with financial market and economic stress. Politicians also legislated to restrict trade, thinking this was the best way to protect their own citizens. All of these things deepened the economic depression that lasted from 1930 until 1939 for many countries. Also, most of the world's banking systems were based on the Gold Standard, which meant every dollar, pound and franc was backed by gold held in bank vaults. This was attacked by speculators and restricted policymakers from responding to the crisis. There is no Gold Standard now. Some say that is the cause of our problems, but it does make our central banks and governments more flexible, as does the existence of floating exchange rates. Floating exchange rates and freely traded interest rate markets allow economies to automatically stabilise. There we go. I'm sure you have many other questions. I'm happy to try to answer them.

101 Comments

by Andrew in Ngaio | 10 Oct 08, 8:06pm

Bernard the issue i have

Bernard the issue i have with you is that you keep saying the banks are safe but it is what you dont say that i potentially worry about that bugs me. And these issues have been known about for a long time now. And now lately you are obviously getting more concerned and talking about the things that i know about but you still are not really laying out as it is. The issue here is transparancy. For some reason the banks here were allowed to take advantage of availability of overseas funds to make large loans that created inflation and drove up house prices. How is this to be funded going forwards? How are the banks well capitalised? What methods have they used? The story of recent years is one of stupid assumptions with real world implications

by Keithw | 10 Oct 08, 8:34pm

A good overall piece Bernard,

A good overall piece Bernard, will be interesting to see how correct your predictions are.

What I would like some comment on are some of the unexpected events that could happen, such as how likely is a knock on the door from the bank manager, if mortgage payments are still being made. ?
Is it likely that the outstanding credit card balance could be called in ?

ie apart from higher cost of living, & probable lowering of interest rates, - assuming their job has not been lost, how is the credit crisis going to affect the average homeowner & their mortgage ?

I see a very blaze' attitude from many, including the government, along the lines of- Its only the banks that are in trouble (but we are being told they are sound) & i am still paying my bills & have a job, so everything must be fine.
So what if my house drops in value, as long as I don't need to sell it.
So what if the exchange rate drops through the floor -thats good for exporters isn't it?
So what if the sharemarket drops- they deserve it the greedy so & so's
It's great if the interest rates drop - it means my mortgage payments are less doesn't it ?
So what if we get some inflation - that will cancel out the deflation won't it ?
etc

by Bernard Hickey | 10 Oct 08, 8:38pm

Andrew in Ngaio I share

Andrew in Ngaio
I share some of your concerns. We have borrowed too much for too long from foreign lenders to invest too much in overvalued and often leaky houses. I agree it is not sustainable. It has stopped. It is now very, very difficult to get an 80% plus home loan and house prices are falling.
But it's big leap from that to saying the banks will fail.
Our mortgage delinquency rates are tiny. We pay on time. Unemployment is still only 3.9%. Our banks didn't lend to shonky US sub-prime borrowers. The Reserve Bank forced them to put aside extra capital early this year. They forced them to assume there would be a 30% fall in house prices. The banks raised over NZ$2 billion in fresh capital earlier this year in a series of bond issues in response to that.
http://www.interest.co.nz/ratesblog/index.php/2008/07/02/rbnz-tells-bank...
Our banks are well regulated.
Finally, I believe our government and Reserve Bank will prevent or manage a failure so that depositors will not lose money.
cheers
Bernard

by Bernard Hickey | 10 Oct 08, 8:42pm

Keithw I think it's unlikely

Keithw
I think it's unlikely the bank would knock on your door if you're paying the mortgage on time. I also think a unilateral calling in of a credit card debt is unlikely, unless there had been some slow payments. There might be some unilateral reductions of credit card limits though. We've already seen that from some banks.
I agree our political leaders are behind the curve on this. I also agree people are being too relaxed about believing that a little bit of inflation will fix the problem.
cheers
Bernard

by Keithw | 10 Oct 08, 8:45pm

"Finally, I believe our government

"Finally, I believe our government and Reserve Bank will prevent or manage a failure so that depositors will not lose money.
cheers
Bernard "

Oh Bernard- What have you been smoking ?

Do you really believe that lot could organise themselves out of a paper bag ? !!!!!

I know you said you were an optimist at heart but I am astounded you would say the above !!

by Bernard Hickey | 10 Oct 08, 8:48pm

Keithw This is No Smoking

Keithw

This is No Smoking website...
But seriously, governments are powerful and can achieve things. We're finally realising now the power of the nation state is greater than that of a multinational or a fund manager.
The US$ is rallying because the United States is the most powerful country in the world with the most aircraft carriers and the biggest nuclear arsenal.
cheers
Bernard

by Keithw | 10 Oct 08, 8:59pm

There is more power in

There is more power in other areas that tell governments what to do.
Bush & Bernanke have made a dozen statements in the last couple of weeks & after each & every one the stock market has taken a huge dive & wiped out billions in a day !! We have had 4 or more 700 point drops on the DOW in the last week - that's 1.4 Trillion per time- that must be starting to approach the governments operating budget.

by jill wellington | 10 Oct 08, 9:00pm

I agree with Keithw with

I agree with Keithw with the track record for them handling a boom economy ,and putting us in the same bright red as their logo .words fail me ,not them they reckon they have the financial experience?for getting us in the red,for the next 10 years.

by Keithw | 10 Oct 08, 9:21pm

Here's another question for you:

Here's another question for you:
Assuming we manage to get through this mess & there is still any money left somewhere, & if as you say people have rightly been scared off the share market after 87 & again this week, & if as you suggest people loose interset in investing iin property (wihch i disagree with, but anyway) & they don't trust the banks as they have seen them collapsing overseas, & they don't trust the finance companies as they have seen them collapse here, & the business downturn is bad, so they will not be interested in investing directly into any business in case it collapses, Why would they bother saving at all ? Where else can they put their money ?

They would be better of just spending whatever excess they have, & at least get to use it themselves rather than letting it be lost in one of the above.

& for those that know they won't be looked after by the government, where is the safest place - Property of course. At least it will still have some value (even if it ever makes it to 30 below)- unlike all the other alternatives

by Andrew in Ngaio | 10 Oct 08, 9:27pm

Bernard earlier you said: "Our

Bernard earlier you said:

"Our national accounts show $25.1 billion of our debt is "at call", which means it has to be refinanced daily by our banks. This is slightly more than double what it was five years ago before the housing boom.

a further $59.4b that has to be refinanced every 90 days or less, which is up about 60 per cent from five years ago.

This combined $84.5b of debt rolling over every 90 days or less is what is keeping our bankers and the Reserve Bank governor up at nights."

For some reason preparing for a 30% fall equates to an extra 2 billion.

Simplistically (which is how i operate i admit) if you have a difficult economic period then you wipe out the gains of the last 5 years at least. Where did they get 2 billion? Where did the 40 billion go?

Bernard replies: You're right that all the extra debt pushed up house prices. But it hasn't all disappeared. We have about NZ$170 bln of mortgage debt over NZ$616 billion of house values.
Also, the banks have lent against the houses, but it's the borrower's incomes that matter. They are not falling. Unemployment is still low, although it will rise. If it got above 8-10% then the banks will have more of a problem. But remember, the default rate for mortgages in NZ is still well under 0.5%.
cheers
Bernard

by raf | 10 Oct 08, 9:33pm

Your deposits are safe.....in the

Your deposits are safe.....in the main.

The government can nationalise the banks at anytime.

If your money suddenly evaporated they could replace it with a push of a button.

The key issue to the economy is making sure the money supply does not contract too heavily and cause the economy to disappear (literally).

What I would say is that if you own shares in a bank then that investment is most definitely not safe (as we have seen over in the US and UK).

Bernard replies: I agree owning shares in a bank is much less safe than having deposits in a bank. It does show though that a bank failure will hurt many people before it hurts depositors.
cheers/Bernard

by Walter Kunz | 10 Oct 08, 9:35pm

Bernard, I'm just back from

Bernard,
I'm just back from a few glasses of Kaikoura Sauvignon blanc and a taste of local goat cheese on home made bread. Life is great!
Great Bernhard with your article you are leading the way how we should approach the crisis. I think that's exactally what we need in this country- open discussions about where we are going in the next few years - developing ideas and visions to combat the crisis. I'm reading comments on your site every day. Sometimes I agree with people sometimes I don't' understand, occasionally I shake my head and other times I'm surprised about people's knowledge.
Important - we all contribute.
Because of more worldwide, unexpected bad news not only on the financial-markets my personal view for the future is rather grim. I think we are sliding slowly into a depression. In the next few months unemployment and bankruptcies will sharply rise. To maintain an average life- style for many in this country is just not affordable anymore. Middle class people aren't spending much, which means less consumption and production under increasing higher prices "“ considering our debts just a catastrophic scenario. Agriculture exports and tourism our biggest industries already under stress are of course depending on foreign customers, who suffer under the same circumstances.
The silver lining is our innovative, visionary spirit to make things happening, our strong attachment to the land and the modesty of people. Do it together - and we make sure there is enough for everyone and I'm convinced we will learn a lot more from America to do things different. The good life after all is simple.

Bernard replies: You're right.Things aren't that bad. I like the sound of that wine. But I disagree that unemployment will rise extremely fast. Employers are still hoarding.
cheers/Bernard

by A watchman | 10 Oct 08, 9:51pm

Bernard, It would appear that

Bernard,

It would appear that there are local councils who have also invested our rates unwisely as the attached article reports. Do you have access to any other reports on similar overseas investments that may be causing councils in New Zealand grief?
After all, it is their surplus's, and our accummulation of rates that are getting dissapated.

Thanks

"Council exiting alternative strategies fund II investment

16 April 2008

Environment Waikato is making a phased withdrawal of its investment in the Russell Alternative Strategies Fund II, says group manager finance Warren Stevens.

Mr Stevens confirmed the regional council had about $3 million in the "fund of hedge funds" as at 31 December 2007. That compares to a total Investment Fund portfolio of more than $70 million at 31 March.

Due to the turmoil which has hit world financial markets, the alternative strategies fund II investment is currently worth $2.9 million, meaning an unrealized loss of about $100,000 since 31 December.

"In the current, more volatile state of world financial markets, we made a decision some time ago to exit the alternative strategies fund II. We had a small portion of our total investments in this particular fund as it offered potentially higher returns," said Mr Stevens.

"However, as the fund's contracts mature they are being liquidated and monies repatriated to the fund investors.

"Based on the advice of Russell, we believe this is a more prudent course of action given current uncertainty in world financial markets.

"We don't know how big our actual alternative strategies fund II cash loss since 31 December will be once the contracts mature.

"Any loss of money is of concern but we are managing the situation as closely as we can to ensure our overall long-term investment strategy is still relevant.

"We believe that, overall, our current investment strategy is cautious and prudent, and it is one that has earned superior returns for our ratepayers compared with having our Investment Fund assets tied up predominantly in fixed interest.

"For example, in the five years to December 2007, we have earned about an extra $2.5 million a year, or $12 million in total, from having part of the Investment Fund in international shares rather than just sticking with fixed interest.

"The reality is that in any one year there is always a risk of an unrealized or actual loss. But over the longer term our strategy has proved its worth."

However, Mr Stevens said that this year, in line with Environment Waikato's normal review cycle, the current investment strategy will be reviewed by council.

This media item was current at its release date. The facts or figures it contains may have changed since its original publication."

Bernard replies: Interesting article. It's worth ratepayers asking councils where they have invested money. They should be putting it into local infrastructure. Or repaying rates... A bunch of UK councils have lost over 600 mln pounds invested with Icelandic banks. cheers/bernard

by Stan in Wanganui | 10 Oct 08, 9:55pm

Bernard. Could you comment on

Bernard.

Could you comment on the "Safe Haven of Gold" and Kiwi Bonds as alternative investments to the main stream ones which are keeping us awake at night.

Bernard replies; Gold is not easy to buy right now. You'd have to believe in a complete breakdown of the banking system and confidence in fiat (created) money to believe Gold is worthy as a store of value.
KiwiBonds, though, are an alternative to investing in a bank. They are AAA rated and guaranteed by the government. They are open for amounts from NZ$1,000 to NZ$500,000 and offer 6% for six months and 12 months, and 5.75% for 2 years. There's more information here. http://www.nzdmo.govt.nz/securities/kiwibonds
The Debt Management Office has been very busy taking in deposits, which have increased to NZ$516 million by Wednesday from NZ$491 million on October 1 and NZ$420 million on June 30. cheers/Bernard

by Keithw | 10 Oct 08, 9:56pm

Jiust so you have something

Jiust so you have something to keep your brain occupied (which previously you obviously didn't otherwise you wouldn't have asked for questions)
How do you see things for those that don't have any money to save anywhere & have a mortgage or 2 on property.
I hear "Pay Down Debt" being spouted all the time, but if the Dollar is being devalued by inflation & interest rates are dropping, then surely having debt on a physical asset is effectively saving.
Its a bit like being short on the stock market- as things get worse you make more money.
There is risk if the interest rates rise, but assuming you can make the payments then isn't there less risk in having debt than there is in having savings ???

Bernard replies:
Keithw. My brain is plenty occupied right now! Sometimes I wish there was less news to occupy my small amount of grey matter! Your theory is correct if we have high inflation. I suspect, though, that we now have significant deflationary pressures. During the Depression prices fell sharply, which meant that the same amount of savings bought much more in later years. By the same token, repaying debt in a deflationary future becomes even more painful because earning the same amount is harder when wages are lower. I wouldn't take inflation for granted now. cheers/bernard

by Andrewj | 10 Oct 08, 9:58pm

We run both a current

We run both a current account deficit and a trading deficit. What do you plan to back the banks with, a promise to pay based on future earnings. I think those days have long gone. Sorry I don't see the point of deposit insurance, if you don't have the ability to make good. maybe we could sell CDS or such, but they are not so popular at present.
The action in the world banks, today is about Lehman bros CDS next week its WAMU CDS the shadow banking industry is about to meltdown its bankrupt and you are going to pay for it. Id sell any shares if you purchased based on historical earnings the future will be different to the past.

Bernard replies:
AndrewJ
I'm not suggesting buying anyone's bank shares. Ultimately government does have the power to buy these banks if ultimately necessary. Governments have the power to tax. That's one way to stop people spending more than they earn. Just impose a tax. cheers/bernard

by alan stewart | 10 Oct 08, 10:20pm

dont think there will be

dont think there will be queues round the block to loan the bank money at 5-6% paid quarterly when they charge 20% +monthly for their credit card or 18% for personal loans.

by Kate | 10 Oct 08, 10:22pm

Why do you think the

Why do you think the RBG will lower the OCR? Is it principally to increase the availability of short-term finance (given the difficulty of sourcing that money overseas these days) - or is it for some other reason?

Bernard replies;
Kate - I think the RBNZ sees the economy slowing very fast and will be convinced inflation is a much smaller problem. They will also want to help reduce the banks' funding costs so they can pass on some of the OCR cut in the form of lower fixed mortgage rates. cheers/bernard

by Danielle | 10 Oct 08, 11:13pm

I would like to know

I would like to know how "secure" at term deposit would be in "bankwest" which has just been brought by commonwealth bank, who i think also own ASB.
Cheers

Bernard replies:
Danielle - BankWest will soon be owned by Commonwealth Bank, which has a AA credit rating. This is better than the A plus rating that BankWest had under HalifaxBankofScotland ownership. Commonwealth Bank (with a Kiwi CEO Ralph Norris) is a much stronger bank than HBOS and is not exposed to the crashing UK housing market. cheers/bernard

by Mich | 10 Oct 08, 11:41pm

What are the chances RBNZ

What are the chances RBNZ en the government will let inflation go (very) high? How to notice this early? (Like when they lower interest rates without good reason?)

Bernard replies:
Mich - I don't think the RBNZ will let inflation go (very) high. There's less of a concern now about inflation because of the sharp slowdown in economic growth globally and deflation in asset values. But I have been worried in the past about the RBNZ cutting interest rates before signs of inflation easing. But the uglier this global recession becomes, the less risk there is of inflation getting out of control. cheers/bernard

by Iain Parker | 11 Oct 08, 12:59am

â€œYouâ€™ve got to remember â€“

"You've got to remember "“ banks create credit, they lend it to companies and that creates growth." - John Key, Leader of the National Party, on Television New Zealand Breakfast programme, 9 October 2008.

by Mary | 11 Oct 08, 1:00am

Hello Bernard and thanks for

Hello Bernard
and thanks for all your work.
I do not have specific questions but would appreciate your comments on my reflexions about the current situation.

Regarding the OCR and the Reserve Bank policy, i think they are observing what happens in the rest of the world before stepping into action.
I have been wondering why they would not cut the OCR now and I have come to the conclusion that if they cut the rates too early, it would reinforce the devaluation of the NZ dollar with a very strong risk of imported inflation. I am not sure inflation would be such a good idea when all other countries are on the verge of deflation. Inflation would worsen most debtors situation and threaten the good rate of loan repayment to the banks.... For now they ensure banks get the required level of liquidity.

I think they will wait and be sure the risk of inflation is zero before cutting rates. It will be when NZ consumption reduces because of unemployment and high current repayments, and when other countries start reducing their prices also. All this should not take long actually, and the timing would be kind of clever as the rate cut would free some money for loan repayments (provided unemployment does not rise too much).
This is the only reason i see why rates are still so high.

Well, another reason might be that keeping high rates speeds the return of house prices to a 'normal' level. I must tell you i was quite happy when i discovered your website and your comments about house prices. For three years now I have also kept telling everybody that they were too high and would collapse soon, simply because they are not affordable. But...... every body laughed at me.....
Anyway, i think that a 30% drop is very conservative. My estimation is that the 'reasonable' price of a house is 3 years of income. It is currently 8 years....Therefore a 60% drop would make it. But is anyone ready to hear that?
If the situation stabilises and borrowers have to keep repaying a house x times its value, i quite agree that a whole generation will loathe property investment and houses.

The current big question for all governments is how to deflate the price of houses and assets and, at the same time, get debtors repay as much as possible to ensure a 'soft' landing. It supposes stability and as little bankrupcies as possible which is why i believe all countries, for now, will try as hard as they can to stabilise things and cooperate, but the whole system will be utmost fragile for a few years.

Besides, the end of the "credit era" will be quite a change for most people, and a hard one.... They are going to learn the hard way that you must save before buying. And if you cannot afford it, you do not buy it.
For years i have wondered how people who earned much less than me could afford all the new gadgets and cars etc... which i could not? Now i have the answer!
Maybe all the advertising and marketing could start working on it now? After generations of 'you deserve it' the motto might become 'we deserve you - because you can afford our product- '?.

Cheers
Mary

Bernard replies:
Many thanks Mary. I agree with you. We have a major lifestyle change to navigate. Debt will be no longer be easy and we'll have to repay much of it.
We're talking a decade or too of belt tightening and debt repayment. There's simply too much to just let it sit there.
cheers
Bernard

by Iain Parker | 11 Oct 08, 1:06am

Bernard, on Radio Live with

Bernard, on Radio Live with Marcus Lush Tues 7 Oct 6.50am you said "essentially what we have is the FED being the only operating bank lending money to everyone" could you please expand on that if you may.

Am I correct in saying That although the BIS remains the head office, the Federal Reserve Bank of New York took over from the Bank of England as the back office of the central banking network after the Bretton Woods conference of 1944, and the central banking network is a private institute owned by multiple owners, but shares in the central bank of banks do not trade on the open market like normal corporate shares, you have to be born into the right families to own them. It is 70% owned by European interests and 30% American. As these "Nationalisations" occur around the globe, it is nothing more than the future taxes of nations being pledged to the multiple owners of the private bank that is the central banking network, all in exchange for electronic bits typed into the electronic transfer system. Little wonder Russia has kicked them and their multinational corporations out of their country.
Read this below to give you just how much our(NZ) elected members understand this;

Consider for example the question of pieces of paper masquerading as money which are produced by commercial trading banks. Even more intriguing, consider the following example of a pronouncement on this subject by the current Minister of Finance: In a letter dated 16.5.03 sent to Mr. Jeremy Woodhall of Onerahi, Whangarei, Michael Cullen made the following statement; "I can assure you that banks are required to be registered by the Reserve Bank and their books have to balance. In particular, banks do not create credit like a central bank. When banks make loans they are lending the money creditors have deposited with them". That sounds reasonable and indeed, it reflects the widespread public belief that banks only lend what is deposited with them.
However, contrast this with the Reserve Bank's Bulletin 71, No. 1, March 2008 which states; "As this process continues, the ultimate outcome is that the initial $1,000 in deposits can be used to create new deposits (money) and credit (loans) to the value of $9,000. This new money is generally termed "˜inside' money to reflect that it has been generated by the private bank "˜inside' this economy."
So $1,000 can be used to create $9,000"¦"¦ and five years ago the Minister of Finance didn't know?

Then take into account the fact that John Key was one of only a small number of outsiders invited to be an advisor to the Foreign Exchange Committee of the Federal Reserve Bank of New York as a derivatives designer and knows full well the inner workings of the central banking network http://www.national.org.nz/Bio.aspx?Id=28 , why then are our major parties both loath to debate the current crisis in public, could it be that they both fear the public getting knowledge of both of their parts in what has been a hoax since the central banking network got control of us in 1961 via their subsidiary development bank the International Monetary Fund.

by Alex Fergus | 11 Oct 08, 3:20am

Hey Bernard, What is all

Hey Bernard,
What is all this about a 'Banking holiday' in the US?' I'm hearing alot of talk about it - people saying its going to be announced this weekend etc and people also going right out there saying withdraw some cash, buy a heap of food, and fill up on gas... once again this is all in the US.
wot is this all about and does it apply to lil old NZ?

Bernard replies:
Alex
I follow the US news sites and blogs pretty closely. I haven't seen any suggestions of a bank holiday in the United States. There have been calls for a blanket government guarantee of all bank deposits and for the government to recapitalise the major banks.
US Secretary Paulson said he would use the US$700 bln bailout fund to buy bank shares.
There's no suggestion of our government or Reserve Bank having to do anything like that yet. Refer above to my comments on our banks.
cheers/bernard

by Andrew in Ngaio | 11 Oct 08, 6:47am

Bernard you said: "We have

Bernard you said:

"We have about NZ$170 bln of mortgage debt over NZ$616 billion of house values.
Also, the banks have lent against the houses, but it's the borrower's incomes that matter. They are not falling. Unemployment is still low, although it will rise. If it got above 8-10% then the banks will have more of a problem. But remember, the default rate for mortgages in NZ is still well under 0.5%."

Given the level of indebtedness that is present worldwide and the current delevering banks have to be prepared for a contraction back to norms that involves a protracted recession where for example as you point out property falls by 30% in value. This will be accompanied probably by high unemployment and losses beyond just housing. The exstreme run up in house prices in NZ will have funded lifestyles and created numerous buisinesses and jobs wholely dependant on the release of this borrowed money into the economy. Sure i know we are regarded as a commodity currency and it is evident that food prices have gone up enormously worldwide which must benefit NZ exporters in some manner even if the population here is paying huge increases in prices as far as i can tell after being away for a year.

Effectively banks worldwide are bust because of assett depreciation and vapourisation of illusury valuations of supposedly cash like traded instruments. Unprecidented government intervention is underway to rescue the system. Therefore whatever low mortgage defauts are currently present are not really what counts as you no doubt agree? If it were only NZ that experiences 30% falls then other industries exporting to sound economies would be insulated but how can that be if there is such a world wide problem?

Do we really have a mortgage loan to value ratio of 170 over 616 or an incredibly low ratio of .27? I imagine you are not saying that? If we have such a low ratio and New Zealanders have a reputation for paying their debts thru difficult times then obviously there are no problems at all. Instead presumably there is a large number of people who have no mortgage and a smaller number who are highly indebted?
Bernard replies:
It's true that there are a smaller number who are highly indebted. They are paying their bills right now. Even if 10% lose their jobs that's 10% of a small number and even then our banks are likely to rearrange or delay these payments. The chances of mass foreclosures/mortgagee sales of a big chunk of the mortgage books are very low.
What is more likely is the drying up of new loans and the end of top-ups. We are in for a long slow grind of debt repayment and a sharp slowdown in the sectors that relied on cheap and easy credit. cheers/bernard

by Andrewj | 11 Oct 08, 7:52am

Bernard Lehman Bros are unwinding

Bernard Lehman Bros are unwinding their CDS this is a danger point for all share markets.
It just feels crazy that we are running deficits and writing IOU's for present spending. We are expecting future generations to pay for our present life style, we are spending the future. To bail out banks or guarantee them with more IOU's feels a little silly. Especially if our Govt is still going on a spending spree. If bollard drops the interest rates what is the chance of a $ collapse like whats happening in Mexico and Sth America currencies as we speak. Iceland has defaulted Hungary next, we need to start saving fast for a rainy day.
i suspect MacQuarie bank is Aust is one of the banks hiding losses. the 4 banks in a leaked document to Bloomberg from AXA,Where Goldman Sacs meryll lynch Jp morgan AIG and Maquarie.

Bernard replies
I saw on CNBC that the Lehman CDS auction went through OK without any of the counterparties going bust. But there are more and bigger auctions of these derivatives from failed banks to come, including Wachovia, Washington Mutual and the Icelandic Banks, who were heavy users it seems.
It could easily get much uglier for the US and European banks.
That doesn't automatically mean the same will happen to our banks. They weren't hardly involved with these toxic derivatives. cheers/bernard

by Andrew in Ngaio | 11 Oct 08, 8:23am

Maquarie is getting help from

Maquarie is getting help from the ECB so presumably they will be OK

by Edward | 11 Oct 08, 8:24am

Bernard, Given your predictions for

Bernard,

Given your predictions for the housing market, it would seem as though it would be best for first home buyers to rent for the next 6-18 months and focus on building savings as much as possible in order to meet the stricter borrowing terms.

Where do you see rent prices going in the future and where do you think it best to put down-payment savings?

And in a related vein, what is your opinion of the stability of the new PIE cash funds (eg. ANZ FlexiCash, ASB Cash Fund)? The terms of those funds state that they reserve the right to restrict withdrawals. Do you think this is likely in the current climate?

Bernard replies:
Edward
I agree renting would be much more sensible for 18 months or so. I wouldn't be buying until prices have fallen 30% from their peak in November 2007. Rents are actually falling in some of the more stressed markets as landlords unable to sell their properties put them back on the rental market.
The AA rated Australian banks, the AA minus rated Kiwibank and AAA rated RAboplus are rated the safest in New Zealand. That's where I'd start with my own money. Don't worry about the bank PIE schemes. They all invest in that bank's term deposits. They carry the same level of safeness as the bank. cheers/bernard

by Andrewj | 11 Oct 08, 9:01am

News coming in is that

News coming in is that lehman bros CDS have lost %90 of their value.

http://theautomaticearth.blogspot.com/

At .937 to the Aussie I would say take your money to the Lucky country asap. Interest rates are nearly the same lets see bollard drops rates with AUS/NZ so close it will cause a run on the $

by Sarah in the Middle East | 11 Oct 08, 9:26am

Hi Bernard I am a

Hi Bernard

I am a kiwi living overseas (Qatar, in the Middle East) watching this financial turmoil with interest and concern. The sudden and complete collapse of the Icelandic banks and economy is very disturbing. It is a small nation (around 300,000 people). Sure, NZ's population is much larger but on a global scale we are still very small. Does this make us more vulnerable? Was the Icelandic situation aggravated because of its relatively small population? Are there any relevant parallels btwn that economy/banking system and NZ's?

Also, if you were a conservative retail investor (like me and my husband are) and you had $100,000 that you wanted to put into a safe term deposit type investment, what would you choose between (focusing on protecting capital not maximising returns):
-option A - one of the NZ big 4 banks
- option B - one of the big Australian banks (do the Aussies have some term deposit protections that the kiwis don't?)
- option c - kiwi bonds
- option d - some combination of the above - i.e. splitting the money between the various options.

What is the safest?

Bernard replies:
Sarah,
Kiwi bonds have a AAA rating and are backed by the power of the government to tax. They are judged the safest by the ratings agencies and I agree. The big four NZ (Australian-owned) banks are AA rated, which means they're in the safest 20 banks in the world. The Australian banks in Australia will in theory get an A$20,000 per account government guarantee, but that's not confirmed yet. The latest talk out of Australia is that the insurance will be more like A$100,000. NZ does not have a scheme, although Key and Cullen have made positive noises about having one if needed. cheers/bernard

by Andrewj | 11 Oct 08, 9:31am

Lehman bros payout is 91.38

Lehman bros payout is 91.38 on the dollar this is the big story we are talking Trillions
this is ugly as it sets the price for remaining auctions its a blood bath.About as bad as it gets
Opinion: Fear the "Chernobyl" of a derivatives bust

http://www.bloomberg.com/apps/news?pid=20601087&sid=ainXunmcK3kw&refer=home

an extract
Oct. 10 (Bloomberg) -- Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay holders 91.375 cents on the dollar, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

Id be expecting the Aussie to start trying to support their $ very soon. And chances of RBNZ making a rate cut soon look slim.
Look up some of the differences between Aust and us It will be under Roger Kerr (roundtable) top right this page.

by james | 11 Oct 08, 9:43am

Hi Bernard, I am well

Hi Bernard,

I am well cashed up, having deliberately avoided the ridiculous excesses of the share and housing markets over the past few years. I realise at the moment cash is supposed to be king, but I dont trust our governments who would arguably favour inflating our way out of this mess to the detriment of savers. We are always hearing of inflation v deflation. At the moment it seems to be asset, shares and commodites are falling but the CPI is around 5%. So after tax my TDs are losing 1.5% a year according to the headline rate, but are increaslingly able to purchase more commodities, shares and houses. What do you think Governments will try to do, and where is our capital best preserved at the moment? (Advice from others welcome). I have my TDs spread around the big banks, as well as some in Yen and USD.

Bernard replies:
I did share your worries about consumer price inflation until the catastrophe in the banking systems up North and the likely recession we'll see in the world economy. As you point out, asset prices are falling, which is a good thing given your cash is likely to be used later to buy assets rather than consumer goods.
I think our government and Reserve Bank will lend to our banks or provide some other support if needed. They may be inflationary, but it may also simply offset deflation coming from elsewhere. Either way I'd much prefer the government did something than allow a collapse or freeze. If the worst happens then a nationalisation is a possibility.
Australia and New Zealand were judged the 4th and 8th most sound banking systems in the world by the World Economic Forum in its just released global competitiveness survey. http://www.weforum.org/documents/GCR0809/index.html
cheers/bernard

by Andrew in Ngaio | 11 Oct 08, 9:44am

A CDS is only as

A CDS is only as good as a court that will enforce it. These things are going to have to be reworked. plain and simple. End of story. So dont panic. Some kind of resolution will have to be worked thru and agreed if not it is ww3 100% gauranteed. It will be resolved somehow.

by Andrewj | 11 Oct 08, 10:07am

Andrew Ngaio somebody is on

Andrew Ngaio
somebody is on the other side a winner and a loser.

by Trisha Johnston | 11 Oct 08, 10:39am

My fixed-term mortgage expired in

My fixed-term mortgage expired in September. I am currently on a floating rate with Kiwibank. I dont know whether to fix for two years with them now, fix for six months or stay on floating rate and fix later waiting to see what happens with cuts in OCR. What do you think out there? Would welcome any feedback.

Bernard replies:
I'd wait until October 23. Kiwibank has the lowest 2 year fixed rate mortgage at the moment at 7.99%, which is almost 2% below its 9.70% variable rate. That means the OCR would have to fall almost 2% from 7.5% to 5.5% for it to make sense to stay with a variable rate. That is possible. Whatever happens, the OCR will fall and Kiwibank will keep cutting its 2 year fixed rate mortgage. I wouldn't be surprised to see it at 7% by the end of the year. cheers/bernard

by Andrew in Ngaio | 11 Oct 08, 10:48am

AndrewJ Governments wont tolerate some

AndrewJ

Governments wont tolerate some 30 year old hedgefund manager betting in the unregulated casino to gain control of countries or even continents more or less overnight. I cant believe that will be allowed to happen.

by Andrewj | 11 Oct 08, 10:52am

That why hedge funds are

That why hedge funds are liquidating their shares to get cash to met CDO obligations.
They are betting with pension fund money! These are not 30 years old they are AIG Golman sacs macquarie etc

by Andrew in Ngaio | 11 Oct 08, 11:05am

AndrewJ Thats kind of funny.

AndrewJ

Thats kind of funny. If mr Mortgage aka hedgie is on the other side of those trades maybe we can all rest easy. :-) He came out predicting Lehmans was going down many months ago. He seems an ok 30 something kind of guy! Maybe we will yet get a new world order:-)

by sam | 11 Oct 08, 11:53am

To Sarah (in the Middle

To Sarah (in the Middle East)

NZ Public Trust deposits are govt guaranteed up to a million dollars and provides a better return than the Kiwi Bond, and no commision involved. I would recommend this to consider.

by Simone | 11 Oct 08, 1:09pm

Hi Bernard, I have no

Hi Bernard,

I have no property. I rent. But I have money in investments. What about some of our solid finance companies (e.g. SCBS, MARAC)? Surely they will find credit more expensive too. I have investments in these. I am loath to take them out but am aware that these companies may be stretched to find credit to repay investments. YET they do have sound capital backing. These are nervous times not helped by the hysteria gripping Wall Street. Have we seen the last of the shonky finance company collapses in NZ? Should I be putting everything into a Kiwibank PIE?

Cheers for a great and comforting article,

Bernard replies:
Simone,
South Canterbury FInance and Marac Finance are not short of liquidity and don't rely on these international money markets for their funding. But their credit rating is BBB minus, which means they are at least 7 notches below the ratings of Kiwibank and the big banks. They are even further below Kiwibonds.
South Canterbury and Marac are much more diversified in their lending and funding than any of the finance companies that collapsed.
Southern Cross Building Society (SCBS) does not have a credit rating. (Updated from earlier response that confused South Canterbury with Southern Cross.)
There's more info on these in this piece I did a while ago comparing these two with other finance companies.
http://www.interest.co.nz/ratesblog/index.php/2008/06/26/the-5-survivabi...
cheers/bernard

by Tonz (Japan) | 11 Oct 08, 2:05pm

Bernard, A question from a

Bernard, A question from a perplexed observer in Japan.

It is a public holiday in Japan on Monday. Last week was the largest fall of the Nikkei since its inception in 1949! The effects won't be seen until Tues at least. Big business and financial sector people won't be on holiday and will do real work late at night rather than engaging in the traditional Mizu Shobai [Google that] but solace may be all they can turn to.

The Mitsubishi UFJ lshares dropped 20% last week. Like GM, Ford etc in the USA the Nihon motor industry is in serious, serious trouble (the bicycle industry may boom!) . The farming sectors world wide are in precarious positions which raises huge and ugly issues!!!!! Perhaps NZ is a pav paradise beyond all of this .

In all disasters there is initial shock, reality does not set in until days or weeks (it takes a long tie for aid to be efficiently organised and in the disruption, corruption often arises). Ask persons devastated by a natural disaster as they sit amongst the rubble and are asked if they need help . The answer often is ... I am ok and don't need help as the comprehension and actual new reality has not set in (I have personally witnessed this phenomena).

I have had the luxury of time to read worldwide events unfolding over the last year (over the last three weeks up to 12 hours a day).

My interest.co comments may have a wry twists at times but they are not based on idle conjecture. There IS A DISASTER .

My question is simply:

Bernard, Please explain why NZ's leaders appear to be in a surreal state of mind, apparently unable to comprehend the magnitude and implications of the new reality caused by the dire world wide disaster (that is still in a state of disintegration ) ??????

Bernard replies:
Tonz
I have no idea. I'm surprised Key appears not to sense the urgency, given his background in the dealing rooms of London. Maybe he knows and doesn't want to scare the horses. cheers/bernard

by Andrewj | 11 Oct 08, 2:35pm

Tonz how about you comment

Tonz
how about you comment on this

http://www.ft.com/cms/s/0/179be274-96f3-11dd-8cc4-000077b07658.html

by Tonz (Japan) | 11 Oct 08, 3:15pm

AndrewJ, Yamomoto (sub prime casualty)

AndrewJ, Yamomoto (sub prime casualty) , is a amid sized insurance Co (by NZ standards huge!...remember population 130mil) . Japan's 2nd largest Real Estate (and mortgage) Company is tits up too and many other companies have the staggers, if not finacial distropy.

Those who have shares are thunderstruck . I spoke to a very upset retired banker on Friday...he said last week was the end of his retirement dream. He has been taking 4 big trips a year overseas (2007 NZ) to catch up on the holidays he never had during his working life.

When there are busness failures it is spectacular and with little warning... Take Nova, Japan'n largest English School (430,000 students)...last year iit suddenly went belly up ...corrupt CEO who incredibly avoided jail.

The Japanese try to keep quiet and don't show their cards so don't be overly surprisedi in the next few weeks if the flood gate suddenly opens with rush.

Japan's economy has been quietly but surely slowing long before Wall St.

by Walter Kunz | 11 Oct 08, 4:25pm

So far I didn't enjoy

So far I didn't enjoy my few glasses of wine, but it is still a great, sunny day.
We all feel there is an elephant herd running towards our glasshouse- village - called New Zealand. Why do we care about which size/ shape and where we put the fragile stickers ?
What about talks of how we erect a wall to protect the village in the best possible way ?

One of the key questions? What are the consequences for New Zealand when the US$ will lose it's value in the next few days/ weeks? Okay- we all have the right answer. Next- the important question- what are the government/ councils and other authorities doing so far not only to avoid but to deal with the disaster?

Bernard replies:
I suspect they are hoping it will go away or the Reserve Bank will deal with. cheers/bernard

by Andrewj | 11 Oct 08, 5:46pm

Tonz I agree the pain

Tonz
I agree the pain is going to be really felt when it finally dawns on people that their pension funds have been lost the resulting drop in spending on tourism etc will be devastating. I dont know exact figure of losses from lehmans sale, looks to be about 230 million Pounds

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3175474...

flow on effect

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3174217...

Problem is its set the price for the rest.

I expected equities to get a hit looks like a monster, the civil unrest begins when workers who have scrimped and saved all their lives find some smarmy prick has lost their money while taking a fortune in bonuses which where mainly in shares so they pump up share prices while they sell all theirs. Figures form FT suggest that 95% of executive bonuses where sold in 1st week.
So now part 2. research Ive done thanks to Stephen Hulme has scarred the pants of me
Do we hold Cullen or Bollard responsible for creating such a mess. Im inclined to lay it on Cullen as its gone hand in hand with the huge increases in Govt spending.
Ive got a friend with money in Macqarie on advice of a finance idiot he is very unhappy as finance adviser made so much on the way through for poor advice
MacQuarie need keeping eye on at present ,wonder if Rudd has the balls to bail out the millionaires bank.

by Andrewj | 11 Oct 08, 5:59pm

That should be 233 Billion

That should be 233 Billion pounds.

by Simone | 11 Oct 08, 6:19pm

Andrewj what are you on

Andrewj what are you on about. Get a grip, dear. And civil unrest? Cullen and Bollard responsible for "this mess"? They are both high calbre. Bollard especially has done well. Our high interest rates reigned in spending and stalled house inflation 18 months ago and now mean we have fair room to move downwards to help relieve the fiscal pain brought on internationally. The dropping of commodity prices means that this will not be an inflationary move. I think NZ is in a better position than most. Cullen has done well too with his Kiwisaver and superannuation schemes ensuring that our financial institutions are getting SOME deposits.. AND our banks are rated in the top 20 of fiscally responsible banks internationally. NZ started the recesssion earlier than most countries. Our over-leveraged financial institutions toppled earlier than most countries. They are gone now. We have low employment, sound banks, and interest rates that can move to contain the credit squeeze (unlike 2% in US). I can't think of a better place to be than NZ to ride out the storm.

BTW -from your link "The International Monetary Fund said it is mobilising a "rapid-fire" fund worth several hundred billion dollars to stop a domino collapse across the developing world." - WHY can't they do this for global warming e.g.make public transport free and easily available across the globe. It would be a drop in the fiscal ocean to do this. But no...

by Steptoe (Steps) | 11 Oct 08, 7:32pm

Simone..totally agree with you The

Simone..totally agree with you
The fact that we are in a far better position than most countries, could only be because of prudent policy over the last few yrs.
I ask which or how many counties around the world,
1/ have not had to bail out a bank or nationalise?
2/or quickly garantee desposits to fend off a run on their banks?
3/ or jump in and drop wholesale rates quick?
And what do we have in common with those r countries?

Im NO Labour supporter, If the current crisis didnt happen, no way would Clark get my vote..on social issues
But right now it is a matter of WHO is going to see us thru the next few yrs the best.
All English can do is piont fingers (in the wrong direction) and and Key saying what his PR ppl tell him...to get votes...not do what is right.
So it is a simple choice, do we want a helmsman or an Aussie PR company to determine our direction?
Cullen doesnt panic, just quietly gets on with the job hes paid to do.

BH
"We think the extent the credit crunch and the collapse going on in the property investment market will ensure that a generation of New Zealanders will come to loathe property investing in the same way that a generation of New Zealanders loathe stock market investing because of the 1987."

Interesting concept I have to agree with u, and also has quite social and fisacal impications over the next 20 yrs

I dont share your veiw on inflation and unemployment, rather I expect inflation in 12 months 2 yrs to head out to around 10 to 12% for a while, and unemployment hit about the same, so hooking in at a higher 5yr (even around the 8.7)rate elimates uncertainty, and in the end would ave out very similar over that time as to changing shorter terms.

by John | 11 Oct 08, 7:50pm

Here's more on international trade

Here's more on international trade freezing up:

http://www.nakedcapitalism.com/2008/10/international-trade-seizing-up-du...

by Mary | 11 Oct 08, 8:07pm

Hi Bernard And how safe

Hi Bernard
And how safe are 'Bonus Bonds' that ANZ took over all those years back??? I have a bit invested there and not sure if I should be withdrawing them also into 'Kiwi Bonds'

Bernard replies:
Bonus Bonds will carry ANZ's AA credit rating, but you're right that Kiwibonds are better rated. cheers/bernard

by Glenn Parker | 11 Oct 08, 10:40pm

Bernard, I am wondering whether

Bernard, I am wondering whether my local Taranaki TSB bank would be a good safe haven in face of the turmoil going on and the OCR being cut? I see they are still offering 7.50% for 9 months term. I presently have my funds with Rabobank.

Bernard replies:
TSB's credit rating is BBB+, which is significantly below Rabobank's AAA. TSB is exposed to the Taranaki housing market, while Rabobank lends in dozens of markets internationally and across multiple sectors. cheers/bernard

by Kate | 11 Oct 08, 11:21pm

Bernard, are you getting any

Bernard, are you getting any more news on the effect the freeze is having on obtaining Letters of Credit: Example here;

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

I think I read somewhere about an effect this is having on shiping/port operations?

Bernard replies:
There's a few links elsewhere on this thread. But there are early signs of letters of credit being difficult to trade for shippers and oil refineries. The frozen interbank markets up in the Northern Hemisphere need to unfreeze soon. cheers/bernard

by Steve Netwriter | 12 Oct 08, 12:41am

<b>Did Bernard REALLY say this</b>:

Did Bernard REALLY say this:

Bernard replies; Gold is not easy to buy right now. You'd have to believe in a complete breakdown of the banking system and confidence in fiat (created) money to believe Gold is worthy as a store of value.

???

If so, I am astounded, and disappointed.
There are two very easy ways to buy gold & silver: Bullion Vault (who do gold) and Gold Money (who do both).

I suggest you look at this chart of NZ median house prices in oz of gold:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/HousePr...

For anyone in NZ, gold has been a tremendous store of value. Just look at the GoldNZ$ rate:

http://img.photobucket.com/albums/v207/neuralnetwriter/financial/Gold/Go...

Certainly far better than NZ$ or houses.

Lets base any comments on gold on facts please.
Steve

Bernard replies:
Steve,
My apologies for disappointing you. I welcome your regular comments. But in this case we'll have to agree to disagree. I can't see any chance of being able to buy something with gold. It's only useful in the event of a complete meltdown.
And I've seen evidence that even during the World Wars in destroyed economics it was not useful as a means of exchange.
It may be a great speculative play, but I'm curious as to whether you can actually get your hands on that gold.
cheers/bernard

by AndrÃ© Lategan | 12 Oct 08, 12:45am

It's probably a dumb question,

It's probably a dumb question, but here goes...

If our banks have to borrow money overseas at an interest rate which is higher than the NZ OCR, what difference does it make if the Reserve bank drops the OCR? How does the OCR affect things if the banks are not borrowing from the Reserve Bank?

If this is a long story, maybe you can point me to a place where I can read more, please?

Bernard replies;
Andre,
The OCR is the overnight rate charged to the banks by the Reserve Bank. It directly influences short term rates but the signals are muted longer term because banks find their funding from other sources, including retail deposits and wholesale (domestic and international) money markets. cheers/bernard

by Simone | 12 Oct 08, 1:02am

perspective http://news.bbc.co.uk/2/hi/science/nature/7662565.st

perspective

http://news.bbc.co.uk/2/hi/science/nature/7662565.stm

by Rob | 12 Oct 08, 2:56am

Mr Stevens confirmed the regional

by Andrew in Ngaio | 12 Oct 08, 5:59am

Steve Netwriter "I am astounded,

Steve Netwriter

"I am astounded, and disappointed.
There are two very easy ways to buy gold & silver: Bullion Vault (who do gold) and Gold Money (who do both)."

James Turk seems an honourable man but gold money does not appear to be supplying physical Gold to buyers? Instead they provide paper claims to any Gold that is held by them? Can you clarify? The big fear now is deflation anyway where gold will fall in value. Hard to believe but that is the fear.

by Andrew in Ngaio | 12 Oct 08, 7:09am

"If our banks have to

"If our banks have to borrow money overseas at an interest rate which is higher than the NZ OCR, what difference does it make if the Reserve bank drops the OCR? How does the OCR affect things if the banks are not borrowing from the Reserve Bank?"

The banks are borrowing from the RBNZ. The RBNZ have set up all manner of ways that the banks can pledge collateral in return for lending at interest rates based around the OCR. The banks can borrow overseas for longer periods if they want and get shorter term funding from the RBNZ. Ultimately the issue comes down to how good is the credit of the new Zealand taxpayer who is now the none profit risk accepting counterparty to the banks overseas lending earlier funded by massive overseas borrowing for massive profit blessed by the highly paid RBNZ and NZ government officials. Ordinary New Zealanders probably have the ability to produce sufficient goods that are wanted by the rest of the world so that they can finance the banks profits and if necessary if it gets too much for NZers, they can temporarily be allowed to own the banks till they are profitable again and can be returned to the banks owners.

by Andrew in Ngaio | 12 Oct 08, 7:28am

In my comment above i

In my comment above i did not want to say that NZ banks have lent overseas. Unfortunately i dont have sufficient memory to run the text editor to change my comments.

by Steven - Ngaio | 12 Oct 08, 8:24am

bad as the depression of

bad as the depression of the 1930s....interesting that you think not, some like Paul Krugman seem to be really worried it will happen...(it may even be the worst since 1873)...

http://www.nytimes.com/2008/10/10/opinion/10krugman.html?_r=1&oref=slogin

Then add this bit,

Robert Hirsch did a study on the relationship of (global?) GDP to oil production, his conclusion was as oil supply declines GDP will follow in step...so the Q is how do you think we could cope with GDP falling at 4%~15% per year for a decade?

How to govns who depends on growth (ie increasing tax take) survive when it shrinks instead but costs continue to rise?

You agreed with the comment on a decade of belt tightening a debt gets recalled, so do I...but most of the "developed" world relies on consumerism fueled by debt....remove the access to debt and consumerism dries up.

In such scenarios where would be a good place(s) to safely put your money? I would assume "safe" places...but what is really safe? (and over the longer term) there wouls seem to be many ways to lose what you (I) have....

regards
Steven
PS Great site, only 1 thing, would like some of your trend graphs to be bigger to help see whats going on a bit better, maybe varying scales...somewhat interactive maybe.

by hesi | 12 Oct 08, 9:46am

Hi Bernard, With the release

Hi Bernard,
With the release of the Sept08 REINZ figures, we are seeing things pretty much on hold. A small decrease in price, but a small increase in number of sales and small reduction in days to sell.
2 simple questions
Why, given the tight credit and still poor investment ratios and affordability.
What will happen next.
One commentator on CNN interestingly described it, that American's had been using their houses at ATM machines. Put that way, that makes alot of ATM's in godzone then.

Bernard replies:
Hesi
I agree the flat prices in September doesn't seem to make sense. I think September was the last month of vendors living in cloud cuckooland. Everyone now knows we have a full blown Credit Crunch that will wipe out easy money and drive down house prices.
Part of the reason is that prices are skewed by more expensive houses selling now relative to cheaper ones. The percentage of houses worth NZ$400,000 or more has increased from 30% to 34% in the last year. That's because only rich people with lots of equity can afford to buy. First home buyers and leveraged property investors can't. cheers/bernard

by Steve Netwriter | 12 Oct 08, 9:52am

<blockquote>Andrew in Ngaio Says: James

Andrew in Ngaio Says:
James Turk seems an honourable man but gold money does not appear to be supplying physical Gold to buyers? Instead they provide paper claims to any Gold that is held by them? Can you clarify? The big fear now is deflation anyway where gold will fall in value. Hard to believe but that is the fear.

As I understand it, Gold Money buy and sell 1000oz LBMA bars. When you buy gold with them, you buy real physical gold, but unless you buy 1000oz, you own part of a bar.
It is very different to any paper gold system which can be traded ie can be shorted.
The vault is audited and the reports are publicly readable on the site. So there is the same amount of gold in the vault as has been bought.
So it's not "paper gold".
They buy and store gold and silver for you, and insure it. So it is a very good system IMO, and it offers a very low cost & safe method.
The only real danger is if the government makes ownership illegal.

There is a huge amount of debate about inflation/deflation. And here I am talking about money supply, not price. IMO the real fear is loss, not deflation.
Gold is acting with its usual safe haven role.
One simplistic view is this. Either the central banks fail to maintain inflation, in which case we get deflation and a complete worldwide financial collapse, or they do manage to maintain inflation, in which case the system doesn't collapse, but we end up with high inflation or hyperinflation.
In both cases, gold & silver are IMO essential insurance.

Of course maintaining faith in the fiat money system is essential because the bubble only stays up if everyone keeps blowing into the balloon.
Unfortunately I think this recent historically short experiment with pure worldwide unbacked fiat is going to end.

There is a lot to read here:
http://www.greenenergyinvestors.com/index.php?showtopic=3784

which will answer far more than I can in this small space.
Steve

by Andrew in Ngaio | 12 Oct 08, 10:48am

Steve Netwriter Here at the

Steve Netwriter

Here at the Gold cartel we particularly recommend you give us money so that we can store our Gold on the Island of Jersey or do your banking with LLoyds TSB (The UK government have promised us that your funds are safe) and we very much appreciate the recommendations you have made so far. It is particularly convenient for us that you want to do buisiness with us. We hope you were thrilled with our latest actions and promise to continue providing the kind of nail biting entertainment you have come to expect from us. Have a nice day.

by Neven | 12 Oct 08, 1:54pm

Bernard Much has been written

Bernard

Much has been written about the current turmoil, housing booms, excessive liquidity etc but none of the mainstream economists seem to have explained what initiated the sequence of events that lead us here, Why for example did the US build tracts of McMansions to sell to people who couldn't afford them?

My theory is this. In the last 100 years the economy has grown on the basis of unlimited resources (especially energy), The absolute core requirement of survival (food) has dropped from about 50% of our work requirement in 1900 to about 5% now, This has been made possible by increasingly efficient use of energy (Tractors, Fertilizer, Agrochemicals etc), So for the economy to "grow" other sectors have become larger. If you assume an 80/20 split between the service and real economy, then it would be easier to grow the service side (hence nonsense terms like the "Knowledge Economy") or in the discretionary real economy (Larger Houses for example).

The problem is that all this requires energy, without it you cannot do anything. The "net energy" available in to the world has been steadily dropping, this is due to the fact that energy required to generate/extract the energy we use has been increasing. This in itself is not critical in the short term because it has been offset by efficiency/productivity increases, evidenced by the energy consumption drop in the OECD). A note here about "Alternative or Renewable" energies, they simply do not scale at the rate required to support boundless growth evidenced by the fact that they still only contribute 1% of the world energy use.

The response to this decreasing net energy has been to mask its effects by over- stimulating some sections of the economy, it appears in particular discretionary housing and financial services, (I call it discretionary housing to separate it from "Shelter"), The side effect of all this growth is an increase in the appearance of "Wealth" which stimulated other energy consuming discretionary activities.

The result? Oil (which is about 1/3 of the world energy supply) went ballistic, Coal (25%) went ballistic unfortunately oil also contributes 6% of world GDP and this change could not be sustained, Energy stepped out of the shadows and bopped us one on the nose, hence we have the current "financial" crisis.

What concerns me is the overwhelming opinion that the world will trade its way out of this crisis the way they did in the 30's, This is not an option as it took 3 wars and increasing oil consumption for that to happen. If I am right and the net energy available to the world is on a steady (albeit small) decline then the current scramble to refinance the world and continue business as usual will achieve little, it has not addressed the cause (only the symptoms) and what is required is a structural change in the world attitude to resources.

Neven

Bernard replies:
Interesting points. I'm not so sure of the crucial role of oil in the world economy. It is much less important than it used to be. I think the bigger issue was low interest rates from 2002/3/4/5 and massively leveraged borrowing via hedge funds, CDOs and CDSes. cheers/bernard

by Mark | 12 Oct 08, 2:23pm

Any ideas as to whether

Any ideas as to whether my savings would be safer in a normal Kiwibank call account than the Kiwibank PIE call account? Would any future Govt. guarantee aply to PIEs ? Regards, Mark.

Bernard replies:
There's no difference in the guarantee between PIES and normal Kiwibank deposits. It's all in the same place: Kiwibank deposits. It's all a bit redundant anyway now with the blanket deposit guarantee scheme. Everything's safe from finance companies to AA rated banks. cheers/bernard

by Raf | 12 Oct 08, 3:52pm

Great effort by Bernard to

Great effort by Bernard to hold this altogther but it's alot to put on one guy to answer all these questions.

I'm not a fan of gold for the simple reason you can't eat it. Don't laugh but i've read plenty of stories from WWII about people carrying gold that no one would exchange. Currencies always emerge from somewhere. I don't believe we will ever return to a gold standard either. Perhaps we will end up with an energy back currency (EBCU) at some point.

I think as Simone mentioned we have lost more monetary value from the loss of rainforest services in recent years (some $3-5trln).

I think cash is king (even paper money). I think bank deposits are safe BUT it is now impossible to rule out a discount to cash especially for people with large amounts.

The global banking system has, to all extents and purposes, been nationalised. This is a good thing though not if you hold shares in a bank.

NZ, although exposed to overseas debt, oil and dependent on imported oil and exported commodities, is in an ok position. You will see a wave of people returning over the next year looking for a safer haven and lower population density.

Make no mistake we are in the midst of a major structural change in how our financial system is structured. And coming at a time of ecosystem stress, resource depletion and burgeoning populations makes it a potentially cataclysmic event.

It's hard to see stock markets not falling into a death spiral from here. I imagine we will see suspension of trading in bank stocks and the closing of markets at some point.

I hope by now readers of this blog will be in cash as much as possible.

Alternatives to cash are to buy stuff you can use: a tractor, wood, a solar heating system, patch of land, water etc....sounds alarmist but that's the alternative. You could buy some cheap stocks if you're really brave.

NZ needs to prepare for a full scale nationalisation of the banking system. We are very fortunate to have Kiwibank up and operating and that may ultimately allow NZ to keep functioning. In fact the only politician who may understand what is going on is good old Jim Anderton.

Remember if it all goes to hell in a handbasket NZ is one of the few countries in the world that could go it alone. We just need to prepare ahead.

by Dubious | 12 Oct 08, 4:12pm

Neven, Whilst I cannot argue

Neven,

Whilst I cannot argue with the fact that the net energy available is dropping, and that this will have an undeniable effect on global economics over the coming generation, in my opinion the current crisis is financial in nature.

Mainstream viewpoints would probably state that insufficient regulation in the financial markets led to excessive leverage which led to excessive growth in credit resulting in distortions in the allocation of capital in the real economy. The main feature of the distortion being asset price inflation of the housing sector. The current issues being an unwinding of the excessive leverage in a disorderly, or uncontrolled manner.

My view is less mainstream, in that I believe that this is also a failure of governments to distinguish between money and credit, allowing the banking system to effectively create the world's money supply through an exponential debt based system. This is highly unstable and leads to expansions of money supply well beyond productive growth in the real economy. This is followed by necessary contractions. The current crisis follows the world's biggest expansion in the money supply ever and will necessarily be the world's biggest contraction.

Money is a legal agreement by nature and is a means of exchange. It should be created by government, as a service to the real economy, not loaned into existence by banks at profit. That is not to say that banks should not exist nor is it to say that they should not be able to charge interest on reserves. The problem is that when loans are repaid the money that has been created is cancelled. The nature of the system is that everything cascades. A system where government creates the money in a systematic fashion and puts it into circulation would greatly reduce, if not eliminate the business cycle. In turn this would avoid finance driven misallocation of capital and increase the real growth in the economy.

Before anyone raises the suggestion that governments are unable to manage money supplies and would print to excess causing hyper-inflation, if the RBNZ can be established with operational independence by law, why not an alternative system such as my suggestion?

by Raf | 12 Oct 08, 4:33pm

Dubious, Your last two paragraphs

Dubious,

Your last two paragraphs are absolutely spot on.

If you want to join in a proposal along these lines just drop me a line.

by Tonz (Japan) | 12 Oct 08, 4:41pm

Neven, Your above comment provoked

Neven, Your above comment provoked so many more thoughts as an example ..if connected to Simones above link.
I read back on the 8th Oct (Gloomberg I recall?) that the gross US debt (and it is 'gross'!) held by public and Govt agencies was 9.6trln which was 68% of GDP. Note this is likely to escalate above 70% of GDP,especially when the current bailout which is likely to escalate as it increasingly appears to be a drop in the bucket in relation to what might be needed. Other factors are exploding into the ring, California alone needs 7billion to keeps it schools,health system and other public services going. What about other less affluent states?
Debt v/s GDP has not been at the 70% level since after WW2. AS you say trading out will be difficult to say the least. As you say,... where is the net energy to be found (talking of energy... I read that a source in one of Japan' Mega banks said on 8th... 'I have te impression we are running out of steam' ...and that was before Fridays worst ever day for the Nikkei Index! Have you noted the English News today concerning what the Brit Govt is poised to do. If so will be a long time before anyone can think of trading out of the current chaotic circumstance energy available or not!

I trust Keith Bollard and HelenC have organised teams to read collate and make analysis of the economic, finacial and humanitarian drama that is unfolding (I don't mean just numbers and data)...perhaps they should read the interest.co posts for direction!!!!! Or are they heads down on electioneering or taking the weekend off having the weekend off...what is the quote....???? while Rome burns?

Neven, my reading indicatesI a huge humanitarian disaster emerging (I have noted international comment suggesting this too) as well as a financial one.

But no doubt in Pav paradise all is well . And if by some remote chance the the storm that is hitting the rest of the world does hit the lower lattitudes Helen will stand redoubtly at the wheel of the ship 'Laborious' screaming commands above the noise of the storm to the confused and bewildered crew? That is, if the election does not sink her leaking hulk.

Bernard or Neven (or anyone else) Where is the NZ GDP v/s all up debt % exactly stand right now or perhaps more important in six months time? Or is it an actual unknown?

Bernard replies:
Here's the best I can find on debt/gdp. This is a RBNZ chart showing household debt to GDP and household debt servicing ratios, both of which are at record highs and in line with US levels.
http://www.rbnz.govt.nz/keygraphs/Fig5.html cheers/bernard

by Andrewj | 12 Oct 08, 4:55pm

Theres a wild card in

Theres a wild card in all this its the middle east. Theres a ship stranded of the somali coast at present. This needs both eyes kept on. Its a potential explosion.
A group of Somali Pirates raided the boat successfully but that's about where their success ended. The Iranian ship was meant to be carrying tanks. The Somali pirates opened the containers and were reports that there was fighting and several pirates where killed. It now looks like the dead pirates suffered from skin burns and hair loss and died within 3 days hence the large US naval presence.

this off the wire
Chemical experts say the reports sound inconsistent with chemical poisoning but may reflect the effects of exposure to radiation. "It's baffling," said Jonathan Tucker, a senior fellow at the James Martin Center for Nonproliferation Studies. "I'm not aware of any chemical agent that produces loss of hair within a few days. That's more suggestive of high levels of radioactive waste."

Tucker, a chemical and biological weapons expert, said that Chinese companies have been implicated in selling Iran so-called dual-use chemicals, legal ingredients that can be processed into chemical weapons. (Long War Journal)

just a distraction to the debate but something to watch. may create an opportunity for some distraction in the coming weeks from the political rubbish.
Neven , Dubious and tonz Thanks for the critical. thinking

by Raf | 12 Oct 08, 6:27pm

Just out on the news:

NZ government guarantees all bank deposits with no limit on the amount.

Its an opt-in system with a small fee for the banks.

Its a good move and may well attract funds to NZ banks.

by alan stewart | 12 Oct 08, 7:26pm

goodly news there but I

goodly news there but I think you have wandered onto the sky is falling blog by mistake.

by concerned | 12 Oct 08, 7:43pm

are you sure the depsosit

are you sure the depsosit gurantee is unlimited, i hear its only 20000

Bernard replies:
The deposit guarantee scheme covers all deposits in all bank, building society, finance company and credit union accounts. Here's more detail here http://www.interest.co.nz/ratesblog/index.php/2008/10/13/opinion-this-sc... cheers/bernard

by Andrew in Ngaio | 12 Oct 08, 7:43pm

There is definately something odd

There is definately something odd going on. First you allow the most massive orgy of bank lending of all time. Then you run around like headless chickens creating massive panic. What comes next?

by Raf | 12 Oct 08, 8:01pm

full details on my blog.

andrew; "odd" is an understatement. remember its all about preserving the "growth illusion".

by Simone | 12 Oct 08, 8:18pm

guarantee on deposits would have

guarantee on deposits would have been unnecessary if Oz hadn't decided to bring it in, and if it is "unlimited" will lead to all kinds of risk taking by our bankers- AGAIN. Andrew, do you have a link to this Somali nuclear waste issue?

by Rob | 12 Oct 08, 8:39pm

I had thought that unemployment

I had thought that unemployment would not rise much given New Zealand employers are more likely to "˜hoard' workers, given their experience over the last 5 years that good people were hard to find.

by Andrewj | 12 Oct 08, 10:11pm

Simone You will have to

Simone
You will have to google the names mentioned.
I got it of a white house correspondent.Who, will remain confidential but info he said is available credible .
Also good article about Iranian cheating on Nuclear plant almost certainly ready to manufacture weapons grade by December in today's Times

http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/a...

A friend said Israel will attack this month over a year ago. I think he is high enough up to have a good guess. I can try some other contacts if you wish.Also I have some data on some of the weapons Israel has available for bunker penetration and also aircraft range and guidance systems etc if you wish. Also Iran and Syria have been flooding Lebanon with surface to surface missiles so to be able to react after a Israel strike .Israel would want to be able to defend its self there as well. All fairly depressing stuff Im afraid.

by Simone | 13 Oct 08, 12:25am

Raf, you are right -

Raf, you are right - it IS a guarantee of unlimited deposits. Cullen must (rightly) think our banks are rock solid. And, hilariously, banks are required to pay into the opt-in retail deposit guarantee scheme,- In other word banks will be TAXED to guarantee their deposits. What a brilliant coup! The government knows full well that they will never have to pay out but will be receiving millions from the banks as deposit insurance- which of course will be spent elsewhere. Classic Cullen and Clark!

by Andrew in Ngaio | 13 Oct 08, 4:10am

"The government knows full well

"The government knows full well that they will never have to pay out but will be receiving millions from the banks as deposit insurance"

Simone dont be so sure of that.

If we take the events of the last 2 years at face value then a debt delevering process has now begun that to date shows no signs of stopping, and it is driven by too high assett prices supported by inprudent lending which are now returning to price valuations supported by economic fundamentals of earnings and future prosperity possibilities. As part of the inprudent lending process entire countries have become indebted based on the willingness of other entities who saw themselves as cash rich, supporting somebody elses spending in return for what was assumed to be a risk free rate of return based on some ratings organisations dubious credit ratings.

New Zealand lives beyond its means and the banks here are exposed to overseas creditors who are exposed to their own debts which they will need to somehow refinance. As i said this process of debt delevering began two years ago and shows no signs of stopping The bag holder here is now the New Zealand tax payer who is living beyond their means. The tax payer is now holding the bag for private organisations that are not even owned by New Zealanders who engaged in inprudent lending because they imagined they could do so with little risk to their own profits. Meanwhile the new Zealand owned fiance companies and their new zealand depositors were not given a single cent of public support.

Somebody is laugthing all the way to the bank here but i dont think it can be a new zealander.

by Simone | 13 Oct 08, 7:33am

@ Andrew in Ngaio "Meanwhile

@ Andrew in Ngaio

"Meanwhile the new Zealand owned finance companies and their new zealand depositors were not given a single cent of public support"

Well they are now. Would you now not consider putting your money into a finance company deposit scheme knowing that even if the company goes bust your deposit will be returned? Why leave the deposit in ANZ for 5% for 3 months when F%P Finance (bless 'em) gives you 9.10%?- GUARANTEED!! Bernard your comments??

by Neven | 13 Oct 08, 8:36am

Dubious To me it is

Dubious

To me it is incongruous that on one hand you accept net energy is declining and on the other say it is some future problem. This is where classical economists (Douglas included) lose the plot, Supply will rise to meet demand if there is sufficient energy to generate the supply.

The cornucopian view of world is simply unsustainable.

Re the US attacking Iran, One of the "doomers" I read the blogs of has it down for 22nd of October, All the indicators are there Oil down and Obama in the lead.

Neven

by Andrew in Ngaio | 13 Oct 08, 8:42am

Simone I cant wrap my

Simone

I cant wrap my head around these things to project out scenarios that are meaningful.. In reality if humpy dumpty jumps off a cliff without a life line he falls to the ground even if he might bounce off a few obstructions on the way down.

But at a guess this deposit scheme needs some sort of tuning. Other things being equal if F%P is paying out the highest rate in town and is flooded with deposits then they will quickly lower that rate and/or they will be required to limit deposits/lending by their newly formed regulator who is part of the guarantee process to a point where their financial safety/risk is shared equaly with the risks of the rest of the lender/borrowers in whatever manner the regulator thinks best. No doubt the bigger lends can bend the ear of the regulator the biggest amount. That too is part of reality.

by Gail M | 13 Oct 08, 10:52am

Is anyone prepared to give

Is anyone prepared to give a quick explanation of how financing works in Islamic states which ban interest-bearing transactions? Or point to useful links on the subject?

And how well does it work?

Bernard replies:
Here's how it works. http://en.wikipedia.org/wiki/Islamic_banking
Essentially it's a way for a bank to lend to a borrower without receiving interest. Instead, the bank takes an interest in the asset and they share profits. cheers/bernard

by Bernard Hickey | 13 Oct 08, 6:15pm

My apologies to all about

My apologies to all about my slow answering of questions today.
This thread has been overtaken by events somewhat with the government's announcement of a government deposit guarantee.
I will try to answer questions now

cheers
Bernard

by Steve Netwriter | 13 Oct 08, 10:57pm

<blockquote>Bernard replies: Steve, My apologies

Bernard replies:
Steve,
My apologies for disappointing you. I welcome your regular comments. But in this case we'll have to agree to disagree. I can't see any chance of being able to buy something with gold. It's only useful in the event of a complete meltdown.
And I've seen evidence that even during the World Wars in destroyed economics it was not useful as a means of exchange.
It may be a great speculative play, but I'm curious as to whether you can actually get your hands on that gold.
cheers/bernard

Hi Bernard,
I was surprised to read your comment, but I shouldn't have been as your view is a very common one. It seems to me that a whole generation (or two) of many countries have lost the knowledge that used to be common.
In some countries gold is still appreciated for what it is.
Gold is not just for meltdown situations. It is a safe haven A store of value, and a way to avoid counter-party risk.
It is a way to avoid bank loss, and to protect wealth during periods of negative real interest rates.
To anyone who does not see the reason for owning some gold, I simply ask:
1. Why has it been used as money and as just described, for thousands of years ?
2. Why do central banks hold it ? Why is it good for central banks but not for the common man ?
But we should not forget silver.
It is becoming much more difficult to acquire. I hear from people all round the world. In Saudi today someone reported to me that delivery is currently 10 days.
But, the LBMA 1000oz market is still working, and that is the market that Bullion Vault and Gold Money use to access bullion. So anyone can buy even small quantities immediately using those companies.

I'd like to know why it is that many investment advisers will tell their clients that it is a good idea to hold 10% of their portfolio in gold, and yet this is not a commonly known thing.

If you want to maintain your wealth, what other options are there ?
Property ?
NZ$ ?

Try this:
Gulf central banks look to gold as uncertainty rises:
http://www.gulfnews.com/business/Commodities/10250412.html

As always I appreciate your work, Bernard :)
Steve

by Jim Coyle | 13 Oct 08, 11:39pm

Hi I like the idea

Hi
I like the idea of a strip of gold to be placed a long side the security strip in the paper money,

Say the $20 note with a $5 stip of gold, gee people might save them even if the gold has a value 10 cents.

regards

Jim

by Steve Netwriter | 14 Oct 08, 10:28am

As you suggesting that money

As you suggesting that money should have some intrinsic value, like it used to have ? LOL

by Steve Netwriter | 14 Oct 08, 10:36am

This is a great little

This is a great little video:

The Rand refinery in South Africa.
http://edition.cnn.com/video/

by Steve Netwriter | 14 Oct 08, 11:09am

Oops, sorry, I meant this

Oops, sorry, I meant this one:

Gold rush in a time of crisis 2:37 updated 20 hours, 7 minutes ago
CNN's Robyn Curnow goes into a South African gold refinery, where they're churning out a hot commodity.

http://edition.cnn.com/video/#/video/world/2008/10/12/curnow.sa.gold.fev...

by Andrewj | 14 Oct 08, 11:28am

Steve Netwriter Can you give

Steve Netwriter
Can you give me some options on purchasing Gold and silver. I have been considering using the NZ mint and buying Kiwi coins Im not convinced this is the best option commission is about 7%
Andrew

by Neven | 14 Oct 08, 11:36am

Bernard "Iâ€™m not so sure

Bernard

"I'm not so sure of the crucial role of oil in the world economy."

You've got to be kidding right? The US are currently fighting a war over it and name one activity that can continue/grow without increasing supplies of it

Quote for the day:

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." -- Cicero , 55 B.C.

Neven

by Georg | 14 Oct 08, 7:37pm

Hi Bernard, does the government

Hi Bernard,

does the government deposit plan also cover investments from Family Trusts like Term Investments, bank bonds and company Bonds (AKL Airport, Fletcher Build., Telecom, Sky Network etc)?

Thanks

George

Bernard replies;
The guarantee covers bank deposits, bank bonds, building society deposits, credit union deposits and finance company debentures. It doesn't cover corporate bonds or anything in the stock market. cheers/bernard

by Trishaj | 14 Oct 08, 10:48pm

Hi Bernard. Thanks for your

Hi Bernard. Thanks for your feedback regarding interest rates, Kiwibank and predictions with the OCR. Assuming it does fall dramatically in October still wondering whether to fix for six months or two years? And regarding home affordability. We should be far more concerned about it. What about the next generation of home owners? Those who are young adults now. I feel so much for them. Greed has robbed them of hope or left them with a crippling mortgage. I agree prices have to fall. A pity the interest rate brakes, more stringent lending criteria and disincentives for property speculators weren't implemented a few years ago. Such is the free market.

Bernard replies;
Assuming you are referring to a mortgage, it's likely interest rates will fall a bit, but not so much that a variable rate will be more attractive within 6 months. 1 or 2 years make sense. But your personal situation is probably more important. I agree on affordability, but I don't think it will take long for housing to become affordable again as house prices crater. The difference in a year or two is that a new loan will be much harder to find. I see 50-60% LVR limits within months. cheers/bernard

by Iain Parker | 15 Oct 08, 10:44pm

If you buy gold or

If you buy gold or silver, make sure you take physical delivery, as gold and silver merchants are renowned for selling what they dont physically have, both in the infamous goldsmith scams of the past and more recent (2007) cases as below;
http://news.silverseek.com/TedButler/1193161018.php

by ChrisB | 17 Oct 08, 11:34am

Hi Bernard, Recently sold house,

Hi Bernard,

Recently sold house, $500K on term deposit in NZ bank, moved to new town, currently renting but looking to buy next year onwards after things settle more.
I am aware this puts me in a somewhat more enviable position compared to some other kiwis but still the question remains around the security of my hard earned $$.
From all the financial hoohaa going on at the moment I remain reasonably confident that my $$ are safe but still feel the need to ask the question:
Q: should I spread my risk with a couple of the 5 large NZ banks, consider Rabo bank for its AAA rating, invest in kiwi bonds or hang tight aaarrrrrrggghhhhh

Bernard replies
Well done. You got out before the crash. Spreading such a large amount around does no harm. The government guarantee makes all options mentioned as safe as each other. cheers/bernard

by Sarah | 17 Oct 08, 5:12pm

Hi Bernard,Regarding the govt.guarantee recently

Hi Bernard,Regarding the govt.guarantee recently put in place,was just wondering, IF a bank or other was to find itself in trouble it will be expected now, that the govt.would step in and save depositors funds.I understand all banks and others would be checked thoroughly before being accepted for guarantee,but what would be the outcome if,after being accepted, they were to maybe take risks that were not acceptable ..would the govt. still uphold that guarantee? We have $600,000 and been looking at placing it in Rabo or SBS. Do you perhaps know the SBS rating? What do you know of these two banks? Thankyou, Sarah

by Paul | 21 Oct 08, 8:43pm

The focus has been on

The focus has been on house prices. However I see big problems in farming. Farm prices have risen more than house prices in recent years. $50,000/hectare for dairy land is nuts. Some farms have low equity and most sheep farms in NZ have run at a loss in the past couple of years but they borrow against increasing land values to keep going. Dairy incomes are likely to fall. Small vineyards don't make money
Are banks getting nervous about their exposure here? How long can assets rise as incomes fall? Something has to give.

by hesi | 21 Oct 08, 9:24pm

Hi, can anyone tell me

Hi, can anyone tell me what will happen to Term Deposit rates if the cash rate is dropped 100 points on Thursday, with further reductions in November and December.
Usually you would expect them to drop by similar amounts, but not so sure, with what is going on at the moment.
Thanks

by Andrew in Ngaio | 27 Oct 08, 4:48pm

Bernard In many ways these

Bernard

In many ways these bank guarantees are a disaster for the economy. Ordinarily investing in a bank by loaning to the bank as a saver has a risk associated with it but now the taxpayer supposedly guarantees the banks survivability. *but* meanwhile the relentless negative commentary and relentless movement to safer and safer investments means that many productive investments are going to be totally hammered. You are predicting LTV's to fall way back also further, almost guaranteeing the time when the NZ tax payer will have to make good on those bank gaurantees that you have encouraged for some while now.

One thing is for sure. When it comes for the banks to be profitable again the tax payers will get absolutely zero returns on their investments as the banks are once again handed back to the 'owners'

In fact it would be better to see the bigger banks go bust or at least there be that risk so that people were forced to place their celibrated ("Well done. You got out before the crash") 500K somewhere to the productive investment of other NZers.

I am though just another hypocrit. I got out of European property in 2005 but kept property here. People like me who sit in cash are now part of the problem rather than being part of any solution. We are the predators now:-( We are the enemy even:-(

Meanwhile this disaster was created by the banks and regulators pursuit of more and more profit.

But a question for you:-)

Do you have any links regarding detailed comparisons of NZ banks by independant analysts who rank the banks in order of 1 to whatever number there are?

I tend to think that all guarantees are equal but some guarantees are more equal than others

Cheers!

by Trisha | 04 Nov 08, 8:47pm

Bernard, how likely are banks

Bernard, how likely are banks to fully pass on cuts in OCR in December to longer fixed term interest rates? In particular Kiwibank. Is the Reserve Bank likely to cut them before December as Australia has done and if so what would prompt that? The last round was disappointing. Kiwibank's 2 year fixed rate dropped from 7.99% to 7.79%. Is it likely to get much better than this? Your informed opinion would be appreciated.

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