David Chaston explains why it is a bad idea for the investment scrum to be screwed in favour of the wealthy, and essentially exclude and penalise those who have no weight in the game by making them pay

A capital gains tax to pay for deposit insurance sounds like a fair deal to repair this imbalance. What do you say David?

Would there be any chance that the tongue of the generational self licking ice cream cone is getting tired?

A few thoughts:

1. Every developed country has a deposit insurance scheme, we are behind the curve in not having one already.

2. The notion the average person has the credit analysis skills to assess a banks credit worthiness is comedy. The credit ratings agencies often get this wrong so how can an average person be expected to surpass their performance.

3. The baby boomers have the majority of their wealth in property not bank accounts.

4. The cap on insurance is so low it would benefit a wide net of people. If anything because of the low threshold the wealthy are penalised.

David you need a stronger argument, your current one is constructed like swiss cheese.

"But it is entirely selfish to use your democratic weight to impose socialised costs on everyone else to protect your private gains. Deposit insurance is just that - wanting risk-free benefits at no personal cost"

What about part of society playing a speculative game of capital gains with our housing market and hiking rents - but not being willing to pay for the social costs associated with this private gain? e.g. paying capital gains tax to support those who they've left behind? John Key used the democratic weight of the greedy property owning class to remain in power - why would this be different for those who want to protect their savings?

I tend to agree with the overall thrust of David's argument here. However, as we have seen the chance to level the playing field has been consistently avoided by governments. One way would be to reduce tax on income and increase it on wealth - yet this was not even considered by the TWG as it was effectively ruled out by the government. Deposit insurance is a populist measure that on the surface seems good but isn't that good when all the factors are considered. But I think the banks will go along as it is the cheaper alternative than increase capital.

The argument is wrong.
NZer's can insure almost everything else - house, car, health etc.
Bank deposit insurance should be available.

The idea that the average consumer has the information available (or even the knowledge and expertise) to assess the risk of their deposit in a financial institution is so laughable it hurts.

Even if the average New Zealander deems all the banks too risky, what practical alternative do they have? Modern society basically forces everyone to use a bank account.

The solution is that the RBNZ should be properly supervising the banks and ensuring they are well capitalized, they are lending responsibly, and not overexposed to any one sector. Unfortunately, until recently the RBNZ seems to be failing miserably.

David, how can it be argued this proposed deposit insurance benefits the wealthy, when only amounts up to a max of 50k are being considered? I suggest that there's many a boomer sitting on vast amounts of cash in excess of 50k, mortgage free plus additional properties to boot. Subject to decisions on how the scheme being policed, the insurance may only cover $50k per individual as opposed to per deposit (various banks) anyway....

As for the investment scrum being screwed. I think the chances are growing that many late arrival wannabes are about to be screwed over by their own decisions. I liken it to a chilly backdraft, a symptom of the yawning wealth divide (a shortage of affordable homes/surplus of unaffordable homes). It was all created by the same herd who suffered from FOMO. The rapid capital gains could not go on forever. Many have leveraged their finances as though their unique decisions were somehow insulated from equity losses (foolproof).

Surely a deposit insurance reduces the risk of bank runs. In the absence of one, what happens to the cost of funds if deposits start heading to countries that do have deposit insurance? Look what happened to interest rates in Greece and Turkey.

Societies choose to use taxpayers' money to mitigate all sorts of risks. Most developed countries, rightly or wrongly, include the deposit loss risk in there too.
If one wants to make a case against a deposit guarantee scheme, solid economic / financial arguments need to be brought up, rather than ideological ones (such as “poor” vs “wealthy”, inter-generational animosity, “inequality”, etc). As it is, the article would more appropriately belong to an ideological website, rather than a financial one.
Besides, the proposed deposit guarantee limit is not more than $50k (and possibly as low as $30k), so why the storm in a tea cup?!
Lastly, having a deposit guarantee scheme and carrying out a strong oversight of the banking system are not mutually exclusive.

May I disagree. Most depositors are not sophisticated investors and 85% of people will still think that the bank is simply keeping their money safely in a locked vault that they can access it at any time.
Depositor insurance and the low cap are actually a sensible move to protect the majority who have very little interest in banking, so long as they can ‘tap and go’ and the money gets transferred. This will protect the majority should the reckless lending behaviour, particularly from offshore parents, lead to an event. Weatpac’s Australian loan book that peaked at 50% interest only loans at the end of 2017, would be one of a number of risks.
AThe benefit to NZ is that those with large cash holdings and a an appetite for low risk, will likely diversify and move their deposits around the banking system. This will hopefully reduce our current dependence on 4 overweight Australian firms - who I have no doubt would support (could have written) the position that you take in the article.

For example, a 5% interest return on a million dollar asset is an annual cost (or return) of $50,000.

But if that $50,000 return is happening when interest rates fall to 2%, then the $1 million asset is revalued to $2,500,000. The extra $1.5 million just falls out of the sky and into private hands. ($2,500,000 at 2% = $50,000.)

Those that don't have $1 million to start with don't participate. Those that do get rich quick.

Hmmmm... investment horizons have everything to do with discounted NPV.

A to be issued $100.00 10 yr bond with a 5% coupon rate and a current 5% discount rate, prices at $100
A to be issued $100.00 10 yr bond with a 5% coupon rate and a current 2% discount rate, prices at $127.07

A to be issued $100.00 1 yr bond with a 5% coupon rate and a current 5% discount rate prices at $100
A to be issued $100.00 1 yr bond with a 5% coupon rate and a current 2% discount rate prices at $102.96

I used a semi annual payment bond calculator.

“As the boomer generation is wealthy,”

All of them? Are you sure about that! Have you spoken to debt councillors and citizens advice centres or the salvation army and asked them how their baby boomers are doing? I think you would be shocked at the feedback you would get from those people on the ground!
Time to take those rose tinted glasses off David - all is not well out there!

Here's a suggestion.
Make the deposit insurance apply only to approved banks - ones that either have conservative capital buffers, or that have separate 'sub-banks' firewalled from speculative lending.
Then have a public education campaign informing everyone that their money is only truly safe in one of these institutions. It could be a boon for smaller lenders that play it safe.

No sorry David but we really need some type of protection for peoples life savings. We all know that there's a high risk at the moment with global housing markets that both us and our neighbors banks (Oz and China) that are resident in NZ have become very dependent on property. Even the 2008 Global Finical Crisis was brought about by toxic assets generated by the housing industry via soft lending practices (Mostly in the US).
Now we're seeing Australia relaxing it's regulations and moving along the road of soft lending.

Plus the younger generations are probably the most vulnerable with them desperately trying to save up for their own homes and their own life pensions. Most of the Boomers here have had the advantage of squirreling away their money in to property, and have paid off their mortgage on their residential home. The worst thing that could effect them is that they switch to a reverse mortgage if things get really bad.

Insurance is a bad thing? What a joke

Well, I’m sorry – but if there’s a coherent, well-constructed argument in David’s piece, I’m struggling to find it.

I can only assume he’s having a bit of fun and seeing what bites.

This is a very bad idea. There is no reason to pick a safer bank. It removes one aspect which banks can compete on for deposits.

Couldn't agree more.

I enjoy your articles David. If deposit insurance comes in, watch the share prices of NZ property companies rocket.

Great article David. Sums it up nicely. You should be on prime time explaining it to the masses!

(The economic system) does need higher interest rates.
Its impossible. Higher rates would only collapse debt.

That said, all systems based on endless growth must collapse eventually.
We have depleted our energy base & mineral ores and continue to add exponentially more people...
Historically when energy consumption per capita goes backwards trouble ensues ...

Deposit insurance is another case of boomers having one more slice of cake. They have had far more than their share.
But physics doesnt care either way about bank deposit insurance.

An excellent article David. Continuing interest rate repression undermines the fundamental basis of capitalism, the cost of capital. The endless interventions by Governments and Central Banks has created an appalling environment which favours only the wealthy. And yes politicians are making crazy decisions based on the low cost of money. Yes we desperately need higher interest rates to reverse massive malinvestment. The situation has become so bad that many pension funds in the US which are required by law to hold low risk portfolios i.e cash are now being told its acceptable to default on their payments obligations. Yes asset price have been massively juiced. This is going to end in tears. www.interest.co.nz/opinion/99061/john-mauldin-mauldin-economics-argues-…

Such a Pathetically ignorant article I think it was written as a joke. For eg., Read up on how the FDIC operates in the US. Deposit insurance is such a sound policy it NEVER makes the news and everything makes the news in the days of trumpeter governing.
The US Government has not lost a cent since FDIC was instigated in 1934. This includes 134 bank failures in 2009 after the GFC, because the premiums are paid by the banks , not the Govt. Yes, an extremely small portion of their interest may be adjusted for it but the banks have so much room to maneuver with this as the spreads are fantastically high it is irrelevant.
The Govt. based overseeing agency should incorporate the duties of bank oversight as well. To say a Mom and Pop depositor should know about all the illegal shenanigans performed by most of the Australian owned banks is asinine.
Totally a pathetically written article. He does not have the first clue about how deposit Ins. benefits the financial stability of a country. That's why most other countries have had it FOR YEARS. The moral hazard is non existent argument. Where did this guy come from?????

David I like this article for the sole reason that you have made mention of inequality. I think those giving you a serve on capital gains are quite right also. Good to have the discussion out in the open though.

Charles Hugh Smith paints the picture quite well. https://www.oftwominds.com/blogjune19/burnout6-19.html

My daughter and nephew are suffering as he says. Professionals in the mid 20's doing moderately well, but suffereing fatigue from long hours they have to work. But their brothers and sisters will probably never get on the property train if it remains as it is. My father is behaving exactly as described in his article also.

David I take exception to your statement that Baby boomer generation is capturing all benefits and protection that the State can provide.
Since the restructuring of this Country's Economic system in 1984 etc their has been a lot of financial hollowing out of the so called Baby Boomers wealth. These are the people that built this country.

The Politicians have a lot to answer for

Good stuff David. You lit the fire with this one. I too, have been going on about interest rates (cost of money) being far too low for far too long. Of itself, it will probably be seen in hindsight as the beginning of the end of the current system. Spooky!!! As for term deposit guarantees, that's another issue in my mind. I'm a boomer but I still want my (lousy) 3.25%. However, if I was living in Germany I'd be getting a fraction of that, so we'd better be careful what we wish for. One of the articles points, I think.

May not be 50k yet. I seem to recall that the amount was 30-50k per institution.
I suppose that the next move will be that most of the NZ banks will amalgamate so that will reduce the amount of payout.

Let's take a step back.  What is the primary purpose of deposit insurance?

https://en.m.wikipedia.org/wiki/Bank_run

If you think this can't happen in New Zealand, then look back at 2008/2009 GFC, when the finance companies had difficulties renewing their maturing debentures, as debenture holders did not roll over their maturing debentures, and this ultimately led to many finance company bankruptcies. Many retirees lost their entire investments in debentures issued by finance companies. I heard a story about a retiree who had diversified amongst a number of finance companies and lost most of their investments.

Also recall, that during 2008/2009, the NZ government guaranteed bank deposits to prevent a bank run by depositors. The NZ government also guaranteed some bonds issued by NZ banks - it was the only way for some banks to access the bond market. If the banks had been unable to refinance their debt obligations and experienced bank runs by depositors, the 2008/ 2009 period would have likely been a lot worse that it was due to the likelihood of an even larger credit contraction.

So if there is no deposit insurance, what will depositors likely do if there is concern about bank liquidity and bank solvency? What would you do if you were told that the bank in which you held your deposits was in financial trouble? To avoid potential loss, many depositors would withdraw their bank deposits - some would keep the cash at home, some would buy government bonds, some might buy other assets with a store of value such as gold, jewellery. Some might move the deposits to bank accounts overseas - for example, bank accounts in Hong Kong allow deposits denominated in NZD. Some might move their cash to Australian banks to take advantage of the deposit guarantee there (I know there are some questions raised on this by DFA, but that is another issue).

In the modern day of the internet, social media and mobile phones, news or a credible rumour of a bank in trouble would spread quickly. A credible rumour might result in withdrawing funds first, verify later.

If there is no bank deposit insurance, and a bank run results in a systemic risk in the banking system,
1) the government may need to guarantee bank deposits like they did in 2008/ 2009 to stop a bank run (and the banks will likely pay for the deposit insurance) or
2) the government may need to recapitalize the banks, then the cost may ultimately be borne by taxpayers - similar to the recapitalization of BNZ in late 1980's / early 1990's.

I suspect that David has liquidated his property assets and now has a lot of cash in the bank earning a paltry sum. This has no doubt brought about the sudden revelation that, why yes, higher interest rates would certainly be for the common good!

I hope David will answer these questions;

"...latest example of how the baby boomer generation is capturing all the benefits and protections the State can provide." While the Government has decided to put this in place David, why not argue that the banks should have to fund it? Any insurance company would then want some significant oversight to ensure their liability would be unlikely to be called upon. This doesn't just protect the Boomers, indeed much commentary is about how the Boomers have too much money, it protects everybody and anybody with up to $50 K in the bank. However I believe the banks should be providing the protection not the Government and taxpayer. The banks are after all, public companies (rather than Government owned) and their shareholders should be carrying this risk. It may make them a little more cognisant of the activities of the bank. This move actually protects people at the bottom end of the banking spectrum, rather than embedding inequality to protect the wealthy.

I am really concerned with the assumption you have made re the $1 million asset returning $50 K. By what assumption do you inflate it's value to $2.5 mil? Is it simply that the required return is $50 K? But if interest rates drop from 5% to 2% the the return will drop to $20 K. This is a problem with the financial system. A $1 mil asset is a $1 mil asset and unless the market changes the value of that asset cannot change, so the rate of return will be based on the interest rate and will drop. Besides the bank pays interest on money not an asset. Again $1 mil is $1 mil.

As to interest rates, I agree that we should have higher rates, but it is the banks who have driven them down. There has been much debate on how risky bank practices have been in recent years (since the GFC) but interest rates have done nothing but fall. There is little to no competition between banks other than a race to the bottom. Depositors have received little to no risk premium on their money despite all this commentary, and the revelation that deposits are legally the banks property and not the depositor's!

I would guess what you are really railing against is how banks are regulated and are able to fleece their customer base, and the tax payer with a fair degree of impunity, and on that matter i fully agree!

Should there be a major bank collapse under the current system, I suspect most bank depositors losing their savings might well be pensioners. We are being told to save for old age, because the NZ pension alone is not enough. So what would happen if many pensioners lose their savings? The welfare system (taxpayer) would have to help out in the probably numerous cases where basic living/housing expenses can no longer be met by using savings/interest earnings after having undergone the 'haircut'.
It seems that poverty and inequality always comes at a cost to the taxpayer. So perhaps the question is more about where is the most sensible balance than a straight yes/no.

Why would banks, who are authorised to create loans out of thin air ever get into trouble? At worst they simply will be less profitable if bad debts go up given these loans didn't cost them a cent and must surely dwarf any interest payments due to deposit holders.