By Gareth Morgan*
It’s decades overdue but at last the government guarantee on deposits at banks has been shown not to be cast-iron.
The decision taken in Cyprus to impose a one-off 7% tax on all bank deposits as the cost of securing a rescue deal from Europe, is intensely unpopular.
Ordinary people somehow think they shouldn’t take responsibility for the decisions they have encouraged their politicians to make.
One of the major moral hazards of financial sector liberalisation of the last 40 years has been the guarantee from central banks of the deposits at banks.
That leads people to store their money in the bank with no regard for the credibility of the bank. And then the banks have increasingly disregarded at worst, or not taken seriously the risks they take with their lending.
If you know there’s an implicit or explicit guarantee from the central bank that underwrites the deposits you take in and then lend out, then it follows as night does day that you’re going to be relatively relaxed about credit risks.
This is why we get cycles of systemic over-lending as occurred in the mid-1980’s in NZ to the commercial property sector, and in the early 2000’s to farmers, and has occurred internationally to a major extent culminating in the Great Financial Crisis.
And more worryingly is the over-lending as has been going on for decades with residential property in New Zealand – as the IMF highlighted yet again in its report this week.
That our own Reserve Bank continues to “think about” this issue while the Minister of Finance ponders it publicly nowadays, is testimony to the reality that until a crisis hits nothing will be done. This is the nature of political and central bank leadership.
Central banks rightly guarantee the banks because they don’t want a repeat of the “run on the banks” as occurred during the 1930’s Depression.
But at what cost has come this stream of unfettered credit from central banks to our commercial banks?
Sure it’s all gone swimmingly well for several decades now and while we’ve had booms and busts that profligate credit has sponsored, we’ve used both inflation and taxpayer funds to disperse the costs – or “socialise” the debt as they say.
And along the way bankers have made bigger and bigger salaries as they truly have been on a gravy train courtesy of the central bank guarantee.
Wealth and income disparities across society have burgeoned as a result of credit-fuelled boom bust cycles and the night-after impact of inflation and tax loads on those who in effect fund the profligacy.
We actually know no better way than the infamous “Greenspan Put”.
Well Cyprus just got its come-uppance and the fall guy – when there’s no other line of defence – are not the poor (who inflation roots) nor the suckers (those that pay tax) but those that save – both ironic and somewhat overdue really.
That it takes a country to get itself totally into the crap before the penny finally drops on the public at large, and even then precipitates howling indignation, is enough testimony to the reality that we like to use every inch of rope to hang ourselves rather than untying the knot before the garrotte grips.
Pro-active policymaking is simply not in the repertoire of those whose main priority is to mollify the public (politicians) or ensure tenure (career public-servants).
We get the decision-making we want.
As a society we of course want the good times to keep rolling, no matter how the party’s being funded – and woe betide anyone who stands in the way.
Isn’t it logical then we get the outcomes – eventually – that we should expect?
Meanwhile let the music play.
Gareth Morgan is a businessman, economist, investment manager, motor cycle adventurer, public commentator and philanthropist. This opinion piece was first published on his new blog garethsworld.com and is reprinted here with permission.