Ewen McCann suggests a plan of action for policymakers if house prices fall and that triggers bank failures. He sees a place for a lottery

Ewen McCann suggests a plan of action for policymakers if house prices fall and that triggers bank failures. He sees a place for a lottery

By Ewen McCann*

This is my second article on the housing market in New Zealand. It considers the substantive question, not yet a part of the debate, what is the appropriate policy if NZ house prices fall?

The first article argued that the rises in house prices have been the result of inevitable long run forces that were analysed there.

The price increases themselves are not an economic problem where they are the outcome of underlying economic processes. No economic policy response would be required. Where those price increases are driven by policy intervention the policies should be corrected. The discriminatory tax drivers of house price increases requiring correction were highlighted in the first article.

However, a reduction in house prices is a different story.

A general decline in house prices is not symmetric with a general increase; a policy response is necessary. That decline would have economic effects as other countries have shown us. We should not respond to a general fall in house prices in the ways that they did.

We need a plan

It may not happen, but if it does, New Zealand needs a policy plan ready to pull out of the top drawer to deal with it.

An important driver of the entire NZ economy since the dairy price slump has been the income from the capital gains accruing in the housing market. Capital gains are income. If the income from this source falls or turns negative the effects will be like any other fall in income. It will cause economic distress across the country with its centre on Auckland, the economic region from Hamilton to Warkworth.

Suppose that foreign lenders to NZ banks partly close off the money tap. This may be because they become uncomfortable with the risks that NZ banks take by their high lending percentage of the value of a house. Maybe banks sanguine notions of viable debt to income ratio will be a trigger. It could be because of a recession in foreign markets. Or, it could be the result of banks becoming less profitable and foreclosing on dairy farmers, which cannot be far off. In any event NZ bank lending to the housing markets shrinks and the demand for housing with it. So the capital gains to housing decline or turn negative, this last meaning that house prices fall.

Small capital gains, or worse, capital losses result in a recession because they reduce incomes below what was expected by households. Some households are unable to meet mortgage interest payments, banks foreclose and the recession worsens.

Banks find themselves with un-performing assets on their books so they hold mortgagee sales and the downward spiral intensifies. Don’t forget that banks foreclose, they deliver the stern message of capitalism and households lose wealth. The job market contracts as the household sector spends less and poverty increases. The policy intent of the prescription to follow is to constrain the decline in private sector wealth thereby constraining the recession. There is no policy that would eliminate such a recession.

What should the RBNZ do?

What should the Reserve Bank do? The Reserve Bank’s main functions are to act as a lender of last resort and to control inflation. It is a lender of last resort because, during a recession, other commercial lenders to banks vanish. Mortgage foreclosures occur in recessions and weaken banks’ balance sheets. Lenders to banks become miserly, bank customers become nervous and move their funds out of the bank. These circumstances yield bank runs.

Trading banks hold less than 10% of customers’ deposits in reserve so only 10% of deposits are returned customers during a bank run. A run on a bank is one of the worst things that could happen. An extreme recession would result were there a run on the banks.

This is why the Reserve Bank has to lend to the trading banks in this situation. It is the lender of last resource because the usual commercial lenders to banks evaporate like the mist. But the Reserve Bank should remember the hard lessons of capitalism too and charge the banks a salty interest rate on its loans, say 20% or 25% per annum. These rates are not too much higher than the rates charged on credit cards.

The high Reserve Bank lending rate is warranted because the banks are a poor risk, being possibly subject to a bank run. Alternatively, the high interest rate is an incentive for shareholders stump up more capital to protect their investment. Australian parent banks could well be obliged to sustain a New Zealand investment that has profited them so handsomely in the past. Banks who will not pay the high rate go to the wall just like the people they foreclosed on. Such a trading bank should be liquidated because it could not properly run a banking business.

The Reserve Bank seizes all of the trading bank’s assets. The only liabilities that the Reserve Bank would assume would be the various deposits of NZ located customers. It should loudly proclaim that liability in order to support public confidence in time of need.

This is less of a problem than it may seem. If a trading bank demures on the high interest loan, its license would be withdrawn. Its staff would be instructed to work as per normal as the Reserve Bank is now running the defunct bank.

It is most important at this time that the Reserve Bank feeds a run. Any customer wanting their cash should be given it by the Reserve Bank through its newly acquired trading bank. The Reserve Bank can easily manufacture any amount of cash that the public tries to withdraw. People would learn that their money is still there so they will stop the run. The important point is that the run on the banks has been averted.

There would be no inflation from the newly printed money because a recession would be going on and people would hold the new cash, as a precaution, and not spend it. The new money would be recaptured as times improve.

What of the un-performing mortgages that the Reserve Bank has acquired from the defunct trading bank? In the argot, the households involved are said to be “underwater.” A recession will be under way by the time that the Reserve Bank has taken hold of the failing bank. The Reserve Bank acts to contain the recession. What else would it do?

A lottery

The Reserve Bank should respond with a lottery. It conducts a lottery among the failing mortgagors of the defunct bank. The winning percentage in the lottery among the failed mortgagors have their mortgages forgiven. It has to be a lottery, otherwise everyone would default on their mortgage. The allowed percentage of lucky borrowers really depends on how much relief the Reserve Bank wishes to grant the household sector.

The objective of the policy is to sustain the wealth of the household sector instead of allowing a free fall in it. This support of household wealth would help maintain private expenditure and would mitigate the recession.

The defunct bank’s shareholders and debenture holders bear the loss since the Reserve Bank simply confiscated the mortgage instruments or assets owned by the failed bank. In the case of an overseas owned bank the loss is not a cost to New Zealand because the shares and some of the debenture capital are held overseas.

The proposed forgiveness of households debt is then costless to NZ as the foreign shareholders and debenture holders learn the hard lesson of capitalism too. This transfer of the losses to the foreigners, who are ultimately responsible for the failure of the bank that they owned, is a useful effect of the programme. This is the sort of behavior that shareholders expect of banks when their bank is the creditor. Shareholders have no come-back when it happens to them.

The Reserve Bank will have to foreclose on the unlucky participants in the lottery, whether the failed bank is foreign or New Zealand owned. The families who are unlucky in the lottery lose their homes but the affected houses do not disappear. Other families use them and it is in this sense aggregate welfare is unchanged. The national loss is in the probable decline in the price of houses.

What about term deposits?

Many New Zealand households hold debentures of quite flimsy security in banks that operate in NZ. These are sometimes called term deposits. They are thought to be sound investments but they would not be so in the climate that we are examining. Actual debentures, of low preference ranking, are also on issue. Holders of such paper would lose this part of their wealth which would deepen the recession, unless the Reserve Bank acts.

It should run a lottery scheme among NZ holders of this paper similar to the one suggested for bank deposits. The prizes in the debenture lottery would be the continuance of the contracted interest payments. Foreign bond holders don’t matter to NZ and would not be bailed out. They suck on this lesson of capitalism that they profit from in better times.

Just how far up the ladder of near monies the Reserve Bank should climb with the rescue package is a judgement call but is should extend to term deposits and NZ held debentures because they are so easily converted into cheque account balances as to be considered money by households.

The reason for these actions on bank debentures and term deposits is purely to soften the negative wealth effects of bank failures upon the domestic economy. The suggested policy is rather different from the policies of “quantitative easing” that were designed in other countries to protect bank shareholders from the lessons of capitalism that their banks administered to others as a matter of course. Those policies did not help maintain household wealth the way that the present proposal would. That is why there was a Great Financial Crisis.

Abandon the OBR policy

A further characteristic of the New Zealand banking system needs to be severely scrutinised. The Reserve Bank has significantly destabilized the banking system by an inexplicable policy that it introduced few years ago. The policy makes the banking system more susceptible to runs, especially when there is financial uncertainty. This policy should be immediately abandoned.

A legalistic view has been taken of the banking system by this recent policy that allows the liquidator of a bank to take 10% of customers’ chequeable deposits and apply them to satisfying the rest of the banks’ creditors. This is a legalistic position that treats depositors as simple creditors of bank. Bank deposits have an economic function which is much richer than being a mere unsecured creditor of a firm. Cheque accounts should not be treated like low priority business creditors in a liquidation, even if just 10% of them are to be so treated.

The policy should be abandoned immediately. At root it contradicts the principle of lender of last resort, one of the main principles of banking theory, as old as central banks themselves. The purpose of this principle is to maintain confidence in the banking system. The confiscation policy undermines the public’s confidence in it.

This policy of partial confiscation fails to recognize that it increases the likelihood of a bank run. Under the confiscation policy, customers withdraw early to avoid the loss of 10% of their cheque deposits. They precipitate a run. Such an event would be an economic calamity. Liquidators should not be in charge of winding up banks. A liquidator would be lost in the ramifications of the ideas of this article. It would anathema to a liquidator to let mortgagees off the hook. But this is essential, and sometimes costless to New Zealand.

This is the sense in which banks are too big to fail. It is not the losses that a bank’s shareholders would encounter that makes it too big to fail. The reason that banks are too big to fail is that bank runs would occur as they approach insolvency.

The suggested policy applies the necessary hard lessons of capitalism to incompetent banks and avoids bank runs.


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Here are some features, largely distinct from each other, of the housing market that do not lie comfortably in the structure of the article.

  1. There is one consequence of the increase in house prices that is not attracting comment at the moment. This the mal-distribution of wealth that it induces. New Zealand already has a skewed distribution of wealth compared with OECD countries. Once wealth and incomes are too heavily skewed the skewness becomes self perpetuating. Social mobility in future generations is reduced by skewed inheritance where the mobility otherwise would be merit based. This consequence of the present characteristics of the buoyant housing market is being neglected.
     
  2. Higher house prices increase the aggregate capital stock without directly raising private and aggregate welfare. The increase in the price of a house does not expand its capacity or add to the flow of accommodation services from it. The community’s well-being is unaffected directly by higher house prices. If more junk food and sugar drinks are consumed out of the greater wealth then welfare is indirectly increased by the wealth effect on consumption.
     
  3. One the other hand if, instead of the price of a house doubling, a second house were to be built at the original value of the first there would be one more family accommodated and the aggregate value of the housing stock has increased by the same amount in each case. Social well-being expands in this case through the extra accommodation. This is the grain of truth in the supply side approach.
     
  4. A decline in house prices is a reduction in personal and national wealth. An earthquake that demolishes houses is also a decline in personal and national wealth. The reductions in wealth are not the same because even though the price of a house may decline there is still a place for people to live whereas this is not the case if a house is demolished. In an underlying sense, aggregate welfare does not directly fall as result of a house price decline but it does fall a house were demolished. This distinction is quite useful when thinking about the housing market. Nevertheless, in both cases the nation is poorer and there are knock on, or indirect, effects of the impoverishment in both of them.
     
  5. Economic forces are glacial in their speed and force. If the social issues surrounding house prices are a concern then we should decide where they rank against other social issues. There are undernourished and impoverished children of poor health in NZ whose plight should rank above the bleating of the DINKs and their parents.

Ewen McCann was formerly Head of the Department of Economics, University of Canterbury and latterly Principal Economist at the Inland Revenue Department.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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11
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Ewen good suggestion but to think one has to first admit that their is a housing crisis and PM is still in denial the same way they were denying about problem in foreign trust.

After dragging their feet finally they did a study and was concluded that has problem but if the study conducted by govt and says problem it means must have lot of problen and to have total correct unbiased , feel it should be done by a judge or may be a comittee. Not that the person doing is not good but doing under govt supervision creates a doubt because of trust defict of current national govt.

Similarly overseas buyer data which govt is using to hide behind is flawed and not onlly all kiwis but even the agency announcing confirms but not the government. Infact as that faulty data suits govt their policy of no action is based on it and in future when the next data is released and hopefully using correct parameters to differntiate between citizen/residence AND non resident/ overseas buyer the govt instead of appologising may again find excuse to not act or if the data is compelling, which it will be then the govt will again use all resoufce with them to delay taking any action.

This is the national govt that we elected. Deny deny deny and do nothing till forced and jn that too dilute the action and try to delay it as much as possible.

Everyobe taliking about housing initself is a sign but not to our hon PM

14
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Low interest rates are causing a banking crisis, normalisation of interest rates needs to be a priority.

http://www.otterwoodcapital.com/blog/the-absurd-concept-of-negative-inte...

The sentiment is right, the reality impossible - its why the FED just cant raise rates - because you will bankrupt producers and more importantly energy companies - who are fast going broke on current Oil prices anyway. So an interest rate rise would accelerate this... But, unless growth takes off (again impossible) we are approaching a monster energy and debt crisis anyway.

12
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If house prices fall significantly putting banks at risk then tough bickies for banks and their irresponsible greedy lending practices.
If anyone attempts the stealing from deposit holders then beware of the consequences. It will not be safe
The simple and most obvious solution is to RAISE interest rates gradually but consistently from their artificial lows, thus bringing the risk to the surface and let the banks absorb the loss using that same method. People that over borrowed will soon be made to realise the truth, that houses do not constantly go up forever cause they fundamentally can't. Deal with it now or face a Armageddon of pain later

higher interest rates will destroy equities and asset values,it won't just be housing.

12
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I doubt higher rates will "destroy" them, but they will cause them to fall. At some point this rebalance needs to happen. We do it in a controlled way, knowing asset holders will have to talke some capital losses. Or it happens in an uncontrolled way and there is general carnage.

Nothing is more certain; asset prices are going to fall at some point. We just don't know when.

The recent 'capital gains' (that is, money falling from the sky to capital owners) are unsustainable. But it has been going on for too long now, so an over-correction seems quite likely before more realistic prices are re-established. True for houses, farms, land generally, equities, bonds, art, even gold.

20
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Actually, I am not optimistic. We've had the boom. The bust will come. I just don't know when. I personally doubt the fall will be in a 'controlled way'. Almost too late for that.

Andrew, I don't care. People need to understand that asset investment has risks. Why should a saver, people living within their means or just someone having their wages & salaries in a bank which is pretty much been made compulsory for IRD audits be made financially responsible for dimwits who think Ponzi schemes around housing are great ways to make money....putting us ALL at risk?

Face reality? Plan???

First time for everything, I suppose.

Somewhere in the ballpark of my first thoughts :)

I agree with your thoughts around OBR. I personally have and exit strategy from bank deposits if things get anywhere near that point (assuming I'm quicker than the RBNZ to pick it). The overarching threat of a haircut could actually CAUSE a run on banks when it may have otherwise just been a faint possibility. I understand what the RBNZ is trying to achieve with OBR, but it is an academic exercise that would not work in the real world IMO.

Keen to share your exit plan?

In broad terms - get out of bank deposits! You'd probably want to stay out of houses too, as safe as they are purported to be.

And into what? The mattress? I have some gold which has really helped out with the recent Brexit vote but I don't really want to put everything into something which produces no income.

Carbon credits. No income but....Buyers have to buy, sellers dont have to sell. Up from a few dollars not that long ago to $18.00. Bennet has set a limit of $25 max, so even if that holds (which is unlikely gven we are required or reduce carbon levels) there is still roon for more gains.

.

Come on, I'm sure you don't need me to tell you where to put your money. Find an asset class that you feel offers good risk-weighted value and purchase some of it - repeat until diversified.

If you really want some risk-free (as much as that is a possibility) cash, deposit with some Aussie banks. Free, Gubment-backed insurance on up to $250k per institution.

Yes, thought about this, but that would requite you have an Australian bank account in Australia. I do have that through an ANZ share trading account in Oz but I'm not sure whether or not that is any "guarantee" for a NZ citizen who lives outside Australia.

It's not hard for a kiwi to set up accounts with Australian banks. Your nationality or residency has no bearing on your cover - all accounts with approved Australian institutions are automatically covered, up to $250k per bank. The guarantee would also apply to foreign currency accounts with some banks (all the main ones I believe), so you could do away with forex risk if you wish. All the info is easily available if you're keen to learn more.

18
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So house prices fall,banks get the jitters and i suffer.
Mortgage free house loses value and banks steal my deposits.
Hardly fair methinks.
Not worried about house value falling because in my mind it's a roof over my head not an investment,but i would be f******* annoyed should the banks take 1 cent of my deposits because of bad lending practices.

If OBR is enacted due to a bank failure they can automatically take more than 1% Ngakonui - bank deposits are not guaranteed - a bank is probably not the best place to hold your funds or if you do have a substantial amount with one bank split it into 5 amounts and spread it amongst all of them.

Then diversify it.

Kiwis love 'money in the bank' but I'd suggest spreading into physical gold and silver, cash and even some Bitcoin (popular overseas, considered weird in NZ). Maybe even some jemstones, depends how dodgy you want to appear to your friends.

Perhaps I could sell my house and upgrade using my deposits and have no money in the bank.
It would appear to me that a lot of people are in that situation.

You'd be even more annoyed if they took 90% of all deposits over $10000; diversifying banks would not help much.
As they would all fall over.

If you have money "in the bank" then you have lent it to the bank. Thus, if you have put (lent) all your money to the bank and it subsequently fails...who in that scenario has exercised bad lending practices?!

when have you lent money to the bank, no such thing
What are 'Bank Deposits'

Bank deposits consist of money placed into a banking institution for safekeeping. Bank deposits are made to deposit accounts at a banking institution, such as savings accounts, checking accounts and money market accounts. The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit), and refers to this liability rather than to the actual funds that are deposited.

If they even try it on ngakionui gold, they better get ready for some serious repercussions. Greece will look like a play fight.

12
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I think your lottery idea is a terrible idea.... It rewards the wrong people.... possibly imprudent borrowers and imprudent lenders ( deposit holders chasing higher interest rates in banks that do risky leaning ..etc.).

I understand the need for a managed "deleveraging" in the scenario you describe , ...too mitigate a financial crisis.
In my view Steve Keen has the very best ideas..
It rewards the prudent and helps the imprudent. In an economic sense it is "natural justice" ( fair , equitable and with hardly any unintended consequences...that i can see. )..
http://www.ideaeconomics.org/a-modern-jubilee/

A Modern Jubilee would cre­ate fiat money in the same way as QE, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injec­tion would have their debt reduced but not elim­i­nated, while at the other extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts.
The broad effects of a Mod­ern Jubilee would be:

1. Debtors would have their debt level reduced;

2.Non-debtors would receive a cash injection;

3. The value of bank assets would remain con­stant, but the dis­tri­b­u­tion would alter with debt-instruments
declin­ing in value and cash assets rising;

4. Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;

5. The income flows to asset-backed secu­ri­ties would fall, since a sub­stan­tial pro­por­tion of the debt
backing such secu­ri­ties would be paid off; and

6. Mem­bers of the pub­lic (both indi­vid­u­als and cor­po­ra­tions) who owned asset-backed-securities would
have increased cash hold­ings out of which they could spend in lieu of the income stream from ABS’s
on which they were pre­vi­ously dependent.

7. Banks would lose their strangle hold on the middle class.

Listen. The 6 points you have made here are wonderful, but understand that the banking system would simply not allow this to occur.

All sorts of nasty things would happen to people if this was even seriously suggested.

Low interest rate are here to stay for sometime but RBNZ and Govt can act if want to to reduce the impact of housing bubble as have reached unsustainable level.

National will do nothing and will hope and try everything for it to run irrespective that it is harmful to ecenomy as is must for them till next election otherwise they understand and would have acted by now.

Govt does not realise that problem is so evident that is hard to ignore and need just one tick to burst. It will come and is now only a matter of time.

11
up

I get it...but I don't get it.
House price increases have only been as stupid as this in the last few years. If prices retrace to where they were 3,4,5,6 years ago that means that money on paper that people thought they had is gone. Those who borrowed to the teeth to buy have to suck it up. If they bought somewhere to live and they can service the loan what difference does it make what the place is worth on paper. For those that constantly flick houses, they'll lose out, and who cares...that group of society would not be pitied if they were broke and bankrupt.

If interest rates go back up, again that is the level households must be able to service a loan at. Low interest rates will not be around for the lifetime of your loan so why borrow based on that.

Capital gains are income, sure, but they are from the person next to you. And if they don't have to hand over every dime they have to buy a house perhaps they'll have more disposable income to spend in the economy?

I don't know, we seemed to get along fine when house prices were half what they are now...why does the system all of a sudden fall down if prices go down? Let em burn I say, many people would be happy to see it happen. High greed comes with an element of high risk.

House prices from Bombay to Albany only dropped around 11% after the GFC - some predicted prices in Auckland would drop 30% or 40% so highly unlikely we would see more than a 15% drop in the medium term future - no biggie when they have doubled in value and likely to put on another 15% in the next 12 months. House prices have shown similar growth in the past and over the long term house prices always go up.

p.s. Interest rates gonna stay lower for longer - no chance of an increase in the next 5 years!

So why the need to protect anyone? Let the market correct itself if it does drop.
Interest rates 'will stay low for 5 years' and house prices will only retrace by 15%, much less than the over all gains of the last few years.

With what just happened over at europe i.e. Brexit, Australia and US election coming up, the OCR is going to stay low for sometime. Whether the banks are going to pass on any further interest rate cuts is questionable but low interest rate is here to stay for the next 2 to 3 years.

What happens overseas is irrelevant to OUR country's OCR, as it is supposed to reflect our domestic issues and risks. The rest of the world have their own RB's to deal with THEIR issues. That is how it should work. Otherwise we might aswell abolish our own currency and adopt the Aus or US dollar. RBNZ just need to grow a pair and stop being played like pawns. If we can't actually function as a sovereign nation on our own currency and productivity......

Our Dollar gets hugely affected by what happens overseas. Or what happens to commodities, etc. The US FED's actions trump RBNZs actions when it comes to the value of NZD. NZD is at the mercy of the markets , or so it seems to me.

What happens overseas is highly relevant to our OCR......For a start off where do you think many of the goods comes from that are sold into our domestic market???

A lottery? How ridiculous.That's what bankruptcy is for. Let it show on the records of the "investors" as they start again from scratch. One of our (many) problems is that with this too big too fail economy everyone is jumping on the bus as it drives toward the cliff. Why hand out free parachutes to a select group as it drives over the edge, punishing the rest of us who have had the sense not to get on the bus in the first place. I'd be bloody livid.

The only way this plays out is that bankruptcy occurs, those with cash buy the way cheaper distressed assets and if necessary central government bails out certain entities then rewrites into law more prudent policy.

The ones who win are always those who conduct themselves prudently.

Just because we can all comment on the internet does not change the RULE OF LAW

Why is there a need to do anything if house prices fall and some banks go broke or at least challenged. The sky won't fall in, and the actual houses will still be there. Of course there will be a sorting out and there will be some bankrupts. But that is helpful to future progress.
First to the wall should be the bank shareholders of course. I see no reason for the taxpayer to ever front any funds at all. The taxpayers of Iceland refused to pay the debts of the private banks who got into trouble. Best thing they ever did as it has turned out.
As for the 'lottery idea' - that's weird.

Thanks for this article. It is an important issue that I fear we will almost certainly face in the near future. I am having a little trouble distinguishing between what the reserve bank will do under the current regime and what you suggest that they should do. There is a shocking lack of clarity about how things would proceed under current planing. My sketchy understanding is that it is all in the the hands of the banks until they run out of cash, at which point the government steps in and triggers an OBR event. As you say this is a counter-productive strategy as it means that the public can now have no trust in the banking system and I, as I am sure many others are, am removing all our cash from them as we approach the inevitable crash. I suspect that some are using this cash to buy properties because they are a real and tangible asset, but in doing so fuel the bubble. Crazy? but then again maybe not because it is not clear to me that the mortgagees will loose their properties through an OBR event, whereas the depositors definitely will loose a significant proportion of their cash. The sad fact is that the people who owe the banks money, have more real power over the banks than the depositors and if push comes to shove, they may well be better looked after.

It is a race to the bottom for currencies. Trying to use ocr to move exchange rate is now a fools game that increasingly only transfers wealth to the dominate reserve currencies and ultimately the USA. No, to drop the NZD without further inflating the housing market, NZ should follow the chinese lead and print fiat as fast possible and pour the procceds into hoarding gold. Dont openly admitt it or the gig is up. Dont worry about a price supression, China has got your back, the PBC now openly incourages its population to hoard gold not dollars as store of wealth. And they will make dam sure their elite are looked after.

The liquidator can "take 10% of customers’ chequeable deposits"? Every source I have seen strongly suggests (although the entire matter is left intentionally vague) that they can and will take as much of your deposits as are required to re-liquify the bank and get it open again, including those from everyday chequing accounts.

Buddle Findlay suggested in 2013 that the de minimus could be as low as $5000. Frankly, that too would require there to be $5000 per account available. Perhaps the government would "magic" up some cash ... but maybe not.
http://www.buddlefindlay.com/insights/legal-alert-does-cyprus-provide-le...

Further, the author suggested that the Australian banks may be "obliged to sustain a New Zealand investment that has profited them so handsomely in the past". Quite the opposite. APRA specifically requires the Aussie banks to repatriate profits and at the same time forbids them from bailing out their NZ operations. Far from there being any obligation to sustain, there is a requirement to allow them to fail. Have a look at any of the Big 4 Banks' Disclosure Statements. They all say the same thing. Contingent Funding is only for Covered Bond holders (no, that's not us) and the Big Banks are required to profit strip to reduce "non-equity exposures".
https://www.westpac.co.nz/assets/Who-we-are/About-Westpac-NZ/Disclosure-...

Finally, a winners and losers lottery? Great, if you are looking for assured civil unrest.

A lottery? Gamble with capital gains on the way up then gamble on debt forgiveness on the way down. Sounds like the Kiwi way.

Isn't there an old saying that goes like'''''Banks are as safe as houses''''''Could be wrong.

Yes but how safe are houses at the moment?

That depends on the size of the economic earthquake that's going to hit us??

Why don't we encourage people to save for when the bust comes so we actually have some money to spend at that point? Admit we're up credit 's' creek without a paddle, or one that is soon to break.

Increase interest rates, remove taxes for interest paid on bank deposits.

Or we just get ourselves further into debt, people who are attempting to save get punished further through low interest rates and taxes, when the bust comes no-one has any money to spend to stimulate economy....sounds like wise policy to me...

A Govt Gtee to be required follows a loss of confidence or recession resulting in a run on Banks so the RBNZ either has to print money which is fine until trust in money is lost or Govt increase taxes to pay Peter what Paul has lost and in a recessionary situation raising taxes at a time when social benefits are rising and the tax take reducing may be politically impossible. Ewen at least has a plan which even if it is not a panacea is bteer than no plan, Ewens plan has merit and should provoke more outside the box thinking by those in charge.

CNBC reporting that the luxury house market in London has fallen about 20% in the last 2 weeks.(boohoo)
Senada Adzem a luxury house agent says that 20% is not enough and people are investing in trophy real estate in New York,Los Angeles and Miami because even if the U.S. economy tanks the luxury house market stands up.
I can only dream.

Thanks for this. A great article. Also not sure about lottery rewarding (some of) the imprudent, with the (other) imprudent ones and the prudent feeling doubly hard done by, but really, really appreciate you putting it up, and really good comments, and it triggered an interesting 'Jubillee' proposal. Sadly, perhaps, even if that would be really effective, and even better than the current, what's the chance of anything other than the existing rules being applied?

No amount of suggestion and discussion will help as national govt not in the mood to listen anyone but to do what they want and it does'not matter what the future consequenc will be as long as they are able to hold the bluff till next year election.

Pity the next government who will have so much dirt to clear.

Yes, they don't actually give a toss cause in this country of no real accountability they don't really have too.

Pretty sure key and his crony govt have no plan, he's a strong a believer in the market, and just allowing markets to crash.
In fact why he gets paid half a million a year to do nothing is beyond me, anyone could do his job of just always doing nothing.
If you're not part of the solution, you're part of the problem, this government are part of the problem, and if they don't want to do anything to sort it out, they should get out of the way, so someone else can sort it out.

Key is the most latex infused Politician we have ever had. The trail of stories that the media just let slip is inexcusable - Bring back Rolston !! Need some hard hitters who arent afraid to ask the hard questions and keep asking them, not let sleeping dogs lie.

Nor lying dogs sleep.

I would suggest that we try and vote in some leadership willing to remedy the causes of the house inflation.
Cap immigration at 10,000 useful people and stop unrestricted foreign investment in NZ real estate.
The house shortage will catch up and property values reset reasonably gently. Prices will drop, hopefully not crash.
Globalization hasn't worked for the majority of the population, stop the unrestricted foreign investment.

These are some of the worst ideas I have ever read anywhere!!

Ewan McCann does not understand the banking system at all.
He fails to understand how money is created.
He has failed to understand basic accounting practices.
He also seems to be completely ignorant of the law.
He fails to understand what mortgage instruments are and how they are sold in the market.
He also fails to understand what a free market is all about.

This article reiterates why I loath academics and bureaucrats!!

The banking system (especially our blind reliance on it) is the problem. The banking system cares nought for the law. The masses, the ignorant, the uneducated do not understand the banking system at all.

"It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning." Henry Ford

"Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild

"The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests." The Rothschild brothers of London writing to associates in New York, 1863.

"If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson in the debate over The Re-charter of the Bank Bill (1809).

http://www.moneyreformparty.org.uk/money/about_money/quotes.php

Banking is about leverage......but then taxation is too!! Leverage usually = GREED.....if it is somebody elses money or goods and you are getting a benefit/income off it then call it leverage.....children do this very well!

"The bank hath benefit of interest on all moneys which it creates out of nothing."...........and EM wants the RBNZ to charge 20% on leverage now that is greedy........and he doesn't even know that mortgage instruments do not generally belong to a bank!.....and then run a flippin lottery.........I bet those private trusts who purchased those mortgage instruments would be laughing all the way to the bank and as they go past "Go" collect another $20,000 care of stupid bureaucratic suggestions!

What would the world look like if leverage was a banned product/substance?? Many of our academics and bureaucrats would get the chop!!

Ahh yes the banks...hang on New Zealand doesn't actually own any of the major banks so can an NZ property crash bring down the banks ? Wouldn't it also take a major crash in Australia before it really hit the fan ? Also you can see the Aussies immediately taking a hard line on anyone defaulting on repayments here because in reality they don't care about us. Sure they are all smiles while things are on the up but they will be the "smiling assassins" when the market turns.

Capital gain (loss) is not income until it is realised. ie the house is sold.
So declining house prices have no direct relationship with the household income available to service their mortgages. It's the indirect relationship such as when their employers, who borrow their money (on demand) against their houses can't keep borrowing that jobs start to disappear.
And if the money to realise the capital gain when the house is sold comes via a bank loan which in turn was borrowed from overseas...then it is NOT income to be compared with the dairy industry. It's simply borrowing to maintain lifestyle, ultimately doomed.Totally absurd.
And the solution is a lottery?