Wednesday, 29 October 2008

Grand Coalition?

Either Grand Coalition or a Council of Economic Advisors -- that's the suggestion of Fran O'Sullivan for what's needed to deal with the economic crisis now that "the collapse of the New Zealand dollar has burst the air of surrealism clouding the election campaign."

The argument for Grand Coalition has two main prongs: that the two major parties have more in common with each other than they do with the minor parties with whom they're presently planning to coalesce with, which is undeniable, and that there are "there are stellar players in the senior ranks of both parties" -- a far less defensible claim.

Now it's true that the two main NZ parties coalesced to deal with the first Great Depression in the thirties (and as things turned out, they were never again to part), and even without any "stellar" performers in the Liberal/Reform cabinet they made a reasonable fist of the job -- they cut public service wages and payrolls, and allowed wages and prices to fall to meet the new economic reality caused by the deep contraction and the enormous public debt, and by 1934 the worst of it was over.

But things are different now. The ghost of Keynes now controls the economic psyche, and rather than cutting public spending and allowing wages and prices to fall, as they must if things are to correct, the main solution to the financial crisis from both the Tweedledum and Tweedledumber parties is to borrow big for a mammoth infrastructure spend-up.  But when capital is drying up for productive private businesses, this is not what the doctor should be ordering.

So a Council of Economic Advisors is a better hope, but could one expect either Bill English or Michael Cullen to take advice?  I'm afraid the words "forlorn" and "hope" spring all too quickly to mind.


  1. O'Sullivan:
    The NZ dollar is already worth 40 per cent less than its peak value in US currency just months ago. The "smart money" got out when the dollar was peaking around the US80c mark.
    Now that AXA and other funds are freezing redemptions - while the Reserve Bank and Treasury try to come up with a Government guarantee scheme to keep financial pipelines open - the crisis has entered a new phase.

    No way! I wonder if she connects her championing of lowering the OCR and deposit guarantees with this. I doubt it.

    The deposit guarantee scheme is already distorting the market - as we see with AXA. Private opinion is that the market is now absolutely screwed. Share broking houses(the white-shoe car salesmen of the finance industry) have now thrown their hats in the ring, wanting to be guaranteed as well.

    The NZ taxpayer could potentially be bailing out every piece of crap that moves. And with the guarantee extended to wholesale the country could well be technically insolvent.

    And O'Sullivan now wants a 'think tank' to sort out the inevitable results of what she promoted - UNBELIEVABLE.

  2. Unbelievably ... I'm going to agree with you again.

    You're dead right.

    When you need capital you don't lower interest rates, you raise them.

    When you want to "protect" the financial industry you don't make promises that protect the riskier end of lending, and that discourage the more sober operators.

    You're right: You shouldn't need a think tank to tell you that.


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