Wednesday, September 01, 2010

Corporate welfare is not dead

There’s a lot of people to thank, this morning.  So let’s get started.

We wake up this morning to discover that we are each unwilling investors in a failed finance company. That we have each sent a welfare cheque of around $405 to pay debenture holders in South Canterbury Finance.

Thank you Michael for creating the Deposit Guarantee Scheme. Thanks you John for conniving with him to put it in place before the election. And thank you Bill, for rolling it over in April, just when this shit was heading towards the fan.

We need to put the money in ourselves because South Canterbury Finance couldn’t find anyone else to stump up the cash to fix their cash flow problem.  And why would anyone want to, when the Serious Fraud Office has made a highly public and entirely unspecified raid  on the company’s chairman and related companies.

Thank you Serious Fraud Office.

We said that when the govt’s Retail Deposit Guarantee Scheme was announced that it created a problem of moral hazard—that it would simply encourage finance company to take more risks to make their high interest payouts, and encourage more “investors” to seek out these higher interest rates knowing you and I would bail them out when there was a problem. And so it came to pass. “South Canterbury Finance ramped up its risky real estate loans after it signed up to the Government's scheme that protected its investors' money, the company's chief executive Sandy Maier said last night.

So thank you again, Michael and Bill. And thank you Sandy Maier for placing us on your hook.

We’ve seen that the property bubble was inflated by oceans of counterfeit capital, credit created out of thin air inflating prices, and making everyone think they were rich.

So thank you, Reserve Bank, for underpinning this massive expansion of counterfeit capital.

We’ve seen that at least some of the problem with South Canterbury Finance is problems within the dairy industry. We’ve seen that dairying too was part of a bubble inflated by a $28 billion pyramid of debt – a pyramid propped up by the very assets being inflated by all that debt. That many dairy farmers have been riding the bubble -- "farming for asset gains" instead of for income. About the about the “delusion of credit” that caused it, and the idea that the panacea for debt is credit.”

So thank you, economists, for putting in place the fractional reserve banking system that sees prosperity as a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth.

We’ve discovered that many of these over-valued farms (valued at far more than their capitalised income) have nonetheless attracted interest from foreign buyers, who wish to inject real resources to make them work—but have been told by xenophobes both within and without government that they can go take a hike.

So thank you, xenophobes, for being so dumb you think far land can be shipped offshore—and having the political power to tell would-be investors to bugger off.

We’ve said that the business model so many finance companies adopted of expecting new investors to backstop the positions of past loans (necessary when your borrowers are developers, whose payments are a long way off) is not a sustainable position.

So thank you, Alan Hubbard and Lachie McCloud, for not sticking to your knitting.

We’ve said that in times of financial collapse, we need to stop worrying and learn to love bankruptcies. “Bankruptcy is a normal part of economic life, covered by laws that guarantee stockholders will be compensated as much as possible. More efficient firms move in to take over what is left of bankrupt firms, buying what can be put to productive use. There is no crime in bankruptcy and, if handled quickly, little economic harm. The present financial problems would disappear quickly if the government let the markets operate and let inefficient firms go bankrupt.”

So thanks, govt spruikers, for keeping bad positions alive, like zombies, to keep dragging us back.

We’ve said the result of the financial crash is that there’s now less demand and less money to go around, and that two of the seven ways to ensure the depression continues is to “Prevent or delay liquidation by propping up shaky businesses and shaky credit positions,” and to “Keep prices up.” stop prices  falling to reflect this new reality.

So thank you, Bill English, for helping to keep values at their unrealistic levels down south, and doing exactly what the doctor ordered to keep things depressed.

And now that it’s backstopped this failed finance company, allowing its bad positions to go on indefinitely rather than be liquidated to find their true value, what’s the principle that will discourage the govt using our money to bailout out the next needy corporate casualty. “A bailout [sets] a precedent for a government helping a private company."

So thank you, one and all.

Time to end the deposit guarantee scheme. To get back to producing things instead of trying to get rich on the back of bubbles and because of inflated asset values.  And to end the fractional reserve banking system that makes bubbles out of what were once good businesses.

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11 Comments:

Blogger Dinther said...

I was wondering what kept you so long. Well written Peter.

Make sure you cover the Government interference in how businesses should be run as well. In particular Bill English is making a horrible noise.

9/01/2010 11:16:00 am  
Blogger Eric Crampton said...

1. The per person bill will be much lower than that given that the government will be selling off SCF's assets down the track. Still bad, but not $405 per person bad.

2. Fractional reserve banking was hardly needed for this to happen. Imagine a pure gold standard world. Hubbard sets up an investment company, not a bank, gives full disclosure to everybody investing with him that he'd use the money to invest in farms and such... I can't see how fractional reserve was necessary for this problem to come up.

3. With you on deposit guarantees, mostly. I worry that we may be stuck with them for the banks though, and maybe for the finance companies too, given that the government cannot constrain itself against bailing them out....

9/01/2010 11:56:00 am  
Blogger PC said...

@Eric: "Fractional reserve banking was hardly needed for this to happen..."

Where do you think the counterfeit capital came from to to over-inflate asset values, leading people to work for asset values rather than incomes--and to inflate the property and dairy bubbles, whose popping led to so many of the short positions?

Even a good financier is going to struggle in that situation.

9/01/2010 12:08:00 pm  
Blogger KG said...

This comment has been removed by the author.

9/01/2010 12:12:00 pm  
Blogger KG said...

I wish you'd go over to Yes Minister and argue with those tireless Nats cheerleaders Adolf and The Veteran over this.They're utterly clueless about the implications.

"Still bad, but not $405 per person bad."
Well, in fact it may be much worse, Eric. I suspect that figure was derived by dividing the amount owing by the total population of NZ. Divide it by the number of productive taxpayers and it's likely far, far worse.

9/01/2010 12:14:00 pm  
Anonymous Mark Hubbard said...

And now I see the government is also paying out SCF investors who were over the $1 million limit.

http://www.interest.co.nz/news/despite-fees-collected-scfs-failure-and-treasurys-new-policy-throws-crown-guarantee-deep-losses

If government doesn't bother following its own legal documents and contracts, why should we?

Given my pieces in the past on SCF, and in favour of AH, I'll put my thoughts up on SOLO today or tomorrow on this final turn of events ...

9/01/2010 12:16:00 pm  
Anonymous Mark Hubbard said...

The final sign off ... for now at least.

9/01/2010 04:05:00 pm  
Anonymous sagenz said...

And thank you for an excellent post. One minor grinch. Sandy Meier has only been in post for 9 months. He speaks the truth to media and is the only person to come out of this with any credit.

9/01/2010 08:22:00 pm  
Blogger Eric Crampton said...

@KG: Agreed on noting difference between taxpayers and population

@PC: It takes lots and lots of links in a chain of logic to get from fractional reserve banking to SCF collapse. Any one of them could be bung. It takes one link to get from "stupid deposit guarantee scheme" to SCF collapse.

9/01/2010 08:33:00 pm  
Blogger PC said...

@Eric: "It takes lots and lots of links in a chain of logic to get from fractional reserve banking to SCF collapse."

I invite you to integrate them--because, as you'll recall, SCF isn't the only bank/finance company to go tits up in the last thirty-three months. You think there might be a connection between the rabid expansion of counterfeit capital, and the widespread inflation -- and then popping -- of various bubbles?

9/01/2010 10:49:00 pm  
Blogger Cactus Kate said...

Mark

Open up a can of harden the f*** up and have a long, slow drink - eloquently woosing out of raging against the baying mob is still woosing out.

You were at the time one of the few (only) people to take a real stand on the issue of Hubbard. All the "told you so" arsewipes who really had no bloody clue came out of the woodwork claiming credit for knowing all about Hubbard. Now they are saying "told you so" to you and you can't handle it so are crying off.

Who cares what they think? Fundamentally I think you will come out "righter" than they do. Losing money doesn't automatically make you a criminal or civilly liable else jails would be full since the financial crisis. A fool sometimes, a victim of circumstance, a bad businessperson, but not a fraudster.

9/02/2010 12:34:00 am  

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