SCF’s Deposit Guarantee: Not just a moral hazard problem [updated]
Turns out that Michael Cullen's Deposit Guarantee Scheme--the one agreed to by John Key before the election, and rolled over by Bill English in April--is implicated in at least two ways over in the collapse of South Canterbury Finance (SCF): causing both risky investments and, at the same time, encouraging major investors to withdraw their money.
We talked yesterday about reason number one: the moral hazard created by the scheme— —that it simply encouraged the finance company to take more risks to make the high interest payouts needed to encourage more “investors”—something confirmed by South Canterbury Finance CEO Sandy Maier, who said Tuesday that “South Canterbury Finance ramped up its risky real estate loans after it signed up to the Government's scheme that protected its investors' money.”
Reason number two to implicate Bill & Michael’s scheme was reported this morning on Radio NZ: that just as South Canterbury Finance was looking for more investment, many major investors were taking money out to ensure that the only money they were “risking” was the $250,000 guaranteed by the scheme—which is to say that for the last few fragile months the only money many invested in SCF was money for which you and I were taking the risk.
So it seems it’s time, once again, for the Law of Unintended Consequences to take a bow.
UPDATE: I’m sure you, like me, will enjoy the irony that some of the money frittered away in loans by South Canterbury Finance after the taxpayers’ involuntary guarantee was rolled over went to a bar in the Auckland Viaduct revelling in the name of ‘Lenin.’