NZ's economy in a bubble?

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#1140812 27-Sep-2014 18:22

newbellies:

Summary:

1. Property prices
2. Debt. Govt & household
3. Currency

Hickey's followup article dealt with 1&2 but not #3.

Imho demand for NZ primary products are high and markets for those are diverse so a hard landing for the currency is unlikely. Value is edging gently down. The big external for us in relation to currency is higher fuel prices.

gzt

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#1142807 27-Sep-2014 20:46

Conclusion: Bubble? Well yeah kind of but a fairly insulated one.

frankv

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#1144171 30-Sep-2014 13:37

gzt: Too Big To Fail is an economic theory which says that some financial institutions are so interconnected that allowing them to fail would have catastrophic consequences for a financial system as a whole - therefore if they do fail then bail them out no matter what the cost.

http://en.wikipedia.org/wiki/Too_big_to_fail

The problem with this is that if you perceive yourself as being one of the "Too Big To Fail" group, then any risk is acceptable, the bigger the better. A small risk has a downside because you might fail and the system would go on. A big risk means that you can't lose.... if you *were* going to fail, you would get bailed out.

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#1144223 30-Sep-2014 13:58

frankv:
gzt: Too Big To Fail is an economic theory which says that some financial institutions are so interconnected that allowing them to fail would have catastrophic consequences for a financial system as a whole - therefore if they do fail then bail them out no matter what the cost.

http://en.wikipedia.org/wiki/Too_big_to_fail

The problem with this is that if you perceive yourself as being one of the "Too Big To Fail" group, then any risk is acceptable, the bigger the better. A small risk has a downside because you might fail and the system would go on. A big risk means that you can't lose.... if you *were* going to fail, you would get bailed out.

So let us imagine that 4 out of 5 banks in NZ fail completely because someone decides that we can actually let them fail.

Let us assume that as a result, 65% of NZ households loose all their savings.

Worse, imagine it happening in Europe or the USA.

Too big to fail is a modern reality I am afraid. The consequences are indeed too hideous to imagine. Very tight banking regulation is the quid pro quo for bailouts, as well as separating retail banking from merchant banking.

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#1144225 30-Sep-2014 13:59

newbellies: He does specifically say "New Zealand's housing market is too big to fail". Maybe he's implying that the only way that a housing market would "fail" is if the banks did. It gives me the heebie jeebies to hear real-estate agents here exuberantly claim that housing prices will always go up.

Over a long time period they do. Everywhere in the world.

gzt

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#1144284 30-Sep-2014 15:01

Geektastic:
frankv:
gzt: Too Big To Fail is an economic theory which says that some financial institutions are so interconnected that allowing them to fail would have catastrophic consequences for a financial system as a whole - therefore if they do fail then bail them out no matter what the cost.

http://en.wikipedia.org/wiki/Too_big_to_fail

The problem with this is that if you perceive yourself as being one of the "Too Big To Fail" group, then any risk is acceptable, the bigger the better. A small risk has a downside because you might fail and the system would go on. A big risk means that you can't lose.... if you *were* going to fail, you would get bailed out.

So let us imagine that 4 out of 5 banks in NZ fail completely because someone decides that we can actually let them fail.

Let us assume that as a result, 65% of NZ households loose all their savings.

Worse, imagine it happening in Europe or the USA.

Too big to fail is a modern reality I am afraid. The consequences are indeed too hideous to imagine. Very tight banking regulation is the quid pro quo for bailouts, as well as separating retail banking from merchant banking.

I'm not sure that is really the case. Did NZ add any regulation after the collapse of SCF under the deposit guarantee scheme?

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ckc

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#1144291 30-Sep-2014 15:08

^ The Retail Deposit Guarantee Scheme died at the end of 2011. No deposits with NZ banks are guaranteed. Not even Kiwisaver, which will make up the bulk of savings, and not even with Kiwibank, which is an SOE.

Bit of a raw deal, considering how little choice people have and how badly regulated they are.

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#1144295 30-Sep-2014 15:13

It does not exist now but it will probably exist again if a similar GFC situation occurs hence the question. Talk about moral hazard.

ckc

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#1144323 30-Sep-2014 15:35

Well, that depends on a scheme being implemented because of a global financial crisis. That doesn't, say, cover for a badly or fraudulently run business that just goes broke overnight because the scheme doesn't exist.

gzt

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#1144327 30-Sep-2014 15:43

ckc: Well, that depends on a scheme being implemented because of a global financial crisis. That doesn't, say, cover for a badly or fraudulently run business that just goes broke overnight because the scheme doesn't exist.

That is correct. Can you make the case why it should be different?

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#1144337 30-Sep-2014 15:52

Geektastic:
newbellies: He does specifically say "New Zealand's housing market is too big to fail". Maybe he's implying that the only way that a housing market would "fail" is if the banks did. It gives me the heebie jeebies to hear real-estate agents here exuberantly claim that housing prices will always go up.

Over a long time period they do. Everywhere in the world.

Except in the NZ provinces. QV valuation November vs QV valuation May showed a $50,000 drop in the value of my property. Houses in many of the provinces are now selling way below RV and are still dropping. My own property was purchased a decade and a half ago and is now worth less than what it's cost me.
Prices may have improved hugely in Auckland and Christchurch but in provincial centres we are bearing the brunt of government policies.

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ckc

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#1144564 30-Sep-2014 22:03

gzt:
ckc: Well, that depends on a scheme being implemented because of a global financial crisis. That doesn't, say, cover for a badly or fraudulently run business that just goes broke overnight because the scheme doesn't exist.

That is correct. Can you make the case why it should be different?

Because you're not given any other choice about where to keep your money, save buying gold and burying it in the garden. Because you have no choice about being in Kiwisaver after you've signed up, and you have no choice but to put your Kiwisaver in a state approved scheme.

Customers don't know if a bank is bad or good behind the scenes. They're not transparent and they're poorly regulated, like I said up there.

If the state gives you no choice and no alternative places to put your money, if the state fosters that system and encourages its growth and independence, and if you have no choice about offshoring your Kiwisaver to a country where your deposit is guaranteed, then the state has to front up and owe savers a duty of care other than, "Damn, you made a bad decision banking with them, bro!"

But most importantly, we're the anomaly. We're just about the only country that doesn't protect people's savings, and that's for some weird, nebulous reason about 'the market'. Which is strange, because the US has the FDIC and they're all about the market. Yet they protect people's savings.

I wonder why we're special. Or is it just that underwriting the savings of people who often have no choice about it being taken from them might affect that balance sheet and put them on the wrong side of the wafer thin surplus they're chasing.

frankv

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#1144572 30-Sep-2014 22:23

Geektastic:

So let us imagine that 4 out of 5 banks in NZ fail completely because someone decides that we can actually let them fail.

Let us assume that as a result, 65% of NZ households loose all their savings.

Worse, imagine it happening in Europe or the USA.

Too big to fail is a modern reality I am afraid. The consequences are indeed too hideous to imagine. Very tight banking regulation is the quid pro quo for bailouts, as well as separating retail banking from merchant banking.

65% of NZ households have no savings. Hideous, no? Perhaps the system has already failed?

When an economic system crashes, value does not disappear. It just gets redistributed. Somewhat faster than the once-wealthy would prefer, of course.

Yes, regulation is required when the Govt guarantees to prop someone up. Their aim, of course, is to avoid/evade/minimise the regulations, so that they can get on with the high-risk, high-returns "investments". As indeed the banks have quite successfully done since 1929, since the PSIS crash & bailout, the BNZ bail out, etc.

Dratsab

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#1144573 30-Sep-2014 22:24

Fractional reserve banking. The government is very afraid of what they might have to do if there was a bank run and deposits were guaranteed.

ckc

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#1144575 30-Sep-2014 22:28

Dratsab: Fractional reserve banking. The government is very afraid of what they might have to do if there was a bank run and deposits were guaranteed.

Part of the reason deposits get guaranteed to cover the majority of savers is to prevent bank runs.

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