Many Americans are dismayed by the rewriting of the rules of capitalism and the massive US govt bailout of the banks; others see state intervention as preferable to the collapse of the financial system. But NZ’s financial system – we’ve persistently been assured by Finance Minister Cullen and RBNZ bosses – is fundamentally sound. Each of our four biggest banks has oodles of assets; all have high credit ratings; no retail bank has failed in NZ since the 1860s (although the Govt rescued the BNZ some 20 years ago).

Medium-Term Effects. In mid-September RBNZ governor Alan Bollard said the central bank “always stands ready to support the liquidity of the NZ financial system” – it has taken several steps in the past year to alleviate liquidity pressures. And when the US Congress scuttled the initial Bush bailout plan, he insisted the very short-term effects on the NZ market were “not major.” There might be medium-term effects on the economy. These would be dealt with through the normal monetary policy process (the next OCR decision is due on 23 October). The recent passing of legislation making the RBNZ the regulator of non-bank deposit-takers prompted Bollard to express confidence in non-bank deposit-takers too.

Guarantee Necessary? After all the confidence-fortifying, it was surprising to hear Helen Clark announce her Govt’s agreement to implement a deposit guarantee scheme. The Aussie Govt announcement of guarantees for deposits made a similar move here inevitable, but the extent and nature of the NZ guarantee is perplexing – it covers deposits for two years in all banks (the institutions the RBNZ has monitored for years) and in building societies and finance companies (only just brought under the RBNZ’s supervisory purview). The rules have been hastily tightened, since the scheme’s announcement, to overcome the grouch small fry could lure fresh investments from the banks, then – according to one critic – “lend it to bankrupt property developers.” But the more complex the rules become, the greater the confusion and uncertainty for bemused investors.

New Role For The State? Something had to be done. But the unhealthy urge for Govt intervention is infectious. After a raft of timber mill closures this year and Carter Holt Harvey’s confirming plans to close two more (with the loss of 316 jobs), the Forest Industry Contractors’ Assn called for the Govt to take over the mills for the good of the workers and the wider industry. So who’s next to demand state protection?

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