Jim Anderton's response to Ministerial Statement
Jim Anderton, MP
Leader of the Progressive Party MP For Wigram
This side of the House strongly endorses the need to provide security to our financial system.
The measures that have already been taken bring to mind that old story about a bank being the kind of institution that offers you an umbrella in the sunshine and takes it away in the rain.
The guarantees the government has announced have a similar quality: I agree with the minister of finance that the likelihood of the guarantees ever being called on in anything approaching the full amount is extremely remote.
But if the guarantee were not available, the chance it might be needed is so much greater.
I would like to quote from this year's Nobel prize winning economist, Paul Krugman, who wrote in the Guardian on saturday:
I'm tempted to say that the crisis is like nothing we've ever seen before, but it might be more accurate to say that it's like everything we've seen before, all at once: a bursting real estate bubble comparable to what happened in Japan at the end of the 80s; a wave of bank runs comparable to those of the early 30s; a liquidity trap in the US, again reminiscent of Japan; and, most recently, a disruption of international capital flows and a wave of currency crises all too reminiscent of what happened to Asia in the late 90s.
There are a couple of points he mentions that the world needs to take on board as a lesson from the Great depression as we handle this crisis.
First we need to re-learn the lesson about what happens when the financial sector is under-regulated.
Our financial system here in New Zealand is strong.
But I am very pleased we have our own bank now.
And I am convinced that we need to better regulate our financial sector.
The Reserve Bank Act needs to be changed so that we never end up needing the New Zealand equivalent of a giant bailout for the banking sector.
The Reserve Bank only controls the price of lending. There are no reserve ratios that control the level of bank liquidity. When a debt bubble takes off, all our Reserve Bank can do is put up interest rates.
But that attracts more overseas lending, which therefore continues to fuel the bubble - as happened in our housing market here for several years. It also overvalues our dollar and increases the deficit in our account with the world because it gets harder to export and easier to import.
The failure of many of our finance companies shows that interest rates in the New Zealand economy were not well-matched to the odds that investors could lose their money. When anyone could start a finance company, the savings of many small investors were too easily destroyed. Even responsible finance companies were affected.
We need to make monetary policy focus on wider criteria than inflation, and get it to also address factors like the balance of payments, the rate of foreign exchange, the stability of the housing market and employment.
We need to strengthen Reserve Bank controls on the financial system. We need to ensure that the financial system runs a properly diversified loans portfolio and has systems in place to ensure large risks are spread and that the financial system has sufficient equity capital available in relation to the level of risk undertaken.
And we need to ensure off-balance sheet transactions are made explicit in financial accounts.
Transactions such as the sale of derivatives that have allowed risk to be repackaged and resold have hidden the systems' exposure to potential default.
It is in the nature of contingent risks that they can't be defined precisely, but they should be disclosed so that the financial system can adequately measure the soundness of the risk and adequacy of capital provisions.
The other point I want to make is that the whole world has seen the importance of intervening to bail out the system when it is crisis.
And we ought to learn the lesson that governments also have a role to intervene when people are in crisis. Around the world, around a billion people live in extreme poverty. Why isn't there a coordinated global response to end that crisis?
And we need to think about the pro-people response that helped New Zealand and the world out of crisis here in the thirties.
The first Labour government ended that crisis with a massive increase in state housing, building schools and hospitals, and increasing the unemployment benefit many fold.
People earned more, so they spent more.
Business benefited from the increased expenditure on infrastructure like roads and rail.
Giant kiwi businesses like Fletchers were built by the state house building programme.
So we need to learn the lesson of the past as we confront the global financial conditions today.