Debt only impacts upon economic activity insofar as it limits lending to worthwhile projects – in that context, it is understandable that the strange actions of the ECB, and the issues in NBFI’s have had an impact on economic activity in NZ. The issue isn’t the existence of debt, its the lack of knowledge regarding where the burden of “bad debt” will fall.

Once this has been clarified, it is also clear that changes to financial regulation will have an impact – what isn’t clear at present is how much of the current “wedge” in financial markets is due to changes in regulation (permanent) and how much is due to a lack of trust and the issue of asymmetric information (persistent but temporary). In order to talk about the future, it is important to make an explict call regarding this – which is an interesting issue.

The reality is that a lot of bad debt needs to be flushed from the system and this will severely dent bank profits for a long time. Add to that possible changes in the money creation process, new innovations in P2P lending and finance in general, and you may see that the banking sector may not be the wisest place for one’s “cash”.