TVHE

On Saturday I had an article in the Dominion Post on New Zealand’s debt levels, and why I think we need to spend a bit of time thinking about “why” this level of debt arose before yelling out for things like compulsory superannuation.  My conclusion was:

This issue deserves a much more in-depth analysis then the quick look over the statistics I have provided here.  It requires time looking over the data and trying to understand where there is a distortion in the market, either resulting from market or government policy failure.  Then any savings policies that are introduced should be based on our analysis of these distortions – not on the eagerness of fund managers to receive funds from compulsory savings schemes.

The article is here.  If anyone wants to quote from it or any such, please attribute it to the Dominion Post.

If you merely want to discuss it with me, do so in the comments.  Note, I am very tied down at the moment, so it will be a while till I respond to comments – however, in time I will

So this isn’t what I wanted to hear:

Mr Key also warned that other finance companies may go under and the government would continue to look after investors by keeping the guarantee on investments in place.

I think he meant:

Mr Key also warned that other finance companies may go under and the tax payer would continue to take on all the risk for investors by keeping the guarantee on investments in place.

Look.  I had no problem with the idea that we needed to do something in wholesale markets during the credit crisis to prevent an effective “bank run”.

But the two problems with keeping this going now is that:

1. This problem is gone now,
2. Given the fact that funds flooded into risky assets after the guarantee there is a definite case that we should have done less.

Contrary to what Kiwiblog said that “It is easy in hindsight to say that one should not have had the guarantee scheme, but in late 2008 the wordl financial system was on the brink of possible collapse, and pretty much every OECD country did much the same as a stability measure” I think it is perfectly fine to critique the scheme.

Why?  Well we KNEW there were issues with our finance firms, and we stuck them into a scheme rapidly without doing due diligence on a whole lot of the stuff.  And we made this f’ing critique AT THE TIME – so we are allowed to make it now

Lets just think here for a second.  Effectively government was taking on all the risk, so why weren’t the insurance premiums insuring that all the return also went to government?

If it is hard to observe the price, couldn’t we have just said that people who entered the scheme couldn’t increase lending – this would have allowed the scheme to protect deposits without leading to the “increased risk taking” that has taken place.

Bah.

Via the Herald (ht Education Directions):

The Illicit Drug Monitoring System report found the price – commonly regarded as the best measure of police success against the drug – had increased each year.

Interesting.  So they use ever rising prices as a measure of ever rising success.  This is weird on two grounds:

1. We are using regulation, not the market – yet using prices as an indicator seems to point out that we could use a market mechanism here.
2. If we accept the market mechanism, then even in the face of externalities there is an appropriate “price” – if we go past that I wouldn’t call that a “success”

Also, they seem to have trouble attributing appropriate causation:

Dr Wilkins said dealers around the world had reacted (to restrictions) by filling the (Ectasy) pills with other substances, including methamphetamine, which could create a highly dangerous cocktail of drugs.

…

A revival in LSD use, possibly as Ecstasy users look for a stronger drug.

So they attribute the rise in LSD use to “addicts” wanting a stronger fix – even though they have already admitted that the consumers value of Ecstasy has been lowered by tightening restrictions overseas, which have reduced quality and increase the potential health impact.  If anything I would say that the “obvious” reason for the substitution from Ecstasy to LSD would be the result of these tighter restrictions …

The receivers are in, and the government is throwing in $1.7bn in order to buy assets they expect to get a return of $700m from.  Sounds like a typical New Zealand investment to me

There are a few points to come out of this.  In some sort of order these are:

1. The government had to pay the money when the receivers came in – they had no real choice, after all SCF was guaranteed by government.
2. However, it does show you the type of cost that can be associated with such a scheme – and raises the question of whether putting finance companies in the scheme was a good idea (both Agnitio and myself were skeptical).
3. It is apparent that the scheme may have led to some dodgy lending in that sector.  I am genuinely concerned about what other moral hazard issues will appear over the coming year – is this just the tip of the iceberg from a poorly designed scheme, or is it just one unfortunate failure.
4. Questions have to be raised regarding the price placed on risk by the guarantee – was it really high enough?
5. Why is anyone defending Alan Hubbard when he used other peoples money to make risky bets that made people like him – just to fail and have the rest of New Zealand paying for it?  Running a company under a government guarantee and not following best practice is immoral – no matter who you are.
6. This can’t be compared to TARP, and the lack of insurance would not have made this like Lehman Brothers.  The scope for contagion from a finance company failure like this is small – which implies absent the scheme the government should have just let this company fail.
7. Another nail in the credit rating coffin?  What credit rating did SCF have at the start of the deposit guarantee scheme?

Another point is that this statement:

Furthermore, being in control of the receivership process takes the pressure off the receiver to quickly sell any assets

Is actually a good one, if they feel the assets would be shot off at fire sale prices.  This is one of the main lessons from TARP.  However, the sad thing is that the government is stuck buying them at an inflated price instead

Surely this tells us that it is at least near the time to get rid of this deposit guarantee scheme – and why not do it retroactively so they all don’t “fail” just before the scheme runs out.  Investors that get burned because they saw a high return and decided to face a high risks should have to deal with the consequences of it.

Update:  Bunch of details listed down on Rates Blog.

Just having a look at the speech from Labour on savings.  One bit that has caught my eye so far is:

The Government collected tax, which is compulsory, and saved it for the future.

Now this is true, tax is compulsory.  And one way of looking at “compulsory savings” is as an increase in the tax rate.  But I think there is a more fundamental difference that makes compulsory savings a bit more ridiculous.

We pay tax as part of redistributive policy – tax is used to reallocate resources effectively.  We justify this morally by saying a couple of things:

1. Land and other forms of endowed capital are fundamentally communally owned – but we need private ownership to ensure an efficient allocation of resources.  As a result, tax acts as a form of social rent – as part of the social contract.
2. If we looked at society objectively – without knowing whether we would be born into poverty or wealth – we would say that some level of redistribution is desirable (Rawlsian justification).

So we have compulsory redistribution, which is justified by the “social contract” and the belief that the democratic process enforces this implicit contract.

Compulsory savings doesn’t have this justification.  We are taking someones wealth away from them, and then giving it back to them later – like when a kid in the playground takes another kids ball and plays with it, giving it back to them at the end of the lunch break.

The only “social contract” argument you could make here is that individual in society WANT to save, but lack discipline (time inconsistency).  But forced regulation is not the best solution if this is the case – providing institutions and incentives that help to solve the time inconsistency issue, while still allowing choice, is the way to go.

As a result, justifying compulsory savings on the basis that “tax is compulsory” is a slippery slope.

I will get back to reading the speech tonight I guess – I’ve sort of paused there

So Don Brash spoke out against compulsory savings, as did Gareth Morgan (note that both would benefit personally from the policy, to a large degree).

John Carran’s article sums up how Infometrics feels about the policy.  And I am under the impression that every single NZ economics blogger that has touched the issue has said that compulsion is the wrong policy.

So is it me, or do we have an issue where economists in New Zealand all seem to agree?  And given this, does it make it more likely, or less likely that the policy will go ahead?

I am a bit tied down at present (which should be obvious by my lack of response to comments). However, I just had to pop around to say that I approve of the team for the savings working group – bunch of great thinkers that will look at the issue objectively, and come up with some genuinely useful solutions/analysis.

Looking forward to their reports.

Update:  Nice run down, and terms of reference.

One of the main reasons the government wants to crack down on alcohol is because of the “scenes no civilized society can relish“, which is when people of the age of 18-24 go into town and run amok – causing definite damage to other people, in some way, or something.

So they are introducing a policy that will give people the incentive to go into town, instead of drinking at home?  What policy – well they are splitting the drinking age, so you can drink at a pub at 18 but you have to be 20 to buy liquor to drink at home.

I mean seriously – they are increasing the “price” of drinking at home, so more people will just drink in town (where it is likely more student bars with low margins and high quantities will open), and with them already in town there can be even more people to “run amok”.

This is one place where I agree with Labour rather than the government (removed statement as it made it sound like I normally agree with the government – when I usually disagree with everyone, including myself often) – if there is an issue it comes from our view of alcohol, an inappropriate externality tax on alcohol, or education around alcohol.  So instead of chucking in dumb regulations with mammoth unintended consequences, lets just try to be mature (and adult) about our treatment of alcohol – and in fact all other drugs.

Their case is so compelling, they don’t need to actually make it.

Also, rewriting the start for kicks I find …

So compelling is the case for slavery that it is a mystery why the Government is setting up yet another working group [ed "so compelling is the case"  WTF, did Yoda write this - actually that would be "so compelling the case is" wouldn't it].

It needs only look at the New World, where the concept has proved so successful over recent centuries that almost two-thirds of landowners now support an increase in slavery rates.

Trekking down the same path here will address a number of pressing issues. In reality, it is not a question of whether there should be slavery but when and how it should be introduced.

Yes, the slavery comparison is excessive.  But compulsory superannuation is a forceful, ill conceived, idea.  Expect more ranting next week – I might even go into a little more detail

So if the main justification for compulsory super is that “people are too stupid to save for themselves”, how can we say that a government made up of these same people will be able to determine the “right” level of savings?