Short term pain but long term gain with Reserve Bank announcement


On Thursday Reserve Bank Governor Alan Orr revealed what might be the biggest decisions in decades. Governor Orr, in an attempt to strengthen the banking sectors ability to handle a major financial meltdown, announced plans to make banks hold more of their profits relative to the amount of lending that they do.

Yes there is pain. But as the saying goes, you cannot have gain without the pain. So, putting that in context here are the pains (and later I will mention the gains):

  • Substantial increases in mortgage rates – possibly up to $300-400 a week if you believe A.N.Z.
  • Lending to farmers has decreased significantly on the double digit figures of a few years ago, but with an average mortgage sitting at $3.833 million for farms of all types, even a minor change would hurt
  • The total hit to banks may cost around $20 billion

No one I am sure wants New Zealand to have a spasm of collapsing financial institutions like we did in the Global Financial Crisis where 32 separate institutions imploded, wiping out billions of dollars in bank deposits and taxpayer monies. And we certainly don’t want the non-accountability that went with several of the imploding institutions where the people in charge were found to have properties worth several million dollars and living the societal high life made from ill gotten gains. The massive bangs of Fannie May, the Lehman Bros and Freddie Mac going under might not have been felt in New Zealand but anyone following the news would have certainly noticed.

And I do not think New Zealand society is prepared to be radical like Iceland, which which decided to jail its bad bankers and was the first E.U. nation to have a growing economy again post G.F.C.

However I believe that the short term pain will in the longer term be off set by gain. New Zealanders will have more confidence in the banking sector that when financial strife attacks, the banks will be able to cope. The ghosts of the 2007-2009 Global Financial Crisis will be consigned to the history books. Whereas other countries are having or have had painful reconciliation’s with their banking sectors, New Zealand and Australia did quite well – we had none of the following:

  • Britain and Ireland went through painful austerity periods
  • The United States had to introduce the Frank and Dodd legislation to prevent a repeat of 2007-09, which various Republicans have promised to repeal
  • Greece, France, Spain and other E.U. nations suffered considerable internal strife over domestic fiscal policy

And the gains that I mentioned?

  • Implosions such as South Canterbury Finance, which took out $1.6 billion of deposits, long term investments and other monies will be less likely – the little man who lost his entire savings overnight in the 2007-09 crisis has less to fear
  • Banks credit ratings will hopefully be more secure
  • Small banks such as T.S.B., S.B.S. and Co-operative Bank will potentially gain customers
  • Ultimately there will be more confidence that money will be better in a bank than under the pillow

That is the theory. The reality going forward is quite possibly different in a country without a flash record of understanding the need for a robust banking framework. The possibility that voters will vote for a party that promises to kick the can down the road for another few years is there. So is the possibility that parties beholden to the banks will vote to undermine, or worse still, completely dial the progress back to where we are today.

New Zealand’s $1.4 billion money laundering problem


New Zealand has long been viewed as a soft spot for money laundering, high end fraud, among other crimes. Across the last few years numerous examples of money laundering activity in New Zealand or linked to New Zealand businesses have appeared

  • In 2016 an expert said that New Zealand banks were missing large numbers of suspicious monetary transactions
  • Also in 2016 the so called Panama papers showed how a steady flow of foreign cash into New Zealand became a flood as its holders sought to avoid it being taxed in the proper jurisdictions
  • The same year John Shewan’s report found 12,000 foreign trusts existed in New Zealand – a number that plummeted to 3,000 within a year suggesting many were used for money laundering or other improper monetary purposes
  • In August 2019 $9 million was seized in an anti-money laundering sting in Auckland
  • Just a few days ago the Chief Executive Officer of Westpac resigned after allegations that Westpac failed to pick up 23 million individual breaches including payments to Philippine based child exploiters

Now it has emerged that New Zealand has a N.Z.$1.4 billion money laundering problem. This estimate does not include the domestic cheats who do not pay due taxes to Inland Revenue Department. Globally it is part of what the International Monetary Fund believes to be a $6.5 trillion problem.

New Zealand needs to crack down hard on money laundering. As the resignation of Mr Hartzer shows, money laundering can be linked to some extremely dark criminal activities including child exploitation. A significant part of the crack down would need to ensure a long term budget increase for the police unit investigating financial crime. There would also need to be a revisit of the amendments made to the Anti Money Laundering and Countering Financing of Terrorism Act 2009.

The Government seems to be rising to the challenge. It has made changes that took effect in January for real estate agents. In August changes for the racing industry and businesses with high value products regarding the need to comply with the A.M.L.C.F.T. Act took effect. In 2018 the obligations for businesses providing trust services, lawyers, conveyances and accountants were changed.

But there is more that can be done. I believe that tightening the sentencing regime for those convicted of money laundering, conspiracy to participate in money laundering and providing support for those involved in it can be tightened up. Whereas many of the people who commit offences against the human body are disturbed, come from messed up backgrounds or may simply not have had a loving family to show them right from wrong, organized crime is quite different. The victims of money laundering – although individual victims certainly exist – are whole communities, businesses and in the worst cases the reputation of entire nations.

Whereas the impacts of rape, murder and so forth – certainly not trying to put any of these crimes down in terms of their gravity – on the individual, the family and their lives are well documented, how well do people know about the absolute worst of white collar crime? How well do we know what we as a society, as a nation and as a people are missing out on by not tackling money laundering and the people who engage in this kind of activity?

I fear the answer is not very well at all.

National and Labour wrong about debt limits


When I was growing up I was taught – as was everybody else I know – that if you borrow money, you repay it. A rule that I abide by as best as I can to this day.

Spend within ones limits, unless you borrow money that you acknowledge is not yours and has to be repaid, was another rule that I was taught. For me, borrowing is something I would personally only do in an emergency and only if I could repay in full as soon as the problem has passed.

I will admit now, I did one economics paper at University only because it was suggested that I do one. To this day I do not know why because I knew when I enrolled in it I was not going to pass. I knew I was not interested in it in the least. I was correct on both accounts. I failed, made a conscious decision not to retake it and never looked back. So one might argue that I therefore know nothing about economics and am probably not the best person to judge the apparent bipartisanship in Parliament when it comes to raising debt limits. It might also be argued that running a country’s finances is a lot more complex than a private bank account.

As a student at the University of Canterbury I would sit in the main cafeteria watching the student debt clock that the University of Canterbury Students Association installed before I started, going up by tens of thousands of dollars an hour, hundreds of thousands of dollars a day and millions each week. I did challenge them on occasion as to the accuracy of the clock and was told rather patronizingly that it was. I asked myself and others whose fault it was that student debt was out of control and how it was going to be recovered. We could not completely agree – some thought it was entirely the Government for removing or undermining social assistance such as the postgraduate allowance, and the emergency unemployment benefit. Others thought it was the tertiary institutions, while still more thought it was students spending up large. Whatever the case it currently sits at $15 billion.

Politicians no longer seem interested in addressing how this debt will be repaid. The most recent figures point to 731,000 people having a debt averaging $21,000 to be repaid. Maybe it is a beast that they have put in the “too hard” basket. But that unwillingness to tackle this makes me wonder why I should trust them with handling the debt that would ensue.

I believe in saving borrowing for a rainy day period or for after a natural disaster where you will have unforeseen expenditures that will not be immediately obvious. After the Christchurch earthquakes, suddenly finding N.Z.$35 billion was not something New Zealand could do in a rush so in that instance we had no choice but to borrow. But how are we paying it back? ARE we paying it back? I hope so, because the more we pay back now, the better position we will be in financially for when the next disaster – be it an Alpine Fault earthquake, the Waimakariri River breaks out or one of the volcanoes in the North Island erupts – hits.

National and Labour’s bipartisanship on letting New Zealand’s government debt level increase is therefore something that I find alarming. It also brings me back to my favourite mantra of “growing the pie, instead of slicing and dicing the pie”, which I have described in recent articles.

If we do decide to increase our debt levels, which National’s Finance spokesperson Dr Paul Goldsmith is quite open to doing, we need to know what instruments we are going to use to raise the money. Raising taxes appears to be a no-no on both sides of the house for a change, with possibly only the Green Party interested in doing so. My own position on taxation can be found in other articles.

 

Questions about the banking sector after ANZ chief’s departure


In 2008 when the banking sector was reeling from the effects of 32 separate New Zealand financial companies imploding, and much larger implosions happening in the United States, there were calls for bankers to be tried for fraud and jailed. United States President Barak Obama campaigned on banking reform, which he then got Senator Elizabeth Warren to enact. Democrats and the little man applauded, but the least repentant banking corporates cried foul. The rest of the world was cautiously optimistic.

Ten years later against a linger backdrop of economic uncertainty, with many of the factors that caused the 2006-2009 meltdown, it is New Zealand’s turn to question our banking sector. With A.N.Z.’s practices under the spot light how many other banks have questionable goings on in their back offices?

I agree with Sam Stubbs, who has called for a banking sector Royal Commission of Inquiry. The extent to which Mr Hisco appears to be out of touch with the rank and file employees such as the Branch Managers, the Tellers and so forth who are the public face of A.N.Z. is quite telling. Also notable is how the Chair of A.N.Z. and former Prime Minister John Key appears to think that Mr Hisco has been properly held to account and that the penalties he has accrued are somehow sufficient considering what he has done.

Mr Key denies it has had anything to do with the dressing down that A.N.Z. was handed by the Reserve Bank for not having enough capital in May. He said that Mr Hisco would take responsibility for it if he were in a position to do so.

This idea of a major bank not having enough in capital in the event of an emergency, I think quite a few people inside and outside of A.N.Z. and indeed the banking sector would find quite troubling. It suggests to me at a quite basic level in the same way a ship at sea wants to be sure that it has enough fuel to get back to port, someone or some several people who had significant monitoring responsibilities were somehow not doing their job.

I imagine that A.N.Z. rank and file employees would be quite angry with how the matter has been handled. Yes they might not have had the same entitlements and responsibilities as Mr Hisco, but I am sure that if any of them did that they would be fired point blank and not be entitled to any financial compensation, or other supportive measures. Mr Hisco, whilst relinquishing about $6.4 million in equity will be paid a full 12 months salary, which is dramatically more than the $0 that most people get paid when they get fired.

Yes, Mr Key and his Board might think they have done the right thing in letting Mr HIsco go, and in that respect, yes they have. However the $2 million golden handshake, the fact that there might be much more than what has been let on that he misappropriated all point to a bigger story than either Mr Key was willing to tell the media about, and/or which Mr Hisco was willing to tell Mr Key and the Board of A.N.Z. about.

It is hard not to feel sorry for the ordinary staff member at A.N.Z. just trying to do their job as best as they can to the standards expected of them, who must feel like they have been ratted on from the highest echelons in the company. They surely would not have anything like what Mr Hisco got to support them in their post A.N.Z. career, which by my guess on the current estimated income for a bank teller would take them about 40-50 years to earn.

 

The danger of going cashless


Recently I read in that in the United States there are cities that are starting to push back against going cashless. In a backlash that some have called backwards, cities such asĀ  Philadelphia have moved to reject cashless stores.

It is possible to see why some people think cashless is great. It means less dead weight in ones wallet for starters and time is saved handling the financial transaction of a purchase more quickly if it is done using a card. Security concerns about carrying cash around, properly counting the till at the end of each night and being sure no money has been taken by employees is a justifiable second.

But I can see why there are concerns about going cashless. They range quite extensively from privacy concerns, to socio-economic status, but also vulnerability despite intensive and extensive security measures to cyber attacks/hacking. Specifically:

  • Every financial transaction using a card leaves a digital footprint. In a world where privacy concerns are becoming an increasingly potent issue, the ability of a few tech companies operating under a different set of laws to your country to mine the data stream from your card raise serious questions
  • The same digital footprint also raises significant cyber security concerns that were underlined a few years ago when a single hacking strike caused disruption across the world. With digital data theft on the rise and an apparent inertia among governments to work out how to reach a common agreement, these issues are only going to grow.
  • In America millions of people do not have the means to get a credit card or even have a bank account. Due to many possibly working jobs where payment is cash only, or having issues with credit or not having the education to know how to obtain such things, there is a risk that going cashless will create an under class of citizen.

In New Zealand, going cashless would promote similar issues. Whilst there are certainly people who do not use cash at all and managed to get by on credit, debit and EFTPOS cards, the lower echelons of society have similar problems as those in the United States. Yet, it is a distinct possibility, if you believe M.Y.O.B.

The problems in New Zealand primarily concern rural communities where banking services are often at a minimum and cash is a significant part of their financial system. A little town like Fairlie in south Canterbury might not have a bank and thus people would have to travel to Geraldine or Timaru to conduct banking business. Whilst all businesses now offer EFTPOS and most offer credit card services, despite the urgings of M.Y.O.B., I cannot see New Zealand disposing of cash as a form of money in the immediate future.

Also cash is the likely method of financial transactions among community groups. A group fundraising is not likely to have anything other than cash and what a lot of people consider to be a financial dinosaur now: the cheque book. As the treasurer of such a group in Christchurch the cheque book is often the preferred way of handing over significant money to a donee. We donate the hard cash in our account for safe keeping and then write the equivalent cheque and hand it over.

So, what do you want?

To have a completely cashless nation, at the risk of a financial under class like the United States or a country with a balanced system that is also a bit more secure against attacks on the digital system?