Too little and too much

Oh Dear.

Labour leader Andrew Little still wants to stiff-arm banks:

. . . ‘I stand by the stance I took, which is to get very heavy-handed with the banks. Because the truth is when the banks fail to follow the signal that the Reserve Bank is sending, that’s keeping money out of the back pockets of ordinary Kiwis, and I will always fight for their interests and for their rights. If the banks don’t want to play ball when it comes to the way we run our monetary policy, actually, there’s only one outfit that can really take them on, and that’s the government.’. . .

The Reserve Bank is independent because it’s not the government’s role to set interest rates.

Retail banks are independent businesses and it’s not the government’s role to tell them what interest rates they should charge.

Interest rates are at historically low levels. They are higher in New Zealand than in many other countries which is partly a reflection on overseas investors’ perception of our economic and political stability.

That would be threatened by any stiff-arming of banks by government.

State intervention would also make business more risky for banks, the lenders and their borrowers.

Little’s not the only politician on the left who wants the government to get involved in banking.

Green co-leader James Shaw wants it to give $100m to Kiwibank which Prime Minister John Key described as dangerous:

He told Morning Report he did not support the idea, as the bank would be asked to make “non-commercial loans” – putting it in a weak position.

He said the Greens were using a state-owned enterprise (SOE) to bring about a policy goal.

“But to do that would be highly dangerous, because what you will end up doing is being in a position where you’re effectively asking them to make non-commercial loans, and potentially non-commercial returns.”

Mr Key said that would be “very poor public policy” and could lead you to a situation where the bank had to be bailed out. . . 

Jim Rose at Utopia points out other flaws:

Note well that the $100 million capital injection is to expand in to commercial banking. More aggressive passing on of interest rate cuts may jeopardise credit ratings if this lowers the profitability of KiwiBank. KiwiBank has an A- rating. . .

KiwiBank is minnow in the mortgage market and a pimple in commercial lending. Rapid business expansion is risky in any market, much less in banking. . . 

The proposal to use KiwiBank to lower mortgage rates does not add up. KiwiBank does not pay much in the way of dividends to fund such a foray.  KiwiBank is already far more leveraged than any other New Zealand major bank. 

Rob Hosking points out that while the policy might have political appeal it is bad economics:

Somewhat lost in all this is the risk of a policy that will encourage New Zealanders to take on more debt. . . 


New Zealand’s current account deficit has been there since 1974 and although it is now lower than the peak it reached a decade ago, it is still firmly in the red.

The Scandinavian and North European countries might be running larger household debts on their balance sheets, but these are internally funded: Norway and the Netherlands, for example, are running current account surpluses of  around 10% of GDP as opposed to New Zealand’s 3% of GDP deficit.

So they can afford to run up those debts.

New Zealand cannot. And a drive to push interest rates down – a taxpayer-funded drive no less – sounds more than a little foolish given New Zealand’s long-standing economic and financial vulnerabilities. . . 

Shaw’s suggestion of $100m sounds like a lot of money and it is far too much for taxpayers but it wouldn’t be enough to help many people.

Besides, if people can’t borrow money at the current very low rates, it would be a dangerous move for them, the banks, any other creditors and the wider economy, to try to make it easier.

When Labour was in power in the 1980s interest rates were higher than 20%. When it was in power in the noughties, interest rates were in double figures, well above current rates.

There were several reasons for that and the big one which politicians could have influenced was high government spending and mismanagement of public money.

If Little and Shaw want to keep interest rates low they should be supporting the current government’s efforts to keep a tight rein on its spending and developing policies which would continue that.

That is far better policy than either stiff-arming banks or using more taxpayers’ money to prop up Kiwibank.

22 Responses to Too little and too much

  1. Dave Kennedy says:

    Kiwi Bank has been used as a cash cow for this Government for many years and it has struggled to be competitive as profits have been sucked out to compensate for our reduced tax take. The
    $100 million proposed will support the banks capacity to generate more custom and activity so that it can compete with Aussie big four. As James says, it makes sense to use a local bank to manage Govt business rather than using a bank that we have to take legal action against to ensure it pays its taxes. At the moment Kiwi Bank doesn’t have the capacity to take on that responsibility.

    In reality the taxpayers of NZ are supporting the profits of banks already found guilty of over charging and tax avoidance. These banks control $40 billion of farm debt alone and $100 million is chicken feed in the big scheme of things to restore some real competition.


  2. Dave Kennedy says:

    This banking drama pales in significance to the revelation that National has encouraged and supported the use of our country as a haven for avoiding tax and hiding illegal funds.


  3. Will says:

    Kiwibank is staffed by amateurs who barely cope with the limited tasks they have. If you want to expand their role it will take more than money, professionals will have to be head-hunted. We tried them for a while but had to give up.

    What banking drama, have I missed something? If governments didn’t tax people so hard, there would be no call for tax havens. Get over it.


  4. Dave Kennedy says:

    “If governments didn’t tax people so hard, there would be no call for tax havens.”

    This is a myth, Will, taxes have been steadily reduced world wide and in the case of the largest companies, profits have steadily increased as well.

    If Kiwi bank is full of amateurs and we want to compete with the big four, then an injection of money to lift capability makes even more sense.


  5. Name Withheld says:

    Kiwi Bank has been used as a cash cow for this Government for many years and it has struggled to be competitive as profits have been sucked out to compensate for our reduced tax take.

    What a load of utter bollocks!
    You would do well to stop making stuff up, or are you just another ignorant green?
    I suspect the latter.

    The greens definition of a cash cow.


  6. Paranormal says:

    DK, how do you feel belonging to a party that supported the legislation to make New Zealand, in your words, “a haven for avoiding tax and hiding illegal funds”?

    An lets be honest, Kiwibanks dividends have been propping up the failing business that is NZ Post. Even though a big chunk of the revenue that maintains Kiwibank profits actually comes from NZ Posts bill pay system that was originally transferred to Kiwibank to keep it afloat.

    But lets be clear, the only reason Kiwibank can operate is the guarantee it receives from the NZ taxpayer. if they were paying market rates for capital they wouldn’t be here. Why should the government involve itself in a business that is efficiently handled by professionals? We don’t need Kiwibank to keep other bank honest. That’s the reserve banks role.


  7. Dave Kennedy says:

    Paranormal, the Reserve Bank does not have that role, that is for the banking Ombudsman to do that and the legal parameters that banks operate in. When Kiwi bank first came on the scene it added useful competition and the big four changed their practices considerably because of it. Further strengthening of Kiwi Bank will have the same result.

    The current legislation governing trusts is now 10 years old and we are operating in a different financial environment. The number of foreign trusts has increased dramatically under this government and it has received advice in 2013 that our regulations need strengthening and it has done nothing but celebrate the income we have generated by hosting them.

    NW, it is you who is ignorant:


  8. Name Withheld says:

    Were you REALLY a teacher?
    Can you comprehend anything you read?
    Seems not.
    Lets try and help you.

    Kiwibank has bowed to Government pressure to cough up some cash, paying its first proper dividend since it was set up in 2001.

    Investment documents reveal Kiwibank paid a $21m dividend last month, its first proper payment other than a minor $750,000 payment last year.

    The state-owned bank has been turning a profit for the last 10 years, during which time it has squirreled away more than $500 million to support its growth.

    And you claim that…..
    “Kiwi Bank has been used as a cash cow for this Government for many years and it has struggled to be competitive as profits have been sucked out.”

    You need to use a bit more thought before posting bulls**t

    Did you notice you linked to the same Stuff page as I did?
    Probably not.


  9. Paranormal says:

    DK, the more you talk about financial and business matters, the more you show just how out of your depth you really are:


  10. Dave Kennedy says:

    NW, you are right, this Government has used our power companies and Solid Energy etc as cash cows to suck out dividends but Kiwi bank is just being hit now. I admit the article takes a biased approach and makes it seem as if the bank shouldn’t be reinvesting in its business. “squirreling away” $500 million is actually chicken feed in comparison to what the Australian banks will have used for the same purpose over that time.

    Paranormal, the Reserve Bank provides guidelines and makes recommendations but in reality has little ability to dictate.

    Inland Revenue had to take legal action to claw back avoided tax and the Banking Ombudsman deals with issues of service:


  11. Paranormal says:

    DK when you are in a hole it is best to stop digging. You really don’t know what you are talking about. Pray tell who was it that set the 20% deposit limit for first home buyers that trading banks had to comply with? For bonus points – do you even understand why that was implemented? I’ll give you a clue. It wasn’t the banking ombudsman.


  12. Dave Kennedy says:

    “We don’t need Kiwibank to keep other bank honest. That’s the reserve banks role.”
    Paranormal, I guess it depends on what you intended by “keep other bank(s?) honest”. In regards to the customers of the bank it is definitely the Ombudsman. One would also have to question the Reserve Banks actual power when the Aussie banks often don’t follow its lead and the IRD had to deal with the tax evasion.

    And then there is the honesty of the bankers themselves 😉


  13. Name Withheld says:

    Government has used our power companies and Solid Energy etc as cash cows to suck out dividends

    And here’s me thinking we were referring to Kiwibank.
    No surprise that when caught in a lie, you would change the subject. A common tactic of leftists often referred to as….
    “Look over there.”
    Take the advice and stop digging.
    You are beginning to look even more stupid than usual.


  14. Dave Kennedy says:

    NW, we were and I was wrong about Kiwi Bank and admitted it. There is a difference between lying and sloppy research 😉

    I do get it wrong sometimes and the reason why i like commenting here is that the enthusiasm to prove me wrong quickly isolates any weaknesses in my arguments. I think you will find that i often withdraw, apologise or admit that i was wrong when I am found in error.

    However the main point of my argument is still true. This Government reduced the tax take when they gave tax cuts to upper income earners, it reduced government revenue by around $2 billion a year and tax income dropped from $44 billion in Labour’s last year to $33 billion a few years later. $11 billion is a huge cut in income and the increase in GST did not bring in nearly enough to make the cuts fiscally neutral.

    The only way to balance the books was to suck higher dividends from SOEs. Consequently it pushed Solid Energy too far and electricity charges have become an indirect form of taxation. Even Housing New Zealand had to pay a dividend each year that should have been used to maintain its housing stock. English now admits that there is a huge $1.2 billion backlog of deferred work to be done and our social housing is in a poor state.

    I was wrong about the extent that Kiwi Bank had been used to top up finances but it is clear that that is about to change. I I am not attempting a diversion, I am explaining National’s philosophy and approach which has ramifications for everything thing they are managing. Kiwi Bank is an essential part of providing real competition for the Aussie big four and if they end up being another cash cow then they will always lack the capacity to do that.


  15. Mr E says:

    “I think you will find that i often withdraw, apologise or admit that i was wrong when I am found in error.”

    One of the reasons why I come here and read is humour..


  16. Gravedodger says:

    From where my understanding leads me, Kiwibank is a clearing savings bank for benefit conversion to folding stuff.

    Sure the Anderton folly does have a small mortgage portfolio but with ANZ, NAB, CBA, and Westpac at over 90% of NZ banking activity that leaves Kiwi to share less than ten percent along with Heartland, Rabo, TSB, SBS and others.

    If an idiot government handed the numpties at NZ Post a hundred billion it might create the capitalisation such a bank would need to have anything more than an annoyance factor as then there would be Five banks at say a nominal 20% each.

    Of course in the “Once upon a time” dream land of melons such an massive restructuring is possible as the State can do such alchemy, right.
    Well no it would immediately create a melt down of a banking system that has the entire free world in awe for its profitability and ensuing stability.

    Of course The current big four would just submit , like hell they would they would compete but again that is another concept book learned melon theorists could only dream about.

    “$11 billion is a huge cut in income.”
    Yes as a cherry picked figure for the socialist spend of wets but as a rise in income for taxpayers it represents a serious release of funds for re-investment and R&D for wealth creators.

    “This Government reduced the tax take when they gave tax cuts to upper income earners,”
    Well no the tax cuts were across all tax payers and yes some of the “envy taxes” that successive socialist administrations have imposed did release money for higher earners to increase productivity and expansion of wealth creation.

    “The only way to balance the books was to suck higher dividends from SOEs. Consequently it pushed Solid Energy too far”.

    Absolute utter bollocks, Solid Energy fell victim to a world wide slump in coal prices, an out come that melons were complicit in as they made clean burning coal generation systems so apparently appalling that massive advances in bird slaughtering wind farms were made energy generators de jour.
    Many other coal miners did not crash and burn because Coal was only a part of their activity whereas Solid energy was a somewhat exposed single product miner.

    Mr Kennedy your shallow cherry picking manipulations that you consider debate have almost zero relevance to the economic life blood of our Nation and it is indeed a blessing that at 10% electoral support the rest of New Zealand can continue to create the wealth that the Melons covet.


  17. Dave Kennedy says:

    Gravedodger, you have a simplistic view on economic matters.

    It doesn’t make sense for our Government to do all its banking with a foreign owned bank and Westpac have clearly taken advantage of their dominance in this area. Increasing the capacity of Kiwi Bank makes sense so that it can manage some of the Government’s banking needs. It was the Greens who pushed for an open tendering of Government banking and having another local player should provide for more competitive tenders. Would you actually argue against this?

    It is amazing to see your support of the “trickle down” theory. It never happens. We now have lower tax for upper earners than in Australia and higher taxation for those at the bottom. Instead of using the tax windfall to invest in productive sectors it has resulted in an explosion in the purchases of property and luxury cars and few new jobs were created. Around $3-5 billion was spent on luxury cars alone last year, (imagine if half of that that was invested in job creation):

    You also do not understand economic resilience and instead support the culture of greed. Solid Energy were encouraged to borrow and invest in new fossil fuel developments to supposedly replicate Australia’s success and make them more attractive for future share sales. At the same time SE divested themselves of their wood energy section.

    As with investing in oil exploration, and increasing milk production this Government has sought short term gains over long term trends and the drop in the price of coal was clearly predicted as was the potential of a glut in milk. Why can’t we look at future proofing our economy for the good of everyone rather than feeding the already rich and supporting industries that have past their use by date?

    National has successfully decreased its tax revenue through favouring the rich and consequently has had to reduce spending in essential services. We now have $50 billion more Govt debt, an infrastructure underspend (English admits that Housing NZ and our schools and hospitals are due billions of maintenance and delayed new building).$1-point-5b-fixing-up-state-houses

    Fit for purpose social housing, healthy school environments and a high standard of health care are bottom lines for me, whereas supporting the excesses of the rich seem to be yours. Good luck with that.

    It is always interesting to see how many people accept Govt spin on face value 😉


  18. Name Withheld says:

    I was wrong about the extent that Kiwi Bank had been used to top up finances

    You are doing it again. You just can’t help it…… Lying that is.
    Kiwibank was not used to ANY extent for, (your words),
    “many years”
    For pitys sake, stop digging!


  19. Name Withheld says:

    Gravedodger, you have a simplistic view on economic matters

    Oh the humour….Oh the irony…….Priceless!


  20. Dave Kennedy says:

    NW…Good Grief!

    Try having your own thoughts and put together something that looks as though you have a mind of your own. Repeatedly using phrases that others have used, but out of context, doesn’t help your case.


  21. I don’t think a $100m subsidy for the banking sector is very wise.


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