Private Public Partnerships are back on the agenda as the New Zealand Election approaches once again. National is proposing them and Labour denouncing them. For once I actually agree with Michael Cullen though probably our reasons are somewhat different.

First of all I think infrastructure is incredibly important. Imagine if we had free broadband covering the whole of NZ. Imagine a computer in every household. Decent and reliable energy and school facilities our children require to get them on track to become productive adults.

Of course we need decent roads, hospitals and schools. I think National has a bit more vision in this area. It realises that we need to seriously invest and not in extra layers of bureacracy but in high impact areas like teachers, classrooms, sports and leisure facilities and technology.

It’s the PPP bit that I don’t like because what normally happens is that the Public bit gets loaded with debt and the overall cost of the project spirals out of control. Private investors want iron clad punts with very good paper returns. The Public wants quality common good assets for the public use. I think road tolls can be useful if a road supplies a benefit to a small group of users but in general we need to create long lasting infrastructure that ultimately benefit all.

It’s easy to split hairs over the financing and benefit aspects of building public assets but i’d bring the axe right down and say that we can fund these projects interest free.

Yes that’s right. Interest free. There’s a proviso, well maybe a couple:

One: The asset must be clearly adding the the public good. Broadband comes into this category as do schools and healthcare (though that is a greyish area).

Two: the money supply needs to be better managed.

The proposal is simply that government can create the money interest free, metaphorically speaking by printing it. The money comes into the system and is used to create the asset. The money can be paid back or not depending on the asset.

What? i hear you say. Isn’t that inflationary? Ceteris paribus yes but see proviso 2. The main issue is that interest will not be required so no new money needs to be created in order to pay back the interest. All you monetary scholars will alread know that interest is money that does not yet exist in the system and so has to be created via new money, normally in the form of debt.

The Forum for Stable Currencies in the UK has been advocating this policy for 6 years now through a string of Early Day Motions in Parliament. These have been kindly sponsored by Austin Mitchell, an MP well know to New Zealanders.

The point here is to dispell the myth that we are dependent on banks and overseas financiers to create our own public assets. That is a conversation I would love to see John Key and Michael Cullen have.

New Zealand joins its larger and more illustrious economies, the U.S. and the U.K., on the slippery slope with the release today of pretty poor employment numbers. 29,000 jobs lost is no small number for a small economy and with retail numbers looking very soft as well, the Reserve Bank will soon be reaching for the “cut” lever on its interest rate management dashboard.

Regardless of the credit crunch, employment really is the key to how the economy will fare. As long as people are employed then somehow they can get by and service their debts. Well mostly. But now this will see a deeper problem emerge and that is one where people simply cannot service mortgages or debt in any way.

This will reverberate throughout the whole economy. Added to this is a report out today showing house sales down 40% in the last quarter and 53% lower last month from the previous year.

Ouch.

Yesterday the ANZ reported another huge profit even with very large write downs and provisions for bad debts. A mere $510m for the six months to date is not too shabby though we can expect 2008 to be much harder going as loan demand (and supply) falls and consumers pare back on expenditure. We are already seeing signs of that with credit card spending falling along with credit card balances increasing.

But what really stands out is the $3.2bln the banks made in New Zealand in 2007. That is a lot of dough, the majority of which comes from the ability to create money into existence via interest bearing loans.

In the last 10 years loans have risen from $127bln to $323bln an increase of 154%….in 10 years!!!

In that time house prices (from QV data) have risen 178%.

It’s good to see Kiwibank taking a bigger part of this market because at least the profits stay with the taxpayer. And of course the right to create money is a sovereign one so why not have a “national” bank. That’s something worth thinking about.

Keep going guys, Alan Bollard pleads. He asks banks and businesses not to hibernate. What?!

Is he suddenly the Finance Minister? It’s really quite odd to see a central bank governor talking like this especially since the last few years he’s been going on about house prices and overborrowing without doing a great deal about it.

Now he’s saying don’t let credit constraints get in the way.

At the same time the Commerce Minister tells investors to get savvy or get “burned”. I love it especially from a Labour government where many ministers have invested in property themselves. Financial literacy? We’d certainly like some.

The facts are very simple. Too much leverage, much of it unseen, caused an asset bubble. That bubble is now deflating and there will be some major fallout. Add to that concerns over global food and energy prices and you have a perfect storm. So for banks now to put the shutters up whilst they count the cost is simply sound business practice.

Westpac has already adjusted its loan criteria. This just fuels the need for lower house prices and demonstrates the role that banks have played in the boom. Yes the interest rate is important but only at the margin. The real issue is how much will they lend: 100% or 65%.

It’s a big difference in what people can afford to pay.  Now landlords have the power as they can raise rents and people will just have to bear it. So along with an increase in mortgagee sales we will see an increase in rent arrears if rents increase beyond peoples’ means.

So it’s a bit late for the officials to weigh in with their comments. They have had plenty of time to look at banking regulation and have completely missed the boat.

Following on from my piece on the AMRA, I’m posting a message from Stephen for all Washington D.C. locals who can attend his meeting below. Spread the word if you cannot.

Dear Friends of the American Monetary Institute

Please take a moment to concentrate on this message, and consider the very particular action it asks of you, to help our nation achieve meaningful change to assure that no “Wild West” banking system ever again despoils our people.

Place: Busboys and Poets Restaurant (Langston Room)
2021   14th St.   NW,    Washington DC  20009

 Date:  Thursday, April 10, 2008                  Time: 6:00 PM to 8:00 PM

Late arrivals OK                 Dress: Informal; all are welcome

 

Reservations not necessary but really appreciated 

Call 224-805-2200  or email  ami@taconic.net

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Fed just cut the fed funds and discount rate by 75bps voting 8-2. The 2 against were for less aggressive cuts.

Overall the market wanted a bit more but still rallied initially. Better than expected numbers from Goldman Sachs and Lehmans helped with overall confidence

So what now? Well it’s hard to say. I don’t think much has changed and its hard to justify a big market rally from here. So the best to hope for is some stability from here.

I think the focus will now shift back to the banking sector and who is next up for refunding.

As for the market I expect that to come under further pressure.