Recently smoke signals have been wafting from the Beehive as John Key and Kevin Rudd white flagged the issue in recent talks. When politicians say it’s a good idea but unlikely you know that it’s on the table. In fact this is not a new story. It comes up whenever there has been a proper meltdown and New Zealand looks a bit lonely and downbeat.

It’s been raised by some local economic commentators and all the usual pros and cons have been mentioned. Don Brash laid these all out nicely in a speech back in May 2000 and it’s hard to see past his conclusion that it is primarily a political decision, given that the economic pay off is unclear.

It may be a political decision then but it may not be a comfortable one. As Bernard Hickey writes today “we may not have a choice if we continue to borrow heavily”. The “shotgun wedding” wouldn’t be the most favourable outcome but NZ is not well placed at the moment. To coin a phrase you can’t be a little bit pregnant.

And, as Brian Gaynor writes, according to a recent OECD study, New Zealand is perilously close to Iceland in a ranking of countries with exposure to “overseas debt……personal debt and financial leverage”.The numbers are eye watering and the piper will be most surely paid at some point in time.

But, for now, the Australian banks, which make up most of our banking system, have underwritten us by sending new capital across the ditch. We also had to follow Australia’s deposit guarantee scheme with no choice in the matter. To all extents and purposes we are heavily dependent on them. So as Bernard notes we may find ourselves at the altar of currency union by default and not by political will. And it may happen sooner than we think.

Is there an alternative? Yes. A fully sovereign domestic money supply. More on that another time.

Initial reaction has been interesting with the government saying everything is fine and no need for any competition new competition or inquiry into the financial system for that matter. Well that’s what governments always say. In 5 years of corresponding with officials here in NZ I’ve never had a response that ever differs even when pointing out the finance company sector was going to collapse.

There has also been some commentary about not needing a government owned bank given the disasters of earlier years when many state owned banks collapsed. I enjoyed this quote from the Liberal Senator, George Brandis:

“In principle the opposition philosophically does not support government-owned enterprises unless there is a very clear case, for example, cases of market failure.”

Er yes.

Mostly the commentary has been at the fluffy level. Kiwibank has demonstrated that it is possible and can work well. I certainly have enjoyed their internet platform and found it way better than the big 4 banks. I like that government is backing it in terms of capital though it should be noted it operates as a stand alone SOE. Sam Knowles was quick to comment on the workability of the Kiwibank model in Australia.

So this is the opener in a debate that could take some time and hopefully focus on the real issues within the banking system namely who creates the credit.

Stay tuned.

With its NZ Post guarantee it had attracted huge funds from worried savers over the last 12 months. Now that all bank deposits have been guaranteed it is perhaps less attractive. Until today.

Winston Peters, the enfant terrible of NZ Politics, today proposed that Kiwibank handle all government business.

What a great idea. Why continue to pipe $4lbn odd in profits to the Australian banks?

Having domestic control of your monetary system is an absolute prerequisite for a properly functioning sovereign state.

Colonial invaders always replaced the local currency with theirs as soon as local administration was in place. Currency issuance is all about control.

If someone else is in charge of your money then you have limited control over the functioning of your economy.

I suggested in June 07 that the RB use the opportunity of the high NZ$ to buy as much foreign currency as possible whilst the market was hungry for NZ assets. Now with the NZ$ around 0.60 and our overseas borrowing binge fully exposed, the situation is less than favourable.

The lessons of Iceland show that sovereign control of the money supply is essential and as part of that a strong domestic banking system is a necessity.