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.

I had heard that some Euros were better than others and this story confirms the rumours.

Germans are refuisng to accept Euros which have originated from the Latin Bloc, especially Italy. They want “hard” Euros issued by the almighty Bundesbank, that inflation fighting automaton. You can hardly blame them given the fiscal history of Italy, never mind Greece, Spain or Portugal.

But what this shows is the lengths to which people will go to mitigate risk. It seems a waste of time really given that the Euro is universal in its value and acceptance. But its a bit like English and Scottish Pounds. No one ever wanted a Scottish one even though they were both accepted as legal tender by the Bank of England.

Perception is everything and the Germans have long memories of inflationary times.

The sad fact is that if the financial system falls apart nothing will save you. Having a nice pile of gold soveriegns might but the reality is that there wouldn’t be enough to create a reasonable market for exchange. Now a nice veggie garden is more of a goer in times of monetary distress. This is where NZ has a major comparative advantage. Nearly everyone has a patch of dirt in which to grow stuff.

Our central banks have a lot to answer for but promoting home grown veggies is one good thing to come out of this debacle.

Elites have always ruled the world even in open democracies. Sure this was expected in dictatorships regardless of political persuasion but in democracies? What happened to “government of the people, by the people, for the people”?

In his new book, “Superclass: The Global Power Elite and the World They are Making“, David Rothkopf explores the globalisation of the new elites, naming some 6000 players who basically run the whole show. From media to banking he lays out how close these people are and how they are shaping and making the world in their own images. The link between politicians and business is crystal clear. In some countries its hard to tell the difference with the US a great example of this.

If anyone felt the US financial authorities were in collusion with the banking system look no further. The current US Treasury Secretary, Henry Paulson, is a former Goldman Sachs Chairman and Chief Executive. Rothkopf reveals the shennanigans that took place over the bail out of Bear Stearns. He tells how bank heads met over the weekend to hammer out a deal for Bear Stearns. Clearly the deal had to be done that weekend lest the market really fall apart on the Monday. This type of round table pow wow is becoming more and more common as the fragility of financial markets continues to be revealed.

On one hand this sounds good: we have capable people in government and business to take charge of managing a crisis. They all know each other and have worked with each other. They know the score.

But: are they not the same people who caused and are part of the crisis? Is there any chance we get to hear the truth of the matter? Do ordinary shareholders and citizens matter anymore?

Well there have always been plenty of stories about how the Fed operates and the murky manner in which its was founded.

But one thing is clear from this article and the activities of those in power. They run the show in a “we know best” style. The question all concerned people should have is whether power should be so concentrated and in the hands of so few.

I wonder what Lincoln would have made of it.

Somehow I haven’t heard about Microplace but it’s an exciting addition the the expanding world of P2P lending and microfinance. It is different to Kiva because you invest in a security (like a bond) for a fixed term, usually 2-4 years and you receive a return, although minimal 1.5-3%. As I understand it the big issue is getting registered with the Securities and Exchange Commission. Microplace is backed by eBay which certainly helped whereas Kiva was a start up and was forced into going the non-profit route.

It’s great to have two companies to compare and contrast.

Kiva is more personal. I choose who I want to lend to and can received feedback and updated information on how the borrower is getting on. This is really important as it builds a web of social capital.

With Microplace you are buying a package of loans and so you don’t have that personal contact. Also there is the issue of return. I think it’s good you can get a return on your loan as long as it does not influence the rate being paid by the eventual borrower.

So you could actually lend to the same borrower through either Kiva or Microplace but somehow Microplace can get you a small return on your money. I’ll be digging further to see how they do this.  So far they have been very helpful and open.

In a way the securitisation approach is not much different from mortgage backed securities where people invest in a package of mortgages. Of course we all know what’s happened with those. However i would stress this is completely different in that all the loans are unsecured anyway. It’s also important to note that default rates on microfinance are a mere 1-3%.

When we cut out the banks and go direct we enable relationships of trust to be built. This allows the traditional aspects of social relationships to take place. No one cares if you default to the bank but to default to other people can bring personal shame and other social fallout.

These 2 companies are blazing a trail for the rest of the finance industry. P2P finance could well be the next big thing.

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.

The P2P phenomenon which started with online communities and has now spread to lending money, couch surfing and music swapping has another possible application: currency exchange.

The reason I mention this is because of the highway robbery some currency exchange outlets are carrying out. To give you an example:

Last week I took a trip to Sydney. I bought some A$ at Christchurch airport through the BNZ. Their rates are always very good usually a spread of around 2-2.5%. Now that’s still pretty big but remember these rates are change maybe once a day max and the markets can be moving as much as that. I bought some US$ at 0.7929 knowing the market was actually trading at 0.7945 so i was getting an almost at market rate.

But when I arrived in Sydney I checked out the rates available at Travelex. These guys are offering outrageous prices (unfortunately they are at Auckland airport also).

Their spreads on A$ to NZ$, US$ and GBP were 20%, 15.6% and 22.4%.

Who are these guys kidding. In market vernacular I could drive a bus through that spread (more like a fleet of them).

So what to do? Well we have P2P lending now established in many commonwealth countries. So how about extending that to provide a currency service within the new distributed network.

It’s food for thought.