The damage of the Feb 22nd 6.3 shake is way worse than the Sep 4th 7.1 quake. No doubt this is due to the depth and the proximity of the epicenter. But this post is not about the earthquake, it’s about the economic impact and the re-building to come.

The cost of this disaster is only guessable at the moment. Numbers from $10 to 16bln have been thrown out but it could be anything. There is no doubt that this is a complete rebuild of the city’s infrastructure and central business district. Added to that is the viability of the eastern suburbs. They were affected badly and there will be questions over ground issues when it comes to re-building.

I want to go back to 1936 and the First Labour government which introduced low interest loans as part of a system of public finance to rebuild the country’s post-war economy. Think of it as New Zealand’s New Deal. The Reserve Bank governor can direct this at any time. This is certainly one possibility.

What I would like to see is fresh new money being injected directly into the economy by the government. The Treasury can action this at any time. The New Zealand economy has been struggling for a few years now since the GFC hit and deleveraging started. Business is struggling and cash is constantly tight. This latest quake will have finished off many business hanging by a thread.

I am proposing the Treasury create $5bln of new interest free money and credit it to the Government Earthquake Department for use in the rebuilding of public infrastructure. This is real money (not debt) and it will flow through into the economy thus giving it a boost as well as providing liquidity to the economy.

The money supply will increase by $5bln but I don’t believe there will be any inflationary risk. We are currently in a period of deflation and deleveraging with falling house prices and economic stagnation. NZ needs all the help it can get and there has never been a greater need nor a better time for this proposal.

It’s time for a New Deal. Please pass this on if you can.

So back then I suggested the RBNZ should think about selling as much NZ$ as they could. Why? Why go against prevailing market sentiment which is that intervention doesn’t really work and simply provides a target for the speculating hordes which incidentally account for 95% of the volume of daily trades.

That’s a fair sentiment when your currency is falling but when it’s rising? And when you have an eye popping foreign debt of almost 140% of GDP……that’s foreign debt not overall debt.

And yet the punters keep buying the NZ$. Perhaps they know something I don’t. Maybe 50 years worth of oil has been discovered in the Southern Basin. Who knows?

The point is that at some point that money has to be paid back and at the moment, due to the sneaky monster that is compound interest, we can’t even get close to reducing it.

But now is the time to strike.

Again I would like to suggest that the RBNZ starts selling NZ$. When you have a lot of something to sell it’s always best to do it when others are keen to buy. Now is that chance.

By selling NZ$ now and paying back, or at least holding for that same purpose, it will take the pressure off the very precarious dependency we have on overseas lenders.

This doesn’t eliminate the debt but simply transfers it to a domestic situation where it can be managed at lower rates and where there is no threat of having to suddenly repay.

How can the RBNZ do this? Again this is very simple. Print NZ$ and buy US$. There is no change to the actual money supply just how the debt is denominated.

Considering the implosion Iceland experienced and the unfolding disaster that is Ireland (surviving only due to its membership of the Euro), it makes complete sense just to get on with this now.

To allow foreign debt to be run at such a level is financial mismanagement of the highest level.

It also shows a willingness to be dictated to and dependent on overseas interests. This makes no sense at all when the country’s economy security is at stake.

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.

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.

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.

With lending up 14.3% in the last year he’s not wrong.

And with Lombard the 17th NZ finance company to hit the wall some serious questions must be asked about the health of the NZ financial system.

Deborah Hill Cone , the Hermione Granger of NZ journalism, has been banging on about this for many years now focusing mainly on the Hanover Group which surprisingly hasn’t gone under….yet.

Back in March 2004 she wrote a big piece on it for the NBR which prompted me to write to various MPs and the Finance Minister to express concern about the finance company sector as a whole. The only MP who took interest in it was John Key, the then shadow finance minister, whilst Michael Cullen, the current one, gave the standard response that the system was well regulated.

We also hear that Tower has closed a mortgage fund after a run on funds on a day that centre left leaders met in London to discuss urgent reform of global financial markets. Helen Clark was there and no doubt expressed her concern.

Perhaps her focus should be a little closer to home?

So it’s hard to realise what may be coming our way. Listen to the Westpac economists predicting more rate rises on the back on a very tight employment situation, burgeoning inflation and booming commodity prices. The Kiwi (NZ$) continues to surge forward to record highs against the US$ on the back of very high interest rates. So what is the problem.

Household debt is the major concern here, the fault line as it were. Stories today and from the past week lead me to believe serious problems are now emerging: The Joneses going under because of a slowing real estate market; a serious downturn in house prices where sales below the Registered Valuation (RV) are happening; people being kicked out of their homes; water shortages for farmers; a very strong currency; interest rates really starting to bite; banks having to go to the market to raise money to shore up balance sheets; layoffs on the increase and business confidence sinking.

Yet commodity prices continue to rise: oil, food and metals.

It’s not a pretty sight. What’s a central banker to do? Raise interest rates to squash inflation? Of course they will but maybe if they take their heads out of their discredited forecasting models they may realise that actually people are being squeezed left, right and centre. They don’t have any more money even to pay higher bills never mind higher interest rate charges.

We can’t change the fact that we have experienced a money supply induced asset bubble but we can change the way in which we deal with it.

Bollard be brave: if you need to do anything to interest rates just cut them. If you can’t see what’s coming then close your eyes and feel it.

Watching the UK news is so different: small soundbites, nothing too deep and its making me dizzy. But not as dizzy as those pictures of people queuing up at their local Northern Rock to get all their money out.

They seem so calm about it without quite realising the ramifications of their actions. A run on a major bank in the UK? Who would have thought it could happen in the modern well regulated era.

We have seen finance companies in NZ topple over like dominoes but the general public has taken the view that they were accidents waiting to happen and that people should have taken more care in what they were investing in. But a major financial institution would be a different story.

For money reformers the recent credit crisis was inevitable, a product of the incessant growth in the global money supply. How it will play out is anyone’s guess but there has never been a better time to expose the weakness and corruption at the heart of our money systems.

In the meantime people should check to make sure they do not have to much exposure to any single financial entity. What is amazing to me is how the stock markets have proved so resilient. There is lots of talk about the strength of the underlying economy but the effects of these recent months will take a long time to feed through.

I have a feeling this story has a long way to go.

What we have now is an old fashioned run on finance companies. Clearly anyone who can read a balance sheet can see they don’t carry much cash so if you rock up asking for your money back you may be waiting for some time. Of course you should have checked that before you invested. As some argue this is a good cleaning out process which is long overdue.

Why should the RB bail them out? Well i would argue the RB is not worried about fnance companies going under but more concerned about the financial system freezing solid. So they opened their wallet and the banks were more than happy to plunder. But the poor finance companies can’t access this cash.

So here’s a story from a few years ago (verbatim from Fred Harrison’s “Boom Bust: House rices, Banking and the Depression of 2010″:

In 1794 “the City Council of Liverpool faced a complete collapse in the local banking system. On March 20, the Mayor reported that 58 merchants urged the council to secure a loan from the Bank of England to enable the City to survive “the distress which had engulfed the people”. Parliament issued a special Act which entitled Liverpool to issue negotiable notes for a limited period, to be lent at a rate of interest slightly below 4.5%. The citizens weathered the storm, thanks to what the Webbs described as “the boldest financial step recorded in the annals of English local government.

What caused this trauma? Speculation focused on the rent-yielding opportunities presented by canals”.

Oddly enough the same thing happened in 1812, 1830, 1848, 1866….and on and on.

As Samuel Taylor Coleridge wrote in 1817, in his Lay Sermon booms and bust seemed to occur “at intervals of about 12 or 13 years each {as a result of} certain periodical Revolutions of Credit”.

Thanks Fred for this great piece of research. Let’s hope the central bankers read it and then weep voraciously.

It may sound like i’m enjoying this but i’m not. I wrote several letters to the powers that be well over 3 years ago exhorting them to sort out the non-bank financial sector but to no avail.

Ultimately it’s a case of caveat emptor. Before you invest in anything understand the risks. I am amazed how many financial “advisors” have put their clients into these flaky companies. I use the term advisor loosely here.  I seriously doubt whether many of them actually understand how the products they sell actually work and how to stress test them.

If you want higher yields then invest in a decent fund that buys the whole spectrum of bonds and therefore diversifies the risk. A couple of decent Kiwi funds are Fisher Funds and of course the self styled people’s champion, Gareth Morgan.

Check the fees and check what you are getting. Don’t listen too much to the experts. Learn about it yourself. There really is no free lunch out there except at the City Mission and if you’re down there the chances are you’ve blown your dough already.

It’s your money and your responsibility.