PPPs….no,non,nyet.

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.

Who’s running this show? Rise of the Superclass

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.

NZ economy on the skids

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.

Microplace: Securitised Microfinance

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.

House market in a slump

We’re starting to see real signs of a weakening house market here in New Zealand. Sales for Auckland’s top real estate company are down over 50% and a recent auction saw a 6% clearance rate.

I decided ton investigate this myself in Christchurch and looked at some properties recently. One i saw was a 3 bedroom unit which had been bought for $375,000 a year ago. It could be rented for about $350 a week maybe a bit more if it had some money spent on it. It wasn’t in great condition but looked a reasonable investment property.

It was auctioned yesterday and passed in at $317,500. It still hasn’t sold.

We’re not really seeing this come through into prices yet because we only get the median price which is often misleading. In fact it can go up if a few properties sell in the higher brackets and none in the lower levels.

But it’s clear that prices are falling quite heavily in many areas and there is a buyers strike on at the moment.

Although there is the belief that property prices increase regardless the market is clearly starting to realise that capital gains are not guaranteed and therefore investors are starting to look more closely at the maths.

Mortgage rates are 9.5% for 2 years fixed. Yields are 3-5% and prices are falling. Even with the negative equity tax break that’s a big yield gap to fill. There is also the issue of not being able to borrow 100% of the price anymore.

With many fixed rates rolling over this year to much higher rates, the squeeze is really on. This will really start to impact when banks ask for properties to be revalued and then ask for extra equity.

Property investors, like banks, are facing a major liquidity crisis.  Price falls of 10-20% may not be as outlandish as previously thought.

UK Banks still in distress

Following on from their generous bail out of Northern Rock, the UK Government, otherwise know as the taxpayer, has opened its arms to any old piece of paper banks have sitting around on their balance sheet.

Or to be more accurate, the Bank of England will accept mortgage backed securities in return for government bonds. Nice trade if you cant get it. The amounts mentioned are 50 to 200bln pounds (where the hell is my pound key?) but basically it’s a free for all.

Now we can expect to see banks reaching for the refinancing button in order to take advantage of this. RBS has already put its hand up for 10 to 12bln of fresh capital plus a 6bln write down.

Ok so its just more mess. The markets may rally on this hoping it can help clear the looming crisis in the mortgage market but the numbers are really starting to mount up and this is just very bad news indeed.

The key issue here is the capital adequacy of the banking system. It’s proven to be the achilles heel which is why the authorities have had no option but to underwrite the system.

Given this exposure of the fragility of the banking system it is time to ask questions about capital adequacy and the way banks are regulated and allowed to operate.