Archive | Political

Brexit from US eyes, and a frequently contrary view from me

The US Politico website ran an article on Saturday quoting 17 economists, assorted gurus & historians on Brexit, the UK exit from the European Union. As I ran through their postulations on the outlooks for 5 months out, and 5 years out, I thought so many of their conclusions could be utterly wrong because they didn’t understand the new world they were talking about, and they also didn’t understand how the old order would pull the bed covers over and pretend nothing had happened, and ordinary people would have trouble overcoming that suffocating blanket of ‘business (or power, or hierarchy) as usual’.

A couple of constructive points

In other media, a couple of Bloomberg quotes were pleasing. One from South African businessman Christo Wiese, controlling shareholder of Africa’s biggest retailer, Shoprite Holdings Ltd, who has made numerous investments in British retail: “I don’t think it’s the end of the EU, I think it’s the end of the EU as it’s currently structured. It’s always had unattractive features alongside its attractive features. This will make people sit up and say, ‘How can we make it better?’”

People in all walks of life may sit up, but leadership based on a negative often has trouble converting to the role of advocating & leading the positive. To test this, think locally, how a party in opposition in our parliament gets on when suddenly it takes over the reins of power. The adjustment is often difficult.

For Brexit to become positive, new leaders must emerge. And for Brexit to be positive for others, such as New Zealand, skills far beyond our government’s demonstrated leadership will be needed. Our government could not even understand its abysmal failure to manage any kind of agreed course with the Auckland Council it created, until some new blood (helping the process, but from outside the government camp) was instilled in the last year. And even with the opportunity for new understanding to emerge, the bluster, confrontational menacing & bullying have remained the primary tactics.

Britain has the offer of a political outsider, billionaire businessman Peter Hargreaves, though his belief that business acumen translates into an ability to understand & work with the nuances of political change may be misplaced. Bloomberg quoted him: “I have enormous experience of business, enormous experience of negotiation, enormous experience of economics, and I’m one of Britain’s most successful businessmen. If they don’t involve me, they’re crazy.”

Bloomberg also had an assessment of the instant loss by the UK’s richest in the hours after the Brexit vote – counting assets and subtracting based on currency & market shifts. The assumption is that the wealthy were all sitting on their hands. Even those advised by the staunchest supporters of Remain would have positioned themselves to gain either way.

Making money – and future risks

Jim Rickards, writing in Agora Financial newsletters from the US – and with US investors in mind – wrote in the immediate aftermath: “Since actual odds were 50/50 and the market was priced for 75/25, we recommended shorting the pound, buying gold and other trades that would benefit from ‘Leave.’ That way, we would not lose much if ‘Remain’ won, but we would make huge profits if ‘Leave’ won. That’s exactly what happened.”

He also projected difficulties arising far from the immediate UK-Europe focus: leveraged players who backed the wrong result would be forced to sell, and forced selling can deteriorate quickly into calamity: “When markets move to the extremes we just saw, contagion sets in. Leveraged players have to sell liquid assets to get cash to meet margin calls on the illiquid losing positions.

“This moves selling pressure from obvious places like sterling to less obvious places like Asian stock markets. The selling pressure spreads around the world. Soon people begin to panic and everyone wants his money back. A global liquidity crisis breaks out.”

That affects multiple markets, multiple sectors. New Zealand has, like many countries, been subject to an onslaught of asset investment, hiking up prices of houses in Auckland & Sydney & San Francisco (all markets where the countering provision of extra infrastructure & extra stock had lagged). Along with low central bank interest rates, commercial property yields have been slashed.

Shortly before the global financial crisis interfered with the notion that you could make money without even having to think about it, the stock reaction to my question of how long yields would keep falling was ‘Forever’. On post-gfc resumption, yields have continued their decline – sub-5% is commonplace for food outlets with strong cashflow and sub-6% is becoming commonplace for less likely market leaders such as standard office stock in good condition and well located.

Commercial property throughout Europe has been trading on very firm yields, new markets have been booming and investment funds have been reorganising their portfolios. US investment funds have been sending billions of dollars across the Atlantic to buy property throughout Europe.

Just look at one word from Jim Rickards: contagion.

But, while there will be some positions that can’t be covered, will they really affect wider markets to a startling, adverse degree?

Let’s go back to the views expressed in the Politico article: a summary of most of the comments, with quick comments from me.

It’s chaos – oh?

The Politico story, How Brexit will change the world, was a grab bag of quick responses from 17 US economists, foreign policy gurus & historians. As I read down the page, the feeling grew that reality was often missing. While there was plenty to cogitate over, it was also a fine example of today’s dominating immediacy rule: It doesn’t have to be right or thought through, it just has to be first.

As I read, I summarised to myself, then frequently thought a counter view more likely. My suspicion began with the intro: “The results of the Brexit referendum are in, and it is chaos.”

Chaos? Quick change, yes, but chaos? Brexit has been about economics, finance to some degree, nationhood, the petty rules & suffocating red tape that the Brussels bureaucracy seems to have specialised in these last 40 years, and – the last straw for many English – the arrival on their shores of more foreigners than they care to welcome.

The British speak in a range of dialects that make an antipodean wonder what this language, English, really is. One thing about the speakers of all these dialects unites them: They’ll visit the Continent, they’ll get drunk in their own groups and behave badly on its streets, but basically, they don’t like foreigners. And Europe, for all Britain has supposedly been officially part of it for 4 decades, is full of foreigners.

The world’s languages can all be heard on Oxford St, and large groups of foreigners from the former colonies have made the UK their home, partly the result of ending colonisation, but that doesn’t mean the English are going to take a shine to foreigners.

And that view, rational or not, supersedes all else. While oil income has helped lift Scotland’s economy, the English regions beyond the property-booming London have struggled. At the same time, they’ve seen jobs taken by migrants from poorer European economies.

Given the chance, their anti vote was understandable, even if it means harder times.

The first visible reactions to the Brexit vote were market shifts: currency down, sharemarket down. Market traders overreact like that, always, everywhere. That’s not chaos, that’s perfectly normal.

Among the norms to follow, some of the slump will be attributed to overreaction and prices will edge up. Speculators will enjoy this period. Politicians will talk out of one side of their mouths about controlling calamity without having the expertise to act or decide appropriately, and their thinking will be conditioned by the elite environment of the tier of society that’s permanently in charge. ‘Yes Minister’ is most likely to prevail.

To understand my take on the views expressed by these distinguished commentators, you should note 3 points (my view): Quantitative easing has been used to help those who were at the centre of creating what became an international problem; austerity was inflicted on those who used inappropriately supplied largesse; neither, to the extremes they’ve been taken, is a sensible solution.

Now to my summary of Politico’s helpful spread of views – notably, from that elite environment – and my take on them:

Danielle Pletka: A wake-up?

“Brexit could be a wake-up call, or it could be 1933 all over again,” said Danielle Pletka of the American Enterprise Institute. Ms Pletka saw a return to being a common market-plus if the wake-up call was acknowledged and envisaged Brussels becoming more serious about immigration & refugees, thus revitalising European Union foreign policy and pushing for real solutions in Syria. Failure would mean years of fractured politics, anger, dangerous decisions, isolationism and worse

Me: Brexit should alarm the European bureaucracy into a repair, especially reducing the complexity & all-encompassing, suffocating nature of its regulations. The European bureaucracy created a currency that is not matched to national aspirations. The 2 have to be matched or a federal system introduced. That should have been done, hasn’t been done, won’t happen in a hurry. Brussels is more likely to write regulations about migration & refugees than resolve anything, proving an exasperating & intransigent block.

Dean Baker: Hysteria could be reversed

Dean Baker, co-director of the Centre for Economic & Policy Research in Washington DC, said the initial market hysteria would soon be completely reversed outside the UK and a strong rally was likely to follow Donald Trump’s defeat in November. In the UK, the London real estate bubble could burst – the fault of those who allowed it in the first place, not of the Brexiters – leading to slow growth if not a recession, and the UK would no longer be viewed as a safe haven for the world’s rich. Jobs in the UK financial sector would go as firms seek to relocate to countries still in the European Union. In 5 years, he expected the European Union to have turned away from austerity and be back on a path of high employment & healthy growth.

Me: Mr Baker believes the elites will be swayed by their electorates to give up austerity. However, banks will fight for every cent owed until they’re offered a deal that earns them more. The Europe system faults will remain in place but austerity, like any measure, has a lifespan and should already have been eased. Britain is likely to examine its trade options more closely and look to create opportunities. That could mean trading more openly with the rest of the world, rather than closing the shutters.

Richard Haass: A poorer disintegrating UK

“In 5 years, there will no longer be a United Kingdom,” said Richard Haass, president of the Council on Foreign Relations. He saw the UK being immediately poorer, markets elsewhere recovering, but the weakening of sterling adding to the economic woes of Japan, Europe & beyond. Any contagion reaching the US would hurt Clinton, help Trump. In 5 years, Scotland would be independent & part of Europe, and Northern Ireland might join Eire, thus also staying in Europe.

Me: Oil has helped the Scottish economy prosper; looking beyond oil, will Scotland still prosper, and will Europe still want it? Religion will continue to play a divisive role in Ireland; political union could evolve if London chooses to concentrate on England.

Mr Haass also saw several other countries leaving the European Union, which would then consist of a Eurozone core and an outer ring of countries with tailored ties to Brussels. The US would turn to partner other countries in other regions.

Me: Countries will leave if they don’t benefit. They’ve joined because they saw gains from a European market and from assistance in trading with the rest of the world. Brussels will need to simplify the rules for internal trade, align financial rules & currency, start writing a range of international trade agreements that encourage outsiders’ investment in European business, much like the NZ government is encouraging firmer links for new technological & scientifically based businesses here with businesses overseas. It’s the same as rewriting the Resource Management Act: enable, instead of starting by saying no. Europe’s millions of refugees will be a festering problem so long as they remain refugees; they need to become productive, making them accepted, and the autocracies back home need to be overcome.

Mohamed El-Erian: New leader, election & a deal?

This year, said Allianz SE chief economic advisor Mohamed El-Erian, the UK Conservative Party would unite behind a new leader and prepare for a general election. He saw discussions continuing slowly on a type of association agreement for Britain with Europe, but other European countries also having to deal with anti-establishment movements.

Economic growth would slow, financial market volatility pick up, central banks would be seen as less effective, but in 5 years the UK would be moving forward. The shrunken European Union would be more manageable & harmonious, based on a reinvigorated France-Germany partnership.

Me: A UK election will only happen before the scheduled date of May 2020 if the Conservatives lose their majority, which could occur if the party tries to negotiate a way round the Brexit vote instead of accepting it. That outcome is distinctly possible, given the Brexit vote arose through the failure of the political elite to understand or accept the tide of opposition to business as usual.

Who among the European Union’s 27 other members would pull out? The founders & early members from Western Europe might expect others to leave, but wouldn’t pull out themselves, and the East European additions have gained from being drawn into capitalist markets. The French might debate until eternity which side of a tractor to attach the spare tyre to, but they are intrinsically Europe. The union should survive, albeit with a more federal form.

Ian Bremmer: Down to a European core?

Eurasia Group president & New York University global research professor Ian Bremmer saw the world becoming less polar, international relationships, standards & security more fragmented, the UK in recession this year but less of a hit elsewhere. In 5 years, he saw a “core” Europe centred on Germany, reasonably integrated politically & economically, but the broader European Union a failed political & economic experiment.

Me: Austerity, rigidly applied, is a first principle of the International Monetary Fund for borrowers which stray. Europe showed it wasn’t a union when it allowed Greece to borrow beyond reason and then to be attacked in this way and, until Brussels demonstrates better understanding of the parts that make up the whole, the whole must falter.

John McLaughlin: Others to leave?

John McLaughlin, distinguished practitioner in residence at the Merrill Centre for Strategic Studies at Johns Hopkins School of Advanced International Studies, and the US’s acting director of central intelligence in 2004, saw countries such as Poland, the Czech Republic, Hungary & possibly the Netherlands facing pressure similar to the UK’s to leave if the UK can show the damage seems manageable.

Me: Brexit presents an opportunity to push for constructive change. A widespread view seems to be that that won’t happen.

Dennis Ross: It could strengthen NATO

Ambassador Dennis Ross, distinguished fellow & counsellor at the Washington Institute, who was a foreign policy advisor to Presidents George HW Bush & Bill Clinton, said immediate fears of market tumult might be overblown: “The fissures in the EU today may actually serve to strengthen NATO. Not only may this be a boost to NATO as a way of preserving European security, it could bolster NATO as the forum for manifesting European weight internationally.”

Me: From time to time I wonder why politicians seek the advice of people with such a narrow viewpoint that the politician should already know what the advice will be before it arrives.

Stephen Sestanovich: Be an autocrat

Stephen Sestanovich, a professor of international diplomacy at Columbia University’s School of International & Public Affairs and a senior fellow at the Council on Foreign Relations, said economic turmoil brings losers all round, but that’s too narrow a lens: “The message of the Brexit vote, whether or in what fashion Britain actually leaves Europe, is simple: be a state. Better still, be an autocrat. Those who come out of this turmoil looking better are those with the capacity to make crisp, coherent political decisions and stick to them.” He said US institutions were too much like those of the European Union, which was why people in both were saying ‘Give us our country back!’ Worse, the US depended more than Russia & China on its ability to craft mutually beneficial arrangements with allies & other friendly states (such as the Trans-Pacific Partnership & Transatlantic Trade & Investment Partnership), and that ability might also decline.

Me: Openness to differing opinions is an integral feature of democracies. Refusal to acknowledge them, ordering that rigid austerity as happened in Europe – after the US ordered up year after year of quantitative easing (lending to your mates & making outsiders pay) – is a recipe for failure.

Kori Schake: A more protectionist, less innovative EU?

Kori Schake, a research fellow at the Hoover Institution, said the main Brexit consequence would be a European Union that grows more protectionist & hostile to innovation, less stalwart internationally, with governments less confident in their actions, debtor countries arguing their publics demand less austerity and lender countries arguing the opposite.

Me: This argument returns to the point of aligning currency & aspirations. It also assumes the elite will remain the elite, essentially with unchanged views. Brexit should be a step towards innovation in Europe as well as in the UK and, if Brussels tries to close down argument, I’d expect supporters of change to outgun the incumbents.

James Galbraith: Political divide will deepen

James Galbraith, economist, friend of & advisor to former Greek finance minister Yanis Varoufakis, former executive director of the US Congress joint economic committee, a professor of government at Texas University and author of Welcome to the poisoned chalice: The destruction of Greece and the future of Europe (published 21 June by Yale University Press), said immediate economic effects might be slight, although British exports could pick up if sterling’s drop stuck; and “if the world gets skittish, the $US will rise and US exports will suffer”. As the UK Independence Party’s voters folded back into the Tory Party, the far right would take over the British government. “This will provoke a new referendum leading to Scottish independence. Meanwhile right-wing anti-euro parties are calling for exit referenda in Holland & France. The political division between north & south Europe—as Spain, Portugal & Italy move left – will deepen.

Professor Galbraith expected the structures of European Union law, regulation, fiscal transfers, support for science, open commerce, open borders & human rights to be eroded in Britain and ultimately, in important respects, undone.

Me: The Tories hold an absolute majority of 330 in the 650-seat parliament, a 101-seat lead over Labour, and are under no pressure to change anything in a hurry. The next election is not due until 2020. It can let those European rules slide with little comeback, but it will have to act quickly to retain London’s place as Europe’s leading financial centre. The fall in the exchange rate will encourage foreign investors in, while hurting those who didn’t cover enough for the decline.

Julianne Smith: Deeper integration among EU remnants?

Julianne Smith, director of the strategy & statecraft programme at the Centre for a New American Security, saw a dark future in Europe – in the short term, neither will nor resources to address a long list of global challenges, including Russian sanctions & countering Islamic State. Longer term, she saw the European Union unravelling, although she also the possibility of European integration deepening.

Jared Bernstein: Fed to hold rate down

Jared Bernstein, a senior fellow at the Centre on Budget & Policy Priorities, saw sterling down, $US up, US trade deficit up, Federal Reserve holding off rate hikes.

Larry Korb & Matt Wackenreuter: Downside could be mitigated

Larry Korb, a senior fellow, & Matt Wackenreuter, an intern at the Centre for American Progress, said it could take up to 2 years to finalise the withdrawal agreement. If that agreement allowed the UK to continue to be part of the European Union’s “single market,” many of the short-term problems would be mitigated.

Laurence Kotlikoff: Job shifts & boycotts?

Boston University economist Laurence Kotlikoff, a US presidential candidate in 2012 & (since Friday) this year, saw British exporters moving their businesses to the Continent to avoid European Union tariffs, young Britons being sent home because they no longer have a valid work permit for Europe, the rest of Europe boycotting British products, and other members of the union heading for the exit.

He said the biggest concern was geopolitical: “The European Union, notwithstanding all its flaws, has helped keep the peace in Europe for decades. Heaven forbid if the type of nationalism we are seeing in the Leave vote takes full hold of other EU members. We could yet see European countries doing what they have done for centuries – physically attack one another. And this says nothing of the manner in which Russia will respond to this weakening of the West.”

Kathryn Lavelle: Impact not far-reaching?

Kathryn Lavelle, a professor of world affairs at Case Western University and a global fellow at the Wilson Centre in Washington DC, foresaw the consequences being less far-reaching than many predicted: “Every corporation that does business in the UK & the EU will have an incentive to lobby Brussels to make the ‘divorce’ as amicable as possible.”

Politico, 25 June 2016: How Brexit will change the world

Attribution: Politico, my comments.

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Controlling inflation versus creating jobs: The debate, the ideas, some points to chew on

Published 11 June 2009

The national gdp is 1% negative, Manukau City’s is 2% positive. Unemployment nationally is running at 5-6%, but in apparent contradiction Manukau’s is higher, at 7-8%.


The mayor, Len Brown, is immensely proud of his city, but also keenly aware that, in a recession, while the big companies that make Manukau their home keep totting up dollars, the workforce is more vulnerable.


And so to a debate on Monday night: In difficult economic times, the question was whether to focus on holding down inflation or to shift the emphasis to securing jobs.


Former Reserve Bank governor & National Party leader Don Brash, now listed as an adjunct professor at AUT, and former Labour Finance Minister, now Act MP Sir Roger Douglas took their roles of arguing to keep down inflation seriously, while their partner for the night, Auckland University law professor Jane Kelsey, wondered what she was doing on that side of the fence.


Against them were Labour Party president Andrew Little, Council of Trade Unions secretary Peter Conway & Berl senior economist Ganesh Nana, who I thought presented a less cogent argument for securing jobs ahead of keeping inflation down than the tag team of Dr Don & Sir Roger did for the reverse. The mayor, however, took the temperature at the end of the debate and declared a diplomatic draw.


Point-scoring in a debate doesn’t make a great read, but I noted a few points from the night which are worth considering – and a few that might well be debunked.


Dr Brash started the debate by declaring that all developed countries keep inflation low: “The real issue in monetary policy is this: How can we keep inflation under control and our exchange rate stable?” He said inflation hurts the poor.


“One of the big unresolved issues for all countries is the exchange rate, even for countries that have a fixed exchange rate. Hong Kong’s real rate has moved and jobs have gone across the border.”


Dr Brash made 3 more points:


“Productivity growth over the last decade has been lamentable and if we don’t do anything about that we’re done for”New Zealand has had house price inflation for 20 years, so “it’s not as riskless as you think”New Zealand should give the Reserve Bank governor the ability to vary the excise tax on fuel; the alternative of varying gst, maybe 2-3 times/year, would be a nightmare; Dr Brash has made this point before but it got no traction.


Sir Roger gave this as a debate starting point: “New Zealand has had the lowest unemployment rate in the OECD for years”. He said Government capex created no extra jobs: “It’s job shuffling”. Governments from 1996-2009 had transferred $25 billion from the private sector to Government; not all Government spending was bad, but he asked what individuals might have been able to do with that $28,000/person.


“One of the troubles in politics today is, we argue too much about the means and not enough about the goal.”


Professor Kelsey’s political stance is light years from those of her partners for the night. Her starting point: “Various financial acts have been given quasi-constitutional status by the right” followed by: “Recession is just starting to hit us”.


She commented that the NZ Government budget was given a rating “by some agency that gave AAA to subprime…. Our government is champing at the bit to get the free trade agreement with the US going again, so we can buy more heavily into the model that has failed.”


She figured she ought to support Dr Don & Sir Roger’s view that keeping inflation down should come first, for the moment: “Then we can refocus debate on repealing these laws, then start to look at alternatives.”


The biggest mindshift, perhaps a pivotal point in our society again, was this one noted by Professor Kelsey: In the past 25 years governments had regulated for individuals; before that they regulated for society.


On the pro-jobs side of the debate, Mr Little said strong government was important so it had the ability to intervene. The 80s mantra that “business can do it better” had led to “capitalism unleashed”. He said New Zealand needed to move away from non-productive investment, citing investment in homes in particular, and he noted that, “in any year, more than 50% of wage earners don’t get a pay rise”.


Mr Conway said there were targets to spend on road & rail infrastructure, but not for people: “A set of policies about job creation would be better than focusing on monetary policy & the finance sector.”


Dr Nana picked on having an inflation target range of 0-3%: “Having a specific inflation target distorts.” He said Singapore controlled inflation through its exchange rate. And he answered Sir Roger’s point that money is better in the hands of individuals: “Individuals don’t have good foresight, we don’t tend to have long-term vision.”


He claimed the theory of controlling inflation, having less government & more market hadn’t worked.


It was a debate, so many points get lost in the cut & thrust. But out of it, I figure these points are worth examining if New Zealand is to leap forward rather than to struggle slowly downward:


First is Dr Brash’s argument of using shifts in excise tax as a simple control measure that’s easily adjustedWe talk about productivity, employers crack the whip and employees have had to fight to get their share – while seeing upper levels of management sucking company income out at far higher rates than ever before – but as a country we don’t advance productivity goals that all can aspire toArguments against New Zealanders’ preference for investing in housing are largely spurious: Somebody has to own the housing stock and that stock, like any other, has to pay its way; if individuals don’t invest in houses then institutions will, which may be the same money arriving along a different avenue, but individual attention is often betterThe one issue in housing investment to debate concerns the fairness of tax treatment, but as Dr Brash has indicated with his championing of adjusting excise tax as a control mechanism, tax isn’t always about fairness; there can be incentives for one form of investment – maybe housing, maybe research & development (that’s one New Zealand has done badly for decades)Sir Roger’s point that New Zealand should focus on goals first, means secondProfessor Kelsey’s points on AAA & a free trade agreement are very much about wanting to be part of the winning team, then finding out the win was illusory; for me, it’s about analysing your options well, not just choosing the flavour of the day; so, combining Sir Roger & Professor Kelsey’s points: Setting goals, analysing options, determining meansI didn’t think the points about job creation were presented so well, but it remains there to investigate: Would it be sensible to put a policy of job creation first, in the belief that other factors in the economy would fall into place?Last, the issue of “capitalism unleashed” has the strict among us reaching for regulation, but by nature we are traders so we want at least a measure of capitalism; for me, measures taken by officialdom were at least partly to blame for starting the housing boom around the world and also for accelerating it, which puts a questionmark over regu
ation; “greed is good” will remain a strong driver – and force those less into greed to follow along anyway in fear that they’ll get left behind; company shareholders, institutional investors & corporate managers ought to have looked more rationally at investment decisions through a boom period and put some prudence-based controls in place, but that never happens and it won’t happen next time either.


Want to comment? Go to the forum and check the thread.


Attribution: Manukau debate, story written by Bob Dey for the Bob Dey Property Report.

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Commerce Minister outlines what he wants

Published 1 May 2009

Commerce Minister Simon Power made a scene-setting speech to the annual meeting of sharemarket operator NZX Ltd yesterday – his list of wants for the capital markets.


The list of wants wasn’t matched by a clear message on how to get there, but he talked positively about the markets’ performance this year and also discussed the Government’s regulatory role, capital-raising & investor confidence.


Below is his prepared speech in full:


 I want to talk about 2 issues: My vision for New Zealand’s capital markets and the role of Government in those markets. I will do this with the global financial crisis as a backdrop.


What successful capital markets will look like


Discussions around capital-raising, regulatory frameworks & the Government’s role in the markets sit at the heart of debate on ways out of the current global financial crisis. Regulators & the market are reassessing how we can best achieve successful capital markets able to withstand future shocks.


Successful markets are efficient & liquid. Successful markets work to ensure all relevant financial risks can be identified, priced & allocated to those best able to manage them. They are about providing people with access to an appropriate level of risk in order to be appropriately rewarded.


What I want to see from New Zealand’s capital markets is an increased range of products available for companies & consumers to meet their capital markets needs. This includes derivative products to allow companies better opportunity to hedge risk. Issuers & investors should have access to the full set of products that are relevant to the New Zealand environment.


I also want to see more companies keeping their headquarters in New Zealand. They should be attracted & retained because their capital-market needs can be effectively met here, even when they grow to be large players in the Asia-Pacific region.


I would also like to see overseas companies whose activity is linked to strengths in the New Zealand economy moving their headquarters here. This will provide spin-off benefits to supplier companies & professional services firms.


I want to see company owners in New Zealand who are more informed of the capital-market options available, and who are confident in using those options. I also want to see confident investors with a higher level of financial literacy, who know how to interpret risk & return, and can “vote with their feet”. I want to see more households holding capital-market assets.


I want to see markets that can help consumers understand risk by identifying & pricing it fairly. Investors & consumers need to be appropriately informed about investments – and illegal & unethical behaviour should not be tolerated. Fair markets should reward ethical behaviour.


Finally, successful markets are markets that are resilient in the face of shocks & unexpected events.


It’s clear that the global financial crisis has demonstrated that the New Zealand market has some of the flexibility & resilience needed in a capital market. The crisis has made it clear that the levels of indebtedness that were possible in recent years are, in general, no longer sustainable. This applies to banks & other financial institutions, as well as to other businesses.


As a result, debt finance is likely to be available on different terms than it was in the past. It will, it seems, become harder & more expensive to raise capital directly from offshore.


Much of this is a rational response to the poor economic outlook and, as a result, companies have had to ensure their balance sheets are in good shape and are able to withstand shocks. They have had to look at new ways to access capital. Debt & equity capital markets play an important role in that. And we have seen a number of companies successfully tap into the retail bond market in recent months.


I’m sure that you, as NZX shareholders & representatives of companies trading on the NZX, are aware that capital-raising through the local debt market has been exceeding expectations this year.


In fact, more than $1.2 billion in debt was raised on the NZDX market in the first 3 months of this year. That’s up 87% on last year. We should use this shift towards capital-raising via the debt market as an opportunity to develop & deepen our capital markets.


We should take note of how well our capital markets have come through this crisis. It’s time to strengthen our markets and re-work the framework of regulation of our markets to bring success & growth to the sector.


The Government’s role (regulatory priorities & goals)


The Government has a key role to play in the operation of our markets.


Unregulated securities markets can fail to produce efficient outcomes because of a lack of balance in the information held by issuers & investors, unfair conduct & poor governance and the possibility of systemic dangers & failures. These are issues which cannot be adequately addressed in the absence of regulation.


However, any regime needs to strike a balance between the risk of over-regulation, which may impose unnecessary costs, and under-regulation, which may fail to achieve its objectives.


The financial crisis has brought us an opportunity to reassess the shape of our securities legislation. The crisis has influenced the way we must think about long-term regulatory settings and has highlighted the importance of getting the regulatory framework right.


My officials are working on key areas in relation to this. The Government is responding to the need to help companies raise capital, the need to improve investor confidence and the need for a fundamental review of New Zealand’s securities legislation.




The global financial crisis & the global economic downturn have shown a pressing need to respond to the needs of companies in these times.


You’ll be aware of the general downturn in liquidity on the NZX. Activity in the first quarter of this year was down on recent years, and registered a 29% fall in total value traded.


Capital-raising has become increasingly difficult, even though the situation for our retail debt market is strong and despite the welcome news that in the first quarter NZX has lifted net profit 40% from a year earlier – and I must congratulate you on that. Though the outlook for our markets is brighter than it was 2 or 3 months ago, the Government needs to continue to work quickly to address the needs of business.


In the first quarter of this year we have responded to key recommendations of the Capital Market Development Taskforce which, as many of you will know, is a group made up of industry representatives heavily involved in the financial sector.


The taskforce released an interim report in November last year on the measures to combat the financial crisis and its final report is due to be released in September this year. I have encouraged the taskforce to be adventurous in its recommendations.


NZX’s recent changes to its listing rules to ease capital-raising requirements for listed issuers were in response to those recommendations. In my role as Minister of Commerce I decided to allow those changes, and I will watch with interest their effect on the market.


I also recently released a discussion document on proposed changes to the Securities Regulations. These proposals aim to reduce compliance costs and improve flexibility for issuers, and enhance disclosure to investors. Submissions are due to close next week.


I have also introduced the Securities Disclosure & Financial Advisers Amendment Bill to address some of the recommendations from the taskforce’s interim report.


This bill provides for a “simplified disclosure prospectus”, which may be used by listed issuers who are already subject to continuous disclosure requirements but who would otherwise be required to produce a separate disclosure document for each offering. The regime should promote effective disclosure to investors in a streamlined form.


Further, the recent jobs summit also identified stimulating the development of the debt market as a near-term, high-priority initiative. You will no doubt have heard of the idea of a ‘supercharged debt market.’ One part of the summit’s proposal seeks to reduce the barriers to entering that market experienced by mid-range companies. The detail is currently being worked out by my officials, in partnership with a private-sector group led by the NZX. It is being treated with high priority and I look forward to updating you on it soon.


Investor Confidence


The recent events of the financial crisis and the collapse of finance companies have also shown a pressing need for the Government to address investor confidence.


The Government has to balance the message that we are sending to the markets. As I have outlined, we are working on freeing up the flow of capital at one end of the market while tightening regulation around financial companies & advisers to bring some order to the other end of the market. The unifying theme is investor confidence.


Finance company collapses have highlighted how, more than ever, investors & consumers need to be appropriately informed about investments, and how we need to have a sound net to catch illegal & unethical behaviour.


The financial advisers & financial service providers regimes, which are due to be implemented toward the end of next year, will contribute significantly to the goal of markets as fair places to conduct transactions. Through the financial advisers regime, we will be increasing the transparency & accountability of those on the front line. The Financial Service Providers Act will also make the sector more transparent and improve investor confidence by the creation of a public register & a dispute resolution regime.


As well as this net to catch unethical behaviour, investors need to have information.


They need to be appropriately informed about their potential investments. The average investor gets a lot of valuable information under the continuous disclosure regimes of the NZX listing rules & securities legislation. But we must be aware that less sophisticated investors may not have the knowledge or tools to interpret this information appropriately. This is where financial literacy becomes a key concern. Companies & the Government have a role to play in enhancing the financial literacy of investors. Studies show there is much room for improvement in financial literacy levels.


The next big step for Government is a comprehensive review of the key piece of securities legislation – the Securities Act 1978.


This is a central piece of legislation, more than 30 years old, trying to regulate an area that has seen a lot of innovation. In addition, the lessons we are learning from the global financial crisis, along with the recent series of finance company collapses, highlight the need for a modernisation of this area of the law.


Alongside this review I have asked officials to fast-track work on a trustee supervisory model. This model will increase accountability & competence standards for trustees. I’m not interested in making cosmetic changes here – substantive change is needed to address issues with the role of the trustee in our financial markets and to rebuild investor confidence.


The Government will also focus on developing a regime flexible enough to meet the needs of a relatively small capital market like our own.


It’s a key concern of the Government that any regulatory framework from this review does not stifle innovation. Good rules allow market players the freedom to innovate within clear boundaries. They should have incentives that motivate them to play and not be constantly seeking to invoke the referee.




Today I have outlined the vision I have for New Zealand’s capital markets. The Government has responded rapidly to the volatile global financial environment. But there is more to be done, and the current context of the financial crisis affords us a great opportunity to review the role & scope of Government in regulating these markets.


Of course, the success of the capital markets is not purely a Government responsibility. That depends on the shape, ability & drive of the commercial sector. Though we can regulate for unlawful conduct and acknowledge high ethical standards, there is a large spectrum of conduct within those extremes that can produce very different results for the market. In this, the commercial sector has a role to play in promoting & exemplifying ethical conduct & good behaviour.


Tonight (Thursday) I will be speaking at the INFINZ awards, where we will be celebrating some of finance’s high achievers and recognising that there is much that is good to be said about the New Zealand financial sector. Such personal high performance, combined with a cohesive & flexible regulatory structure, will help ensure our capital markets begin to flourish again.


Want to comment? Email [email protected].


Attribution: Ministerial release, story written by Bob Dey for the Bob Dey Property Report.

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Unexciting budget bears control-freak messages

Cullen concentrates on getting debt ratio down

Unexciting as it was, Finance Minister Michael Cullen said his third Budget completed a $6.125 billion (originally $5.9 billion) programme set out in 2000.

Dr Cullen had a bigger surplus available to play with this year ($2.6 billion), but chose to stay within the guideline (which he said he had to do under the Fiscal Responsibility Act) rather than don the election-year Santa uniform and hand out lollies.

He continued to fire shots at the cut-tax brigade, bringing the only demonstration of serious discord during his parliamentary budget speech when he got off the dreary topic of budget figures and launched into a party-political attack on the notion that cutting taxes benefits the nation, and against the view that New Zealand is a high-tax country.

Whatever the tax level, most taxpayers would prefer it was lower. That’s plainly not going to happen while Dr Cullen has the reins.

New Zealand’s growth this year and for the next 2 years will be about 3%, low compared to the 4% Dr Cullen said recently we need to achieve but a level he seemed happy with today.

Dr Cullen said that in achieving a consensus on how to lift New Zealand’s performance, “We ened to recognise 3 facts which are all too often ignored. The first is that New Zealand’s long-term growth performance has been by no means calamitous…

“The second… is that this long-term underperformance is due to a complex interrelationship of factors which do not lend themselves to simplistic bumper-sticker solutions.

“The third fact is that there is little evidence to support what are sometimes portrayed as the key reasons for that underperformance and therefore the guides to its improvement. The most frequently asserted of these is the contention that New Zealand is highly taxed by developed country standards.”

Dr Cullen said the comparisons were usually wrongly based. He picked out a 6-country comparison in the Economist which compared the total cost to businesses of corporate taxes, social security levies, local body rates & excise duties. The total burden ranged from 9.5% of gross domestic product in the US to 19% in France. Dr Cullen said New Zealand would rate about 7%.

He didn’t say whether the many former taxes/rates such as the student loans scheme through to user-pays rubbish collection and insured healthcare were included in or excluded from his tax equation, so I’m as wary of this comparison as I am of others.

Within New Zealand, Dr Cullen said significant cuts to personal taxes in 1986, 1988, 1996 & 1998, and a massive cut to the corporate tax rate in 1988, all failed to lift the sustainable growth rate. They resulted in significant revenue losses, with consequential pressure on government spending or its operating balance.

“Therefore, the onus of proof rests upon the proponents of such cuts to demonstrate that they will lead to anything other than the unsustainable & inflationary lift in the growth rate that would come from any fiscal loosening… This is not to say that there are not ways in which addressing problems in the tax system can contribute to improving economic efficiency & performance.”

So, the budget did not focus on reducing the government spend and giving the change back to individuals, or on ways to lift growth without centralised control.

Dr Cullen highlighted the stronger balances — net debt at 17% of gdp in June 2003, 15.5% in June 2006, the super fund up from $1.9 billion & 1.5% of gdp in June 2003 to $8.9 billion at 6.3% of gdp in June 2006, a well controlled picture.

But he has spread lollies about — huge capital programmes for a long lineup of hospitals, and an acknowledgment that health spending is rising (from about 15% of gdp to 21% in a handful of years) because the population is aging, without a serious idea on how to stop the rise.

He has paid considerable attention to the knowledge economy and the drive to support new-era economic development. On the other hand, among the many ministerial statements handed out with the budget was the dunce’s prize from Education Minister Trevor Mallard, who, in the midst of a highly unsettling secondary teachers’ strike over inadequate recompense in time as much as money for the introduction of the new national certificate of educational achievement, issued a statement which ended: “At the secondary level, there is $6.8 million over 4 years to support teacher professional development for NCEA levels 2 & 3 and to fund research into the effects of the NCEA on teaching & learning.

“These initiatives show our commitment to a quality education system.”

Another of Mr Mallard’s releases highlighted school funding increases: “Per pupil funding rates to schools will rise next year by 2.2%.” Dr Cullen expects the inflation rate next year to be 2.5%.

Said Mr Mallard: “The budget shows our ongoing commitment to resourcing schools for both their operational & staffing needs. This is an important aspect of maintaining & enhancing the quality & excellence in our schools.”

That kind of statement explains why the private educational sector, led by John Graham’s Senior College group, is growing so fast: Mr Mallard’s statement is unbelievable.

Carried through into the Knowledge Economy, Mr Mallard’s Orwellian behaviour would be debilitating on a wide scale. The Government is looking at public/private sector partnerships, so long as the Government retains control. State staff might be fine at their jobs, but the control-freak behaviour on both the purse strings (Cullen on an aversion to lowering tax) and performance (ministers like Mallard creating the need for a whole damage-control industry) won’t advance the economy, especially the knowledge part of it.

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Prebble says economic base unsustainable

Migration, rising house prices & falling net wages

“Our whole economy now depends on increasing house prices that in turn depend on levels of migration that are at record levels. It is not sustainable,” Act leader Richard Prebble said in his state-of-the-nation speech in Auckland today.

Below are 3 extracts from his address. The 1st relates to debt, which is arising through property price rises and will impact on property. The 2nd relates to the state of political balance, which Mr Prebble sees as precarious. The 3rd relates to real incomes, which will again impact on property.

“The Westpac Household Savings Indicators reported in November last year revealed that households now owe $80 billion dollars, 8.6% more than a year ago.

“Household borrowing in the 90s increased from 57% of disposable income in 1990 to 112% in 2002.
The average Kiwi has never been more in debt. When the official figures are released I predict that retail spending at Christmas & the now important Boxing Day/January sales were a record, and we owe record credit card debt. Spending through the bank’s electronic system payment was up 11% in December. And let’s not forget that student debt has doubled under Labour.

“Our banks that have financed household debt have borrowed from overseas. Our own savings are insufficient. The Reserve Bank Governor (now MP Don Brash) stated: ‘NZ banks now rely more heavily on overseas borrowing than banks in any developed country — roughly a third of the total assets of the banking system are now fuelled by borrowing overseas.’

“The alarming state of our trading banks’ balance sheets does not concern the Reserve Bank. Banks borrowing overseas to onlend for domestic mortgages & credit card spending is a crash waiting to happen. The official answer is that our major banks are Australian and they are strong enough to refinance their NZ subsidiaries in the event of a downturn.

“No one asks what happens if Australia also has a downturn? No one asks what if the Australian banks also tighten up in New Zealand. Our whole economy now depends on increasing house prices that in turn depend on levels of migration that are at record levels. It is not sustainable.”

Abolishing Privy Council

Mr Prebble began his look at the political balance by focusing on the constitutional issue of abolishing the Privy Council and setting up a new Supreme Court with its membership drawn entirely by the present government, and probably not containing existing Appeal Court members.

“Abolishing the Privy Council is an important step to the Socialist Republic nightmare. But the Greens, if they are consistent with their election promise, must make the GE ban a precondition of support. Labour in turn, if they are consistent with their election promise, the government must lift the GE moratorium. So it’s an interesting year. This government is nothing like as stable as commentators opine. Minority governments can always fall.”

Actual wages fall

Lastly, the state of the family pocket:

“While gross wages have basically matched inflation, government has taken much more in tax, so take-home pay of the average worker has actually fallen in real terms.

“Over this summer I have had the parliamentary library research real take home pay. The average worker’s take-home pay after tax & inflation is $14/week less today than when Labour took office, a reduction of 2.4%.

“Increased income tax, user charges, petrol tax, government charges & stealth taxes have reduced the real income of the average working person. What families have done is take on more debt to keep up living standards. As interest rates are lower, households can do this.

“So now we have the most heavily indebted families in our history. A small increase in mortgage rates will have a disastrous effect on New Zealand families.”

Full address on Act website

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