Friday 3 September 2010

Now It's Time For Realism

Bernie Madoff in a Vee-Dub? There are times when good intentions simply aren't good enough. As the war poet, Siegfried Sassoon, wrote of another old man who cost people all they had: "'He's a cheery old card,' grunted Harry to Jack/As they slogged up to Arras with rifle and pack./But he did for them both by his plan of attack."

THE COLLAPSE of South Canterbury Finance (SCF) is just the latest in a long line of serious business failures. What’s different about the latest debacle is that, this time, it’s taxpayers who are picking up the tab.

More than $1.5 billion is being paid out to SCF investors – a sum greater than the entire amount set aside by the Government for new spending in the coming year.

The Finance Minister, Bill English, has been quick to reassure us:

"The up front cost to the Crown of repaying South Canterbury's depositors is about $1.6 billion, but we would expect to recover the bulk of that as the receiver sells the assets over time."

An expectation is not, of course, a guarantee. Time alone will tell whether Mr English’s sanguine response to SCF’s collapse is based on fact or folly.

Right now, however, it’s time to face the brutal fact that New Zealand’s business community has become this country’s biggest liability.

For the best part of thirty years business-people have been telling us that all they need to restore New Zealand’s prosperity is for the State to get out of the way and let them get on with the job.

Labour’s Roger Douglas and National’s Ruth Richardson took them at their word.

And even though it cost us of tens-of-thousands of well-paid jobs and scores of thriving communities, we stoically and selflessly "bit the bullet" of radical economic "reform".

By the time Rogernomics and Ruthanasia had run their course, New Zealanders had lost control of their finance sector, most of their news media, and much else besides. Valuable state assets, the product of more than a century of public investment, had been sold-off to foreigners for a song.

Undeterred, we kept on chewing the business community’s ammunition. Why? Because they’d successfully brainwashed us into believing that the "long-term gain" would, ultimately, be worth the "short-term pain".

Unfortunately, "ultimately" turned out to be a moveable feast.

And while we waited for that ultimate pay-day, things went from bad to worse. The 1987 Stockmarket Crash revealed not only that New Zealand’s business titans had feet of clay, but that some them were also just plain, old-fashioned crooks.

If we’d been smarter, we’d have realised back then, in the early 1990s, that the entire neoliberal project was one almighty scam: a weird sort of political Ponzi scheme in which the early converts reaped all the benefits, and the late-adopters paid all the bills.

And pay we did – with the Employment Contracts Act.

The ECA absolved the business community of all responsibility for learning the lessons of the excesses of the 1980s. Instead of upgrading their technology and upskilling their workforce, New Zealand’s businesses spent the 1990s stripping their staff of hard-won conditions and allowances and putting an end to penal rates.

By the turn of the century thousands of New Zealanders were living off their credit-cards just to make ends meet. Indeed, the whole New Zealand economy seemed to be adrift on a limitless ocean of debt. Like Tennessee William’s fragile heroine, Blanche DuBois, New Zealanders had become hopelessly dependent on "the kindness of strangers".

Also, like Blanche, they no longer wanted Realism – but Magic. And, as it has done so often in our history, this unwavering faith in the "unseen hand" of the market, and the superhuman powers of entrepreneurial capitalists, has led thousands to financial ruin.

"Kindness" and "Magic" are certainly the operative words in the tragic demise of Alan Hubbard’s empire. How else should we explain the quaint anachronism of a man who, in an age of instantaneous data and light-speed capital flows, was still willing to put his faith in the unwritten contract of a handshake; the reliability of a Canterbury cockey’s spoken word?

Now it’s time for realism.

From Vogel to Muldoon, the growth and development of New Zealand’s economy has not been driven by the daring visions and fluctuating fortunes of individual capitalists, but by the cautious intelligence and financial solidity of successive New Zealand governments.

Over and over again, throughout our history, we’ve had to learn this lesson. That we are too small to let big things fail. And that the only institution with both the collective resources and the collective wisdom to make big things succeed - is the New Zealand State.

Who else could have rescued SCF?

This essay was originally published in The Dominion-Post, The Timaru Herald, The Taranaki Daily News, The Otago Daily Times and The Greymouth Evening Star of Friday, 3 September 2010.


Allan said...

Thanks for pointing out that the emperor has no clothes, and never has. The time has come for the so-called 'ordinary New Zealanders" to say categorically that enough is enough. What kind of society cuts back funding to the young and the elderly in order to ensure that wealthier sections of society don't lose money because of a bad ' gamble' in SCF?

Anonymous said...

"the only institution with both the collective resources and the collective wisdom to make big things succeed - is the New Zealand State."

Cheers Chris

Big help.

Well, there goes any attempt at class analysis down the toilet.

sagenz said...

If the state had not intervened by providing a poorly structured guarantee that took no account of the risk of the firm rather than the systemic risk they were trying to guard against investors would have been forced to make their own decisions. The state failed.

If the state had not intervened by extending the guarantee investors would have been forced to make their own decisions. The state failed.

If the state had not intervened by putting Hubbard under statutory management investors in SCF would not have been spooked causing liquidity to be withdrawn. It is apparent that Hubbard is guilty of poor record keeping but there is NO evidence to date that Hubbard investors will lose when the personal assets of Hubbard are included. The state failed.

You do Hubbard an extreme disservice by comparing him to Madoff although you are not alone in that. The real issue here is the failure of state intervention. That is the same globally. If AIG and Goldman Sachs had been allowed to go broke it may well have been the case that the global financial system destabilised but that would have taught valuable lessons about risk rather than the lesson that the state will bail everyone out.

Chris Trotter said...

In every respect, Sagenz, you are wrong. Worse, yours is precisely the sort of "reasoning" that continues to cloud the judgement of so many of New Zealand's decision-makers - to our huge collective disadvantage.

At the heart of your error is an indefatigable ignorance of history (a necessary ignorance, I would add, because History refutes Neoliberalism in its entirety) allied to an indifference to the suffering of your fellow human-beings that borders on the psychopathological.

"It may well have been the case that the global financial system destabilised". In that single sentence is packed the ruin of countless lives. But does Sagenz flinch? Not at all. To him, such a disaster would have been positively beneficial - teaching "valuable lessons about risk".

Like the equally morally compromised Stalinists of the 1930s, the Sagenzs of this world are willing to offer up the lives of millions to the Moloch god of ideological rectitude.

The world will return to its senses one day, but not before the likes of Sagenz have, in the words of Tacitus: "Made a desert and called it peace."

Anonymous said...

Do you think Chris that the Christchurch earthquake has any connection to this? It is serious stuff, but there is a touch of irony.

Chris Trotter said...

Hmmm. Questionable taste on display there, Anonymous.

It is, however, true that making the external environment correspond to the inner world of character is a very common literary device.

Perhaps God is a novelist.

Allan said...

Sagenz would be well advised to read some history - the "Great Depression" for a start. Those who do not learn from the lessons of the past are doomed to repeat it. Maybe Sagenz should read the original Adam Smith whose utopian vision of the 'invisible hand" is a long way removed from the greed of our capitalist brethren whose greed dominates all. This quote from The Wealth of Nations (via Wikipedia) illustrates this:
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state." Hmmm, how does giving the rich extensive tax cuts meet this vision?

Victor said...


The Medieval European mind believed firmly in the inter-relatedness of human affairs and natural phenomena, both of which were seen as part of "The Great Chain of Being".

Thus, the death of kings, disruptions in the realm and treachery or discord were seen as reflections of great storms, plague or famine and vice versa. The macrocosm reflects the microcosm ....and the microcosm the macrocosm etc.

A lot of Shakespeare is only comprehensible if we bear this crucial distinction with modern ways of thought in mind.

If I remember the narrative correctly, it's also why Henry VII ordered the destruction of some dogs that had had the temerity to kill a lion (i.e. "King of the Beasts").


Yes, absolutely.

Adam Smith's defence of capitalism was based on the notion that humans could be cautious, responsible citizens, possessed of public-spiritedness, probity and integrity.

To some extent, these were characteristics that helped the development of early capitalism in some early modern societies, and, not least in late eighteenth century lowland Scotland.

Unfortunately, however, these are the very qualities that are undermined on a global scale by developed capitalism. It requires an intelligently interventionist democratic state to re-set the balance.

Madison said...

It's good to see people pointing out that the idea and original practice of capitalism isn't the destructive force many liken it as today.

The end posit of neo-liberal capitalism was that while you could use the system to be ahead you also had to take into account the welfare of those who did not come out ahead so to keep the playing ground semi-levelled for the next generation. This summed up by the idea that a healthy and well educated people wouldn't dream of letting others starve.

As for many things it is all done in not by the system but by the corruption of people. Much as we have seen on the few times people have claimed to put socialism or communism fully into play. It may start well but within a few generations corruption has rotted it through just like in capitalist systems.

A strong government back could possibly have prevented this but I doubt it. Governmental institutions are long known for being black holes of innovation and very slow moving to adapt to change so I don't think a government bank as the only bank would prevent this. I think it would only prevent the increase in wealth that New Zealand has seen over the last 20 years.

It would be interesting to see someone get pure socialism installed as the governing system of society as I think it relies on the populace to make choices that benefit the group and not the individual but I rarely see anyone make those choices even at a young age. I see them make those choices even less as people get older.

As a solution I think these bailout funds should be self sustained by the institutions that are relying on them. The financial companies should be having to dump a percentage of all returns into these funds to remove much of the burden on the taxpayer. It works to shrink some of the ACC financing needed to cover work injuries as employers are forced to pay ACC levies so why not have the banks fund their own emergency service. I'd be happily corrected if they are already doing this but it doesn't look like they are from what I can find.

markus said...

Excellent post, Chris.

But I will take issue with one relatively minor point. You suggest that: "Undeterred (after "Rogernomics and Ruthanasia had run their course"), we kept on chewing the business community's ammunition. Why ? Because they'd successfully brainwashed us...If we'd been smarter, we'd have realised back then, in the early 1990s, that the entire neoliberal project was one almighty scam...".

The polls and surveys I've seen do suggest that most New Zealanders (well over 50 percent) were opposed to the key tenets of Rogernomics/Ruthanasia by the time of the 1990 general election (hence the massive post-1990 public disenchantment with the polity, upswelling of support for electoral reform, and significant drop in National's percentage of the vote at the 1993 election - from memory, about 12 or 13 percentage points).

In fact, I've seen a 1988 poll which suggests that, even then, the Country was roughly divided into relatively even thirds on Rogernomics - 1/3 support' 1/3 oppose, and 1/3 neutral/wait-and-see.

But, as I say, the central thrust of your argument is spot on.

Anonymous said...

If the govt is so great then there isn't much point to even having a SCF exist is there.
There is no point in having any private finance companies if the govt. is required to bail them out whenever they fail through poor (often downright crooked) investment/loaning.
There is however nothing in govt. record that would inspire any sane prson to think they can do what private companies can do nor do it better.
This whole thing is the usual elites looking after themselves.

bubbsie said...

Noting your Blogroll is very slanted to " left wing" opinion,not surprising, but the viewpoint is limited... that KP blog is a lot of hot air, psuedo intellectuals ( second rate tech college lecturers like Pablo) waste of time...

try some of the UK political bloggers, maybe Huffington post, Drudge, Vanity fair, the New Statesman et al.

or just get out more often !! That post you put on KP earlier is even more " up your nose, I can quote the classics " if you do it in Latin:

quem deus vult perdere prius dementat !

You're half way there, Chris, keep smiling..

Victor said...


On reflection, I must rise to the defence of Sagenz. I think he is only half wrong.

He is, in my opinion, wrong in his attack on the government guarantee to finance companies. 'Moral Hazard' notwithstanding, it remains the least bad alternative when major organs of finance capitalism fail, as fail they have so often in recent years.

He is also, in my view, wrong to extend his attack to a general assault on the involvement of the state in our economy.

But he is right to remind us that: "If the state had not intervened by putting Hubbard under statutory management investors in SCF would not have been spooked causing liquidity to be withdrawn."

It seems to me to have been extraordinarily draconian and unwarranted to place Allan Hubbard's personal operations under statutory management and hence to deprive him and Mrs Hubbard of rights that the rest of us take for granted.

It raises the suspicion that the SFO and financial authorities were seeking a soft target to prove their 'cojones'.

Were I prone to believe in conspiracy theories (which, of course, I'm not), I might also be tempted to believe that a conscious decision had been made, by force or forces unknown, to put pressure on a large number of Canterbury farmers, whose land would then be on the market at bargain basement prices. I leave it to you to work out the ramifications of this obviously fantastical line of argument.

As a Social Democrat, I believe firmly in the need for the state to intervene in the economy to offset market failures, to provide counter-cyclical stimuli, to build up our social capital and to help optimise living standards and social justice.

But I remain opposed to the arbitrary exercise of state power against individuals, to callous, heavy-handed bureaucracy and to 'Exemplary Justice' which, almost by definition, is no justice at all.

We can only trust the state with our economy, if the state is just, measured, responsible and humane. It must also, like Caesar's Wife, be above suspicion.

Tribeless said...

All the Hubbard Stuff aside, Chris, just a couple of (rhetorical) questions for you.

In regards to your statement: "it’s time to face the brutal fact that New Zealand’s business community has become this country’s biggest liability."

Who do you think finances the totality of the State and its services? Who employs the workers?

Further, as a taxpayer I have to now stand the losses of private investors, but that is only because of a guarantee given on my behalf by a State acting completely beyond any mandate I would choose to give it. The 'liability' in this instance was created by government.