Bollard tells of rush on $100 bills

BY VERNON SMALL

The Reserve Bank had to raid its vaults to meet a sudden demand for $100 bills during the economic meltdown as savers pulled money out of banks to stuff under the mattress for safe keeping, Governor Alan Bollard says.

The Reserve Bank usually issues about 150,000 $100 notes in October, but in October 2008 that spiked to more than a million notes, Dr Bollard reveals in a new book on the economic crisis.

"Clearly a lot were taking it out and sticking it under the bed. We heard a lot of stories about people burying it in gardens," Dr Bollard said this week.

"A certain amount of that goes on in normal times ... we've had stuff that has been stashed up chimneys and has been half-burnt. This was happening on a very undesirable scale."

The run on cash, amid fears of bank failures like those already seen in the Northern hemisphere, also saw officials start work on a guarantee scheme, to reassure depositors their money was safe. It was activated this week to cover $1.6 billion of depositors' cash in South Canterbury Finance.

The book also reveals how the outgoing Labour Government was stampeded by Australia into announcing the guarantee scheme during the 2008 election campaign.

The prime minister, Helen Clark, had intended to signal the scheme was being considered but shortly before she was due to speak, Australian prime minister Kevin Rudd called her to say he was about to launch a comprehensive guarantee.

Amid fears of a flood of cash across the Tasman, Miss Clark's speech was hastily rewritten in the "Green Room" behind the stage at Auckland Town Hall. Twenty minutes later she announced the scheme would start here immediately.

It has been criticised this week for exposing taxpayers to the bill for SCF, because it encouraged depositors to put money into shaky finance companies offering high interest rates, which in turn lent on risky property deals.

Dr Bollard said officials working on the scheme knew it would be distortionary, and lead to "adverse incentives and there would be room for institutions and individuals to game it".

"It was the least bad option," he said. "We also knew we might be forced into it and we were forced into it. We can blame the Australians, they blame the British, the British blame the Irish and the Irish blame the Icelandics. It's a connected world."

Former finance minister Michael Cullen confirmed this week that there had been a rush to put the scheme in place. He indicated attempts to check the rumour with his opposite number Wayne Swan had drawn a blank – suggesting even he had not known of Mr Rudd's plan.

Dr Bollard said he had pushed for smaller lenders, including finance companies like South Canterbury, to pay a risk-weighted fee for the guarantee. But Dr Cullen feared they could not afford the relatively high premiums and in the end only the big banks were charged a fee on deposits above $5 billion – though smaller institutions were later charged a fee to cover new deposits.

Though the Reserve Bank disagreed with its final shape, Dr Bollard defended its coverage of the whole sector. "If none of them were allowed in they would have all gone under the next day ... I think I can just about say that. People would have taken their money out and put it into a guaranteed scheme. If we had allowed some of them in but not others, the ones we didn't allow in would have had the kiss of death."

He said a tighter guarantee scheme, to cover some companies from October, was "really a tough-love scheme. If you have to be in it, you have to pay".

THE THOUGHTS OF GOVERNOR BOLLARD

On the financial crash in the United States: "I will even admit to Googling `subprime mortgages' to learn more about these toxic assets."

On a dinner with Finance Minister Bill English and Treasury Secretary John Whitehead: "Both ... had given up alcohol for Lent. Perhaps I should have supported them ... but if ever I needed a stiff drink it was then."

On co-ordinated cuts to interest rates by big central banks: "Did they ring us to ask if we wanted to be part of it? No, I'm afraid that when the chips are down, New Zealand is not big enough to count in these international interventions."

On preferring hire cars to taxis: "I drive myself because I hate taxi drivers. I suppose I shouldn't say that but I just do. I know the roads better than the Auckland ones and also they charge an arm and a leg. And it's a better deal to drive yourself around."

On April 2009 economic woes: "For the first time as an economist, I started seriously to wonder about just how tenuous our Western market-based world might be."

On a visit to Goldman Sachs in Wall St: "Monitors were blank and desks were unoccupied. Despite the gloom we had good attendances from senior people. I wondered whether this might be because they didn't have much else to do."

On a bank salary review during the crisis: "I was surprised some staff did not realise how bad things were. There was general horror at the thought of a salary freeze."

On the Jobs Summit: "It was difficult to conclude on the very up-beat note that the prime minister would have liked."

On difficult questions at a select committee: "Chairman Craig Foss ... readily understood the dangers and assured me that he would guide the committee away from dangerous questions in public."

On planning for a crisis bank closure: "We could `close' an existing bank's operations over a weekend and `open' a new bank on Monday morning, with the questionable assets quarantined."

On cutting interest rates to 2.5 per cent in 2009: "I concluded we could comfortably cut our OCR to as low as 2 per cent ... but this was no time for dissent. I did not think it appropriate to overrule the majority view."

On an occasional dinner with Finance Minister Michael Cullen and Mr Whitehead: "Simple enough affairs – salad, a meat dish and a good New Zealand red wine. In our positions fancy food is to be minimised or avoided altogether – we have to keep an eye on our lifestyles, our waistlines and our watches."

On a run on $100 bills in 2008: "We checked our stock of new $100 notes and reviewed our emergency holdings, kept in the vaults in our building below the pavement on The Terrace in Wellington."

- © Fairfax NZ News