Shaky lending and Cullen's wobbly thinking

OPINION: I blame Michael Cullen.

In the same week that the former deputy prime minister and Christs College pupil transitioned from soft monarchism to promote the inevitability of a republic, apocalypse now was visited on the South Island.

Perhaps someone up there backs the monarchy.

That was a calamitous week for the south: the huge quake around Christchurch when the area was not even regarded as being on a significant fault line; the end of the line for South Canterbury Finance when Old

Mother Hubbards cupboard was found to be bare; and the final tragedy of a Fox Glacier plane crash killing nine.

Wellingtonians are the ones constantly warned to be prepared for the big one, with a major fault running through the city, up the Hutt Valley and along the route of the planned new northern motorway outlet through Transmission Gully.

The Christchurch quake, amazingly without fatalities, was approximately the same size as the Haiti quake in January which killed about 200,000.

It was the biggest in an urban area since the Napier quake of 1931 (death toll 256).

Earthquake standards were improved after this, but Wellington local government will need to run the Christchurch results through forecast models.

Clearly, unstrengthened brick and stone buildings are hugely vulnerable at this level of quake severity. Wellington, with a predominance of wooden houses, has advantages here.

But the widespread destruction of water mains and sewers needs study, along with the peculiar effect of liquefaction on Wellingtons reclaimed land.

The ballpark quake cost estimate of $2 billion that Prime Minister John Key initially placed on the disaster was even more than the $1.6 billion compensation figure the same week for South Canterbury Finance investors, which left taxpayers and out-ofpocket investors in other failed finance houses spluttering with rage.

But if we go back to the rushed introduction of the deposit guarantee scheme at the start of the 2008 election campaign, it was clear there was little option.

It is easy to forget, even at this brief distance, but the world then was in economic and financial crisis.

With Australia rushing in such a guarantee for its banks (but not covering the New Zealand operations of the same banks), a failure to follow suit would have resulted in a flight of funds and wide-scale economic collapse.

Interestingly, Reserve Bank governor Allan Bollard, in his book being published this week, tells of a crisis run on New Zealand $100 notes at the time because so many investors were withdrawing from financial institutions, presumably to try the 1930s Depression safeguard of storing money under the mattress.

SCF is said to be bigger in relative terms to the New Zealand economy than Lehman Brothers in America, the collapse of which set off a chain of financial failures, resulting in governments on both sides of the Atlantic being involved in massive bailouts.

New Zealand emerged from this crisis in reasonably good shape, apart from continuing massive budget deficits for the foreseeable future.

But for all that, it is extraordinary, in hindsight, that SCF was allowed to indulge in the orgy of extra borrowing and lending that followed the guarantee. Much of this lending, in speculative property deals, bars and hotels, was clearly unwise.

But punters had a gold-plated opportunity to invest at interest rates of up to 8.5 per cent while keeping a government guarantee.

As for Dr Cullens calamitous suggestion for a motion in the House next year, setting in train events to provide for a republic after the death of the Queen, there are one or two fish-hooks.

He envisages a head of state elected by a 75 per cent majority in Parliament.

But would the electorate trust the politicians to appoint a president, or would voters prefer a direct say and direct vote, bringing an additional costly layer of politics on top of what we have now?

Then there is the divisive question of the flag, on which there is no agreement.

The current system gives us an admirable governor-general on the cheap. Should we mess about with that till we have to?

- © Fairfax NZ News