Sunday, October 19, 2008

National Seeks Bipartisan Approach to Financial Regulation

National Party leader, John Key, has announced that his party is willing to engage in a bi-partisan approach to financial regulation policy with the Labour government in the run up to the General Election on 8 November.

Labour's announcement of the introduction of a deposit guarantee scheme for retail deposits last week caught National somewhat off guard but National quickly agreed in principle to the scheme and National finance spokesman, Bill English, received briefings from the Labour government.

Labour's Minister of Finance, Michael Cullen, has responded to Key by saying that it continues to provide briefings on the developing situation to Bill English on behalf of National.

Reflecting the high degree of Trans-Tasman economic integration between Australia and New Zealand, a policy divergence between the countries in recent days on the issue of whether wholesale deposits should also be guaranteed has emerged. New Zealand's government announced last week that interbank deposits would not be guaranteed but the Australian government has decided that such deposits will be.

National is signaling that it will not seek to make political capital out of a Labour government reversal of last week's position should Labour choose to provide a guarantee of interbank lending to harmonize this area of Trans-Tasman financial regulation policy.

Both Labour and National see the New Zealand banking system as sound given the strong balance sheets and more cautious lending policies of the major trading banks compared to their international counterparts. Nonetheless, the policy dilemma is that failing to guarantee the wholesale deposits while important economic neighbour Australia does, is to face the high risk of capital flight to guaranteed deposits in Australia and elsewhere in these uncertain economic times.

Once again, as previously pointed out here, emergency economic policy making procedures in New Zealand have proven to be inadequate in a rapidly changing global economic climate. The deposit guarantee policy as it has unfolded in the past week or so has left more questions unanswered than answered. This reveals a failure to think more than two or possibly three steps ahead.

Post-election a new government will need to launch a major review of the failure to activate and engage effective policymaking to cope with what have been demonstrated to be more external than domestic economic problems.

It is all very well to sit back with self-satisfaction and pride that New Zealand's economic house is in order, but when the economic crisis reaches your doorstep you had better have the sandbags, mops, and more affirmative instruments ready to go. And you best have thought out a train of steps ahead to respond to rapidly changing circumstances if the house threatens to be washed away.

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