Politically Naive Dealers Could Cause Frenzy and Hysteria in the Financial Markets
Listener: 29 June, 1996.

Keywords: Business & Finance;

There is a real danger the financial dealers in our money markets will precipitate a serious financial crisis. Not all dealers, of course. The culprits are those who are comment in an uninformed and hysterical manner on political issues who are causing the increased market uncertainty. As I write they are frenzied about the possibility that Winston Peters may become prime minister, drawing parallels with Rob Muldoon.

It is true that a younger Muldoon in politics today would be drawing a substantial popular vote – not least because he would be addressing issues with which people are concerned (rather than what the dealers think they should be concerned). But if this Muldoon were to become prime minister after the 1996 election, he would face very different circumstances to those of 1975. There would be no majority of the MPs in the one party. It would either have to form a coalition, or would rule as a minority government, dependent upon the goodwill of other parties. Moreover it is likely that the prime minister and the minister of finance will be from different parties if there is a coalition government of near equal parties (as seems likely).

But even if there was a single party government, the range of economic instruments available to it would be very different from those that Muldoon had in 1975. It would require major legislative change to give a government the ability to control the economy directly again. Muldoon mainly used the existing legislation to intervene, rather than created new legislation. Those statutory powers are no longer on the books.

However the dealers are not only naive about politics. They are not thinking carefully about their own circumstances. Their hysteria could kill the very activities their livelihood depends upon.

I do not want to assess here to what extent dealers perform useful activities, or whether the rewards they receive reflect their usefulness. Financial dealing has been an integral part of the modern economy. The simplest form is the banker who takes your and my savings, invests it, pays us a return from that investment, and takes a share of (a toll on) the return for the services provided. We dont have to use a banker, but generally they intermediate between lender and borrower more effectively than the individual could.

It is not these prudent bankers making all the noise. Rather it is the high flyers in the financial markets who deal in much more complicated financial paper/transactions, which they also toll. Their importance is a relatively recent phenomenon, reflecting changes in the global financial markets, and financial market liberalization in New Zealand.

At first the dealers made their money mainly from the financial boom of the mid 1980s. It was meant to reflect an improvement in the New Zealand economic performance. When the sharemarket crashed in 1987 it became clear that much of the financial paper they dealt with was valueless. The tolls the dealers made were funded by the destruction of the savings which they had been handling.

Local investors have not since trusted the high fliers. Fortunately the government came to the aid of the dealers with its privatization program, which generated substantial fees for those involved, mainly paid by the taxpayers. Today the government is running out of things to privatize, although there is still a bit of action in local government assets such as electricity supply (and perhaps water supply). Some dealers have not ruled out fees from hospital and even university privatization.

But the dealers have been fortunate. If local New Zealanders are not willing to use them, and the government is less willing to employ them, there has been the overseas investors. It is true that the public overseas debt is rapidly decreasing, but the total (public and private) New Zealand debt is increasing, as foreigners buy financial and real assets. A recent OECD survey concluded that New Zealand has the largest net foreign total debt of any developed country, measured as a proportion of GDP. The normally sober London Economist, termed the level “massive”, comparing the New Zealand ratio at 80 percent with debt ridden Mexico’s at 60 percent. It concluded “New Zealand’s heavy debt burden leaves it vulnerable to external shocks.”

While the debt ratio may be bad news for New Zealand, it is good news for the dealers, since they can toll the foreign investor, just as they tolled the local investor in the mid 1980s and the taxpayer thereafter. However to ensure dealers have an adequate income, the foreigners have to have confidence in the economy. If they end up with a similar view of the dealers as the average New Zealand investor, then the high flying dealers will be grounded. Those who beat up hysteria over the possibility of a different economic leadership after the election, risk being listened to by their foreign clients, with a resulting reduction in confidence and financial transactions shortly. By inadvertently generating a panic, the dealers could, like Samson, pull the entire (financial) temple down on themselves – and the rest of us.