South Canterbury Finance and all that jazz (updated)

There have been a number of good blog postings on the South Canterbury Finance saga so let me just make a couple of brief comments on what I agree with or disagree with from these postings.

Matt Nolan over at TVHE makes a number of good points including

1. The government had to pay the money when the receivers came in – they had no real choice, after all SCF was guaranteed by government.
2. However, it does show you the type of cost that can be associated with such a scheme – and raises the question of whether putting finance companies in the scheme was a good idea

What I would take from these two points is that we should not have had the deposit guarantee scheme in the first place, so I agree with Matt when he says

Surely this tells us that it is at least near the time to get rid of this deposit guarantee scheme – and why not do it retroactively so they all don’t “fail” just before the scheme runs out. Investors that get burned because they saw a high return and decided to face a high risks should have to deal with the consequences of it.

No Right Turn is also right to highlight the moral hazard issues in all of this. Where I disagree with him is here,

Banks have customers, who are innocent victims in any collapse. Finance companies, OTOH, have investors, people who are effectively gambling.

I see no real difference between "customers" and "investors". Consumers are a type of investor and thus should take all the same precautions as regular investors and face the outcomes in the same way as regular investors..

Eric Crampton writes

AntiDismal called the other day for ending deposit insurance. I'd be reluctant to pull deposit insurance for the banks until after the current financial mess is over with. And even then, I'd worry that the government now has zero credibility in the face of potential bank default and so may be stuck with deposit insurance for the longer term - at least in that case, they collect premiums on the insurance.

I am, obviously, less reluctant to pull deposit insurance since this would at least help send the message that the government is serious about letting the banks deal with any default themselves and this should reduce the chance of such a default. Unfortunately I think Eric is correct when he says,

If things stay as they are, the message to Kiwi investors is pretty clear. Forget all that "diversify your portfolio" nonsense. Put everything into a government-guaranteed roulette wheel. Heads you get high interest payments; tails the government covers you.

So lets change things!

David Farrar is right when he says,

Which is well intentioned. But he lent too much bad money, and in the end he has left the taxpayer with the bill. That is not generosity. Allan Hubbard is not the victim here – the taxpayer is.

We lose again. :-(

Update: Mongrel Dog comments here.