Mary Holm 's Opinion

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm: Lessons from the Great Depression

14 comments

I have had issues with banks being totally safe, as I recall when studying the 1930s depression (history at high school) that banks closed and what followed was that people's funds were frozen, and/or they could not extract/access their money as the banks did not have the money!

That is a simplification no doubt, but it always niggles in the back of my mind. We have been saved from the fallout from the sub-prime mortgages debacle - to date - but if the US economy crashes, does this not mean that the world economy follows, and banks go, and so does our money?

Gosh, you must have some tossy and turny nights. And I can't give you an absolute guarantee that your scenario won't play itself out. Nor can I guarantee that aliens from another planet won't land here.

What I can say, though, is that the Great Depression of the 1930s has been studied and studied, and the experts are confident they can prevent it from happening again. Nearly 80 years have passed since then, including several lurches in the world economy, but we've always recovered.

While the US economy is not at its healthiest, it's a pretty powerful beast, and it's not going to collapse. Even if it did, the world economy wouldn't necessarily follow.

The Chinese economy, alone, has plenty of power.

As for how all of this transfers through to your and my bank accounts, perhaps a few words from the Reserve Bank might help. "Bank failures are very rare in New Zealand," says a spokesperson. "The country's banking system weathered the global financial crisis well by international standards."

Banks operating in New Zealand have to meet strict regulations set down by the Reserve Bank, which regularly monitors them. For more on how banks are regulated, see www.tinyurl.com/nzbankregulation.

Want to read more? If you are really considering taking your money out of our banking system - and putting up with all the inconvenience and risk that would involve - it might be worth doing a little research first. And the Reserve Bank's publications are often more readable than you might expect.

"The Reserve Bank's six-monthly Financial Stability Report offers an insight into the overall New Zealand financial system, including trends within the banking system," says the spokesperson.

"The most recent of these reports [released in May 2011] stated that the resilience of the New Zealand banking system has improved since the financial crisis, with bank profitability lifting recently.

"The banks have also moved to a more stable funding base, reducing their vulnerability to disruptions in external funding markets," it said. To read the full report, go to www.tinyurl.com/nzbankregulation1.

It's also worth noting that household deposits with New Zealand banks have been growing over the past year. That suggests most people are confident about the banking system.

Still not convinced? There's always under your mattress. But lock your doors, watch out for fire and spread the money out evenly so there are no lumps. We don't want you to have more reason to toss and turn.

Spreading it around

Your first writer last week appeared to be even more cautious about banks than me. I thought your answer was top, but to add comfort to the writer, perhaps he could spread his funds around, say, four banks.

As a general rule, diversification is a good thing.

When it comes to banking, dealing with several different banks is a bit of a hassle. Personally I think the risk of one of the main banks getting into trouble is so low that I haven't spread my banking business around.

But - particularly if you have considerable amounts in term deposits - it can't hurt to use several banks.

For one thing, it's a good way to keep tabs on who is paying what interest. While you can get that info online, there's nothing like having money invested somewhere to make you take an interest.

Credit ratings and gold

Lehman Bros, AIG, Bear Stearns and every other banking/financial institution that imploded at the start of the GFC had an "AAA" rating from S&P the day before they crashed! Every rating agency throughout the world is "in bed" with the bankers. Are you really this naive to think otherwise?

How the hell can you tell folks - good, honest, decent, hard-working Kiwis - that their money is safe in any of our banks when none of them even have an "AAA" rating? Ratings don't mean squat, clearly.

Clean up your act and start writing something decent, please. Stop regurgitating crap news you've lazily grabbed from some other less-than-mainstream media outlet.

I'm going to hold this article of yours from Saturday's paper, and remind you and everyone else a year from now, why you and everyone else should have all removed our money from the trading banks.

PS: And tell "boy wonder", who apparently thinks he is an investing genius because he spent a few years investing, that Gold is not in any bubble. If you clearly understand the fundamentals of this precious metals bull market, I can guarantee you wouldn't be so bearish. We have a long, long way to go.

You and I both know the only reason you or any other so-called financial adviser doesn't recommend any more than 5 to 15 per cent of Gold for any portfolio is that you don't get paid on any bullion transaction. Why recommend it when you don't derive any income from your client's purchase of Gold?

Let's take your letter one paragraph at a time:

* Reliable accounts say Lehman Brothers' credit ratings were lowered by the big three credit rating agencies, Moodys, Standard & Poor's and Fitch, in the months before it failed.

And AIG suffered a liquidity crisis because its credit rating was lowered, not the reverse. Meanwhile, Bear Stearns saw its rating lowered months before its collapse and fire sale to JPMorgan Chase.

I've seen on the internet the "day before" stuff you quote, but it doesn't seem as credible as other sources.

Still, I take your point. What happened to these US companies in the global financial crisis, despite strong credit ratings not long before, has made everyone concerned about how much we can count on the credit ratings agencies. That's why I said, last week, "Standard & Poor's has occasionally got it wrong in the past, but not often".

Over many years, in many countries, the work of S&P and the others has largely been correct. And I don't buy the idea that they are in bed with the bankers. If they were giving banks or anyone else better ratings than they deserved because they were mates, how long do you think the ratings agencies would last?

In fact, after they got it wrong with Lehmans and so on, they are probably all the more careful to ensure their ratings are accurate. They can't afford to make more mistakes, or people will stop bothering with them.

In the meantime, the Reserve Bank is among the many who still bother - by including banks' credit ratings on its website, at www.tinyurl.com/NZbankratings.

"Credit ratings are a useful tool in that they provide a simple measure of risk, are widely available and allow for easy comparison of institutions," says a Reserve Bank spokesperson.

"However, like anything, they have limitations, and ratings will not always predict default reliably, meaning that failure is a potential outcome for even a highly rated institution. Nonetheless, they help to provide an indication of a bank's relative strength. Depositors can also make use of other tools such as banks' disclosure statements to get an overall idea of its relative health."

Disclosure statements are available from bank branches or their websites.

* Your comment that none of our banks has an AAA rating from S&P makes me wonder how closely you read my column last week. Excerpt: "If that's not good enough for you, Rabobank has an AAA rating ('extremely strong')."

Furthermore, as I said, most of our major banks have an AA rating ("very strong"). That's second to top, and not to be sneezed at.

* Lazy regurgitation isn't quite how I would describe my role, but each to his own description.

* It's a date. See you a year from now - although you might want to think twice about dating a lazy regurgitator.

* Ah, so you are a fan of Gold, with a capital G. No wonder you're not Mr Friendly. More than half the cross letters I receive are from gold bugs. For a possible reason, read on.

* I don't know anything of the kind, and I humbly suggest you don't either. You're right about one thing, that I don't get paid on any bullion transaction. But nor do I get paid for any other transactions.

I am not an adviser and I have no clients. As a glance at the bottom of this column shows, I make a living from writing, lecturing, serving on two boards and presenting seminars. I have no vested interests in what I write.

How about you? Could it be that you worry that less-than-enthusiastic writing in the Herald about gold could hurt the value of your holdings - even though that's hardly logical, given the gold market is a global market? I might be quite wrong. Just wondering.

One final question: Why do you bother to read regurgitated crap?

KiwiSaver growth funds

I've recently read your KiwiSaver book and am definitely going to join KiwiSaver on the back of it.

One of your principles seems to be to invest in growth funds if you have lots of time to play with. I'm 32 and already a homeowner, so have 30-plus years of KiwiSaving to come.

Given current market turmoil, do you advise a new KiwiSaver to start in a conservative scheme and move to a more aggressive one once the markets calm, or is it better to take the plunge rather than try to look into the crystal ball?

At least don't try to do both at once. Crystal balls aren't safe around swimming pools. Sorry - couldn't resist!

It would be great to wait until a market downturn ends before investing in shares. The only trouble is there's no way of knowing when that has happened until some time afterwards. If the market rises today or even for a whole week, it might be a new trend, but it might also be a blip followed by a further fall. And if you wait around until you're sure it's the former, you'll miss out on part of the upturn.

You're a natural for a growth fund. Just get in there. In KiwiSaver you haven't got a lot of money at stake at the beginning anyway.

* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

Mary Holm

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm is a columnist, best-selling author and seminar presenter on personal finance. She is also a director of the Financial Markets Authority and the Banking Ombudsman Scheme, and holds an MBA in finance. Previously she was business editor of the Auckland Sun and Auckland Star, and has worked for the NZ Listener, Australian Financial Review and Chicago Tribune. She has been called “The nation’s favourite investment agony aunt.”

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