KEY POINTS:
One of the reasons more than 158,000 New Zealanders now have more than $5.3 billion frozen in finance companies and mortgage funds is they have lacked choices for bond-type investments.
New Zealanders are often accused of being poor savers, but at present about $100b of savings is in
bank accounts, finance companies and mortgage funds or trusts.
Many savers who were looking for investments with an interest rate higher than a regular bank account have put their money in finance companies and mortgage trusts or funds, most of which have then lent to or invested in the residential property market.
This seemed to make sense when residential property was booming and all those investments and loans were as "safe as houses".
But, as the tide has receded, Kiwi investors and financiers have been exposed to slumping property values and sale volumes.
The sneaking suspicion now is that much of that money went into less-productive investments, such as resort and coastal property.
Imagine if that $5.3b had been invested in New Zealand infrastructure.
Just imagine if at least some of that $100b still in banks and finance companies could be invested in infrastructure. Unlike other countries, New Zealand doesn't have a large and vibrant market for corporate and Government bonds that would allow regular investors to invest long-term in assets returning more than bank account rates.
Almost all infrastructure investment is paid for from taxes and rates. This isn't fair because taxpayers aren't necessarily the consumers of the roads, rail, schools, hospitals, water and power networks that will be around for decades.
Some say this means today's taxpayers resist stumping up enough cash to build the infrastructure we need to improve long-term economic growth. One way around this is by raising debt to pay for the infrastructure so the cost of the services can be borne over time.
In America and Australia, for example, local and central governments issue bonds to fund their infrastructure spending. They are bought by professional and "Mum and Dad" investors.
Here, there isn't much choice. Individual investors can buy the Government's Kiwibonds but the interest rates are low.
Local governments rarely issue bonds. The last time was in March when the Bay of Plenty Regional Council raised $200 million through a bond paying 10 per cent. It was backed by the assets of the council, including bridges and roads.
It was just the sort of thing New Zealand investors would love to put their money into if they had the chance.
National Party leader John Key has proposed offering Government-issued infrastructure bonds to help pay for the investment needed over the next decade. That would be a good addition to the investment landscape. Prime Minister Helen Clark's claim that any debt would have to be foreign debt is not necessarily true.
The chart on this page shows that we have borrowed heavily overseas in the past but the recession ahead is likely to increase local savings and they should be directed into our infrastructure through Government debt.
The creation of a single issuer of local government bonds would be an even better way to fund the $30b of infrastructure investment needed at a local level over the next decade.
Local governments should get together to issue bonds, thus creating a new class of investment for New Zealanders hungry for high-quality bonds.
* Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.