KEY POINTS:
In times of financial crisis, panic is the worst enemy. If it takes hold, it makes a mockery of any controlled and rational response.
For that to happen, there must be a trigger, usually a sign from a figure in authority that things have incontrovertibly gone awry
- the sort of signal that might be supplied if the Reserve Bank Governor were to deviate from his normal review of the official cash rate and announce an immediate reduction of as much as 100 basis points. Some say this would offer comfort and shore up confidence.
More likely, it would suggest something was, indeed, badly wrong and provide many with reason enough to panic.
Alan Bollard has been saying repeatedly over the past few weeks that the New Zealand financial system has held up relatively well in the face of the current international volatility and disruptions.
Crucially, the banks operating in this country did not entertain the flawed lending practices of many of their American and European counterparts. Their assets are of far higher quality.
This means there is not the incentive or the urgency to mimic the unprecedented action of seven of the world's major central banks, which this week cut interest rates in unison by 50 basis points. The stability of their financial systems was being questioned and, in such circumstances, decisive action was needed to avert panic.
It is relatively easy to be drawn to a conviction that a similar strategy is necessary here. Drastic slides in share values and a plummeting dollar, the product of the flight of capital to home ports, offer reasons for unease.
But the major problem we share with overseas jurisdictions is that banks have lost the confidence to lend to each other, thereby creating a credit market stasis. The need to keep the wheels turning, not the level of the official cash rate, has, quite rightly, been Dr Bollard's focus.
This week, he added to earlier measures to improve liquidity in the financial system by announcing the Reserve Bank's readiness to allow trading banks to use fully secured residential mortgage-backed securities in their dealings with it.
The next review of the official cash rate will be on October 23. Already, Dr Bollard is being urged to follow the lead of his Australian counterpart and announce a drop of 100 basis points. For the sake of consistency, he cannot allow himself to be drummed into taking such an unprecedented step.
There will obviously be a move to take pressure off borrowers but, for the purposes of confidence, this should be related to circumstances in this country and be framed as part of an ongoing fine-tuning of monetary policy.
Those who argue for a blind following of Australia have too easily forgotten that the Reserve Bank acted ahead of many other central banks when it dropped the official cash rate by an unexpected 50 basis points last month. They also overlook the fact that dramatic central bank action overseas has not been a panacea for market turmoil.
Attention now turns to what confidence-boosting measures will emerge from the Group of Seven meeting in Washington DC. A particular focus will be a more urgent injection of money into American banks.
Whether the Reserve Bank had cut the official cash rate this week or in a fortnight will make no difference in the long run. What matters is the underlying message conveyed by its governor.
Panic has an acute hearing. When it is unleashed, any signs of resilience are rapidly trampled underfoot.
John Key, the National Party leader, did nothing to engender confidence when he advocated a minimum cut of 50 basis points and said "you can't rule out a bigger cut". He should, instead, have been congratulating Dr Bollard for his sensible attempt to ward off undue alarm.
