John Roughan: Where is the 'creative destruction' promised?

In the junk mail this week was a long letter from the publisher of a business newspaper urging a non-existent corporate executive at my address "NOT to waste this recession".

He explained, "We don't get them very often. That means opportunities for big changes also come rarely. But right now is one Big Opportunity.

You can change almost any obsolete business practice at the moment under the guise of tackling the The Great Recession."

Though it was really "just an economic cycle that will start and end like all the others for the last 500 years", while it lasted I could "rock the boat, rattle the cage ..."

He is no doubt right even if his timing is off. The recession lifted about three months ago according to the June quarter growth measure issued by Statistics New Zealand on Wednesday.

The figure, 0.1 per cent, might be tentative but the trend feels right and accords with a sense of international recovery.

Those who quietly welcomed the worldwide financial crisis as a force for creative destruction will have to get on with it. If they don't act soon the financial system could be worse than before.

On a global scale this recession was not "just an economic cycle like all the others".

It was not simply an asset bubble that burst and destroyed sharemarket wealth, those events this time led to a banking failure such as the world had not witnessed since the Great Depression.

But history never precisely repeats, because we learn from it. The antidote to depression, adopted too late to avoid mass unemployment in the 1930s, has been administered in desperately large doses this time.

Folly and greed have been rescued and even rewarded. Governments have created $12 trillion of debt against future taxpayers to keep financial systems afloat and it has worked, possibly too well.

At the anniversary of the Lehman Bros collapse the surviving Wall St institutions are reportedly back trading some of the same sort of debt instruments that caused the trouble.

Goldman Sachs is taking on more risk than ever. In New York and London, big bonuses are on offer again.

Unless something concrete is decided at the G20 meeting in Pittsburgh right now, it is going to be not just business as usual for finance traders.

They will be better off than they have even been, certainly better than their forbears of the 1930s who had reason to be chastened by the near-collapse of capitalism.

Now they know they cannot fail.

The particular cause of this crisis - US subprime mortgages on-sold in debt packages that hardly anyone understood - might not be repeated but the next speculative offering could be as poorly secured.

And traders will know that if they are caught short when the bubble bursts they will be bailed out.

Economists call this moral hazard, meaning decision makers might not learn from their mistakes.

But the hazard is moral in a worse sense; when capitalism fails to enforce the risks that justify rich rewards it betrays its moral basis.

The protests planned for the streets of Pittsburgh this weekend should be angry and insistent.

Someone should tell them how well Australasian banks have fared. Our recession has been benign by comparison.

It was initially self-inflicted by sustained high interest rates to counter the inflationary threat from rising house prices.

The creative destruction we need is in personal investment. Too much national capital has been tied up in residential real estate, which punishes the exporter through the dollar's exchange rates.

For years there have been fruitless attempts to find a way to stop high interest rates driving up the dollar. This week I received an interesting suggestion from a correspondent, Paul Chrystall at Maui Capital.

He advocates a tax on interest paid for property purchases. The levy would be set by the Reserve Bank when it is worried about rising house prices. At those times it would be preferable to a general interest rate increase that attracts foreign holdings in the dollar.

In effect it would be a property interest rate. It could be set quarterly, apply only to new loans and could not be increased for the life of the loan, though it could be lowered. Thus the costs for banks and home buyers need last no longer than the inflationary threat from house prices, but banks would be permanently wary of excessive property lending.

That could be the circuit breaker we need. The global cure will have to be equally inventive. It is clear now that it will not happen of its own accord. The recession has been relieved too easily.