Nats' double standard for rich and poor

Capitalism is a great concept. It's too bad that, like many another great idea - like Christianity, say - those who profess it rarely practise it. It was not capitalism that failed in the crisis of 2008 when global financial system was endangered.

It was crony capitalism, a rogue brand in which the few are allowed to enrich themselves by taking great risks and later, with collusion of government, to load the incurred loses on the backs of the many - the taxpayers. That is what happened in the US with a bailout of banks now known to exceed US$7 trillion. And then there's New Zealand.

Here, a centre-right party, National, has just been returned to power. It certainly preaches the doctrine of free markets, where risk may be rewarded or punished according to market forces. The leader, John Key, has even declared that the reason some people are poor is that they made bad decisions.

How does that sentiment stack up in practice where the more fortunate, the investor class, are involved? What are the real works of National, especially its Finance Minister, Bill English? Not so adherent to free market capitalism if the Auditor General is to be believed. His report of October 4, 2011 (available online), entitled Treasury and Crown Retail Deposit Guarantee Scheme, is a must read. Caveat: A strong stomach is required. I offer a brief summary.

On October 12, 2008, at the height of the global financial crisis, the Labour Government, fearful of a run on the New Zealand banks, stepped in with the Crown Retail Deposit Guarantee Scheme, which guaranteed money deposited in banks and "non-bank deposit takers" - finance companies and building societies - to a cap of $1 million per depositor.

The good news is that the scheme worked - at least for banks, none of which failed. There was no run on the banks and the economy stabilised. The story of the finance companies is not so good. Nine have failed so far, and the cost to the taxpayer is $2 billion. And the latest finance company debacle is the one at South Canterbury, with potential losses of an additional $1.7 billion.

While support of the banks was necessary in the face of the global crisis, the same support for the finance companies was questionable, in that it encouraged greater risk once the guarantee was in place.

Most importantly - and here the Auditor General is damning in a review - the Treasury department - that is, Bill English - of the successor National Government failed utterly to supervise these companies, or to try to intervene when he had reason to do so, or do anything but prepare to pay off when they failed. If the Auditor General stops short of recommending English's resignation I feel no such reservation. Bad decisions, according to John Key, deserve consequence.

Just this week, the National-led Government announced it is taking over the debt burden of AIG in that company's purchase of the Christchurch insurance of AMI, leaving AMI debt burden free and allowed to continue operating elsewhere in the country. I'm willing to be corrected, but it always seemed to me that insurance companies collected premiums, invested them, and then because of pooling their premium assets, could pay off in event of disaster.

They could also buy reinsurance from global companies like Lloyd's or Re, the Warren Buffet company. It's like the way a bookie works, laying off some bets to cover the rest. But along comes Bill English and company to socialise the insurance companies' risk, making it a tax burden for the rest of us, although we never participated in the profit. Crony capitalism at its finest and worst.

The cream on top of all this pie in our face is that $1.7 billion fraud in South Canterbury Finance. For his failure in superintendence alone, Bill English should go. Bad decisions need to have consequence. If it's good enough for the poor, it ought to be good enough for the privileged.