The SCF legacy; thanks Michael

There's another interesting editorial in the Dom-Post this morning on the South Canterbury Finance receivership. Whilst it's well worth a read in its entirety, our attention was drawn by this bit:

However, it appears to be the irreversible consequence of the last government's desperate scramble to match the retail deposit guarantee announced by its Australian counterpart in October 2008. Two days before the scheme's unveiling it was just a possibility. The Treasury and the Reserve Bank advised finance minister Michael Cullen of the form such a scheme could take, but told him there was no need for immediate action. Forty-eight hours later the scheme was a fait accompli, announced by Helen Clark at the launch of Labour's 2008 election campaign. Inevitably "i"s were left undotted and "t"s uncrossed.

Treasury and Reserve Bank officials warned the government a perverse incentive was being created for investors to shift their savings from banks to riskier institutions offering higher interest rates. However, neither officials nor ministers appear to have considered the separate question of whether it was right to burden taxpayers with the responsibility for meeting interest payments as well as guaranteeing capital.

A strong case can be made for the guarantee, which was supported by both Labour and National. Without it, there was a danger of capital being sucked out of New Zealand to Australia, where the government was guaranteeing bank deposits. But why should those who invested with riskier institutions have been guaranteed a higher rate of return? They should not.

The failure of ministers to address the perverse incentives created by the scheme increased taxpayers' liability by encouraging investors to transfer savings from banks to finance companies. Repaying SCF's creditors will cost every New Zealander $372, although Finance Minister Bill English is optimistic that two-thirds of that will eventually be recovered. The failure of ministers and officials to anticipate the consequence of guaranteeing interest returns has created a sense of unfairness that will linger long after SCF's depositors are repaid.

The leader writer raises some interesting points. First-up, it is noted that the retail deposit guarantee scheme was conceived in haste, and on the hustings. That it changed from idea to entrenched policy in 48 hours suggests that not enough thought went into the scheme. The blame for that lies fairly and squarely at the feet of Michael Cullen.

Policy conceived on the hoof is seldom good policy. It would appear that Labour learned nothing from the debacle of the 20 Hours "Free" ECE policy which was similarly conceived on the hustings in 2005. The Ministry of Education staff (with whom we worked closely and collaboratively) had the devil's own job to try and construct a coherent policy out of Steve Maharey's lightbulb moment where he seized an opportunity to garner some votes in a tight contest. 20 Hours "Free" ECE was never free, not could it have ever been, and we were delighted when one of Anne Tolley's first moves was to rename the programme 20 Hours ECE, a far more honest description.

That is not to say that National is not at fault for its ongoing administration of the retail deposit guarantee scheme. There's still a lot of dust to settle, and judgment will be passed in due course. But it's also given us renewed cause to reflect on the legacy that Michael Cullen left for his successors; a bare cupboard, a rusting, over-priced train set, a misleading PREFU statement, a hole in the ACC earners' account, and a get-rich-quick scheme for investors with an eye for the main chance.

Thanks a couple of billion, Dr Cullen.