Try this blunt commentary from Iain Martin of the UK Telegraph for a freezing shower.  As Phil Goff issues his daily demands for "solutions" from John Key, I wonder if he is desperately trying to head off a similar judgment from history, on the Clark government of which he was a part.

Martin says

"The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic".

He goes on:

"This catastrophe happened on [Gordon Brown’s] watch, no matter how much he now opportunistically beats up on bankers. He turned on the fountain of cheap money and encouraged the country to swim in it. House prices rose, debt went through the roof and the illusion won elections….

Our money in New Zealand was not cheap, but a fountain of government spending made us think it did not matter if we lived on high priced loans from other people (often poorer than ourselves). Envy taxes on earned income and no tax on house capital gains,  gloating enforcement of land use controls and law-pumped building costs combined to make it silly to invest in anything other than real estate here. So we joined the other Anglo countries with the biggest housing bubbles in the world.

Martin goes on:

The Government’s bail-out of the banks in October with £37 billion of taxpayers’ money was supposed to have "saved the world", according to the PM, but now it is clear that it has not even saved the banks. Our money kept the show on the road for only three months….It is finally dawning on the Government that the liabilities of the British banks grew to be so vast in the boom years that they now eclipse the entire economy. Unfortunately, the Treasury is pledged to honour those
liabilities because it has guaranteed not to let a British bank go down. RBS has liabilities of £1.8 trillion, three times annual UK government spending, against assets of £1.9 trillion."

For any politician there is one terribly tempting solution to this – trash the value of the currency. Formal bankruptcies may be avoided as the creditors lose the spending value of their investment, instead of having it formally written off.

Look out superannuitants and anyone else planning to live on savings or fiat money investments.

Things may be little brighter in Obama’s domain. Yesterday’s Bloomberg report of Nouriel Roubini’s assessment of bank solvency summarises things:

"U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

We are assuring each other that our banks in New Zealand are insulated. Ahem.

One thing should be made perfectly clear by the politicians rescuing banks anywhere – under capitalism, as a shareholder, when your company can not pay its debts as they fall due you have done your dough  and the company passes into the hands of an agent for the company’s creditors, not for you, unless your creditors agree otherwise. Those carrying the risk of failure thereafter (the creditors) also have the benefit of any upside.

That’s why taking the equity and injecting shareholders funds (the way the BNZ was last rescued nearly 20 years ago) can be a better way to go than to offer wholesale guarantees. Gordon Brown has made sure the UK government at least shares any upside. Why not ours?

Government rescue announcements on those terms should  make it clear that the equity will be sold off when the crisis is over, hopefully under conditions that keep most of it in New Zealand.

Using the opportunity to buy back the farm may cause cries of rage, given that much of the crisis is attributable to bad government policy. And it is even more unfair now that acceptance of government rescue may be forced on institutions simply because their competitors have accepted government guarantees.

But many banks have profited from the  bad policies that created a property boom (and in New Zealand maintained the balance of payments deficit funded by the banks). Taxpayers and creditors now at risk of losing umptillions should at least have the comfort of knowing that they, not bank shareholders, will take any  upside after the rescue works.