In 2000, the Initial vote on Kiwibank in the Labour-Alliance government was 16 votes against from Labour, and four votes in favour from the Alliance.

I was there when this was reversed, and in 2001 the four insurgent Alliance Ministers – Jim Anderton, Sandra Lee, Laila Harre and Matt Robson- received our foundation Kiwibank cards in Jim’s office.

New Zealand once again had a popular publicly owned bank to aid its development and counter the strangling grip of the privately owned foreign banks.

Finance Minister Hon. Michael Cullen said, begrudgingly, that the bank, operating from New Zealand Post premises, would get an $ 80 million loan , but not one cent more. Helen Clark continued her opposition by announcing she would remain an Australian Big 4 customer.

Kiwibank had been a long journey.

So, why had Alliance members campaigned so long and hard for this goal?

Jim Anderton had spelt out the reason in 1988 as the Lange Labour government continued its crash sale of public assets by putting the Bank of New Zealand with its 20 percent share of the banking sector on the auction block. In a 1988 parliamentary speech that led to his expulsion from the Labour caucus Jim Anderton said:

“The sale of State Owned Enterprises transfers ownership, control, wealth and resources from the public sector to the private sector…Once it is sold the policy options available…are almost certainly removed…Even after the worst stock market crash in New Zealand’s history…the Bank of New Zealand made an operating profit of $182 million in the 1987-88 financial year… (it) is virtually a perpetual asset…(and) commands 20 percent of the current financial system.”

As a highly capitalised bank the BNZ, meeting its huge taxation and dividends obligations to the government and with its long history in the development of New Zealand as an arm of government, the BNZ limited the destructive side of  private banks and kept profits and investment capacity in New Zealand.

Within a short time, an expanding  Kiwibank kept local branches open, and rapidly attracted customers. It paid back the initial government capital within 3 years. It now has over one million customers, including over 40,000 businesses.

Michael Cullen, resiling from his initial hostility, was to praise Kiwibank in his autobiography as follows:

“But Kiwibank proved its real worth to New Zealand in the early stages of the global financial crisis. The Australian  banks withdrew substantially from the New Zealand mortgage Market. Kiwibank stepped  into the breach. Despite its very small size compared with the Aussies, it was for a year or two the largest provider of new mortgages…since Kiwibank was set up, the Australian banks have emphasised their New Zealand character…”

Michael Cullen, the former Finance Minister then warned, and Minister Willis would do well to heed,  about the true character of the private banks:

“…when the crunch comes , one should never be fooled  about where their primary accountability will lie.”

In his 1988 speech to Parliament, opposing his own public asset selling Labour Party,  Jim Anderton also outlined the vision which in 2002 was to underpin both the  Kiwibank and  a newly minted  ministry of economic and regional development, of the public bank playing an essential role in national economic development:

“…if it were decided to run an active regional development policy the geographical spread of the branches of the Bank of New Zealand makes the bank the only Government agency with the detailed knowledge required to act of the Government… of providing long-term development funds for viable projects in all the regions…sale of such an extensive economic power…may lead to the operation of the bank for purely financial commercial reasons…small borrowers , and even Governments, suffer when dominant banks  are run for short term financial reasons and profits.”

All of these advantages are now at risk as the government , using the excuse of the need to raise capital for the bank to take on the Big 4, sets out to gift an essential economic tool to the private sector.

The New Zealand Herald revealed the government’s intentions on 25 July:

“In a routine letter of expectation sent to Kiwibank’s board chairman David McLean in April, shareholding ministers suggested they were open-minded as to how Kiwibank grew… ( Minister of State Owned Enterprises ) Goldsmith said the Government had no plans to privatise state assets, but conceded a possible outcome of the purpose statement exercise could  be that it decided it no longer wanted to own an asset.”

Renationalisation Pledge

Warning bells should ring for Labour and the Greens. Labour members and voters triumphed over the initial opposition to Kiwibank of Helen Clark and Michael Cullen to Kiwibank. The Green Party has pledged to oppose asset sales. As Alliance MPs, Green Party founders Jeanette Fitzsimons and Rod Donald campaigned for Kiwibank . Labour and the Greens must form a united front in defence of Kiwibank.  A pledge to re-nationalise and expand through government financing ,there are multiple financing methods available , will deter the circling sharks which include the Australian bank competitors.

Governments of all stripes throughout the world recognise the crucial developmental role of a large state bank as an essential tool for long term investment and development. Labour and the Greens can unite to build on the vision of Jim Anderton and ensure that New Zealand is not, once again, deprived of its state-owned bank by a short-sighted government acting in the narrow interests of the private sector and not in the best interests of New Zealand.

EDITOR’S NOTE: Matt Robson and others are calling on the New Zealand Government to abandon any plans to privatise Kiwibank and to commit to keeping it in public ownership.

You can sign the petition here.

Last week (The Ponzi financial model and New Zealand’s monetary policy) I described New Zealand’s place and financial strategy within the world’s financial ecosystem; how New Zealand pursues a ponzi financial model, and how that model has played a role in offsetting the ‘mercantilist’ financial strategies of other countries (examples given were Denmark and Netherlands). (See New Zealand chart, noting the persistent inflow of foreign money.) In this kiwi case, New Zealand takes the role of ‘player’, with Denmark and Netherlands taking the ‘investor’ role.

The net effect of this monetary strategy has been East Asia (especially from 1993 to 2009, see Malaysia example) and  Northern Europe (especially this century, see Netherlands example) supplying foreign aid to New Zealand, with the beneficiaries of that ‘aid’ being New Zealand elite consumers. There has been a substantial domestic cost to New Zealand arising from the strategy; a cost which has manifested as substantial entrenched inequality and poverty.

Of course, New Zealand has not been not the only recipient of such unconditional ponzi-style ‘aid’. Other recipients have included Australia, the United Kingdom and the United States. (We may note that Australia is moving away from the ponzi model, though indications are that Canada has adopted it post-2008.) While the United Kingdom and especially the United States have been exceptional cases in other respects, they have both played key roles in balancing the world system. (The United Kingdom is exceptional because it has a financial realm which extends very much beyond its formal borders. These are essentially offshore tax havens. The financial fingerprints of Jersey, Guernsey, Isle of Man, Cayman Islands and Gibraltar almost certainly look more like that of Switzerland than that of the United Kingdom. For the United Kingdom, financial statistics must be treated as incomplete. See my Interesting Financial Fingerprints: Malaysia, Switzerland, United Kingdom, Israel, Evening Report, 30 October 2023.)

Japan

It’s time to see the role of the US, but before that to look at Japan as the truly exceptional country that shows the rest of the world how it could have been managing its public finances.

Japan Incorporated experienced a ‘balance-sheet recession’ through the 1990s, following a few years in the late 1980s and early 1990s of extraordinary exception; a short period of financial speculation run riot – fuelled by a significantly overvalued yen – and in which the lands of the imperial palace in Tokyo were said to be worth more than California.

Japan developed a way of dealing with its first-world financial problems by creating a new financial model, although it must be said that the United States has long deployed aspects of this pro-deficit approach. This new model, which consolidated in Japan as ‘Abenomics’, suits both these countries (the two largest liberal economies in the world), both of whose citizens strongly resist increases in taxation. Abenomics is characterised by what we in the west would call persistently easy monetary and fiscal policy. Japan’s interest rates have been below 1% since 1996. For half the time this century Japan’s interest rate has been zero, and since 2016 Japan’s interest rate has been negative. Japan’s interest rate is still negative. The last time Japan faced a significant financial crisis was 1998, thanks to its position in Asia; Japan weathered the 2008 global financial crisis very well.

Looking at the Japan chart, the dominant feature since 1993 has been the huge private savings being channelled directly into government spending, with the full participation of Japan’s citizens and businesses. Whereas New Zealand actively participates in a globally-oriented ponzi financial model by setting interest rates always high enough to draw in foreign savings, Japan operates a sophisticated and benevolent domestic ponzi model.

In Japan the ‘player’ is the government and the ‘investors’ are the citizens and businesses. Rather than be taxed more by the government, Japanese agree to lend large portions of their unspent incomes to the government, and with wholesale interest rates at zero percent, or less! This is truly astonishing in terms of the usual rhetoric of finance that western populations are subjected to.

It works of course because the Japanese people prefer to lend to their government instead of having that income taxed. It’s win-win. The government gets to spend the money on all sorts of public good systems and projects – as well as on World Cups and Olympic Games – while the money remains available for savers to spend should they experience ‘rainy days’ or should they want to travel or buy a car or buy a house. (It works like a cheque account; while borrowers spend the money, it remains fully available for the account holders to also spend it.)

The downside for Japan is that its cheapness (low cost of living, not low quality of goods) makes foreign travel – and imports – expensive. And then there’s having to put up with the tut-tutting from the west about Japan’s huge government debt. Nevertheless, everybody in the world who can be bothered to observe what financial success looks like understands that Japan’s government can service its debts to its own people. Japan’s government is as far from being bankrupt as any government can be. (In New Zealand’s final political debate before the 14 October election, Prime Minister Hipkins acknowledged Japan’s success by claiming that New Zealand’s economic growth was second only to Japan. Hipkins was not in fact correct; USA had higher growth in mid-2023 than either New Zealand or Japan.)

Japan’s government debt is stabilising at below 300% of GDP. It means that the Japanese government can run substantial budget deficits indefinitely. We should note that, in the 2020s, Japan’s interest rate has remained negative, and that inflation, which maximised in January 2023 at 4.3%, is now 3.0%. Japan’s very cheapness means that it cannot but help running balance of trade surpluses on an ongoing basis. Meaning that Japan becomes an ‘investor’ in New Zealand’s version of the ponzi game.

United States – USA

The final country to mention is United States, which plays both kinds of ponzi game; the New Zealand global version (USA Inc. is the player) and the Japan domestic version (US Treasury is the player). It has to. The United States financial model stabilises a world system destabilised by mercantilist ‘anti-players’ such as the European Union.

It’s just a huge pity that United States government spending is so focussed on war rather than peace. Indeed, the twentieth century wars in Iraq and Afghanistan were entirely funded from foreign savings being channelled into the United States Treasury. It is truly remarkable that the United States has been able to cut taxes while escalating foreign wars.

The United States’ ponzi economy acts as the world’s consumer of last resort; a situation necessitated by the extensive mercantilism elsewhere (especially the European Union), and by virtue of the $US being the world’s reserve currency. And the wars in Iraq and Afghanistan can be understood as ‘last resort consumption’. (We note that military consumption is easily the ‘least-green’ of all kinds of consumption. Fortunately, Japan has been constrained – by others and by itself – from indulging in military consumption. And we may note that in the early 2010s China shared the role, with the United States, of ‘consumer of last resort’. The least green type of production is probably mining; including the mining of crypto-currencies such as Bitcoin.)

The global economy’s woes have been compounded by an aggressive and totally misplaced United States monetary policy; a policy that has sought to induce a global recession by forcing other countries into believing that they also had to raise interest rates aggressively to ‘deal to’ a global ‘cost of living’ problem; a problem that transparently began with the Covid19 pandemic (especially the political ‘mission creep’ which generated a degree of economic paralysis in the world) and came to a head with the US-perpetuated Russia-Ukraine military stalemate. The trifecta of costs was completed by the raising of interest rates in most of the world. The cost-trifecta – the source of the coming stagflation crisis – has been pandemic-related paralysis in 2021 and 2022, war in 2022 and ongoing, and the US-led assault on interest rates from late 2021.

As the global system plays out at present, the United States is trapped in its role as ponzi-player-in-chief. The world will be a better place when the United States plays ponzi in a responsible way, as Japan does. Even better, the United States could be facilitating the intellectual leadership required to lead the world away from mercantilist growth economics. The mercantilist countries prioritise economic growth, and achieving that growth through export surpluses; hence the need for a consumer of last resort. It’s a global economic model that has become completely unsustainable; and which finances the cruel wars which the United States subscribes to.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

On 26 October I wrote about New Zealand’s exceptional financial model, showing it to take a similar (though non-fraudulent) form to a Ponzi Scheme (The Ponzi financial model and New Zealand’s monetary policy). And I showed how this kind of financial behaviour by a nation-state could help to stabilise a world economy when some other national economies pursued a strongly contrasting model. I call the two models the ‘ponzi model’ (with New Zealand as exemplar) and the ‘mercantilist model’ (with Denmark and Netherlands as twenty-first century exemplars).

Malaysia, here, is a country which switched from the excesses of one model to the excesses of the other, before reaching a  neutral position after the 2012 Eurozone crisis.

In the Malaysia chart, we see Malaysia adopting the ponzi model around 1990. The telltale signature is the persistent amounts of foreign money (green) going into Malaysia’s private sector (blue), with the government creaming the resulting money-go-round, running fiscal surpluses (red).

Malaysia was one of the countries which precipitated the Asian financial crisis late in 1997. Having to pay back much of the debt incurred in the 1990 to 1997 ponzi period, we see a massive switch to private sector saving paying back much of the foreign debt incurred and then saving by accruing foreign credits.

For 14 years, Malaysia kept up an extreme form of the mercantilist model, which has foreign deficits as its main feature (which means current account surpluses). This 1998 to 2011 signature is one of high saving (blue), exports exceeding imports (green), and the export of material living standards (green) to countries like New Zealand. Fiscal policy (indicated by red) followed closely to global norms; annual government deficits of about 4% of GDP.

This pattern continued in Malaysia until 2012 when mercantilism became the collective financial policy of the Eurozone countries. After 2012 the East Asian trade surpluses got smaller, as these countries increasingly looked to domestic markets to keep their economies growing. (The last three years, of course, is the Covid19 pandemic, a period of increased government deficits.)

(Malaysia, by the way, has an interest rate of 3%, and which has not gone above 3.25% in the last 10 years. Its inflation peaked at four percent in 2022, and is now 1.9%. Its government debt is 60% of GDP, nearly twice as high as New Zealand’s. Its neutral post-2012 financial model is delivering for Malaysia.)

Switzerland is exceptional in that it is the world financial centre, par excellence, and is the headquarter country of global corporates and world governance agencies (including much of the United Nations).

Thus, Switzerland makes large global profits which are deployed all over the world, hence the persistently strong savings (blue) and foreign deployment  of those savings (green). While it has the look of a mercantilist country (like Netherlands), its special circumstances with respect to the global economy mean that this is by circumstance rather than by design.

Fiscal policy is passive in Switzerland. It does not make any fetish about the desirability of governments running financial surpluses. It’s government debt, much greater than New Zealand’s in dollar terms, is 41% of GDP, compared to New Zealand’s 36%.

Switzerland’s interest rate has been minus 0.75% for most of the last ten years. For half of that time, its inflation rate has also been negative. For much of the time its interest rate was similar to its inflation rate; in the late-2010s its inflation rate was positive, though under one percent. Its current interest rate is 1.75% and its inflation rate is 1.7%. The main reason for its low inflation has been its low interest rate. Unlike New Zealand, Switzerland has not created a domestic cost of living crisis, because it did not raise its domestic interest rates.

The United Kingdom shows aspects of New Zealand’s ponzi model; in particular it is a recipient and spender or foreign savings, especially this century. However, United Kingdom no longer pretends that fiscal (government) surpluses are necessary. Although David Cameron’s government (2010-2017) did misguidedly try for a large dose of government austerity, known there as ‘fiscal consolidation’. The United Kingdom is also notable in that it does not accrue large private debts in the way New Zealand does.

The United Kingdom is exceptional in that not all that country’s economy is covered by its national statistics. The United Kingdom economy includes a range of realm countries – such as Jersey, Guernsey, Isle of Man, Cayman Islands, Gibraltar – some of which are tax havens with economies with which contain a disproportionate part of the United Kingdom’s financial activity. So the United Kingdom’s chart is in fact incomplete; invisibly offset by these other countries which do not keep comprehensive statistics, and which most likely all have financial balances like Switzerland.

The United Kingdom has interest rates and inflation rates similar to New Zealand. Its current interest rate is now 5.25% and inflation rate is 6.7%. As with New Zealand, it has a hawkish monetary policy (anti-inflationary in dogma if not in reality); an excessive readiness to raise interest rates (with, as in New Zealand, unstated additional motives for this policy) created and perpetuated its cost-of-living crisis.

Finally, Israel is a mercantilist nation with a mercantilist mindset. It’s a financially conservative country, with private sector surpluses and savings deployed to other parts of the world. But you will see that it has substantial government deficits. In this respect it is like the United States, and of course (like the USA) the red in Israel’s chart shouts ‘defence’, or at least a very well-funded military sector. While Israel is a net exporter – hence the green on the lower portion of its chart – it is of course a recipient of foreign aid in the form of grants (mainly from the United States) rather than loans.

Israel’s inflation peaked at just over five percent and the interest rate is now 3.8%. From 2014 to 2021 Israel’s inflation varied between minus 1.5% and plus 1.5%. In that time interest rates were between 0.1% and 0.2%. Israel did not have an inflation problem, despite its high levels of government spending. Its government debt is 61% of GDP, twice New Zealand’s. (Government spending, per se, is not the cause of cost-of-living crises; although government spending without outcomes can be a contributing factor to inflation.)

Nobody would accuse Israel of unsound finance. But it does have very different monetary and fiscal policy agendas than New Zealand. And Israel is closer to the world’s norms than is New Zealand. For Israel’s first-class citizens – the majority of the population in its less-disputed territories, along with a minority of the population of occupied Palestine – there is markedly less inequality.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Today I read this article (David Seymour calls for sweeping changes to make the Reserve Bank more accountable, NZ Herald, 26 October) showing David Seymore’s wish to double-down on New Zealand’s financial model.

The Ponzi financial model operates much more broadly than the fraudulent Ponzi schemes associated the likes of players Bernie Madoff and Charles Ponzi. In particular, the model can and does operate without the fraudulent deception of these renowned schemers. And it can operate on a global scale.

Ponzi finance takes place when ‘investors’ (people wishing to make money from unspent money) advance saved funds to ‘players’ (understood by ‘investors’ as ‘intermediaries’ such as banks or funds managers). Ponzi players then use the funds for their own gratification (gambling or consumption) rather than reinvesting those funds into a venture which would be expected to yield a profit. Instead of servicing the ‘investors’ with genuine earnings, Ponzi players service existing ‘investors’ by borrowing from new ‘investors’. A Ponzi player ‘borrows from Peter to pay Paul’, rather than paying Paul out of income earned. Peter and Paul are example ‘investors’. (In a fraudulent scheme, one could say ‘rob’ instead of ‘borrow’; although even in fraudulent schemes ‘investors’ only actually lose when the scheme unravels.)

(Note that ‘investor’ is one of the most ambiguous words in the English language. In correct economic language, a saver is not an investor; but a true financial intermediary – such as a legitimate bank – is an investor. An investor is a spender, or a direct financer of spending; a purchaser or manufacturer of new assets. A true investor is neither a saver nor a consumer nor a purchaser of existing real or financial assets. Essentially, an investor operates a productive business or acts in a businesslike way, sinking capital and awaiting an eventual return in the form of profit or interest. Investment is ‘giving up something real to create greater future value’. Investment is not the purchase of existing assets in the hope that those assets can be sold in the future at a higher price; such speculative behaviour is gambling, though not all gambling is imprudent. Genuine investment may be called productive gambling, whereas speculative ‘investment’ is unproductive gambling.)

Non-fraudulent Ponzi finance takes place when there is no overt deception. ‘Players’ and ‘investors’ are open about their activities, though there may be degrees of naivete or self-deception on the part of either.

The nation-state Ponzi model

A ‘nation-state actor’ is not the same as a government. A nation-state such as New Zealand, when considered as an economy or as a financial actor, may be called New Zealand Incorporated (NZ Inc. for short). The chart here (Intersectoral financial balances from 1980: New Zealand, from Visualising Countries’ Deficits and Debts, Surpluses and Credits, Evening Report, 29 May 2023) shows, from 1993, the telltale fingerprint of a nation-state ‘player’ adopting the Ponzi financial model as its ‘business model’. New Zealand Inc. is the player in this chart. ‘Peter’ and ‘Paul’ are represented (in green) as the ‘foreign sector’. Paul has always been very happy to ‘invest’ in New Zealand Inc. because Peter keeps supplying the funds which pay Paul. Likewise, Paul pays Peter. There is an ongoing long-term flow of funds from foreign savers to New Zealand consumers as well as to other foreign savers. Much of it is channelled through asset markets; thus the end-consumers are often people who sell their houses or shares to speculative ‘investors’.

The funds from foreign Paul and foreign Peter are channelled into the New Zealand private sector, supporting a mix of private consumption, private speculation, and private investment. The Government gets its cut, indirectly, by taxing the indebted and profligate private sector. In New Zealand, unlike some other nation-state economies, the government is usually able to collect most of the taxes that it levies; so the government is enriched by the process while looking ‘squeaky clean’; the government is taxing debt rather than incurring debt.

While the Ponzi financial model was not fully operable in New Zealand until 1993, it was established in 1985 with the deregulation of the financial sector and the adoption of a monetary policy which ensured that interest rates would be high enough to attract Peter’s and Paul’s money.

We should note that, before 1985, it was also normal for New Zealand to receive a substantial net inflow of foreign funds. But, until then, New Zealand Inc. was following a traditional development model. In that development model, New Zealand – and especially the New Zealand government – was an active borrower, with the foreign sector sufficiently responding to New Zealand’s requests for investment funds. As an active borrower, those pre-1985 debts would be serviced out of incomes generated because of those debts.

In the development financial model, government deficits are a central feature, driving the economic development of the nation-state. In the Ponzi financial model, governments feed off private deficits; while not always in surplus, governments tend to be surplus-seeking. In the development model, governments are the active party. In the Ponzi financial model, the Reserve Bank – the immediate player – sends interest-rate signals to foreign Peter and foreign Paul; Peter and Paul become the rentier ‘investors’, and the banking system of the nation-state is the Ponzi intermediary. In New Zealand at least, the Reserve Bank plays this financial game in part of its own volition; and in part because it is mandated by the government to do so, through the Policy Targets Agreement which David Seymour wishes to modify. The irony is that the Policy Targets Agreement is the ultimate in Government intervention, which is most strongly advocated by those who otherwise claim to be anti-interventionists.

National economies which pursue the Ponzi financial model have overvalued exchange rates for their national currencies; this is the result of the ongoing inflow of foreign funds from the many Peter and Paul ‘investors’. That is the key feature and consequence of setting elevated interest rates, where ‘elevated’ means interest rates sufficiently high to successfully bid for Peter’s and Paul’s spare money.

Excess elite consumption in New Zealand is thus underwritten by foreign ‘investors’, foreign Peter and foreign Paul; indeed, such excess consumption – debt-financed enjoyment – has been funded in that way in New Zealand since 1985, when the floating exchange rate mechanism was introduced. New Zealand has become one economy in which the foreign-exchange market is dominated by ‘investors’ and ‘players’ rather than by exporters and importers. Not in the top-fifty economies in the world based on gross domestic product (GDP), New Zealand Incorporated is among the top 15 in foreign-exchange transactions.

While private sector deficits in New Zealand did not become prominent until 1993, we may see from Governments run financial deficits; it’s their role to do so (Evening Report, 17 Oct) that private sector surpluses are the global norm, and when global private sector balances approach zero then trans-national financial crises are the result. New Zealand only shows private sector surpluses during financial crises, and even then these private surpluses are smaller than in most other countries.

To see the converse financial model, we may note these two countries: Netherlands and Denmark. These countries, with their financial signatures opposite to New Zealand’s, in slightly different ways pursue the ‘mercantilist financial model’, which relies on an undervalued exchange rate. (Noting that a central feature of the Ponzi nation-state financial model is an overvalued exchange rate.) Netherlands, if you like, is Paul. And Denmark is Peter. Whereas New Zealand’s consumers – especially its elite consumers – overconsume, Netherlands’ and Denmark’s underconsume. Netherlands’ Paul and Denmark’s Peter transfer material enjoyment to New Zealand consumers. In general, in the Ponzi financial model, ‘investors’ transfer consumption enjoyment to ‘players’.

Netherlands is a small nation-state within the Eurozone of the European Union. And Denmark, though in the European Union, has its own currency and banking system, untied to the European Central Bank. Denmark Inc. is the closest to being the antithesis to New Zealand Inc. As such, it became the best-known country in the world for its negative interest rates, which its Reserve Bank operated from 2012 to 2022. (Refer Reuters 22 July 2022, Denmark’s decade-long experiment with negative rates seen ending soon.)

The Netherlands’ case is more complex; it is linked to an unstable (and perhaps unique) example of the Ponzi financial game; the example which operated within the Eurozone during the first decade of this century. In that 2000s’ scenario, inflation in the southern European Union countries created an effective currency overvaluation there, and an effective currency undervaluation in the north of the Eurozone. Netherlands became the northern exemplar, while Greece was the southern exemplar. The dynamic in this case was the ‘investors’ in Eurozone north whereas the south was the ‘player’. In this case the game crashed in the early 2010s, and now the Eurozone as a whole is playing the role of ‘investor’ in the same global Ponzi game which New Zealand and Denmark (and others) have been playing since the 1990s.

Why do I call this game a ‘transfer’ from ‘investors’ to ‘players’? If we look back over the decades, we see a direct subsidisation of ‘player’ living standards by ‘investors’. Under conventional financial principles, this would be called a player ‘liability’ rather than a ‘transfer’. However, the issue is that players’ debt to income ratios have not been increasing, thanks to a mix of economic growth and inflation. (This economic growth is largely despite the engagement with Peter and Paul, not because of their ‘investment’ in us.) New Zealand as a player has never had to repay its debts to its Peter and Paul ‘investors’. NZ Inc. services these debts with ease, by enlarging these debts. This debt servicing becomes even easier when global inflation diminishes the accrued debts as well as the interest payable. Nevertheless, New Zealand continues to play the Ponzi game; in order to keep its exchange rate overvalued, New Zealand must pay Paul by borrowing more from Peter than it is paying to Paul. The player pays its interest (and any repayments) from newly borrowed funds.

Iceland’s banks played the same Ponzi game in the mid-2000s. It got severely burned by the 2008 Global Financial Crisis. But, after what amounted to a painless bankruptcy, Iceland Inc. recovered soon enough.

What applied in the past will not necessarily apply in the future. Global deflation, if that happens in the future, would increase the debt-to-GDP ratio of NZ Inc. But global stagflation looks to be a much more likely bet for much of the next twenty years. New Zealand’s accumulated debts to date would then largely disappear into the ether of financial history. New yet-to-be-incurred debts would probably enjoy the same fate. Nevertheless, New Zealand’s financial game will end when there are no longer willing Peters to facilitate New Zealand’s servicing of Paul. Paul might even ask for repayment in full. New Zealand’s exchange rate would then fall, and Paul’s payout in New Zealand dollars would convert to a lesser amount of Euros. The only substantial consequence for New Zealand would be that the Peters and Pauls of this world would no longer see New Zealand as exceptional; would no longer see New Zealand as a player who would pay them higher ‘risk-free’ returns than other players.

Is it a Problem?

This state of affairs is not (and has not been) a problem for any of the participants, because they are all ‘consenting adults’, and all parties have been rewarded so far. Indeed as noted in my Governments run financial deficits; it’s their role to do so (Evening Report, 17 Oct), this is a case where two wrongs do seem to make a right. Two forms of destabilising financial behaviour – mercantilist and Ponzi – offset each other. So long as the Danes and the Dutch keep playing their game, they (taken together) do not want to be paid out simultaneously; they want to keep playing. Repayment for them would mean that their incorporated countries, long-used to private sector surpluses, having to enjoy deficits; they would have to spend more than they earn, something they are not used to and have never been comfortable with.

Looking back over the last 30 years, New Zealanders have benefitted; and Dutch and Danes have lost, though they would have lost by more if they had ‘invested’ elsewhere at lower interest rates. They have been the givers, and New Zealanders have been the takers; and have been the takers without any form of systemic financial default.

However, this Ponzi financial model is a past and present problem in that it has substantial adverse distributional implications for New Zealand (high domestic wealth and income inequality); and, distributional implications for Netherlands and Denmark too (less domestic inequality than they otherwise would have had). In this sense, it is Netherlands and Denmark – not New Zealand – who become the winners of the game.

The differences, domestically, are linked to the interest rates. New Zealand’s financial model depends on setting interest rates above the norm for economically advanced nation-states. Netherlands and Denmark’s mercantilist model depends on setting interest rates below that norm. High interest rates create inequality; and perpetuate cost-of-living crises; crises which are ameliorated by the overvalued exchange rate keeping elite consumption cheap. Low interest rates in Netherlands and Denmark diminish inequality, reduce the costs of housing and other basic needs, and, through their undervalued exchange rates, raise the prices of elite consumables.

Summary

The New Zealand economy has worked according to a simple Ponzi model since 1985. The model relies to a degree on New Zealand exceptionalism which works by creating the perception in world financial markets that New Zealand is a sure bet: both ‘safe’ and providing ‘investors’ with relatively high returns. The model relies on the government’s anti-inflation mandate to justify the higher domestic interest rates required.

Interest rates in New Zealand are set to ensure an inflow of foreign savings which stimulates (while indebting) New Zealand’s private sector, and which sees significant amounts of that credit pass through the private sector into government coffers.

New Zealand’s Ponzi financial model is stable so long as New Zealand retains its exceptional status in foreign perception. Is New Zealand’s Ponzi financial model stabilising? Yes, given the mercantilist games played elsewhere in the global financial ecosystem. How will the model fare in the next Great Depression? Possibly no worse than Iceland fared in the 2008 Global Financial Crisis.

Should New Zealand Incorporated shift to another financial model? Yes, because ultimately two wrongs do not make a right. And because this model underpins the increasingly grotesque inequality we see in Aotearoa New Zealand. And because the two extranational Ponzi games which we are familiar with from the late 2000s, that played by Iceland’s banks and that played by the Southern Eurozone (including Ireland who got away with it; see Economic Growth, Ireland compared to Australasia, Evening Report, 12 Oct 2023), both crashed and burned soon enough.

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Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.

Political Roundup: Will the Govt act on mega bank profits and reform the banking sector?

The corporate retail banks are making mega profits on the back of Government policies and indirect subsidies of recent years. As a result, there are calls from across almost the whole political spectrum for greater regulation of the banking sector, including windfall taxes. But will outrage turn into action?

Prime Minister Jacinda Ardern led the charge against the banks this week, warning the likes of ANZ – which announced recently that its profits were up 20 per cent to a record $2.3b – that they are at risk of losing their “social license” to operate here. The Prime Minister sounded tough, but she was also quick to admit that she has no intention of taking any action or changing the rules. The Finance Minister Grant Robertson was also fast to rule out any reforms or further investigations.

Critics have said that Ardern’s plea for the banks to have “self-reflection” is wishful thinking in the extreme. The Green Party’s finance spokesperson Julie Ann Genter put forward this analogy: “Expecting banks… to put people ahead of profit would be a bit like putting the fox in charge of the hen house.”

National, too, is pressuring the Government to act, with spokesperson Nicola Willis saying a full investigation needs to be launched into the banking sector, including whether government monetary policy had contributed to the mega profits.

Why won’t the Government act?

Claire Matthews, a banking expert at Massey University, has accused Ardern of grandstanding on the issue, suggesting that if Labour really thought the mega profits were a problem, they would be doing something about it. She suggests today that Ardern is just being an opportunist populist and electioneering: “People like to hate the banks so it’s quite an easy win for the Government.”

Looking at the lack of substance from Ardern on banking, one leftwing blogger wrote yesterday on Labour’s banking policy: “this is why Labour deserves to end up in opposition after the next election: they’re all noise and no policy. They’re offering us literally nothing, just the same tired, unjust status quo.”

Sam Stubbs, Chief Executive of KiwiSaver provider Simplicity, is reported today as saying: “The PM talks about the social license to operate. There seems to be quite a bit of hui but not much doey from the Government on bank reform.”

Stubbs is rather scathing about the dissonance between Ardern’s bank-bashing and her own governance of the banking sector: “These are nice sound bites but so far what the Government has done is slap the banking industry with a wet bus ticket all through the pre-Covid profit period when it was huge, all through the Australian banking inquiry. They then provided them with a massive amount of free money during Covid.”

The Government has handed the banks the mega profits

Stubbs’ critique of government subsidies of the banks is important. He says: “They have received a tremendous amount of tax-payer-funded support. How do they reward us? By making record profits when everyone else is doing it hard.”

Business journalist Bernard Hickey also argues that the big banks have essentially been subsidised by the taxpayer in recent years. Today he writes that “The big four banks got massive help to grow their lending & profits from the Govt in 2020, 2021 & 2022. They get their licenses to print money from the public.” He argues that mega bank profits have been made because of the Government’s “$55b of money printing, abandonment of LVR controls and $16.4b of subsidised lending by the Reserve Bank to banks through the Funding for Lending scheme”.

Hickey also explains that the banks have benefitted from a government guarantee of their sector: “the banks benefit from an implied and unfunded Government guarantee to protect them, especially now the Government is building a deposit guarantee scheme and especially after the Government’s actions during the Global Financial Crisis, when the Government created retail and wholesale deposit guarantees in 2008/09.”

Quite simply, banks have always been keen to privatise the profits from their role in the economy, but then socialise any losses – by getting the state to bail them out and to guarantee their operations.

New Zealand Herald business editor Liam Dann makes some similar arguments today: “Billions of dollars were pumped into the economy by Government and the Reserve Bank to save businesses and jobs and avoid a crisis. A side effect of the stimulus was a property and savings boom through 2020 and 2021. That’s now had the galling result that a sizeable chunk of that cash looks set to line the pockets of Aussie bank shareholders.” And he adds, “When things actually go wrong, taxpayers have to bail them out.”

Leftwing political commentator Gordon Campbell also points to Government policy as behind the mega bank profits: “The banks have reaped the rewards of the government’s successful efforts (e.g. the wage subsidy scheme) to keep the economy relatively buoyant during the pandemic. Not only did those government schemes and capital injections save the banks from suffering the bad debts and mortgage defaults that they’d expected. In addition, the Aussie-owned banks are also now in line to reap further profits from the Reserve Bank’s current efforts to curb the inflation that those initial Covid interventions inadvertently helped to generate. For months, the banks have been able to crank up their lending rates. They’ve also increased their profit margins. In sum, Covid has been something of a joy ride for the banks.”

All of this means that the banks are likely to have a combined profit total of $10b this year. Analysts point out that a 14 per cent rate of return is extremely high for banking, which is a low-risk activity normally expected to make more like half of that rate. Unusually, banks are making much greater profits and return on investments than the average NZX50 Index companies.

As Bernard Hickey points out, the local bank operations in New Zealand are “now more profitable than their parents and almost all their peers in other developed economies”. And according to Victoria University of Wellington’s banking analyst Martien Lubberink, the previous year’s profit announcements showed that the four big banks were making a profit of about $1,200 per New Zealander.

Actions the Government can take on banking

Four different reform areas are currently being proposed by analysts.

The first is a special tax on the current mega bank profits. A “windfall tax” has been proposed for some time, especially by those on the political left. The Greens took up this idea last month, pushing for a one-off tax on companies in super-profitable sectors such as supermarkets, electricity and banking.

Bernard Hickey advocates that Labour adopts the same tax used by the Australian government on banks, arguing today that this “would generate extra tax revenues of $2.6b a year, which would be enough to either pay for a tax cut or extra social spending, or to return the Budget to surplus sooner.” He says that the tax could be a levy of 0.06 per cent on the banks’ loans of $447b.

A second action would be to increase competition in the banking sector. At the moment the lack of competition in New Zealand means that mortgage rates are higher than they should be. Australians get a much better deal from their banks, because a more competitive market has been fostered there. Here, the four big banks are allowed to make a killing without any great attempts to make the playing field level and competitive.

One way to do this would be to invest significantly in the state-owned Kiwibank, which is currently far too small to compete properly. Some critics say that the Government is failing to properly fund the bank which means that it can’t properly compete with the Big Four Australian banks. It simply doesn’t have the assets and economies of scale to make any difference.

Sam Stubbs has argued today that the Government should scale up Kiwibank significantly: “Now the Government owns it yes it can recapitalise it. It would be profitable and the Government would still make money and you would get a serious competitor.”

Similarly, Liam Dann argues today that the best way to scale up Kiwibank would be “with mixed-model ownership in the style of the power companies – something this Government will never allow.” Dann suggests Kiwibank could be doubled in size.

The third action would be a full independent inquiry into the banking sector, as took place in Australia recently. Banking expert Claire Matthews, suggests that the Commerce Commission could also undertake a market study, as they did with the supermarkets and the building sectors. She argues that we simply don’t know how the banks currently operate and what problems there might be with the market and its regulation.

A fourth action would be to open up the banking sector by creating “open banking”, whereby customers can more freely shift between banks. This has occurred in plenty of other countries, and Labour has been accused of being far too slow to act on this.

For example, Stubbs is scathing on the lack of reform in this area: “Why aren’t they doing what everybody else has already done? They talk about open banking – they could have bought it in three or four years ago. We are still waiting for that. They could bring in number portability – we know what that has done for phones – they haven’t done that.” He suggests that the banks have successfully lobbied Labour to delay such reforms.

Liam Dann also comments on this today, explaining that “new blockchain-based tech that allows consumers to control all their banking data and switch providers more easily. In fact, New Zealand is dragging the chain on this initiative which has been adopted in the UK and opens the market to all sorts of new players to offer retail-facing banking services.”

Today, Newshub is reporting Government sources saying that “a mega shakeup” in terms of open banking is soon to be announced. While neither Labour nor the banks are commenting publicly, it’s reported that “Behind the scenes there’s now a scurry to get this out quickly to capitalise on the public outrage over the massive bank profits.”

The banking problem is going to get bigger

Although the Government seems more inclined to try and embarrass the banks into action rather than take a more interventionist or reforming approach, it won’t be enough. In fact, the political situation could get more embarrassing for the Government over the next year.

With rising interest rates bank profits are just going to get bigger. But at the same time, for homeowners these rising interest rates – together with mortgage holders going into negative equity with falling property prices – may result in defaults on mortgage payments. Banks may then have to increase their foreclosures. That’s going to reduce their social license to operate even further.

Banks would be wise to convince the public and politicians that they are “ethical capitalists”. If they can’t or won’t do that, then pressure will mount on the Labour Government to regulate. Government pleas to the banks to be kinder are unlikely to be enough to convince the public.

Increasingly voters are aware that Labour’s monetary policies of recent years led to increased super profits for the rich – including a transfer of about $1 trillion to asset owners. A reckoning might therefore be coming, and politicians will increasingly have to show which side they stand on: with the banks and the super-wealthy, or with the public.

Further reading on bank profits
Amelia Wade (Newshub): Revealed: Major shake-up to banking on its way
Tamsyn Parker (Herald): Super profits: Are banks making too much money? (paywalled)
Luke Malpass (Stuff): Jacinda Ardern bashing the banks won’t distract the public from real-world inflation
Liam Dann (Herald): The Prime Minister is right, the banks have made too much money (paywalled)
Gordon Campbell: On bank profits, and the US midterms
Sam Stubbs (Stuff): How much is too much? Just look at the banks
William Hewett (Newshub): National Party leader Christopher Luxon ‘uncomfortable’ with large profits banks are making
William Hewett (Newshub): Expert defends banks after Prime Minister Jacinda Ardern questions large profits
No Right Turn: All noise and no policy
Jamie Ensor (Newshub): No plan for study into banking profits, Grant Robertson says, despite Prime Minister Jacinda Ardern’s criticism
1News: Bank profits soar as Govt lobbied to introduce windfall tax
Tess McClure (Guardian): Jacinda Ardern says banks ‘wrong’ to take huge profits as cost of living crisis deepens
Rob Stock (Stuff): Bank of New Zealand increases annual profit by 7% to $1.4 billion
Gareth Vaughan (Interest): BNZ CEO predicts ‘more New Zealanders are going to find it tough’ as bank posts record profit
RNZ: BNZ posts record annual $1.4 billion profit

Other items of interest and importance today

RESERVE BANK
Bernard Hickey (Interest): Reserve Bank independence just ended
Peter Dunne: Labour’s meddling and National’s attacks pose serious threats to the independence of the Reserve Bank
Tom Pullar-Strecker (Stuff): Could Adrian Orr govern the Reserve Bank under a hostile National government?
Bridie Witton (Stuff): Why the Opposition is upset about the reappointment of the Reserve Bank governor Adrian Orr
Bridie Witton (Stuff): Why Adrian Orr’s RBNZ Governorship could be shortlived under a National and ACT government
Thomas Coughlan (Herald): Reserve Bank Governor Adrian Orr’s fate will be decided by election (paywalled)
Richard Harman: Luxon changes mind on Orr (paywalled)
Michael Reddell: Reappointing Orr
Molly Swift (Newshub): Economist Brad Olsen says National raises ‘legitimate concerns’ over reappointment of Reserve Bank Governor Adrian Orr without review
RNZ: Reserve Bank governor’s job: New govt needs right to make choice – Luxon
Russell Palmer (RNZ): National ‘shocked’ by reappointment of Reserve Bank Governor Adrian Orr
Ireland Hendry-Tennent (Newshub): National, ACT lambast Government over Adrian Orr’s reappointment as Reserve Bank Governor
Bernard Hickey (Interest): Opposition leader and potential Finance Minister say they’re ‘shocked and appalled’ Orr was reappointed Governor
Susan Edmunds and Bridie Witton (Stuff): National ‘shocked’ by Adrian Orr’s reappointment to head of Reserve Bank
Adam Pearse (Herald): National Party ‘appalled’ Reserve Bank Governor Adrian Orr given another five-year term
Jenny Ruth (BusinessDesk): Mixed reaction to Adrian Orr reappointment (paywalled)
David Hargreaves (Interest): Adrian Orr reappointed RBNZ Governor for five years

ECONOMY, BUSINESS, EMPLOYMENT
Adan Pearse (Herald): Cost of living burden pushes Govt into fuel sector changes
RNZ: Commerce Commission given power to set fairer petrol, diesel prices
Interest: Commerce Commission to get the power to step in and set ‘fair’ fuel prices
Geraden Cann (Stuff): ‘60% of the way to wage-price spiral and hyperinflation Armageddon,’ economist says
Pattrick Smellie (BusinessDesk): High inflation to persist for two years, says Reserve Bank (paywalled)
David Hargreaves (Interest): Up and away: RBNZ’s own survey shows inflation expectations shooting up again
Thomas Coughlan (Herald): Christopher Luxon on the fence about reviving Bridges-era tax indexation
RNZ: Productivity Commission to examine supply chain issues
Adam Stephenson (Herald): Fast-food workers deserve Fair Pay Agreements (paywalled)
Anna Whyte (Stuff): Is the pay freeze nearly over? Early public service pay offer revealed
RNZ: University staff rally at Parliament over proposed cuts

PARLIAMENT
Graham Adams (The Platform): Ardern enters the tragi-comic phase of her tenure
Glenn McConnell (Stuff): Efeso Collins considers standing for Parliament – but for which party?
Jenna Lynch (Newshub): Newshub-Reid Research poll: What New Zealanders really think of Jacinda Ardern, Christopher Luxon revealed
William Hewett (Newshub): National Party leader Christopher Luxon defends reputation after Newshub poll found Kiwis view him as ‘smarmy’, ‘inexperienced’
Brigitte Morten (NBR): Labour changes focus to election prep mode (paywalled)
Michael Neilson (Herald): Labour, National compromise on Māori electoral roll options bill in ‘rare occasion’
Newshub: Dame Jenny Shipley ‘thrilled’ Parliament now more women than men
Jamie Ensor (Newshub): Government exploring changes to proposed electoral legislation to ensure cross-party support
Joseph Los’e (Herald): David Seymour says he is not playing dog whistle or apartheid style politics – and he’s not a useless Māori
Rachel Sadler (Newshub): David Seymour denounces critics who call him a ‘useless Māori’, racist
Martyn Bradbury (Daily Blog): How the Left wins 2023 Election – Jacinda’s electorate coffee dates to maximise MMP dynamics
Kirsty Frame (RNZ): More ‘humane’ sitting hours for parliament needed, Labour and National MPs say
Nikki Mandow (Newsroom): ‘Nobody’s cracked it’ – Govt struggles to fix poor procurement

LOCAL GOVERNMENT
Georgina Campbell (Herald): Greens and Labour clean up in Wellington mayor’s committee appointments
Max Frethey (Local Democracy Reporting): Nelson mayor Nick Smith ‘disappointed’ with local government review
Steven Walton (Press): Christchurch deputy mayor Pauline Cotter keeps seat after recount confirms slim victory
Tim Murphy (Newsroom): Wayne’s first fix – a budget emergency
Verity Johnson (Stuff): We don’t need Wayne Brown to be another Office Rambo

THREE WATERS
Thomas Cramner: Three Waters and He Puapua
James Perry (Te Ao – Māori News): ‘We won’t have a say’ – iwi water representative on Wayne Brown’s counter-proposal
Bernard Orsman (Herald): ‘Outrageous’: Taxpayers foot $2.1m bill for controversial Three Waters Auckland HQ (paywalled)

ENVIRONMENT
Hamish Cardwell (RNZ): Climate Change Minister says COP ‘nightmare’ decision-making process needs to change
Marc Daalder (Newsroom): NZ promises cash for climate damage – is it enough?
Michael Neilson (Herald): COP27 climate change conference: New Zealand announces loss and damage funds of $20 million
Hamish Cardwell (RNZ): COP27: New Zealand offers $20m to developing countries for climate change damage
Olivia Wannan (Stuff): New Zealand becomes third country to offer cash to climate-hit countries
Ian Llewellyn (BusinessDesk): James Shaw heads to COP27 with a $20m promise (paywalled)
Hamish Cardwell (RNZ): Jacinda Ardern skips COP27, says commitment to climate change won’t be questioned
Richard Prebble (Herald): Jacinda Ardern misses a powerful opportunity with COP27 no-show (paywalled)
Injy Johnstone (Newsroom): Number 8 wire thinking for a Net Zero NZ
Felix Watson (RNZ): Climate change tops agenda of New Zealand insurance companies
1News: Govt’s emissions trading scheme ‘vilifies farmers’ – Luxon
Tess McClure (Guardian): Serious concerns raised in NZ about environmental impact of major productions including Amazon’s Rings of Power
Benn Bathgate (Stuff): High Court shuts down hut burning across Te Urewera

HOUSING
Damien Venuto (Herald): The Front Page: Who’s to blame for Rotorua emergency housing crisis?
Miriam Bell (Stuff): Wellington house price slide the biggest in 20 years
RNZ: Double-digit house market declines in main centres, new figures show
1News: Average house values falling by double-digit percentages

HEALTH
RNZ: Health Minister responds to mental health woes at North Shore ED
John Donne Potter ((The Conversation): With a COVID ‘variant soup’ looming, New Zealand urgently needs another round of vaccine boosters
RNZ: Government says no plans at this stage for annual Covid-19 booster for most people
Stefan Dimitrof (Te Ao – Māori News) Petition launched to halt defunding of child cancer medicines
Muriwai Hei (Te Ao – Māori News): Drug Foundation CEO on overdoses: ‘We are failing Māori’

IMMIGRATION, REFUGEES
Katie Todd (RNZ): Ukrainian arrivals say government support lacking in battle to begin new lives
Gill Bonnett (RNZ): Govt looks at Treaty interest in immigration policy
Gill Bonnett (RNZ): In residence limbo: Doctors, split families wait for news from Immigration NZ

FOREIGN AFFAIRS
Thomas Manch (Stuff): Government backs away from autonomous sanctions regime
Sam Sachdeva (Newsroom): How the US midterms will affect NZ
Gabrielle Armstrong-Scott (Stuff): Five reasons Kiwis should care about the US midterm elections

OTHER
Phil Pennington (RNZ): Officials fear anti-government sentiment could impact next census
Oliver Hartwich (Herald): Rebuilding Better: Once world-class, NZ’s education system is now a disaster. How do we fix it?
Gavin Ellis: Alarm bells must bring out disinformation fire fighters
Lloyd Burr (Today FM): Jenna Lynch, Mani Dunlop are two of the most impartial journalists I know
Thomas Manch (Stuff): Anti-money laundering regime to be tweaked after sweeping review
Riley Kennedy (BusinessDesk): No quick fix to ease anti-money laundering burden (paywalled)
Emma Hatton (Newsroom): Privacy case throws up liability questions for social media groups
Pokere Paewai (RNZ): Taonga stolen during Crown invasion of Maungapōhatu returned
Ashleigh McCaull (RNZ): New study suggests Māori settlers arrived in Aotearoa as early as 13th century

The Papua New Guinea government’s financial hub was hit by computer hackers last week, holding state officials at ransom, reports have revealed.

The ransomware attack on the Department of Finance’s Integrated Financial Management System (IFMS) happened last Thursday, locking out government workers who use the system to run the country’s entire financial system.

The Acting Treasurer, Finance Minister Sir John Pundari, confirmed the hacking but told the PNG Post-Courier that the system had been restored and no ransom was paid.

Sir John said workers were using a temporary accounting system after the IFMS was hit last week but did not reveal the real extent of the damage, saying only that the hackers did not steal anything.

However, they had damaged a system that now puts PNG’s national security at risk.

This is the first time the country’s central financial hub has been hit to such an extent.

Ransomware is a collection of malicious software variants, including viruses, designed by hackers to cause extensive damage or gain unauthorised access to computer networks.

‘Cyber-attack on core server’
“The Government Financial System suffered a cyber-attack in the form of ransomware infiltrating our core server at 1am on Friday, 22 of October 2021,” Sir John said.

“As a result of the ransomware infiltration, the Department of Finance’s IT network was compromised. The department immediately took precautionary steps by closing down the network systems.

“The department has now managed to fully restore the system, however, because of the risk we are playing it safe by not allowing full usage of the affected network.

“While we progress cleaning up the server environment, we have put in temporary measures.

“These include all government departments and agencies having access to commit and process cheques using a controlled environment in Vulupindi Haus.

“All provinces and districts will also have access to commit funds, through a controlled temporary arrangement.

‘Full restored’
“The department is conscious of the security and integrity of its data, thus, restoration of services to all government agencies, including at the sub-national level will be done gradually, bearing in mind the security of individual networks, so as not to compromise or allow any further spread of this malware or other viruses.

“At this stage I wish to state clearly that the government financial system has been fully restored.

“Department of Finance did not pay any ransom to the hacker or any of its third party agents. We have managed to restore normalcy.

“The government and the people of Papua New Guinea can be assured that the government’s financial services will continue as usual.”

Gorethy Kenneth is a senior PNG Post-Courier journalist. Republished with permission.

Article by AsiaPacificReport.nz

Finance Minister Sir John Pundari has warned Papua New Guineans who are still holding onto the 102 APEC “on loan” vehicles to return them as soon as possible — or face the law.

A disappointed Sir John, flanked by Finance Secretary Dr Ken Ngangan and Police Commissioner David Manning, said on Friday the ultimatum notice that had been published in newspapers recalling a total of 102 APEC vehicles in the hands of unauthorised people had now lapsed.

Those involved would face the full force of the law.

“The seven-day ultimatum period lapsed on Thursday, September 16, and to date no person has surrendered the APEC vehicles,” he said.

“The Finance Department has requested engagement of police, RTA and MVIL to establish a collective task force to recoup all outstanding APEC vehicles.”

The designated officers from Finance Department, Motor Police – Boroko, NCD Traffic Police, RTA – Road Traffic Enforcement Teams and MVIL are all ready to execute the recovery of the missing APEC vehicles.

The recovery task force team would start executing the recovery soon after the Friday’s meeting.

Taking stock of assets
“Consistent with the requirements of the PFMA and the NPA, all APEC assets including liabilities were assumed by Department of Finance.

The Department of Finance had already taken stock of the assets and was progressively preparing to dispose all of them through public tender.

The disposal of state assets was a financial management process under the Public Finance Management Act (PFMA) and the National Procurement Act (NPA).

It is by law that the Department of Finance was now the legitimate custodian of all APEC assets including the vehicles.

He said there are two phases in this disposal exercise – disposal of all 166 donated APEC vehicles, which was completed in June.

“Our donor partners agreed that donated fleets be allocated to schools, hospitals, churches/NGOs, government departments and other important charitable institutions.

“As far as our record is concerned, we have disposed 166 donated vehicles.

Fire trucks, ambulances and buses
“Donated vehicles were collectively fire trucks, ambulances and buses,” he said.

The disposal of 326 state-purchased APEC vehicles and a total of 119 low-end state-purchased APEC vehicles have already been allocated and distributed to various government departments (Public and Statutory Bodies, District and Provincial Governments, and SOEs) used for their administrative purposes.

“Finance Department is in the process of disposing the remaining.

“Some of these fleets are now with agencies and individuals and they have been advised to bring back for disposal.

“For instance, more than 15 vehicles are now utilised on covid-19 operations by Health, Police, and Defence on temporary basis, and about 98 vehicles are in the hands of unauthorised individuals,” he said.

The NEC, in Decision #5112021, has directed the Finance Department to immediately dispose all remaining stocks of APEC vehicles and put to rest the APEC issues.

APEC vehicles recovered and other remaining stocks of APEC vehicles will be prepared for BoS review and evaluation by the Department of Works. The NPC Board will then assess and approve on the BoS evaluation from Works Department.

Public tender
The NPC Board will further approve on the public tender for all remaining stocks of State purchased APEC vehicles.

All remaining stocks of APEC vehicles will be disposed by way of public tender though National Procurement Commission.

As a team and government stakeholders, we look forward to serving the government and its people while following the established government procurement processes.

“The government is committed to ensure that it employs a fair and transparent distribution of wealth for our citizens to benefit in this APEC vehicles disposal processes,” Sir John said.

Papua New Guinea is one of the poorest countries in Apec, with 40 percent of the population living on less than $1 a day, according to the United Nations.

Gorethy Kenneth is a senior PNG Post-Courier journalist.

Article by AsiaPacificReport.nz

Described by a Guardian reviewer as “superb hate-reading”, writer and columnist Anand Giridharadas‘s latest book Winners Take All: The Elite Charade of Changing the World investigates the hypocrisy of billionaire “do-gooders”.

He questions how and why we have become reliant on the philanthropy of the super-rich to help solve our biggest global issues, and their role in eroding the public institutions that should be leading the way.

Giridharadas is an editor-at-large for Time magazine and was a foreign correspondent and columnist for The New York Times from 2005 to 2016. His two previous books are India Calling: An Intimate Portrait of a Nation’s Remaking and The True American: Murder and Mercy in Texas.

LISTEN: Kim Hill interviewing author Anand Giridharadas

He told Saturday Morning he once rubbed shoulders with the elite at Aspen Institute but had a revelation when seminar rooms there were named after some of the “worst actors in American and global life, David Koch for example and others”.

“We were discussing how to make the world better. And it occurred to me that some of these very people in the room had flown into Aspen from their jobs making the world worse.

“They worked for some of the Silicon Valley tech companies putting our democracy at risk, monopolising the economy and political power, they worked for food companies … lobbying against nutrition wavering, they worked for employers that fought against … raising minimum wages. And then they would fly to Aspen to talk about solving problems they were causing.”

Giridharadas said there was a spectrum of complicity – from the naive to the shrewd – among the richest and most powerful people in the world.

‘Shrewd’ financial crisis actions
He referred to the actions of Goldman Sachs in the global financial crisis of 2008 as shrewd.

“Tech is where the new money, the new power is.”

Tech elites like Mark Zuckerberg, Jeff Bezos and Elon Musk, felt privileged because of their finances and that they had mastery over a specific set of tools which they could use to change the world, he said.

“This vision is fundamentally incompatible with democracy.”

He said neoliberalism was a notion that “you should always do what’s good for money because when you do what’s good for money, people benefit somehow”.

But the money never trickles down.

“This was a fraudulent ideology from the beginning.”

‘Reputation laundering’
At the heart of the argument of “winner takes all”, he said flamboyant do-gooding around the world increased one’s chokehold on wealth and power.

“You first get rich by cutting every possible social corner you can cut – you avoid taxes if you can avoid them, you use trusts and Cayman Islands accounts, you lobby for bottle service public policies that are good for you and your rich friends and bad for most people, you avoid paying people in creative ways by suppressing minimum wage, outsourcing to contractors.”

Bottle service, he explained, was like at a nightclub, where a patron commits to spending a large sum for it.

“You now have a lot of money, but you also have a lot of resentment if these connections are going to be made by people about what’s going on.

“Then what you do is you turn around and you start donating a fraction of that money to various forms of elite do-gooding – philanthropy, corporate social responsibility, for-profit social enterprises, maybe something involving Africa even if you’ve never been.”

He called this “reputation laundering”.

Do-gooding a smokscreen
Giridharadas said a person with money and a selfless demeanour could easily reach policymakers.

He said elite do-gooding was a smokescreen so the rich and powerful could continue to have their way.

There was a need for thought leaders to combat plutocracy, he said.

“A lot of these very wealthy business people are smart enough at business to make money and keep power, they’re not intellectuals, they’re not thinkers and they’re not necessarily gifted at spinning the web for justifications for their rule, so there is a need for quirk thinkers to supply the argumentation for an age of plutocracy.”

This article is republished by the Pacific Media Centre under a partnership agreement with RNZ.

Article by AsiaPacificReport.nz

The modern anti-money laundering system (which makes banks and other firms check identity documents and scan billions of financial transactions) doesn’t stop crime. Criminals keep up to 99.9% of the earnings from misery, and a scheme meant to ‘protect the financial system’ causes severe social and economic harm.

So, where did it all start to go wrong?

Good intentions and ‘voluntary coercion’

Today’s anti-money laundering movement began at a G7 summit in 1989. The seven big industrialized nations circumvented the usual treaty-based consensus to establish an ad-hoc body to use financial flows to help prevent drug trafficking. The Paris-based Financial Action Task Force (FATF) later targeted money laundering associated with other profit-motivated crime and terrorist financing. All worthy aims.

For many years, however, few nations signed up to the ‘compliance with rules based on standards’ model that FATF advocated. Rather than trying to develop an alternative model, perhaps better aligned with countries’ anti-crime efforts, FATF rated compliance with 40 ‘recommendations’ (then claimed to reflect the effectiveness of anti-money laundering regimes) and began a ‘name and shame’ campaign — publicly denouncing nations not ticking enough boxes.

FATF no longer needed to persuade countries that its prescription worked. Nor demonstrate how it helps reduce crime and the social and economic harms caused by serious profit-motivated crime like drug, human, wildlife and arms trafficking, fraud, corruption, and tax evasion. Assumptions that it ‘should’ do so, or assertions that it ‘would,’ was enough, apparently.

In any event, countries can’t afford to ignore FATF because banks use its ratings as a proxy for risk in their dealings with other countries. Sovereign nations are effectively forced to submit to evaluation and implement the laws that FATF demands, to maintain vital access to international financial markets.

Unsurprisingly, momentum to join the anti-money laundering ‘family’ rapidly escalated. Facing the risk of exclusion from financial markets, seemingly more countries than there are countries ‘voluntarily’ joined the anti-money laundering movement. With 205 participants, the anti-money laundering movement counts more jurisdictions than even the United Nation’s 193 nation-states. (Mainly because FATF includes semi-autonomous jurisdictions separately, like China and Hong Kong, the UK’s dependencies and overseas territories, and islands formerly known as the Dutch Antilles).

Despite the now global ubiquity of money laundering controls, FATF admits that it still “pressures” nations to meet its demands, if they want to “maintain their position in the global economy.”

But, whether it works, or not (I’ll return to that shortly), unilateral financial sanctions and the anti-money laundering system — both part of a policy arsenal available to few nations — cause significant harm, and disproportionately affect smaller and less powerful countries.

Measures meant to ‘protect’ the financial system also harm economies

Pakistan’s Prime Minister, a former international cricketer and cancer campaigner, Imran Khan, recently decried the “devastating” impact of illicit financial flows causing “poverty, death, and destruction in…the developing world.”

He rued billions of dollars leaving developing countries, siphoned into offshore accounts, tax havens and real estate in Western capitals, and denounced a lack of political will in those countries to help recover looted funds, “because they gain from it.”

As well as the economic damage Khan described — some might say due to Pakistan’s failure to meet FATF standards (and a recent empirical study suggests a correlation between terrorism financing and the incidence, scale and location of terrorist attacks) — the anti-money laundering system also inflicts harm.

Compounding Pakistan’s difficulties, an evaluation report (embargoed since August) was released a few days after Khan’s UN speech in September, excoriating the ‘effectiveness’ of Pakistan’s anti-money laundering regime. Reportedly after lobbying from powerful nations, FATF had earlier added Pakistan to its ‘grey list’ of countries with claimed ‘strategic deficiencies’ (in June 2018), so Khan presumably needed no reminder that the anti-money laundering system inflicts social and economic damage. (Wielding the stick of financial exclusion, there may be little perceived need for subtlety. In October, FATF gave Khan a reminder anyway, bluntly warning that it might blacklist Pakistan at its next plenary in February 2020).

In any event, a similar theme — of deliberate, devastating economic damage inflicted by powerful nations for political reasons — was expressed by many other leaders at the annual UN General Assembly in New York at the end of September.

Many Caribbean nations, for instance, voiced dismay about the use of the financial system to hinder the economic development of small countries that try to compete with powerful nations.

Dr Ralph Gonsalves, Prime Minister of Saint Vincent and the Grenadines, decried the “weaponizing of trade and the banking system” as a “thinly-veiled war [based on stereotypes and paternalism] against…developing States under the guise of…reducing illicit financial flows.”

Dr Timothy Harris, Prime Minister of Saint Kitts and Nevis, described “unfair” blacklisting and “de‑risking” (where global banks use blacklists and ratings as proxy risk assessments and cut ties with local banks) as an “existential threat” to small economies. Saint Lucia’s Prime Minister, Allen Chastanet, agreed, adding that small nations are grappling with restrictions imposed with no “credible evidence of wrongdoing” wreaking “irreversible damage.”

Mia Mottley QC and Dr Keith Rowley, the Prime Ministers of Barbados and Trinidad and Tobago spoke, respectively, about the “challenges” of blacklisting and “deep concern” over the loss of correspondent banks harming small nations, which, according to Prime Minister Gaston Browne of Antigua and Barbuda, continues the economic damage wrought by centuries of exploitation by slavery.

It is easy (and common) unreflectively to dismiss such protests as contrary to the expressed aim to protect the financial system. However, even trenchant supporters of the dominant anti-money laundering narrative might concede at least some merit in some complaints.

For example, professional advisers from the United States, United Kingdom, and other former colonial powers helped design financial systems now labeled ‘deficient,’ and their clients in those more prominent countries remain some of the most significant users of such services.

Moreover, countries like the US and UK offer many similar services to those for which smaller nations are disparaged (Delaware, anyone?) The United States also frankly admits that it’s a “major money laundering jurisdiction,” yet commands the default global currency and is big enough to avoid negative consequences of pejorative labeling. And more laundering likely takes place in a few big countries like the US and UK, untroubled by poor ratings and blacklists, than most other countries combined.

The reality, however, is that few other countries can avoid the impact of financial sanctions or poor anti-money laundering ratings.

Sudan’s newly installed Prime Minister, for instance, appointed in August after months of mass protests, sought the removal of sanctions punishing the Sudanese people for acts committed by the previous regime. Iraq’s President Salih called for action to combat corruption networks and regain stolen assets. Vanuatu’s Prime Minister, Charlot Salwai, denounced persistent colonial hegemony, and Cuba’s foreign minister condemned the “economic warfare” of “criminal” financial sanctions hindering his country’s progress.

Venezuela’s Vice-President, Delcy Rodríguez, a lawyer targeted with financial restrictions by multiple countries, described economic sanctions as the “preferred weapon of domination in the twenty-first century”, capable of wiping out the income of sovereign states “with the press of a single digital button”, and punishing innocent people and using their suffering “to bolster…hegemonic power.”

Disconcertingly from a Western viewpoint which considers democracies the strongest cheerleaders for democratic institutions on the global stage, it was Russia’s Foreign Affairs Minister, Sergey Lavrov, who championed equality in international relations. Concerned, apparently, with the fragmentation of the international community, Lavrov characterized the emergence of a ‘rules-based order’ as trying to replace established rules of international law with new ones based on self-serving schemes and political expediency favoring only some countries. He urged that global challenges should be addressed based on the inclusive nature of the UN Charter and the interests of all states.

It’s easy to dismiss grievances from ‘the usual suspects.’ Narratives about Russia’s ‘autocratic regime,’ Sudan’s ‘brutal dictatorship,’ Pakistan’s ‘support for terrorists,’ Cuba’s ‘refusal to move towards democratization,’ and Venezuela’s ‘illegitimate regime’ are well-rehearsed. Who has the time to check if reality is more nuanced than these familiar tropes from our own politicians and industry insiders? (Especially, if we’re honest, about countries we might perceive as ‘other’).

But, whether the ‘rules-based order’ is a force for good, as many Western nations contend, or risks undermining international law and equality between nations, as Russia claims, financial sanctions and the operation of the anti-money laundering system clearly cause harm. Deliberately.

Harms intended

Financial sanctions (mostly, US-imposed) and FATF blacklists, grey lists, and ratings all affect countries’ access to financial markets, with no apology for any damage caused. After all, severe restrictions are the point of such sanctions. As FATF explains, it “pressures” nations to meet its demands “in order to maintain their position in the global economy.”

It could be said that countries harmed by blacklists and poor anti-money laundering ratings are righteously punished for not adhering to norms of the rules-based order. After all, from a Western perspective, a rules-based order sounds comfortingly familiar and uncontroversial, like the rule of law.

But the ‘rules-based order’ increasingly prominent in recent years is ill-defined and plagued with differing assumptions. Simple questions reveal complex concerns. Who makes the ‘rules’? Can all countries participate equally in their development? Does the new ‘order’ disproportionately favor, or harm, some nations compared with others?

Disturbingly, in the anti-money laundering context the answers to such questions also convey overtones of rich vs. poor, big vs. small, ex-colonizer vs. former colonies, and ‘us’ vs. ‘them.’

A few years ago, for instance, Saint Lucia’s Prime Minister, Allen Chastanet, described the “painful example” of financial exclusion by powerful nations whose professional classes were “the very architects” of the economic development strategies for which Caribbean nations are being penalized. Moreover, the G20, which “designated itself” as the forum for collective international economic cooperation, excludes most countries. Ninety percent of nations are not members of that “unofficial and non-inclusive bloc,” so “were not involved in the solutions to the problems,” he added, “nor were we consulted on its appointment as the arbiters of our economic fate.”

Nonetheless, complaints by affected nations might still be dismissed as self-serving, if the anti-money laundering system works.

In other words, if enough discomfort forces countries to introduce or strengthen rules enabling a material impact on serious profit-motivated crime and terrorism, it might be worthwhile, at least in a collective sense. That, arguably, is the rationale of money laundering blacklists and ratings.

The only problem is the tyranny of truth: the anti-money laundering system doesn’t work.

Failure locked in

Despite trillions of dollars and 30 years of prodigious effort, the modern anti-money laundering experiment scarcely has the impact of a rounding error on criminal accounts. By UN measures, the ‘success rate’ of money laundering controls is inconsequential when authorities reclaim a puny 0.2 percent of illicit funds, allowing ‘Criminals Inc’ to keep up to 99.8 percent (my own research puts the figure at 99.9 percent, but who’s quibbling?)

Nonetheless, the practical reality is that reasoned criticism by suffering nations is unlikely to curb the use of economic sanctions. Instead, pressing other countries to the will of a more powerful force is a growth sport.

‘Naming and shaming’ alive and well

The European Union’s attempt to join the ‘name and shame’ World Series was denounced by the dominant player and criticized by countries labeled ‘bad.’ A new list of ‘external’ jurisdictions unilaterally declared ‘deficient’ —initially due to be re-issued this month — is still “on the agenda,” and is now expected in 2020. (Extending the ‘us vs. them’ theme, the EU only pejoratively labels ‘external’ countries, not its member states).

Although the EU methodology was heavily criticized, the system that it seeks to attach itself to remains astonishingly ineffective, for reasons persistently unaddressed. (Ironically, the European police agency, Europol, frankly recognized the scale of policy failure, but its finding that serious crime pays, seriously well, appears to have fallen mostly on deaf ears, like the United Nation’s earlier assessment).

Design flaws

There are many reasons for anti-money laundering’s failure. Most trace back to the rushed development of a compliance model unchanged in three decades, seldom questioned, and seemingly unquestionable. Perverse incentives also harm people trying to do what the system was originally intended to achieve. But the main problem is a persistent focus on the effort and activities to prove compliance rather than what’s needed to achieve better (crime prevention) outcomes.

For example, new ratings meant to fix the problem use the language of ‘effectiveness’ and ‘outcomes,’ absent a functioning effectiveness framework [research paper, free access to January 2020], thereby continuing the 30-year focus on effort rather than results. Despite FATF’s grandiose labeling of its flagship ratings ‘mutual evaluations’, a trio of professors found that there has been “minimal effort” at anti-money laundering evaluation, “at least in the sense in which evaluation is generally understood [in public policy and social science], namely how well an intervention does in achieving its goals.”

Moreover, the rating system’s tick-box mentality encourages a tick-box response to mitigate harms imposed by a system characterized more by good intentions and rhetoric than any cogent measure of effectiveness.

It is, therefore, unsurprising if ‘compliance’ is the unspoken objective of many governments (to ‘get the FATF tick’ and minimize adverse consequences from the system itself), rather than any meaningful crime prevention outcomes.

The hectic nature of anti-money laundering compliance also conceals the reality of poor outcomes. Complicated rules are designed like a giant stack of colanders to catch water, with each ‘gap’ ‘fixed’ by constantly extending money laundering controls to more transactions, businesses, and industries, and more ‘solutions’ touted (increased public/private sector collaboration, law enforcement integration, artificial intelligence, etc). With a steady stream of new ‘solutions’ constantly adding more colanders, it’s easy to miss the big picture, about how much ‘water’ the entire stack of colanders manages to catch. Most ‘solutions’ have some positive effect, but when all combined, over three decades, manage to trap less than one percent of criminal finances, the impact on crime seems marginal, at best.

Conclusion, and options for leaders

The anti-money laundering industrial complex affects every citizen — with higher fees and taxes to pay for hundreds of billions of dollars of compliance costs each year, plus the social and economic impact from serious crime, barely checked. It also makes banking difficult for millions of ordinary people and penalizes smaller, weaker nations, yet the modern anti-money laundering experiment is almost entirely ineffective.

Complicated laws, armies of regulators, and costly compliance tasks give the comfort of activity and feeling of security but don’t make us safe from serious crime and terrorism.

Authentic leaders keen to reduce the social and economic harms from serious profit-motivated crime and terrorism have a choice. They could blindly follow the orders of an unelected agency accountable to no country’s citizens, driven by a few powerful states, in order to get FATF’s tick of approval for implementing its standards, despite scarcely any impact on criminal finances.

Or, leaders might face up to the reality of anti-money laundering’s failure, and consider reframing the system to switch from less than one percent impact on crime into the 99 percent zone, as the G7 intended in 1989.

— — —

Postscript

If any leaders choose the second option, pragmatism suggests that they should still ‘get the FATF tick’ in the meantime.

(88 jurisdictions have so far been assessed in the current round of evaluations, and reports published. Many governments were surprised with lower than expected ratings, but a few — learning the unspoken lessons not recorded in any official guidelines — have begun to operate the system as it’s designed, if not intended, for better than expected ratings, irrespective any ‘real’ [empirical] risk, which, ironically, the current system doesn’t measure).

After all, retaining access to the financial system helps governments extend their own crime prevention capabilities, even if there’s no appetite to reframe the global anti-money laundering system for meaningful outcomes.

Simpson@8 investigated the allegations of mismanagement that had accrued over professor Chandra’s tenure. Video: Simpson@8

By Sri Krishnamurthi

Staff and students at the University of the South Pacific have said poor governance, nepotism and negligence were rife at the institution under the leadership of the previous Vice-Chancellor, Professor Rajesh Chandra.

The current Vice-Chancellor and President, Professor Pal Ahluwalia raised his concerns in a paper titled ‘Issues, Concern and Breaches of Past Management and Financial Decisions’ which Auckland Accounting firm BDO was asked to investigate and report on.

Professor Ahluwalia listed 26 allegations of mismanagement by professor Chandra who held office from 2008 to 2018.

READ MORE: Former USP Vice Chancellor ‘violated’ norms, say staff and students

The BDO report found governance was weak across USP and implicated some members of USP’s senior management team who were alleged beneficiaries or decision makers.

“Oversight, governance and control is a key weakness across USP. Current policy framework is outdated and isn’t fit for purpose,” the BDO report said.

Frustrated staff such as Dr Morgan Tuimalealiifano, Professor and coordinator of history at USP told a Fijian TV current affairs show Simpson@8, which investigated the allegations of abuse, the incidences had accrued over professor Chandra’s tenure.

“The evidence of our awareness comes from the numerous complaints, the way staff members were treated and the way some decisions were over-ruled, overturned,” Professor Tuimalealiifano told the programme.

“Over the years they accumulated and very little was being done. Sometimes when complaints were lodged the general response was ‘we have to check on our procedures to make sure they were working’, this was getting a bit tiresome.”

Dr Sunil Kumar, an economics lecturer, was more forthright in his assessment of what went on the university which is owned by 12 Pacific countries – Cook Islands, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Solomon Islands, Tokelau, Tonga, Tuvalu, Vanuatu and Samoa.

‘Widespread mismanagement’

“The indications are clear, there has been widespread instances of mismanagement of policies, funds and all kind of resources we are familiar with at USP,” Dr Kumar told the TV programme.

“When there is mismanagement of resources then obviously the university will go through constraints. We were all faced with constraints particularly those who were engaged in delivering the mainstream objectives of the institution.

“There were very basic things we were stifled of, for instance we would not be allowed to buy text books or reference books or our printer material …which means the money was draining out elsewhere and mainstream materials weren’t available as they should have been.”

He said staff had spoken out about governance issues.

“A lot of our staff members have been expressing the element of bad governance that has been happening over the last five, six or seven years during the last Vice-Chancellor’s period.

“The institution suffered very drastically under the former Vice-Chancellor’s leadership.”

New Zealand, which is a key funding partner having signed a $5.15 million agreement with the university back in February, is likely to be concerned about the events that have transpired at USP.

Chandra’s opinion piece

Professor Chandra in an opinion-editorial in the Fiji Sun on September 14 claimed that the BDO Report into allegations of USP mismanagement had found nothing against him.

However, 500 staff and students released a rebuttal, contesting his claims of being “vindicated” from mismanagement during his time at the university.

“Chandra claims that Fiji Independent Commission Against Corruption (FICAC) found no corruption, fraud or abuse of office after two months of investigation. This is not borne out by the FICAC letter to USP, namely, that FICAC has not ceased work but merely suspended its investigation to avoid duplication.

“For FICAC to demonstrate it’s independence it must insist on getting the BDO report and formulate appropriate charges. We are quite certain this will happen in due course, if not in Fiji, then in any jurisdiction of an appropriate member country of USP,” the rebuttal said.

It raised other instances specific of mismanagement.

“When he took professional development leave in September, three months before his retirement in December 2018, one could ask, was that leave for the good of the University? Part of the reported leakages of money would have included Chandra going on USP-paid training leave on the verge of his retirement and keeping his housemaid in a student accommodation facility,” the rebuttal said.

Allegations of negligence

The rebuttal also alleged negligence in infrastructure management.

“Before Chandra’s appointment as the VC and current setbacks under his watch, the University had maintained steady growth and expansion for 40 years.

“The Solomon Islands campus in Honiara has been delayed for at least five years while more funds were channelled to the Laucala Bay fourth campus costing $4.1 million. This point is vindicated by the number of written petitions to Council and formal complaints against him during his term in office.

“During his 10-year term, the facilities used intensely by thousands of students and staff, such as the gym, the dining hall and the student halls, fell into disrepair. Many staff were evicted from quarters because of required maintenance work. Instead, many houses remain derelict and unoccupied.

“On the other hand, the Vice-Chancellor’s residence was always renovated on time at considerable cost to the university. During Cyclone Winston, a power generator installed at the VC’s residence ensured his house was lighted while the campus was in darkness.”

It warned that the USP will have to take care of increased costs for the upkeep of the facilities.

“USP will have to pay more as a result of the deferred maintenance costs now. We lost an iconic building on the campus on the eve of Chandra’s departure, which clearly happened as a result of lack of maintenance and upgrade.”

Current VCP thanked

The rebuttal went on to thank the new VCP for his role for taking on perceived mismanagement at USP.

“The staff appreciate VCP Ahluwalia’s role in drawing the USP Council’s attention to alleged irregularities at the university. We look forward to strengthening of USP’s governance system for posterity which the review commission is tasked to do.”

The committee that the USP Council has set up to make changes is to be chaired by the Deputy Prime Minister of Samoa Fiame Naomi Mata’afa,  Prime Minister of the Cook Islands Henry Puna and Fiji’s Attorney General Aiyaz Sayed-Khaiyum.

Article by AsiaPacificReport.nz

Analysis by Dr Bryce Edwards – What sort of topsy-turvy political world have we arrived at? This week, the Government continued to defend its fiscally conservative approach, in direct opposition to economists who suggest more spending is warranted. Even Treasury, the Reserve Bank, the private sector, and National appear to be open to much greater spending.

On Tuesday, Finance Minister Grant Robertson had to once again defend to economists why the Government is being so fiscally conservative – see Victoria Young’s Finance minister Grant Robertson resists calls for fiscal stimulus. Covering the Minister’s inaugural “Bloomberg address” in Auckland, this article reports: “Robertson says he will spend if necessary but for now he is resisting calls to use fiscal policy to stimulate New Zealand’s economy.”

Surely it should be the other way around. Shouldn’t a Labour Government be spending strongly on health, education, and infrastructure, with opposition coming from economists worried about debt levels and deficits? That would certainly be the normal order of things. Instead, there is a growing economic consensus about the need for Robertson and his Government to stop being so stingy and start spending on things the country urgently needs.

But as Reserve Bank Governor Adrian Orr has said, “we live in very very very interesting times”. This comment is meant in terms of fiscal and monetary conditions, yet this also applies to the political response to these conditions.

The KiwiBuild fiasco has again raised the issue of why the Government isn’t willing to invest in a mass programme of house building. The KiwiBuild reset announcement had a number of commentators arguing that the Government should be expanding house production rather than scaling back its ambitions.

Most notably, Bernard Hickey argued yesterday that the Government could have undertaken a programme to make housing affordable, but this would have cost significant amounts of money and “would have necessitated a relaxation of the debt limit” – see: Young renters just got double toasted.

This couldn’t happen, Hickey says, because “our political class are still wedded to the idea that public debt should be as close to zero as is possible”. That means KiwiBuild, or any other proper house building programme, was always going to be undercut by a lack of ambition: “The decision by the Greens and Labour to both adopt the 20 percent debt target ruled out subsidising a mass house building programme.”

Hickey has argued many times for the Government to go beyond it’s highly-restrictive Budget Responsibility Rules and start spending. For example, last month he suggested that Robertson and Ardern have spent too many hours in the studio with Mike Hosking and this has made them overly-fearful of being more than National-lite on fiscal policy – see: The building case for big and long fiscal stimulus everywhere.

Similarly, former Labour politician Bryan Gould has complained that the current Government seems too “timid” and “foolish” to embark on the necessary state building programmes to meet New Zealand’s needs: “Many other countries around the world have followed this insight – not least, today, Japan and China – but, at various other times, countries like the pre-war United States re-arming under Franklin Roosevelt, and depression-ridden New Zealand under Michael Joseph Savage, when we built thousands of state houses and brought the Great Depression to an end in the 1930s” – see: More courage needed.

Gould says Robertson is failing to do the right and smart thing because he’s allowing National to set the political agenda: “It makes no sense for the government to be reluctant to borrow, when it can do so at virtually no cost, and could thereby provide a shot in the arm for a slowing economy – as well as proceeding with economically beneficial infrastructure projects.  Sadly, Labour governments have often been unwilling to borrow when it would make sense to do so, for fear of being accused of profligacy, but this is to allow their opponents to set the agenda.”

And writing today, the boss of KiwiSaver company Simplicity, Sam Stubbs, says Government spending on infrastructure is urgent, and “In my 40 years of investing I’ve never seen such an opportunity. Why? Because demand, supply and price are in a rare and very close alignment. The demand for major infrastructure is clear, with many projects nationally and locally needing serious funding” – see: Government debt is low and borrowing is cheap; time to think very big.

Stubbs calls out the Government’s lack of action at a time when borrowing is so cheap and debt is so low: “fiscal restraint when interest rates are this low simply isn’t a rational way to manage any balance sheet, let alone a whole economy.” The Government’s reluctance to spend the necessary money just isn’t logical: “It’s looking increasingly like the Government is still wanting to save money for a rainy day, when its already raining. We need to build bridges over troubled waters in the short term, and we need them anyway. The case for investing heavily in infrastructure, using local money, is now compelling.”

Another private sector investor, Mark Fowler, writes in the Herald today that “the Government’s reluctance to spend” doesn’t make sense, and by building infrastructure they would be creating jobs, economic growth and valuable assets for the nation – see: Why are politicians so averse to investing for the future? (paywalled). He says Labour and National need to be listening more to the Reserve Bank, which is currently encouraging borrowing and spending.

Similarly, today TOP leader Geoff Simmons writes about the unsuccessful KiwiBuild reset, and argues that central government should be stepping in to fund the infrastructure necessary for massive new housing, and that this would be an “opportunity for the Government to finally be bold and transformative” – see: KiwiBuild reset shows Labour have completed their transition into National Lite.

The reluctance of politicians to deal properly with the “public infrastructure deficit” is also lamented by Pattrick Smellie, who says “our two main parties of government, National and Labour, are locked in a mindless contest to be the least willing to let the boat out on government debt” – see: Bone-headed debt debate ahead (paywalled).

Smellie points to Reserve Bank Governor Adrian Orr recently making “an unusually frank plea for the government to use its balance sheet strength” by spending more, and he says Orr’s request should be heeded. He argues that the “low-debt mantra” of the Finance Minister and others is harmful and unintelligent.

Although some more conservative economists are unconvinced about the need for a big spend-up, even former Reserve Bank economist Michael Reddell acknowledges that a good case can be made for more spending – see his blog post, Fiscal policy. He points out that by historical comparison, the current government is rather rightwing in its low level of expenditure.

What’s particularly interesting is Reddell’s calculations that the Labour-led Government are effectively spending less on health and education than National was under Bill English. Here’s his main point: “Education spending this year was last this low in 1988.  Health spending has increased a little, but the share of GDP spent this year is lower than in all but the last two years of the previous National government.  And this in a sector where the ageing population – and, arguably, advances in technology – could probably make a case for a rising share of government spending in GDP.  At least if you were a party making the sorts of arguments Labour was making at the last election. There is something about their fiscal choices that – based on their professed values and rhetoric – doesn’t make a lot of sense to me”.

Nonetheless, the paradigm is changing fast, with everyone coming around to the need for increased government spending. This even includes the National Party. As Jenée Tibshraeny details, under finance spokesperson Paul Goldsmith National seems to be becoming much more fiscally liberal – see: National no longer sees need for government debt-to-GDP ratio to fall.

National is even relatively happy with the Government’s current levels of spending, with Goldsmith saying: “We think the figure at the moment is about right”. Furthermore, he says “if there are good opportunities to spend money on infrastructure, we’re open for that.”

This has been reinforced by a recent opinion piece by former National Finance Minister Steven Joyce, who has made the case for more spending. He’s outlined how at the time of the global financial crisis, his government spent more despite its declining income, and he argues it’s time for such an increase again – see: Here’s why the Government needs to spend more now.

Joyce says: “It makes sense in a slowing economy to bring forward infrastructure investment to boost economic activity and protect jobs. You get the economic boost from the extra spend, plus something to show for it. If you build the right infrastructure it can in turn boost economic growth in the future. Governments build things like hospitals, schools, prisons, electricity transmission lines, and new roads and railway tracks.”

Of course, National’s favoured target for infrastructure spending is on transport and roading, and Joyce claims the current Government are making disastrous cutbacks in this area.

With the clamour to spend more, there will now be a whole new debate on where this should occur. This topic is well covered by Liam Dann in his column, Get set for the most stimulating NZ election in a generation (paywalled). In this, he outlines how the ideological traditions of Labour and National will result in different areas for generosity at the next election. Beyond infrastructure spending – which both parties may end up agreeing on – it’s likely to be a question of more welfare spending (Labour) or tax cuts (National).

Regardless, Dann says to expect a new focus on spending over the next year: “Brace yourself, New Zealand. You’re about to get fiscally stimulated. With the Reserve Bank Governor, economists and business groups calling for the Government to inject more fuel into our slowing economic engine, the 2020 election is shaping up to be the most generous campaign in years. The time for austerity has passed. Politicians across the ideological spectrum have been given the green light to loosen the shackles on the Treasury vaults.”

For another very interesting discussion of these issues, see Thomas Coughlan’s National and Labour on the same page on debt. He points to National’s recent loosening of fiscal policy as being highly significant: “The concession was massive. If National wins power in 2020 and sets its debt limit for the rest of term, it would mean an increase of $36 billion over the 10 per cent target set by the previous National government’s finance minister, Steven Joyce.”

The topsy-turvy aspect of the situation could even play out further, Coughlan says, with National willing to set spending/debt targets higher than Labour: “If National really wanted to do something for the economy, it would set a public debt target above Labour’s. Such a target would probably align quite closely with where the business community would like to see public debt.”

And, if that seems odd, Coughlan also points out that it’s Treasury – alongside the Reserve Bank – that is currently signaling the need for, or possibility of, much higher government spending: “Even Treasury – that famously hawkish Government ministry – said net debt could rise to roughly 30 per cent of GDP and still leave headroom for a crisis like an earthquake or a recession. The case for borrowing has never been greater.”

Much of the debate about greater government spending relates to the possible use of an aggressive injection of money into the economy by Government if some sort of sharp recession struck. The common term for this is “helicopter money” – which is well explained by Thomas Coughlan: “Helicopter money is the nickname for stimulating the economy by putting money in peoples’ accounts, as if you had thrown it out of a helicopter” – see: Give Kiwis ‘helicopter money’ cash payouts if economy crashes – Treasury.

For similarly useful discussions of this, see Bernard Hickey’s What if money really did fall from the sky?, and Marc Daalder’s RBNZ eyes unconventional options.

Finally, on the topic of the Government’s spending on housing and KiwiBuild, see my updated blog post, Cartoons about Labour’s KiwiBuild and the housing crisis.

By Johnny Blades of RNZ Pacific

Political fallout from a controversial loan taken on by Papua New Guinea’s government five years ago could hinder rather than help attempts to remove Prime Minister Peter O’Neill.

O’Neill and other leading officials have been referred by the Ombudsman Commission to a Leadership Tribunal over a US$1.2 billion loan his government took on from Swiss-based investment bank UBS in 2014.

The ombudman’s report, which was completed last December but only handed to the Parliament Speaker, Job Pomat, late last month, is yet to be tabled in the house.

READ MORE: UBS loan to PNG may have breached 15 laws

LISTEN: The controversial loan saga on RNZ Dateline Pacific

However, the report has been published at a time when the parliamentary opposition, bolstered by recent defections from the government, is planning for a vote of no confidence against the prime minister later this month.

The UBS loan was nominally taken for the state to buy a 10 percent stake in oil and gas producer Oil Search, a major player in PNG’s burgeoning petroleum sector.

In last week’s heated Parliament debate the prime minister said it was imperative for the state to regain Oil Search shares.

These were earlier lost after being mortgaged by PNG’s Sir Michael Somare government in 2009 as it sought finance from the United Arab Emirates-based International Petroleum Investment Company to gain equity in the country’s first LNG gas project.

‘Strategic investment’
“The Treasury officials said the Oil Search investment is a strategic investment to government,” O’Neill explained in Parliament last week.

“So the company decided to offer the government of Papua New Guinea at a special issue so we can secure the 10 percent. Why? Because Oil Search, even today, is the biggest company in PNG, is the biggest taxpayer in PNG.

However, the report reveals that the Ombudsman found the prime minister failed to present the government’s proposal on the borrowing of a loan, from UBS’ Australia branch, in Parliament for debate and approval as required by the constitution.

O’Neill was found to have misled the cabinet into approving the loan, among other irregularities. But he was not alone.

The commission’s findings also implicate the former Finance Minister, James Marape, who was found to have signed off the loan’s approval as minister despite knowledge of irregularities and “that his actions were improper”.

According to the opposition’s justice spokesman, Kerenga Kua, the deal and O’Neill’s lead role in pushing it through were very suspicious. He said the greatest transgression in the deal was its commercial injustice.

“In the end we only held that share for about twelve months before it was foreclosed by UBS and sold. So you see we don’t have those shares in our hands any more, because the state fell into default on that loan arrangement.”

Stock price fell
PNG was forced to sell its Oil Search shares when the stock price fell sharply, incurring a big loss. On the other hand, UBS profited around US$83 million in fees, interest and trading revenue from the deal.

Kua said the financial professionals involved in arranging the huge loan must have known the transaction was bound to fail for PNG.

“They would have seen this as a scam, a real professional scam. Because everybody knew of the state’s financial vulnerability, and its lack of cash flow to pay for that loan,” Kua said.

“Yet they created a monster, so that within a matter of months it would fall into default, and then you foreclose on the asset, cover yourself. But what are the people of PNG left with? Nothing, except a debt of 3 billion kina [NZ$1.4 billion].”

But an issue over which the opposition has been attacking O’Neill for years is now proving problematic for the MP seeking to replace the prime minister.

Marape, who resigned last month as minister and left the ruling party, has emerged as the opposition’s choice for alternative prime minister in a motion of confidence against O’Neill which it lodged last week.

But along with other officials, including Government Chief Secretary Isaac Lupari, Treasury Secretary Dairi Vele, and the Central Bank Governor Loi Bakani, Marape has also been referred by the Ombudsman Commission for investigation under the leadership code over the UBS loan. This undermines his own recent attacks on the prime minister.

Questions unsuccessful
Standing on opposite sides of the Parliament chamber for the first time last week, Marape questioned the prime minister about the loan process. The questions were unsuccessful because the prime minister was able to remind Marape that he was also involved in those decisions himself.

While it remains to be seen whether O’Neill, Marape and others will face the Leadership Tribunal, the opposition continues to portray the prime minister as the lead transgressor in the UBS saga and other controversies.

The former Health Minister, Sir Puka Temu, who also left the government last month, has portrayed the prime minister as exerting too much control on state departments, overriding the authority of ministers.

“I resigned because I saw things were not working well. There were a lot of corrupt practices and there were governance processes from agencies and bodies of the state that the leaders did not support,” Sir Puka said.

O’Neill has denied any wrongdoing, characterising the investigation as politically motivated, and part of a “dirty game” by the opposition as it tries to lure support to change the government.

He has indicated that the issue would be the subject of a judicial review.

Although he was a member of the last Somare government in its later stages, O’Neill has placed blame with that regime for placing PNG in a weak position when it sought finance in Abu Dhabi for the LNG Project.

Country ‘mortgaged’
“When they borrowed that money, when the mortgaged not only Oil Search, but they borrowed every state-owned entity of this country,” O’Neill explained.

“So if we wanted to sell one of the planes in Air Niugini, we had to ask the permission of the Arabs. If we wanted to sell one of the buildings in any of the SOEs, we had to ask the Arabs. So literally, we were mortgaged to the Arabs.”

But Kua said the O’Neill government’s purchase of Oil Search shares under the controversial UBS loan was a far more shoddy deal than the IPIC transaction.

“The IPIC transaction led to PNG owning 19.26 percent in the PNG LNG Project. That equity is still there and annually we are receiving over a billion kina in revenue from that project,” he explained.

The UBS loan was opposed from an early stage by the then Treasurer Don Polye, who ultimately refused to sign off on the deal before resigning in protest.

Polye insisted that the loan required parliamentary approval, warning that taking the loan on would break the country’s official debt ceiling.

The former Kandep MP was also not involved in the negotiations with Oil Search on the purchase of the shares.

‘Cup of coffee’
According to the Ombudsman report, the agreement to buy the shares was reached “over a cup of coffee” in a swanky Port Moresby hotel when O’Neill and Vele met with Oil Search’s managing director Peter Botten and its board chair, Gerea Aopi.

The government’s purchase of the Oil Search shares allowed the company to buy a stake in the Elk Antelope gas field in PNG’s Gulf province. This resource is being developed by French company Total SA to be the second major LNG project in PNG.

The Papua LNG Project agreement was signed by Total and the government last month.

However, the agreement immediately preceded the exodus from O’Neill’s ruling party, and was cited as a causal factor in the move by several of the MPs who resigned, including  Marape.

Warning that interests of provinces and landowners were not being protected, the MPs lamented that promised equity and royalty benefits from PNG’s first big LNG gas project, based in Marape’s province, had still not transpired, 10 years after that project agreement.

Meanwhile, the Chief Ombudsman, Richard Pagen, says the commission submitted its final UBS report to the Parliament Speaker, Job Pomat, on April 30.

Asserting that the commission has jurisdiction over the prime minister’s office, Pagen said the Speaker must table the report within 8 sitting days of receiving it.

Public interest
However, he added that the commission decided to publish the report as it considered it a matter of public interest

Only one day of Parliament sitting has lapsed since the handover of the report. That was last Tuesday, May 7, the same day the opposition lodged its motion of no confidence, when Pomat adjourned parliament until May 28.

PNG’s Attorney-General has filed a Supreme Court application to which could yet delay the confidence vote against the prime minister proceeding.

Opposition MPs say they’re confident that the vote will go ahead. The group is not likely to change Marape’s nomination as alternative prime minister, but his involvement in the UBS loan may yet count against him.

Article by AsiaPacificReport.nz