The debt binge – who to “blame”?

Posted by: Matt Nolan on: August 20, 2008

• In: New Zealand Economics
• 5 Comments

Has anyone else noticed the large swath of BNZ articles turning up around the internet, both on the Rates Blog and on Business Day (they also do more writing on their homepage). It is good – I like seeing economists getting out there and writing things.

Anyway, while I was looking through all these articles I noticed one by Tony Alexander on our “borrowing binge“. Now he is exactly right that households will, at some point, have to pay off debt. However, he does not cover the fact that households can also take on debt – as long as incomes are rising, households will be able to sustain larger and larger amounts of debt. This is an important point, and as a result I feel that his article appears to create more panic around debt levels then is really necessary.

Furthermore, I found it a bit unusual that BNZ was going on about how:

We (as a country) borrow a lot but we save sod all and that is where the vulnerability of our entire economy is increased to the attitudes of investors offshore from which we banks need to source money to keep funding the over-spending of New Zealand households

Isn’t this ignoring the role that retail banks have in determining who receives credit, and setting an appropriate interest rate in that environment. If bank’s had set higher interest rates, there would have been less need for “overseas sourced funds” – why is he blaming the household that took advantage of the low interest rates rather than the banking institutions which kept them at what he appears to be calling an inappropriate level?

He then also says:

That vulnerability is manifesting itself currently in interest rates sitting at much higher levels than would otherwise be the case because the risk premium we pay offshore to borrow money from these people has increased in the past year from 0.1 per cent to over 1.5 per cent.

However, wasn’t our debt position also this bad last year? The risk premium has increased because global economic uncertainty has changed peoples expectations and seen them reprice risk. As a result, the increase in rates is the result of this repricing, not just the fact that we have “high” debt levels.

Another point I would add on this is that, if the banks are setting rates “too low” (as it appears Tony Alexander is saying – without directly blaming banks) then the re-pricing of international risk will simply be a response which will set domestic interest rates at an appropriate level.

Now you guys can discuss this 🙂 (I will try to have more interesting posts up when I’m not sick – maybe by next week. For now you guys will just get stuck with reactionary, dazed, stuff 😛 )

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