Playing with risk - A smart move?

The launch of the deposit guarantee scheme may be smart politics from the Labour-led government but you have to question the practicalities of it. It seems to have some pretty big flaws. What’s more, people like RBNZ governor Alan Bollard acknowledge that, but are happy to live with them. The two issues I have are that governments shouldn’t be underwriting the risks in the market. Perhaps the biggest irony in this is that Commerce Minister Lianne Dalziel has made innumerable comments over the past year or so about this issue. She has told people who have lost money in the finance company sector that it is not the government’s job to take risk out of the market. There was no way she was going to do this. What happens next? The government announces a deposit guarantee scheme which captures all the organisations the Reserve Bank regulates. Another irony is that until recently the non-bank sector was outside the central bank’s regulator ambit. Now it’s in and all these institutions are covered (if they opt in). Perhaps the biggest issue though is that the scheme captures banks, finance companies, building societies, credit unions and PIE funds. However, fund management firms and corporate debt are generally left out of the scheme. This seems a little unfair and makes one think the scheme should either be wider, or narrowed up. My preference would be to see it narrowed up. Such a scheme is likely to encourage a shift away from the investments outside the guarantee to ones inside. This could quite easily see the people shift from less risky investments like corporate debt to higher risk finance companies as the government is guaranteeing the returns. One good thing is that it will give people with money tied up in still functioning finance companies some confidence about their investments – even if the actual return comes from their taxes! I guess it will be a bit of a boon to advisers too – as they can safely recommend any investment which is guaranteed.