The Crown retail deposit guarantee scheme that picked up the tab for the collapse of South Canterbury Finance was hastily crafted in a war room in Wellington on a Sunday in October 2008 in response to fears of a run on banks.The story of the creation of t
The Crown retail deposit guarantee scheme that picked up the tab for the collapse of South Canterbury Finance was hastily crafted in a war room in Wellington on a Sunday in October 2008 in response to fears of a run on banks.
The story of the creation of this "massive intervention" in the economy pushed through under emergency provisions of the Public Finance Act while an election was under way is told in a new book by Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard.
The scheme was "an awful thing,",Dr Bollard said. Neither he nor his colleagues were happy about New Zealand taxpayers having to guarantee deposits but there was no choice after Australia announced a scheme.
In a new book Crisis: One Central Bank Governor and the Global Financial Collapse, Dr Bollard says that demand for $100 bills shot up in this country after Lehman Brothers collapsed in September 2008.
The central bank started hearing stories of people "stuffing bundles of cash up the chimney or burying them in the garden," which fortunately never made it into the media.
The RBNZ had doubled its stock of new notes a few years earlier following the Sars and avian influenza scares so had supply to meet demand.
By the second week of October the RBNZ was on full alert and was keeping in close touch with Finance Minister Michael Cullen.
"We agreed to take the next step in case the crisis worsened," Dr Bollard writes.
Prime Minister Helen Clark wanted to announce the possibility of a scheme on Sunday October 12 as part of the launch of the Labour Party's 2008 election campaign.
Late on Saturday the RBNZ started hearing rumours of an Australia scheme. They were confirmed by a telephone call from Australian Prime Minister Kevin Rudd to Miss Clark in the middle of the day on Sunday.
"We had no choice I feel at that stage," Dr Bollard said. Money could have flowed to Australian banks on Monday. A scheme was announced and officials set to work.
Dr Bollard said no one liked using emergency provisions but that was precisely what they were there for.
He said John Key and Bill English, now the country's prime minister and finance minister, were briefed and could have blown it up into an election issue but did not.
"I actually thought that both the outgoing government and the opposition were very, very careful and I have no complaints," Dr Bollard said.
The New Zealand Business Roundtable criticised the scheme and there was vigorous table-thumping and phone calls from Australian banks operating in New Zealand who were indignant that they had to pay fees for it.
"But having dealt with them for six years as bank regulator, I have become hardened to some of their arguments," Dr Bollard said.
