You will recall we wrote to the Minister of Finance on 18 December regarding the The Chicago Plan Revisited. We have now received a reply. It seems the Government no longer wants the taxpayer to bail a bank out in the event of failure, so it is setting in place this thing called the Open Bank Resolution (they say by 30 June) This is a process in which in the event of a bank failure, banks will be able to give your deposits a ‘haircut’. Any bank creditor is vulnerable. But burdening savers with this risk is no more desirable than burdening taxpayers. We want banks fundamentally structurally reformed so that there is no risk of a run on the bank. You see while banks have the power to create the money supply, if everyone came to the bank for their money at once there wouldn’t be enough for everyone.

Anyway we are contemplating our next step. We would far prefer the The Chicago Plan Revisited and want to make it work. It would have to be implemented internationally simultaneously and New Zealand should play its part in making this happen to protect us from financial contagion. Here is the letter

1 February 2013

Dear Deirdre Kent and Phil Stevens,

Thank you for your email of 18 December 2012 regarding the recent International Monetary Fund (IMF) paper on the ‘Chicago Plan’ by Jaromir Benes and Michael Kumhof.

Their paper has stimulated significant debate among economists. While some economists have supported the arguments made in the paper, others have questioned the desirability and the practicality of its proposals. For example, I refer you to a recent paper by Adair Turner, chairman of the Financial Services Authority in the United Kingdom, which discussed the Chicago Plan (http://www.faa.gov.uk/static/pubs/speeches/1102-at.pdf). Turner argued that even if implementing the plan was practical, it may not be ideal, given the role of private banks in risk pooling, maturity transformation and their ability to allow consumers to smooth their consumption through their lifetime.

Despite the issues relating to the feasibility of the plan, many of its aims are consistent with the Government’s policy objectives. As confirmed in the recent Half Year Economic and Fiscal Policy Update (HYEFPU), the Government is committed to reducing net public debt to below 20% of Gross Domestic Product by 2020. In addition the Policy Targets Agreement (PTA) signed with the new Governor of the Reserve Bank includes a commitment to take account of the efficiency and soundness of the financial system when setting monetary policy (http://rbnz.govt.nz/monpol/pta/4944840.html). The RBNZ Governor, Graham Wheeler’s recent speech also notes the Reserve Bank’s current work on developing macro-prudential policy instruments and an Open Bank Resolution system to maintain a stable financial system and minimise the damage to the wider economy in the event of a bank failure (http://rbnz.govt.nz/speeches/5005204.html).

Thank you for taking the time to write. I hope you have found my comments helpful.

Yours sincerely,

Hon Bill English

Minister of Finance