So there was some kerfuffle the other day when it was revealed that the Governor of the Reserve Bank, Adrian Orr, had written a bullying letter to the heads of the four Aussie-owned banks here in NZ:

The Herald understands RBNZ governor Adrian Orr wrote to the bosses of the big-four Australian-owned banks late last week, using rather colourful language to defend the amount of capital the regulator requires banks to hold.

That’s hardly a surprise, given Orr’s history and it’s been five years since the dry-as-dust news came about the Reserve Bank’s changes to bank capital ratios.

All of which caused me to re-visit a column from Chris Trotter about those changes, where he speculated that the real reason behind them might be that Adrian Orr is a revolutionary in disguise:

What the new communist government of China did, in the early 1950s, was to pass a law requiring all existing capitalist businesses above a certain size to make the Chinese state a 25 percent shareholder in the enterprise. Naturally, such a large shareholding would also entitle the state to be represented on the enterprise’s board of directors. As the years passed and the new regime consolidated itself, the legislation was amended constantly. Year by year, the state’s shareholding in the enterprise was increased – along with the number of its directors.

And as Chris explains the wonderful result of all this was that the value of the shares fell until the capitalists saw the writing on the wall and got completely out, with the final kick in the nuts being that they were paid “a handful of cents on the dollar”. One can almost hear Chris chuckling, “Heh, heh, heh”.

It seems he wonders if something similar is in the offing here:

Like the ruthless, clear-eyed hero of the television series McMafia, the state’s representative will patiently explain to the people who used to be in charge, the new rules of the game:

“From now on” he’ll quietly inform the Chairman and his CEO, “your bank will be obliged to meet a capital requirement of 18 percent. In two years’ time that will rise to 25 percent. Three years after that the Reserve Bank’s CR will be 33 percent.” 

“But that will ruin us!”, the Chairman and the CEO of the Aussie bank will wail. “We will have nothing to offer our shareholders.” 

“With respect to that”, the young, clear-eyed lawyer will respond, with just the flicker of a smile, “the Minister of Finance has authorised me to make you the following offer …”

Read the whole thing, just in case recent events involving Israel-Hamas and Chris’s shunning by the Left for his (very mild) defence of Israel may have caused you to think Chris was no longer a man of the Left.

Oh yes he is! Very much so in the tradition of Ye Olde Lefty and a “tankie” who still thrills to the idea of an all-powerful state doing whatever is needed to better the people; check out his Bowalley Road posts on the Covid-19 Pandemic, culminating with Putting On The Armour Of Covid Righteousness.

The more time that passes since 1984 the more Chris pines for Old Zealand. What a sad fantasy of a democratic-socialist government that is. And while I’ve not dug into the historic details of China’s expropriation of business in the early 1950’s it doesn’t sound like any Communists I ever read about anywhere. The sheer thrill of sending in “the revolutionary guards” to seize such businesses, as well as the Judge Holden murder-kick of putting business owners up against the wall with a bullet, was too irresistible.

There’s also a huge dollop of historical ignorance in such thinking, uttered seemingly as a stream-of-unconscious desires:

As an added bonus, most of the by-now-former capitalists took what was left of their money and ran – to Taiwan, Singapore and the United States.

And what good did that do Communist China? All those nations did immensely better economically in the decades that followed. So much so that around 1980 even the Chinese Communist leaders decided to allow free enterprise, property rights and trading markets to appear again. The effects, first seen in rural areas, of increased food production, falling prices and increased incomes and wealth, led to such freedoms being extended into the rest of the economy, which is why China started doing better.

And without starving millions to death too. Bonus!

Mind you, I’m happy to indulge Chris’s fantasy in debate since the real reasons for Orr’s actions still seem unexplainable by any standard economic viewpoint, as I summarised here with The Impact of Regulations:

Aside from many other problems with the NZ Reserve Bank analysis, Reddell points out that it would see NZ subsidiary banks with higher requirements than exist in Australia for many of the parent banks, which makes no sense, since any banking crisis that took them down would take the NZ ones with them.
…
So basically there will be a whole lot of extra cost caused by regulation with no measurable increase in safety. Sounds typical.

In fact it might even reduce that safety factor across the whole economy because any extra money paid in interest is money not being used to reduce private exposure to debt, which means borrowers are more exposed in the next recession.

You can also read Riddell’s other analysis of the policy. You could summarise that as saying that it’s a pricey insurance policy that doesn’t really insure against the risk it claims exists – and even that assumes the the RB has calculated those GDP costs and benefits accurately, which is doubtful given the inadequacy of the analysis seen from them in earlier cycles of this policy debate.