Professor Robert MacCulloch: The Finance Minister's Solution to Big Bank Oligopoly.....

The Finance Minister's Solution to Big Bank Oligopoly: Make You Pay for a Dirty Deal Replete with Kick Backs that Sells Out 3 Million KiwiSaver holders.

What's the object of Kiwi Saver? To build up retirement savings of New Zealanders by giving us the opportunity to earn high returns during our working careers. 

Yesterday Finance Minister Willis sabotaged that aim by announcing she would ask Kiwi Saver Fund Providers to invest up to $500 million in Kiwibank to try making it more competitive.

The Finance Minister doesn't want to use government funds. The PM doesn't want headlines saying he's "privatizing" Kiwi Bank by floating it and selling shares in it on the open market. So, in a cunning plan of which comedian Rowan Atkinson's Black Adder character would be proud, the Finance Minister wants to use your money, in the form of Kiwi Saver funds, to better capitalize Kiwi Bank. 

Yes, its a dirty deal. Since when did the object of Kiwi Saver become to address market-failure problems that are giving the government bad headlines, rather than earn three million Kiwi Savers the best returns on their own funds? 

Former Finance Minister Robertson did the same. He imposed sustainability objectives on Kiwi Saver Default funds in 2020, preventing them from investing in fossil fuels.

Willis is pretending everything about the deal is voluntary. But its not. She has a personal vested interest: to garner favorable front page news that she's taking on the Big Banks, as she did yesterday. Kiwi Saver Providers also have a vested interest: fee income from you. 

The Finance Minister is using her power over the industry to get what she wants - the government approves Kiwi Saver Providers and subsidizes the scheme. Kiwibank Executives are on for the plan - since they get to tap into private Kiwi Saver funds for capital, which pushes up their pay and status. So the dirty deal is complete. The providers will happily oblige to provide a mechanism to dump Kiwi Saver funds under their management into better capitalizing Kiwibank, which will end up costing you, but not the government.

Of course, the Finance Minister would argue it doesn't cost Kiwi Saver account holders. But it does. 

For example, I hold some Westpac shares. They are up 50% over the past year. NZ is where Westpac makes its highest profit margins. Why buy Westpac shares when they have oligopoly powers? Exactly for that reason. I'd like to see the industry more competitive, but at the same time don't want to be poor, and can recoup some money that the Big Banks rip us off with their high fees and mortgage rates by getting some back through owning their shares. Why would I invest via Kiwi Saver in better capitalizing Kiwibank, to sink my Westpac investment? 

Willis herself said yesterday she was de-banking her own bank, ANZ, aware of such conflicts. Does she own ANZ shares via Kiwi Saver? Stuffing Kiwi Saver money into Kiwibank to help the government make banking more competitive is a policy objective that shouldn't be implemented using the nation's private Kiwi Saver funds. Its risky investing in tiny Kiwibank to try making it bigger. Why put that risk onto 3 million Kiwi Saver investors? ANZ's market capitalization is $100 billion. How does increasing Kiwibank's capitalization by 0.5% of that number - $500 million - make a difference?

My view is that its wrong to do a back-room deal between the government & Kiwi Saver Providers with money not owned by either of them to get them both out of a fix. One party wants to look like its addressing competition problems. The other's dependent on its regulator / subsidizer & wants more fee income from Kiwi Saver accounts. As for the people whose money will be used to do the deal, you will either lose money on bank shares you already own - to the extent there is more bank competition - or alternatively, lose money on Kiwibank that fails to take on the Big Banks. 

Air NZ's shares, which are majority State owned, are down 70% these past 5 years. Do you want the Finance Minister pumping your Kiwi Saver money into government outfits to save them and her? 

Competition issues should be addressed on their own - for example, by criminalizing cartel behavior - and not having former PMs becoming Chairman of ANZ to protect it. Don't mix politics with Kiwi Saver. Don't politicize it. Don't force government-of-the-day needs onto a/c holders, who should be maximizing portfolio returns. Ever since National PM Muldoon ended Sir Roger Douglas' Super Savings Scheme in the 1970s - which would've meant NZ had no savings problem today - politicians, National & Labour, can't keep their noses out of our savings - meaning today most folks don't have any.

Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.