Socialising losses

Before the election, the then-government announced a deposit guarantee scheme to ensure confidence in New Zealand's banking sector. Unusually, though, this guarantee scheme extended not just to banks (which are essential tothe smooth running of the economy), but also to highly risky finance companies (which aren't). And now its being called on for the first time, by a finance company:

Taxpayers will come to the aid of investors owed $70 million by South-island-based Mascot Finance, which collapsed today.

Mascot is the first institution covered by the Crown's deposit guarantee scheme to fail.

Treasury secretary John Whitehead confirmed in a statement that "all eligible" Mascot investors would get 100 per cent of the money they were entitled to under the guarantee scheme, which was put in place in October in the midst of the global financial market meltdown.

Finance companies engage in risky lending, e.g. to property developers, or (at the riskier end of the scale) providing consumer credit to people buying cars. Borrowers pay a premium for that risk, and this is passed on to investors in the form of high returns on their investment. But now when things go sour, the taxpayer picks up the tab. Not just for their initial investment (which would be bad enough) - but also for their interest!

It is one thing to help people through a recession; that's what the state is for. But this is the outright privatisation of profit and socialisation of losses. And I really don't see why we should be paying for that.

Update: added note about investors getting their interest as well. Talk about a one-way bet - you win either way!