Thursday, 2 September 2010

Morning fun

I did a spot on RDU this morning on finance firms and bailouts. I explained the deposit guarantee scheme using the following analogy.

Imagine that there was a fire crisis in 2008 where everybody was worried about houses burning down. So the government started thinking about providing government fire insurance. Treasury recommended looking at things like whether houses had lots of sprinklers in them when setting rates and that houses where arsonists lived should probably pay higher rates than other houses. Instead, in the middle of the election campaign, Australia announced a fire insurance scheme, so New Zealand reckoned it had to move quickly. And the quickest way of putting in a fire insurance scheme was to charge premiums based on square footage without adjusting for risk. And the fire halls were bigger than the arsonists' houses, so the fire halls had to pay more for their insurance.

What a disaster of a policy. The more I read about it, the worse it gets.

I suggested folks keen on the issue ought be following Hickey and Nolan.

Update: Podcast here.

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