Ninjas and private equity

Brian Easton Brian holds positions at five tertiary institutions, and is the economics columnist of The New Zealand Listener. Check out his website

Of Ninjas and private equity

Will there be a worldwide financial crash?

We cannot tell whether the current turbulence in international financial markets will continue, end or get worse. What is certain, though, is that there are serious financial imbalances in the world economy that have to be corrected in the long run.

Sometimes such adjustments occur without excessive pain, as when US presidents George Bush Sr and Bill Clinton ended the US budget deficit inherited from Ronald Reagan. Sometimes the correction leads to bankruptcy and unemployment.

The current imbalances arise from Bush Jr’s tax cuts while he increased government spending, coupled with the Japanese central bank’s low interest rate of half a percent a year. The resulting liquidity injection into the world economy has had investors looking for opportunities to invest cheap funds. As prudent opportunities became exhausted they sought higher-risk ones such as “sub-prime” housing loans in the US.

This is not a term used in New Zealand, but US banks have been providing mortgages to “Ninja” borrowers – “No Income, No Jobs or Assets” – on the grounds that, while there will be failures, enough high-interest loans will succeed to cover the failures. It is not obvious that this strategy works in the long run.

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