Ninja Mortgages And G20

Ask an economist when the best time would be to carry out reform and they'll tell you that it's when times are good. Ask a politician, and they'll say it's when times are bad.

This seeming contradiction is easily explained by the concept of public opinion. When the economy is collapsing, the need for change is self-evident. This concept was taken a step forward recently when the Group 20 - aka G20, made up of 20 countries - met in London to plan a co-ordinated response to the global recession.

Although presenting huge concerns and problems, the global financial situation also provides opportunities. President Obama's new Chief of Staff, Rahm Emmanuel, appeared to grasp that concept to its fullest extent recently when he said: "You never want a serious crisis to go to waste."

By this, he meant that a crisis situation is often the best time to make those changes that might not be so palatable in better times.

For those who follow international economic co-operation, the title G7 - Group 7 - will probably be more familiar than G20. G7 originally consisted of the world's seven largest capitalist economies: the US, Japan, Germany, France, Britain, Italy and Canada.

G7 became G8 in 1997 with the addition of Russia but emerging economies - such as Brazil, China and India - now account for an increasing share of production and consumption. To reach 90 percent of world production, the group needed 20 members.

Unfortunately, the G20 meeting on April 2 was marked by huge demonstrations. I suspect few protestors could name many attendees - let alone the meeting's agenda - but the protest's size, and the alleged police mishandling of it, have dominated the press. This is a pity because if ever the world needed a co-ordinated plan for economic recovery, it is now.

If asked, the London demonstrators would probably have vented their spleens against the large financiers of the Wall Street and the City of London - whose greed, we are told, has apparently precipitated the current economic downturn. In my view, the truth is more subtle but it is important to establish the diagnosis because the stakes are high. I should start where there is general agreement:

The problem began in the US housing market. The market was somewhat overheated and, having lived through a couple of housing booms, I am familiar with the mentality that develops: people convince themselves that property prices will continue to rise long term.

While it is mathematically impossible for property prices to rise faster than incomes indefinitely, such arguments fall on deaf ears. Property prices inevitably stagnate as people are over-extended with mortgages and must cut back on spending in other areas.

In the current situation, indebtedness took on extra dimensions. First, the degree of risk banks were prepared to take was higher than usual. US bankers spoke of 'Ninja' mortgages - lending to people with "no income, no job and no assets". With the benefit of hindsight it seems blatantly unfair to lend to those who have no hope of meeting the repayments but, at that time, US government policy encouraged offering mortgages to the poor.

The second phenomenon was timing: the business cycle turned sour at the same time throughout the world. In 1997 the East Asia economic collapse was mitigated by exports to booming Western countries. This time the pain has been more evenly spread - as the US Government spent unimaginable sums bailing out Wall St, British Prime Minister Gordon Brown faced the first run on the banks since Disraeli and the 1870s.

Finally there is the concept of 'imbalances'. Many countries - particularly the English-speaking nations and especially New Zealand - have been spending more than they earn. This has created trade imbalances, and a dependence on foreign capital.

Some economists joke that the Chinese save so they can lend to the US - which can then buy Chinese exports. The same could be said of New Zealand, and it has been postulated that our import-export balance is of at least the same concern as change in government spending.

So, with the stakes high and economic recovery required, the G20 leaders reached an agreement - despite a split with the UK and the US on one side wanting a large financial stimulus, and France and Germany on the other arguing for stricter financial regulation.

In principle the new agreement will provide US$1.1 trillion to various programmes designed to improve international finance, credit, trade, and overall economic stability and recovery. These include: US$500 billion for the IMF to aid struggling economies; US$250 billion to boost world trade; US$250 billion for a new IMF overdraft facility and US$100 billion to assist international development banks in lending to poor countries.

The G20 leaders also agreed to try to implement wider global regulation of hedge funds and credit-rating agencies, and to establish a financial stability forum working with the IMF to ensure wider global co-operation and provide a warning system for future financial crises. Time will tell of the success or otherwise of these strategies.

Lest We Forget - The USSR Pledges To Leave Afghanistan

On April 14 I joined Chief of Army Major-General Gardiner at Christchurch's Burnham Military Camp in farewelling New Zealand troops deploying to Afghanistan - 21 years to the day since the USSR signed an agreement to withdraw its troops from the war torn nation.

The agreement was the result of negotiations between the USSR, the US, Pakistan and Afghanistan. Signed at a UN ceremony in Geneva, it signalled the end of the nine-year occupation of Afghanistan - which began in 1979 when the Soviets intervened to prop up the country's struggling communist government.

However, the agreement - which gave the USSR nine months to gradually withdraw - came under fire from a number of fronts. Afghani resistance leaders were furious at being excluded from the preceding negotiations, while other critics pointed out that the deal still allows the USSR and the US to continue arming the two sides in the Afghan civil war.

Critics also predicted the country would spiral into anarchy after Soviet withdrawal as the war continued between the Russian-backed communist government and the rebel groups.

The rest, as they say, is history. Disengagement following conflict continues to be a significant challenge to all.