Evening Post

Evening Post, Issue 126, 29 May 1936, Page 8

Evening Post.

FRIDAY, MAY 29, 1936.

MODERATION IN LOANS

When the final report of the State Advances Office was laid before Parliament last session we remarked with regret on the fact that no attempt had been made to assess the value of the State lending operations carried on for forty years. Each year there have been reports of the business done, the money advanced and repaid, the cost of management, and the losses incurred. But it is not possible to judge from these how far State lending has been beneficial and how far harmful. The Minister of Finance in his explanation of the State Advances Corporation Bill last night made an attempt to supply this lack of knowledge from his own study of the annual reports. But he did not cover the whole field; as, of course, he could not have done in the time. What he did say was that against the State Advances losses of the depression period there was a substantial reserve, and, what he claimed as a greater offset still, the fact that the rate of interest had for many years been kept at a lower figure than it would have been if the State had not been in the lending market. We can admit this, though it cannot be reckoned as all gain to the community. If borrowers have paid less, lenders have received less, and among the lenders now are a host of thrifty people who hope by the careful investment, of savings to acquire a competency for old age. A more vital point is: at what cost to the borrowers has' the cheap money been made available? If the cheap money leads to such an orgy of gambling that the farmer or house-owner exchanges a high interest on a small loan for low interest on a big debt the borrower is no, better placed. He may be in even worse plight. It has been admitted by at least some who have investigated the farmer's position that rates of interest are not everywhere excessive; it is the size of the debt that is the real trouble. How much lias the State Advances lending contributed to this? There can be no question, we think, that it has been &■ contributing factor. Professor Condliffe, writing in 1929 of State advances for housing, admitted the social value of the system. But he added: The dangers of the system are worst in a time of rapidly-rising prices and land speculation. The shortage of houses, combined with over-adequate lending facilities in the post-War period, caused excessive prices to be paid. It needs only a sriiaU marginal surplus or shortage of houses to cause great variations in price. Even a brief period of boom, therefore, results in over-borrowing, and the subsequent fall in prices transfers a large part of the community's wealth to the creditor classes. The Government's plan, as outlined by the Minister of Finance, presupposes a belief that cheap money in ample quantities is the need of the day. It -will provide what Sir Josiah Stamp has called "economic stimulus" and what the Americans describe as "priming the pump"; but in applying this remedy there are risks. Commenting on declining production after 19,10 (though it was marked for a time by rising prices), Professor Condliffe has this to say: The fact that production declined heavily in the only similar period of heavy borrowing and active speculation in New Zealand's history, the period of the Vogel boom from 1879 to 1880, leads one to suspect that there is a point beyond which an undue amount of stimulant decreases instead of increases productivity. In 1928 Mr. W. P. Reeves, a member of the Government that established the State Advances system, declared that New Zealand, if suffering at all at that date, was suffering not from low prices, dear money, and high costs of production, but fr^om "the results of dear land, heavy taxes and rates, too much public borrowing persisted in for many years, and JV _still more, from too much private debt." We quote these opinions not to oppose an extension of housing activity under a new State Advances Corporation, but to show that this will not be beneficial simply by pumping out cheap money without regard for the consequences. We believe that there is scope for greater activity in housing and that this, encouraged and wisely controlled, will be socially and economically beneficial. But it is just as important to guide and control the expenditure as to provide the money, Mr. Nash declared emphatically last night that the Government would not provide housing or farm advances for speculation. There are some checks now. Under the Mortgage Corporation Act a borrower may bo called upon to repay the loan if he sells the property; and the State Advances Corporation will have power, to forbid second jnort-

gaging. But we are not convinced that these safeguards are adequate if ihc Government liberalises advances lo the degree generally anticipated. Either the lending policy must be cautious and most moderate or there must bo greater precautions against speculation and an advance in costs. The Bill now before Parliament does not provide for these full precautions. They may. of course, be provided in llu: housing plan when it is brought down and in the legislation dealing -with existing mortgages. But provided somehow they should be, for there is no check upon the Government's provision of money for lending. The Mortgage Corporation had a limit under the Act (a. high one, it is true) and the limit imposed by the necessity for borrowing directly from the public; but the present Government has removed both limits. Without public subscription for bonds, it can take loans up with credit issues. Under these circumstances it is essential that the lending side should be subject to an effective check. Unless it is, a plan with much promise of social betterment may lead to debt and difficulty.