KEY POINTS:
Extending a Government guarantee to banks' wholesale sources of funding makes sense only if it is the lesser evil of something very evil indeed.
Its defenders insist the alternative is that a key source of funding dries up, which would require a savage contraction in the availability of credit to New Zealand households and businesses, and take the recession to a whole new level of pain.
The overseas commercial paper markets, from which the banks derive on average, according to Reserve Bank governor Alan Bollard, about a fifth of their funding, are frozen, posing an obvious problem for the banks when they need to roll over that borrowing.
There are signs credit markets are starting to thaw, however: 90-day US Libor rates have fallen for several days and US Treasury yields have risen. No one really knows how long this market will remain dysfunctional.
Ah yes, say the banks, but even when the market starts functioning again, New Zealand banks won't be able to compete for funding with issuers that have Government guarantees. Not even with their clean balance sheets and high credit ratings.
Even if that turns out to be true, they have an alternative source of funding to tide them over.
It's called the Reserve Bank, which has announced facilities to lend them money, on security, as the lender of last resort. There was no mention of this in John Key's "we've got to do this and we've got to do it fast" press conference on Sunday.
There is a world of difference between guaranteeing the retail deposits of New Zealanders and guaranteeing wholesale funding extended by the very Northern Hemisphere banks whose disregard of risk has brought the world to this pass.
However a wholesale guarantee is designed, there will be boundary issues. How will corporate or local authority borrowers get on if their paper is not also guaranteed? More business for the banks, perhaps?
And what is the exit strategy?
The longer this guarantee is in place, the greater the moral hazard and the greater the economic cost of institutionalising a disconnect between risk and reward.
The Australian parents of New Zealand's banks have made out like bandits during the good years.
Now they are hiding behind the Australian banking regulator's rules which limit the extent to which they can extend funding to their New Zealand subsidiaries. The extent to which that is a binding constraint will vary from bank to bank, but in any case it is an unedifying spectacle.
Once extended this guarantee will be difficult to unwind.
It represents an enormous contingent liability, and a transfer of risk from the shareholders of Australian banks to New Zealand taxpayers. It deserves parliamentary scrutiny. Claims that the problem is too urgent for that don't wash when there are Reserve Bank guarantees of liquidity in place.
