KEY POINTS:
We are likely to be presented before long with the fait accompli announcement of a scheme to guarantee banks' wholesale funding, to follow the guarantee of retail deposits already announced.
We will be invited to greet this with relief, that an economically calamitous contraction of credit has been averted.
Or at least with resignation on the grounds that circumstances - and the Australians by going down the same path - have left us with no alternative.
Dismay and foreboding would be more appropriate.
Dismay because of the constitutional outrage that such a scheme delegates, without parliamentary scrutiny, to the employees or agents of private, foreign-owned banks the right to put billions upon billions of dollars of taxpayers' money at risk as they go about what should be their ordinary course of business in places like the commercial paper market in New York.
Until recently it has been easy - all too easy indeed from the standpoint of monetary policy - for the New Zealand banks to raise money on that market.
After all they have some of the highest credit ratings in the world for commercial banks, like their Australian parents.
They have clean balance sheets which are not encrusted with the kind of shonky securities which have got their Northern Hemisphere counterparts into such trouble.
And they are large enough, relative to the size of the local market, to be systemically important. Like the Bank of New Zealand in the early 1990s they are too big to be allowed to fail (but not too big to be nationalised).
Credit markets have frozen up, but there are signs of a thaw.
In the United States the "Ted spread", which is the difference between the rate at which banks will lend to each other for short terms and the rate at which they will lend to the US Government has fallen by 150 basis points over the past week or so, though it remains high by historical standards.
The point is that no one knows how much longer these markets will remain dysfunctional. The argument from those who want a blanket Government guarantee of the banks' wholesale funding is our disreputable old friend from the 1980s, Tina (There is no alternative).
Even when the markets return to normal functioning, they argue, credit will be a lot scarcer because of the damage that has been done to banks' balance sheets globally.
In such an environment when government guarantees are available for some institutions but not others, funding will flow to the former and the latter will miss out.
This is a plausible assertion.
But in light of the magnitude of the contingent liability at issue - potentially hundreds of billions of dollars - we are entitled to ask for some evidence. Or is policy to be made merely on the basis of that which is supposed to be obvious a priori?
And the evidence should come from sources other than the banks, which are hardly disinterested parties.
This will take time. But in the meantime the Reserve Bank stands ready to lend to the banks on the strength of mortgage-backed and other securities.
An independent view has been offered by credit rating agency Moody's. The Business Herald asked if a contingent liability this big could affect the Government's credit rating.
"Our view is that such a guarantee is very unlikely to be realised, and that, therefore, the effect on the Government's balance sheet will not be large, if anything at all," Moody's said.
"This view is contingent, of course, on the New Zealand banks being able to obtain financing, partly as a result of the guarantee and partly from their parents in Australia. The $300 billion number is not something we consider at all likely to migrate to the Government's balance sheet, but if the shutdown of the credit markets lasts for a long time, then it becomes more of a possibility. At this stage, this is not our main scenario."
There are two possible but contrasting conclusions you could draw from that. One is that if the guarantee is unlikely to be drawn on, why worry about it, just extend it. After all the guarantee, like any insurance, will come at some financial cost to the banks. The taxpayer might even make money.
The other conclusion is that the very things which make it unlikely to be called upon make it unnecessary in the first place - or ought to.
The banks point out they are limited in the extent to which they can draw on their Australian parents for wholesale funding by Australian regulatory requirements which have the force of law. Those restrictions have been clear to New Zealand authorities for some time - at least since the detailed negotiations which went on over transtasman banking supervision three or four years ago.
We can't expect them to be relaxed now so that New Zealand banks can piggyback on the Australian Government guarantee. Some kind of burden sharing between the two Governments is required.
That's all well and good, but we should remember that these banks were happy to frustrate the Reserve Bank's attempts to tighten monetary policy when it was timely to do so.
They got around ever-rising official cash rates by borrowing ever-larger sums on international credits, which at the time were awash with cheap money, to fund fixed-term mortgages at rates that are now just a poignant memory.
It inflated a housing bubble which has now burst but not before doing real harm in terms of housing affordability.
And now they clamour for a Government guarantee so they can roll over that funding.
Inevitably such a guarantee will create distortions and dislocations wherever the line is drawn, as the Australian Government has swiftly discovered. What is the plan for unwinding such a guarantee down the track?
The longer such a guarantee is in place the greater the economic cost of the distortions and the moral hazard involved.
We are in the mess we are because of a cavalier attitude towards debt. Deleveraging needs to occur, painful as it may be.
A situation where household spending grew faster than incomes, and exceeded incomes by ever-larger amounts, could not continue.
Easier monetary policy - of which we can expect a large dose today - and a hefty fiscal stimulus will provide some pain relief.
But policies that just transfer debt and risk from the private sector to the poor old taxpayer don't help. Not in the long run.
