KEY POINTS:
Neither a borrower nor a lender be. That was Polonius' advice to his son.
We have long been too inclined to follow the second part of that prescription, and too inclined to disregard the first.
Collectively New Zealanders want to borrow more, a lot more, than other New Zealanders are willing to lend. Banks have to make up the difference by tapping capital markets offshore.
And that's the main reason why we can't shrug off the turmoil on Wall St as none of our business and not our problem.
Funding from non-residents accounts for about a third of New Zealand banks' combined balance sheet - $125 billion as at the end of July. That is $19 billion more than a year ago and $36 billion more than two years ago.
Being so reliant on imported credit means the successive waves of fear sweeping overseas credit markets, as one great and famous institution after another totters and falls, have a direct effect on the cost of the money from which our banks fund mortgages.
And it means the Reserve Bank's accelerator may prove as "spongy" as its brake pedal did.
Between 2003 and 2007 the bank raised its official cash rate from 5.25 to 8.25 per cent as it tried to hose down a housing market that was on fire and to curb the debt-fuelled spending binge that accompanied it.
But those 3 percentage points of tightening only raised the effective or average mortgage rate by 1 percentage point over the same period.
Partly that was because of the effect of fixed-rate loans. The lags before loans roll off onto higher rates means the average mortgage rate being paid is still rising now even though Governor Alan Bollard stopped tightening more than a year ago and has subsequently cut the OCR (official cash rate) by 75 basis points already.
But it wasn't just that.
Its struggle to get traction in the household sector during the tightening phase also reflected how cheaply banks could borrow abroad.
That is a distant memory now.
Reliance on imported credit is not so good when the world's credit markets have a deathly pallor, despite transfusions of fresh liquidity from the central banks.
Credit spreads have widened markedly, increasing the amount banks have to pay on top of local wholesale rates for funding they import.
The Reserve Bank can counter that by hauling down its end of the local yield curve, as it did with its unexpectedly large OCR cut last week.
The offset is partial, however. Only a fraction of the bank's 50 basis point cut has flowed through to retail lending rates.
Without it they may not have budged at all.
Hence Bollard's decision to "front-load" the easing cycle he has embarked on. The markets see him as more likely than not to cut by 50 basis points again next month, according to Credit Suisse's swaps-based indicator.
But he can only do so much for New Zealand borrowers. For the rest they are in the hands of his counterparts overseas.
That is the inevitable consequence of outsourcing saving to foreigners rather than doing it ourselves. Freshly returned from a gathering of central bankers in Jackson Hole, Wyoming, last week Bollard reported to MPs on the finance and expenditure select committee that the general view was that we faced the biggest financial crisis since the 1930s - but not the biggest economic one.
The challenge governments and monetary authorities face is to prevent the one from turning into the other.
The US Federal Reserve's move to avert the implosion of AIG has to be seen in that context. The collapse of an insurance group so ubiquitous, with so much connectivity to the financial system and the real economy, would have had incalculable effects. "A disorderly failure of AIG," the Fed said, "could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance."
Its US$85 billion ($128.8 billion) loan - at a double-digit interest rate - is intended to prevent a fire sale of AIG's assets and the economic disruption that might have caused, but an orderly disposal of AIG businesses is envisaged.
Existing shareholders have been diluted to just 20 per cent of whatever shareholders' funds remain and the Fed has the right to veto any dividends
AIG has succumbed to the Wall St disease of finding too-clever-by-half ways of diffusing risk through the financial system, through layers of guarantees and underwriting.
When times were good and risk appetites healthy, it was a recipe to clip the ticket and sleep well.
But the commodity they were trading was still risk. The arcane edifice of credit default swaps and collateralised debt obligations depended ultimately on the health of a real market, the American housing market. And that market remains distinctly poorly.
Our "vanilla" banking system may have avoided those pitfalls. But our collective improvidence and reliance on foreigners to do the saving for us leaves us exposed all the same.
Tomorrow's balance of payments and international investment position figures from Statistics New Zealand will give us an updated read on the extent of the shortfall between domestic investment and saving.
The market is expecting a current account deficit of $14 billion for the June year. That has to be funded by an inflow of capital, which in recent years has been of the same order as the increase in banks' foreign borrowing.
The arithmetic is depressing. The higher the interest cost on our foreign borrowing (or dividends in the case of equity funding) the more we have to export to pay our way.
A back of the envelope calculation by ANZ economists shows that we need to maintain a trade surplus of around 2 per cent. Instead we have been running trade deficits for the past four years.
Oil prices are falling because faltering growth means less demand. But the commodities we export are not immune from the same effect.
The current account deficit has often been described as the economy's Achilles heel. In these tough times the zone of vulnerability is more like two entire legs. And the arrows are flying.
