Consultation : Credit Crunches And Good Faith

My timing might be bit slow and you might think this question bit late but can you explain in simple terms what has happened to cause the “credit crunch” and what is likely to happen in the future?

Well basically what happened was that banks became nervous about lending to their customers and to each other. This resulted in higher interest rates across the board which then led to the prospect of an economic slowdown.
The cause is fairly straightforward. Basic economics covers the law of supply and demand. If there is too much of something its price falls. If there is too little its price rises.
The world has experienced huge economic growth over the last decade or so and banks have been very keen to lend cheaply on the back of this. The result is that many people who can’t really afford it have been able to take out large loans and mortgages, particularly in America.
The basis for this over-lending was that as house prices were rising so quickly, banks felt they could afford to lend to risky borrowers with the increasing house value providing equity that would cover risk. Yeah right! This was real ‘smoke and mirrors’ strategy as the easy money created the spiralling house price increases which in turn motivated the banks to lend more.
Finally, it got to point where the bubble burst. The riskiest borrowers started to get too stretched and defaulted which then started decline in house prices. Once this spiral got going, interest rates started to rise as banks became more risk averse and more and more people defaulted on their loans which continued the decline. At this point banks started to lose confidence in being able to lend to their borrowers and also to each other. This meant that some of the more stretched banks went out of business, which then reduced confidence further.
However, the story gets worse as the banks had packaged up these sub-prime loans and had on-sold them worldwide as investment securities to hedge funds and investment banks. This enabled these organisations to offer high-yield but risky investments. However, the investors tended to accept the risk due to the apparent strength of the world’s overall economic growth.
Once the bubble burst these fund providers and investment banks were on very shaky ground and started to go out of business themselves. Therefore an issue primarily starting in America became worldwide problem as these people bought into these high-yield securities.
So what will happen in the future? It really is anyone’s guess. With instant communication and strong Asian economies it is possible that the world may weather the storm, but definitely with some pain. However, it may be that there is far worse to come.
What we do know is that the outcome is unpredictable. In New Zealand steps were taken to retain confidence in our banking system and it appears our banks may not have been as carefree as overseas banks in lending money, but time will tell.

My employer has restructured our ­organisation and my role is significantly affected. I still have job but it is much smaller. I am not at all happy even though my salary will stay the same. Do you have any advice?

The Employment Relations Act 2000 aims to promote “good faith” in employment relationships. That is both parties in an employment relationship must deal with each other in “good faith”. They must not do anything, either directly or indirectly, to mislead or deceive each other. They must be “active and instructive” and “responsive and communicative” in all their dealings. Therefore, if an employer is proposing to make decision that may have an adverse effect on an employee, or employees, then under the Act they must “consult” with the employee/s in good faith before the decision is made. This is subject to genuine confidentiality requirements.
In practice, this means that if an ­employer is considering, as in your case, restructuring, then as soon as is sensibly practicable they must communicate with the employees who may be affected and outline the proposed changes and options. To be truly working in good faith they must also invite feedback from these employees on the proposal and give them reasonable time to think it through and respond. The employer must genuinely review this feedback and provide an appropriate response. The employer is not forced to act on the employee’s feedback but if they decide not to then they must communicate genuine explanation for not doing so.
So having said this it would appear your employer may not have acted in good faith and you may want to address this with them further.

Kevin Gaunt, FNZIM, FAIM, is CEO of NZIM Auckland and has been senior executive with, and consultant to, some of New Zealand’s largest companies.

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