Bernard Hickey suggests some terms of reference for a truly independent inquiry into the Reserve Bank's 'tidal wave of cash' unleashed in 2020 and 2021

An independent inquiry into the Reserve Bank of New Zealand is very unlikely without a change of Government late next year, although opinion polls currently show that is a very live prospect, in part because of the combined effects of fiscal and monetary policy in helping create the newly-modern scourge of high inflation and a 'cost of living crisis.'

Finance Minister Grant Robertson dismissed the Opposition's call for such an inquiry into the bank's 'tidal wave of cash' in 2020 and 2021 this week, calling National Leader Christopher Luxon 'Captain Hindsight' and saying the Reserve Bank had only just gone through a full review that led to legislative tweaks to how it runs monetary policy in 2018, including getting an extra mandate to 'support maximum sustainable employment' and formally making decisions via a Committee, rather than directly by the Reserve Bank Governor individually. Those changes followed a full review and select committee process. 

"I just did that, and I don't think I'll put the Reserve Bank through that again," Robertson said.

But National Finance Spokeswoman Nicola Willis is not backing off and has said she wants all parties in Parliament to agree on terms of reference for a truly independent probe. Australia's new Labor Government launched an independent inquiry last week into the Reserve Bank of Australia's operation of monetary policy during Covid. It is being led by outside experts and is expected to challenge the RBA's use of Quantitative Easing (QE), often described as money printing, to stimulate the economy.

The Reserve Bank of New Zealand is, coincidentally, conducting its own statutory five-yearly review of how monetary policy is operating at the moment, but its own terms of reference leave little room to challenge its decisions in 2020 and 2021 to create $55b to buy Government bonds, to remove loan-to-vale ratio (LVR) restrictions and to lend banks $12.6b cheaply through the Funding for Lending Programme (FLP).

But if a truly independent inquiry was launched by a new National-ACT Government, what sorts of questions should it ask? And what sort of questions might a National/ACT inquiry prefer not to ask? Just in case the answers did not please its voters, especially those median-voting homeowners still sitting on more than $500b of capital gains because of the Reserve Bank's interventions.

When monetary policy became redistributive policy

National would find itself in uncomfortable territory if it was to go ahead with a proper and full inquiry. But it would be justified because by choosing to use the wealth effect to rescue the economy, the Reserve Bank was making both a monetary policy decision and a wealth redistribution decision.

It was effectively choosing to make one section of society (home owners) much wealthier at the expense of the rest (young renters with renting parents, and their unborn children).

It did so at the risk of an inflationary surge that would hurt renters on precarious and low incomes much harder than asset owners. Accidentally on purpose, Governor Adrian Orr and Finance Minister Grant Robertson agreed the best way to rescue the economy was to create a new housing boom.

None of the new lending unleashed by QE, LVRs and FLP went to business or job creation. It went straight into open homes and auction prices.

So what did Robertson know, and when did he know it?

But also to be fair to the Reserve Bank, it made that decision with the clear and clearly-advised approval of the Government of the day through Robertson. Treasury told Robertson the money printing would boost asset prices. It turned out that approval, came from a Labour Finance Minister, but could just as easily have been a National Government.

What was the alternative? The Reserve Bank could have chosen not to remove the LVRs, a move other central banks did not do, or introduce cheap loans for banks, which only a few other central banks did. The Reserve Bank could have chosen to distribute stimulus directly as one-off helicopter cash payments to consumers. That may have created inflation, but not the massive asset price inflation we saw due to the unleashing of massive new bank leverage in the form of new mortgages.

I opposed QE and the LVR removals, and proposed ‘QE for the people’ (helicopter money) from the start. I also think the scale of the $20b in cash payments to businesses was too much, and not necessary after the end of the first lockdowns. Ultimately, those payments were put straight into the bank accounts of home owners, and were weaponised by extra mortgage lending through late 2020 and early 2021.

The $20b of cash paid to asset owners and the $55b printed to buy Government bonds off banks and pension funds were in effect metastasized into a 45% rise in house prices, which made home owners more than $500b richer.

Accidentally on purpose, they sparked a bonfire in the auction rooms

A supposedly independent central bank that was supposed to be focused solely on keeping inflation low and our financial system stable, ended up working with a Finance Minister to spark a once-off redistribution of wealth from one group in society to another.

Were they hoping no one would notice? There were always going to be consequences. Now they’re starting to dribble out at the edges through the likes of this call for an inquiry and doubts about the reappointment of the Governor (and the Government) that did it.

But would a National Government have done any differently? I doubt it. The wealth shift benefited the median voters that both major parties need to win elections.

National has also not framed this issue as a wealth redistribution issue. It has framed it as a cost of living issue. The subtext is that higher inflation creates the danger of higher interest rates, which in turn risks reversing some of the multi-decade capital gains created by lower-than-expected inflation from 1990 to 2020.

But didn't everyone do it? Doesn't that make it alright?

This use of the arms of the state to rescue and benefit asset owners was not unique to Aotearoa-NZ. Every major central bank in the world did it repeatedly during the Global Financial Crisis and through much of the following years, until a major acceleration in 2020 and 2021. They too used their independence to rescue banks and keep asset owners confident and whole.

Few of the bankers for the GFC were prosecuted. Almost all kept their jobs or were soon employed again and earning bonuses. If you can’t remember or weren’t around, have a read or watch The Big Short again (or for the first time). Effectively, central banks and Governments ‘got away with it’ in the 15 years to Covid, although the Tea Party, Trump and Brexit political reactions could be seen partly as the political revolts in response.

The difference for us here in Aotearoa-NZ is that our central bank and Government did it for the first time deliberately in 2020, and at a much greater scale than the rest, once the LVR removal and the Funding For Lending programmes are accounted for. Our house prices rose by much, much more than in other economies where other central banks printed money.

This is a big rodeo, but not our first

I think we saw an early preview of it here in late 2008 and early 2009 when the Reserve Bank lent $7b to banks so they could roll over their frozen loans on international markets through a little-known Term Auction Facility, and when first Labour and then National Governments created temporary wholesale and retail deposit guarantees for banks and finance companies in late 2008 and 2009.

So what should an (unlikely) inquiry any time soon examine?

The question is whether any independent inquiry in the Reserve Bank’s actions happens (unlikely) and if it did, whether the redistributive aspects and morally hazardous aspects would be examined (even more unlikely).

Ultimately, there will be a political fallout over many generations. Social licenses will be lost, if they haven’t already been. Governments will change and maybe laws will be rewritten. Or maybe nothing will change. Little has changed of substance in the United States and Europe.

The same central bankers and finance ministers are in place with the same powers. The only difference is they don’t have the excuse of low inflation any more, although it is a very useful way to inflate away Government debt.

The most interesting question for me right now is whether National launches an independent inquiry if it wins Government late next year, and whether it will ask these sorts of questions about the redistributive consequences.

It will depend on who it has to partner with. If TOP and/or Te Pāti Māori are part of any coalition, these would be sorts of questions that could be inserted.