Gareth Vaughan on the RBNZ's competition reticence, landlordism & the housing crisis, Biden's crisis management blueprint, SWIFT & CBDCs, Germany's €23b green experiment

This Top 5 comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing a guest Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

1) 'We're not going to be making things unsafe in the hope that competition suddenly bursts out.'

In a podcast interview with Commerce Commission Chairman John Small last week, I asked him which of the Commission's 16 draft recommendations to improve competition in personal banking services he'd rank as the most important. His answer? This one;

The Reserve Bank should review its prudential capital settings to ensure they are competitively neutral and smaller players are better able to compete.

In the podcast Small says;

I think levelling up the prudential [capital] playing field is very important. This is a pretty significant cost disadvantage, in the order of 15% less capital that's required to be held against the same kind of housing loan by one of the big four as opposed to any other bank. And so we would really like to see that one levelled up. That's probably number one because that gives other banks a bit of a chance.

This recommendation was a key reason why I wrote an article the day the Commerce Commission's draft market study report was released highlighting the tension raised by the competition watchdog between improving competition in our oligopoly dominated banking sector and the Reserve Bank's responsibility for financial stability. I say;

A key question now is; to what extent they [the Reserve Bank and the Government] are prepared to move the prudential regulation of New Zealand banks away from international orthodoxy in an attempt to make banking more competitive for consumers?

As Reserve Bank Governor Adrian Orr has been prepared to talk about competition, or lack thereof, among banks. This is more than his predecessors did, preferring to limit public comments to their monetary policy and financial stability knitting. Thus I was interested in comments Orr made in an interview with RNZ on Friday.

The main work we do is not going to shift the competition dial very much at all. We can not just let lots and lots of small companies that will be unsafe or likely to fail [obtain bank or non-bank deposit taker registration] in the hope that it creates competition.

What we really need to think about is how are we allowing the incumbents, the major four, to remain the incumbents, and where and how can competition continuously disrupt? And we are looking at access to our payments [settlement] accounts, but that isn't going to do too much. We're not going to be making things unsafe in the hope that competition suddenly bursts out.

What we're really interested in is open banking. I think that is critical to competition, people being able to take their bank number wherever they like, and more smoothly shift between bank services, and allow fintech in there. As well as the ownership structure and disincentives to innovate in our payments and settlements systems, those are the two big game changes.

Reserve Bank staff were no doubt watching closely as the Australian Prudential Regulation Authority was left with "a bit of a bloody nose," as The Sydney Morning Herald put it, when Volt, 86 400 and Xinja, three so-called neo-banks it had licensed, gave up their licences. In NZ the Reserve Bank has taken a more conservative approach, steering any would-be bank start-up down the non-bank deposit taker (NBDT) path.

Orr knows who will be blamed if the Reserve Bank gives banking or NBDT registration to a newcomer and it fails. 

So it's on August and the Commerce Commission's final report, to see whether their recommendations to Commerce and Consumer Affairs Minister Andrew Bayly change much.

(There's background on how and why the big four banks have an advantageous regulatory capital position over their smaller rivals here).

2) Blaming landlords for the housing crisis.

Writing for The Guardian, Nick Bano argues mass-scale house building isn’t necessary to solve the UK's housing crisis because there's already enough housing stock. Instead Bano, a barrister specialising in renters’ rights and homelessness law, says landlords are the problem.

Speaking against his own government’s renters reform bill last autumn, the Tory grandee Sir Edward Leigh told MPs: “I was able to buy my first house – although it was a bit of a struggle – for £25,000. The opportunities for young people are so difficult now”. Younger people are “overwhelmingly reliant on the rental sector”, Leigh conceded, but the problem as he saw it was one of supply: “We have to build many more houses, and we have to free up the rented sector.”

What never seems to occur to Leigh, his parliamentary colleagues, or indeed his entire generation, is to look seriously at what has changed between their time and ours. 

Bano points to a housing crisis in London, where the population is similar to what it was 70 years ago when the city was extensively bomb-damaged by World War II.

In the 1970s, when Leigh’s contemporaries were buying their first homes, they were the direct beneficiaries of an imploding private rental market. Rent controls, secure tenancies and high interest rates had conspired to decimate the sector: it shrank from nearly 60% of dwellings in England and Wales in 1939 to just 9% in 1988, towards the end of Margaret Thatcher’s premiership. This was welcomed by Conservative governments and Labour councils alike: the former rejoiced that rack-renting landlords were having to sell up to new owner-occupiers, while the latter enthusiastically repurposed existing private lets into new social housing stock.

He writes about how the "project of municipalising” the private sector enjoyed cross-party support in the 1970s, but now things have changed since to the point where;

We now find ourselves in a situation where one in every 21 adults in the UK is a landlord. We have four times as many landlords as teachers. As a consequence, virtually everyone struggles to afford a home that meets their needs despite a net gain in housing stock. Landlords are entitled to ask for whatever rent they think they can get, and insecure contracts drive a coach and horses through the concept of tenants’ rights. This is the market that Leigh, landlords and developers want to “free up”. Instead of confronting the horror of our situation and its causes, they pretend that there is an extraordinary shortage of homes. This is simply untrue, as the international and historical data shows.

Here's Bano's conclusion;

Where Adam Smith and Karl Marx found common ground was in the idea that everyone’s interests are aligned against landlords: they are an economic deadweight. Even if we leave aside the appalling conditions and precarity that private renters face, anyone with an interest in lower taxes, lower wage bills and increasing the number of first-time buyers must equally be interested in smashing the private rented sector to bits. Homebuyers are now forced to compete with landlords, who chase sensational yields in our unregulated rental market, and £85.6bn a year (which comes, of course, from wages and taxes) is wasted on rent. A renewed collapse of landlordism would represent not just the tenants’ revenge for the housing crisis, but a much broader and more valuable moment of social progress.

Bano has a book out. It's called Against Landlords: How to Solve the Housing Crisis. I imagine ACT leader and impending Deputy Prime Minister David Seymour won't be reading it. It was Seymour, after all, who upon the Coalition Government's formation declared they'd be restoring landlords' dignity.

3) Biden's crisis management blueprint.

Zachary Carter, writing for Slate which describes itself as a daily magazine on the web, makes the case the US economy's recovery from the Covid-19 pandemic is pretty darn good, not justifying a disconnect between the country’s economic performance and public sentiment. He also looks at why President Joe Biden is struggling to get credit for it.

President Joe Biden spent most of his recent State of the Union address celebrating his economic record, with good reason. There is no denying the numbers: The United States currently enjoys the highest rate of economic growth among nations in the G7, the lowest inflation, and the strongest wage growth. The unemployment rate hasn’t been this low for this long in half a century. Even accounting for inflation, wages are higher today than they were before the coronavirus pandemic, and the biggest wage gains have accrued among the lowest-paid workers, resulting in a dramatic reduction in overall wage inequality. The economy is even outperforming among communities that are often excluded from boom-time gains. Biden has overseen the lowest Black unemployment rate on record and the lowest ever unemployment rate for workers with disabilities. The American economy isn’t perfect, but by any historical standard it is very, very good.

Who is to blame for sentiment the US economy's performing poorly? Carter argues it's Biden's own Democratic Party.

For much of his presidency, Biden has been the victim of a centrist revolt against his economic program that the progressive wing of the party has been either unable or unwilling to put down. Everyone expects Republicans to give a Democratic president a hard time, but sharp and sustained economic criticism from Biden’s ostensible allies established a narrative of failure that has proved alarmingly resistant to reality.

He goes on to compare the response to the Global Financial Crisis under President Barack Obama , when Biden was Vice President, to the pandemic response under Biden. Carter says the key lesson Biden’s advisers took onboard was the Government didn’t spend enough in Obama’s 2009 stimulus package to get unemployment under control.

The American economy is strong today for the same reason that the labor market has been strong throughout Biden’s presidency: the U.S. government spent a ton of money to support workers and their families. Biden has not only established a blueprint for successful crisis management, but he has achieved something on the economy that pessimists across the ideological spectrum have been declaring impossible for much of the 21^st century: He learned from the government’s prior mistakes and found a way to govern better.

4) SWIFT building central bank digital currency platform.

Global bank messaging network SWIFT is building a new platform to connect central bank digital currencies (CBDCs) to the existing financial system, Reuters reports. 

Around 90% of the world's central banks are now exploring digital versions of their currencies. Most don't want to be left behind by bitcoin and other cryptocurrencies, but are grappling with technological complexities.

SWIFT's head of innovation, Nick Kerigan, said its latest trial, which took 6 months and involved a 38-member group of central banks, commercial banks and settlement platforms, had been one of the largest global collaborations on CBDCs and "tokenised" assets to date.

It focused on ensuring different countries' CBDCs can all be used together even if built on different underlying technologies, or "protocols", thereby reducing payment system fragmentation risks.

It also showed they could be used in highly complex trade or foreign exchange payments and potentially be automated so to both speed up and lower the costs of the processes.

Kerigan said the results, which had also proven banks could use their existing infrastructure, had been widely regarded as a success by those who took part and given SWIFT a timeline to work to.

Our own Reserve Bank is among the central banks working on a CBDC. See more on its plans here. And to see where other countries are at, check out the Atlantic Council's CBDC tracker here.

5) Germany's €23 billion green experiment.

Bloomberg reports Germany, Europe’s biggest economy, is running a €23 billion experiment to reach net zero by 2045 without destroying the energy-intensive industrial base of its economy.

The government of Olaf Scholz announced earlier this month so-called “climate protection contracts” to help companies in sectors like steel, cement and glass cover additional expenses incurred in using cleaner technologies, compared with conventional processes. Under the program, applicants present proposals for the amount of support needed, with the bids offering the highest CO2 reductions for lowest price receiving funding.

The policy is similar to the Contracts for Difference (CfD) programs that governments have used to help roll out renewables in many parts of the world. Yet the scope of the technologies that it covers is different to anything that’s been tried on this scale, making its success far less certain. The first auction round offering up to €4 billion worth of contracts recently launched, and another bidding opportunity with a €19 billion pot will follow this summer. It’s an “innovative instrument that doesn’t exist anywhere internationally yet,” said Udo Philipp, state secretary in the economy ministry.

The way the new support system works is linked to Europe’s Emissions Trading Scheme, and it's ultimately about protectionism, Bloomberg says.

Above all, the government’s main focus is protecting its industrial economy, and it’s also keen to not repeat past mistakes. Two decades ago it invested big in the solar industry, which has virtually disappeared from the country. That’s why it’s reserving these auctions for native companies only, with foreign entities blocked from the pot.