By Bernard Hickey
A chink of light broke through the clouds over New Zealand's economy this week.
The Reserve Bank seems finally to be talking seriously about adding a few extra weapons to its rather bare arsenal.
This week Deputy Governor Grant Spencer, who is widely seen as the likely successor to outgoing Governor Alan Bollard, revealed the bank is actively considering adopting so-called Macro-Prudential Policy tools to add to its main tool, which is the Official Cash Rate.
This has to be welcomed and, if adopted, could break a horrible Catch 22 that the New Zealand economy has been stuck in for much of the last decade.
New Zealanders' love for property investing funded with foreign borrowing helped fuel a consumption binge and economic boom from 2002 to 2007 that succeeded only in loading households up with debt and pushing up our interest rates and currency to levels that stunted growth in non-commodity exports.
The Catch 22 goes something like this:
1. A booming property market fueled inflation and economic growth.
2. This forced the Reserve Bank to push up the Official Cash Rate to keep inflation within its 1-3% target band.
3. This in turn pushed up the New Zealand dollar and reduced the competitiveness of exporters.
4. This reduced export employment and increased New Zealand's reliance on foreign borrowing to service its foreign debt.
5. The increased inflows of foreign funds and pushed the New Zealand dollar even higher.
6. Any attempt to cut interest rates simply fired up the property market, sucking in more foreign debt.
7. Rinse and repeat.
Breaking out of this cycle has seemed impossible.
Various short and long term solutions have been proposed. Governments from both sides of the spectrum have tried to increase domestic savings, which would reduce the reliance on foreign borrowing and, in theory, reduce interest rates in the long run. The National-led government's moves to make rental property investment less attractive by reducing the ability to claim depreciation on buildings was also one of the attempts to break this Catch 22.
The current strength of the New Zealand dollar despite weak commodity prices shows the Catch 22 is still operating with a vengeance. The Reserve Bank has been so frustrated by this that the outgoing Governor has even suggested in recent months he might cut the Official Cash Rate to tried to drag the currency lower. This has served only to increase the heat in the property market. Not much has changed since Dr Bollard was appointed in September 2002.
Labour and the Greens have tried to spark a debate in recent years about how to break this Catch 22, including suggestions for currency intervention, a capital gains tax and a dual or triple mandate to target employment and exports as well as inflation.
But until now both the Government and the Reserve Bank have been reluctant to break away from the current inflation-targeting regime with the use of the single tool of the Official Cash Rate.
In 2005 and 2006 the Reserve Bank and Treasury investigated Supplementary Stabilisation Instruments, including a mortgage interest levy, property tax changes and a loan to value ratio limit, but decided in the end to do nothing. In mid 2007 the Reserve Bank intervened to push the currency lower, but has been reluctant to do it again.
Now the Reserve Bank is again looking at tightening regulations for banks that would make it harder for them to lend heavily against property during booms. These suggested Macro-Prudential policy tools include loan to value ratio limits, a counter cyclical capital buffer for banks and changes to the Core Funding Ratio introduced after the Global Financial Crisis.
Let's hope this latest study goes a lot further than the one that petered out in 2005 and 2006.
Somehow New Zealand needs to break its economy policy Catch 22.
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A version of this story first appeared in The Herald on Sunday
23 Comments
The problem is that we are part of a globally-tied 'economy'.
Some folk talk of 'investing in the productive economy', rather than 'creating a housing bubble'. Just what they expect that 'productive economy' to be selling, and to whom, and where those folk will do their consuming of it, doesn't get addressed. Nor does the great limiter to growth - the energy required to do all of that at an ever-increasing rate. That needed rate is already behind the curve:
.http://www.chrismartenson.com/blog/trouble-money/73469
(5th graph down)
I'm more and more coming to the view that the system will have to crash - way beyond anything the RB can solve with its 'tools' - and probably be re-booted and crash again; before the new leadership emerges.
This week Deputy Governor Grant Spencer, who is widely seen as the likely successor to outgoing Governor Alan Bollard, revealed the bank is actively considering adopting so-called Macro-Prudential Policy tools to add to its main tool, which is the Official Cash Rate.
And therein lies the problem. Out with the old and in with the same.
Grant Spencer still persists with his edict to stop the release of currency swap trades undertaken by the RBNZ on a timely basis.
Prior to the currency intervention policy this data was freely posted daily on the RBNZ website. It's not as if traders could glean any advantage whatsoever from these trades since those that undertook intervention trades on behalf of the RBNZ telegraph the actions by default.
These currency swap trades if they are meant to be transparent and can survive the stare of public scrutiny why are they banned? Primarily they involve security for government deposits held by the RBNZ which have been lent to local banks and collateral for settlement cash borrowings - both important indicators of what the citizens involvement is with foreign owned banking operations.
This culture of opacity is not a forerunner for change that equates with equality between our central bank servants' care of the banks and the needs of the taxpayers.
Time to consider the RBNZ's position in society and the aims we wish to impose upon it.
I rather try to build a bridge than burn one PDK....and it's no talk ,it's do....I may be wrong and you may have the last laugh as the shirt comes off my back , but it's worth giving it a go as opposed to finding a million reasons not to...and I'm OK with that.
I don't care to sit and wait for Financial Armegeddon,resting on an " I told you so" attitude, when the outcome for most will be the same anyway.
As to the R.B. solving anything at all, please spare me, Bollards policy of wait n see n wait some more has an all to familiar ring of the Helpless gazing to the horizon waiting for the bang...
that similarity never struck me before.
You have to know where you're going, before you know where to site your bridge.
I've build more than most, and the ones I've built are free to copy (I anticipated the end of our fiat fiscal folly some years ago) - the interesting thing is the lack of takers.
Wanna hawk our 200-220 degree power-stroke-to-crankshaft system? I've been riding the bike for 20+ years. Due diligence all the way up to F1/sportscar manufacturers. No takers. Billions of people just accepting the 180-deg crank as 'given'.
Ben Carlin ran into the same mass non-comprende, took his round-the-world amphib jeep to Willy's (Annapolis) and to Ford (Dearborne). The Willys guy "shook my hand without charging me for it", the Ford man wouldn't even look out of his office window at the vehicle.
http://www.4wdonline.com/Mil/HalfSafe/HalfSafe.html
If you foster what you foster for the future good of humanity, you cann'ae do any harm. If you do it for fiscal reward, the planet cann'ae support the combined exponentially-increasing load, and our species will crash. Your conscience, your call. Have a good one; I'm putting the finishing touches to my one-wheeler-wubble - gorgeous day down here.
Easy ... follow the Singapore model . in the mid 1990's when the Singapore property market started to balloon they passed a regualtion to force buyers to put down 10% in real hard cash.
In other words not borrowed funds or fictitious deposits or other fancy financial wizardry.
The market stabilised in about 90 days, prices returned to realistic levels as developers realised that the gouging had come to an end, and sellers moderated their expectations .
I think the elephant in the room is still Credit Crowth(Money printing) by the Banks.
People pay a lot of attention to the base interest rate but Credit growth gets much less attention although I believe Credit growth is the main ingredient behind an asset bubble.
Steve Keen in his latest blog seems to draw a correlation behind Australian credit growth and the current Australian housing slump.
http://www.debtdeflation.com/blogs/
"The lack of expansion in the Australian private credit markets is certainly having an adverse effect on commerce in the post 2008 financial crisis period."
"Housing credit has offset this with an average annual growth rate of 6.9% since October 2008. However, this has since slowed to an average annual rate of 5.3% for the first 3 months of this year and is continuing on this slowing trend. With significantly less credit coming into the market, the Government have had no choice but to compensate deficit spending."
Yes, I agree with Bernard that it is a good sign. The RBNZ has got the hang of controlling inflation but can't seem to take the next step of keeping the currency in a range that benefits manufacturing and production. To use a rugby analogy, they know how to gain control of the ball but not how to actually score tries.
This is a slow burning problem, it takes a long time to build a strong manufacturing base, think 20 to 30 years, but without one we become someone else's debt serfs.
“There will be opposition to the speedy implementation of these changes from the banks and heavily indebted sectors, as there may be increases in the price of credit, but this is a necessary part of the rebalancing process.”
“Over the longer term, loans in New Zealand will have less associated risk as a result of the new regulations, and the RBNZ will not need to hike the Official Cash Rate as much, ultimately leading to lower interest rates,” says Mr Walley.
“The Reserve Bank must seek out ways to support, even encourage, the rebalancing of the economy. Weighting reserves by asset class would enable better targeting.”
“Further efforts from the Reserve Bank are needed as an overvalued exchange rate, a persistent current account deficit and a stagnant traded sector demonstrate that we have a system that does not work. These moves are a step in the right direction.” From:
http://www.realeconomy.co.nz/282-rbnz_must_continue_to_add_tool.aspx
And Bernard, yes agreed, "Let's hope this latest study goes a lot further than the one that petered out in 2005 and 2006."
Anyone know why the 05/06 study didn't go anywhere?
The things we are talking about here are not rocket science, although the people talking about them are skilled and capable enough to be rocket scientists, or better. So why o' why did they not see the writing on the wall during the boom and implement these measures?
If they had, would NZ be worse or better off?
Perhaps it time to stop paying them salary alone and bring a strong element of performance based pay into their remuneration, say bonus linked to current account deficit/surplus etc? Better still, pay them in USD ....
Cheers, Les.
So why o' why did they not see the writing on the wall during the boom and implement these measures?
Les are you seriously asking this question or just seeking the realm of rhetoric?
Surely an upfront salary of ~NZD 600,000.00 for the position of RBNZ Governor is tantamount to an up front bribe. One that the citizens should surely resist.
The Congress sets the salaries of the Board of Governors of the Federal Reserve System members. For 2012, the Chairman's annual salary is $199,700. The annual salary of the other Board members (including the Vice Chairman) is $179,700.
A salary for the governor of our local central bank more than twice the same position in the US is obscene and hence serious questions have to be asked about the integrity of our local officials when they are willing to accept outrageous emoluments and pretend to act above suspicion.
Stephen - at half those salaries they should have seen the writing on the wall. I don't think it was the size of their salary cheques that blinded them, rather blind faith in ideolgy that pretty much sunk the rest of the world - so at least they were in good company. They do seem to be learning however, albeit at many others expense except their own - pretty much the deal one gets in that kind of game I guess.
Relative size of salary; as a resident of ChCh I can tell you it's not out of the ordinary for those in the highly performing areas of the NZ civil service. (My cheek is hurting again, must stop this ....)
Pretty shatterd now meh, but still no real leadership from NACT. The answer might have something to do with a gorilla that has bullied both sides of the house for too long:
Bernard the "catch 22" scenario is for Bolly the rock and the hard place......it would take a willingness without reservation on the part of Treasury to show any meaningful disruption to Bankers Paradise in the interests of the wider economy.
My fear ..indeed belief is that you will be sorely dissapointed and left saying yet again .."it did not go far enough"
But I guess on the upside , you'll have it confirmed yet again who's really in charge of the economy that is the buying and selling of houses to each other and sweet f / all of anything else....particularly now that Fonterra's having a bad day / week / month / year...eh..?
There's not going to be another property boom. It will not happen. Property prices in New Zealand will follow the trends elswhere, especially Australia. Melbourne down 7% and Brisbane down 6%.
There is simply too much debt held by Mum and Dad investors to support a new boom. Moreover, jobs will be fewer and income will be less.
The coming years will not be like any other the world has known. New paradigms in regard to the global monetary system will soon render the old "prices always go up' property mentality to the dustbin of bubble history.
About a month ago, while Bernard was away in the company of another poster who goes by the Nickname of WifeOfBernard, someone posted a link to a 20 year old documentary of one 25 year old guy by the name of "John Key" working for Elders Finance as a currency trader. What was notable about the video was the intraday trading. He never made one losing trade in any year. Not one loss. Amazing. Assuming he was doing 10 trades per day he was doing over 2000 trades in a year. And not one losing trade. That is more than amazing. Why does NZ even need a Reserve Bank Governor. Dont worry about the NZD. Worry about what it is doing. Forget Fonterra. Get Key to train the next Governor. New Zealand could become very rich, very quickly,
Amen to that Justice ...and Sore Loser.
Iconolast ..i think you will find Key has had a lot more input into the hedge positions of Fonterra than you would like to believe......
You stay at the table long enough ...everybody loses ...no exceptions...!
Of course John boy could be taking advantage of their position.....well that's all part of the rules of the game.....
Well you've got to ask yourself iconolast about the environment here..
Take a prime market trader in forex.......not forgetting it's now his credo.
Take an overvalued commodity based currency......with dairy being the prime commodity.
Take an unwillingness on the part of Treasury to look for correction while the Dairy industry is hot and hedging with reasoned knowledge and information to have made 12%net of the bottom line 2011.
Take a falling commodity and look to short to medium term losses in currency value
Coming off the spread is 3.5 to 5 in the dollar........
Now all the hypothosising starts......look like your not wanting gasoline prices to skyrocket but pick the profit out of the spread....
Do you forewarn the player who can have an immediate impact on the spread...?
Do you include the player and continue the strategy....
Do you insist Treasury start jawboning interventionalist tools to invite more players to the table......
Do you risk an inflationary spike to bail out the player now bleeding at the nose for the lack of ante........
And here comes the big question.....Does the greater good have precident in this game when no short term historical evidence would suggest it be so....?
So iconolast what I suggest here is that the Environment coupled with inside Knowledge could not be better for someone such as Key.......never forgetting on every side of a big win position someone on the other side of that position has to lose big.......let's keep our eyes peeled for the losers..eh ...cause sure as hell you won't hear the winners screaming it from the rooftops.
What a bloody great joke....economists, if they had 1/2 a brain they would all die of confusion.
I have been talking about this since...oh yeah 1990s and here 2006/7
We have major economic crisis, 1929 and before and since... tools are introduced depost to loan ratios for bank, min desposits for high at least value items etc etc...to stablise the ups and down caused by bad business banking practices.
Then the new enligntened idiots come along spouting off free market BS and we have another international/ national economic crisis.
Then we put these good banking busines practice restrictions/ RB tools back on.
Removal in the early to mid 1990 s as a result of the enlighed Reaginism/ thatcherism/Douglasism is what caused this whole debacile /resseccion
And they are now only "considering " this now?
The curse of the 21 st Century, proliferation of PhDs without any commonsence
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