By Dave Grimmond*
The introduction of loan-to-value ratio limits on mortgages (LVRs) by the Reserve Bank on 1 October 2013 has been a controversial policy development this year.
It appears to have been responsible for a spike in house sales in the middle of the year, with the seasonally adjusted number of house sales increasing by 5.1% in the September quarter.
Thus it seems very likely that there will be a natural decline in the number of house sales in the December quarter, irrespective of the extent that the LVR regulations will have an ongoing impact on the housing market.
Although protecting the integrity of the financial sector underpins the development of LVRs, the reasoning provided by the Reserve Bank, seems to have morphed into being about protecting new, highly leveraged, entrants into the housing market from the risks of house price declines.
I must admit hearing this type of justification for policy intervention fills me with considerable unease.
There is no discussion of normal policy considerations like market failures or externalities.
Instead it smacks of the glorious and all-knowing Bank protecting us from our own ignorance and excessive greed.
My experience is that when it comes to self-interest, people from all walks of life on the whole tend to be very astute in assessing what is best for them.
Two problems
In the case of home ownership, as I have discussed previously, there are obvious tax incentives that make it highly advantageous for people to own their own home, and the younger one begins the better.
This in turn suggests that the LVRs have two associated problems.
First rather than addressing the tax-related root cause to an excessive demand for home ownership it is trying to curb demand by introducing a new set of regulations. If you cannot change the tax rules then there may be some merit in a LVR scheme, but the result will invariably be worse than an approach that directly addresses the tax design issue.
The second issue relates to one of the political mandate for the LVR regulations.
Tax laws are determined by government and parliamentary votes.
If it is the political will to have a tax system that favours home ownership, what is the political mandate for a non-elected body like the Reserve Bank to introduce regulations to “protect” people from taking advantage of these tax rules?
Ultimately the Bank is imposing highly selective regulations that are limiting free choice and redistributing wealth across society. These are the type of actions that normally require a political mandate, and it is not obvious that the Bank possesses this mandate.
Unlike the elected government, we do not have the recourse to vote out the Reserve Bank Governor at the next election if we are not happy with the Bank’s performance.
Political interference
On balance New Zealand is well served by systems that protect roles like the Reserve Bank Governor from political interference. We know from experience that political influence can undermine the effective implementation of monetary policy.
A key purpose of the 1989 Reserve Bank Act was to provide this type of protection to the Governor, and this independence has contributed to the generally low inflation environment that New Zealand has sustained since then.
We can quibble about the appropriateness of monetary policy settings at any particular point in time, but such concerns are second order in comparison to the overwhelming success of the institutional framework established by the 1989 Reserve Bank Act. The independence of the Reserve Bank has served New Zealand well.
But one reason for this success was the narrow focus of the Act, with the primary aim being the protection of the value of the New Zealand monetary system via inflation control.
The Bank also has a responsibility for protecting the integrity of the financial system, and this role has increased in importance since 2007, and is ostensibly a key consideration behind the introduction of the LVR regulations.
The purpose of the LVR policy
Irrespective of the merits of the LVRs in protecting the integrity of the financial sector, it is being sold by the Bank as a means of influencing the demand for housing.
This might simply be rhetoric in order to make their introduction more palatable (although why calling new home buyers stupid should be regarded as good spin escapes me).
I am concerned that using such spin to justify the LVRs represents a step by the Bank into the political domain, which if unchecked risks leading to an erosion of the Bank’s operational independence.
Another part of the spin associated with the introduction of the LVRs has related to linking the expected impact of the LVRs to interest rates (see p5 of the September 2013 Monetary Policy Statement).
The inference is that the LVR has joined the official cash rate (OCR) as a new, housing market targeted, instrument for implementing monetary policy.
Again this might simply be spin, but if so it is dangerous.
What is the true purpose of the LVR? Is it to protect the financial system, to protect new home buyers from themselves, a new precision instrument for reducing inflationary pressures sourced from the housing market, or a wonder drug that does all three things at once?
Now I really hope that all my confusion about the LVRs simply reflects my own stupidity or, at second best, just some inept communication by the Bank.
Rising inflation
My real concern is that the Bank may be equally confused.
One thing that is for sure is that the introduction of this new regulation is going to make the implementation of monetary policy a lot more complicated and uncertain in coming months.
The Bank has introduced this new regulation just at the time that inflation pressures appear to be on the rise.
In the September quarter inflation jumped from 0.7% to 1.4%.
With non-tradeable inflation at 2.8% one could imagine that inflation could very quickly be threatening the top of their 1-3% target range. But if the introduction of the LVRs is expected to quell inflation pressures from the housing market, then maybe much of the recently observed increase in inflation pressures could also dissipate quite quickly.
But how will the Bank know which path we are on?
The first sign of the effectiveness of the LVRs might be to see some reductions in the number of house sales. But if there was a boost in house sales in September in anticipation of the introduction of the LVRs, a fall back in sales in the December quarter might be expected anyway and so tell you very little about the impact of the LVRs.
Maybe it is best to wait until we get information about house sales in the March quarter? How long will it take before a LVRs induced slowdown in the housing market will feed through into lower generalised inflation pressure?
What does the Bank do if the expected slowdown in house sales takes longer to appear and inflation pressures continue to mount?
What perhaps looked to the Bank like a king-hit new policy six months ago, must now be starting to look like a big gamble and could become an almighty headache in coming months.
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David Grimmond is a senior economist at Infometrics. You can contact him here »
33 Comments
A key purpose of the 1989 Reserve Bank Act was to provide this type of protection to the Governor, and this independence has contributed to the generally low inflation* environment that New Zealand has sustained since then.
I think you are peddling a myth here. But if we keep on repeating it - then it is true.
*To do this please ignore the China effect, carefully select what you leave in and leave out from your inflation measure and you to can have low inflation.
Yes I was arguing this point with some guys on Matt Nolan's blog but it was like debating creationism with rabid fundamentalist Christians. It seems to be somewhat of a sacred cow with them.
Not to mention the significant changes in labour markets since the 1980s which have seen incomes lagging well behind productivity growth, even when including high earners such as politicians, lawyers, doctors, accountants, and public servants whose fortunes have eclipses the average worker quite markedly.
I've no doubt that you can produce figures that show that productivity has grown faster than incomes since the 1980s.
But can it be shown that that is "incomes falling behind productivity", as opposed to "productivity catching up with incomes"? In other words, if I put forward a hypothesis that we were previously overpaid for the value of what we were producing and so what we have seen since is a correction, can that be disproven?
Trying to challeng your argument would be like trying to engage in debate with a Christian on the subject of the existence of God. Its futile, because its an unfulsifiable hypothesis.
Rather it would be better to argue on the basis of the impacts of the state of affairs. Society being swamped with debt, a large portion of the working population needing social security just to survive, many families not being able to provide even the bare necessities, many households afflicted by Thir world illnesses because they're forced to live in overcrowded accomodation.
Or can you prove its so? ie its your hypothesis, hence you should be able to substantiate it. If you cannot, then it cant be true.
Overpaid or over extracting resources? look at the oil consumption growth pre-opec crisis and that drop and the subsquent growth rate. How develped economies swicthes to smoke and mirrors (finance) rather than produce reals goods and called that GDP and "advancing".
Further look at the top 1% who have taken the lion's share of the gains from the last 30 years. Can you show that they deserved this by their endevours? or is it simply that they have extracted monopoly level rents purely from their position?
I'd suggest the latter.
and in fact I'd suggest for the last ten years its highly probable that they have been parasitic and indeed damaging to the system/economy/society overall, let alone beneficial.
regards
Where on TVHE was the discussion - I'd like to go back to have a peak at it ;)
I also enjoy the fact you've put yourself in the role scientist and me in the role of faith based healer here. Have you really been clear with your hypothesis on the basis of some clear causal chain that has a reasonable relationship with individual action? Is the hypothesis falsifiable?
Ruling out what economists say as 'faith based' doesn't illustrate a real willingness to debate, and sounds a lot more like playing the man and not the ball in an argument.
Also - I don't think anyone who solely looks at the data honestly could venture opinions quite as strong as the ones you've noted down here. I suspect there may be a bundle of 'faith based' assumptions in your own argument ;)
Ho hum, yet another chery picker....lets pick items that are going up only to show how bad inflation really is for me personally.
Or alternatively lets do what we do now and pick a set of criteria to show the overall effect and use it every time.
The latter is a far better model for picking out the changes happening ie a baseline.
At that point you can then say what the baseline says is this, but it appears to be more like this, why?
Now in some items we see that there is a bubble, house prices in parts of Auckland, yet go out into the rural areas and Im sure you will find houses flat or even dropping, if you look hard enough.
So really you dont want items that are bubbles which will pop, or seasonal.
Then take demographics for the poor and older then yes the inflation rate is probably higher as what they mostly buy is going up. For younger ppl who say run a mobile phone a lot the cost of communications is dropping a lot.
As an example I just swapped one phone to 2degrees from vodafone. The old plan was $40 a month for 60mins and 250meg of data, the new plan is 160mins and 500meg of data for $29. I just saved 25%+ in my pocket and got x2 the capability. One phone went to pre-pay 2deg, 1/2 the cost of vodafone a 50% saving.
I think someone mentioned clothes over the last 5 years clothes have actually got cheaper. Now oldies might buy few new clothes, youngsters on the other hand far more.
Hence really you can make anything up that satisfies your pre-depositon, or you could try and be rational....
regards
Dear oh dear. Another orthodox economist who pretends the GFC was just an anomaly.
My experience is that when it comes to self-interest, people from all walks of life on the whole tend to be very astute in assessing what is best for them.
Most economists still think society and the economy are best served by everyone acting out of self interest and aggregating those impulses into macro economic theory, even though they have no way of measuring objectively either individual or aggregated utility. Nor do many people act in a purely self interested fashion. We are social beings with many of us capable of altruism or even acting for the good of others without regard to our personal circumstances. Orthodox economics ignores this.
Instead it smacks of the glorious and all-knowing Bank protecting us from our own ignorance and excessive greed.
If only the market was left alone we would be in a state of perfect equilibrium. All market participants are perfectly rational, there are no bubbles or manias, they have perfect and complete access to all information. Rubbish. We would do better guided by human psychologists than economists. If markets and their participants were always near equilibrium, rational and priced to perfection the GFC would have been impossible. It happened, you've ignored it as an abberation and returned to the rubbish theories that caused it.
At least Wheeler seems to recognise the role of human psychology and herd behaviour, fear of missing out and greed. Maybe its time other economists tried a different kool aid.
In disagreeing with the assertion that people tend to be astute in assessing what is best for them - Are you saying that
- people don't know what is best for themselves, or that
- what is best for individuals, is not what is best for "society"?
Either of those would be justification for Government intervention to guide or dictate individual decision making. But the appropriate nature of that intervention would be different depending on which justification was being used, so it is important to be clear which it is.
And how can you know? Since (as you rightly point out) we cannot objectively measure either individual or aggregated utility.
Before universal sufferage in Britian an argument against every man having a vote was the inability of the uneducated man to make good decisions for society.
Early socialists complained the working man did not act in his best interests before the outbreak of world war 1.
Greenspan in a recen interview lamented the lack of the markets to act in their best interests.
So the trend is neither new nor has it abated. However, who is the judge of what is in anyones best interests?
Well, the obvious answer is "nobody can judge what is in somebody else's best interest".
In which case we are both agreeing with the premise of Dave Grimmond's article, in which he says that RBNZ should not claim that it is acting in people's best interests by preventing them from taking out high LVR loans - and I'm still not clear what wtf's point it.
But if you can't and shouldn't seek to judge what's in my best interest, and I am being selfish and antisocial if I seek to act in my own best interest - am I to understand that my interests are not to be looked after at all, by anybody? Where, and to whom, is the benefit in that?
I guess I both agree and disagree.
For most of history somebody did make those decisions on behalf of most everybody else. nobility or someone else in the power structure. The fact we have such ideas as benevolent and despot show their degree of success varied greatly.
So although the question of who gets to play king is a very problematic one I would not discount the possibility of it both being able to be done and well.
To me your second question highlights the two faces of freedom. There must be "Freedom to: as well as "Freedom from". Another way to say it might be for every 'right' there must be a balancing "responsibility".
I want to make my own decisions - but - my decision to cut your head off with an axe cuts against your decision to live a free and violet free existence.
So interests or rights do not exist in a vaccum, which is why the idea of society quickly pops up when talking about these sorts of issues.
Well 1...8...9...10....oh and 2 pretty much need to be delisted if the species is anything to go by Notaneco
I'm all for ...do unto others...etc as a replacement
and maybe Joe South's walk a mile in my shoes another goodie.....
Don't you just love the rewrites...Catholic.....Thou shall not kill
Protestant....Thou shall not Murder
Ha Ha! ya see he subtle outdoor
It's all down to interpretation........No 1....(and yes i know there are plenty of rewrites) It is an act of devotion worship....maybe it's yourself - we can choose to be humble or arrogant but at the end of the day if you don't devote to yourself....your a slave.......
and No 2 graven images and idols....could lead you back to yourself again....if it aint out there it must be inside ya.
No 3, if its inside ya..don't be horrible to it.....
No 4 nothing wrong with a day off once a week,
No 5, I don't have a problem with this one - I wouldn't be here if it wasn't for them.
If you go to the tablets cos the order changes in every other text, there's nothing wrong with 6 thru 10. Don't kill, Don't commit Adultory (leave them first) don't steal, don't tell lies (false witness), Don't covet.....get your own you lusty thing.
Even the staunchest of libertarians would agree that a libertarian state requires the state to protect persons and their property from unwanted harm by others. There's no viable sociopolitical model in which you would have the right against my will to chop my head off if you so chose.
I guess a very libertarian state would allow you that right if I freely consented- in fact if you and I had a contract to that effect, it might even actively enforce that contract and require you to chop my head off. Though you might well have difficulty proving that my consent was truly "free", particularly after the fact!
Amartya Sen is interesting on what "freedom" really means - he argues that mere protection from others' harm is pointless without the ability to make use of opportunities, and so requires society to go further than protection of harm; we need also actively to enable people, through education for example. So if RBNZ really wanted to help individuals who might be at risk of damaging themselves by taking out a high LVR loan, it should instead provide better advice
Can you give some historical examples of successful benevolent despotism? Defining your criteria for "success"?
By the way I don't think the state has any obligation to help me to live a violet free existence. It would be up to me to avoid flower shops, botanical gardens etc if that's what I wanted.
A socialist core argument is against the idea of personal property (means of production et. al.) ands I am pretty sure they are not alone on that concept.
Might have been uncelar there, I mean to say there are examples of either benevolence or depostism rather than both at the same time.
And on the meaning of freedom if we tackle the question of what's the point - one possible idea I will add is that only freedom to do the *right* thing is true freedom, rather than the right to do *any* thing. This definition cuts to the core because it addresses the human heart, which is the source of evil in this world (according to the judeo/christian world view). Something against which there is no effective law.
Also, there are quite a few philosophies whose base assumption is the human heart is *good* and therefore result in various constructs to bring it back to what they propose is its 'natural' state. With such an assumption ones conclusion as to what freedom means would be quite different to a view that asumes the human heart is full of evil of every kind.
Hm, freedom only to do the "right" thing sounds either pretty constrained (if "right" means "approved by the Government, or some other authority") or meaningless (if it means "whatever the individual actor believes to be right").
True indeed that no law can make people good. At best it can force them to behave as if they were good, but all too often it can have the opposite effect.
Take for example the socialist ideal of "from each according to his ability, to each according to his needs". That's actually what would happen anyway if everybody were good and honest - everybody would do their best to contribute, and nobody would take more than they genuinely needed, and that would be a fine thing indeed.
Set it as a rule to be enforced, however, and combine it with human nature, and what you have is an incentive to conceal/not develop your ability (so that not much will be expected of you) and exaggerate your needs (so as to get more). Which is pretty much what we've seen happening
http://www.libertyzone.com/NeoActionsConstitution.html
The Constitution of the Universe
Preamble
The purpose of human life is to live happily.
The function of government is to guarantee those conditions that allow individuals to fulfill their purpose. Those conditions can be guaranteed through a constitution that forbids the use of initiatory force, fraud, or coercion by any person or group against any individual:
* * *
Article 1
No person, group of persons, or government may initiate force, threat of force, or fraud against any individual's self or property.
Article 2
Force may be morally and legally used only in self-defense against those who violate Article 1.
Article 3
No exceptions shall exist for Articles 1 and 2.
And this is my little bit of food for thought.
- The Individual has no members or leaders. Cults exist through members and leaders.
- The Individual requires crossing boundaries to generate ever expanding knowledge. Cults prohibit crossing boundaries to protect ever stagnant dogmas.
- The Individual generates open-ended wealth for individuals and society. Cults dissipate wealth earned by others and society.
- The Individual is anchored in factual reality. Cults float in imagined mysticisms.
- The Individual holds the individual self and natural law -- one's own self and objective law -- as the only authorities to guide man's life. (1) posits self-responsibility as a primary of conscious life and (2) rejects the concepts of political-agenda "laws", collectivist "leaders", and external "authorities". With Individual, conscious beings become self-leaders, allowing no outside "authority" to rule their lives. By contrast, cult members demand that their leader and his group-agenda "laws" rule their lives.
- The Individual seeks out its errors in order to correct them. Cults evade their errors in order to propagate them.
- The Individual has productive interactions with others and life. Cults demand harmful withdrawals from nonmembers and life.
- Many people avoid or attack the Individual because its integrated honesty exposes their own irrationalities and destructiveness. Cultists avoid or attack society because the real world exposes their cult's irrationalities and destructiveness.
- The Individaul brings growth, prosperity, and life to individuals. Cults bring restrictions, stagnation, and death to individuals.
- The Individual spreads social benefits through integrated honesty and competitive business. Cults spread social harms by manipulating their victims through dishonesty and frauds.
- The Individual propagates individual freedom. Cults propagate group oppression.
- Maybe the Individual will prevail in the 21st century. Cults will vanish in the 21st century.
A number of reasons, in no particular order but just as thought appears:
It's a shallow and inward facing purpose for life.
I don't know of any rational basis for claiming this could be he purpose of life.
It strikes me as a somewhat pointless purpose in the light of death.
As a concept it lacks any depth of definition and is therefore vague.
At best I find contentment to have great benefit to life but even that insufficient to be said to be the purpose of life.
I think if one reads the preamble as a whole for interpretation then the meaning of happily can take on a different perspective.
If threats of force, fraud and coercion are removed we have a neutral position. The question I would then think about, would be, does this neutral position remove fear and greed? Currently humans are required to adapt as best they can to force, fraud coercion etc. The adaptation process is not neutral as people strategise to obtain a particular benefit which can usurp values from others.
If people take action using force, fraud or coercion is there an honest benefit or value? While the initiaters of such action might appear positively happy or contented there will usually be an equally opposite unahappy party who obtained no benefit or value. The person who obtains happiness from actions of force, fraud, coercion etc can not really be truely happy. This however brings in the debate of whether they have a conscience or not. Maybe they live in fear of being exposed.
Being competitively neutral requires the removal of threat of force, fraud, coercion etc. It would be difficult to find any type of relationship that would not benefit from this honest approach to life. If we are competitively neutral it is very easy to see the behaviours of others who are not.........
Interesting isn't it. The happy people I know (they do exist) by and large do so in spite of the circumstances of life and not as a consequence of them.
I would suggest it is sadly not given to us to remove force, fraud and coercion from the human heart and this aspect of things is not subject to any effect of adaptation, which as a concept I find over applied in many situations.
I hold it self evident that everyone has a conscience; the difference being in extent to which we deny it.
I would agree that, as with many things, when it comes to competition, a little can be very good but a lot can be very bad. Balance is such an important principle in all of life and nature.
We are bonded in this life as much by the values we hold and the duty we feel to protect them Ralph.
Encumberment can be the load we gladly carry or unwanted burden placed upon us.
It is nonetheless an impediment to some of the freedoms we may want to enjoy, so self denial has a positive meaning when duty to your values or those you value in this life restrict your freedom in ....truth.
There are squillions of people on this planet living out the Truth as they see it, the Truth as they are taught it, the Truth that comforts them in their mortality.
Truth....? Happiness upon you Ralphie......true matey.!
You could argue both but it would be somewhat paternalistic to say people don't know what's best for themselves (even though we often do it as parents)
I would argue what is best for a number of individuals isn't necessarily good for others in the same society - the freedom to do as you will should be as long as it does not cause harm to others. Laws and regulations try to perform the role of preventing individuals or groups from defrauding, exploiting or criminally harming other individuals or groups in society. No they are not always successful, are open to interpretation and inconsistent enforcement. I don't want to get into the libertarian argument but as far as I'm concerned, without sanction a small percentage of humanity will have no compunction about harming the rest of us for their own gain or even pleasure. We need protection from these people. This goes for economic matters as much as anything else.
With regard to the LVR restrictions I would argue the RB needs to protect both us as individuals and society as a whole from the banking industry. Their business model is to push as much debt onto the population as possible without regard for the greater social and economic consequences. I am totally with Michael Hudson on that!
The orthodox view of economists, including Reserve Banks, is that banks can regulate themselves as they are rational and to put it crudely, wouldn't want to shit in their own nest or act as a parasite that killed its own host. The GFC should have put paid to that delusion. Individual executives effectively destroyed not only their own companies but also their own economies for personal gain. It was only the massive infusions of credit/debt (socialised onto everyone else) that prevented a total meltdown.
The rational solution from economists? Go back to business as usual and pretend the whole thing was just an unforseen accident. Freedom to borrow freely at your own risk is fine if those same individuals are willing to also suffer the consequences of any mistakes and the society they live within can survive those consequences or not be forced to socialise them. If they can't, that freedom should be curtailed for the greater good :)
Please cite some examples of economists saying that the rational solution is to go back to business as usual and pretend the whole thing was just an unforeseen accident?
I am not sure whether your concluding statement (from "Freedom to borrow" onwards) is your view or is intended to be a representation of what economists are recommending?
If the latter, what exactly is wrong with it?
Grab yourself a copy of Steve Keen's updated Debunking Ecnomics. I know plenty of people here don't like his manner but the book is a tour de force of economic history and rationality. It systematically demolishes every premise underlying contemporary orthodox economic theory and all its disciples including the debate or lack of it before and after the GFC within the profession.
His conclusion, hard to dispute, is that economics as taught in most universities is a subjective social science that has tried to become a hard science by grafting unrealistic mathematical models and a bit of algebra onto it for a bit of crediility. Even here he can show the maths is flawed. Never let reality get in the way of a good model! It is maintained because economists find it extremely difficult to find academic or financial industry positions without being orthodox. Dissention is filtered out at every level, more so than any other academic field
A mixture of both.
First assumes ppl have all the information and can make a rational decision based on that. It should be pretty obvious that isnt the case.
Individuals, v society, yes I think there is an argment that indeed that is the case where they are mutually exclusive.
It seems a common tactic by those on the extremes of political spectrum to take a logical point and drive it to extremes to prove its invalid when in fact that isnt the case.
So a mixture of both ie a moderation, works best, probably.
How can you know, well by looking at the historic outcomes. We've had 30 years of greed is good and we can see the mess and inequlaity that has caused.
regards
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