Today's Top 10 is a guest post from Shamubeel Eaqub, the principal economist at the New Zealand Institute of Economic Research and a blogger at www.tvhe.co.nz. This is his second Top 10 in our Friday guest series. You can see his first Top 10 here.
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 the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.
See all previous Top 10s here.
1. The great stagnation.
Lawrence Summers’ speech on stagnation and the need for bubbles has cause quite a stir.
The FT sums it up nicely here. He reaches the conclusion that maybe we need a bubble to reach full employment.
Perhaps low growth now is the penance for growth borrowed from the future, rather than needing yet another bubble to fuel a recovery to ‘full employment’.
So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.
2. US banks get Volckered
US banks will no longer be allowed to gamble their own funds, sometimes against their own clients (like Goldman Sachs in Matt Taibi’s memorable The Great American Bubble Machine in the Rolling Stones magazine).
The Telegraph reports that the bank chiefs are unhappy that it was tougher than they had expected. But then they would say that, wouldn’t they? Banks enjoy an implicit guarantee of the state, as seen by many bailouts during the GFC. There has to be a cost to that – not just profits for banks.
The sweeping reforms were met with dismay by US banks, who have led a lobbying campaign to have the wording watered down. Critics of the Volcker Rule claim that its targeting of proprietary trading is unfair, since this was not one of the factors that led to the financial crisis.
3. Nobel cat fight
The Guardian reports on the somewhat peevish Robert Shiller interview, on winning the Nobel economics prize and sharing it with Eugene Fama and Lars Hansen.
The two disagree on economics. Shiller blames bubbles on psychological/behavioural factors. Fama reckons markets are efficient and prices incorporate all available information at that time.
From well below the pulpit, this humble economist can see both points.
The market clears, as per Fama, because buyers and sellers agree on the price. This doesn’t mean that that price is ‘right’ over a longer timeframe when the number of buyers, sellers or prices – including for psychological reasons – may change. Economists really don’t like to agree with each other:
Highlighting what he sees as a mismatch between Fama's findings and his theories, he [Shiller] suggested his fellow laureate must feel like a Catholic priest who has discovered God does not exist.
4. Being small means higher prices
UK supermarkets warned that an independent Scotland may face higher prices. Currently, higher distribution costs for the northern parts of the UK are subsidised by southern parts, according to The Guardian. Perhaps being small and far away can explain New Zealand’s relatively high prices for many things?
Asda and Morrisons said they would be unwilling to absorb the extra costs of doing business in a separate Scotland or to pass on any additional costs to customers elsewhere in the UK.
5. America's reputation for sound economic policymaking takes a beating
Mohammed El-Erian, the CEO of PIMCO, wrote about US policy making – rather the lack of it – in The Guardian. The US Congress has delivered the lowest legislative activity since at least 1947, when record keeping began. His to-do list for the US in 2014 would not be too far off for what New Zealand needs to do.
Government has a long pro-growth to-do list heading into 2014. The top priorities include modernising the country's transport and energy infrastructure, reforming an underperforming education system, improving the labour market, bringing order to an overly fragmented fiscal structure, enhancing the provision of public goods, and safeguarding America's interests abroad.
6. Home buying out of reach for a whole generation
The Telegraph reports research by the National Housing Federation and Oxford Economics that housing will be out of reach for an entire generation. Population is growing strongly but supply is not. Can we also have a mature conversation about letting people build more homes in New Zealand, where and how they want, within reason?
Where a market is fundamentally characterised by a lack of supply, a demand side subsidy is just going to put prices up.
We get trapped into the conversations about how we can make it easier for some people to access the scarce supply, the answer is we need to build more homes.
7. Affordable homes in China
Contributors to The Conversation wrote about China’s plans for affordable housing for low and moderate income earners. Many of the policies are essentially welfare policies. Their lesson for Australia was that, alongside supply/planning reforms, it is important to also look at welfare policies. We already do that to some extent in New Zealand, but the queues for social housing are very long.
…the experience of China shows that significant overall housing construction is not sufficient to deliver affordable homes for low and moderate income earners. Rather, specific intervention has been needed to secure affordable outcomes within the wider housing development process.
8. ECB considers taboo tools
Lending is contracting in Europe and the economy, particularly in the southern parts, is weak. The ECB is weighing up previously taboo tools to get things moving, according to Der Spiegel. It sounds a little like the RBNZ’s dilemma, they want to control house prices and borrowing in Auckland but stoke demand elsewhere. In Europe, the ECB doesn’t want an overheating Germany (where house prices are rising sharply and exports are soaring), but it wants resumption of growth in the debt plagued economies.
…he [Draghi] sees two worlds. In one of those worlds, the one in which Germany primarily resides, companies and consumers are able to get credit more cheaply and easily than ever before. In the other, mainly Southern European world, it is extremely difficult for small and medium-sized businesses to get affordable loans. Fears are too high among banks that the debtors will default.
For Draghi and many of his colleagues on the ECB Governing Council, this dichotomy is a nightmare. They want to do everything in their power to make sure that companies in the debt-plagued countries also have access to affordable loans -- and thus can bring new growth to the ailing economies.
9. RBNZ reverses course on taboo tool
The RBNZ reduced the high LVR share of new mortgages from 30% to 10% from 1 October, to be phased in over six months. On 10 December, they reversed the rules for new builds but not existing homes. When they announced the policy on 20 August, they noted that the reason for putting the policy in place is financial stability. That is to reduce the accumulation of high-risk debt in the banking system. By this test, and this should be the reasonable test, this is bad policy.
20 August: “The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.”
10 December: “This exemption will help to support the supply of new housing and, in doing so, reduce some of the pressure arising from excess demand in the New Zealand housing market.”
10. RBNZ talks accountability and transparency, but…
The RBNZ’s deputy governor delivered a speech outlining the importance of accountability and transparency at a 6 December speech.
As a financial regulator, accountability is a key reason for transparency around our regulatory conduct, with public engagement a cornerstone of our approach to prudential policy development. Transparency also gives economic benefits from enhancing the operation of financial markets and improving the public’s understanding of financial risk.
But the latest change of policy on LVR speed limits (number 9), suggests that perhaps their communication strategy is still in its infancy. They put forward a framework for why they are implementing the LVR speed limits, but did not explain the change in policy using the same frameworks. The way thay I read it, the RBNZ is essentially saying that high LVR mortgages on new homes are less risky than on existing homes. It’s like a Tui “yeah right.” billboard. Seems like the RBNZ’s communication is about leaving a lot unsaid, rather than accountability and transparency.
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