By Gareth Vaughan
The Reserve Bank's response to the Covid-19 pandemic followed a misdiagnosis of the problem, and we ought to use an inquiry to develop a blueprint for managing future challenges, says The Opportunities Party (TOP) Leader Raf Manji.
Speaking in interest.co.nz's Of Interest Podcast, Manji says any inquiry into the Reserve Bank's response to the Covid-19 pandemic should be as apolitical as possible.
"Let's look at what we did, could we have done things differently, what were the impacts of what we did, and could we have changed that response at an earlier stage? And I think clearly the answer to that is yes," Manji says.
"One of the first focus points was the misdiagnosis of what was happening. And I think for me when I go back, and it's important that we all reflect on what we said at the time, I was very, very clear that this was a liquidity crisis. It wasn't particularly a credit crisis, it was not a business cycle recession or depression, yet that's how it was being treated."
In terms of quantitative easing, or the Reserve Bank buying up tens of billions of dollars worth of government and local government bonds in the secondary market from banks, Manji says he'd have preferred Treasury and the Reserve Bank to deal directly with each other rather than "providing huge amounts of profit for the banks."
"New Zealand's problem, which is always our problem, is the huge focus on the property market and the impact that has. And there's no doubt that probably, whichever data you look at, probably a third of our inflationary impulse was from the housing market and the follow on effects of that, the renovations, the squeeze in capacity, and just the extraordinary rise in property prices," says Manji.
"I think if the Reserve Bank had looked a little bit more carefully at the outcomes of its policy towards the end of 2020 they might have gone 'okay everyone, let's get in a room, what has happened here, do we need to change our policy'?"
"We're in a position that could've been avoided to some extent," Manji says.
In the podcast Manji also talks in depth about interest rates, inflation, government debt, overt monetary financing, the Government's fiscal policy response to Covid-19 and more.
21 Comments
The error in the actions of the RBNZ and the Government is extremely easy to diagnose. They simply were not close enough to real time data and corporates. By actually listening to businesses and looking at real time data that those businesses possessed they would have realised back in 2020 when Auckland exited lockdowns that business was powering along and making up lost ground very quickly. By staying close to those businesses and understanding that, while the future was uncertain, further stimulus (even if not used - 12 Aug 2020 announcement of the lift in the cap for LSAP from $60bio to $100bio) was not needed and in fact indications at that time would have mean not only reducing the cap but the possibility of stopping QE at that point in time, or at the very least pausing it. Yes QE amounts would still be large but there is a significant difference between $30bio and $50bio and when you give a Government access to unfettered amounts of cash they tend to use it whatever the colour. Lowering the amount of QE would have also lowered the loss on those bond purchases (loss occurs by investing at a low interest rate, which the RBNZ did, and withdrawing your investment at a high interest rate). While some will comment easy in hindsight I believe if the RBNZ and Government had been close enough to business they would have quickly seen that QE was not needed to the extent it was delivered.
Lowering the amount of QE would have also lowered the loss on those bond purchases (loss occurs by investing at a low interest rate, which the RBNZ did, and withdrawing your investment at a high interest rate).
But that was the plan - buy longer duration coupon securities from private bank portfolios and replace them with an inert zero duration OCR bearing security, hence transferring risk to the taxpayer - privatise the profits, socialise the losses.
A recent Bloomberg article described central bank easing with the phrase “pumping money into the economy.” That’s a misconception. Monetary easing is actually an asset swap. The public was holding savings in one form, and now it holds it in another. The Fed buys Treasury securities from the public, and replaces them with currency and bank reserves (base money) that someone has to hold, at every point in time, until the Fed sells its bonds and retires the cash. All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations. - courtesy of Hussman
QE doesn't give the government money to spend, it is returning money to bond holders. Its main purpose is to reduce interest rates by inflating commercial bank reserves. Bonds are the nations risk free savings held as government currency and so bond holders are unlikely to spend this money when it is returned to them and they may do no more than leave it in the bank.
The government must always spend first before it can tax or borrow as it is the source of the currency. The only constraint on government spending is the need to pass a budget through parliament and there is not any need for it to raise the revenue first as the government never spends other peoples money, we spend its money.
QE doesn't give the government money to spend, it is returning money to bond holders.
Not at all. That only happens when the bonds are extinguished upon redemption or purchased by NZ Treasury. Otherwise bank deposit obligations (IOUs) to the government recorded at previous syndication and tender underwriting events remain outstanding.
Banks don't take deposits and they never lend money. They are in the business of purchasing securities. When one gets a bank loan, the loan contract is a promissory note. The bank purchases that contract from the borrower. Now the bank owes the borrower money and it creates a record of the money it owes, which we call deposits - source.
I understand how banking operates and that is a separate issue and nothing to do with QE. The Bank of England shows clearly in its graphics how QE affects a banks balance sheet. A new asset of bank reserves is created but also a corresponding liability in the bond holders deposit.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/20…
Apparently, the plan was to create a massive debt and asset bubble via QE and low interest rates, and then to collapse that bubble (trapping up borrowers and crashing the economy). We are in the second stage now.
The massive interest rate rises (OCR has gone up tenfold since its lows) have created a property crash, first home buyers have lost everything. It seems the plan is to create a massive crisis so people will ask for government help, and then to bring in even more government control (a new form of communism).
God defend New Zealand!
"The massive interest rate rises"
You mean coming off the emergency rates back to a more neutral 2.5% ocr ???
"trapping up borrowers and crashing the economy"
Banks were supposed to stress test at 6%+ doesnt sound like a trap. Economy is not crashing, but reverting to normality after being artificially elevated.
I agree that govt / rbnz did not need to do that amount of QE, but do remember that QE does not create any govt money to spend. If RBNZ bought $500m of bonds on the secondary market tomorrow, the Crown Settlement (current) account would be unchanged as would overall Crown debt. QE just swaps one form of debt for another.
Australia reserve bank governor has accepted his mistake, will Mr Orr.....
https://www.ft.com/content/3a70759d-2673-4179-83f1-cdea77f9553f
In April 2020 can understand that need was to support existing house owners from defaulting but WHAT was to need to remove LVR to fuel market ponzi along with zero interest rate.
Secondly as early as November 2020, just after six to seven months, it was clear that emergency measures followed ( least regret) has not only stabilized but have heated and is now doing more damage than help, still the denial and to support manipulated TRANSITORY INFLATION.
The RBNZs response was a clear example of systemic corruption.
The whole system is rotten and corrupt to the core.
The RBNZ chose winners. They chose losers. They deliberately pumped the "wealth effect" to make asset owners richer, and everybody else poorer.
It was a deliberate strategy and they openly stated their intent. Corruption in plain sight. And like all systemic corruption, it weakens nations and makes life worse for all but a select few.
These are unelected beaurocrats who have no mandate for this kind of social engineering. I would say something here about Orr's pigheadedness and vanity and hubris, but that would probably result in my comment being deleted by Ed.
He did an interview a year or so back where he essentially told renters that they were lucky to have jobs.
["Be grateful, peasant, that I the great Tane Mahuta Orr am providing all you underlings of the forest floor with jobs."]
I felt like reaching into the screen and slapping him.
Does anyone has doubts........why the question
Did the RBNZ's Covid-19 response follow a misdiagnosis of the problem?
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