Lose confidence in our central bank


OPINION: It’s easy to ignore the skirmish of impending economic collapse from a disgruntled second-rate bankruptcy trustee swarming a seedy past in the semi-industrial wasteland of Rosedale.

It is more difficult to set aside the deliberate deliberations of the respected small conservative Wellington think tank NZ Initiative.

Your report, On the way to the next financial crisis, was founded by Dr. Bryce Wilkinson and Leonard Hong written and published last Thursday. It was launched by Sir John Key, which is reasonable given that his fiscal recklessness and failure to address our underperforming public sector have contributed significantly to the current economic woes.

The NZ Initiative has raised a number of concerns, many of which will not come as a surprise to regular readers; rising national debt, permanently low interest rates and the rising specter of inflation. However, they pose new problems that have contributed to my own fears.

* Reserve Bank’s Orr holds the “greatest wand” of all time amid the housing boom, says John Key
* As hard as it tries, the government cannot regulate wealth
* Hey Productivity Commission, leave ‘Social Justice’ alone

Most worrying is the politicization of central banks. In the late 1980s and early 1990s, most OECD countries gave their central banks a degree of independence and autonomy. This should help reassure the financial community that monetary authorities would focus on fighting inflation; and nothing else.

Slightly obsessive monetary wingnuts, a category I belong to, have long complained that Mr Orr and other central bank governors have expanded their remits.

The NZ Initiative report is important because, unlike me, they are respectable. Your views will mirror those of other experienced and less experienced monetary policy monitors.

Outlining some of the policy objectives and statements made by a number of central banks, including our own, the authors conclude: “These policy statements are certainly distracting central banks from their core functions of price stability and financial stabilization. Potential financial instability from loss of monetary and budgetary discipline is certainly a much more immediate and pressing problem. “

As the NZ Initiative writes, “The central bank’s credibility, once lost, will only be painfully regained.”

I lost confidence in our central bank when Orr and Robertson agreed to add “maximum sustainable employment” to the banks’ goals. Fortunately for Orr, I was and still is a relevant degree in art history.

However, when organizations like the NZ Initiative begin to question the bank, we see the beginning of a new contagion. One we don’t have a vaccine for.

But the real aspect of this analysis that deserves comment is the speculation about how this will play out. Four scenarios are offered; one benign, two worrying, and one catastrophic.

Best case: Governments become fiscally prudent, pay off debts, and economic growth solves all of our problems. This could happen. I was able to stick to the healthy diet recommended by my GP. Both are equally likely.

More likely, we have faced low growth and missed opportunities for decades as we endure a Japanese-style managed decline or, as much as possible, a return to the high inflation and high unemployment of our parents and grandparents in the 1970s. The advantage of this approach is that inflation is a means of paying off debt; some form of polite default.

It is the last option that our political class should draw attention to. “There is a catastrophic collapse of the global asset market. It’s a lot worse that the GFC. Investors panic, liquidity dries up … Economic activity implodes … Unprecedented economic hardship and unemployment would spark anger and unrest in the minds of the public. “

This is not likely, but it is a possibility and organizations like the initiative are openly writing about it. “Unfortunately, the trends outlined in this report suggest that the likelihood that an unexpected event will trigger a major global financial disaster is alarmingly high.”

Wilkinson and Hong look back at the black swan that started the GFC; adjustable rate mortgages that were issued at the urging of the US federal government, some of which were secured by state-owned financial institutions.

These loans enabled the poor to purchase homes by offering near-zero interest rates for the first few years before interest rates increased. This led to defaults and ultimately contributed to the demise of the financial institutions that had acquired massive books of this debt.

We see the same pattern playing out; only to a much more worrying extent. Over the past decade, kiwis have gone into debt to get into the housing market. They could afford more than a million dollars worth of mortgages because the cost of borrowing was lower than our politicians’ economic literacy.

Now that inflation is starting to take hold, banks are starting to raise rates. In contrast to the US example, the prisoners will not be those with no income, no job, no debtors, but large parts of central New Zealand. What is even more worrying is that the exposed financial institutions are not the second tier intermediaries whose insolvencies triggered the GFC, but the four major licensed commercial banks.

Since the GFC, the political and economic masters of the universe have used all available tools to avoid even a slight recession. They printed money, they borrowed money, they rigged interest rates to zero, and they devalued not only national currencies but also the financial institutions on whose credibility the global financial system is based.

“This time is different” is the mantra that has been repeated before every major calamity in the last century.

It’s no different this time. For three decades since the fall of Ruth Richardson, this country has been ruled by politicians and officials with a short-term focus; by those who either do not know or are intentionally blind to the teachings of the past.

If economic history is, and usually is, any correct guide, we will continue to borrow and spend until our credit or credibility is exhausted. At this point the solution is imposed on us.

We can hope for a positive result, but as Wilkinson and Hong write; Hope is not a plan.

– Damien Grant is a business owner based in Auckland. He writes from a libertarian perspective and is a member of the taxpayers’ union but not a political party.

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