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All hail RBNZ independence! – Armstrong

Written By: - Date published: 10:32 am, October 5th, 2013 - 94 comments
Categories: capitalism, exports, housing, monetary policy - Tags:

Old man Armstrong’s out on the Herald’s front lawn this morning, shaking his fist and telling those bloody kids in Labour to stop questioning whether the Reserve Bank is doing the right thing. They should sit quietly and accept whatever the Bank decides to do. This is called ‘consensus’, apparently. Problem is, Armstrong provides no justification for complete RB independence.

His entire argument is: it’s been that way for 20 years so it must continue to be that way forever, regardless of whether it works or not. He says:

“With Labour also committed to making the Reserve Bank take heed of exchange rate fluctuations, Cunliffe has to avoid leaving the impression that Labour’s answer to every economic problem is to fiddle with the Reserve Bank’s mandate – and thereby neutering the institution in the process”

John, you’ve failed to make any argument as to why the Reserve Bank shouldn’t be neutered. Why should we all bow-down to the Reserve Bank like it’s some neoliberal god? Why is complete independence – a concept that’s only two decades old – sacrosanct?

Let’s face it, the Bank is a disaster. The two decades of the modern Reserve Bank have seen a string of housing bubbles, diving high-value exports due to a high dollar, high unemployment and low wage growth, and rising international debt. Not only failed to fix these problems, it’s made them worse.

It’s prime tool is the OCR. Even working perfectly, the OCR works by punishing every mortgage holder and business in the country with higher interest rates when inflation goes up, whether or not the punished sector is at fault.

But, in reality, the OCR has the most impact on the economy via the exchange rate – ie. when housing gets out of control, the RB raises the OCR, which forces interest rates up, which attracts hot money from overseas boosting the exchange rate and strangling our exporters. Ironically, this just brings in more cheap credit from overseas to fund the housing bubble. For a decade now, we have had some of the highest interest rates in the developed world leading to a near-permanently over-valued dollar, and it’s killing the economy without fixing the housing bubble.

When the Bank, finally, tried to add a new tool, LVRs, it stuffed up by punishing first home buyers the most. Sensible tweaks, like excluding first home buyers (easily done as it’s already done for the Kiwisaver deposit subsidy) and limiting LVRs to problem housing markets were ignored in favour of blanket punishment.

So, what has the Bank done to earn a free-pass from every government to do whatever the hell it likes? As far as I can see, all its done in its 20 years of independence is kill our exporting industry, help us rack up massive foreign debt, and failed to tackle successive housing bubbles.

But no, Armstrong says that Labour should just keep quiet. “some kind of consensus between the two main parties would be of considerable assistance to the Reserve Bank if they stopped questioning its efforts to cool a dangerously overheated property market as it sees fit”. His argument would be a lot stronger if he wasn’t arguing for a failed institution to be allowed to continue to make mistakes in peace.

94 comments on “All hail RBNZ independence! – Armstrong ”

  1. ianmac 1

    Didn’t Winston get into trouble a decade or so ago for advocating Reserve Bank Reform?

  2. Bill 2

    That ‘independence’ is merely an extension of international financial institutions into national political spheres. There is and has been nothing ‘independent’ about any of these reserve banks that governments relinquished control over through the 80s and whenever.

    And there’s been no accountability either. Which is great for the international and anti-democratic institutions who’s prescriptions ‘independent’ reserve banks follow.

  3. Colonial Viper 3

    Armstrong is WAAAY out of his depth. Globally, “reserve bank independence” has ushered in a period of massive financial system instability, asset price bubbles, and global financialisation. It has not been a good period for 80% of NZers.

    Further, we should note that direct market intervention, something that central banks never anticipated doing as part of their role, is now and every day occurrence in Japan, USA, China, UK, Eurozone.

    Add to that the fact that our Reserve Bank is a proponent of macro-economic theories which are highly flawed and largely based on the neo-lib assumptions of market equilibrium and market efficiency, and Armstrong proves that he is two or three decades out of date.

    And stop talking to your Reserve Bank contacts, John. They are as out of date as you are.

    • Rogue Trooper 3.1

      where President Xi Jinping and the Beijing government goes, investment flows.
      (maybe we could start our own newspaper and clear a few trees).

    • Saarbo 3.2

      +1

      “But, in reality, the OCR has the most impact on the economy via the exchange rate – ie. when housing gets out of control, the RB raises the OCR, which forces interest rates up, which attracts hot money from overseas boosting the exchange rate and strangling our exporters. Ironically, this just brings in more cheap credit from overseas to fund the housing bubble. ”

      This quote from “Eddies” article is spot on the mark, but I guess Armstrong has never worked for an export company which has had to close down plants and make people redundant because export volume has disappeared due to the exchange rate. I worked for a business in the early 2000’s that was exporting manufactured product to China and Taiwan. This same manufacturing business is now struggling to compete against cheap $US denominated imports in its own domestic market.

  4. tc 4

    Oh dear, grandad has a rant about the good old days. Reserve bank govenors are appointed by political parties arent they and treasury is full of nat contractors with a former analyst as our finance minister.

    Go back to your quill and pen some more archaic thinking grandad, we expect no less.

    • I should point out that until very recently, Treasury was actually run by a Labour supporter, so it’s not really about what party affiliations the staff have, it’s about the neoliberal, pro-Trade Anarchy (as opposed to fair trade) culture that Treasury has.

      We shouldn’t be opposed to sound budget advice, but it should use more realistic assumptions and not have a practical rather than ideological culture. Treasury should be about evidence and results, not about economic dogma.

      • Finbar 4.1.1

        Matthew,its about value and what you value your being.They say, that if you have a home that you wish to own,in the main centers,where the jobs are, you have to be scratching 80 thousand to service your 30 year debt,on a 400 thousand debt,and after your service, would make your ownership and its service, to afford one of those flash boats in the harbour for your house value.They say that if this unregulated cat gets his way,your mortgage for your 400,000. debt will increase by $340 per week with a eight per cent loan rate.But hey,capitals rules always profits no matter the damage.

        • Rogue Trooper 4.1.1.1

          if interest rates rise to the 8% forecast by the end of 2015, a mortgage on a ‘typical’ 400+K initial home is likely to rise $400 / month; some will go to the wall.

          • Colonial Viper 4.1.1.1.1

            many will go to the wall, including the negatively geared types.

            And it’s not going to go to 8% that is BS. ZIRP is here to stay. If the retail banks want to push mortgage rates up to 8%, the Government will intervene through Kiwibank and re-finance it all back to 6.75%. And still make a killing for the tax payer.

      • Draco T Bastard 4.1.2

        We shouldn’t be opposed to sound budget advice,

        Which you can’t possibly get from Treasury because of their adherence to the neo-liberal paradigm.

  5. rhinocrates 5

    Armstrong would be out of his depth in a puddle.

    • ghostwhowalksnz 5.1

      The crazy part of Armstrongs claims is the RBNZ Act , allows such policy fiddles!

      “The Reserve Bank Act requires that price stability be defined in a specific and public contract, negotiated between the government and the Reserve Bank. This is called the Policy Targets Agreement (PTA). The current PTA, signed in September 2012,….”

      I think every new government gets its own PTA, and its revised as a matter of course every few years

      http://www.rbnz.govt.nz/monetary_policy/policy_targets_agreement/

      So its fair to say the RBNZ is independent only in the sense of meeting the government of the days targets

  6. greywarbler 6

    The Reserve Bank is independent – of what or whom? When it was first touted it was the general idea that politicians were the most powerful and likely to interfere with personal agendas in the proper controlling of the economy on behalf of an enterprising economy run to high standards of business nous and regulation. So far so good. When inflation controls using high interest rates in the 1980’s took house interest to 18 % it was horrific. The Reserve Bank instructed to keep inflation to near zero, also had disastrous effects. Now interest rates are set at a reasonable rate but RB is trying to use inflationary controls on interest rates for housing which is I think, not included in the Consumer Price Index calculations. And it will upset the healthy earning part of our economy, encouraging higher foreign speculation from those drawing on low-rate USA capital to place it in NZ currency and get the easy middleman profit.

    This unwillingness to control housing inflation, and to look squarely at the cause is part of inadequate aspects of systems in our economy. making easy profits because of the high capital rise (up 7% since August in Auckland I heard someone say this week on radionz),

    Now we know that politicians are happy to give up their power and control levers, for payments or ‘free’ gifts that seem satisfactory to them. The Reserve Bank operates to a recipe provided for cooking for mass catering for hundreds of millions, and we end up with a lot of wasted resource that does not reach the home table.

    Someone mentioned that the new chap after Alan Bollard would be more conservative than him. Apparently that means that he and his team spend all their time in a bunker deep under the capital where they can get clear communication lines to their core source of thought. And they hardly have to go up into the real world at all. Probably they are planning to build underground tunnels that financial workers can walk along as the oil-rich companies in I think Houston, Texas have done. They are air-conditioned so everyone can be really cool when the heat is on at the surface.

    A British speaker on radionz this morning Dame Margaret Drabble expressed bewilderment and anxiety about how the financial forces seem to be uncontrollable there, no viable action can be taken to restrain and govern them, and their housing is rising unaffordably too. When all the housing will be out of ordinary people’s reach, there will be little activity in business as larger amounts of income go on housing and basics, and so the pirates trading in the other necessities for life, food and water will cause the prices to go sky-high, and the mega corporates will fight
    over the spoils and make share raids on each other.

  7. Saarbo 7

    What are Armstrong’s credentials to make these claims? and how do they compare to David Cunliffe and David Parker’s credentials. (I guess what I’m trying to say is, what the f$%# does half arsed right wing NZ herald political commentator know about these things? Way out of his depth)

    • Draco T Bastard 7.1

      what the f$%# does half arsed right wing NZ herald political commentator know about these things?

      Just the slogans. He sure as hell doesn’t know anything about economics. Not that that’s surprising I suppose, neither do the economists.

    • Finbar 7.2

      Capital and its market value Saarbo,with its uncontroled usury.

  8. muzza 8

    Leaving aside Armstrong is simply an agent mouthpiece, seeking to cover up the deeds of his master primary financial tools BIS/FED/BoA/BoJ/RBNZ/BoI et al, it is likely that Armstrong has no idea about the global financial markets, and it is possible he is no longer writing his own articles, at all!

    Was there any mention of the Office Of Debt Management, which is the key interlink, unelected and unrestrained!

    Quite something that Kiwis are happy to parrot that “interest rates are sooo low”, yet still the highest in the western world, so there is little that joe kiwi will resist, nor bend over for!

    BTW – Interest rates and FX rates have been divorced for quite some period of time, so while it is true there is a correlation in local impacts by way of changes to the OCR, the NZD is manipulated independently to the OCR for a myriad of reasons!

    Top ten most traded currency for how long now, versus what ranking of global sized economy!

    Edit: Armstong calling for an end to the Red/Blue sham, with plea of a “grand coalition”, is about the only honest reference be had made of late!

    • Rogue Trooper 8.1

      Impressive, or Very Impressive?

      • Draco T Bastard 8.1.1

        The scary thing is that it’s actually true.

        • Rogue Trooper 8.1.1.1

          the picture went with a documentary on the bank’s production of money, yet I lost it’s location.

          • Draco T Bastard 8.1.1.1.1

            There’s a few such documentaries around now. Here’s a good page.

            The fact that the private banks create money ex nihilo is slowly becoming common knowledge. Once it does become common knowledge then we’ll have that revolution that Henry Ford predicted.

            • Colonial Viper 8.1.1.1.1.1

              To help people get their heads around the idea, thinking of banks creating bank deposits (instead of “creating money”) can be easier.

              Let’s say you take out a mortgage for $250,000 from Westpac. You now owe Westpac $250,000 (i.e. a promise to pay them $250,000 back plus fees plus interest etc.)

              Westpac electronically increments the value of your savings account upwards by $250,000.

              The Westpac balance sheet stays completely balanced: on the liabilities side is the extra $250K deposit they have generated for you. On the asset side is your promise to pay back the $250K debt you owe the bank.

            • Tamati 8.1.1.1.1.2

              The fractional reserve system is no big secret. Every economics 101 student has be taught it for the last 50 years!

              • Draco T Bastard

                Yep and it’s wrong.

                • Tamati

                  It’s a misconception that banks “create” money though. Most depositors know that the money they invest in a bank in lent out by the bank not stored in a Gringotts style vault under the ground. It’s not created, it’s just recognized in two places at once.

                  • Colonial Viper

                    Totally incorrect if you are talking about the major banks, and it fails to take into account the creation of the international central banking system.

                    In other words, banks no longer rely on depositors for funds day to day, especially when they have the Federal Reserve system.

                    Your comment is only correct for “savings and loans” or “building society” type institutions.

                    • Tamati

                      RBNZ requires all commercial banks to hold a certain amount of domestic deposits as a proportion of their balance sheet. Thus, if global credit markets shut down, our banks would still stay open. They do however bridge the savings/lending gap through international credit markets.

                    • Colonial Viper

                      You’re talking about the CFR (Core Funding Ratio). It’s a completely different concept to the idea of “reserves” as used in the outdated “fractional reserve banking” approach.

                      The fact that you have mixed this up suggests that your understanding of central banking regulation is not complete.

                    • Phil

                      CV,

                      Your comment is only correct for “savings and loans” or “building society” type institutions.

                      That’s incorrect.

                      The process, accounting treatment, and balance sheet outcome by which S&L’s, Building Societies, and Credit Unions, generate loans is exactly the same as the example you give above for Westpac. The outcome for “money” is fundamentally no different.

                      While it’s true to say that private banks ‘create’ money, it ignores that publicly owned banks, mututals, credit unions, and finance companies all engage in the same activity.

                    • Colonial Viper

                      While it’s true to say that private banks ‘create’ money, it ignores that publicly owned banks, mututals, credit unions, and finance companies all engage in the same activity.

                      Can you please provide a technical or textbook reference, author, or academic which/who describes the equivalence between bank activities in credit (or deposit) creation and say what a finance company or credit union does.

                      I don’t believe it to be the case at all and would like to know where you got the idea from.

                      My view is that finance companies eg. Hanover Finance, can only lend a dollar out to someone if they already have that dollar on hand to loan out i.e. no additional monies or deposit is created.

                    • Phil

                      Hi CV,

                      Can you please provide a technical or textbook reference, author, or academic which/who describes the equivalence between bank activities in credit (or deposit) creation and say what a finance company or credit union does.

                      Without wanting to be glib about it, the answer to that question is: any Accounting 101 textbook you choose to pick up.

                      It’s technically incorrect to say that banks ‘create money’. What they do, when making a loan to you or I, is record a series of accounting entires today that represent future commitments to repay a financial transaction. By international standards and convention (see the IMF’s Monetary and Financial Statistics Manual 2000) we choose to call those bank liabilities ‘money’ because of the connections those transactions have to other macro-economic variables like inflation, GDP, and the balance of payments.

                      To give you an example, lets say you started up a credit union with some of your own capital, and term deposits you got from the public. Your opening balance sheet might look like this:

                      Assets:
                      Cash $200

                      Liabilities:

                    • Phil

                      Gah – did my completed comment end up somewhere retrievable?

                      Sorry.

                    • Phil

                      Ok, lets try this again…

                      To give you an example, lets say you started up a credit union with some of your own capital and term deposits you got from the public. Your opening balance sheet might look like this:

                      Assets:
                      Cash $200

                      Liabilities:
                      Capital invested by owners $100
                      Term deposits from Public $100

                      In this example, your monetary liabilities (that is: funds that a depositor is able to withdraw to purchase a good or service) is $100. We’ll leave the RBNZ’s physical cash liability out of this, for simplicity.

                      Then you go and make a loan to a person who want to buy a house. You lend them $100, which they deposit into a transaction account with you while they’re awaiting house sale/settlement. Now your balance sheet is:

                      Assets:
                      Cash $200
                      Loans to borrowers $100

                      Liabilities:
                      Capital invested by owners $100
                      Term deposits from Public $100
                      Transaction deposit $100

                      Your monetary liabilities have doubled. There is now $200 that could be withdrawn and used for the purchase of goods and services. Total money supply, because of your lending, is now $200.

                      Next day, the borrower settles on the house purchase. They withdraw the cash and hand it over to the seller, who deposits the cash in a different bank.

                      Your balance sheet is now:
                      Assets:
                      Cash $100
                      Loans to borrowers $100

                      Liabilities:
                      Capital invested by owners $100
                      Term deposits from Public $100

                      BUT there is another financial institution that received the cash from the seller. Their balance sheet has an extra $100 in cash and $100 in deposit liabilities. Total money in this economy is STILL $200.

                      It doesn’t matter if the lending institution is a private bank, or a credit union, or a public bank, or a finance company. The accounting process which records the initiation of a loan creates liabilities and assets. The liabilities are identified as money solely because we have the ability to engage a third party in a transaction with them.

                    • Colonial Viper

                      Nah, but that’s not what happens in real life.

                      No one withdraws in cash the funds they receive from taking out a mortgage, in order to deposit those funds in the vendor’s bank account.

                      So using your example:

                      Let’s say the mortgagee needs a $500 loan (not a $100 loan) in order to buy the house they want. But the savings and loan style/credit union type institution has only $200 cash on hand. How does the institution manage that situation?

                      And let’s say that the mortgagee wants those funds, once they have been placed in their bank account, transferred over to the vendor’s account at a different institution in order to complete the sale and purchase of the house. And as I said, without walking the cash over to the other bank. How does the institution manage that situation?

                      It’s technically incorrect to say that banks ‘create money’.

                      Hey I’m quite happy to have a detailed discussion with you as to what counts as “money” and the hierarchy of what civilians usually consider as “money”, but that’s a whole different discussion.

                      Without wanting to be glib about it, the answer to that question is: any Accounting 101 textbook you choose to pick up.

                      What you’ve described are balance sheet operations. Yes that is accountancy 101.

                      What is not in accountancy 101 are the systems which enable deposit accounts accessible to the financial transaction and settlement system to be incremented or decremented in value. Neither you or I can start up a finance company or building society which has that system, even though you and I can start up an excel spreadsheet to show numbers moving around on a balance sheet.

                      So a bank creating deposits is not simply a balance sheet operation, although it has balance sheet implications.

                    • Phil

                      Nah, but that’s not what happens in real life.

                      No one withdraws in cash the funds they receive from taking out a mortgage, in order to deposit those funds in the vendor’s bank account.

                      A blog comment thread is not a particularly efficient way to get into a lot of detail about banking, so the example I described (using cash) was deliberately as simple as I could make it and still try to get the point across.

                      You could replace ‘cash’ in those examples with: electronic deposit with another bank; government bond; or any number of other “liquid assets” that might be held by a bank or credit union. The process would still hold true.

                      Additionally, the second balance sheet I wrote down isn’t usually visible to you or I as a borrower. In practice the bank would provide the borrower with a commitment to lend, and then transact straight from #1 to #3 instantaneously when the sale was settled. For the non-bankers that might have been reading that post, #2 helps to explain the logic of getting between those two balance sheets and how money gets created.

                      Let’s say the mortgagee needs a $500 loan (not a $100 loan) in order to buy the house they want. But the savings and loan style/credit union type institution has only $200 cash on hand. How does the institution manage that situation?

                      There are a few things that could happen, but firstly the CU or bank would acknowledge that it doesn’t have the funds available to make the loan and remain solvent – this is also connected to the (incorrect) temporal comment you made somewhere else in this thread.

                      But if the CU or bank really thinks that you’re a good customer and wants to lend you $500, then it has to do (again, simplified examples) one of two things:
                      1) get more term deposits from the public
                      2) issue a wholesale financial market instrument (e.g. a bond) that another bank or investor is willing to buy

                      In either case, the value of the banks liabilities increase (recognising the deposit or bond has to eventually be paid back) and assets increase (becuase they’ve received cash or some other kind of liquid asset) which they are then able to give you access to to make your purchase.

                      And let’s say that the mortgagee wants those funds, once they have been placed in their bank account, transferred over to the vendor’s account at a different institution in order to complete the sale and purchase of the house. And as I said, without walking the cash over to the other bank. How does the institution manage that situation?

                      In practice, all of these transactions happen via electronic payment systems. For example, you and I might make dozens of EFTPOS transactions during a day, which will inevitably be between our own bank account and accounts held by retailers with different banks. The banks (both for their own account and as an agent for other financial institutions that you have accounts with) keep track of all these different payments going back and forward, then settle the net amount with each other at the end of the day. They have funds available on hand (actually it’s a deposit with the RBNZ) that are debited and credited for this purpose.

                    • Phil

                      What is not in accountancy 101 are the systems which enable deposit accounts accessible to the financial transaction and settlement system to be incremented or decremented in value. Neither you or I can start up a finance company or building society which has that system, even though you and I can start up an excel spreadsheet to show numbers moving around on a balance sheet.

                      So a bank creating deposits is not simply a balance sheet operation, although it has balance sheet implications.

                      Do I, personally, have the technical skills to create bank or credit union systems and infrastructure?
                      No.

                      Could I register with the companies office and start a credit union or building society?
                      Yes.

                      Could I engage with the New Zealand Association of Credit Unions, who provide technical assistance to credit unions all around the country, and leverage off their skills and experience to support my start-up CU?
                      Yes.

                      Could I then take deposits from the public, lend to borrowers (managing the consequent credit and liquidity risks prudently) and in doing so create liabilities that would be recognised as money?
                      Absolutely.

                  • Draco T Bastard

                    No, the misconception is that banks loan out money that is deposited. If they did that then you wouldn’t be able to get the money back out after you deposited it because it would’ve been loaned out.

                    It’s not created, it’s just recognized in two places at once.

                    No, it’s created – go read the page I linked to above.

              • Paul

                Not sure Armstrong has a clue about economics.
                He should watch this film.
                Money as Debt.
                http://www.youtube.com/watch?v=jqvKjsIxT_8

              • Colonial Viper

                The fractional reserve system is no big secret. Every economics 101 student has be taught it for the last 50 years!

                The fractional reserve system has not been used in most parts of the world for up to a 100 years now. Hong Kong is one of the few countries which still uses it. You need to update yourself.

                • Tamati

                  It has been on this planet for the last few decades. What planet are you on?

                  • Draco T Bastard

                    The Fractional Reserve system is what is taught – it’s not how it works.

                    • Colonial Viper

                      DTB: correct. Fractional reserve banking theory is just one of many parts of business school education which is dead out of date.

                      Tamati as you are so confident: please name 5 countries which still use fractional reserve banking (as opposed to central reserve banking with flexible reserve limits).

                    • ghostwhowalksnz

                      Exactly.

                      Westpac first has to borrow the money from someone else, its depositors, overseas etc before it lends to you.

                    • Colonial Viper

                      Westpac first has to borrow the money from someone else, its depositors, overseas etc before it lends to you.

                      No, that is temporally inaccurate.

                      Westpac lends the money first and then looks for where to get it from later. In other words: the bank creates the deposit first, then looks for the reserves it needs afterwards.

                    • Tamati

                      Banks are constantly lending money and taking deposits. They don’t match an individual depositor with and individual lender. That’s why we have banks, to act as an intermediary between lenders and borrowers.

                      The banks simply maintain an appropriate reserve ratio by adjusting the amount they lend/receive.

                    • Colonial Viper

                      Just stop it mate. You are up to 100 years out of date. Listen the fuck up please.

                    • Draco T Bastard

                      Read the third paragraph.

                      I’ve already read it and I’ve done the university thing. Thankfully, I wasn’t so stupid as to continue to believe the myth.

                      How about you update yourself by reading all the information on this page and the accompanying pages and videos?

                    • Tamati

                      Clearly I hit a raw nerve! Calm down dear, it’s not like the banks are adding fluoride to our water or anything like that. Perhaps it’s the Auckland water that’s getting to my brain?

                    • Colonial Viper

                      Dr Steve Keen explains aspects of it for you Tamati, if you are interested.

                      http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier?OpenDocument=&emcontent_spectators=

                      Clearly I hit a raw nerve! Calm down dear,

                      Take some responsibility and stop parroting out of date theories, and now also acting like a condescending prick.

                    • Read the talk page, Tamati. A few ill-informed users are keeping dumb statements like the one you quoted on that arcticle by edit-trolling it, wheras it doesn’t really accurately reflect economic theory from either the Right or the Left.

                    • Tamati

                      No I don’t have half a day to read all that.

                      Steve Keen, is a pretty radical economist. Hardly inline with mainstream thinking. Perhaps he’s right and the business schools are all wrong, and the fluoride action network is right and the Dental schools are wrong.

                      Regardless, Labour won’t change that RBNZ, all they’ll do is make them consider unemployment when setting the OCR.

                    • Colonial Viper

                      No I don’t have half a day to read all that.

                      Steve Keen, is a pretty radical economist. Hardly inline with mainstream thinking. Perhaps he’s right and the business schools are all wrong

                      1) Thanks for proving you have no real interest in what actually happens in the banking system. BTW I went through the article in about 20 minutes.

                      2) Steve Keen is a heterodox economist doing ground breaking quantitative, empirical and simulation work with research partners all over the world.

                      3) Yes, the business schools are all wrong, most of them teach their undergrads vats of toxic laced Kool-Aid. That’s what we’ve been trying to tell you.

                      “Mainstream thinking” in macro is completely falsifiable Tamati and has led the global financial system to the brink. Time for you to get up to date instead of spreading your masters’ lies.

                  • Draco T Bastard

                    Hardly inline with mainstream thinking.

                    Mainstream economic thinking happens to be the problem but even mainstream economists are starting to realise that the present teaching of the fractional reserve system is bunk. I tried to find the Bank of England economist that said so but couldn’t. I believe it may be on the positivemoney.org.uk site. Then there’s the IMF economist recommending that we go to a full reserve currency and drop the bank money as it’s the bank money that’s causing the exponential debt increases.

                    BTW, the only raw nerve that seems to have been hit is yours – you’re the one that dropped to ad hominem attacks.

                    • Colonial Viper

                      BTW, the only raw nerve that seems to have been hit is yours – you’re the one that dropped to ad hominem attacks.

                      well, so did I 😈

                    • Tamati

                      Well I’m certainly glad I bumped into you two vanguards here and now. We’ll see what happens. I highly doubt DC the messiah will change a thing when he gets his hands on the Treasury benches. It’s smart politics though.

                    • Colonial Viper

                      Appreciate all your efforts to spread disinformation on the banking and financial systems, Tamati.

                    • Tamati

                      The feeling is mutual.

                  • For those of you confused by Tamati’s misinformation here are three video’s you might want to watch to inform yourself about the Reserve bank system and the creation of money out of thin air which we have to repay with our hard slog and interest on top:

                    Money as debt 1
                    the Money Masters
                    And the Creature of Jekyll Island

                    • ghostwhowalksnz

                      A quick look at Westpacs financial accounts shows , not up to date.
                      (1) Assets , mostly are loans they have made to others , $77 Billion

                      (2) Liabilities, mostly money they have borrowed from others $72 billion

                      Not much fractional banking going on there, as they have to have $5 bill of their own money in the kitty

                    • Colonial Viper

                      What about their off-balance sheet assets and liabilities, GWWNZ? Which we have seen revealed through the GFC are often larger than all the on-balance sheet items put together?

                      Also, what assurance do you have that those assets and liabilities that we can see are all accurately marked to market?

                      And one last point – you do know that a bank creating a new deposit through a loan automatically creates a balancing entry on the balance sheet? The new deposit is entered as a liability whereas the loan is entered as an equivalent asset.

                      Just because you see assets and liabilities as almost equal doesn’t mean that they are anything more than created book keeping entries.

  9. bad12 9

    Yes when the Reserve Bank Governor or that dribbling fool from the Herald John Armstrong can explain in a few logical sentences why someone in Invercargill should be made unemployed because Auckland house prices are over-inflated i may even find the time to listen,

    Until such time i can only spare my spittle for such economic Neanderthals who foisted on this country Legislation that looks from here to be simply a ‘protection racket’ for the shareholding class,

    The equation is this, Neo-liberal policies of laissez fairre claiming the market as the final arbiter created in the city of Auckland a gross shortage of housing by allowing open slather immigration and not providing an iota of planning for accommodating such an inflow, leaving this instead to ‘the market’, which of course FAILED under such an influx,

    Finally, after the profiteers have fed mightily on such a clusterf**k, the Reserve Bank Governor threatens the employment of 1000’s, not to mention the living standards of the rest of New Zealand with His current threat to raise interest rates across the country penalizing those who have in no way added to the cause of this mess,

    If interest rates must be raised to cool the over-inflated Auckland housing market then the Governor of the Reserve Bank should raise the interest rates for houses in the City of Auckland,

    If the Governor of the Reserve Bank claims He cannot raise only the interest rates on houses in Auckland leaving the rest of the economy alone by NOT raising interest rates on anything else, anywhere else, i suggest the Governor of the Reserve Bank should be removed in favor of someone that can…

    • greywarbler 9.1

      There are precedents for fashioning policies just for Auckland City so the RB could do so too. We are always hearing about Auckland being the power house of the country and needs this or that. While Gisborne is a big food raising area and doesn’t need this or that.

      So right, tailor policies to assist powerhouse areas to function well using economic theory which will be known already, and strengthen functioning areas to increase their commercial activity to be mini powerhouses. RB – my unofficial consultants fee – $1,000.00 pay to
      anti-TPPA fund raising site. (For top of my mind unresearched data, which is the sort of stuff most of government policy is based on.)

      • bad12 9.1.1

        My view is it is the economics of ‘the chimps’, Auckland house price over-inflation IF such over-inflation is to be the target of interest rates rises should be separated from the rest of the economic picture and such rates applies solely to that City,

        Christchurch right at the point of the first major earthquake should have also been separated from the overall economic picture and been declared a special economic zone for the purposes of the rebuild,

        There is no real economic growth involved in rebuilding that city it is simply replacing growth that was destroyed, and parts of the rest of the economy should not be punished through any perceived but false inflation from that rebuild,

        We need far smarter economics and economists, what would the rate of inflation be if Auckland house prices and the Christchurch rebuild were factors addressed outside of the current means of primitive bean counting,

        i would suggest that rate of inflation would be something akin to .02%-.07% and if the Reserve Bank Governor is suggesting that we all get kicked in the nuts with interest rate hikes over the whole economy because of the Auckland and Christchurch factors when any logical person viewing such would simply say to address both those cities outside of national inflation figures, then i suggest we find a new Reserve Bank Governor…

      • xtasy 9.1.2

        greywarbler

        “We are always hearing about Auckland being the power house of the country and needs this or that. While Gisborne is a big food raising area and doesn’t need this or that.”

        In my honest opinion, this talk about Auckland being the “power house” is a lot of self serving, arrogant garbage that mayor Len Brown and other senior Auckland politicians, business and other stakeholders love to go on about. And I say this as a person who has lived here over two decades.

        What does the Auckland “economy” actually consist of, and what does it “produce”? A look at various sources reveals some interesting information, which exposes that most is more or less “services” that are provided by some Aucklanders to others (businesses, public providers and invidivuals). The Port of Auckland is not so much an export port, it is primarily and IMPORT port, for goods MADE elsewhere.

        Manufacturing here is only taking place in some places, and we know how Fisher and Paykel and others have partly closed factories and moved off-shore. There is a lot of transport happening, but most is private motor cars and trucks, the latter transporting goods that were made elsewhere, from Auckland or to Auckland. There is an inland “port” in South Auckland that services mainly goods transported here from Tauranga and Whangarei (much for on-transportation).

        Naturally there is the international and domestic airport, and there are hotels and backpackers accommodating tourists. There are a few headquarters of major businesses and banks, there are courts, administrations and not much else.

        A BIG part of the economy is the inflated inner Auckland housing market. Now is that the kind of “economic activity” this country needs? Most this inflated talk about the Auckland economy only serves the large Auckland middle class to feel important, as it is all about their buying and selling of homes, their “investment” in homes, selling homes and “services” to new migrants, their importing foreign goods, their housing foreign students as boarders, their education investment, their personal jobs, their consumerist shopping from retailers, and their driving around in cars half the days, to get from A to B to C.

        That is the f**king “Auckland Economy”, at least the bulk of it in my eyes, not much else. So the provinces have good reasons to be furious at times, as true economic activity should look a bit better than what we have here!

        http://en.wikipedia.org/wiki/Auckland_City

        http://www.aucklandcouncil.govt.nz/EN/planspoliciesprojects/plansstrategies/theaucklandplan/economicdevelopmentstrategy/Documents/economicquarterly2013april.pdf

        http://livenews.co.nz/2013/07/16/aucklands-housing-market-boosting-wider-economy/

  10. Draco T Bastard 10

    The thing is that high interest rates don’t stop speculation in the housing market. In fact, with all the hot money poring in, it actually feeds it.

    Stop banks from creating money, get rid of the OCR and also stop RBNZ being the lender of last resort (only the government would have access to money created by the RBNZ, specifically, the RBNZ would be charged with creating the money the government needs to spend into the economy) and we’d go a long way to making our economy rational.

    • bad12 10.1

      Unfortunately your prescription would require the politicians to also be rational all the time, a prospect i fear that has as much chance as the proverbial snow flake in hell…

      • Draco T Bastard 10.1.1

        Throw in referenda and the sustainable rate of use of the countries resources and the required rationality of the MPs decreases.

    • Herodotus 10.2

      DTB hot money on its own does not feed the housing market – crap controls feed the market. Place some brakes e.g. Eliminating interest as tax deductible, state housing sub contracting out to private land lords.
      http://www.hnzc.co.nz/about-us/our-publications/factsheets/guaranteed-rent-through-home-leasing/guaranteed-rent-through-home-leasing.pdf
      And allowing capital gains to go untaxed when there is no basis for rentals to stand up as a viable trading business. The only reason rentals work IS the capital gains.
      Regulate so that owner occupies have an advantage over private land lords, and that state housing is the 1st alternative as a landlord and that there are sufficient housing stock.

      • Draco T Bastard 10.2.1

        hot money on its own does not feed the housing market

        Didn’t say it was but I believe it to be the main driver.

        The only reason rentals work IS the capital gains.

        Oh, I think you’ll find that people with 10+ houses the capital gains is just icing on the top.

        Eliminating interest as tax deductible

        I’m trying to eliminate interest altogether.

      • Saarbo 10.2.2

        +1000

      • Colonial Viper 10.2.3

        Herod, I do believe that you are on the right track.

        We need the business of being a landlord (as opposed to being a property speculator who rents out houses in-between flipping them) to be sustainable and attractive, providing fair net returns of 4% to 5% to the investor.

        And the NZ Govt should be a major player in that rental provider market, as well as facilitating the financing and the house price controls which will make it possible.

  11. BrucetheMoose 11

    I stopped reading the Herald regularly a while back due to their rightest slanted garbage and consistently biased views. Not only that, they hardly ever posted my comments. Especially after I said that National was really a club for closet fascists. They’re no fun.

  12. xtasy 12

    “For a decade now, we have had some of the highest interest rates in the developed world leading to a near-permanently over-valued dollar, and it’s killing the economy without fixing the housing bubble.”

    Interest rates in New Zealand have been much higher than in most OECD countries for as long as I can remember, and it goes back at least until the 1990s and also 1980s!

    New Zealand is considered a higher risk lender on the international lending market, given its small size and traditional over-dependence on foreign funds for investment. It seems a bit absurd, as on the other hand New Zealand always gets considered to be one of the most politically and socially “stable” countries. But it is size that matters, and the traditional reliance on capital inflow, which goes back to the early settler’s days, under direct British Crown rule here, has continued.

    What is the greatest problem for New Zealand is the high indebtedness due to private lending for financing real estate purchases. As most of this lending is done by Australian owned banks, a lot of interest and due dividends flow into their coffers, and the pockets of their shareholders. Also do foreign investors here earn their dividends on investment in enterprises that sell goods and services.

    The currency fluctuations, and the often overrated NZ currency is a major issue, and for instance Japanese mums and dads have a habit of investing their currency in NZ dollars, given high earning potential, all propped up by high interest rates.

    All this is little productive, as it disadvantages investment and economical feasibility of local manufacturers, producers in general, and therefore exports. Like with real estate Kiwis also love to import many consumer products, and the high dollar enables the to do this.

    So what we have is continued growth in bulk exports of easily produced mass primary products that appeal to Chinese and a few other consumers, to pay for imports of higher quality value added goods made there. This makes for a primitive, commodity dominated economy, with many flaws.

    Armstrong is in semi retirement from my view, and his articles reflect his somewhat redundant views, shaped by an age that was dominated by neo-liberal dogma and practice. Winston Peters and David Cunliffe are right, the Reserve Bank Act needs amending, so Armstrong is best advised to seek other daytime activities to avoid further embarrassments prior to full retirement.

    • Anne 12.1

      Armstrong is in semi retirement from my view, and his articles reflect his somewhat redundant views, shaped by an age that was dominated by neo-liberal dogma and practice.

      Add to that a debilitating disease that not only cripples the body, it must eventually have a detrimental effect on the mind as well. I give him full credit for persevering through all the tribulations of his condition for as long as he can. He still has something to offer, but some of his analysis work is outdated and falls short of what it once used to be.

      • xtasy 12.1.1

        “Add to that a debilitating disease that not only cripples the body, it must eventually have a detrimental effect on the mind as well.”

        I accept that, Anne, and while some know this, many readers would not, and without possibly being aware of his slowly weakening capacity, I feel concerned that John Armstrong may unintentionally expose himself to harsh criticism and ridicule.

        Hence there will be the time where he will be well advised to perhaps pursue his writing skills in a different forum at a different pace and level of exposure.

        • Anne 12.1.1.1

          Agree 100% xtasy. I know someone with the same condition and it really is deeply sad to see this once bright and active person reduced to a shell of his former self.

  13. Liberal Realist 13

    Armstrong is just another tool with his ideology firmly stuck in the Chicago school cesspit (Somewhere on Planet Key perhaps?).

    “So, what has the Bank done to earn a free-pass from every government to do whatever the hell it likes? As far as I can see, all its done in its 20 years of independence is kill our exporting industry, help us rack up massive foreign debt, and failed to tackle successive housing bubbles.”

    Eddie, you’ve hit the nail on the head. +10 Since independence 20 years ago almost every move the bank has made, has been to the detriment of ordinary New Zealanders. Of course those that have made enormous amounts of cash via property speculation and the boom / bust cycle want BAU and Armstrong is one of their mouthpieces.

    Labours CTG will certainly help address the imbalance but the issue of a single blunt tool – OCR still needs to be addressed. Why can’t the OCR be pegged against a trade-weighted basket of currencies while wielding more targeted tools to address problem areas of the economy?

    Furthermore retail banks need to have their profit regulated, perhaps by a maximum lending rate above the OCR? Of course in a market economy they have to make a profit but it doesn’t need to be obscene as we’re seeing today.

    The building materials duopoly also needs to be addressed. Material costs for a build a much higher than they should be simply due to lack of competition. QE also needs to be an available tool – I’ve yet to hear a valid argument against..

    As for LVRs, stupid stupid move. Shut out first home buyers leaving more property stock available for those who can stump up a 20% deposit.. As Eddie suggests, it wouldn’t have been hard to apply LVRs to problem markets only. The Government changed Housing NZ’s Welcome Home Loan and Deposit Subsidy easily enough.

  14. Colonial Viper 14

    QE also needs to be an available tool – I’ve yet to hear a valid argument against.

    QE refers to a very specific technique where the Fed buys investment bank assets (often impaired/toxic assets) with newly created money. In doing so, the Fed massively expands its balance sheet on the assets side.

    The problem is that the newly created money is not getting from the Wall St institutions, to Main Street. In the lingo, the “transmission mechanisms” for the money are broken.

    If NZ wanted to create new money in a way to help the economy that ordinary people experience, it wouldn’t use QE, the Government would instead spend that money into circulation buying goods and services from NZ businesses and NZ workers. This is more like what Roosevelt did with the WPA to help end the Great Depression. Hiring 8M or more people into new jobs all over the country. (A massive investment for a country with a population of only 100M at the time).

    *I wrote this reply to an individual who posted quite a good comment, but who seems to have deleted it or had it put into moderation.

    • bad12 14.1

      Yes the American version of expanding the money supply does seem overly complicated, here’s one example of the State producing monies and then adding labour and goods to produce an asset which is of the same value as the monies produced,

      Produce into existence X amount of monies and build with such monies X amount of State houses…

    • Liberal Realist 14.2

      CV, my comment did hit moderation – in fact I thought it had been lost but checking today my comment has been published.

      I’m familiar with QE the US Fed has been engaging in – I should have further clarified in my comment, I wouldn’t suggest NZ engage in a free for all into a stock market black hole as with the US experience.

      As you suggest (QE doesn’t necessarily need to be the mechanism) newly created money should be used to purchase infrastructure / earth quake recovery bonds such as the GP suggestion 12 months ago (not sure if it’s policy?). The CHCH rebuild could be fast tracked with a such a bond purchase and Auckland’s public transport woes could also be addressed.

      [lprent: We tend to be somewhat lackadaisical on the weekends on moderation but that gets cleared every few hours. But releasing comments that went into spam is always slower. Firstly because the anti-system is over 99% accurate and secondly because it is so accurate, I usually only look at it a few times per day. There is no apparent reason for that comment to be auto-spammed apart from style. It does read a wee bit like someone wanting to sell financial services 🙂 ]

      • Draco T Bastard 14.2.1

        newly created money should be used to purchase infrastructure / earth quake recovery bonds

        No need, just spend the money into the economy. Adding bonds to the process just adds complication and unneeded interest.

  15. vto 15

    All hail the great god of capital!

    Imagine if it disappeared?

    No capital. What would we all do. Armstrong is incapable of imagining such a place, common as it has been ….

  16. vto 16

    The war of capital.

    Played out in New Zealand via the reserve bank.

    Played out in the US via the government shutdown.

    Capital is pulling its weight.

    Best we push back. Fuck them. Capital is an apparition. Fuck the capital!

  17. Ad 17

    2 quick provocations.

    1. If Cunliffe wants to break the neoliberal consensus and gain control over our currency and hence our export prices received, then kill the Reserve Bank dead and pull its functions back to Treasury. Interest rate changes made by Cabinet only.

    2. Shift all govt banking business to Kiwibank. This could make Kiwibank offer lower mortgage rates than any of the Aussie banks. And stronger, safer deposits.

    We need a banking system returned to direct accountability by the political order, and designed to strengthen New Zealand’s interests.

  18. tricldrown 18

    The reserve bank act is nothing more than allowing money speculators to continueously plunder our economy taking tax free capital gains for doing nothing more than pushing our dollars value up to artificial highs for their gain while the productive sector is damaged .
    Then because we are not making enough from exports NZers have borrowed massive amounts of debt to buy cheap imports.
    We have lived beyond our means ever since this legislation has been in place.
    A Capital gains tax on profits from money speculation would be a start.
    The housing bubble needs to be dealt to.
    Printing money at the same level as the major trading blocks do and using that printed money to build enough houses to deal to the property bubble.
    This would keep our dollar and interest rates down.

  19. Sable 19

    I’ve met a least one Reserve bank fool and they are just that. Armed with economics masters and PHD degrees (might as well have a degree in fortune telling) they have absolute faith in neo liberal twaddle trotted out by the Chicago school mob and as time has shown their faith is sorely misplaced. Yet do they consider other alternatives, hell no!

    The clown I spoke to was rabid in his support of this economic fairy tale and ranted on for ages when challenged. He certainly had a good knowledge of the global economy and an answer for everything BUT there was little practical basis for his belief in neo liberalism or any real indication he had the ability to credibly influence or change anything. Really just a nerd in a government think tank, big brain but beyond that nothing of substance….

    Not at all surprised by this reaction, no one wants others to find out they are, in fact, clueless…

  20. Rogue Trooper 20

    National Governments minor adjustment responses to housing supply issue:
    -Welcome Home Loans; 15000 over next three years
    -KiwiSaver changes; 20000 to access deposit assistance
    -Auckland Accord; 39000 new homes (5000 consents by Christmas intended) immediately bringing 300 homes at 335-400+K on-stream-Nick Smith.
    appears to be mainly about money supply rather than housing supply.

    Tinkering “mostly at the margins”- Colin James.

    “Easy credit” from overseas QE and financial markets IS washing up here.
    (house prices may face a fall on the back of US stalemate and bank credit changes.).

    “Exempt first-home buyers from new LVR’s”- Phil Twyford

    and an interesting suggestion for discussion from a realty spokesman-
    Have the government underwrite deposit shortfall / balance on new homes constructed for first-home buyers.

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  • Liam Hehir: Our obsession with American politics
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    Democracy ProjectBy bryce.edwards
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    No Right TurnBy Idiot/Savant
    4 days ago
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    No Right TurnBy Idiot/Savant
    4 days ago
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    4 days ago
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    5 days ago
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  • Tax cuts for all!!! (except you, you, and you)
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    6 days ago
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    PunditBy Brian Easton
    6 days ago
  • New Zealand has role to play in resolving crisis on ‘geopolitical fault line’, Helen Clark says
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    7 days ago
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    7 days ago
  • Why we need cameras on boats
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    No Right TurnBy Idiot/Savant
    7 days ago
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    Democracy ProjectBy bryce.edwards
    7 days ago
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    No Right TurnBy Idiot/Savant
    7 days ago
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    7 days ago
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    1 week ago
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  • Don’t Steal This Book
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  • Tackling the hard issues – trust and relationships
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  • Closing the Gap thinks that Labour’s proposal to raise the top tax rate is great but………
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  • Climate Change: No nonsense
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    No Right TurnBy Idiot/Savant
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  • My Climate Story: Coming full Circle
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    2 weeks ago

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    BeehiveBy beehive.govt.nz
    15 hours ago
  • Clean energy future for more schools
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    BeehiveBy beehive.govt.nz
    20 hours ago
  • Building business strength with digital tools
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    BeehiveBy beehive.govt.nz
    21 hours ago
  • New pest lures to protect nature
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    BeehiveBy beehive.govt.nz
    21 hours ago
  • Support for innovative Pacific education responses to COVID-19 needs
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    BeehiveBy beehive.govt.nz
    2 days ago
  • Eligibility expanded for COVID-19 leave support
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    BeehiveBy beehive.govt.nz
    3 days ago
  • Seasonal work visa available to more people
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    BeehiveBy beehive.govt.nz
    3 days ago
  • More border exceptions for critical roles
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    BeehiveBy beehive.govt.nz
    3 days ago
  • Crown will not appeal Dodds v Southern Response decision
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    BeehiveBy beehive.govt.nz
    3 days ago
  • Crucial PGF investments for Northland
    The Provincial Growth Fund is investing nearly $30 million in a diverse range of projects that will create immediate and long-term jobs and lift economic and social outcomes for Northland and its people. Deputy Prime Minister Winston Peters and Regional Economic Development Minister Shane Jones made the announcement today in ...
    BeehiveBy beehive.govt.nz
    3 days ago
  • $27million investment in global vaccine facility
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    BeehiveBy beehive.govt.nz
    4 days ago
  • Government backing Māori landowners
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    BeehiveBy beehive.govt.nz
    6 days ago
  • New tools to make nature more accessible
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    BeehiveBy beehive.govt.nz
    7 days ago
  • PGF makes Māori history more accessible
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    BeehiveBy beehive.govt.nz
    7 days ago
  • Making it official: The journey of te reo Māori | Kia whakapūmautia: Ngā piki me ngā heke o te r...
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    BeehiveBy beehive.govt.nz
    1 week ago
  • Better-than-forecast GDP reflects decision to protect New Zealand
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    BeehiveBy beehive.govt.nz
    1 week ago
  • Boost for COVID-19 related Pacific education needs
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    1 week ago
  • More resources for kiwi conservation
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    1 week ago
  • Improving access to affordable electricity
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    1 week ago
  • Government achieves 50 percent women on state boards
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    1 week ago
  • Record transport investment to help economic recovery and save lives
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    1 week ago
  • Advancing clean energy technology
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    1 week ago
  • Major milestone reached in Pike River Re-entry
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    BeehiveBy beehive.govt.nz
    1 week ago
  • Economic recovery guides Govt response to retirement income policy review
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    1 week ago
  • Iwi community hub opens in Murupara
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    1 week ago
  • PREFU shows economy doing better than forecast
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    1 week ago
  • Spruce-up for Ōtaki community facilities
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    1 week ago
  • PGF funding for Jobs for Nature programme
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    1 week ago
  • Procurement to promote jobs, Māori and Pasifika businesses and sustainability
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    1 week ago
  • Timaru’s Theatre Royal to be upgraded and new heritage facility built
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    1 week ago
  • District Court judge appointed
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    BeehiveBy beehive.govt.nz
    1 week ago
  • Approval given to Commercial Film and Video Production Proposal
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    1 week ago
  • Supporting a thriving wānanga sector to benefit Māori learners
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    1 week ago
  • Jobs for Nature boosts efforts to restore Kaimai-Mamaku
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    1 week ago
  • New Zealand first in the world to require climate risk reporting
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    1 week ago
  • Economic data highlights impact of Auckland moving out of Level 3
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    2 weeks ago
  • PM statement on Cabinet COVID-19 Alert Level review
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    2 weeks ago
  • More mental wellbeing services for young people in regions
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    2 weeks ago
  • Government joins forces with Central Otago communities to clean up waterways
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    2 weeks ago
  • Government confirms new Dunedin Hospital design
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    2 weeks ago