A couple of good but not quite satisfying articles today. The first is Brian Gaynor’s analysis of the economy in which he lays out where we stand financially as a nation and blames the housing boom for our current account deficit:
But the message from both the GDP and current account figures is that New Zealanders have borrowed and invested far too much in residential property.
This makes the economy vulnerable to a downturn in the housing market, and does not give us a strong, diversified economic base to shield us from the worst aspects of an international recession.
While it’s a fair call the root problem of the reserve bank act isn’t dealt with by Brian. The reason we have been able to develop high debt against a housing bubble is simply our absurd use of pure monetarism to control inflation. As I’ve said before we got ourselves into a situation where debt was fueling inflation so we increased interest rates to control inflation which in turn made the profits from selling us debt even greater and ensured we’d have more debt-fueled inflation. Meanwhile our exporters suffered from our high exchange rate and many shut their doors.
Cullen made an effort to take money out of the system by holding surpluses, paying down public debt and implementing Kiwisaver and the super-fund but never addressed the core problem of the reserve bank act. I see that as his greatest failure.
It’s also worth noting that returns to offshore investors have been something like 6% of GDP (from memory, I could be wrong). That’s goes some way to explaining our current account deficit.
Henry Blodget covers the US housing bubble in this month’s edition of the Atlantic. He was a big player in the dotcom boom but got seriously burned in the 2000 crash so he knows what he’s talking about:
But most bubbles are the product of more than just bad faith, or incompetence, or rank stupidity; the interaction of human psychology with a market economy practically ensures that they will form. In this sense, bubbles are perfectly rationalâ€”or at least they’re a rational and unavoidable by-product of capitalism
Unfortunately, despite having a clear view and a damn good analysis of the market’s failure he excuses it as inevitable because:
bubbles are to free-market capitalism as hurricanes are to weather: regular, natural, and unavoidable. They have happened since the dawn of economic history, and they’ll keep happening for as long as humans walk the Earth
Some of us might have thought that after all he’s been through Blodget might not see the free-market as the last word on how to run an economy.