By and large the Right are refusing to defend their neoliberal monetary policy system. The currency is causing chaos, the housing bubble is back, and the Reserve Bank is in a ‘damned if you do, damned if you don’t’ position as it tries to control inflation. But the Right treat the neoliberal doctrine like a sacred religious text, no debate will be tolerated. Only one guy’s given it a go – BK Drinkwater has responded to my post on the need for reform. It’s pretty shallow but since it’s the best the Right can put up for debate, let me respond:
Drinkwater starts off with a lengthy quote from rightwing hero Milton Friedman, who basically invented the kind of monetary policy setup we currently have but he’s fundamentally misunderstood what I’m saying. I’m saying that the Reserve Bank, like nearly every other central bank should have to consider economic factors than just inflation when setting interest rates. Other countries manage it, why can’t we?
Drinkwater says he can’t figure out if I want interest rates higher or lower. I want both. I want lower interest rates for productive investment (ie in business), a lower OCR in line with other countries to kill the carry trade, and higher interest rates on mortgages in relation to the OCR.
Let’s start at the beginning – the point of the OCR is to increase or decrease consumers’ buying power by adjusting how much they have to pay on their mortgages – if inflation is too hot, increase the OCR, that will increase mortgage rates and people will have less money to spend, reducing inflationary pressure. The problem is that our OCR is chronically too high relative to other countries causing the carry trade (=housing bubble, current account deficit, high currency) but if we lower mortgage rates any further it will cause more inflation.
What we need is a way to keep mortgage rates as high as they are (or higher) while letting other interest rates go lower. we could do it with a variable mortgage levy/savings rebate that functions to increase the interest rates on mortgages and savings. The Reserve Bank gets the choice of setting that levy (between say 1% and 3%). The OCR could be lower, letting business borrowing rates fall and killing the carry trade but mortgage rates would effectively be the same as they are, keeping inflation at bay. This levy wouldn’t be a money raiser for the government. The revenue would be used to fund something like a tax rebate on interest income or an inverse payment to savings accounts, encouraging Kiwis to save.
Drinkwater makes some other silly comments – like saying we need the carry trade to create jobs – which fall over on their own without me pushing them. Basically, he seems to think that 40 years ago Friedman created the best of all possible monetary policy setups and we can’t improve on it.
I fundamentally disagree with that. In economics you can never solve all problems at once but we can do better than this. Our current setup is causing the housing bubble, the high currency, and the current account deficit. I’m not saying let’s go back to pre-neoliberal approach, I’m saying let’s go forward to something better. The mortgage levy/savings rebate is one of a number of refinements we could make to do better. I’ll write about others soon.