Monetary policy needs to change

Written By: - Date published: 9:29 am, November 20th, 2009 - 66 comments
Categories: monetary policy - Tags:

I’m really happy that Phil Goff has taken monetary policy up as an issue. The current system – a puritanical neoliberal model set in place twenty years ago – has never worked particularly well and has now become a major threat to this country’s ability to export competitively. Monetary policy is a big issue, as important as any fiscal policy like spending or taxes, but one that’s largely been ignored in recent years, so I guess I’ll split the topic into several posts.

Before the detail, the politics. Hasn’t it been interesting to see the kneejerk reaction from the Right? They won’t even countenance a debate despite the clear problems being caused by our widely fluctuating dollar and the negative side-effects of inflation-targeting (using interest rate to keep inflation within a certain band). Ironically, the Right’s behaviour matches the original definition of politically correct – the received wisdom can’t even be questioned. Key’s come out against any change but, then, he’s a money-trader.

OK, first, the carry trade:

David Farrar writes “declaring monetary policy is no longer working is silly, because of course it is. You can’t blame the high NZ dollar on monetary policy considering we have the official cash rate at a very low 2.5%.”

That’s just ignorant. The Reserve Bank Act is a major cause of our high currency because the Reserve Bank’s myopic focus on inflation causes the carry trade.

The carry trade, where people borrow in one country (say Japan) to invest in another (say New Zealand), which results in currency transactions pushing up the exchange rate of the destination country, works because of interest rate differentials, not absolute interest rates. Sure, our OCR is 2.5% but Japan’s is 0% and it’s that differential that investors are exploiting in the carry trade. We can’t lower our official interest rate to 0% because that would fuel inflation but the result is the carry trade, which pushes up our currency, hurting exporters.

Ironically, the carry trade itself is inflationary because it creates a flood of credit into New Zealand, which lets banks lower their mortgage rates more than they otherwise could and, crucially, offer home loans to people with very small deposits. People use all this cheap and easy credit to buy houses, prices go up, more people use the cheap and easy credit to get on the speculation wagon. Rising houses prices = inflation. Inflation means the Reserve Bank has to keep the Official Cash rate relatively high or even increase it, which brings more hot money on the carry trade, which lifts the exchange rate and provides fuel for the housing bubble. While exporters are being hammered, housing becomes a great investment, which distorts investment towards housing rather than productive capacity.

What we’ve got here is a feedback loop that looks almost custom designed to screw over our economy by making the exchange rate too high for exporters to be profitable and by creating housing bubbles, which in turn draw capital away from investment in productive things into housing. The system is broken.

The first solution is to do what Australia and nearly every other country does. Rather than the Reserve Bank being fixated on keeping inflation within a tiny, low range, it should be tasked with balancing a set of economic factors – inflation, the exchange rate, and unemployment – within healthy ranges.

The second is to give the Reserve bank more tools than just the OCR, more on that next post.

66 comments on “Monetary policy needs to change ”

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  1. RedLogix 1
    20 November 2009 at 10:20 am

    Yet another great post Marty.

    a puritanical neoliberal model set in place twenty years ago

    Neoliberal economics = Mad, bad and dangerous.

    All this model has achieved for NZ is the fastest rising income inequality (GINI score ) in the OECD, an unsustainable Debt to GDP ratio and huge profits for our finance sector. The four Aussie banks make more profit than the total NZSX50 companies combined.

    Goff is pointed in the correct direction; question is, will he go there?

  2. Craig Glen Eden 2
    20 November 2009 at 10:26 am

    I have to agree about the reaction from the right Marty and knee jerk is exactly the right description. So we have this problem ( boom bust cycle and fluctuating dollar) but the rights reaction is lets not see if we can do anything about it.

    Until we do, how can we expect people to invest in businesses that exports goods, how is the pie/ economy going to be made bigger (to quote the over used metaphor) if nothing is done/ changed we will get the same results that we have already got. Something has to change!

    Why would the spokes people on the right not want to see exporters flourish, is it because the likes of Mr Key would/ might loose his little gambling table.

  3. mickysavage 3
    20 November 2009 at 10:31 am

    Good post Marty.

    The right are regrettably predictable again.

    They criticise Phil for having no solutions but if he came out with one they would criticise him for making his mind up too soon!

    Pick an option and watch them say it is wrong and he should have done the other thing.

    This is a really important debate and dare I say it but Phil looks Prime Ministerial in the way that he has started it off.

    This is one policy area where a bit of mea culpa is appropriate.

    NZ Inc is essentially owned by overseas interests. That big sucking noise that you hear every month is the sound of our wealth flooding overseas to foreign interests. The exchange rate is an important part of this.

    The interesting thing will be how do we reintroduce some sort of control without there being a run on the dollar?

    • prism 3.1
      20 November 2009 at 10:43 am

      Phil Goff did sound when talking about the decision to change monetary policy like a man who could be PM and give a boost to NZ that would benefit all.

      • Herodotus 3.1.1
        20 November 2009 at 12:10 pm

        Someone spousing off newspaper neadlines BUT you will have to wait 2 years for any detail. There is more devil in this detail than floating down the styx in hades, just like the Power revelation, We (Lab) have been overcharging But wait we are going to fix this. Free preschool headlines yet the detail was subsidies Preschool. Still good do not get me wrong but underdeliverd in a big way.
        Phil has brought this topic up but to wait 2 years for any thing tangable?
        What happens if Phil & co support goes up, what tis the result of overseas money with uncertainity?
        Marty interesting yet no comment on what could happen when the world gets sick of proping up our debt. Using the reverse NZ$ crashes, interest rates increase as there is limit $ to loan out. This outflow of funds has not really happened YET?

  4. Geek 4
    20 November 2009 at 10:46 am

    A good start would be to remove some of the restrictions on housing density in our Major cities. By restricting density you cause a shortage in housing in key area’s. This results in that housing then increasing in price. This has also been proven to be one of the driving factors of the housing bubble.

    There are many other added benefits. Reduced sprawl mean less clearing of land for housing. Increased density improves the potential profitability of public transport increasing the viability of current providers investing in public transport networks thereby providing a more reliable and attractive alternative to personal car use. Building larger accommodation on smaller area’s allows for a better return on the value of the land whilst still keeping the price of the actual dwelling low so that it is more affordable to those wishing to enter the market.

    • Geek 4.1
      20 November 2009 at 10:53 am

      This is a link to the reserve banks own report on the effects of density on monetary policy.

      http://www.rbnz.govt.nz/monpol/about/2989594.html

    • ghostwhowalksnz 4.2
      20 November 2009 at 10:56 am

      Uhh ? That will drive up land ( and house ) prices.
      In Auckland ( City) the minimum land area has gone from 1100m2 25 years ago to 360m2 to day. All those people have two cars, drive the kids to school, the mall, to work. ergo nothing has changed

      • Geek 4.2.1
        20 November 2009 at 11:14 am

        Check the link.

        I know you don’t like market economics but there is one simple principle to it that I know you get. Supply and demand determine value.

        In major cities demand for housing in more central area’s increases with increasing population. By limiting the supply you force the price up because demand exceeds supply. As clearly stated in the RBNZ submission in Auckland for example factors such as urban density restrictions and fractitious land ownership in certain areas result in an inability to increase supply to meet this demand. This forces house prices up.

        It is only one of 3 factors affecting supply but I choose it because it also ties into other key area’s in which our major cities struggle. i.e public transport and urban sprawl.

        • Bill 4.2.1.1
          20 November 2009 at 11:28 am

          “Supply and demand determine value.”

          Really? So oil is cheaper than water….why?

          • Geek 4.2.1.1.1
            20 November 2009 at 11:34 am

            Are you really that dumb?

            Could it be that oil has a far lower supply and a limited supply at that?

            You really don’t understand a basic supply and demand curve do you?

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

            I know its a wiki link but I think it will give you the gist of how a market’s most basic principle works.

            • Bill 4.2.1.1.1.1
              20 November 2009 at 12:30 pm

              Erm. S’cuse if I really am being dumb, but aren’t you simply reiterating my very point? The theory says something like….

              Low supply + high demand = high price (oil)
              High supply + high demand = med(?) price (water)

              But the reality is that oil is cheaper than water. So a simple and basic principle of market economics is a crock of shit. No?

            • felix 4.2.1.1.1.2
              20 November 2009 at 1:17 pm

              Salt water is definitely cheaper than oil.

            • Geek 4.2.1.1.1.3
              20 November 2009 at 1:23 pm

              Bill has either:

              a) Never bought bottled water, or
              b) Seen an add about countries that have no fresh water.

              This is good because if there are more people like him we can go out and start bottling any dirty old water up and start selling it to him as aparently he thinks its all the same thing.

            • Bill 4.2.1.1.1.4
              20 November 2009 at 2:40 pm

              As you point out, NZ has an abundance of fresh water….no problem securing supply. And yet….

              Cost of water in NZ is $3+ per litre from retail outlets.

              Cost of petrol in NZ is $1.60 odd per litre from retail outlets.

              This simply doesn’t fit with your assertion about the relationship between supply and demand determining price does it?

              Or am I still being really dumb? If so, please indulge me to the extent of offering a simple explanation pointing to the error of my ways in the above example. Much appreciated.

            • Geek 4.2.1.1.1.5
              20 November 2009 at 3:04 pm

              Because your initial analysis of supply and demand are incorrect.

              It is a graph. The demand for bottled fresh water versus the demand for that product are major contributing factors to its cost. If demand drops the producers lower price in an attempt to increase demand so that stock is not wasted. If demand goes up then producers increase their prices to match or increase their production. If demand lowers to the point where cost can’t cover production then production ceases.

              As for petrol. OPEC supply the majority of the worlds crude oil. In this case demand is relatively constant(in that it grows at a somewhat constant rate). It’s cost is effected by dollar value shifts to a larger extent than most products due to it high turnover, however OPEC constantly shift the price of oil by either increasing or decreasing supply. This is an excellent example of changes in supply relative to demand have a direct impact on price.

              Comparing the two is irrelevant. The demand for petrol has no effect on the demand for water and vice versa the demand for water has no effect on petrol. The supplier puts a product on the market at a price he chooses. If the demand at that price level exceeds his ability to supply then he has two choices. He can raise the price and reduce demand so that he can now meet it, or he can increase supply. Likewise if the price he chooses to initially set is too high and demand is low he is then forced to lower the price to try and increase demand.

              The same can be used in housing. When demand for houses is high (as it was during the bubble due to easily available creadit and limited supply) there are a number of ways to reduce it. You can go with current monetary policy which is to increase interest rates thereby reducing the availability of credit and hence reducing demand. This leads to cap and hand trading which is what Labour is trying to reduce. What you could also do is increase the supply of housing. This is what I am referring to by allowing for increased density.

            • Clarke 4.2.1.1.1.6
              20 November 2009 at 4:49 pm

              Geek – I think you missed Bill’s central point.

              The reason that bottled water – which let’s face it, falls from the sky for free – is more expensive than petrol is that markets are not rational. Basic Econ 101 theory (complete with Wikipedia-level supply and demand curves) assumes everyone is a rational actor who will always act to maximise their personal welfare. This is such transparent bullshit that it’s a wonder it is still taught by reputable universtities.

              People tend to make decisions for emotional reasons and then rationalise them logically afterwards, and this has a much greater effect on markets than any amount of post-hoc rationalisation about supply vs demand curves.

          • Bill 4.2.1.1.2
            20 November 2009 at 4:13 pm

            But isn’t that just a long and convoluted way of saying that the producer will gouge what they can from the consumer today (water)…. or the producer might opt for artificially low prices to generate ever higher turn over….to generate dependency ( by a number of avenues) to secure profits in the long term (oil).

            Either way, artificially generated demands interplaying with arbitrary controls of supply, all in the interests of profit, would appear to be a recipe for deliberate mis-pricing of certain commodities…. which comes back to the whole demand supply argument being a con…ie not some impartial relationship being a constituent part of a deterministic price setting mechanism.

        • Quoth the Raven 4.2.1.2
          20 November 2009 at 11:40 am

          People are confusing price and value.

          captcha: values

          • Geek 4.2.1.2.1
            20 November 2009 at 11:42 am

            To be fair in this situation price is a measure of value. I understand it isn’t always the case.

        • Nick 4.2.1.3
          20 November 2009 at 12:13 pm

          Perfect supply and demand curves only occur in theoretical worlds, here on planet Earth we have those very obdurate objects (people) who as interested parties do their damnedest to bugger up the curve in their favour. Read todays thearchdruidreport.blogspot.com on how medieval guilds managed supply and demand.

          • Geek 4.2.1.3.1
            20 November 2009 at 12:25 pm

            At no point did I claim that a perfect supply and demand curve exists. However it is a large step to claim that it is no longer relevant.

            I don’t know if you even read the submission, linked above, by the RBNZ but a major contributing factor to inflation in NZ is house prices and they list a large contributing factor to house prices as being an inability of supply to meet demand.

            • Herodotus 4.2.1.3.1.1
              20 November 2009 at 1:32 pm

              We experienced the lowest no of dwelling consents for 40-50 years, a depression and house prices fell 10-15%.
              Zoned Land is in short supply, yet it takes 10 years to turn unzoned to zoned land. 6 years ago council contributions were about15k now they approach 45k. Manukau Water crept up from $10k /ha to $6k/dwelling. There were 12 dwg/ h.a. now there are 18. (A big windfall to Man Water) The cost of materials has skyrocketed, double glazing adds $6+k/house, consents have increased from a few k to $10+k. The time to get plan sign off and build has crept out from a 4 month process to 10-12mth.
              The cost to buy existing for a std 220m2 home to build is about $100k differeential and the existing would have a larger section size.

            • Geek 4.2.1.3.1.2
              20 November 2009 at 3:13 pm

              Consents did drop and so did house prices. However that was due to current monetary policy. no one is claiming that you can’t control house prices and hence inflation via interest rate changes. You give an excellent example of it at work. However there are unpleasant side effects to using interest rates. When you up them you now encourage investors to borrow money overseas at a low rate and invest it (lend it) here at a high interest rate. This is mostly done by overseas interests and that interest we pay goes off shore. This is Cap in hand trading.

              What I am saying is that by removing those blocks that you indicate in you post and leaving interest rates low you can control house prices and inflation via supply rather than demand. Rather than removing peoples ability to borrow money and hence remove them from the market you provide more houses that they can get cheaper. This keeps the price down whilst keeping interest rates down so that you don’t have the same cap in hand issues.

    • Draco T Bastard 4.3
      20 November 2009 at 12:17 pm

      I’d actually love to see all the single level dwellings in our cities knocked down and replaced by high rise (at least 12 levels) apartment buildings. Then have all the cleared land turned into park land and native bush.

      IMO, living in an apartment is much better than living in a single level house on it’s own section.

      • Geek 4.3.1
        20 November 2009 at 12:33 pm

        I don’t know if you are trying to be sarcastic here as type really isn’t the best medium for it, but I will assume you are.

        Yes people would rather live in single dwellings over apartments normally. No one is claiming they should be removed. However by allowing for more cheap housing you introduce a lot of benefits to not only the economy but the environment. If you want a house on its own lot then you can coff up the money to own one or look in an area where they fall inside the price you are willing to pay. However those who want cheaper central housing will have it available to them.

        Better than being forced to either rent at exorbitant prices or live a long way from work and commute in thereby increasing their carbon footprint. That’s just my opinion, oh and that of the economic experts at the reserve bank.

        • Draco T Bastard 4.3.1.1
          20 November 2009 at 1:33 pm

          No, I wasn’t being sarcastic. I really would like to see single level dwellings in cities on their own little piece of land replaced by high rise apartments. It doesn’t mean that I expect it all to be done immediately nor do I expect it to be forced.

          Yes people would rather live in single dwellings over apartments normally.

          That, IMO, is due to conditioning. I got the same conditioning growing up but the reality is that apartment buildings have all the benefits over single dwellings. Better services, more convenience and less hassle.

          • RedLogix 4.3.1.1.1
            20 November 2009 at 1:41 pm

            Totally agree Draco. I’ve lived in several European cities in the kind of apartment you describe… as a single person I found them perfectly acceptable. I’m less sure how it would have been with kids, but then again there were plenty of open public spaces about, and the countryside was usually very accessible on excellent public transport.

            Never felt the need to own a car either.

          • Geek 4.3.1.1.2
            20 November 2009 at 1:53 pm

            Sorry for miss reading you then. I am so use to be at the opposite end to you that I guess I was looking for the sarcasm.

          • lprent 4.3.1.1.3
            20 November 2009 at 2:21 pm

            ..but the reality is that apartment buildings have all the benefits over single dwellings

            I’d agree. However they really need to fix up the ambiguities that are in the Strata Titles Act (or whatever it is called).

            I really can’t abide stand alone houses anymore as I found out while house sitting one for 7 months this year. Cold, awkward spaces….

      • Bored 4.3.2
        20 November 2009 at 1:52 pm

        A bit extreme but you are on the right track, the urban sprawl is a dead loss, and we have let our cities become too extensive. It kills off what should be productive land and creates any number of issues, not least being how we will live in the suburban sprawl in a fuel starved world.

  5. Olwyn 5
    20 November 2009 at 10:47 am

    Lovely analysis Marty. You describe a state of affairs which I see as roughly analogous to Cheyne-Stokes breathing – something that sets in within approx. 48 hours of death, where the blood flow abandons the majority of the body and runs between the heart, lungs and brain. Many on the right, of course, count themselves as analogous to these important organs, forgetting their dependence on the rest for long-term survival. What is more I just love the fact that Labour has grasped this important nettle, which plays a such large part in the gap between us and Australia. The Don Brash closing-the-gap exercise should be shown up for what it is – another example of the say-something-scary-do-something-a-bit-less-scary game that this government has lived on for far too long.

    • The Baron 5.1
      20 November 2009 at 12:34 pm

      Oh for god’s sake. I realise you all think that the left are god’s chosen savants, and that right thinking is akin to child molestation…

      But this comment fellatio when all Marty has done is say “well thats crap” is really a bit much. This isn’t a left and right argument; more a “what are our objectives, and whats the best way to achieve them” debate.

      Say what you will about the bad sides of neo-liberal monetarism (yes, there are plenty), but it has achieved its aim of keeping inflation low, and therefore protecting the value of assets for everyone in an economy. I am yet to hear anyone on this site (or in the labour party) articulate anything that is even remotely:

      – well researched
      – effective
      – achievable
      – or credible

      as an alternative, though I am sure Marty will wow us in his next post.

      Regardless, you also have to accept that with any monetary policy, there are trade offs. We have traded a low inflation environment for exchange rate volatility and interest rate manipulation. Other priorities will have other trade offs. Have you thought all of those through before you start declaring “whats best for workers”?

      To the larger point though – please, enough of this goddamn us versus them mentality. Monetary policy is one of the areas where there is no room for partisan politicking, unless you want to drive us all to the poor house. There is plenty to play bloods vs crips with on ACC and the like – but this particular debate requires reasoning, research, analysis and some tough decision making, rather than “my favourite colour is” style debating.

      • Pat 5.1.1
        20 November 2009 at 12:50 pm

        Well put Baron.

        We also forget that our inflation focused monetary policy of the last 20 years has given us a long period of interest rate STABILITY. We all cry foul when home mortgage rates get up to 8% but we have forgotten what high interest rates really look like.

        Trying to keep inflation, interest rates and exchange rates under control in a fast based global environment is like trying to juggle 3 bars of soap. We need a reasoned debate. But Goff should be admitting that until a better policiy option comes along he will stick with the status quo.

      • Draco T Bastard 5.1.2
        20 November 2009 at 1:34 pm

        and that right thinking is akin to child molestation

        No, it’s that it’s not based in reality.

      • lprent 5.1.3
        20 November 2009 at 1:34 pm

        Monetary policy is one of the areas where there is no room for partisan politicking, unless you want to drive us all to the poor house.

        Yeah. However NACT are untrustworthy when it comes to doing the bipartisan thing – the climate change / ETS debate is in the same category, and NACT has been treating it as a political football for most of this decade.

        I can’t see any real point in bothering with them. It isn’t like they ever come up with any good ideas…

  6. tc 6
    20 November 2009 at 10:54 am

    Good post and good on him for wanting this debate started and agree with MickyS that he does look more like a PM than JK does, but there’s nothing new in that as my labrador looks a better PM than JK as she knows her boundaries and sticks to them.

    I just think this plays into NACT’s hands as the debate is way over most peoples heads, especially the swingers and smackers so JK can toss a few well crafted slogans at it and watch it fly away from causing them any trouble.

    I just hope this doesn’t detract from the obvious wins to be had in ETS/ACC/education/Energy/Industrial relations arenas, to name a few, which the voters can understand and influence their 2011 vote on.

    If this is a bold strategy to wrest back the agenda then it’s relying on intelligent debate from Fed Farmers/Business/media etc……if I was JK I’d be pretty relaxed about where this is going.

    • Daveo 6.1
      20 November 2009 at 10:57 am

      Don’t underestimate the potential for major conflict within Fed Farmers and the business lobby over this. Business owners in the productive economy have been asking for changes along the lines of what Goff is asking for years.

      It’s the monetarist ideologues at Business NZ, the EMA and the Feds that are behind all the wailing, not the businesses that actually have to try and turn a buck with a fluctuating exchange rate.

  7. randal 7
    20 November 2009 at 10:55 am

    dont forget the golden rule marty.
    i.e. he who has the gold makes the rules.
    there is no point in having a system that is supposedly ideologically pure and designed to cope with an economy of 350 million people unless there is some benefit to somebody.
    turning it loose on this country was just another mad kiwi scheme for using monetary “laws” to fleed an unsuspecting populacewhile the framers (framers) reaped the untold benefits that avalanched down on them before the 1987 crash.
    i.e. also designed to fleece the consumers and prick the bubble.

  8. Gosman 8
    20 November 2009 at 11:25 am

    Once again a commentator from the left of the political spectrum makes comments about economics which ignore basic economic fundamentals.

    In case you forgot, NZ runs rather high Current Account deficits. What this means is that the country needs to borrow a lot of money from people overseas to fund this. This explains why our Interest rate’s have to be much higher than some place like Japan. We need the money from the Carry trade to fund out lifestyles.

    The implications for having a less attractive interest rate is obviously less capital inflows which, ironically means higher cost of capital (i.e. Interest) for the consumer. This is unless you do something drastic to reduce the Current Account Deficit, which I not Labout failed to do anything about in their nine years in office.

    • mickysavage 8.1
      20 November 2009 at 11:32 am

      This is unless you do something drastic to reduce the Current Account Deficit, which I not[e] Labout failed to do anything about in their nine years in office

      Well they did pay off all of the Crown debt. They admittedly did not stop individuals borrowing more and more from overseas banks so that they could buy houses off each other for greater and greater amounts but it looks like Phil and David Cunliffe are now onto this.

      We need a few things:

      1. A capital gains tax. This incessant search for tax free profits in land speculation has to be curtailed.
      2. A lower and more stable exchange rate. Exporters including farmers have been hit for years.
      3. Greater local ownership of public NZ companies. The Cullen fund was one way of achieving this.

      Labour were part way there and were much closer to the ideal situation that Key is. I am sure that he is relaxed about the way that things are.

      • Gosman 8.1.1
        20 November 2009 at 11:44 am

        You can’t really get a lower and more stable exchange rate until you deal with the issue of the Current Account though. All you will do by lowering the OCR is increase the cost of capital for the average consumer and business. As for you views on the Cullen fund, where was it stipulated that this was for the purpose of local ownership?

      • Gosman 8.1.2
        20 November 2009 at 11:52 am

        On top of that, what other methods are there to lower an exchange rate and stabilise it?

        I don’t think Government intervention in the Forex markets is a sustainable policy long term. The Market determines the price of something, not the Government.

        • snoozer 8.1.2.1
          20 November 2009 at 12:18 pm

          You’ve got the causation a little confused, gosman. A large part of the current account deficit is profits heading overseas to people involved in the carry trade who have leant money to nzers for mortgages on overpriced homes.

          ideally we wouldn’t have this huge pool of easy credit for housing speculation and, then, we wouldn’t need to be sending the profits from the lending on that overseas.

          I have not seen it argued anywhere, except by you, that the reason for our OCR being relatively high is to promote the carry trade.

          • Gosman 8.1.2.1.1
            20 November 2009 at 12:39 pm

            You’d like to think that wouldn’t you snoozer but then again you have little idea of how the finacial sector works. By your reckoning we should be able to eliminate the Current Account Deficit just by imposing capital controls on foreign owned companies repatriating profits. Some countries have had this policy in place. One of them is Zimbabwe. For some reson they still have a massive problem with spending more on foreign currency than they get in. I wonder why?

    • Draco T Bastard 8.2
      20 November 2009 at 12:26 pm

      Once again a commentator from the left of the political spectrum makes comments about economics which ignore basic economic fundamentals.

      You’re the one who ignoring basic economic fundamentals. I know this because the neo-liberal economic policy assumes them all away so that it doesn’t have to deal with them.

      Also, the solution that you describe is best corrected by the people actually living within their means and not by more borrowing.

    • Bored 8.3
      20 November 2009 at 4:34 pm

      “Once again a commentator from the left of the political spectrum makes comments about economics which ignore basic economic fundamentals”….let you into a little secret here Gos, not everybody agrees with the economic fundamentals you propose. There are many theories and models, I have yet to find one that encompasses the total truth to the degree your statement claims. And to claim what you do ossifies any debate or change, which in itself is a recipe for disaster.

  9. Pat 9
    20 November 2009 at 11:51 am

    Gotta love that right wing champion Phil Goff.

    Export-led recovery, eliminate current account deficits (Treasury have some ideas on this, Phil).

    Why do they fight so much. Goff and Key are so alike they should be best mates.

    • Gosman 9.1
      20 November 2009 at 11:54 am

      You have a good point. All Goff is offering is a return to the where we were pre-1984 that served us so well. LOL!

      • snoozer 9.1.1
        20 November 2009 at 12:20 pm

        no. goff and others are saying let’s do better. No monetary policy concensus lasts forever. It’s stupid to say we can’t do better than we have now. That doesn’t mean returning to the past.

        Pat. The Left isn’t anti-exporting. The Left is pro-full employment and good wages, anti sending the profits of our work overseas – for that to happen the economy needs to be healthy.

        • Gosman 9.1.1.1
          20 November 2009 at 12:41 pm

          I just love this whole ‘Sending profit’s overseas is bad’ mantra that is being repeated here.

          Why don’t you just advocate massive capital controls like they have in places like Zimbabwe?

          • RedLogix 9.1.1.1.1
            20 November 2009 at 1:44 pm

            How about just retaining the profits here in NZ because they were created using NZ capital, labour and resources?

            • The Baron 9.1.1.1.1.1
              20 November 2009 at 2:55 pm

              Ah, but alot of them weren’t created using capital from NZ. Domestic capital scarcity is one of our most massive problems, because we have no realy asset base to allow domestic investment.

              So… are you actually saying that foreign investors don’t deserve a return? If so, then where is the cash going to come from to build anything?

            • Draco T Bastard 9.1.1.1.1.2
              20 November 2009 at 7:54 pm

              Ah, but alot of them weren’t created using capital from NZ.

              Actually, almost all foreign investment is in already existing and profitable businesses. The foreign capital did nothing for it and has often been used to close the local business down and shift it’s work overseas.

              Foreign ownership really is bad for the economy.

      • lprent 9.1.2
        20 November 2009 at 2:11 pm

        Your history is pretty poor. Actually probably closer to pre-1976 if you wanted to make comparisons.

        But in reality this will all be uncharted territory because the autonomy of the Reserve Bank didn’t exist prior to the current RBA.

    • lprent 9.2
      20 November 2009 at 2:13 pm

      Something about objectives perhaps?

      Key’s look more personal for him and his mates rather than being good for the country. Just look at the ETS.

  10. ben 10
    20 November 2009 at 1:16 pm

    Marty, you are leaving out half the story.

    Your concern under the current environment is that the interest differential between NZ and the world is too great, and you believe that an alternative monetary policy will alleviate this. Fine so far; let’s say you’re right.

    The problem is this. Let’s say the new regime does what you want and reduces or elminates the carry trade by reducing or eliminating the interest differential. Now New Zealand’s interest rates are tied to foreign interest rates (perhaps with a smaller margin). Even if this does reduce exchange rate volatility, what is sacrificed is control over our own money supply and inflation!

    Strangely, this basic trade-off is missing from your piece, as if the consensus that has existed for 20 years existed for no reason at all. Of course the world is simple when you leave half the story out.

    One argument for preferring exchange rate volatility to inflation is that the exchange rate is a single, visible price, that directly affects relatively few, whereas inflation interferes with every transaction in the economy, introducing distortions and frictions everywhere. You could at least acknowledge this and consider why the current setup isn’t worth the cost.

    Your analysis is worthless without at least considering this and other tradeoffs.

  11. Nick C 11
    20 November 2009 at 2:11 pm

    The problem with any debate about Labour’s proposed changes to monetary policy is… that they havent proposed any changes.

    You can rave about the problems of the status quo all you like, but until an alternative is actually suggested we have no way of determining where Labour can improve the situation or not.

    I do wonder however given the negative reaction of most commentators whether Phil Goff will go hide in his shell and never announce any spesifics, hoping that everyone forgets he said it.

  12. mike 12
    20 November 2009 at 6:42 pm

    Anyone else thinks it’s a little strange that after 9 years in power (and with Goff a senior Minister) there was no hint of monetary policy change……. Just 12 months into opposition and the system doesn’t work and the whole thing needs an overhaul???

    Goff and labour are a frigg’n joke and this desperation for attention is just laughable.

    • RedLogix 12.1
      20 November 2009 at 8:06 pm

      Yes, very reprehensible. Helen Clark and Michael Cullen have of course defined the Labour Party for all time. Goff must not say anything ever.

      • mike 12.1.1
        20 November 2009 at 8:36 pm

        Not a great rebuttal Red but you are in an indefensible position – the exact reason Goff will never lead labour to victory. He’s tarred with the same ‘old’ brush

  13. SPC 13
    21 November 2009 at 7:19 pm

    You have all overlooked a changed reality to this debate since June

    Bollard’s new policy (announced June) is the major reform of monetary policy (and under current policy settings) which Goff is seeking. He seems to have not noticed its arrival.

    It’s called the “core funding ratio’ it diminishes the amount of offshore money financing bank lending and allows a looser “local” monetary policy (lower OCR).

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10 609289

    Sure more could be done – if government gave the RB more tools.

    Such could be a surcharge on mortgages (which could go on as an alternative to raising the OCR). Perhaps at .5% or up further to 1% of the mortgage.

    Otherwise government itself could

    1. Apply GST to loans on property and use the revenue to reduce tax on interest income (to a flat rate 20% – the most reasonable thing is to allow deduction of the CPI rate off the interest level before tax is assessed but some find complications to this process, a low flat rate achieves the same result for most of those able to save and is simple to apply and with PIE about now is not going to lose much income to government).
    2. Apply a form of CGT on rental property (paid as an annual land tax, rather than on the sale of the property – this so the income to government is consistent and is not avoidable).
    3. Apply a Tobin tax on New Zealand currency trades – and tell the IMF this is to help reduce the government’s budget deficit. And assist in an export led recovery – reduce the BOP deficit.

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