Search

Today I wrote an Opinion Piece for the NZ Herald which is on the front page of their publication on the web. You can read it below or at this link:

https://www.nzherald.co.nz/business/robert-macculloch-the-case-against-the-reserve-bank-and-the-finance-minister/WANWN3KGNDS5SWES3N2URJZROM/


The Reserve Bank of NZ (RBNZ) has a formal objective to keep inflation in the range of 1 to 3 percentage points, as specified by the Remit for the Monetary Policy Committee (MPC), which was signed and “agreed by” the Governor and Finance Minister. This range constitutes the official definition of “maintaining stability in the general level of prices” in the RBNZ Act. However, both signatories to the Remit have gone and wilfully ripped up their sworn aim.


Let’s build the prosecution’s case. Exhibit A is that the defendants have already admitted guilt. At the last meeting of the Bank’s Monetary Policy Committee (MPC) its members confessed that annual consumer price inflation is expected to peak around 7 percent in the first half of 2022”.


Are the shocks hitting us short to medium term? No. The Bank says A broad range of indicators are highlighting … ongoing inflation pressures”. Has the misconduct of monetary policy which has been inciting the inflationary breach ended? No. The Bank says that the Official Cash Rate (OCR) “is stimulatory at its current level”.


Not only has NZ’s inflation target been ignored, but the defendants who were charged with achieving it are still pouring gasoline on the fire, as we speak.


Exhibit B comes from an expert witness, Professor John Taylor, inventor of the “Taylor Rule”. That Rule is a simple formula explaining how a Central Bank can quell an inflationary shock. It has proved extremely influential as a robust guideline when setting Official Cash Rates around the world.


What does it say? To contain a surge in prices, the Rule states than an increase in the OCR of more than one percentage point is required when inflation increases by one percentage point. The reason is to ensure that real interest rates go up to reduce borrowing. Without a rise in real rates, debt financed spending can continue to fuel inflation.


So what’s been going on in NZ? Annual inflation, measured at March 2021, was 1.5%. Annual inflation at March 2022 was 6.9%. In other words, inflation has risen by over FIVE percentage points this past year. However the RBNZ has only increased the OCR by little over ONE percentage point over the same period, sending short term real rates deeply negative. The Taylor Rule is powerful evidence that there has been no intention, whatsoever, of our authorities to meet their obligations in terms of keeping inflation on target.


Exhibit C is NZ’s record low unemployment rate, which stands at 3.2 percent. Had unemployment been sharply increasing, there would have been a justification for holding back on steep hikes in the OCR to contain inflation. Yet the MPC says employment is above its maximum sustainable level”. Our super tight labour market provides no argument for the defence.


In their desperation to be declared innocent of breaching NZ’s agreed inflation aims in the face of overwhelming evidence to the contrary, the Governor of the RBNZ and Finance Minister have claimed others are committing the same offence. Global consumer price inflation is high, well above most central banks’ targets”, argues the Monetary Policy Committee.


Attempts to present the situation abroad as being the same as in NZ are misleading. Although the US Federal Reserve also has a mandate of “stable prices”, these words are not defined in terms of an inflation target that has ever been “agreed” by the Fed Chair and US Treasury Secretary.


For most of its history, the Fed baulked at providing even its own internal definition. Although a target did emerge when Ben Bernanke was Chairman, the Fed subsequently changed it into one that was intentionally vague and ambiguous. Targets are not all alike, contrary to the MPCs insinuation.


In stark contrast to the Fed, our RBNZ has no discretion to play around with the meaning of price stability. The point of the explicit inflation target signed off between the RBNZ Governor and Finance Minister has been to provide a clear agreement between policy makers, thereby limiting the scope for discretionary policy actions”. Who’s the quote from? A bloke called Adrian Orr writing for OECD Policy Studies in 1994.


So what has been driving OCR decisions? Populism. After having kept the cash rate so low for so long and embarked on a $53 billion Quantitative Easing (QE) Program, the Bank is now in panic mode. It is panicking at the prospect of a full-on policy reversal that will highlight past mistakes and provoke widespread debt distress.


To the extent folks get into trouble paying back their mortgages the next few years, the blame lies squarely with our RBNZ Governor and Finance Minister. Together they encouraged a borrowing binge to buy houses at wildly inflated prices, financed by dirt cheap credit, both of them turning a blind eye to the breach of the target to which they mutually agreed, neither of them learning the lessons of the Global Financial Crisis in 2008.


The RBNZ was once lauded around the world for making NZ exceptional. It pioneered inflation targeting. We became the gold standard of monetary credibility. Now our hard-fought success and huge reputation built up over 30 years lie in ruins. Exhibits A, B and C reveal how the RBNZ and Finance Minister have overseen the trashing of their “agreed” inflation target.


The official defence is that other Central Banks are just as bad. That’s not true. Not one of them operates under the same laws as ours.


The US Fed Chair and Treasury Secretary have not broken any agreement. By comparison, our RBNZ Governor and Finance Minister have driven a truck through their one. It happens to be the single most important agreement that has been underpinning our economic security since 1989.

My regular column in the National Business Review came out yesterday. You can read it here, https://www.nbr.co.nz/node/233924, or below:

In 2008, Prime Minister Helen Clark’s Minister of Housing, Maryan Street, gave a speech entitled, “Home ownership - Protecting the Kiwi Dream”. The same theme was picked up by Labour’s leader in 2015, Andrew Little, who is now Minister of Health. At his first annual conference, he promised to restore the Kiwi Dream and defined it as being "a home of your own, a stable income and time with family and friends".


The story keeps repeating. The Beehive reported in 2018 that PM Ardern “says Kiwi Build is restoring the Kiwi Dream of home ownership to thousands of families who have been priced out of the housing market in Auckland and around the country”. Since then prices have risen by another 50%.


By comparison, the American Dream, as originally popularized by James Adams in 1931, was defined differently. It was couched in terms of ideals. Adams described it as “a dream of a social order in which each man & each woman shall be able to attain to the fullest stature of which they are innately capable & recognized by others for what they are.”


Martin Luther King invoked his own vision of the American Dream in his famous speech under the Lincoln Memorial in 1963. His Dream was that his “four little children will one day live in a nation where they will not be judged by the colour of their skin but by the content of their character”.


Picking up on these definitions, Nobel Laureate Robert Shiller has argued that the American Dream was originally conceived as having a strong moral underpinning, like giving respect and equal opportunity to all.


But not in NZ. Here the Kiwi Dream is repeatedly being defined in materialistic terms. It is about becoming a (wealthy) home owner. It is about the personal gratification received from having a stable income.


It’s not a partisan thing. National has also embraced this characterization of the Dream. In 2020, the party’s leader, Judith Collins, stated “Sadly, the dream of home ownership has slipped further away under the Labour-led Government … It helps give people financial security.” Finance Spokesperson, Nicola Willis, claimed earlier this year that “this Government is destroying the NZ dream of home-ownership”.


In doing so, Labour and National have aligned their positions with former US President Trump’s Republicans, who reframed the American Dream in exactly the same way. The US Secretary of Housing worried back in 2017 “that millennials may become a lost generation for homeownership, excluded from the American Dream.”


Our PM has even reassured folks that her government would go to great lengths to prevent them from losing their property bucks, saying “Today’s first home buyers, once they’re in the market, we want to ensure we don’t have a housing crash”. Buyer don’t beware.

Former Labour Finance Minister Sir Michael Cullen added yet more assurances when he headed the Tax Working Group. Capital gains should be taxed, he declared. Yet he quickly abandoned his own hallowed principles by declaring that most peoples’ primary source of capital gains, namely their own home, should be exempt.


Better to hit business owners with capital taxes who are investing to produce new types of valuable goods and services than a person who is a home-owning millionaire, according to Sir Michael’s Group.


There’s a simple explanation for such a stance: Labour and National’s definitions of the Kiwi Dream both don’t include becoming an earthshattering inventor or entrepreneur. The high risk to which these folks expose themselves runs counter to Labour’s Dream of a “stable income” and to National’s Dream of “financial security”. By contrast, risk-taking is fully compatible with American James Adams’ ideal of ensuring that every person is able to push to the limit of their innate capabilities.


So a strong political consensus exists in NZ, at least on this issue. For our two major parties, the Kiwi Dream is a materialist property-owning one. It even comes complete with no-crash-in-value and no-capital-tax guarantees.


As a result, National and Labour have found themselves hoist by their own petards. Having defined the Dream in this particular way and firmly entrenched it in our culture, politicians from across the divide have found themselves unable to deliver on it.


How do we know? Lord Ashcroft, the former Conservative Party Deputy Chair, commissioned a poll of 5,000 Kiwis in 2021, called “Living the Kiwi Dream?” He found “Voters rate housing as the single most important issue facing the country, even ahead of dealing with the pandemic. Whatever the causes … the results are clear to them: growing inequality between those on and off the property ladder, parents worried about prospects for their children, and young people wondering at the point of trying to make a go of things in NZ”.


Due to the bipartisan failure to achieve the bipartisan Kiwi Dream, the Enabling Housing Supply Act was passed as part of a bipartisan deal to shield our political class from intense public wrath. The Act allows for 3 townhouses of 3 storeys to be built on almost any urban site without a consent. Is it good legislation? Who knows? The NZ Treasury has not done its own Cost-Benefit Analysis (CBA) to find out. Attorney General David Parker told Parliament how a CBA was outsourced to private consultants, which is no way to independently assess such a profound change in public policy.


This article, however, is not about what policies can best address the housing issue. It is more basic. It is about the corruption of our values by Labour and National whereby success in terms of the Kiwi Dream now equals owning a house. No wonder voters told Lord Ashcroft how they “felt that whether or not they were successful in life was now completely out of their hands”.

 

SUBSCRIBE

Thanks for submitting!

CONTACT

Robert MacCulloch