Search
  • rmacculloch

Did the RBNZ Sucker the Finance & Expenditure Select Committee?

At the recent meeting of Parliament's Finance & Expenditure Select Committee, the Reserve Bank Governor was reported as voicing “discomfort” at being questioned on government spending. “We don't get involved in fiscal policy. That is the Government,” he said (see below).


If only things were so simple. Ever since the RBNZ purchased $52 billion of government bonds which are currently sitting on its balance sheet, the Bank immersed itself in fiscal policy. That purchase led to the RBNZ signing an indemnity with the Minister of Finance (on behalf of you, the Kiwi taxpayer) covering losses on those bonds.


The indemnity "smoking gun" document states, "The Crown Agrees to Indemnify the Reserve Bank in Respect of All Losses which the Reserve Bank occurs in respect of the Indemnified Bonds" (see below, complete with signatures of both Grant Robertson & Adrian Orr).


What are the losses on those bonds? They stand at about $6 billion due to the rise in interest rates.


And if the RBNZ isn't "involved" in fiscal policy, then why do economics texts say lines like, "Because Quantitative Easing (QE) meant that the central bank expanded its balance sheets through the purchases of government debt, it blurred the separation of responsibilities between the fiscal authority and the monetary authority" (see below)?


And if the RBNZ isn't "involved" in fiscal policy, then why do other academics & practitioners describe how Quantitative Easing means that, "Monetary policy now has large fiscal implications" (see below)?


And if the RBNZ isn't "involved" in fiscal policy, then why does the Treasury Secretary attend the meetings of the Monetary Policy Committee, alongside Reserve Bank officials, and was at those meetings when QE was discussed?


In short, the Reserve Bank of NZ could not have been MORE involved in fiscal policy these past few years - ever since it went down the road of printing money to help the government win the last election by effectively paying its bills. Political economists have known for a long time that you can swing an election with such policies, but the people will pay the price afterwards, in terms of higher inflation, which is exactly what has been happening in NZ.


By the way, the German hyperinflation of 1923 was caused by monetary & fiscal policy working together - the pressure on that government to pay for reparations after World War 1 was relieved by monetarizing public debt. Yes, the purchasing of government bonds by the Central Bank and fiscal policy are inextricably "involved" with one another.


It's a shame the MPs who sit on the Finance & Expenditure Committee lack the technical expertise in the subject of monetary economics to have a proper debate with Reserve Bank officials who seem to be preying on that Committee's lack of such knowledge.


Sources:

https://www.rbnz.govt.nz/-/media/ReserveBank/Files/News/2020/Letter-of-Indemnity-from-the-Minister-of-Finance-9-August-2020.pdf


https://www.economicsobservatory.com/quantitative-easing-and-monetary-financing-whats-difference


https://www.stuff.co.nz/business/128762274/orr-agrees-government-spending-feeding-inflation-raising-ocr-risks-recession


https://voxeu.org/content/quantitative-tightening-protecting-monetary-policy-fiscal-encroachment