COMMENT: If you follow conspiracy theories, you’ve no doubt come across some of the claims about the US Federal Reserve, the national agency which is tasked with controlling the American monetary system. Technically the ‘Fed’ isn’t owned by anybody, and this has given rise to claims that a secret cabal of the uber-rich controls this body and uses it to line the pockets of its shadowy overlords by manipulating the global monetary system.
These claims are anti-Semitic nonsense and they confuse statutory independence with private benefit in a way which doesn’t stand close scrutiny. In reality, central banks need to be independent so that they can work in the best interests of their countries, overseeing the monetary system free of political interference and, for evidence of this you need look no further than New Zealand prior to the 1990s. Back then our Reserve Bank was at the whim of the Government of the day and followed the dictates of that Governments policy. Anyone who remembers what happened to the New Zealand economy, particularly under former Prime Minister Rob Muldoon, will quickly recognise the folly of that approach.
Following on from Muldoon and, arguably as a direct result of that era, the 1984-1990 Lange Douglas Government moved to remove the ability of Governments to interfere in the activity of the Reserve Bank and, in 1989, it was given total autonomy under the Reserve Bank Act. This ground-breaking piece of legislation put New Zealand ahead of most of the rest of the world and was subsequently copied by other jurisdictions including the Reserve Bank of Australia and the Bank of England in the UK.
Over the following two decades this independence contributed to, arguably, the most economically stable and prosperous period of our nation’s history. Despite several global economic crises over that time New Zealand experienced price stability and low inflation and, while it would be unfair to give all the credit to the Reserve Bank, the fact that our economic performance was similar throughout the terms of both National and Labour governments between 1990 and 2012 is an indicator of the importance of that institution to our economic stability.
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Bad decisions: Reserve Bank Governor Adrian Orr and Finance Minister Grant Robertson. Photo / Getty Images
Sadly, the wisdom of the Reserve Bank started to unravel in 2013 when then Reserve Bank Governor Graeme Wheeler introduced the loan-to-value-ratio lending restrictions "to help slow the rate of housing-related credit growth and house price inflation".
A couple of years later, when they had failed to do this, Wheeler said the policy was aimed at “reducing financial stability risks as house prices became increasingly stretched”.
Eight years on from their introduction, LVRs have achieved neither objective and now represent the single biggest obstacle to buying a first home – in effect shutting tens of thousands of young Kiwis out of the housing market. They remain, not because they work, but as a glaring testament to Reserve Bank hubris and intransigence over a failed policy.
Ashley Church: “The wisdom of the Reserve Bank started to unravel in 2013.” Photo / Ted Baghurst
It can’t even get its forecasting right. It didn’t seem to anticipate that its lockdown measures in March last year – cutting interest rates and completely removing all LVR restrictions for all buyer groups, then giving several months warning that it was going to put them back on – would result in a huge spike in house prices, and it seemed incredibly slow in trying to address that spike. And this week it was shown to have got it wrong on inflation, with its prediction of inflation running at 2.5% eclipsed by the reality of 4.9%.
This comes against a backdrop of attacks on the independence of the Reserve Bank by Government ministers. This started in July 2018 when then Deputy Prime Minister Winston Peters instructed the Reserve Bank to add an employment goal to its objectives, a move away from the clear focus on keeping inflation in check.
Then, in February this year, Finance Minister Grant Robertson wrote to the Reserve Bank Governor Adrian Orr instructing him to include house prices in the bank’s decision-making process. The Reserve Bank was instructed to set the policy targets which supported “sustainable house prices and dampened investor demand for existing stock to improve affordability for first home buyers”. In other words, the Government was telling the Reserve Bank that it understood the economy better than the Bank and was instructing it on precisely how it should fix the housing market.
Robertson has justified this interference using the excuse of “electoral legitimacy” (which is code for “we got lots of votes so we can ignore the legislation”), but the reality is that it constitutes a return to the bad old days when governments tried to use monetary policy to achieve their ideological and re-election aims.
Given the double whammy of a Reserve Bank which lacks wisdom and a Finance Minister who has discarded longstanding conventions of independence, I have real fears for our economic stability in the years ahead.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
