Captain deluded or market poodle?

Dominion Post

History will not be kind to retiring Reserve Bank of New Zealand governor Alan Bollard. But then he will be in good company along with Alan Greenspan, Ben Bernanke, Jean Claude Trichet, Mervyn King et al. His 2010 book Crisis about his experience of the GFC suggested a man tougher on the big banks behind the scenes than he appears in public, yet like all his overseas counterparts he remains deeply wedded to the economic conventions and dogma that have caused an escalating series of crises over the last 30 years. Perhaps another book when he is no longer governor will be more forthcoming about his tenure, his decisions and relationships with the institutions he had responsibility for overseeing. For the most part his statements in public have been bland and lacking in apparent conviction particularly with regard to house price inflation/housing bubble and the level of the exchange rate. Maybe he has strong words to say in private or via proxies but his public criticisms are the equivalent of being savaged by a poodle.

To be fair to Bollard the RBNZ is more than just one person and he is bound by a Reserve Bank Act that limits his official focus to controlling inflation within a prescribed band (although even here it has failed as the considerably understated official inflation figures have been “temporarily” outside the 1-3% band for years)  The most commonly used phrase in the RBNZ lexicon seems to be “monitoring closely” ie watching without doing anything. Bernard Hickey does a good job of taking Bollard to task over his inaction in this March article. Talking about the paper tiger technique of Reserve Bank’s everywhere – jawboning – Hickey says:

“Instead, yet again, the Reserve Bank is bluffing because it is locked into its straightjacket of a CPI-index inflation targeting regime with a free floating currency and no capital controls. If it cuts the OCR to punish the currency traders it risks repeating the mistakes of 2003 and 2004 when it allowed the housing market to get away on everyone.”

He then goes on to talk about the veiled RBNZ threat of other “prudential” measures. Unfortunately these have been threatened half heartedly before and ignored by the banks as empty threats. Maybe they are just for public consumption.

“The Reserve Bank could also use some macro-prudential controls to limit the sort of low equity borrowing and foreign funded lending going into the housing market. It could impose loan to value ratio limits on housing lending. It could increase capital requirements for housing lending.

The bank’s existing core funding ratio is helping to reduce the amount of hot money flowing into our housing market, but a higher ratio and a focus on domestic rather than foreign funding would help.”

Gareth Morgan is even more critical over the RB’s inaction during the debt fuelled housing mania up to 2007/2008

“Here the banking crisis is not so severe although, for sure, in line with Reserve Bank directives, the banks extended way too many loans to ordinary New Zealanders speculating on house prices.

In the midst of that orgy, Governor Bollard wrung his hands and said he wished Kiwis wouldn’t cause such an asset price bubble, but on the other hand he excused his impotence by adding the central bank couldn’t do anything about it. Shameful. That has landed us in the mire.”

One comment I picked up on from his book in an article I did last year was in the same vein as Luxembourg President and Euro Group Chairman Jean-Claude Juncker’s comment that “when things get serious you have to lie” because of the potential reaction of financial markets. In Crisis Bollard admitted to colluding with the chairman of a Parliamentary Select Committee over the direction of questioning to avoid having to answer hard questions that might spook the “markets”.

  “I knew I might be asked questions about exchange rates, foreign reserves, bank liquidity and a whole range of topics on which straight forward answers could upset the financial markets. The day before the hearing I rang the chairman and explained my concern. He readily understood the dangers and assured me that he would guide the Committee away from dangerous questions in public.”

We have a system where supposedly the most knowledgable and influential people in the country guide our political and economic destiny. Instead we find not only our Reserve Bank governor but our elected Finance Minister and Prime Minister are in thrall to faceless financial markets and a financial industry including our banks and supported by Treasury that threaten Armageddon every time someone suggests reigning them in.

Not only that but their “junk economics” is supported by an academia that is at best intellectually deluded, at worst corrupted by corporate money. For an accessible and comprehensive explanation of the GFC and how deep the rabbit hole is, watch Charles Ferguson’s brilliant Inside Job or read Matt Taibbi’s angry but incisive articles in Rolling Stone. Have a look at Steve Keen’s Debunking Economics: The naked emperor dethroned?, a devastating deconstruction of the economic theory practiced and supported by both National and Labour, the Reserve Bank and Treasury. If at the end of that you can put your hand on your heart and say what we are experiencing is just another minor blip in capitalism and that we are in the best of hands, I salute your optimism but hold great fear for your powers of reason.

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