By Matt Nolan 30/05/2013

Hey RBNZ, love your work and all that.  But I have to point out something about today’s speech.

I love seeing you guys discuss what is going on with the public, describing the factors, and talking about risks – this is incredibly valuable!  And given your views, I get why you are jawboning the dollar, that is all good.  But, I’m not sure you’ve really thought through the way people will interpret some parts.

Key point – do you realise that one of the main reason people think you control the structure of the economy (you don’t) is because you comment on it a lot, and never explicitly point out that you don’t control it.  The reason you have the Greens saying lets get the RBNZ to fund the rebuild as a “solution to structural issues” and the reason you have other economists and journalist going on about having the RBNZ “rebalance”, is because people explicitly think you are doing things to determine the underlying make-up of the economy.

Now I know, this is a bit ridiculous, but let’s read parts of the speech:

One of the more complex analytical challenges for example, is whether New Zealand can achieve the resource allocation needed for the rebuilding activity in Canterbury and Auckland without seriously damaging its tradables sector. This damage could occur if the relative price changes needed to induce the supply response spilled over into broad inflationary pressures, necessitating tighter monetary policy and creating further upward pressure on the exchange rate. This is one reason why reducing the Government’s demand for resources through fiscal consolidation is so important.

Two things here:

  1. How many people are going to read this and say “well just change the resource allocation then” or with an eye to policy “well just don’t lift rates then, you frikken choose them” (even though you don’t) – this kind of monetary policy fine-tuning is ridiculous, make it clear!
  2. Also, this isn’t a concern as much as its a trade-off that DOES exist.  We are experiencing the equivalent of an investment boom in the non-tradable sector … this is what a rebuild is.  We will see capital inflows, we will see a higher dollar, we will our net international investment position deteroriate.  Your final line indicates that you appreciate this – but personally I think you should be directly say it is going to happen, and that it is not due to you.

As a sidenote, from the many comments I’ve been hearing in recent weeks about “competitiveness”, “debt”, and “exports” I think I’ve figured out a solution to our problems.  Time to cancel the rebuild.  Sorry Eric, Seamus, and Paul – it is for the good of the “goodies” in our economy. (Note sarcasm)

Another concern

Ahhh this reads a little bit strangely:

Despite being over-valued, house prices could continue rising for some time. In this respect, the recently agreed Auckland Accord reflects the growing need to improve the responsiveness of housing supply. Other measures can help. The adoption of the full range of supply side measures in the Productivity Commission’s recent report would lower costs, and the demand for housing could also be moderated by changing the tax treatment of housing to reduce its attractiveness as an investment relative to other assets. But the current supply/demand imbalance in Auckland is very large and it could take several years to address this through supply measures alone.

Adding to the challenge is the decline in capacity in the construction industry in the last five years. According to the latest Business Demographic Statistics, in February 2012 there were 5,000 fewer firms and 14,000 fewer employees in the construction sector than there were in February 2008. Despite this overall decline, construction sector employment in Canterbury had increased by 15 percent. Although the construction sector is a relatively fluid industry and attracts workers from other sectors, the level and pace of construction activity outside Canterbury will no doubt be constrained by the pull of resources into the Canterbury rebuild.

We aren’t building enough houses (a fundamental), but their price is too high (given fundamentals).  Any “bubble” component is likely to be independent of supply issues after all – and this difference may have needed some articulation.


One should be cautious in predicting the size of the impact of such measures when house prices are increasing rapidly, but we believe that macro-prudential instruments could have played a useful role in building up capital buffers and reducing credit demand and asset price pressures in the housing price boom of 2003-2007.

When your concern is around financial stability, the key thing is that you are making the “system resilient to a price shock” and dealing with any “perceived externality in the system”.  You don’t even need lower credit demand or asset price pressures in this case – the greater capital buffer does the trick!  Might be worth articulating that more clearly – so people realise “success” doesn’t depend on “popping bubbles” or even “preventing bubbles” … you are not trying to stop people hurting themselves after all!


RBNZ – this is the sort of comment your own language leads to from politicians and the public:

”At the beginning [of his term]  he seemed pretty complacent but he has rapidly appreciated that New Zealand’s economy is in deep trouble and he’s now starting to do the kinds of things, very slowly and not as full on as I think he needs to, to help rebalance the economy.”

I would be very surprised if this is actually how you felt.  Although I completely blame Norman for this bit:

‘When I was suggesting  intervening in the currency six months ago, all the mainstream economic commentators were all saying that was a crazy thing to even talk about,” Norman said.

”Now the Reserve Bank Governor is doing it. He’s doing it in a way where he doesn’t have much ammunition, but actually he is doing exactly what I said he should be doing.”

Did you actually talk to any mainstream economists – and you have been suggesting something entirely different, namely using QE as a form of inflation tax to pay for the rebuild – not having the RBNZ intervene on the peaks and troughs of currency movements (which is already within their mandate, and based on a clear set of conditions).  Also the “rebalancing” issue is a medium-long term one, peaks and throughs in the dollar are a short term issue.  Can people attempt to understand “time” before they try to “design the economy”.

Man I hate how much “mainstream economists” get bashed without being able to defend themselves.

In fact, why doesn’t a journalist actually check with a “mainstream economist” before letting politicians bash them.  Bah, whatever.