Key misses the point on financial regulation

By Matt Nolan 19/06/2013

I know it’s politics but seriously – this is why the confusion between “affordability” and “financial stability” (guess what they are separate things) leads to ridiculous statements, this time from the PM.

“Yes I accept absolutely and endorse the view that the banks should be forced to use this (LVR limits) as a legitimate tool.

“I don’t think it should be a tool that is used to write high LVR ratios for a bunch of rich people, and lock out a whole lot of first-home buyers.”

“I’m not saying it’s going to be perfect or there won’t be some implications but for the most part we want those first-home buyers to get a chance to buy a home.”

“So you can’t tell me that the trading banks can’t work with the Reserve Bank and make sure that those people are better looked after.”

Let’s ignore the fact that “rich people” have equity, so can afford to actually put a deposit down, so aren’t going to be hit in the same way by LVR limits (all it does here is ensure these groups reduce leverage).  And let’s also ignore the fact that the riskiest speculators won’t get hit by this policy … as they won’t be able to get funding through banks in the first place.  Let’s also ignore the fact that banks are supposed to be competitive, and the RBNZ shouldn’t really be trying to “wheel and deal” them.

Ok then, given this LVR limits are still being looked at because of concerns about systemic risk in the banking system – first home buyers do indeed take larger loans, and will be at greater risk of defaulting, trying to “exclude” them is just entirely missing the point of the policy.  Yes LVR limits, or increasing the costs for high risk loans, are not a particularly good tools – but turning around and making them completely useless and not dealing with financial stability at all is ridiculous.

But you may say “Key is just concerned about affordability and wants the RBNZ to solve it”.  This is ‘disingenious’ at best.  It is the GOVERNMENTS job to work on equity and redistributionary type policy – not the frikken central bank.  If the government is concerned about affordability for first home buyers, then focus on government policies for this – don’t lean on the independent central bank.

COULD YOU PEOPLE STOP BLAMING THE RBNZ FOR EVERYTHING – IT DOESN’T MAKE ANY SENSE (yes I’m shouting – but in a slow loud manner, instead of an angry one.  Maybe this will get people to actually “think about why” they keep saying these things, I’m experimenting here).

Ya know if we are thinking about affordability then we can look at issues that increase the supply of housing, or income transfers (although a lot of this would be capitalised in house prices), as “solutions”.  Stop trying to blame the central bank for the fact that trade-offs exist and work with the trade-offs at hand.

0 Responses to “Key misses the point on financial regulation”

  • …or change the trade-offs… Again, a political matter, not an RBNZ matter.

  • I suspect our definition of trade-off is slightly different here. Let me clarify my own.

    I don’t think we can change the underlying trade-offs that exist – as they inherently represent the set of possibilities that different policy would allow for.

    Perhaps you are gunning for changing incentives for people, so that we head to a different outcome among the possibilities that are available? That is cool, but it just isn’t quite the context I use the term “trade-off” with when discussing policy 🙂

    The term trade-off does seem a bit loose I guess – it can be used to discuss the trade-offs an individual faces, or the trade-offs policy makers face. I suspect you were using it in the first context, and I was using it in the second!

  • I suspect you are correct! Which is not to say we disagree from my pov. Perhaps a better definition is “incentivised or apparent trade-offs”

  • I don’t think either of us were wrong – just trying to define what I meant by a term a bit more neatly. From what I can tell we seem to be agreeing, so I’m really just commenting for the sake of commenting 😉