The dangers of “financial stability”

By Matt Nolan 01/07/2013


In an otherwise clear, insightful, and useful speech regarding the use of macroprudential tools – and why – the Reserve Bank states the following

While the Reserve Bank’s mandate is to promote financial stability, not social equity, there are clear implications here for housing affordability. As house prices and debt levels trend increasingly upwards, so too housing becomes less affordable, particularly for first home buyers. While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term. Such measures should also reduce the risk of a sharp housing downturn and the loss of equity that would result, particularly for highly indebted home owners.

And from the summary:

“While macro-prudential policy measures might make credit less accessible for a period, they should help to make house prices more affordable in the longer term,” Mr Spencer said.

Sigh.  Is it necessary to go down this road, does it have anything to do with RBNZ policy?  Do people even know what they mean by “affordability”?  If our concern was due to a bubble, does mentioning affordability confuse or help with understanding Bank policy?  Does their comment make any sense (note, I don’t think it really does)?

Why bother defending the Bank from politicians who act like the RBNZ is responsible for everything (here, here) if the Bank is keen to make arbitrary ill-defined statments that seem to imply just that?

Is financial stability not actually about financial stability – but a catch phrase used to justify moral judgments regarding “rebalancing” and “deleveraging“.  This is one of the dangers of focusing on financial stability in such an ill defined way, and one of the reasons why Scott Sumner has pointed out why care must be taken (extra comment here).

This speech was otherwise a good set of clear statments that discussed RBNZ policy.  Why try to pretend it does other things?  It is statements like this one about affordability that makes people believe the central bank can dance upon the head of a pin and make happinesses and manufactured products rain down from the sky.