Treasury and the Reserve Bank have words

By Matt Nolan 30/06/2015


I am not blogging at the moment – and I’m incredibly sorry about that.  I won’t really be back until I can commit to being back properly – which won’t be until I’ve completed a lot of modeling work related to income inequality in New Zealand.  I am not back today to talk about any literature on inequality though – I realise there are a lot of things I can post about here, and I have views, and those views will come in due course.  But not today.

However, there have been a multitude of developments I should post on regarding an issue I angrily stopped writing on nearly two years ago – the area of financial stability.

Firstly, there is Michael Reddell’s blog.  He is a very good New Zealand economist who would be among the top of my reading list if I was still involved in these sorts of issues.  He recently stated:

The Reserve Bank appears to have taken on itself some responsibility for trying to manage house price fluctuations.  However, the Bank’s involvement appears to be based on a misconception of what is going on, and a misapplication of insights from financial crises abroad, notably that in the United States last decade. There is little or no evidence that financial stability in New Zealand is in any way threatened.  The LVR restrictions –  and others the Bank appears to be contemplating – undermine the efficiency of the financial system.

Eric Crampton has also added the important view about how increased direct regulation threatens actual independence.

However, the big move has been Treasury turning around and criticising the Bank with this gem:

However, Treasury has been engaging with the RBNZ to suggest that although we accept that house price changes can have macroeconomic implications, the RBNZ’s mandate is focused on promoting financial stability, and therefore the policy proposals should be reframed to focus more clearly on reducing systemic risk rather than asset prices.

There are three extreme ways to take this:

  1. The Bank’s communication has been unclear, and this is a push to try to improve the way policy is justified and evaluated
  2. The Bank has been implementing unjustifiable policy due to its own misunderstanding of the issues
  3. Treasury is acting in a politically motivated way, and this illustrates the gradual loss of central bank independence.

I would never come down on any of these explanations as an extreme – but they are useful to consider when we think about how recent events will be interpreted and considered.

And my view on the policies involved – it hasn’t changed since prior to the implementation of LVRs, I’d instead note that views may have changed across organisations relative to 2013.

Sidenote:  There was also this well written bulletin piece by the Bank.  It is well written, but I feel that it missed the critique people actually have – namely the dual concerns of “does risk weighting make any sense when we are talking about systemic risk and externalities stemming from the lender of last resort function” and “is the implied equity ratios for banks really high enough, given how low it is relative to other firms due to the belief by banks and depositors that banks will be bailed out”.  In this case, as in the above case, the RBNZ keeps answering questions people aren’t asking, and missing the questions people are justifiably asking.

Sidenote 2:  This is also not at all related to monetary policy and any perceived failure due to the long period of elevated unemployment NZ has had – this is a relevant issue to discuss, but it is separate and involves a discussion about how we view potential output.  Eg here and here.  If the Bank’s decrease in its view of potential in June 2012 was justifiable and the increase in June 2015 was justifiable then their actions were justifiable – you can use that to defend or to attack the Bank, it is simply a framework.