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.

  • I’m more concerned with the ramped up intervention comments.

    RBNZ simply is not capable of acting like a hedge fund. They have Bloomberg Terminals, surely they realise how out of their depth they are?

    They are smart people, but not smart enough to take the other side of the trade from George Soros et al.

    • I’m assuming they are more talk than action. I am not particularly keen on our monetary authority taking on a lot of inherent risk with no democratic mandate – it is up to elected officials to arbitrarily piss people’s labour output against the wall 😉

  • Miguel Sanchez

    “you are not trying to stop people hurting themselves after all!”

    I’m afraid you may have lost that battle Matt. According to this speech, the Reserve Bank’s mandate now extends to protecting overseas currency traders from hurting themselves:

    “Investors also appear to downplay the liquidity risks inherent in a small market like New Zealand. Our past exchange rate cycles have exhibited substantial overshooting followed by a sharp and rapid exchange rate depreciation. Such rapid exchange rate corrections reflect the drain in market liquidity that can occur when a small market like New Zealand begins to turn down.”
    “We can only hope to smooth the peaks off the exchange rate and diminish investor perceptions that the New Zealand dollar is a one-way bet”

    Nice to know that someone’s looking out for the poor wee lambs; after all, John Paulson has had a rough time of it lately.

    • “I’m afraid you may have lost that battle Matt. According to this speech,
      the Reserve Bank’s mandate now extends to protecting overseas currency
      traders from hurting themselves”


      If I was being less generous I imagine I could read many of these things in quite a surprisingly interventionist light – and as a general outsourcing of “economic management” from politicians to technocrats to avoid democracy and make transfers to interest groups less transparent.

      But I’m trying to be less cynical than my underlying natural state makes me.

  • Luc Hansen

    “This is one reason why reducing the Government’s demand for resources through fiscal consolidation is so important.”

    This really concerns me, and I have mentioned it to you previously. If the RBNZ does not, in your words, from memory, ‘look through’ the rebuild, then some part of the rest of the economy must deflate- or at least be actively inhibited from inflating. And we all know that ‘fiscal consolidation’ means spending cuts and National governments have reflexively always cut benefits and the public service even absent any policy direction from the RBNZ. But roads are always good!

    So we would appear to be heading towards a two speed economy: Christchurch and dairy booming (and good on them) but the rest of us fitted with a governor (couldn’t resist that one!) or even sharply decelerated.

    My plea would remain that the RBNZ simply allow inflation to rock along at the top of the target zone, or even up to 4%, temporarily, and explicitly, while the rebuild works through the system. It is, after all, the mother of all one-offs!

    With that out of my system, I agree with your general point that the RBNZ is playing exactly into the general perception of what the RB’s job is, ie running the economy, and now it can further be seen as taking sides by intervening to depreciate (or stabilise, if you like) the currency, hurting those who have watched jobs go overseas on the promise of cheaper imports and rewarding exporters as being deserving of special treatment – class warfare?

    I’ll close with a question: does the RB actually have a working definition of what constitutes a bubble?

    PS The last bit of your reply to Brennan should be in 101 textbooks. Classic. 🙂

    • I’d note that, the key thing is that when we have a big relative price shift the RBNZ wants resources to head towards that (where relative value is higher). Monetary policy actions will be to prevent slack overall, but price signals have to be allowed to say “hey, we need capital and labour to consider moving to Chch”. That is a balancing act, that’s cool.

      Government actions “should” take into account distributional impacts. So I can see where your concern comes from. Overall, I find the policy prescriptions flying around at the moment from pretty much everyone (probably even myself) to be wildly inconsistent – and the reason for that is because people are “hedging bets” because we are uncertain. And tbh, this is where I’m glad the RBNZ is making a real big effort to communicate a lot.

      I still think they leave themselves to be open to being misread due to their obsession with structure. I can understand why Treasury might use a term like “rebalancing” when they are putting in places changes in policy (even then 😐 ), I cannot see why central banks are using it. What can I say, I’m a bit old fashioned 😉

      • Luc Hansen

        Yes, policy is hard – especially if one thinks about it! Sam Richardson has done a good job enlightening me in this respect this semester 🙂

        And I take your point, as I interpret it, that values largely drive policy choices, so I see the term ‘rebalance’ as used by Treasury and the government as implying a deliberate redistribution from the poor to the rich, because that’s where I see their values lie (of course, I could be wrong).

        And, of course, ‘rebalance’ implies previous balance (equilibrium), and since equilibrium only exist in economists’ models, it is born as a fallacy.

        Q. So why is the RB using the term?

        A. Values?

        • Ahh you’re at Massey, good times 😉

          Indeed any “rebalancing” is essentially redistribution … we should be asking who the winners and losers are a bit more directly. I find the entire metaphor, and the way it is used to hide trade-offs, to be the antithesis of what an economist does.

          We need to be a bit careful with equilibrium. We are never in a full “stock” equilibrium, and economists know this. I prefer the concept of equilibrating tendencies – all other things equal, we move towards equilibrium, this movement is the underlying tendency that exists. If we introduce a correspondingly larger shock, we will introduce a tendency to move towards the next equilibrium. This is where we get down to the differences between short, medium, and long term as well – and all that sort of jazz. But like everything, the way we discuss it depends on the question we are answering.

          There are likely two reasons the RBNZ is using it:

          1) There own value judgments
          2) Because they don’t want to be seen “at fault” if other poor policy settings lead to a crisis in NZ – and the more wealth dispersion, or the greater gross debt levels are (irrespective of net debt), the smaller the external shock necessary to cause an ugly situation.

          We’ll see what happens!