The dangers of “financial stability”

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.

  • boristhefrog

    One might also argue that the RB believes in unicorns also based on those comments…

    It all smells a bit political (and therefore worrying) – the issue of housing is the Govt’s job in terms of law, regulations and policy settings and the RB wading into the issue as they have done is poor.

    I agree with your conclusions 100%

    • http://tvhe.co.nz/ Matt Nolan

      I don’t think the RBNZ see’s unicorns, they are pretty good with photoshop. But my concern is that by covering the issue this way, they give other people evidence that unicorns exist ;)

  • Alfred Duncan

    I agree with you But, I fear that there is a bit of a dilemma here.

    I understand that there are constitutional norms that encourage governments/CBs to clearly discuss the distributional/equity consequences of all of their actions. This is surely a good thing for most/all government actions. It is problematic as you say in these cases like housing affordability: the tendency I fear is to just make up some distributional consequences that have little or no empirical or theoretical support!

    I was recently at a “Law and Monetary Policy” conference here in the UK and one of the points was that the BoE needs to explain the distributional consequences of QE. The general consensus (from the lawyers) was that it was ‘lining the pockets of the rich’. Partial Equilibrium Alert!

    • http://tvhe.co.nz/ Matt Nolan

      This is no doubt the advantage of a clear goal though! If the goal is financial stability, then they can say – sure we can sacrifice that, but then it is on your head govt.

      The hard thing comes from their being “multiple tools” for financial stability, and financial stability being in of itself a fuzzy objective. There are structural issues stemming from this that need to be discussed – indeed.

      But this attempt at discussing affordability was not this, it was an arbitrary, in many ways misleading, statement – thrown into an otherwise good speech. When I held my hand over this paragraph I enjoyed the rest of the speech and thought it was well targeted. But whenever I moved my hand away from it, I couldn’t help but feel that it was a painful sore spot that well meaning non-economists will misinterpret as the RBNZ having to take housing afforadability into account.

      I’d note something here – I also despise the idea that communication idea that the Bank is targeting the “cost of living”. They are making fiat currency depreciate at a predictable rate, “cost of living” makes it sound like they control house prices, petrol prices, and food prices. Does this not come across as another awful communication issue to anyone else!

      • Alfred Duncan

        Couldn’t agree more!

  • Shamubeel Eaqub

    I thought it was a pretty good speech. Laid out clearly what it aims to do (financial and economic stability), and what it doesn’t (social equity). Much better than the MPS (particularly that bizarre box #2 which showed an implausible interest reaction to a small exchange rate change).

    It provided good balance on how the tools will work, and how they may be weakened.

    The net impact is uncertain, but they were up front with the obvious, that those with low incomes will be cut out of the market for a while. If they hadn’t it would be seen as deceptive and ultimately weaken their message and its impact.

    Matt, they are not just talking to economist but the masses. It needs messaging, and – for a change – I think they did a very good job.

    • http://tvhe.co.nz/ Matt Nolan

      Indeedy, I agree that the vast majority of the speech was sweet (I noted that a couple of time) – more than sweet even – and that the RBNZ has been doing a danged good job of articulating the separation of roles and why.

      But, trying to articulate financial stabilility is a new thing. And inserting in comments on issues about affordability, without simply ruling that out, will be misinterpreted. I hear other economists making complaints about housing affordability and blaming the Bank – stating that in their new role something must be done. If economists (who I am not going to name, but aren’t from our institutions ;) ) are going to get minced up on this track, how do we expect non-economists to take these sorts of statements.

      And let’s not add that the statement didn’t make much sense. Unless we have a good idea how LVR settings interact with the “bubble element” of house price setting, and how this compares to any interruption with investment, there are no “clear” statements about affordability (even if we limit that to only the servicing of a mortgage – not the underlying housing service cost). This para, and it’s inclusion in the summary, was bad for communication with the masses – if it was just “imperfect for economists” I would not have cared in the slightest.

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