Ministry advice on LVRs

It appears an OIA request has made government ministry advice relating to loan-to-value ratio limits on mortgages available.  The Herald article is here:

  1. Reserve Bank.
  2. Treasury.
  3. MBIE.

Linking is not approving.  I’ve gone through the documents and didn’t agree.  There was no evidence to sway me in any of these documents, so my views have not changed since I last discussed bubbles, limits on foreign ownership of housing, my concerns that financial stability is being abused as a concept, or NZ LVR policy (here and here as well).

We rely on markets (with appropriate competition policy) as we cannot observe the things people value.  Within an insurance framework, there is scope for financial stability policy, and active monetary policy – but it should be clear and rule based.  It should not be the direction we are going.

That is my view, I hope I am wrong and that I am persuaded otherwise.  I will actually be switching the topics I write about next week – income distribution and income inequality will be almost all I’m posting on.

On this note, Cochrane is supporting the idea of a externality tax for banking:

I think a simple tax is the answer – though since “tax” is a dirty word, let’s call it a “systemic externality fee” – on debt, and especially on short-term debt or any other contract where the investor has the right to demand payment, and fail the firm if not received.  Every dollar of such funding will cost, say, a 10 cent fee. Payments due later generate smaller fees. I think we’ll see a lot less run-prone debt, fast. (We could at least stop subsidizing debt!)

Then, we won’t have to argue about risk weights and precise capital ratios, we won’t have to intensively regulate bank assets, we won’t tempt regulatory arbitrage, we won’t ask the Fed to decide whether houses in Palo Alto are a “bubble,” we will not hear the periodic call “we must recapitalize the banks” (at taxpayer expense), and, most of all, we can escape the chokehold on competition and innovation posed by our current expanding regulatory mess, together with the capture, cronyism, and politicization to which it is swiftly leading.

We need a financial system that can absorb booms and busts without creating a run or a crisis, rather than dreaming that regulators can produce a world without booms and busts. We need to regulate financial institutions’ liabilities, not micro-manage their assets, and especially not try to manage the price of every asset in which they might invest. We must escape this crazy system in which our government subsidizes debt, guarantees debt, increases the demand for debt by regulating it as a safe asset, and then tries to regulate financial firms away from issuing that debt.

Indeed, this is more consistent view of the entire financial stability issue – hence why I agree 😉