Descriptively, Hickey and Labour are both right on LVR’s

I’m not commenting of course, but both LVR restrictions will limit lending to SME’s and on house building.  As is stated by:

This was known before the LVR restrictions were put in place, hence why it is seen as an indirect tool.  Mortgages are used as a cheaper finance option for small firms, this is one of the most widely known “secrets” around (sorry that article is only available to Infometrics clients it seems) – the regulations were put in place knowing that it would credit constrain these groups.  Whether this is appropriate or not … well that would be commenting.  If you want to in comments go for it ;)

Note:  The link isn’t available, sorry – I thought our articles from March 2013 were freely available now, but seems not!  The article is on LVR’s and risk-weighting adjustment (before it was clear which tool the Bank was going to use), but in the LVR section the quote I wanted is:

Furthermore, it is important to ask who will be getting credit constrained by the introduction of LVRs.  Who are the sorts of people that load up on mortgage debt?

It is our view that the credit constraints will be most binding for the following groups.

  • Young borrowers who haven’t built up sufficient equity
  • Small business holders who rely on mortgages to fund investment in their business
  • The construction industry, by making it more difficult for people to use their property as equity when looking at infill or the construction of a new house

As a result, the introduction of a maximum loan-to-value ratio will lead to collateral damage for small firms and some private investment in the residential building industry.

Food and obesity

Via Noah Smith I’ve seen this interesting article on the food industry – it is a long read, but worth it!

But why couldn’t Big Food’s processing and marketing genius be put to use on genuinely healthier foods, like grilled fish? Putting aside the standard objection that the industry has no interest in doing so—we’ll see later that in fact the industry has plenty of motivation for taking on this challenge—wouldn’t that present a more plausible answer to America’s junk-food problem than ordering up 50,000 new farmers’ markets featuring locally grown organic squash blossoms?

It is an issue I see a lot of my friends talking about, and one which has led Gareth Morgan and Geoff Simmons to write a book.  Seems like an interesting and important issue to think about :)

Note:  I have no interest in trying to define what people should be doing here – and I aim to have a little chat about choice at some point in the future as I think it is an important issue that can get lost in this (eg I feel it gets lost here).  However, I can tell the food issue is, and is going to be, an issue that people want to look into – and would like to hear your thoughts ;)

Small New Zealand: It’s advantages and the growing importance of trade

Matt Nolan discussed the benefits of trade for a small open economy on Rates Blog (Infometrics copy here), and some of the specific factors for New Zealand.  Namely, the fact that New Zealand’s comparative advantage is in a homogenous product, where New Zealand as a whole only provides a tiny amount of the world’s supply.  In this context, if demand or supply changes in our of New Zealand’s target markets it is relatively easy for dairy or meat producers to slip the products somewhere else for a slightly lower process (relative to if New Zealand sold very specific goods within a global supply chain).

New Zealand’s small size and exporters reliance on homogenous goods actually makes the country relatively resilient to global economic shocks – an important point to keep in mind when demanding that the government interfere to “restructure” or “rebalance” the economy.

However, he does touch on the idea of terms of trade shocks, and the justification for insurance.

Then Matt wrote up a guest Top-ten at ten last week.  In this, he focused on trade during the Great Depression and now – before swinging to a couple of posts by Aaron Schiff and Eric Crampton discussing the importance of competition to domestic industries.  That can in turn be expanded by thinking about services and the changing nature of scarcity.  At the end of it all he concluded:

We are moving into a world where trade in services is becoming more important, more valuable, and where it is removing the burden of distance from New Zealand firms.  The fact the world is changing, and that New Zealand firms and households have to be prepared to change with it, is an important point to keep in mind – both in terms of what we can expect, and what policies government should be putting in place.

Confusion on income and poverty

I have heard this sort of claim quite a bit from friends in recent months:

Doesn’t that sound grand – if the richest 100 people in the world gave up a quarter of their income then SLAM poverty gone.  Ez.

However, this isn’t quite right.  In fact it is very much not right.

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That’s it, I’m done: RBNZ takes the path of discretion

A paper from the latest RBNZ bulletin.

It has always been clear that the aim should be to increase the resilience of the system to adverse shocks, but is it possible to be more ambitious? The traditional prudential approach has had a strong focus on shock-absorbing capacity; for example, increasing capital requirements so that banks are better able to absorb loan losses. This approach largely takes movements in credit and asset price cycles as a given, and aims to provide an adequate safety net should systemic risks be realised. A more ambitious approach is to try to reduce the amplitude of the financial cycle – in a sense lopping off the extremes of the cycle. Swing low but not too low; swing high but not too high. The potential benefits of this approach are obvious but it is also much more demanding, as it requires the authorities to answer some difficult questions.

Hmmm.  This seems to be saying that simply ensuring the resilience of the financial system is not enough, the central bank should be trying to exert direct, and discretionary, control over what financial markets do and where investment heads.  Fine tuning at its finest.  It does appear that policymakers here have been strongly influenced by Borio.

That’s me, I’m done with writing about macroprudential policy in New Zealand.  If you want to know why, read below the flap ;)

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Where does the burden of proof lie?

Antonio Fatas discusses inherent bias in economics given our reference point – an important issue, and one that economists need to think on (Note:  James wrote on this as well – we did our posts separately, so are focusing on different points).  Specifically:

This subtle (or not so subtle) bias in economic analysis is my biggest source of frustration with my profession. Not being able to predict crisis, the stock market or exchange rates does not bother me, it is just a reflection of the limits of our knowledge and I can live with it. But using the same naive predictions of models that refer to a fictitious world as the reference and only moving away from them when someone produces an unquestionable piece of empirical evidence is in my mind the true cost of our profession to society.

His post raises good points, but I suspect that what he is laying out runs into the same problem many of us run into when using models to think about policy and the impact of policy – we are not being clear on where the “burden of proof” lies or what we think about assumptions.

Now I like his writing, and this is a good post, but I have a bit of a different view on what economists do with reference to this.  Perhaps New Zealand economists are a bit different?  Essentially, the question of burden of proof is usually treated as a central part of how we frame and discuss policy questions in New Zealand, so it becomes part of the way we discuss models.

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