The Thin End of the Corruption Wedge
As an MP in Britain, I offered a free weekly advice service to constituents who needed help. I was occasionally embarrassed by a constituent who seemed to think that any request for help should be accompanied by a gift of some sort. The offerings were usually small in value, and were almost invariably made by a member of the immigrant community. I would gently explain that, while such gifts might be acceptable – even required – in some societies, they would breach the conventions of public service in Britain.
As far as I know, these anti-corruption conventions still apply in Britain and certainly do in New Zealand; indeed, our country regularly comes at or near the top of international surveys showing that we are remarkably corruption-free. So what are we to make of the growing evidence that the culture here is changing and that there is an insidious growth in the belief that politics and business are natural bedfellows?
The Justice Minister’s travails are just the latest piece of evidence. Her failure to recognise a conflict of interest when she went out of her way on a recent ministerial visit to China to visit a company of which her husband was a director shows how far we have relapsed from a proper recognition of the dangers of corruption. Judith Collins’ excuse – that she simply had not thought about the possibility of a conflict of interest – shows how far our standards have slipped.
The revelation that other Chinese businessmen have been able to lobby the government for favours, and have then shown their gratitude for those favours by giving large sums to the National party, demonstrates that a serious line has been breached; in issues involving a conflict of interest, it is the perception that matters.
No one who does business in the international context will be unaware of the fact that different standards apply elsewhere; the temptation – and sometimes, it may seem, the necessity – to pay bribes when expected in order to secure desired outcomes is no doubt ever-present. The slope can be slippery. My constituents in Britain who offered me bottles of whiskey no doubt thought they were acting in a perfectly normal and acceptable fashion; for them, securing my goodwill was the necessary prelude to obtaining my help.
We would be foolish to think that the lower standards in public life that are commonplace in other parts of the globe could not establish themselves here. It is perhaps not entirely an accident that the recent causes for concern have involved Chinese business people. Like many other countries, China – as a country and as a culture – has a view of the law that is quite different from our own. Rules are not so much to be complied with, but rather to be circumvented wherever possible.
With the growing involvement in our economy of Chinese business, we are becoming increasingly familiar with the tendency to disregard the rules – whether they concern minimum wage rates or planning requirements or anything else. One of the most obvious and effective ways of getting round the rules is to secure the support and help of those who make them; and if that support can be made more likely by rewarding the rule-makers with acts of generosity, then who can be surprised?
The danger is, in other words, that along with the undoubted benefits we gain from Chinese investment and business acumen, we may also be invited – almost imperceptibly – to accept somewhat different standards governing the relationship between our rule-makers and the business interests that are increasingly important to our economy.
That danger can be averted and minimised only if the other party to these transactions – the government – is absolutely clear about the standards of ethical behaviour required of those who do business in this country – and it is here that the recent revelations assume a much greater importance.
The impression already given to overseas business interests – and confirmed by many recent instances – is that the way to get things done in this country is to get the ear of the Prime Minister or of his close colleagues and advisers. In that way, private deals can be struck, rules can be changed or bent, tax benefits can be conferred, ministerial interventions to grant citizenship can be arranged – and if, at the end of the day, a generous donation is given to a political party by way of thanks and recognition, then who can complain?
In view of the government’s apparent belief that business advantage trumps all other considerations, and that their role is to serve business interests, we must expect many others to follow in the footsteps of Sky City and Warner Brothers and to find ways of securing government help. Who can blame them if they also conclude that – as is commonplace elsewhere – a discreet donation would not come amiss?
Unless our government is much clearer than it currently is, watch for the New Zealand ranking in the anti-corruption stakes to plummet – and we would have lost one of our most prized virtues.
Bryan Gould
15 March 2014
This article was published in the NZ Herald on 18 March.
Housing Bubble? Blame the Banks
The news that the ANZ – our biggest bank – has increased its mortgage lending to record levels in the last quarter and accordingly made huge profits comes as no surprise. What is surprising, though, is that the news is accepted without a scintilla of concern being expressed by those who supposedly run our economy.
In the interests of combating inflation, we are told, we have to maintain a strict control over the money supply. Yet by far the greatest factor in increasing the money supply in our economy is bank-created credit – money created out of nothing by private companies in the interests of making profits for their shareholders.
There is no mystery about how it is done; the banks constantly lend money that they do not have. They do not deduct the sum lent from the assets they hold but, by agreeing to make the loan and by entering that loan in their accounts, they create a debt which is repayable by the borrower and is therefore an asset in the books of the lending bank. The borrower can use the loan as money and it adds to the quantity of money in the economy. When the loan is eventually repaid, the repayment is treated as an asset in the bank’s accounts.
This process, conducted over and over again on a daily basis and on a cumulatively huge scale, is the source of most of the money circulating in our economy. It is subject to virtually no control other than the willingness of the banks to lend.
The banks’ preference, of course, is for the easy pickings they can exploit by lending to the residential housing market. That market is largely created by the banks themselves; it offers virtually foolproof returns since it offers ample and easily realised security, continuous demand, and a buoyant market with rising prices which are almost entirely the consequence of the banks’ willingness to create new money. The banks decide, in other words, the size of the market – one that they themselves create.
This power to create new money is a straightforward private monopoly. The only attempt at restraint is the price of credit – the interest rate – the fixing of which is handed over to the tender care of a supposedly “independent” (you’ve guessed it) bank!
The Reserve Bank’s occasional effort to restrain bank lending, as with the governor’s restriction of the proportion of lending to those with less than 20% deposits, is easily circumvented, as the ANZ has demonstrated. All they had to do was increase the total amount of lending so that the proportion going to those with small deposits fell. The governor may have (perhaps unwittingly) encouraged an increase in the pace of asset inflation.
The banks’ ability to dictate the amount and the purpose for which the money they create is used confers on them an astonishingly central role in our economy, yet it is one that is scarcely recognised – and at times is actually denied. Its impact is unique, comprehensive and fundamental. The failure to take it properly into account is one of the major features of our difficulties in managing our economy effectively.
The first and most obvious consequence is that the major inflationary impulse in our economy is, and has been for many years, the asset inflation created directly by the banks’ continued willingness to lend into a market whose values are constantly inflated by the volume of money (that is, credit) flowing into it.
There is, of course, a secondary economic consequence of that asset inflation. Home-owners who see the value of their properties rising fast are encouraged by the apparent increase in their equity, whether or not immediately realised, to feel better off and therefore more able to spend and consume more freely. This stimulus to consumption will eventually spill over into the threat of consumption-led inflation and a larger trade deficit – both factors which inhibit any prospect of export and production-led growth in the economy.
At the same time, the largely ineffectual reliance on raising interest rates to control these inflationary pressures means that there is constant upward pressure on the exchange rate, so that our productive sector finds both its profits margins and market share in international markets under constant threat. And that is on top of the fact that the banks’ preference for lending to home-buyers and their corresponding reluctance to lend for the riskier and less profitable purposes of productive investment means that industry is starved of the very investment capital that has served more successful rival economies so well.
The adverse consequences go well beyond the economic. The asset inflation continually transfers wealth to home-owners, and away from those who do not own their homes, who therefore enjoy no equivalent increase in their purchasing power and for whom rising house prices mean an end to any hope of home ownership. This shift in purchasing power from the poor to the rich is undoubtedly a major factor in the growing inequality and poverty in our society.
And to cap it all, the huge profits made by our Australian-owned banks are then taken out of the country and transported across the Tasman!
Bryan Gould
3 March 2014
The Risk of Denying the Values We Seek to Protect
Most people accept that the “war on terror” is a regrettable necessity. There is a clearly discernible (if hard to quantify) terrorist threat; we are certainly entitled, indeed required, to protect the innocent against unjustified violence and our society against disruption and chaos.
We also recognise that what is at stake is more than lives and property. We are defending our way of life – the principles of democracy, the rule of law, the values of western liberal civilisation.
So, we understand, too, that in fighting the war against terror, there is a risk that the weapons we use might jeopardise and betray the very values that we are defending. Sadly, there is already a long and shameful catalogue of just such instances.
The use of torture, including “waterboarding”, is well established. The illegal imprisonment of suspects without trial or any legal recourse is still a reality at Guantanamo Bay. The practice of “rendition” – the illegal kidnapping of individuals – was, and perhaps still is, commonplace.
It can be argued that these instances are not only at odds with the values we seek to protect; they are not even helpful in the war against terror. When the state itself commits what would in most circumstances – and certainly if committed by anyone else – be regarded as crimes, we cannot be surprised if the uncommitted are less than fully convinced by our protestations that we are taking a morally superior stance.
The illegal invasion of Iraq, for instance, was undoubtedly a major recruiting weapon for Al Quaeda. The West’s involvement in Afghanistan, too, has meant that young Muslims have been more easily persuaded that the West is their enemy.
Our own societies, too, are weakened when we allow Islam in general to be tarred with the terrorist brush. The vast majority of law-abiding Muslims will naturally feel isolated and unfairly condemned by a blanket hostility to their religion.
These breaches of international law and affronts to basic common sense and morality should warn us that we need to be vigilant; and there is a range of less obvious denials of human rights that also demand our attention.
In the US, the UK and now in New Zealand, there is a growing tendency for the executive to excuse any invasion of individual human rights as necessary in order to identify and deal with the terrorist threat. Our security services increasingly claim the right to act in our name without any corresponding duty to explain themselves. And the courts in many western countries show an increasing willingness to accept a certificate that national security is involved as a carte blanche for any activity that the executive undertakes.
The revelations by Edward Snowden show how far-reaching those claims can be. We now know that the right to privacy that most people imagine they enjoy is easily cast aside when the state decides that it needs to know.
We should bear these considerations in mind when assessing the government’s recently announced decision to withdraw the passports of a few New Zealanders who wish to go to Syria in order to join the fight against the Assad regime.
There is of course a long and honourable history of young men who have been willing to leave their homes and to fight in a foreign country for a cause they believe in. Thousands of young Britons and other Europeans, for example, joined the ultimately unsuccessful struggle to resist an emerging Fascist military dictatorship during the Spanish Civil War.
In more recent times, other overseas battles – often those whose purpose is to protect people from oppression – have been joined by volunteers. It is not as though the principle of intervention in a foreign struggle is regarded as wrong. The state itself has been happy to involve itself in foreign adventures, as countless invasions and interventions in other people’s battles have shown.
The step announced by our government in the Syrian case is a serious one. To deprive a citizen of the rights of citizenship, and in particular to deny the right to freedom of movement, is a major invasion of the freedoms that our society is thought to guarantee.
The removal of those freedoms has been carried out by the executive without any transparent legal process and on grounds which are unclear and not subject to scrutiny. Indeed, it is hard to fathom what the rationale for the decision is.
Has our government decided to support the Assad regime against the opposition? Does it have the detailed knowledge to allow it to distinguish between the various elements of that opposition?
Does the apparent prohibition against involvement in the Syrian dispute apply to other foreign conflicts? Is the government acting on advice from another authority and if so which? Does our government claim the right to tell us which causes we are allowed to support and which not? If fear of “radicalisation” is the basis of the decision, what other “radical” causes would be similarly outlawed?
In the end, the claim that the threat of terrorism trumps all other considerations should be treated very cautiously. The war against terrorism must be fought, and fought hard; that makes vigilance to protect our fundamental values all the more necessary.
Bryan Gould
11 February 2014
This article was published in the NZ Herald on 12 February
Don’t Throw Your Hats In The Air Just Yet.
A hike in interest rates next month is a done deal – and it will be the first of many. The virtual certainty of higher rates – presaged by Graeme Wheeler’s speech last week – is presented in the media as bad news for home buyers, and that it certainly is; but its real significance goes much wider than that.
What it really tells us is that, despite all the self-congratulation about the long-delayed recovery from recession, our long-term problems are not only unresolved but are likely to get worse.
The truth is that we cannot be allowed to grow at anything like the rate that out most important competitors in Asia take for granted; and the reason for that is that our past failures have ensured that we are a fundamentally uncompetitive economy. Because we are uncompetitive, we dare not grow at a reasonable rate for fear of renewed inflation and worsening our perennial balance of trade difficulties.
Any increase in purchasing power would go, not on investment in increased domestic production from New Zealand industry, but on the import and consumption of goods we are no longer able to produce ourselves. And even more predictably, any increase in the money supply will end up unerringly in an inflated housing market, creating the illusion that people are better off than they really are and encouraging them to spend their unrealised and supposed equity on yet more imported consumer goods.
Those problems would mean in turn an increased need to borrow and to sell off our dwindling assets, so that higher interest payments and repatriated profits would impose further burdens on our balance of payments. No wonder the Governor of the Reserve Bank has taken fright.
The whole point of the rise in interest rates is to choke off the economic growth that we might otherwise aspire to. The monetarist doctrine that has dictated our economic strategy for three decades stipulates that a rate of growth that would fully utilise our resources and accordingly mop up the pool of unemployed must by definition be inflationary – so much for faith in the ability of an efficient and competitive market economy to generate increased production.
The Governor’s intervention will at least be welcomed by some employers who fear the effect of full employment on wage rates. Applying the brakes at this early stage is a certain recipe for exercising a downward pressure on wages and, in due course, for a further transfer of wealth from wage-earners to asset-holders. Little wonder that it is applauded by a minority.
The tragedy is that higher interest rates at this stage of the cycle will actually make our problems worse. The higher rates we will have to pay to mainly overseas and short-term lenders will not only increase the burden on our balance of payments but the inflow of foreign funds will push up the exchange rate of our already overvalued dollar. Our own domestic producers will find that they are even more handicapped in the battle for markets at home and overseas – even less able to withstand price competition from rivals whose governments pursue very different strategies designed to maintain their competitive advantage.
Indeed, some of our trading partners make no secret of their preference for following a quite different course. Singapore, for example, uses indices of competitiveness, not the inflation rate, as the primary determinant of macroeconomic policy. China has for years maintained their currency, the renminbi, at an undervalued level, tying it to the US dollar to ensure that they lose none of that advantage.
The government of Shinzo Abe in Japan has gone even further and has engineered a 35% depreciation of the Japanese yen so as to set the economy back on a sustainable growth course. They have achieved this by doing the exact reverse of the higher interest rates that are now in prospect for us; instead of tighter monetary conditions, they have significantly relaxed monetary policy but have ensured that the extra money available is carefully directed into productive investment rather than consumption.
Western economists are entirely ignorant of the great post-war Japanese economist, Osamu Shimomura, and of the successful investment credit creation strategy that he pioneered and that is again being applied by Shinzo Abe. Locked into our tight little certainties, we cannot conceive that the rest of the world has anything to teach us.
It is a safe bet that Graeme Wheeler, who is no fool, understands these issues perfectly and recognises the futility of the strategy he is pursuing, but is at a loss to know what to do about it. He will know that our current and much-touted “recovery” depends on the stimulus provided by Christchurch reconstruction (why did we have to wait for an earthquake to make that kind of investment?), high – and probably temporarily so – dairy prices, and our old friend, an unsustainable and damaging housing boom.
These factors will either be short-lived or positively harmful to any long-term recovery. When they have been exhausted or have done their worst, we will be left with even fewer options, and an even grimmer outlook, than we have at present. It’s too early to throw hats in the air just yet.
Bryan Gould
2 February 2014
The Voters Deserve Honesty
When Don Brash failed by a hair’s breadth to become Prime Minister in 2005, it could be said that New Zealand dodged a bullet. Despite his undoubted intelligence, Brash would have been a disastrous Prime Minister, polarising opinion and splitting the country in the cause of extreme social and economic policies.
I was certainly not alone in welcoming the advent of John Key, who struck me as a much more moderate figure who – though no doubt serving the interests of those who put him in power – I hoped would not do too much damage to New Zealand’s great traditions of social justice and equal opportunity.
John Key himself was quick to understand the potency of an appeal to moderate opinion. He has courted an image as a politician who is difficult to categorise; we saw that facet of his political personality again in his announcement last week of plans to raise educational standards by paying top-performing principals and teachers to spread best practice.
That initiative is typical John Key; on closer examination, it may well be asked whether this is the best way to spend $359 million and whether there is any established causal connection between incentive pay and improved educational performance, but it sounds good and is unlikely to cause any actual damage, and the Prime Minister was able to tout it as a step towards an egalitarian society.
This occasional foray into his opponent’s political territory is all of a piece with the pragmatism shown by the Prime Minister in musing about potential allies if he seeks to form a government at the end of the year. It seems that the actual policies don’t matter; it is only the votes that count, provided they add up to enough to keep him in power.
So, he is happy to contemplate a deal with the Conservative Party, about whom little is known other than the flaky views of its leader. Both Act and United Future remain in the frame, despite the problems both they and their leaders have endured – problems that should surely have disqualified them from any role in government. The Maori Party will again be welcome, notwithstanding the unhappiness of their voters, while the issues of principle that supposedly excluded New Zealand First have miraculously faded away when the parliamentary arithmetic demands it.
So far, the voters seem not to mind too much that the Prime Minister gives such a convincing performance as a political chameleon, changing colour from one issue to another – indeed, depending on who he is talking to – from one conversation to another. For the moment, they seem ready to forgive him the ducking and diving; but there may come a time when they grow tired of the sharp tactics and demand something more principled.
But, in any case, the flexibility – not to say slipperiness – apparently demanded by MMP politics conceals a very different truth. John Key’s carefully cultivated image as a pragmatist is a mask for a much more ideologically driven politician. It has suited him very well to pose as open-minded and ready to consider all options, especially by contrast with his predecessor, but in reality he is just as committed to partisan politics as Don Brash.
Whereas Don Brash, however, ensured that anyone who would listen would know what his views actually were, John Key is much more circumspect. Perhaps he genuinely does not see himself as an ideologue – that he even believes, in the face of all the evidence, that his government really is a defender of an egalitarian society – but there is a growing gap between image and reality.
It has surely become more and more evident, especially in his second term, that his starting point is always the same simple inquiry – what serves the interests of big business? This may or may not be described as an ideological bias, but it is certainly in practical terms a sure-fire recipe for ensuring that the interests of ordinary people, and of wider society, are always subordinated to those of business – and, for preference, of overseas business and the bigger the better.
The result? An economy that is increasingly dependent on a single domestic industry (and the income stream even from dairying, too, is now passing into the hands of foreign owners), and on overseas mining and petroleum companies keen to dig up and drill for whatever they can find, leaving us to pick up the pieces when they leave.
The price we pay is a polarised society in which increasing numbers of poor and dispossessed have to make do with the occasional well-publicised sop to give the impression that the government cares, while the proportion of national income going to profits (which are increasingly repatriated overseas) grows rapidly at the expense of wages.
The Prime Minister’s apparent pragmatism conceals, in other words, a deliberate policy that has produced a widening and damaging gap between haves and have-nots, as destructive in economic as it is in social terms. He should stop dissembling and put that policy and its outcome clearly before the electorate; at least Don Brash ensured that voters could make a clear and properly informed choice.
26 January 2014