When I was a child, we lived in Palmerston North.  Our favourite picnic spot was a few miles away, at Raumai, on the banks of the Manawatu river.  It was in the river there that I learnt to swim.

Like many of my generation, and many others as well no doubt, I was shocked to see television pictures the other day of what has happened to our rivers.  What we saw on our screens looked like footage of polluted sewers and drains, with large clumps of discoloured foam floating along the surface of what was once a pristine river.

We could not see the e-coli but the commentary assured us (if that is the right word) that they were there in very large and dangerous numbers.

There are those who choose to deny that climate change is brought about by man’s activities.  But there can be no doubt about who or what is responsible for the despoliation of our waterways.

It is not necessary to single out dairy farmers or any other group to recognise the truth.  There can be no more graphic illustration of what happens when the “bottom line” always takes precedence – when “turning a buck” or “making a profit” or “staying in business” or “increasing production” is always seen as good enough reason and excuse to destroy our environment.

Are we pleased with and proud of what we have done?  Of how we have been fortunate enough to live in the most beautiful country in the world, one of whose greatest treasures is its sparkling, clean waters?  And that we have then, within a few decades and by giving free rein to market forces, succeeded in transforming that treasure into dross?

We are told that, so bad is the damage we have wreaked, we will never be able to restore our aquifers and waterways to an acceptable condition, and that it will take decades before young Kiwis can swim safely in our rivers.  What a legacy to leave!

Will we learn any lessons?  I doubt it.  The drive to make more money and the conviction that the market must always prevail are now so deeply entrenched in our psyche that we will shrug our shoulders and carry on – to drive species to extinction, to exhaust our reserves and resources, to contaminate anything that gets in the way of “progress”.

Will we even pause to consider what else we might be placing at risk?  If we are prepared to sacrifice our environment (in other words, where we live – and swim, if we are lucky), what other sacrifices are we lining up?

The environment at least has the advantage that it can, in many of its aspects, be depicted visually, so that we can at least see what we have done before shrugging our shoulders and motoring on.  But what of those other forms of damage we are doing to ourselves, that cannot be so easily viewed on our television screens?

The same lack of care, the same greed, the same drive for material goods, the same selfishness and short-sightedness are certainly doing us great damage of another kind – damage of which we are constantly made aware but that many of us choose to ignore.

That damage is to the fabric of our society – and the analogy with our destructive treatment of the environment is, sadly, all too clear.

The health and integrity of New Zealand society was once, like our environment, the envy of the world.  But our concerns for our fellow citizens, for ensuring that everyone has “a fair go” in the sense of being properly equipped with good health, housing and education to face the challenges of life, have fallen away as we focus more and more on “getting ahead”, on the “rat race”, on that bigger and better house or car.

We have become a “me first” society, indistinguishable from those in “less happier lands”.  Our pride in the fact that we once led the world in terms of giving proper and equal value to every one of our citizens has faded away.  We have instead hastened to fall into line as adherents of the hard-nosed, Anglo-American version of capitalism, and we are undeterred by the widening inequality and increasing prevalence of poverty that now mark the way we live.

The unacceptability of the damage we have done, and continue to do, may not be so graphically demonstrated as it is in television pictures of the disgusting state of our rivers – but it is no less real.  The rivers, and what we have done to them, matter hugely in their own right, but they should also be seen as a metaphor for what we have done to ourselves.

Bryan Gould

30 April 2017

Jim Bolger will have surprised a few people this week.  In an interview with Guyon Espiner of National Radio, the former National Prime Minister expressed the view that “neo-liberal” economic policies have failed, and that an important aspect of that failure has been that most of such new wealth as has been created has gone to the richest people in society.

The surprise was occasioned, as Guyon Espiner pointed out, because Jim Bolger had headed a government that had set about cutting taxes and therefore public services, and weakening trade unions – policies often seen as the hallmarks of neo-liberalism – and that is to say nothing of Ruth Richardson and her boast of delivering “the mother of all budgets”.

I may have been less surprised than most.  I did not return to New Zealand until 1994, and therefore did not directly experience the early years of the Bolger government.

But, more importantly, I also had the pleasure of meeting up with Jim Bolger a few years back in a debate at Waikato University, of which he was then Chancellor and I had been Vice-Chancellor.  I was pleasantly surprised to find how much common ground we had.

I discovered a politician who had had time to reflect, and who had recognised the downsides of the changes in New Zealand society that had come about as a consequence of economic policies that had come to reflect the consensus across most of the democratic world.

His declaration in this week’s radio interview, supported as it is by evidence from around the world, was intended, I believe, to apply as much to the global economy as to New Zealand.

It is beyond dispute that the countries which have enjoyed the best economic outcomes have been those – like the Scandinavian countries – which have at the same time most stoutly resisted the growth of inequality.  As for the rest, the application of neo-liberal policies has meant a poorer economic performance, accompanied by greater social division.

We do not have to choose, in other words and as is so often asserted, between social justice and economic success.  The former is an essential element in producing the latter and is not just a “luxury” we can do without.

Or, to put it in another way, the failure of neo-liberal policies is largely attributable to their inevitable tendency to exacerbate inequality and to foster a lack of concern for the less fortunate.

And a moment’s reflection will tell us why that is so.  An economy will always be more successful if it engages with and uses all of its productive capacity – and that means its human resources – rather than leaving some of them under-used and undervalued.

It is pleasing that Jim Bolger – a decent and humane man – should have come to realise the truth of these sentiments.  The loss and damage we sustain, if we fail to take account of the interests of the whole of society, creates not only a weaker economy, but a more divided and unhappier society.

Interestingly, Jim Bolger’s declaration suggests an unexpected contrast between himself and his eventual long-term successor, John Key.  While Bolger allowed himself to appear driven by ideology, but was in reality more socially aware, Key was the reverse – apparently a pragmatist, but ideologically driven by the quintessential neo-liberal conviction that the market must always prevail.

This in turn suggests that, in today’s politics, it is the right that is ideologically driven while it is the left that constantly seeks merely pragmatic solutions to pressing problems.  The left’s difficulties in attracting majority public support suggest that solutions to problems will stand a better chance of being accepted if they are seen to be grounded in a coherent analysis of what has gone wrong.

It may be that, in their anxiety to gain support from the “middle ground”, the left has too easily been frightened away from developing such an analysis.  Surprisingly, they seem reluctant to engage in an ideological debate and prefer to leave the territory uncontested.

If Jim Bolger can do it, and link outcomes to policy frameworks, why not the left?  But, if there were to be a next time, Jim, could you please see the light and find the road to Damascus a little sooner?

Bryan Gould

23 April 2017

It is no surprise that a former Governor of the Reserve Bank should seek to defend the banking system from its critics.  It is less expected, however, that Don Brash should do so while displaying an apparently complete – and certainly shocking – ignorance of the subject.

In attempting to deny the accuracy of the points I made last week in the Herald about how the banks operate, Don Brash accused me of “peddling nonsense”.  I made two basic points.  First, I asserted that the banks do not, as usually believed, simply act as intermediaries, bringing together lenders (or depositors) and savers to their mutual benefit.  Secondly, I said that the vast majority of new money in circulation is created by the banks “by the stroke of a pen”, and they then make their profits by charging interest on the money they create.

If this is “nonsense”, the “peddlers” include some very distinguished economists.  My legal training has taught me the value of being able to turn to reliable authority to support what I say.

In my original piece, I invited my readers not to take my word for what I said.  I referred to a Bank of England research paper – published in the Bank’s Quarterly Bulletin in Quarter 1 of 2014 – which describes in detail the process by which banks create money.  A couple of extracts from the report’s summary will give the essence of what they found.

First, they say that “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them…[that] ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money…Rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.

Bank deposits make up the vast majority – 97% of the amount [of money] currently in circulation.  And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”

They then go on to say that “Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach…[but that] is not an accurate description of how money is created in reality.”

They go on.  “Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set… It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the [central] Bank.”

It is a pity (and a surprise) that Don Brash seems unaware of these findings in one of the most important research papers published in recent years.  If he would care to proceed with his charge of “peddling nonsense”, I could introduce him to the authors of the paper, with whom I have corresponded, and he could put that charge directly to them.

Perhaps the conclusive evidence that Don Brash is out of his depth is his argument (which he apparently regards as clinching) that it cannot be the case that banks create money, since otherwise – he says – why would they bother to do anything other than write cheques to themselves?

This simply betrays a failure to understand the process described in the Bank of England paper.  As that paper says, “Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created.

For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.”

Commercial banks create money, in other words, by placing loans (or credits) into the bank accounts of borrowers.  They then charge interest on, and demand security for and repayment of, those loans.  They have no capacity to create money in any other way or for any other purpose (though the central bank can pursue “quantitative easing” to increase the money supply if it thinks that is needed).

But the capacity they do have is hugely important.  I concluded my earlier article by asking whether it was wise to entrust such wide-ranging powers – so significant in their impact on the whole economy – to the banks, and then to arrange that the only person able to regulate that impact was himself a banker – the Governor of the Reserve Bank.  That concern is surely heightened if a former Governor seems not to understand what is really happening.

Bryan Gould

20 April 2017