Who’s in charge of the economy?  We need to know the answer and to know that someone is taking responsibility.  As is becoming clearer by the day, we are entering a very dangerous phase.  If we are to avoid an increasingly likely calamity, someone will have to bring in the measures that are needed to steady the ship.  We need to know who that someone is.

Our economy, which we tell ourselves is doing quite well, is in fact overloaded with debt.  The sense that things are going well is engendered by no more than our propensity to borrow and to demand a standard of living that we cannot afford.  It is a fool’s paradise.

The huge and alarming rise in house prices is the product of record lending by the banks on mortgage.  That in turn helps to fuel a consumer boom, as home-owners are encouraged to borrow against the reported rises in the value of their equity and to spend large sums on imported consumer goods.  The banks will continue to lend without limit to house-buyers and consumers alike for as long as they are allowed to do so.

The result is a dangerously inflated bubble of house prices, consumer spending, and imports, none of which reflects any actual increase in wealth or is sustained by anything other than borrowing.  History tells us that bubbles of this kind do not go on inflating ad infinitum and only rarely deflate gently.  If we insist on continuing our rake’s progress, the day of reckoning is sure to come and it will be painful.

In the meantime, the injury we are doing ourselves is not just in the economic short-term.  Rising house prices continue to exacerbate the housing crisis and widen social division.  The consumer boom diverts our resources away from productive investment and saving.  The import spree widens our trade deficit and forces us to borrow more and sell more assets to fill the gap, with the result that we lose more and more control over our own affairs.

So much is now widely understood and is scarcely denied.  It is when we ask what is to be done and even more, who is to do it, that we enter the realm of controversy.

It might be thought that the answer is obvious.  What else is a Minister of Finance for, after all?  But it is not as straightforward as that.

It is an article of faith for our government that their role is a limited one.  Monetary policy is contracted out to the Reserve Bank.  There is some responsibility for fiscal policy but that is largely focused on cutting public spending and making changes to top-end tax rates, for largely political rather than economic reasons.  Otherwise, the theory goes, the economy is best left to its own devices – or to big business.  The market can be trusted to produce the best outcomes and should not be second-guessed.

The government is of course concerned about “the deficit” but it is not the country’s deficit that worries them.   It is the imbalance in their own finances that monopolises their attention. The private sector’s borrowing and consuming boom, and the country’s perennial and growing trade deficit, on the other hand, are best left, it seems, to look after themselves.

The results of the government’s efforts to cut its own deficit are very apparent.  As The Economist reports this week, New Zealand spends a lower proportion of GDP on public social spending (excluding health care) than most other advanced countries.  Not surprisingly, it has experienced a corresponding widening of inequality and become one of the most unequal countries in the developed world.

The Minister of Finance may feel, according to his own priorities, that this is a proper reward for his efforts to cut spending.  His Prime Minister’s contribution to resolving the country’s problems – excessive borrowing, consuming and importing – has been, however, to indicate that he will engineer a further boost to spending with $3 billions of tax cuts.

If we cannot expect much action from the government, who can we look to for an effective response to the dangers we now face?  The other obvious candidate is the Governor of the Reserve Bank – and there is reason to hope that help might be more forthcoming from that direction.

There are increasing signs that the Governor is aware of the problems and has analysed them correctly; he may even recognise that the central problem is excessive bank lending – a factor, after all, that emerges right at the heart of the Governor’s responsibilities.

The problem here, though, is that the Reserve Bank’s central duty is to protect the banks’ viability – which can all too easily mean simply their profitability.  It is unlikely that he will dare to come up with macro-prudential measures that will really make a difference.  The banks themselves, however – as witness their decision not to lend to foreign borrowers – recognise the risk to their profits if the Governor is eventually forced to act.

The outlook therefore is bleak.  The problem may be clear, but there is no one ready to step forward with a solution.  The government disclaims responsibility for correcting it and is ready to make it worse, gambling that the chickens won’t come home to roost till after the next election, while the Reserve Bank will continue to put its loyalty to the banking system ahead of the country’s well-being.  Poor New Zealand!

Bryan Gould

10 June 2016

So, now we know.  The two major parties are agreed that the homelessness and unaffordability crisis has arisen because the market has not been allowed to function properly.  It seems that the Auckland Council, in a misguided attempt to prevent urban sprawl, has restricted the supply of land with the result that prices have risen.  With the Council cast as the villain of the piece, it looks as though the government can celebrate getting off the hook – but whether the consensus is in Labour’s interests, or those of the homeless, is less obvious.

The Greens, on the other hand, have a different take.  For them, it seems, the pressing problem is the one that has been hogging the headlines – the plight of that growing number of Kiwis, in Auckland and elsewhere, who literally have no home, no washing or toilet facilities, no home comforts, nowhere to relax at the end of the day, nowhere to call their own.

That crisis demands the fastest possible solution.  That will not be achieved by firing the starting gun for another round of property development.  The crisis has arisen because we have not been building homes for that significant sector who simply cannot afford either purchase prices or rents – those whom the market, in other words, totally overlooks and does not provide for.

Our decade-long failure to concern ourselves with this group of our fellow-citizens has led inexorably to the current crisis.  It can be remedied only by making good – and fast – our past failures.  That means a publicly funded building programme of decent houses at reasonable rents in the areas where they are needed.

How is that funding to be found?  It depends where our priorities lie, but a decent start could be made, as the Greens suggest, by desisting from treating Housing New Zealand as a cash cow, extracting over $100 million a year from the poorest people in our society to pay over to the government, and using that money instead to finance a building programme.

But, it will be argued, homelessness is only one aspect of a malfunctioning housing market.  It surely stands to reason that an increase in the supply of housing will help to resolve the separate problem of unaffordability by bringing prices down?  Isn’t the National/Labour cross-party consensus right on the money?  And doesn’t the enthusiastic support from Business New Zealand, the Property Developers Association and the real estate industry show that the politicians have at last agreed on the right solution?

It is certainly true that property developers, the banks, speculative investors, all love the idea – I can hear them salivating from here.  Any concept of sensible planning and land use, any concern for other interests such as our important horticulture industry, any reckoning of what further urban sprawl would mean in terms of infrastructure costs and longer travel distances is swept aside.

Supporters of the consensus have little patience with these concerns.  The market, they say, must be allowed to operate.  The housing market is like any other market, and rigidities must be removed so that it produces optimal results.

But the housing market is not like any other market.  There is no other market of any size where purchasers are armed with a purchasing power up to nine times higher than their annual incomes, where recent experience shows that they can expect huge untaxed capital gains, where speculative investment using borrowed money can virtually guarantee a huge return – all because house prices go on rising and banks go on lending.

Economists may see, and warn about, all the signs of a rapidly inflating bubble, but those who are responsible for the inflating are not to be deterred.  As the consensus promises to provide yet wider opportunities for profitable investment, property developers stand ready to bid up the prices of the newly available land, the banks stand ready to lend virtually without limit to both the developers and the eventual purchasers of the new houses, and the inflow of new lending and credit into the housing market ensures that the bellows applied to housing prices will continue to blow fiercely.

As another round of house price increases is generated, the gap between those who are already in the housing market or who are able to borrow, and those who are not and cannot grows, ever wider.  And, the diversion of yet more of the country’s finances into speculative rather than productive activities leaves us even more dangerously exposed to the risk of a housing bubble that one day is certain to burst.

The proposed solution, in other words, may in due course bring housing values down all right, but not in the way that is foreseen – and that outcome would be at huge cost to the national economy.

Bryan Gould

20 May 2016.

The Prime Minister, asked on National Radio this morning what advice he would offer to an Auckland family with nowhere to live but in a car, suggested that they should “go to see Work and Income to see what help they could give them.”  The advice that a desk officer in Work and Income could miraculously find them a house they could afford was the equivalent of shrugging his shoulders and saying, “I have no idea of what they could do and I don’t really care.”

Auckland’s shortage of affordable housing and soaring house prices are now so significant that they could threaten the financial stability of the whole country, but there is no one at greater risk than Auckland’s poor.  For them, the possibility of buying a house is non–existent, and – as speculative investors buy up the cheaper houses and force up the rents – their meagre budgets do not extend as far as even the cheapest rented property.

Yet let us be clear.  The problem of families with children forced to live in third-world conditions is eminently resolvable.  It simply requires the application of resources – resources that a country with our wealth could easily afford.  The issue is one of priorities.  We could put an end to child poverty and housing shortages if we decided to move the issue nearer the top of the list.  It doesn’t happen because we choose that it shouldn’t.

We choose to elect a government that we know will give a low priority to the most vulnerable in our society – a government that on the other hand will strive might and main and will take considerable political risks in the interests of, for example, its friends in the foreign trust industry.  We endorse, in effect, the Prime Minister’s confidence that “middle New Zealand” will support his casual dismissal of concerns about the plight of the homeless and the consequent blight on our society.

Mike Hosking, the self-proclaimed champion of “middle New Zealand”, that apparently uncaring and blinkered sector of society, assures us, in the authentic language of neo-liberalism, that the “free market” would solve the problem if only there were more opportunity for speculation, profit-taking and unrestrained bank lending.  The market, it seems, despite its current excesses and failures, is the solution, but government – our government – is either part of the problem, if local, or absolved from responsibility, if central.

We, “middle” or otherwise, could change this attitude if we so decided.  There was a time when New Zealanders would have reacted with distress and even anger at the thought that we would tolerate homelessness on a significant scale in our midst.  Sadly, the cynical view of human nature represented by the values of so-called “middle New Zealand” now allow our government in effect to wash its hands of the problem.

It is no accident that the concept of “middle New Zealand” has been established and has prospered in the media where, with honourable exceptions, a self-serving attitude has been assiduously propagated.  That trend is likely to strengthen if proposed changes in media ownership take place.

The concentration of cross-media ownership in New Zealand is already of dangerous proportions.  With important outlets in the press, radio, and television already in single ownership, we already see a politically partisan figure like Mike Hosking free to peddle his literally eccentric views across all of those outlets.  His very ubiquitousness allows him to claim his chosen role as the spokesperson for “middle New Zealand”.

That, however, is just the forerunner of what will happen if NZME and Fairfax merge their New Zealand operations.  Virtually the whole of New Zealand media will then be in single ownership; views that diverge from the supposed “middle” will be heard even less than they are today.

The Commerce Commission will of course have to assess the proposed move in terms of whether or not it will reduce competition.  But that is a financial judgment that takes little account of the importance to a properly functioning democracy of allowing a diversity of views to be expressed.

If those views are not heard, we will become more and more inclined to accept that we should look at all issues in the public domain through a business lens.  We have already travelled a long way down that path.

How many people, for example, even noticed, let alone reacted adversely to, the statement from our Health Minister that he was “preparing a business case’” in respect of a decision as to whether or not to fund a bowel cancer screening programme?  When other countries with whom we like to think we are comparable see it as a worthwhile expenditure, what does a “business case” have to do with it?    And in such a business case, what dollar value is to be placed on the lives saved, the pain avoided, the grief and misery of bereaved families?

There are some areas of course that are apparently exempt from a calculation as to a monetary return on investment.  Does anyone recall a business case being prepared for the $26 million spent on the flag campaign?

Bryan Gould

16 May 2016

It was Harry S. Truman, the post-war U.S. president, who famously had a sign on his desk that read “The buck stops here.”  It was apparently a play on “passing the buck”, a phrase once used in poker to indicate that it was someone else’s turn to deal.

Our own Prime Minister has not bothered with a sign, but in his case it would read “The buck stops anywhere but here.”  He has made an art form out of shuffling off responsibility to someone else when things go wrong.

There have been countless occasions when John Key has claimed not to remember (his “brain fades” are notorious) or not to know – it is amazing how often a Prime Minister who totally dominates his government seems to have been left out of the loop when crucial issues are decided.

Nor has he been overly fussy in choosing whom to blame.  A misleading allegation about a security briefing received by the Leader of the Opposition?  It was the Director of the Security Intelligence Service, Warren Tucker, who was required to carry the can.

A series of damaging exchanges with the blogger Cameron Slater about “dirty tricks”?  It was a staff member from the Prime Minister’s office, Jason Ede, who stepped forward to accept responsibility.

His ministers have been quick to learn.  One of the prime exponents of the art of ducking responsibility has been Murray McCully.  A botched “reform” of the Ministry of Foreign Affairs?  Nothing to do with the Minister but the Chief Executive, John Allen, was moved on.  The Saudi sheep scandal?  It was the lawyers who gave bad legal advice and landed him in it.

Perhaps the most extreme example of the genre, however, is the Prime Minister’s current attempt to distance himself from the IRD’s inexplicable decision to abandon their planned inquiry into the damage to New Zealand’s reputation that could result from our disreputable activities as a tax haven.

In this instance, the fall guys are the Prime Minister’s personal lawyer and one of John Key’s junior ministers.  The cover story requires the lawyer, Ken Whitney, to plead guilty to misrepresenting the Prime Minister, and the junior minister, Todd McClay, to profess to feel “insulted” by any thought that he might have allowed himself to be influenced by the Prime Minister’s known support for the foreign trust industry.

The Prime Minister himself, of course, claims to have been totally unaware of the IRD’s concerns, and to have pleaded ignorance of it when approached by his lawyer – someone he knew to be a leading figure in the foreign trust business and indeed to be the chair of the Antipodes Trust Group, a major player in the industry.

The Prime Minister’s own view of such matters is now well-known, though it is worth recalling that no one would have known anything about those views and his connections to the industry if it had not been for the leak of the Panama Papers.  Even after that leak, the Prime Minister was still happy to express strong support for secret foreign trusts as a worthwhile business – indeed, he expressed the hope that New Zealand could become the “Switzerland of the South”, a haven where the rich could hide their money in secret.

When Ken Whitney became alarmed at reports that the IRD was preparing to launch an inquiry and approached him on the matter, neither party would have been in any doubt, in other words, as to where they both stood.  The approach was in essence a request that the Prime Minister should intervene in a matter of concern to them both and that the IRD should be told to drop its proposed inquiry.

John Key has – improbably enough – tried to equate this request to those many instances when he is no doubt buttonholed for a moment or two by strangers about matters of little consequence.

We are asked to pile improbability on top of improbability by believing that Ken Whitney would then, at the Prime Minister’s direction, repeat his concerns to a newly appointed and anxious-to-please junior minister and that neither of them would have thought to mention John Key’s known views or to take them into account.

What we do know is that the Whitney/McClay meeting was organised almost immediately following the approach to the Prime Minister and that the IRD subsequently, and without explanation, abandoned its plans for an inquiry into foreign trusts.

The end result is that, instead of an independent inquiry organised by the IRD in the public interest into business practices that do New Zealand no credit, we have a limited inquiry conducted by a single finance industry insider, hand-picked by a Prime Minister whose hand has been forced.

When the establishment of that inquiry was announced, it was met with widespread scepticism.  With all that has happened since, both the credibility of the inquiry and the Prime Minister’s reputation have suffered further damage.  We need something better.

Bryan Gould

4 May 2016

The introduction of a possibly contentious policy on a controversial issue under this government usually follows the same pattern, especially when the interests of the government’s supporters might be affected.  First, the broad outline of the new policy is floated, both to gauge reaction and to get people used to the idea.  The new policy is often said to be contingent on some further piece of information that is already available to the government but not yet known to the rest of us.

Criticisms from political opponents are rubbished; comments from supporters are taken into account; and the new policy eventually emerges fully fledged, often in a form that is subtly different and with less impact than was originally proposed.

So it has been with the notion of a land tax.  The initiative is nevertheless to be taken very seriously, for at least two reasons.  First, it is an acknowledgment by John Key that housing affordability is now of major public concern, not just because of the difficulty it means for those seeking to start a new life in a new home, but for what it is doing to social cohesion.

The $70,000 untaxed capital gain made by the average Auckland home-owner in a single month should be contrasted with the Prime Minister’s “generous” 50 cent increase in the hourly minimum wage.  And, since the capital gain (admittedly as yet unrealised for most) does not represent any corresponding increase in real wealth for the nation as a whole, it has to come from re-distribution – from the poor to the rich.  Asset inflation in housing is the principal driver of inequality.

The government is cautious in dealing with it is because Auckland home-owners are naturally (and short-sightedly) very happy with what is happening.  They are inclined to thank the government for the cosy glow that getting richer without any effort can produce.

The second point to notice is that a land tax would endorse an analysis of what lies behind soaring land prices that has so far been rejected by the government – and most others.  A land tax for foreigners (as is proposed) would represent an attempt to discourage investment and thereby to reduce the volume of demand and purchasing power that is currently fuelling the Auckland market.

This focus on the level of demand is at odds with the reasoning so far adopted by the government and by most so-called experts.  Their preference has been to point to supply-side issues as creating inadequate supply and therefore unaffordability – the shortage of land, bureaucratic rigidities, construction bottlenecks.  A new focus on bearing down on demand is welcome, but threatens to take the government further than it wishes to go.

If the problem can be eased by reducing the level of demand, why does that argument not apply to the whole market and not just to foreigners?  And if the volume of purchasing power coming into the market is a central factor in causing prices to rise, as it surely is, then why do we not look at where the overwhelmingly greater part of that purchasing power really comes from?

If we were to do that, we would rapidly come to the realisation that the Auckland market is the product of a veritable tsunami of new credit flooding into it day by day, week by week, month by month.  This huge volume of new credit is created by our banks and is made available for the sole purpose of buying property.  Without it, the housing market would be unrecognisable.

The banks have created the housing market and will go on fuelling it until they are restrained.  In the meantime, asset inflation in the housing market could not suit them better.  The demand for mortgage finance from those whose purchasing power is inflated by their ability to borrow many times their income is stimulated ever further by soaring house values.  Lending on mortgage keeps growing – as do bank profits by virtue of the rising volume of interest paid on the ever-increasing volume of new loans.  The risk is minimal since the value of the security – houses – will keep on rising for as long as the banks keep on lending.

Tweaking interest rates or imposing a low rate of land tax in an attempt to cool the housing market are likely to be ineffective for as long as the market is awash with constantly growing volumes of new credit.  Small marginal increases in the cost of investing in property will be quickly swamped by the tidal wave of new credit and by the capital gains thereby created, and will just become another (small) factor to be added into the price structure.

It is unlikely that government will have the courage to tackle the banks (or their home-owning supporters) on this issue.  Any action that might be taken would in any case have to be taken gradually and cautiously, so as to avoid a bursting of the bubble and great damage as a result both to individual family budgets and the national economy.

It is now up to the Reserve Bank.  They must devise “macro-prudential” measures that will effectively restrain bank lending on mortgage.  The longer the current situation prevails, the more damaging and dangerous it becomes.

Bryan Gould

27 April 1016