QE 'worth considering', says Bollard

RBNZ Governor Alan Bollard says quantitative easing or money printing is 'worth considering' when rates are close to 0%, but is hard to exit and results are unpredictable

27th Jan 12, 2:04pm by Bernard Hickey

Reserve Bank Governor Alan Bollard briefly discussed the use by other central banks of Quantitative Easing (QE) or money printing in a speech to the Canterbury Employers' Chamber of Commerce in Christchurch.

He said the tool was worth considering when official rates were close to 0 %, but the use of quantitative easing, where central banks buy government bonds either directly from the government or from banks, was difficult to exit and the results could be unpredictable.

Bollard said inflation risks were very low in economies where activity was at stalling speed.

"In these conditions, inflation-targeting countries, including New Zealand, have seen scope for big cuts in interest rates during the GFC (Global Financial Crisis) and persisting through the subsequent sovereign debt crisis," Bollard said,.

"However, monetary policy in Europe, unlike in New Zealand, has had to operate a lot closer to the ‘zero bound’, where policy interest rates are near zero with no scope for further cuts," he said.

"This has left quantitative easing (QE) and other unorthodox monetary policy as options still in Europe and the US, as their economies have failed to restart," he said.

"These tools are worth considering at the zero-interest bound, but they can have unpredictable effects and may be hard to exit," he said.

"Where QE has been employed, it is still too early to judge the overall impact. Moreover, monetary policies around the world have begun to take on some features that we tend to associate with fiscal policy, assisting the private sector directly. This casts central banks in a non-traditional role."

The US Federal Reserve is now expected to consider a third round of quantitative easing later this year and many believe loans from the European Central Bank to European banks expected to be worth more than €1 trillion are effectively a form of money printing, albeit a flawed one.

We welcome your comments below. If you are not already registered, please register to comment

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

42 Comments

by Andy Rodgers | 27th Jan 12, 2:31pm 1327627891

Bollard says - "Where QE has been employed, it is still too early to judge the overall mpact."

Wrong - it's impact has been minimal and has only stored up bigger problems for the future.

Why do all Central Bank Governors believe that they are magicians who can wave their interest rate magic wands and rescue their national economies. History will not be kind to these fools. Unfortunately everyone, except those who have invested wisely, will suffer terribly for their mistakes.

by steven | 29th Jan 12, 4:53pm 1327809189

QE is always limited in its effect.....most of the work should be done by the Govn and not the RBs....but Govns are incapable of acting, so the Rbs are with what they have and its not a lot......."fools" depends on which ones, the USA certainly but its not just the RBs fault.....voodoo economics is the root cause.....thats not the RBs thats the pollies.

regards

by economist | 27th Jan 12, 2:36pm 1327628185

But the RBNZ has been printing for decades??? Huh???? How does he think average house prices have gone from 50,000 to 400,000 and lollies from 1 cent to 10 cents???? and video games from 20cents a turn to $2 a turn???? Are 1 cent lollies really in a gigantic bubble? .. now could be a good time to sell them then...

by Nic the NZer | 27th Jan 12, 8:52pm 1327650749

Thats a complete missconception, though a common one. The housing inflation, most inflation comes from the commercial banks. The RBNZ and other central banks back-fill the reserves when necessary. Many central banks tried to control the rate of inflation in the 70s but were totally unable to (for this very reason). The only way this could be prevented was if the central bank could simply demand all lending stop at times, but thats not going to happen and would probably be considered counter productive.

by scarfie | 27th Jan 12, 10:27pm 1327656471

Perhaps the inflation really comes from people who are stupid enough to indulge in the commercial banks.

by Nic the NZer | 27th Jan 12, 10:53pm 1327658017

Debt requires a borrower, yes. But you should not go too far blaming either side for the crisis actually. The banks can't change the banking system, the reserve bank can't actually change the banking system much either, the borrowers have mostly (legitimately) no conception of how the banking system actually works. The borrowers could not see a crisis coming in 2008, but I believe that economists in finance should have (a few did). It should also be said that 99%+ of all mortgagees acted entirely legitimately, had/have secure jobs and borrowed amounts they could eventually repay with their income. I don't think borrowers did anything morally wrong, or even stupid.

However that is the source of inflation. Its not treasury deficits, because the treasury has no decent way of predicting what lending and inflation will be created off any deficits they spend. Its not really the reserve bank either, because nobody can predict the future, especially 5+ years hence, so when setting interest rates they can hardly prevent bubbles. In fact in many circumstances their hands are tied, if they marked base rates up to 12+% say in 2006 say (when the NZ housing bubble was well known about) they would possibly have caused it to break and thrown the economy into recession prior to 2008.

Want to prevent financial crisis and control inflation, the you need to change the monetary system.

by economist | 28th Jan 12, 12:08pm 1327705724

Nic,

Hyperinflation is caused by primarily government deficits. Take Zimbarbwe, for example - it started when the government decided to spend more money than it had and decided to give all veterens 50,000 in cash. The RBZ then just prints the 'credit money'. Take the Weimar republic - ditto, or high inflation in Israel years ago - ditto - government spending more than it had or could sustainably borrow - or take a dozen other cases....

by KanucK | 28th Jan 12, 7:13pm 1327731206

facepalm...

Hypernflation is caused by dysfunctional economies & governments. You need to consider the circumstances surrounding the Wiemar Republic & Zimbabwe scenarios.

Try reading this for a good summary: Zimbabwe for hyperventilators 101

So hyperventilate as you like but Zimbabwe does not make a case against the use of continuous budget deficits in defence of full employment.

Bad Governments will wreck any economy if they want to.

A wise government using the fiscal capacity provided to it by a fiat monetary system can engender full employment and equity yet also sustain price stability.

by Nic the NZer | 29th Jan 12, 12:44am 1327751066

I wouldn't give that Zimbabwe for hyperventilators analysis more than a C grade, it uses too many neo-classical concepts which I know are pretty dubious. But Hyper-inflation will only happen coming out of inflation. As the author points out there typically I think needs to be some reason why the government needs to raise new revenue, over and above the increase in its tax take from inflation.

In a deflationary environment the government would be the only source of new money, so if they change course and balance spending and tax then no more inflation (or hyper-inflation).

by economist | 29th Jan 12, 2:40pm 1327801213

Well okay - government deficits don't always create inflation - unless they are monetised that is - usually out of the fact that the government spending is well beyond the savings rate of the entire economy - eg Zimbarbwe - so it just borrows the money into existence (ie prints it)... that's my point... once it starts doing this then it's almost impossible to stop.... it matters not what triggers it - food shortages, war reparations, welfare payments etc.. the effect is still the same.

There's nothing wrong with government deficits if the growth in debt is below the economic growth rate....- just like any family - but as is the case for US, Italy, Greece, etc.... that's not true... infact the growth in debt is beyond even their capacity to grow... that means a default or monetisation or a bail out - until the Germans get tired of bailing out everybody, or they go broke themselves, haven't worked out what will come first... well probably the former actually.... kiss that euro good-bye - at least in its present form that is...

'A wise government using the fiscal capacity provided to it by a fiat monetary system can engender full employment and equity yet also sustain price stability.' .. yep - thats the whole point of the article really...(as do others like it)... Okay I call your bluff then, facepalm - NAME ME THAT WISE GOVERNMENT IT'S REFERRING TO - JUST ONE will do? - and anytime in the history of the world can be your reference range - just to be clear - the author is referring exactly to what government fiat monetary system that engenders full employment, equity and price stability?

Have a happy day,

Nick

by scarfie | 28th Jan 12, 12:11pm 1327705903

I agree, well I think I do:)

My own knowledge of the banking system has been stimulated by the crisis, although I also saw the crisis coming as early as 2004 without really understanding the detail. It was just a gut instinct that something wasn't right so I started consulting encyclopedia's at that time.

I have tried to explain my basic understanding of the banking system system to some but even then they either lack the capacity to understand or don't want to know. By capacity I don't exclusively mean intelligence either, some just aren't technically orientated despite an elevated IQ.

Although where you say 99% were essentially acting in ignorance I think you are being too generous. Where I get off that bus is where it steps up from someone borrowing for their own home, to those borrowing for property investment. You could even take that further and include business.

As far as I am concerned when you undertake to make profit then there is a duty of care to understand the system. But really the appropriate action when understanding how banking is really fraudulent is to cease participating at that point and to warn others of the danger. There are some columnists and contributors to these forums who do understand but use it system to their advantage. Quite despicable and they are really criminals. It is very similar to buying stolen property. Sure you didn't do the stealing but there is guilty knowledge and a contribution to the crime.

It is not capitalism at all, as there is very little of that involved.

by skudiv | 28th Jan 12, 12:43pm 1327707834

When you understand the system is fraudulent (and go throught the 5 stages of the awakening) you realise that most people are getting stuffed, and will struggle for their whole life. I have to say there is a choice to make, get flattened like everyone else, game the system, or work out the best way to become independent from the system. My choice is to use my knowlege to get independence from the system. I can't do that in a meaningful way, without using debt.

Welfare slaves, have no power, and few have any motivation to change the system. Wage slaves may have the motivation but very little power. Both depend on the system, to get their daily bread.

If enough people have the knowlege, and use it to become independent from the system, then there is the ability to help others and bring about change. Violent revolutions are no guarantee of a better future. Look at Libya, a violent dictator replaced by a mob of violent overlords, and crony capitalists.

Personally I believe precious metals are going to go stratospheric, which is why I'd encourage anyone to hold at least some physical. Use it to purchase independence when the price is right. If enough people wake up, and walk away from the wasteful, consumption based economy, and fraudulent montary system. Then there is a chance for meaningful change. There are very few people who in reality, would want a new system, while they are totaly dependent on the old one.

by scarfie | 28th Jan 12, 5:16pm 1327724161

Sensible words, although I don't think people will wake up as history shows otherwise. Too much trust in our leaders is a major flaw that I see.

PM's, well you hold a lot more certainty than me there but I guess if you have some then you own something tangible in a world of illusions(delusions?).

I actually see the Pan Asia Exchange as being the major issue this year, as it has the ability to give people a looking glass that cuts all the way to the slime at the bottom of the sewer. I am surprised there isn't more commentary on it. My question is what, if anything, the brits and yanks can do to counter it.

by economist | 29th Jan 12, 2:51pm 1327801878

Hi Scarfie,

If i may I suggest you get 'The Creature from Jekyll Island by G Edward Griffin - A second look at the Federal Reserve' - if you want an introduction to global banking. Its an easy read best seller and has chapter summaries at the end of each chapter if you are pushed for time. Available for free hire at most public libraries (at least Manukau has several copies)

by scarfie | 29th Jan 12, 4:28pm 1327807714

I will do that. There is certainly plenty of reference in other reading I have done that concludes the FED was the beginning of the end. "The New Empire of Debt" was a good one, and I particularly enjoyed "False Economy". I am still waiting on "The Guns of August", I can't even remember who recommended that one as it was a while ago I requested it.

by Roger Witherspoon | 27th Jan 12, 2:42pm 1327628559

There I was thinking it was the Auusie banks that had been printing, I mean creating credit, (oops sorry for that, how silly of me, completely different apparently) while the RBNZ had a nice long snooxe.

by Nic the NZer | 27th Jan 12, 8:59pm 1327651167

and you would be correct, though since interest rates had so little effect (even when they were near 16%) I doubt that being awake would have helped anyway.

by Wolly | 27th Jan 12, 2:54pm 1327629286

What a farce. Credit is money in this economy..indeed it is this economy...so whenever the RBNZ gives the required wink wink ....the banks start creating....exactly what's going on now...

The bubble in property has been restarted in Auckland with a vengence...were it not for nature we would probably see the same in parts of chch.

Saving is for mugs. The currency is debased in a never ending slide ...even 2 year olds know they must spend fast before they find their coins are worth less and wait too long they become worthless...story of our time.

But nobody in the RBNZ faces a decline in real pay do they....no way....it's top shelf all day every day.

by Elley | 28th Jan 12, 5:58pm 1327726714

"Saving is for mugs. The currency is debased in a never ending slide" If that's the case, planning for the future by saving for retirement is not common sense, it is completely pointless. Might as well enjoy life now and hope for the best! And saving for the kids' future is pointless too. As is saving at all.

So what option shall I pick: work just enough days/week to make ends meet or go spend the surplus every week to beat the inflation? Crazy.

by Gummy Bear Hero | 28th Jan 12, 8:06pm 1327734370

Let's take a step back from the gloomsters' cliff of doom , Elley ...... things may not be as dire as some declare .....

....... central bankers around the world are ( sadly ) giving up on sensible policies , and deciding upon money printing to deflate government debts away . That will erode the value of long term savings , if inflation ticks up . ..... . If !

Solid equity investments will trend up in price , along with inflation , given time ...... savers will be punished , and deeply indebted mortgage holders will win .....

...... it is all arse about , I know . Any idea of governments cutting back on spending , or lifting interest rates to encourage saving , have been chucked . Zombie banks have been declared " too big to fail " , and been bailed out , when they should have been bankrupted , in an orderly fashion .. ...

... , we're on a rip & a tear to cure a mountain of debt by adding to it , and then inflating it all away ......

Japan has wasted 20 years following the same policies .

by Kerry Hand | 27th Jan 12, 4:09pm 1327633780

QE really. What a menace.

Print the money. Screw those who have invested. Encourage the spenders. We all get poorer. And somewho this works ?

by Casual Observer | 27th Jan 12, 4:57pm 1327636669

Bollard tipped to resign. Ok, who wants his job?

http://www.stuff.co.nz/business/industries/6325929/Bollard-tipped-to-re…

by economist | 27th Jan 12, 5:03pm 1327636980

I'll have his job - I'll even do it for half the pay and no exit fee (of course I'd phase out the central bank altogether)...

by economist | 27th Jan 12, 5:03pm 1327636986

I'll have his job - I'll even do it for half the pay and no exit fee (of course I'd phase out the central bank altogether)...

by Gummy Bear Hero | 27th Jan 12, 5:10pm 1327637410

Wolly would be good !

....... Bernard would have to bring his own thermos to the lock-ins ; no more smoked salmon sandwiches and low-fat sugar-free decaf free-trade soy lattes .......

by Wolly | 28th Jan 12, 6:57am 1327687031

They would not appreciate my policies one little banknote bit.

Inflation target would be zero to .5% which would mean up goes the ocr.

LVR ceilings would be 60 to 70%

Mortgage protection would be restricted to first only and to the LVR level. Lending above that would have no legal protection.

All lending would be restricted to banks and credit companies only.

Payday loan scam outfits would be shutdown overnight.

Retail credit controls would be engineered to drive this beast into a vault once and for all.

Saving would receive the blessing of the RBNZ with govt on hand to slash taxation on returns and the returns would be higher with zero tax on govt bond interest payments to Kiwi citizens.

Bank senior staff incomes and director fees..... would be tied to the wages paid at the bottom level.

BH would be charged a fee along with the others wanting a briefing on the policy and planning.

by MortgageBelt | 28th Jan 12, 9:21am 1327695710

Welcome back Rob Muldoon. Get a hold of those controls & levers .... Why not throw in a major infrastructure profect while you're at it. Actually, not that crazy

by Wolly | 28th Jan 12, 5:38pm 1327725516

So what's wrong with any of my policies Mortgage belt?

The focus is on saving and reducing the property bubbles.

Of course it would be a total waste if the idiots in the Beehive set about a fiscal splurge using Kiwibank to flood the market with cheap loans based on dangerous leverage, for business setups...as they are about to do!

And ways would need to be engineered to throttle the inflow of overseas cheap credit...quite possible if the will is there. Currently it is not...!

It all comes back to govt being too gutless to ride out a storm of losses on deflating bubbles...nobody in wgtn has a pair when it comes to the banks being in total control...that's what the Crafar fiasco was all about....the bank refused to take a loss....needed a fool to pay up.

by steven | 29th Jan 12, 5:00pm 1327809633

There is a reasonable argument that,

a) Govn spending should be counter-cyclical, a govn gets better value when work is scarce and it keeps employment down.....

b) and one off Govn projects are not inflationary.

c) There is only a marginal cost on employing someone to build a sam (say) v keeping him/her on the Welfare....

The problem is the right projects....Right now we need (tallow) bio-deisel plants to be got up and running and other green projects...instead we will sit here and do nothing or build more roads which will be useless....

regards

by muzza | 28th Jan 12, 10:34pm 1327743272

Rob Muldoon lives on , a form of State-controlled fascism, albeit without the racialism.

The fascists like Hitler and Mussolini were also big on their hatred of the banking/financial sector's conspiring to screw everyone

by economist | 27th Jan 12, 5:01pm 1327636904

Perhaps he should read the article Ben Bernanke co-authored a couple of decades back stating QE doesn't work....? Oh well - roll on those zero interest rates then - let's have another housing boom... maybe the next one might be the biggest... is this some kind of joke?

by skudiv | 27th Jan 12, 5:48pm 1327639729

You will never get another round of QE, it will have a new and better name, like operation twist, QE has become tainted, and is forcing more covert forms of monetization. The LTRO/Ponzi Bonds fiasco is a perfect example, the main flaw is that the assets still show up on the balance sheet. Sooner or later they will figure out how to hide the transactions off balance sheet, somewhere in the footnotes. If they aren't already doing this.

by Wolly | 27th Jan 12, 5:52pm 1327639961

Shame on you skudiv...fancy suggesting the Fed would be involved in dirty tricks....they are as honest as the elected member of the US govt....all branches...roots included.

by economist | 27th Jan 12, 7:55pm 1327647344

yes yes, the fed would never deceive us ba ba ba they know whats best!

I mean its not like we will ever need to audit them or anything

by MortgageBelt | 27th Jan 12, 7:23pm 1327645400

We need more OCR cuts before the QE. Too late to cut once we stall.

by steven | 29th Jan 12, 4:48pm 1327808931

I think the world is stalling.....NZ will be pulled into it...

regards

by scarfie | 27th Jan 12, 10:35pm 1327656924

Well that would rhyme nicely with STD.

by philthy | 27th Jan 12, 8:22pm 1327648972

Yeah it's a great option when you've been ridiculously irresponsible at running your country, and want to do nothing but help idiots in their pursuit of unproductive activities like buying houses.

by Andrew Atkin | 28th Jan 12, 3:59pm 1327719544

What Bollard needs to do is explain, in direct structural tetrms, how money printing will lead to a rebalance and correction in our economy. If he can't then fire him.

And I don't think he can. Can anyone? I get the feeling that John Key and his spinless chums and going to take us to Greese.

by steven | 29th Jan 12, 4:46pm 1327808795

He isnt printing, and I cant see how printing does as you suggest.....it stops a depression ie a liquidity trap get out card....its buys time, which, especially the USA has wasted....and its not up to him to re-balance the economy, its the Govn's job....

Maybe you need to read up on the RB's function....

regards

by Andrew Atkin | 29th Jan 12, 5:28pm 1327811315

It delays a depression, and makes the final depression (correction) worse because you get even more debt, but no correction. If Bollard can't understand this then I believe he should be fired - or is he just recommending the model of the corrupt USA for the sake of looking to be doing/thinking the right thing?

Bollard should explain how the economy can be rebalanced with QE. Maybe I am ultimately wrong? If so then can a critic please explain to me how economies can rebalance out of debt with even more debt being added.

by MortgageBelt | 29th Jan 12, 5:33pm 1327811633

Well, we now know that the OCR is never ever going to be raised again in the next 5 years.

And an OCR cut is coming sometime in the next 12 months as the banks are trying to brainwash the public that their retail rates are now 'independant' of any OCR in future.

And QE will also be coming to NZ sometime in the future as we have had the first 'airing' of the concept - more pre-sales PR will be coming on that over the next 6 months...