Post RSS Feed 
Podcast Feed
RBNZ’s Bollard warns households not to resume ‘borrow and spend’ habits
July 14th, 2009
Reserve Bank Governor Alan Bollard has told a business audience in Hawkes Bay that early signs of an economic recovery are emerging in New Zealand before the rest of the world, but now was the time to rebalance the economy in favour of production rather than consumption.
Therefore, households should avoid resuming their ‘borrow and spend habits’, Bollard said.
Here is the full copy of the release with the speech below.
Household savings, investment in the tradable sector, and deeper funding markets are the key to New Zealand’s economic recovery, Reserve Bank Governor Alan Bollard told a Hawke’s Bay business audience today.
“Early signs of global recovery have now emerged. We have avoided a repeat of the Great Depression,” he said. However, world growth will probably be subdued for the next one or two years, and the current low international interest rates, expansion of liquidity and central bank balance sheets, and fiscal stimuli will be necessary for some time.
“New Zealand looks likely to start recovering ahead of the pack. But this is an opportunity to rebalance. Getting the sort of sustainable recovery we want will be assisted by: first, greater savings by the household sector, to reduce the need for foreign funding of the economy; second, investment in the economy’s productive base, particularly in the tradable sector; and third, greater durability and depth in funding markets, including a lengthened maturity structure for bank funding.
“A clear risk over the medium term is that households resume their ‘borrow and spend’ habits before they have paid down some of their existing debt. This could be triggered by renewed moderate house price inflation, and needs to be avoided.”
With slower growth in household income expected, households would have to reduce spending growth to repay their debt. “Reliance on past experience of strong house price inflation and easy credit will be untenable.”
Increased household saving would have the added advantage of providing a more stable source of funds for business investment and expansion, reducing reliance on foreign funding. This would contribute to more stable and lower interest rates, thus promoting a more sustainable growth path.
Stronger world demand and a weaker New Zealand dollar would provide the signal that investment needs to move to the tradable sector to help correct the current account gap. However, financial markets were currently focused on a US dollar correction. “We hope that, in the next phase of recovery in financial market sentiment and return of risk-seeking, the markets will be more discriminating about New Zealand,” Dr Bollard said.
A priority over the coming year or so would be for New Zealand banks to diversify their funding sources more, and to increase the proportion of stable funding sources, including long-term wholesale borrowing and retail deposits. The Reserve Bank’s recently released prudential liquidity policy for banks will reinforce this move.
The Reserve Bank appreciated that interest rates are a blunt instrument to curb excessive borrowing, Dr Bollard said. “We see prudential policy potentially playing a greater role in the future.”
Attention is now focused internationally on the potential role of minimum capital and other prudential requirements on banks in dampening business cycles, the impact of smaller and peripheral financial institutions on financial system behaviour, and how cross-border financial activity should be monitored or regulated.
In the recovery, he said the Bank’s focus will be on keeping inflation expectations anchored, the macro-economy stable, system liquidity available and the financial system stable, so that funds keep flowing and relative price signals work.
The Reserve Bank would be closely watching the international debate in these areas for insights into improving its own framework. “At this point we are reasonably well-positioned to adapt in light of the new thinking, with a conservative approach to bank capital adequacy, the new legislation bringing the regulation of non-bank deposit takers into our responsibilities, and long experience in managing macroeconomic stability, financial stability and prudential policy functions under one roof.
“The New Zealand economy has taken knocks in this crisis, but some form of recovery is now on the horizon. Our opportunity is to use this time to rebalance the economy for the medium term.”
The speech can be read at the following link:
Here is a full copy of the speech here, including charts.
Popularity: 9% [?]
You may also like to read:
Loading ...
July 14th, 2009 at 11:09 am
My immediate thought on reading the speech is to ask the question: “Why aren’t you putting up interest rates if you’re worried about consumers borrowing and spending too much?”
I don’t understand why anyone would invest in productive assets when low interest rates encourage them to invest in very risk averse (on the face of it) things like rental property.
July 14th, 2009 at 11:12 am
“My immediate thought on reading the speech is to ask the question: “Why aren’t you putting up interest rates if you’re worried about consumers borrowing and spending too much?””
Very fair point.
July 14th, 2009 at 11:31 am
Maybe, if he had a supplementary instrument to the OCR that, effectively, controlled volume of credit, he might feel a little more comfortable with increasing the price of it via increased OCR? In aggregate both would restrain another asset bubble, savers would be happier – and exporters might get some breathing space with the ex-rate. Maybe?
July 14th, 2009 at 11:32 am
AB is a Muppet, the above point is the most obvious.
Instead of letting property correct itself he softened the blow by reducing interest rates.
What better time would there have been to encourage people to save, savers could have got 8% in the bank while property prices plummeted. We would not be seeing the increase in property sales we are now.
July 14th, 2009 at 11:34 am
couldnt agree more Bernard, which is why I suggested that he be the next person you interview to ask that very question – its like giving your 6 year old kids 100 dollars and telling them to spend it wisely. They will have a great time eating lots of lollies, but it will do their teeth damage in the long run. NZers are that immature when it comes to investment decisions and understanding of long term risk from excessive borrowing. We NEED our parents/govt/RBNZ to FORCE us into better behaviour. They are neglecting their duty.
July 14th, 2009 at 11:35 am
The only reason that question by Bernard will go unanswered is the place where Michael Jackson used to be in residence has now a potential new tenant maybe NEVER NEVER LAND we all live in a fools paradise or in the RBNZ comments a paradise run by fools.
July 14th, 2009 at 11:43 am
The horse could have already bolted. There is a shortage of residential property in auckland . The Bamks are already cranking up their lending and reducing their deposit requirements. Interest rates are the lowest in N Z s history. property appears to be the main driver of economic growth in all the Anglo countries. Bollard is dreaming.
July 14th, 2009 at 11:51 am
Agree Jimmy but last week the BBoomers were being accused of getting us into this mess by the X & Y’s. Sorry you can’t have it both ways , mate.
As for Bollards predictions — very , very few economists saw the crisis coming so I would not trust them to see the light at the end of the tunnel. From NZ’s point of view I’d listen to a seasoned exporter first to hear what he/she “sees on the ground “
July 14th, 2009 at 11:55 am
Ross,
I was not implying the 6 years olds were GenX and Y – the baby boomers are just as immature in their investment habits, probably worse.
July 14th, 2009 at 12:05 pm
Dear Dr Bollard,
What have you been smoking?!?!
I thought you wanted banks to pass on more of your OCR cuts to savers (ooops borrowers) didn’t you?? And now you want more people to save and not ‘borrow and spend’.!?!?
Time to hand over that nice big shiny OCR lever to someone else !!
Matt @ the bank.
July 14th, 2009 at 12:07 pm
Time to hand over that nice big shiny OCR lever to someone else !!
No. Time to reassess the entire central fractional reserve banking system full stop. Dump the RBNZ.
July 14th, 2009 at 12:08 pm
True !!
July 14th, 2009 at 12:10 pm
Jimmy — my comment was a ” tongue in cheek” comment on the last two sentences in your post. I agree that parents need to lead by example with their kids , but I’m not sure the govt. and RBNZ can force us into better behaviour ( their behaviour is often not the best example to follow )
July 14th, 2009 at 12:19 pm
As much Bollard would like to increase rates to ward off property investment again, he can’t, because it would kill off growth in the business and agricultural sectors. There is more to our economy than property…..
July 14th, 2009 at 12:27 pm
Ross – I agree with your sentiment, the variance in views from economists tells me no one really knows what’s going to happen. They didn’t see it coming, so how can the see the end?
I personally suspect the reserve and government bank has been trying to jawbone the economy back to life, because that’s the only thing they have left.
Look to the actual underlying indicators of economic activity, i.e. international shipping volumes, road and train freight, manufacturing figures etc. Until the real inner workings of the global economy start improving I can’t see any meaningful recovery.
The ‘green shoots’ so far have only been a stabilisation in decline, possibly a bottoming out. Is it temporary stall in decline, are we in for more pain – or is this a start of a long slow recovery. I doubt anyone really knows the answer, but I suspect we will know by the time the end of the year is out.
July 14th, 2009 at 12:33 pm
chris…Businees & Agricultre are already paying high interes rates relative to home mortgages.iI,m no economist but wouldnt higher deposit rates help supply funds for banks to lend to these sectors ,and reduce the banks need to source funds offshore from potentially more expensive sources?over thpast few years cheap (&; available)money for farmers has forced up land prices with a minimal effect on xtra production.I agree though with your statement”the is more to the economy than property” it would be nice if those in power had the same sentiment.
July 14th, 2009 at 12:43 pm
when it comes to reverse psychology i am a real sucker, tell me to do something and i’m almost automatically doing the opposite, is this the intention of such a statement….
July 14th, 2009 at 12:52 pm
Chris, businesses pay a far higher raate of interest than house owners, and this interest rate has hardly dropped, despite the OCR cuts. I don’t know why bollard isn’t putting more pressure on these banks to lower their business lending rates, rather than putting pressure on their floating home lending rates, which is fueling the new property bubble. It just doesn’t make sense. If we want to fuel a recovery, we need lower business lending rates, to fuel new businesses and growth, as it is businesses that are going to get us out of this recession, not buying and selling houses to ourselves, which is not a real and sustainable ‘green shoot’.
It was only a few months ago when bollard was telling us all to spend and support the economy, rather than save, this guy just doesn’t have a clue. No wonder NZ is so mixed up, with such mixed messages.
If bollard was to encourage saving, he will need to raise the interest rates, or possibily see that interest on savings aren’t taxed, otherwise there is no real reason to save. However if bollard was to raise interest rates, it will mean that the NZ dollar will raise, as overseas investors come in to take avantage of our higher rates, which will mean decreased earnings from overseas by selling our pile of milk powder. As our recovery has to be export led, this is not acceptable.
July 14th, 2009 at 1:30 pm
“New Zealand looks likely to start recovering ahead of the pack”
Very helpful comments, that are unlikely to help lower the kiwi dollar..
Oh and also Singapore beat us to recovering ahead of the pack;
http://business.smh.com.au/business/singapore-economy-booms-out-of-recession-20090714-djg4.html
July 14th, 2009 at 2:17 pm
Here is the key comment, “Attention is now focused internationally on the potential role of minimum capital and other prudential requirements on banks in dampening business cycles” maybe, just bloody maybe they have finally realised that it is not so difficult afterall to slam the door on the stupid lending behaviour going on. Again I ask, why are they not setting maximum residential mortgage loan limits and using the power of the lack of security over loans to both raise the cost of unsecured credit and to curtail demand for overpriced properties? This is so simple. The fact that the banks are able to receive the power of the State through the Judicial system to protect their dumb lending, has been forgotten by everyone.
July 14th, 2009 at 2:35 pm
Rob,
“As our recovery has to be export led, this is not acceptable.”
I actually disagree. Our debt payments oversease are so crippling at the moment that we need to be more and more productive every year just to stand still. Its reached the point where debt reduction is in my opinion a far mroe pressing concern than increased productivity, especially as it is a no brainer to achieve. Its hard to come up with great products the world wants to buy. Its easy to stop pissing interest overseas – just prevent people from taking on lots more debt – higher rates, remove tax on savings, ring fence -ve gearing losses, add housing supply, reduce immigration. These measures would have a far bigger impact on our net current account position than increasing productivity which is always going to be uncertain. On a macro level its a bit like following the advice that you should always pay your mortgage off before investing. the % interest you pay on your mortgage is GUARANTEED and unlikely to be lower long term than your UNCERTAIN investment returns.
July 14th, 2009 at 2:40 pm
or to put it another way. The NZ economy is like a car – we need fuel to run and its very important that we continue to looks at ways to earn enough to buy the fuel. But right now the tank has sprung a massive leak, and its leaking out fuel faster than we can fill it. We need to stop the car and FIX THE LEAK RIGHT NOW!! And yes we will not be getting closer to our destination while the leak is fixed, but better than being stranded in the desert!!
July 14th, 2009 at 2:52 pm
jimmy , I do agree. It is however the Reserve Bank who is focusing all their efforts into an Export Led recovery. Therefore the low interest rates, are largely for that benefit. However with business lending rates so high, I can’t understand why they aren’t putting pressure on banks to lower business rates, becuase their export led recovery which requires businesses to borrow, isn’t going to work.
July 14th, 2009 at 3:03 pm
Here’s a blunt question: Why is the Judicial system protecting bank lending, even if lending is clearly causing harm to borrowers?
July 14th, 2009 at 3:13 pm
Because, Wally, it is not the role of the ‘judicial’ system to protect people from themselves – unfortunately, the Government has taken that role on Itself, hence the insane and offensive debacle which is folic acid, the welfare state, the Finance and Expenditure Committee, and every other act limiting my freedom and costing me (tax) money.
The role of the legal system is/should be to enforce contract (civil), and to punish those who would initiate force on others (criminal). Or is it your position that your bank forced you to take a mortgage from them? If so, then we are plainly not living in the same country.
July 14th, 2009 at 3:28 pm
Mark! “The role of the legal system is/should be to enforce contract” …is this what is happening in the USA ?
July 14th, 2009 at 3:41 pm
Isn’t Bollard just basically signalling —-> if you borrow and spend, I will put up interest rates.
He sort of has 2 levers – he can raise and lower the interest rate, and he can threaten to do it.
July 14th, 2009 at 3:46 pm
Les, indeed. Dr Bollard said: “We see prudential policy potentially playing a greater role in the future.”
Jimmy, you raise a valid point. Nonetheless, higher interest rates are not the answer. It increases the cost of repayment and drives up the exchange rate.
There is a more cost effective way. Requiring larger deposits reduces people’s ability to borrow while encouraging people to save – win-win.
The current situation is so dire we need to concentrate on both (increasing productivity & debt reduction).
July 14th, 2009 at 3:57 pm
Mark , i went into a property joint venture and unbeknown to me the BNZ approved the mortgage based on fraudulent information it received from my JV partner. The JV partner went bankrupt and i was left holding the baby as the judge ruled that although the bank was grossly negligent (in accepting fraudulent information with absolutely no verification) it owed no duty of care to me.
Wally- i like what you’re saying.
July 14th, 2009 at 4:15 pm
the chairman
What you say makes sense. I was very sure iny my mind that the 20% deposit was here to stay for another decade atleast……..but westpac is already advertising minimal deposit loans. you would have thought this is a great opportunity for the RBNZ to enforce some rules.
July 14th, 2009 at 4:20 pm
Excellent comments that I can’t do much to improve on. I would perhaps persue further challenging the relevance of improving productivity in a depression.
A quick assessment on Alan Bollard/RBNZ’s logic: 28:0 against.
July 14th, 2009 at 4:34 pm
What a load of garbage fronm Bollard. As others have mentioned, if he wants kiwis to save and not to binge on debt then there needs to be the incentive to do that.
I despair, I really do!!!!
July 14th, 2009 at 4:53 pm
Im no expert on economics , but have a couple of questions for anyone who cares to answer them
1. Last December didnt he tell us the recession was over ?
2. Wont this latest attempt at jawboning help underpin the NZD…which wont help an export led recovery ?
July 14th, 2009 at 4:56 pm
It’s all words, words, words – and nothing to back it up from AB. What’s the old saying – actions speak louder than words?
BTW – I didn’t put in a tender, I don’t want to participate in the bubble.
July 14th, 2009 at 4:57 pm
Matt, don’t despair, use your time to prepare! We know what’s coming.
We also know the govt and the RBNZ will not lift a finger to prevent the banks from throwing as much petrol onto the residential property bonfire as they want. It will be the overseas investors who currently lend their savings to Noddyland that kick this place up the bum. Iceland here we come.
July 14th, 2009 at 5:01 pm
Bollard – If this is what the New Zealand taxpayer gets for $450,000+ a year all I can say is, God help NZ. Is he in the pockets of the Banks? Save and end up with stuff all. Thanks but No thanks Doc!
July 14th, 2009 at 5:02 pm
Andrew.
Alan ‘the recession is over’ Bollard has morphed into Alan ‘we avaoided the depression’ Bollard.
Anyone expecting Alan ‘Central Banks were partially to blame for the depression’ Bollard?
July 14th, 2009 at 5:20 pm
Bernard, I just read your excellent article in the Herald on your advice to Bollard. Thats about all he is, a finger wagger, that sends mixed messages on a weekly basis. What was his claim to fame before he came to his present position? Has he ever been on The Rich List? I think he needs replacing as soon as possible. The country deserves better. Cheers
July 14th, 2009 at 5:28 pm
Bernard,
and another question for Phil Heatley on the home loan extension
http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=10584301
My question is :
WHY?
July 14th, 2009 at 5:32 pm
Bernard, I just read your excellent article in the Herald on your advice to Bollard.
Does anyone have an online link please (I’m assuming it’s on this blog somewhere)?
July 14th, 2009 at 5:36 pm
Mark, I read it in the online edition of the NZ Herald. Cheers
July 14th, 2009 at 5:57 pm
Here’s the link to my finger wagging piece
http://blogs.nzherald.co.nz/blog/show-me-money/2009/7/14/stop-wagging-your-finger-and-start-hiking/?c_id=3&objectid=10584438
cheers
Bernard
July 14th, 2009 at 6:10 pm
Just words. Cash savers receive a return below the rate of inflation after 39% tax. House price inflation is well over the rate of general rate of inflation. Poor are forced to pay a rent matching 6-7% of the value of the property, and hence they cant save either. The only sector that is benefiting is those who took excessive debts.
July 14th, 2009 at 6:47 pm
Just wish I followed my gut feeling and brought more property 8 months ago, oh well
July 14th, 2009 at 7:07 pm
Bernard
Good herald article. Any news on an interview with Phil Heatley?
July 14th, 2009 at 7:09 pm
Veedub – well I think you made the right decision, but the property bulls would probably beg to differ
July 14th, 2009 at 7:15 pm
Jimmy – the first home scheme is really dumb
It has the potential to actually INFLATE house prices, therefore it is self defeating
These Nats are no better than their socialist friends
Bernard, your duty is to grill Heatley!!!
July 14th, 2009 at 8:31 pm
Bernard, good article in the NZ Herald. Regarding Bollard should hike up the OCR, hasn’t he already essentially promised that it will remain near this current level until near the end of 2010? Therefore even though it may do more good than harm to raise the OCR, can he go back on his word? If he did go back on his word, would that mean that he would have to resign, as businesses and people will have lost faith in him if they haven’t already.
July 14th, 2009 at 10:22 pm
From reading this you have to ask where did the cheap money come into the banking system. (Money does grow on trees) US $50 trillion of global wealth was wiped out in the past 18 months. There must be a pact between the OECD countries to keep interest rates at very low levels to hold up the US dollar. Let the bailout bubble rumble along before that bursts.
July 14th, 2009 at 11:09 pm
Raising the OCR only increasing the money in circulation as global banks take every opportunity to get higher yields at the lowest possible risk and will again flood NZ with money.
So let’s see what the lowest possible risk might look like from their perspective. Perhaps it’s the Governor of the reserve bank now jawboning the public “not spend but safe” trying hard not to announce we may be facing a bank fueled inflationary cycle.
When the time comes he will pull his one lever (the price of money via the OCR) and whoops, the price goes up but the money keeps flooding in. So then you ask where does it all go?
Well it goes back into housing of course. How? Just change the deposits required ever lower and it all starts up again….. Highest yield you can get if you’re a banker. You get to write back those previsions as all your property issues are now resolved from last year, you bring the money in cheap and get to lend it out at higher and higher margins as the OCR finally gets acted on as its going up!
Mean while they get an extra kicker from the increase in the exchange rate as the carry trade goes into over drive. Well a double kicker really as that’s FX trading so they get a slice of that one as well.
So what’s wrong with this picture?
Nothing if your happy to have the banksters manipulate the country in this manner. When we first said that the banks where gouging (9th of February) http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10555813 it was such a shock to them that I received a very abusive call from ANZ bank asking how I dear to suggest they where gouging .
Well now it’s a call from every street corner. We all want an explanation, all except John Key and Bill English. Why is that?
Could it be that any enquiry will expose the desperate need for CGT and reforms to our Monetary policy. Or worse, could it expose the need to recapitalize Kiwi Bank (to enable it to take market share) and have it fill the role of the High Street moderator to keep foreign banks in check.
None of these align with current or past National policy, so to open up a broad banking enquiry would opening a can of warms for National. It’s just a pity that the country doesn’t come ahead of politics (applies to all party’s equally) as another round of housing inflation and associated high interest and exchange rates will push the productive economy over the edge. You think farmers have a problem now, just wait and see what our friendly banks have in store for them.
July 14th, 2009 at 11:43 pm
Rob,
Bollard has every right to go against what he has indicated – thats why he has the power to set rates more than once every 2 years, circumstances may arise that require a change in policy. It would seem he was not expecting such an upsurge in debt based on his low interest rates – for that he is an idiot. Clearly things have changed and hopefully his comments signify the beginning of a return to rate rises. Anyone who relies on a “promise” to gear up deserve what is coming to them.
July 15th, 2009 at 6:41 am
Bernard – IMO your finger wagging article was not that good.
You, like AB appear to have missed a major point and that is, if we simply follow your (orthodox) prescription and, as you suspect AB is hoping for, we see the orthodox result of a downgrade – then we will have wasted a good recession.
In other words we will not have recognised the need to change mon.pol and add an effective credit volume control.
Sure a downgrade will weaken NZD, but unless we modify mon.pol as suggested the situation will only suit asset investors who enjoy inflationary cycles (buy the dip, sell the failure) and exporters who rely more on immobile assets (primaries), than those who might broaden, de-risk and increase the value of our export mix, who rely more on immobile assets, eg. people and value-add plant/systems.
As you say:
“The great irony, of course, is that a higher OCR is likely to push up the New Zealand dollar and further hamper any shift in the economy to the productive sector from the consumptive sector.”
So how should we fix that?
One answer is, and in support of Selwyn’s comment – have the inquiry – as with the right kind of ‘joined up’ thinking there, this problem would of necessity also be addressed.
July 15th, 2009 at 8:30 am
What’s the point of the debate, the fatheads in the Beehive will sit there on the 9th floor sipping their tea, Bollard will carry on wagging his finger into the future at one and all and the banks will continue to run the country for the benefit of the banks. The peasants will think everything is humpty tumpty again because they can roll up to one of their masters and get a big fat wad of money to throw at already price bloated rubbish. The overleveraged can see big fat capital gains. The fools on the 9th floor will think they have done enough of doing nothing to win another 3 years in power.
July 15th, 2009 at 8:52 am
Chandra, indeed. Now is the time to act.
Bollard is in a bind, hence the attempted balancing act.
We need interest rates to remain low to help keep down the rate of exchange, to encourage productive investment and to help lower the cost of debt repayment. However, on the flipside lower interest rates also encourages consumers to borrow and spend while discouraging savings. Which explains bollard’s actions to date.
Bollard is trying to create a balance by tinkering around the edges and waving the finger, when it’s clear it’s time take off the gloves.
However, if he were to increase interest rates it will attract a flood of foreign capital and most should remember what happen last time he increased rates and the banks had money to lend.
Bernard is right. He should stop wagging his finger. Consumers and banks respond to “real signals” (which last time round banks and consumers totally ignored) hence the need to regulate.
The OCR alone has become an ineffective tool and banks seek to serve their own interest with some back to lending up to 90 per cent – therefore, the most cost effective way to get on top of the situation is to send some “real signals” that can’t be ignored – balanced regulation.
Dr Bollard even said: “We see prudential policy potentially playing a greater role in the future.” Well, that time is now. We can’t afford to let the “debt-laden truck” go on.
July 15th, 2009 at 9:10 am
Nah, you won’t see anything happening apart from hot air and finger wagging. Expect the banks to flood the residential property market with cheaper and larger lumps of loot as they realise complete ownership of all family income is in their grasp and total control of the economy is being handed to them on a plate held in the fingers of the legal system which they made sure gave them a win win mastery over all things financial. Key English and the RBNZ are a waste of space. Govt has been reduced to a poodle on a leash trotting along beside its master the fat banker.
July 15th, 2009 at 9:36 am
Correction to my earlier comment in this thread, middle paragraph should read:
“Sure a downgrade will weaken NZD, but unless we modify mon.pol as suggested the situation will only suit asset investors who enjoy inflationary cycles (buy the dip, sell the failure) and exporters who rely more on IMMOBILE assets (primaries), than those who might broaden, de-risk and increase the value of our export mix, who rely more on MOBILE assets, eg. people and value-add plant/systems.”
Need more coffee – I can’t manage on one a week Bernard…
July 15th, 2009 at 12:00 pm
Many years ago…. in the dark old days of Lord Keynes…. Fiscal policy AND Monetary policy were considered to be the “Twin Pillars” upon which inflationary/deflationary pressures were managed.
How about using a little fiscal policy today..
Increase GST to …?????? and decrease personal Income tax by… an equal amount….
This would provide tangible incentives…rather than AB giving us lectures
Leave the OCR alone ..for the moment….. (try to moderate exchange rate movements… and give exporters and producers some stability so they can make some medium term decisions….)
Just one idea…
July 15th, 2009 at 12:19 pm
roelof – the right kind of thinking, I reckon. See the ‘What I think’ part of this article – even better – 23% flat:
http://www.interest.co.nz/ratesblog/index.php/2009/05/08/have-your-say-what-should-the-new-tax-working-group-recommend/
July 15th, 2009 at 12:44 pm
les … I can see the benefits of a flat tax system…
But I also see how the lower income earners are struggling…
I would prefer a system where the first $ X,000s’ of income is TAX FREE…. (eg. first $20,000 of everyones income is tax free)….
I do believe the PAYE tax system is a very unfair form of taxation ..A flat tax would go some way to making it fairer.
I prefer the Henry George way of “land tax”.. ( land meaning, land + natural resourses)
He advocated ZERO income tax but have a land tax instead.
I’m not a “Socialist” but, to me, one of the most disturbing long term trends in the western World is the concentration of wealth in fewer and fewer hands…… whoops..I’ve gone off-topic
July 15th, 2009 at 1:06 pm
AB is being criticised for not using the stick, OCR, what was the outcome of high interest in the recent past? Why is it that solutions other than use of OCR are not proposed by an influential writer like Bernard?
July 15th, 2009 at 1:21 pm
Gidday Nomad, waste of time mate. The place is destined for the debtors prison from which it will never escape but the peasants will have borrowed their way into an eternity of misery feeding the fat banker and throwing scraps to the two poodles as they are dragged on their walkies.
July 15th, 2009 at 1:23 pm
Where can I see stats on the composition of NZ debt? Who are the debtors, mostly?
If they are mostly people who just own their own homes, I can’t see how raising interest rates will help reduce existing NZ debt. Low interest rates might help if households are able to save a little extra to put against the principal every year. But that would only be possible for those whose mortgages are up for renewal.
Bernard, your “anyone” wanting to invest money while avoiding risk should pay off their own mortgage first because interest rates are bound to rise. Then maybe the banks will be able to shift that capital to lend to productive businesses. It seems to me that buying over-valued rental houses using high levels of credit is extremely risky when interest rates are going up.
On the whole, I like what Bollard said. Reduce household debt, improve productivity, and reduce depency on short-term volatile funding. Sounds like a plan.
July 15th, 2009 at 1:27 pm
I find it amusing that Alan Bollard choose to use the only tool that had proven to be ineffective the past two years….TALK !!
Central Bankers are given powers even Politicians envy…and he chose to use the one that’s proven unworkable.
The Banks has ignored him, the borrowers had ignored him, soon everybody else will do the same. Even the Politicians…except they will need to find another scapegoat then…
His own analysis shows that nothing works…paraphasing his words : “when the economy gets better, it’s only to get worse later”. He sees microbiotic movements to be “green shoots”, with higher borrowing later becoming the pesticide.
What NZ needs is a lower exchange rate to repay our foreign debt, and a higher interest rate to kill off unproductive investment and consumption and improve savings.
He believes there is no other tool except “responsible borrowing and lendings”.
I believe the rest of the world has already found the solution which he refuses to see…it’s called “devalueation”. Every country is doing it but not telling you….RBNZ believes they are wrong ? Wonder why Singapore last Q is up 24%? Because they kept their exchange rate low !!!
July 15th, 2009 at 1:41 pm
hey here’s an idea, spend less than we earn, then bang those accumulated savings into a ‘nice’ investment property – who wants to wait until 77yrs old to get the pension anyway when these things are best done without government interference… as the results are quicker and obtainable.
and only spend the happy money once it is in your hand, not on paper….
July 15th, 2009 at 1:42 pm
Kin, it doesn’t work mate.
July 15th, 2009 at 2:51 pm
Back in 2002 i was desperately trying to save to buy a house not as an investment but somewhere to call a home, then the bubble went up which meant even tho i was saving i was going backwards fast. All very depressing for a period of years then early this year i thought i might have a window, interest rates for savers were around 8% and it looked like property was going to get the correction it needed. Now more depressing my savings are worth less than 2% after tax and property looks to be on the up again. So thats 8 years now i’ve been shut out and now my savings are being inflated away. Can anyone give me some sound advice as to what i should do with my savings going forward as bollard changes his mind every week other than take my money out of nz in protest.
July 15th, 2009 at 3:00 pm
Jon, savers are made fools time & again. If you have over one-third equity, buy a house and do not rent. The maths is simple. Interest after tax is below the rate of general inflation. House price inflation is much higher than the general inflation.
In any market, you can find a bargain as long as you investigate well on the location and quality of the property. It is not a bad idea to buy an ex-rental in a good location and do it up rather than buying an overvalued house that has a new flash of paint. Good luck.
July 15th, 2009 at 5:49 pm
Jon, try and get a family member to top your deposit up if need be, buy a solid house that needs cosmetics on as much land as possible in a family area/ good school zones and I think you cant go wrong. Wouldn’t touch units/ townhouses/ leasehold/ crosslease/ mainroads/ freshpaint/ under 500 sqm. Hope you are able to find something that suits, saving is waste of time for next few years in my opinion, better off paying a floating mortgage back asap. My 2c
July 15th, 2009 at 7:16 pm
Jon,
Dont listen to BuyerInCch and Sam P. Yes, yields in saving are pitiful, thanks to absurd tax laws and artificially deflated rates. And yes, it would appear the govt and RBNZ are doing everything in their power to keep the bubble inflated. But lets get one thing clear, right now saving is the lesser of 2 evils. The ABSOLUTE BEST CASE SCENARIO for the property market is inflation level capital gains over the next 5 years. (Households are stretched and can not take much more debt to fuel further gains, and if they could the Reserve Bank would hike very quickly – despite Bollards stupid policies he knows how precarious NZ’s debt position is and has warned on this today.) The muted gains will never be enough to offset the additional costs of ownership v renting (ESPECIALLY ONCE RATES RETURN TO >8%). If you cant win on a best case scenario, I would say avoid it at all costs. You can do the math to see how you would be if we have further drops or even stagnation.
If you can find a bargain as Sam P says then great – although I find it funny how the bulls are saying if you are smart you will fund bargains out there while at the same time they are saying the market is going freat guns and prices are good again. WHY WOULD SOMEONE SELL AT BARGAIN PRICES IF THINGS ARE BOOMING?????? And remember, for something to be a bargain it would need to be 40% below GV, 30% below would represent fair value.
Hope this helps. Yes savers are being screwed, we are helping to smooth out the fallout from crazy lending and speculation. But it is very much the lesser of 2 evils, and definately give a global index share portfolio some of your funds.
July 15th, 2009 at 7:30 pm
@ Jon
hope you have the commonsense to not listen to jimmy, but be guided by BuyerinChCh, as that advice is the raw goodness through and through. you will not find anyone with those guidelines that fell into trouble as the market underwent it’s blip as the world was faced with a depression on it’s doorstep. and that is in very dire times indeed, added to which i hope we will not see again for some time yet (some say every three property cycles – or every 21 years or so we get these market recessions – it’s just part of the game)
anyone happy with 2% return on investment can lend their money to me. i will give them 2% all day long, which is my way of saying, if savings is their ‘investment’ then they are courageous enough to slip slowly into poverty as their money slowly burns itself into worthless pennies…
HOWEVER, understand due diligence, for without that you are throwing money darts blindfolded, and there is a very big chance you will lose it all…. (i.e. leaky house)
July 15th, 2009 at 7:38 pm
buyrinchch says:
“Jon, try and get a family member to top your deposit up if need be, buy a solid house that needs cosmetics on as much land as possible in a family area/ good school zones and I think you cant go wrong. Wouldn’t touch units/ townhouses/ leasehold/ crosslease/ mainroads/ freshpaint/ under 500 sqm. Hope you are able to find something that suits, saving is waste of time for next few years in my opinion, better off paying a floating mortgage back asap. My 2c”
Anything that meets those criteria in Auckland is likely to cost at least 550-600K
July 15th, 2009 at 7:56 pm
try Instant approval credit cards
July 15th, 2009 at 8:00 pm
housing remains a poor investment. Rents are not going anywhere but sideways.
Lots of young ones at my work are being made redundant .First thing they look to do is move in with mates or family. With the youngies being the worst affected by unemployment we will see a lot of flats being vacated. A drop in rents will only be prevented by the improvements in net migration.
the next two years will remain a great time to rent.
July 15th, 2009 at 10:58 pm
And John,
Dont be blinded by property bulls appeals to the past 30 years. Property boomed because households took on more and more debt. Houses are now saturated with debt – it is MATHMATICALLY IMPOSSIBLE for households to triple their debt again.
July 15th, 2009 at 11:02 pm
agreed Matt – 10% of my software company was laid off last week. Everyone else took an 8% paycut. Dont see much stimulus for property from my workplace.
July 16th, 2009 at 11:22 am
Thursday 16th?
“Phil Heatley has told Parliament’s social services select committee that the current $280,000 loan limit for the scheme could be raised by the Cabinet on August 3 to between $320,000 and $350,000″
In other words, Bollard is asking for less while these fools are about to supply more!
Go figure.
July 16th, 2009 at 3:43 pm
We have 3 parties to this
1/The Banks..who are solely responsible to their shareholders return
2/Citizens..who are responsible to maximise their individual positions, investments etc
3/The Gov/RBNZ …which regulate for the over good of the country, thru strong and positive leadership
1/ and 2/ are doing their job, 3/is standing around waving their arms in the air telling everyone else they should not be doing their job
Fine…. we borrow more, and goes in places that are non productive under recession conditions cant pay it back, housing boom doesn’t rectify to true market levels….
Then the proverbial hits the and just when all seems ok, and mid next yr, or yr after it all comes crashing down
And Bernard is wrong about rescinding his 30%….
Right or wrong the Lange Government had some very hard calls to make after the Muldoon debackle….but at least the had the leadership and courage to upset damn near ever section of NZ…..Does this government have the back bone to do what is good for NZ, or are they just good at waving arms in the air?