Raf Manji on the lessons from Christchurch for a COVID-19 world, and a lesson from Japan pointing the way to fixing local government funding and building infrastructure

By Gareth Vaughan

We will never get a better chance than now to sort out the broken local government funding model and upgrade New Zealand's infrastructure which can effectively be funded for nothing, argues Raf Manji.

Manji is a strategy and risk consultant, former investment banker and ex-Christchurch City Councillor where he chaired the strategy and finance committee.

Manji says there are lessons from the Christchurch earthquakes for the whole country as we battle COVID-19 and a major economic downturn.

"The central city was cordoned off for two years. We had military on the streets here, you had places you couldn't go. Even though we could congregate together we had 18 months of ground shaking, businesses shutdown. We had the wage subsidy which worked really well. We had a lot of people working from home, we had kids not at school," Manji says.

"So we experienced a lot of those social issues that we're experiencing now, and the economic ones. And I think the impact of insurance and all the insurance claims that some people still have today, had a huge impact."

If you take people trying to rebuild their houses in the same way as people trying to rebuild their businesses, you're going to have exactly the same issues. Do I get an insurance payout, how can I get my house rebuilt, how can I get my business back off the ground, do I need to leave it, do I need to take the money and move on?" 

"The mental health impact is going to be huge. We're still dealing with that down here," Manji says.

"The lessons from Christchurch need to be learned, that you need to provide the appropriate help to people and you need to try and help people back on their feet."

"I saw the Minister of Finance talking about the small business loan direct from the Government. Brilliant. At 0% that's exactly what you need. You need cheap funding to let people get some cash back into the business and work things out," adds Manji.

"If we had a proper public bank you'd be able to do that a lot quicker, and I think that's something we certainly need to look at."

He notes that after a crisis people share their visions for a new society and a new way of doing things, but most of these ideas never actually happen, even if they're good to talk about.

"What we do need to do is not have delusions of grandeur, of big projects, of stuff that sounds great but [is] very difficult to get off the ground. What was done well here was rebuilding horizontal infrastructure," says Manji.

"I think the Government and the Infrastructure Commission should be ready to go with that. It's not sexy stuff but actually if they spent $10 billion, $20 billion on renewing underground pipes, sewerage systems, flooding systems, that would be the best return of money because it needs to be done."

"And every single local council around the country has got infrastructure projects backed up. And they don't have the funding because the ratepayer model doesn't work. So this is the chance to finally sort out the funding model between central and local government. And if you've got that money flowing through the economy at that base level, you are supporting the whole economy anyway. Don't build convention centres and all that kind of nonsense. It's a complete waste of money. Put the money into stuff that you know has to be done, and where you have a lot of jobs to be created," Manji says.

"And we can fund this stuff now at nothing. We will never get a better chance to upgrade our country's infrastructure as now. So that's what I'd be focusing on." 

'The RBNZ should buy bonds direct from Treasury at 0%'

Manji is an advocate of the Reserve Bank buying government bonds directly from the Treasury at 0% with the Government then using proceeds from this to fund infrastructure. This could be an extension of the Reserve Bank's existing $33 billion quantitative easing programme through which it's buying government and local government bonds in the secondary market to push down interest rates.

Neither Finance Minister Grant Robertson nor Reserve Bank Governor Adrian Orr has dismissed the possibility of the Reserve Bank buying bonds directly from Treasury's Debt Management Office. Even though neither Robertson nor Orr has endorsed the idea either, there's speculation it could happen. (Manji wrote two articles on this concept for interest.co.nz in March. They're here and here).

"In terms of the public sector we have got work to do and we want to fund that in the cheapest and quickest way possible. That doesn't mean that we can't still have the central bank participate in the bond market. [But] it doesn't have to do all its bond purchasing from the Government in the bond market, it can do it directly," Manji says. 

"It still will be regarded as a debt on the government's books. And theoretically it still needs to be paid back. The main difference is the financing. We don't need to pay interest on it so why should we?"

"At some point in the future depending on monetary conditions at the time, depending on where inflation is, depending on where other economic indicators are, the Government may not pay that off. So it may just become part of the permanent debt and at some point the Reserve Bank may just wipe it. That's the monetisation aspect of it. But you don't need to actually answer that question right now. The main issue right now is that it reduces the interest cost for the Government. So if it's for public spending that's absolutely appropriate," says Manji.

A lesson from Japan

Manji says his interest in this area developed when he was trading the yen and Japanese government bonds, or JGBs, in the 1990s.

"One of my two big losing trades that I remember quite well in that period was being short JGBs. And that's because the Japanese were printing money like crazy. And I thought clearly bonds are going to go down. [So] I had a short position for many years and they just kept going up and up and up. It caused me to really investigate what was going on. Speaking to people at the Ministry of Finance in Japan, Bank of Japan and other specialists over there, to try and understand what they were doing."

"And that's what really led me to investigate the money transmission mechanism in the government bond market," Manji says.

And whilst Japan has been "in a bit of a slump" since the early 1990s with its share market never getting back to the heady heights reached at the end of 1989, Manji argues the country's economy has still functioned well.

"[Japan] hasn't had a lot of inflation, it hasn't had a lot of growth. And Japan is what I regard as a highly advanced but post-consumer society. The birth rate has dropped, they don't have a lot of immigration...but people are still well off. It's quite a high standard of living and everyone seems reasonably happy," says Manji.

"There are a lot of social issues [in Japan] that are worth investigating, but from a financial perspective that growth imperative is not driving the interest rate anymore. So interest rates have pretty much come to zero and the cost of money is nothing."

Now, Manji says, the Japanese experience could be New Zealand's future.

"History would show us that this is actually the future. And that's why the Japanese experience is so important to understand. Not just from the financial perspective, but from an economic and social perspective. And you notice I don't lump finance in with the economic and social because finance is a different beast altogether. That's why a lot of macro-economic models don't work because they don't have money in there in the right way. And I think that's what we've been learning over the last 10-20 years, is that money plays a specific role in the economy." 

"The US experience is interesting. If you remember 2010, 2011 everyone was going on about the national debt in the US, Congress was shutting down and the national debt was going to be $10 trillion, $11 trillion and the world was going to end according to the Republicans. It's now $24 trillion and the world has not ended yet. And it's probably going to go to $29 trillion because actually it doesn't really matter. The debt sits in the economy somewhere. Either it's on the public balance sheet or the private balance sheet. It's actually the stock of money in the system so someone's got to own it," Manji says. 

"Let's say all that debt gets paid back, the money stock contracts. So the way the monetary system is designed is actually you need new debt coming into the system. And that's the role of the commercial banks, to create new debt. So every time they create a loan that creates the deposit which is the other side of the bookkeeping entry and the money stock grows."

"And then of course you've got the velocity of money circling around the economy. But if we stop creating money, that whole thing stops and the economy contracts. And I think we have to be very careful in the situation we're in now to not get too carried away, with everyone cutting salaries and all this kind of stuff, because austerity doesn't work. It shrinks the economy and actually leads to very poor outcomes, especially for lower income and lower socio-economic people," adds Manji.

"We just have to know that if inflation were to rise, it's easy enough to drain that money back out of the system. And you can drain it out the same way that we do now. You issue more bonds, so you drain liquidity out of the system, or you raise taxes. But the real question is, is that going to happen?" 

"It is hard to see that we're going to be in a high inflationary environment, certainly not caused by monetary issues. If inflation comes like it did in the 1970s, it will come through a commodity shock and probably won't hit New Zealand because we don't have food issues. So in a way we become the Saudi Arabia of the 1970s where we have a commodity that the rest of the world needs and that's good quality food. We produce enough food, I think, to feed 40 million people," says Manji.

"So that now becomes even more important. And that stewardship of our food production systems becomes something that we want to invest even more in."

*This is the eighth interview in a series looking at reactions to and potential policy responses to the coronavirus pandemic and evolving economic downturn. 

The first interview, with staunch critic of the economic mainstream Steve Keen, is here. 
The second interview, with director at economic advisory firm Landfall Strategy Group David Skilling, is here. 
The third interview, with Motu and Victoria University's Arthur Grimes, is here. 
The fourth interview, with Patrick Watson, senor economic analyst at Mauldin Economics, is here.
The fifth interview, with Climate Change Commission Chairman Rod Carr, is here.
The sixth interview, with Director of the Centre for Sustainability at the University of Otago Janet Stephenson, is here.
And the seventh interview, with Frank Jasper, chief investment officer at Fisher Funds, is here.