Reserve Bank Assistant Governor John McDermott has delivered a speech on behalf of Governor Alan Bollard that looks how central banks such as New Zealand are changing the way they monitor the economy and the financial system in the wake of the financial crisis.
McDermott told an audience in Singapore that monitoring the equilibrium value of asset prices would be a new challenge for central banks, similar to the challenge of measuring the output gap or the NAIRU (Non Accelerating Inflation Rate of Unemployment) was in previous decades.
"Identifying bubbles will require new empirical tools ... but as with assessing disequilibrium in the goods or labour markets, we will still probably need to rely on information from a wide range of qualitative and quantitative sources to help identify the presence of a bubble and understand the nature of it," McDermott said.
"How successful we will be remains an open question," he said.
The crisis had also prompted a revival of interest by central banks in money and credit, whereas in previous decades central banks had paid less attention to monetary and credit aggregates, he said.
"Several factors have contributed to this revival. First, the impairment of the flow of credit as a result of the financial crisis has led to fears of a creditless recovery, or at least a recovery held back by less plentiful credit. Second, there has been a significant change in money flows during the crisis (with depositors favouring the banks over the non-banks)," he said.
"Overall, there has also been a recognition that credit growth over the past decade was excessive and a potential risk to financial stability given the build-up in leverage and rising asset prices that accompanied it. We are continuing to build our understanding of money and credit at the RBNZ, and its inter-relationship with both sectoral financial decision making and potential risks for the banking sector."
Prudential supervisors were also focusing more on the funding markets and balance sheets of the main banks, including their debt maturity and risk management policies.
"This follows the closure of international funding markets in late 2008 and the increased fragility of markets generally," McDermott said.
"At the RBNZ, our focus is particularly on the four systemically important banks in New Zealand, which are all subsidiaries of Australian owned parent banks. During the Global Financial Crisis we learned that much of the mandated disclosure of public information from the banks was available with too long a lag and was too general to be much use in predicting stress vulnerability. Consequently we have reduced the information we require to be made public but are requiring more real time private information about funding, bad debt, deposits, loans etc. These receive very close attention from the regulator."
McDermott also said traditional policy tools needed to be augmented with macro-prudential instruments targeting financial stability goals.
18 Comments
"How successful we will be remains an open question," he said."
Or you could say....
"How willing we are to identify an asset bubble remains an open question"
And you could add....
"whether we would act to throttle an asset bubble that we chose not to identify remains an open question"
Aint that right Bolly?
"The crisis had also prompted a revival of interest by central banks in money and credit, whereas in previous decades central banks had paid less attention to monetary and credit aggregates, he said."
It is hard to have much confidence in these guys...... It has taken central bankers 30 yrs to figure this out.... !!! I would call this basic knowledge...
With that in mind it is a real worry when they start talking about managing bubbles.... My eyes roll when I hear stuff like...... "Identifying bubbles will require new empirical tools...but as with assessing disequilibrium in the goods or labour markets, we will still probably need to rely on information from a wide range of qualitative and quantitative sources to help identify the presence of a bubble and understand the nature of it," McDermott said."
Can't they see.... with the benefit of hindsight.... that their monetary policies have been found wanting..... ????? ( they don't actually believe that inflation is a monetary phenomenon ).... They can't even see the structural flaws in the Global monetary system, where countries are able to run chronic current acct deficits,... and countries like China, chronic current acct surpluses because they manipulate their currency to keep it low.
How on earth do they think they can manage bubbles...????? Even the best investment minds on the planet can't spot them before it is tooooo late and there is a bubble..... ( and then it is too late to do much about it ).
John McDermot is not saying anything new..... You will find this stuff written in books from 40 yrs ago.....
Thank God we don't have any ex reserve bank Governors in politics.... :)
cheers Roelof
Well I think a very small number of the BEST investment minds on the planet spotted the US sub-prime housing bubble.. Dr Michael Burry from the book The Big Short for one. Well worth the read. The stupid thing is that he was severly chastised by his own investors for betting against the market that everyone else believed in. And some of these investors made millions and even tens of millions of dollars from his fund.
Even if the central bank could spot a bubble (doubtful), with that kind of pressure do you think they'd have the balls to back themselves enough to slow it down?
These guys are joking if they think they're going to start managing bubbles.
If you wanted to detect a bubble pre-crisis it would have been fairly easy, for a an RBNZ staff member, just look at what was being said in the MPS statements, time after time after time - yet RB ignored what was going on and still hammered on with the ineffectual OCR regime, or should I say, they neglected, what was going on.
All of this was post the previous crisis, so what does that tell you about the learning ability of those that should have learnt?
highly unlikely that you could have spotted a bubble. if even a monkey could have spotted it, it wouldn't have become a bubble.
you cant see a bubble from the inside.. and in a country where house ownership is so important to everyone its pretty hard to be on the outside.
On fire today eh PDK!
Hamrod I disagree. When prices move beyond technical and fundamental levels of support then they move into bubble territory.
It was clear to me even in 2003 that it was going to overcook. You know when those stories were circulating about having your cheque book in your pocket when going looking for houses. What the hell was with that?
Some simple research such as looking at long term trends led me to predict in that year that we would see a significant crash.
When I worked out a couple of weeks ago that 75% of total NZ overseas liabilities is lending against residential property, then I say we are still facing serious declines in prices ahead. We are in serious trouble when they can't find anywhere to hide the debt problem.
I think a term that you could apply here, but isn't bandied around by economists, is 'reasonable'. When prices move beyond reasonable, then they are technically in a bubble.
Im voting PDK for interest.co call of the week.
Scarfie, I agree with everything you've said about how obvious it was looking back, but I think you're underestimating how difficult it would have been at the time to predict a bubble and even more so a crash. You sound like you've been fairly cynical about property so you're probably one of the few standing outside the bubble. I reckon the ultimate measure of wether you predicted a crash or not is if you put your money where your mouth is and profited from it.. and how many people did that?
What gets me is that I have really smart, intelligent friends and family that still think property is the only way to go, even now with the world in such a precipitious financial position. I get looked at as if im loony for not believing as they do.. but I can see why.. when you're entire net worth (and in some cases more) is locked up in property you're not going to believe a word from some property bear.
Hamrod - I remember the same look in the eyes of a friend. He was waving his Ariadne share certificates in one hand, and an invitation to canapes in Queesnsland in the other.
You can get sceptical of anything, by the time Joe Bloggs is climbing aboard.
I saw it later, dragged along to what turned out to be an Amway spinsession.
All those open-jawed believers, took me two seconds to recognise the spiel "woud you like to have $1 mill?" as an 'all yes answers' set-up. Then I counted them - this was a pyramid scheme by any other name, to me - there at the whip end of a country at the whip-end of the world. My small village had 14 agents in maybe 300 people. And the tier below was?????
As you say, the trouble with believing is that you have to once you've placed your bet.
I will second that nomination Hamrod.
I don't know so much about profiting from my decisions, I am more about not getting burnt. So yes I have put my money where my mouth is in that regard. So while I am not exactly rolling in it I have managed to keep my meagre amount so far. If I can see this through with enough to build a life boat for myself and family+friends then I will be happy.
I can see that it will have to accomodate a few friends, because they have that same look in the eye that PDK describes. A few are going to get horribly burnt.
Amway, haha. Herbalife meetings also spring to mind.
1 If the cost of housing had been left as a component of the CPR then the housing price rises would have put interest rates through the roof and quickly squashed it. But that did not suit the government who seemed happy promoting the feel good Ponzie ecconomy for it's own political purposes.
2 We are a small population in a relatively large area of land, so the shortage and price of residential land is totally contrived. There is no compedative market for the supply of land. In a truely compedative market it would be moot whether farmers subdivided their farms into residential sections or continued farming.
3 Wages are about 30% higher in Australia while building costs are about 30% lower. This suggests that we do not have any real competition in the building materials market.
4 One of the governments most important tasks is to ensure that our markets are free, open and compedative. (Were these not the catch cries of the 80's and 90's?) In free compedative markets, bubbles do not get too far out of control as market forces will correct them. Nor would interest rate have to go through the roof with all the bad side effects that go with that. (high exchange rate and depressed ecconomy)
5 One would hope that by now the government and reserve bank now realize all this (you have to wonder where there heads have been in the preceeding ten or so years) The problem they now face is that, if they correct the market imbalances now there will be a property value crash which will have drastic political consequences, may well put the banking sector and stability of the whole ecconomy at risk.
6 The whole mess needs to be unwound slowly to a clear and widely understood plan that includes, freeing of the land supply market, breaking down the stranglehold of the monopoly or duopoly supliers. These measures should be backed up with a capital gains tax and inclusion of property values in the CPR after property values have normalised.
I don't see the admission of culpability I would like to see.
This stuff is not rocket science. It is a question of seeing through the noise of their own ideas.
If you artificially keep interest rates low then people do daft things with borrowed money. Things like borrowing too much to buy houses, lending money to finance companies that are corrupt and incompetent, planting vineyards in Otago.
Bubbles start with something that makes sense but they cannot become a bubble without the petrol of borrowing.
The RBNZ are brilliant sometimes (the core funding ratio comes to mind) and as thick as two short planks at other times (the creation of the finance company disaster).
It wasn't the lack of regulation that caused the finance company bubble - it was the RBNZ.
Anyone in the very early 2000s who wasn't suspicious that a property bubble was forming was and is a drooling idiot. Any who didn't KNOW by the mid 2000s that a property bubble had formed was and is too stupid to live, and definitely should not be permitted to make any kind of financial decisions.
Honestly, it makes me very angry to read comments along the lines of "Way back in 2007, so-and-so said there was a bubble!!!!!!!!!!!!", because, by the beginning of early 2005, only the dumbest of the dumb, the greediest of the greedy, the most loserish of losers hadn't already recognised the existence of the so-obvious bubble.
If you got in, made a fortune, then got out by 2007, good for you, even though you are as guilty of anyone of contributing to the bubble. But at least you got your cash and got out before it burst. Those of you still desperately flailing about in the property morass, telling yourself that your crushing debt is "a good thing", should just hurry up and DIE ALREADY. Get out of our way. It's what natural selection and 'survival of the fittest' is all about.
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