Social Credit leader Chris Leitch says the Government should borrow from itself to fund state house building, infrastructure development, health investment, and a substantial lift in low incomes

Social Credit leader Chris Leitch says the Government should borrow from itself to fund state house building, infrastructure development, health investment, and a substantial lift in low incomes

By Chris Leitch*

Eric Crampton of the New Zealand Initiative, Finance Minister Grant Robertson, and Reserve Bank Governor Adrian Orr, all appear to be singing from the same song sheet. Let's just keep doing what we've been doing, but do more of it and that will fix all our problems, tra la la.

Crampton must have been fossicking around in the basement at the New Zealand Initiative and come across a cobweb-coated chest labelled neo-liberal bright ideas. In it he's found a little gem – a market where you can buy and sell futures contracts on house prices in a desired area.  Another neo-liberal market solution where people who have lots of money they can afford to lose, and those who haven't and can't afford to lose, can have a gamble - a bet on the future price of houses.

It's similar to the bright idea that caused the 2007/2008 global financial crisis. That was triggered by get rich quick bankers whose idea was to package up house mortgages that were already in default or about to be, and market them as investments with high potential returns to greedy investors prepared to take a gamble.

Hard-working taxpayers ended up bailing out the failing banks, many lost businesses and properties, and the get-rich-quick bankers continued to get their big bonuses.

This time, don't bet on real houses - just the likely future level of price rises or decreases in the hope that when you want to buy a house you've made the right bet. As usual with get-rich-quick type schemes, few will win big, most will lose big.

Doing the same thing that got us into the mess we’re in, but more of it.

When the level four lockdown was imposed and the government announced a financial rescue package, the first impression was that Grant Robertson had dug out some old Labour Party literature and finally read about Michael Joseph Savage and his use of the credit creation capacity of the Reserve Bank to invest debt-free money to build houses, create employment, and improve infrastructure, to build up the economy.

Oh the disappointment when it became obvious that the dramatic increase in government spending was going to be financed by a dramatic increase in government borrowing from commercial banks, pension funds, and private investors, with taxpayers footing the bill for interest and loan repayment. 

Doing the same thing that got us into the mess we’re in, but more of it.

After the dour financially conservative Reserve Bank governors of the last few decades, Adrian Orr seemed like a breath of fresh air.

The Bank already provided the government with a zero interest overdraft facility which it used on a regular basis, but suddenly, early this year, first $30 then $60 then $100 billion of newly minted digital money was to be put into the economy.

Perhaps during the lockdown Orr had been reading Social Credit policy.

But no.

Instead of that new money going debt-free to the government to spend on supporting those in need or building state houses or for healthcare, it was going to the already rich to increase profits for bank shareholders and executives, pension funds and wealthy investors, by purchasing the government bonds (IOUs) they already held, and the new ones they got by lending more money to the government.

With interest rates so low, that Reserve Bank money went into assets, mainly to housing, supported by a lending splurge by the commercial banks who ramped up money creation for lending on housing to help replace their tighter margins with an increased volume of interest income.

The Reserve Bank has just announced that a further $28 billion in newly created digital money will be available to commercial banks as a base on which to create even more money to lend. Much of that is likely to go into the housing market too, driving prices even higher.

Doing the same thing that got us into the mess we’re in, but more of it.

The result of all this will be a massive increase in debt, a greater transfer of wealth from the majority (hard-working wage earners) to the wealthy minority (bank shareholders and already wealthy investors), and even more people locked out of an increasingly overheated housing market.

So what should be done instead?

The New Zealand Initiative should put the lock back on the cobweb-coated chest and leave it to the spiders, lock the basement and throw away the key, and take up tiddlywinks - a pastime more useful than trying to resurrect outdated failed ideas.

Grant Robertson should actually dig out those campaign speeches of Michael Joseph Savage, and having read them, call in Adrian Orr for a coffee and a chat to arrange a zero-interest non-repayable line of credit from Adrian’s Reserve Bank – which the government owns.

Quite simply it should borrow from itself to fund a massive state house building program (using factory built pre-finished panels), infrastructure development, investment in hospitals and healthcare, and a substantial lift in low incomes - including those of beneficiaries, through targeted tax cuts.

Adrian Orr should stop feeding fuel to the housing market and use the Reserve Bank’s credit creation facility to provide zero-interest loans to local bodies for infrastructure - water, wastewater treatment, rubbish recycling, roading, and environmental projects, along with replacing any existing borrowing originating from credit creation by the banks. That money, when repaid to the banks, will be cancelled out of existence.

In addition it should make zero-interest funding available to innovative New Zealand businesses such as, for example, those house building factories, Haydon Padden's production of electric powered rally cars, and EV Maritime’s electric ferries, which could provide substantial employment and export income for New Zealand.

Then we might be heading in the right direction – an economy based on credit not increasing debt, where the infrastructure that business and the pubic need is put in place, where our most productive assets are in Kiwi, not overseas hands, and where wealth is spread to the majority not further concentrated in the hands of a minority.

Not doing more of the same thing that got us into the mess we’re in.


*Chris Leitch is leader of the Social Credit Party.

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21 Comments

Why use private capital to fund the civil infrastructure, drains and roads, it sounds to me it will cost the council and everyone more in the long term.

Councillors split on Rotokauri development as infrastructure costs hit tens of millions | Stuff.co.nz
https://i.stuff.co.nz/national/123382218/councillors-split-on-rotokauri-...

You didn't read the article properly. This has absolutely nothing to do with private capital. In fact, what Chris is suggesting has some parallels with post-WWII Japan and its development.

Did you read it yourself Mr Smarty Pants ... what are "commercial banks, pension funds, and private investors, with taxpayers footing the bill for interest and loan repayment." if not private institutions/entities with private capital

And did you read the link link I posted so that you can give a reply/response rather than the usual angry JC critique

Yes ol' Smarty Parts will repeat. The govt creating money to invest in infrastructure has nothing to do with private capital. Furthermore, lending central govt money to councils for the development of local infrastructure also has nothing to do with private capital. No anger. Just the way it is.

Yes that's the point that you missed... the govt is offering councils the IFF fund as a solution...

"A new proposed Government initiative, the IFF, might help pay for the swale, Macpherson said.
The IFF fund would allow private capital to partly fund the infrastructure without it showing up on the Council's books."

The IFF relies on private funding to finance the infrastructure without which homes cannot be provided... Where is the central govt funding for shovel ready projects? It just seems to be the way with this govt.

I haven't missed anything. I'm talking about the difference between public and private capital. if the central govt wanted to fund infrastructure at a local level by issuing interest-free loans, it can do so. In fact, I'm surprised that it's not being considered on a much larger scale. Note that I referenced the JR network in Japan. This is an example of the idea at work.

Agree, it seems like there's so much that could be done to benefit our country through this massive credit creation. Imagine the issues that could be solved through the billions of $$$ the RBNZ is frittering away.

Japan built the finest public transport system in the world (Japan Rail) based on similar thinking. The JR Network was eventually and partially privatized in the 90s, after the core framework of the development had been complete.

Yeah that JR line is incredible. We need some of that vision & commitment.

The ghost of Sir Dove Myer Robinson laughs in a bitter and hollow manner.

NZ faces precisely two future outcomes:

1. Most houses belong to a minority of the population and most people are renting from them;

2. the bubble bursts, prices collapse, the economy tanks, Kiwis suffer for years and years until they begin the inevitable re-inflation, because Kiwis never, ever learn a damn thing.

Good luck.

The rate of NZ home ownership has been dropping for a long time. In my town there are apparently more than 10% of houses that are empty according to a report the local council had done. A neighboring town has a very high number of houses that are just used for weekenders or Air BNBs, as it is far easier than renting them. My fear is buying a nice home, then renting it, and then it being damaged. Many people will prefer to just keep it empty, as the cost of repairing anything is so expensive. Then they get that capital gain from it just sitting there,

This is why I want to know how many ghost homes / weekenders / AirBNBs, there actually are in NZ. I wouldn't be surprised if we wouldn't have as much of a housing problem if all our homes were actually being lived in. A Ghost house tax IMO is needed urgently, as well as commercial rating Air BNBs, Bookabaches.

Use government (elected) and central bank (owned by government) to help bottom half of the pop instead of helping those who do not need help... v rational and fair. So of course they won't do it.

Great read, hard to disagree with any of it.

Great article.

All sounds so reasonable. There is no reason why it might not work, as far as I can see, but, what is to stop the money being wasted ala Shane Jones patronage fund, whatever that was called? $3 billion redirected from much needed transport infrastructure to, er, well, who knows what.

Do we have the discipline to spend the money wisely, or will it just fund a lot of people sitting around writing reports, reading reports, consulting on reports and discussing reports? Given that our infrastructure deficit and housing shortage is the result of government bringing in too many new faces, why should this not just allow a faster rate of shareholder dilution?

In theory there is no difference between theory and reality, yet in reality there is.

Where are the feedback loops that encourage usefulness? Who decides how the money is spent?

And is Orr to ignore the currency implications and subsequent capital flows?
We are caught up in a currency war where we have little option or impact....and no sign yet which way it will end.

Why the debate as WHO the hell wants to fix housing crisis....be it JA, Mr Orr........

Most Kiwis gradually would agree the more of FLPs and opening it for housing investor, the sooner the better, the govt sooner removal of bright line test will certainly help to put resiliency to the housing market. Just like human bodies in sedated controlled environment; NZ need of these multiple life support gears to work in unison to maintain the life. So indeed, more QEs/LSAP amount, neg OCR, FLPs for RE investors, permanent wage subsidy etc. RBNZ & govt must steadfast, those whingeingly Banks asking back for LVR? just being selfish part from them Let's do this, keep on moving Kiwis! Any of these are bad for our economy: LVR, DTI, Banks CAR, TD guarantee, high OCR. - Vaccine is here, border will open soon, mask off? hand sanitiser/wash off?, distancing off? not to worry, the apps use alone is clearly quashed this Covid19 from NZ. So keep buying and upgrading those property - the wealth effect shall cover for country health needs.

Good article! The missing bits of the story are (a) with the partial exception of Auckland, 'housing supply' is absolutely not the problem; and, (b) house prices are at about the level you would expect given average rents (rents are the dominant driver of house prices in NZ).

So, whilst rental yields remain higher than interest rates and house prices show no signs of slowing, landlords will continue to buy more houses than first time buyers. The problem is that there are not enough homes for people that cannot afford market rent. This is where Govt-funded state housing should step-in to create more affordable homes and start to anchor prices. This could start with the careful purchase of existing homes coupled with policy measures to reduce the differential between rental yields / interest rates (e.g. rent freezes, landlord licences, eco-standards for rentals etc).

Agree with Jfoe and the article. At some point we must think what kind of country we want to live in. How much food-producing agricultural land was sacrificed to build all those empty houses? What costs do we pay in taxes to compensate for the health and mental health issues caused by crappy rentals, the absence of settled communities (as renters are regularly pushed out to find another home), lack of citizen involvement and mutual support (see previous parenthesis) -- Too much greed, too little long-term planning. And it's not necessary. We do not have to pay interest on money government needs to provide proper services and infrastructure. We are doing it to enhance (read fatten) profit margins for already profitable banks and investors.