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Social Credit leader Chris Leitch argues the clock should be wound back for the future so the Reserve Bank acts in support of government policy rather than against it

Social Credit leader Chris Leitch argues the clock should be wound back for the future so the Reserve Bank acts in support of government policy rather than against it
Photo: NZ Geographic -

By Chris Leitch*

Former NZ Prime Minister, John Key, while touring an engineering factory shortly after the Christchurch earthquake said ”If printing money is the way to go, and that’s going to bail out our problems in Christchurch, why don’t we just print lots of money and give it to every New Zealander and they’ll have a great Christmas. The reality is, it's a bit of a fool's paradise.”

The reality is, actually, that statement proved how illiterate Key, now the chairman of ANZ Bank New Zealand and director of ANZ Bank Australia, was about money - or economics at all for that matter. Perhaps that’s now changed.

Because, despite Key’s silly attempt to ridicule the idea back then, just eight years later the Reserve Bank is printing $128 billion in new electronic money over the next two years.

Not a word anywhere you’ll note, about ‘funny money’ – that charge laid at the door of Social Credit who have been championing the use of Reserve Bank money to support government spending for neigh on one hundred years.

But the way the Reserve Bank is channelling that newly created money is fuelling a bush fire in house prices.

Instead of giving it to the government, which it could do by simply depositing it into the government’s account at the Reserve Bank (as a non repayable overdraft) and letting the government spend it into the economy on building infrastructure, providing more resources for hospitals, loans to small businesses, or funding state house building, it’s making banks awash with money by buying their holdings of government bonds (IOU’s) – some of which they only acquired a few days earlier by lending the government money they created out of thin air (wonder if John Key knows that), the same process the Reserve Bank uses to create the money to purchase the bonds from them.

Consequently the banks are creating even more money to lend on housing, driving prices ever higher. Their money creation increased the money supply in New Zealand last year by $32 billion.

The premium it’s costing for that money-go-round is around $11 billion, a cool profit for the banks, and roughly half what the government expects to spend on health this year. 

All because the Reserve Bank and the Government are supposed to stay at arm’s length – a lightbulb moment somebody had in the mid 1980s because it seemed like a good idea at the time and which nobody appears brave enough to challenge. Why not?

 It’s time we did.

Since being nationalised in 1936 the Reserve Bank had existed quite happily as simply another government department doing its job – overseeing the financial system, providing the government and the country’s producer boards with a virtually interest free overdraft (which was great for our agricultural exports), and not contributing even more to the profits of the commercial banks by paying them interest on money in their settlement accounts (another silly idea from that lightbulb moment).

It’s time we wound the clock back for the future.

To when Michael Joseph Savage and John A Lee got stuck in to the task of building state houses, 5,000 in their first three years in government, financed by non-repayable no-interest Reserve Bank credit.

To when government departments were funded by government, not forced to borrow money on the open market, contributing to profits for fat cats.

To when the Reserve Bank acted to support government policy instead of against it. 

Then the $204 billion borrowing debt and $4 billion annual interest bill the government is wracking up on the way to 2024 could be funded interest and debt free and taxpayers’ money could be spent instead on solving the child poverty crisis, providing free dental care, free urban public transport, better health care, or a multitude of other possibilities.

As Reserve Bank Governor, Adrian Orr, said in an interview with Bloomberg in April “Direct monetization, I know, has been heresy, taboo for a long time, but it’s only a long time in our lifetime.” “It’s not a mysterious issue. It’s just not how we’ve run business.”  

It’s an idea that has a growing tidal wave of support, including from former Finance Minister Michael Cullen, former Australian Treasurer, Paul Keating, BERL chief economist Ganesh Nana, and economist Shamubeel Eaqub.

It appears Social Credit might have been right all along.

*Chris Leitch is leader of the Social Credit Party.

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Interesting view. The most pressing economic issue New Zealand seems to have is a lack of productivity/wage growth, if we could just work that out inflation/interest rates would rise while asset prices would normalise which would likely greatly relieve many current issues (e.g. housing, poverty, social mobility, inequality etc.) I agree however that Reserve Banks, that where set up to curb inflation, do not have or have not used their tools wisely.

Productivity and wage growth can't occur when all investment goes into non-productive assets.

The one thing that soaks up the most capital and debt in the whole country is something that doesn't change in supply when you invest in it, and doesn't change in utility when you invest in it. See if you can guess what it is.

The most pressing economic issue New Zealand seems to have is a lack of productivity/wage growth

Really? Productivity is really driven by technology, not human labor. If anything, productivity leads to negative income growth and unemployment. I think NZers are more partial to doing sweet f__k all and getting paid moderately for it.

I believe that it is actually that mandatory wage growth is far outpacing productivity growth due to government intervention and as a direct consequence productivity increases never get to catch up to wages which means productivity can never be the driver of wage rate increases.

a lot of what is going on in the market makes little sense economically but one thing can never be defied is supply vs demand - this may be starting to be illustrated in the rental market, I live in lower hutt and have been watching the amount of rental listings for the area, back in mid Oct - there were just 80 properties available for rent, as of this morning , there are 144 listings - a doubling in 6 weeks. Now typically as Wellignton has a high student population , listings do tend to appear at this time of the year (this time last year there were roughly 120 listings) however what is unusual is roughly 10% of the listings are for brand new townhouses that are coming to market, this is just the tip pf the iceberg, looking around lower hutt , there are at least 50 development sites underway - with anywhere between 2 and 30 new townhouses been built on each site) Already a number of landlords have had to slash rental prices (one in Petone (3,1) listed in Mid Oct for rental in early Nov at $850 and is now in Dec still unrented with a weekly rent of $750). Already it looks like there may be an oversupply on rentals occurring in this one market, it doesnt take a genius to figure out that this will favour renters , but more so put pressure on investors who have overextended themselves in buying rentals (at the moment most rentals seem to be selling in the hutt for $800- 950K) and will need increasing rents (not decreasing) to fund their repayments- not just now but for the next 5 years (if they are to avoid the brightline test).

This would mean we need to discourage investing in real estate so that less development occurs and rental prices can find support. maybe increase regulation on landlords or introduce a capital gains tax to discourage investors from buying property ( including new builds - no other investor will buy it off them if you make a new build exemption because that second investor would be liable for the CGT. This in turn would still discourage investors from buying new builds due to the lack liquidity in the market / potential to get stuck ) so that developers stop building as much ( due to a reduction in the potential for them to make a profit from investors ).

Nothing like a refreshing socialist view of capitalism to start the day!
Of course it's lacking in addressing one key distinction, which is that 'government policies drive actions' - not the other way around

This article is simply playing into the Labour blame game ignoring that the current housing crisis has evolved over many years, caused primarily by easy credit, relaxed immigration policies, relaxed foreign cash restrictions and a piece-meal response to the housing crisis in general
Which for the most part, has been simply denied, ignored, shunned, token band-aided (kiwibuild) and generally kicked down the road to the next government to actually work out a solution

The truth is it is not in the interests of the politicians who write the laws to reduce the value of their own assets, neither is it in their interests to actually try to solve the housing crisis in any meaningful way

I generally think Labour is inept in this space, and hearing Jacinda trying to raise the profile of climate change as another 'crisis' speaks volumes as to her core competency - which is empathy in times of crisis - aka a one trick pony

What does this Leitch's view have to do with 'capitalism'? Do you think you live in a capitalist society where you sink or swim based on some law of the jungle dynamics?

Good article. If you give the printed money to commercial banks it mainly just goes into residential housing. If you want proof just look at residential mortgages as a % of their total assets. Stop giving them control over the direction of money. Give it direct to the govt so they can spend it on infrastructure etc. Govt will no doubt waste a chunk of it but by giving it to banks and therefore residential housing we're wasting all of it.

QE does not give the banks more money to lend. QE is an asset swap where the banks exchange their government bonds for exchange settlement account reserves. These are both listed as primary liquid assets by the RBNZ so a banks liquidity does not alter and banks do not lend their reserves out anyway they create new money when they lend.
This is explained by The Bank of England here.
It also tells us that the banks are not reserve constrained in their lending. QEs only effect is in reducing interest rates which is its purpose.
Also all government spending involves the creation of new money created by The Reserve Bank and not commercial banks , spending occurs first and taxation and borrowing happen later just as MMT describes.

A lot of academic writing can be said about it, and is enough to justify the reasoning for sure. But not many, willing to disclose the real non-rationale, non-academic papers when it comes to the real world practical result. The said can be true if you don't canvass this QE at all, what is the end practical result? - or? using it say at half of the current value. One thing is for sure for the size of population, country & economic size? do check out what our RBNZ did in term of Covid, if there's an unknown fly in the room.. I bet you rather than using stages manual means, some cowboy actually re-define what it means about 'knee-jerk' reactions by using .22 caliber gun to shot at the fly.

Monetary policy is all part of the neo-liberal agenda in giving the banks free reign over our economy hence our extreme levels of household debt. Meanwhile government borrowing is just used as a smoke screen to have us believe than the government has no money of its own and has to rely on the private sector for its financing.
The Levy Economics Institute tells us here that taxation and borrowing are incapable of financing the government.

As pointed out in my article "Consequently the banks are creating even more money to lend on housing". They don't lend money people deposit with them either - every dollar they lend is created by them, effectively out of thin air. They can't and don't lend their reserves, (or money they get from the Reserve Bank) but they do need those in order to undertake money creation. Read what Paul Sheard, Chief Global Economist and Head of Global Economics and Research at Standard and Poors, New York, has to say about that.
I could take issue with the MMT view, but that's for another time.

Thanks treadlightly, I understand now. QE drives down wholesale interest rates resulting in lower COF for banks and therefore banks can offer lower rates to borrowers. So the real problem is that in this country we only borrow for housing and nothing productive. Lured by the multiple incentives to invest in housing over other assets thanks to poor fiscal policy. So we only have ourselves to blame? Boomers are the fat kids who gorged on the sugar laden cake baked by past and present NZ govts, middle/lower class and the young are the skinny kids who just arrived moaning that there's no cake left, and now the fat kids are blaming the baker (NZ Govt) for making the cake too darn enticing (as they continue to stuff their faces w/ cake).

Tax rates are too high to build companies in NZ. Our top talents build companies overseas whilst living in NZ. they can collect the money / ownership of the overseas companies once they move overseas for a bit, whilst on their OE.

Nice idea in the part, govt do have opposition to do some ineffective controlling. But it's wishful thinking for current modern NZ to have govt. that listen to RBNZ and vice-versa.
If both govt. left & right clearly deny any housing crisis issue? & not willing to give some prudent tools to RBNZ? guess what, If I'm in the shoe of RBNZ govt & team, I'll say F*** it - I'll do the same, pretend not to acknowledge everything, deny any crisis or any clausal decisions result.. keep doing the same, and more of it - more to go please Mr. Orr & RBNZ team: Banks are clearly scared of your negative interest rethoric, I say DO IT, then open up FLP into housing, then triple those 100billions QEs, it's clearly not enough you need to put it into 300-500billions, tell govt to buy it to fund the more permanent wage subsidy, to support insurance cartel going forward into climate crisis declaration... just don't be surprised where it's going to be ended up though. This year housing increase of 20% is drop in ocean as the future potentiality, 2021-2025 as per climate change declaration carbon neutral target? we're still have option to go up into 80% of housing cost increases, our debt is not yet comparable to USA so more room for stimulus is the key here, the recent dividend to big companies that taken subsidy despite idle for months, clearly a good sign that more need to be done. So keep up the good work! - govt. will increase supply, immigration at lowest point, that is enough to counter any arguments.

why don’t we just print lots of money and give it to every New Zealander and they’ll have a great Christmas. The reality is, it's a bit of a fool's paradise.”

Gawd Lord Key is awful. A career built on and around the whole monetary regimen and hegemony and he comes out with this. The only reason he can get away with it is that his audience is largely ignorant beyond simplistic ideas of 'money printing is bad' (yet what their hero Lord Key presides over today).

Russel Norman asked in parliament why the government could not fund itself and Key stood up waiving a Zimbabwe bank note about, "this is what happens when the government prints money" he said. Either a very ignorant statement or one designed to fool us I think.