Jenée Tibshraeny has spent the year scrutinising the seismic government and central bank interventions made to keep the economy (and house prices) afloat. She shares her observations on the NZ Everyday Investor podcast

Jenée Tibshraeny has spent the year scrutinising the seismic government and central bank interventions made to keep the economy (and house prices) afloat. She shares her observations on the NZ Everyday Investor podcast

Interest.co.nz journalist, Jenée Tibshraeny, talked all things monetary policy, housing and politics with Darcy Ungaro on his NZ Everyday Investor podcast.

Above is a cut from the conversation recorded on Monday.

Jenée reflected on the relationship between the Reserve Bank and Government responses to Covid-19, the to-ing and fro-ing between the two institutions when it comes to addressing the housing crisis, the effectiveness of monetary policy in a low interest rate environment, protecting banks from themselves when it comes to mortgage lending, tax and more.

The full episode will be broadcast on the NZ Everyday Investor podcast in coming days.

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47 Comments

32
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Fantastic Jenée. You are one of the best placed people to ask these questions of the government and one of the only journo's that seems to understand the issues. I have one request though - get more mongrel in you when asking these questions of the government ministers and RBNZ. They NEED to be pushed as to what they are doing. Ruffling their feathers and aggressively challenging their ideas (which appears to simply be blundering along blindly) is required at this time. For instance aggressively questioning GR on why he won't provide a DTI to the RBNZ is required, particularly when it will likely reduce house prices and secure the financial system. Asking why he is OK with the RBNZ printing $25,000 for every man/woman/child in the country and giving it to property owners and banks. Hard questions need to be asked and followed up.

QE is an asset swap, it returns reserves back to the banks that they had previously held before they used them to buy bonds with and it makes no difference to a banks ability to lend out money. Bank reserves are created in the first instance when the government runs budget deficits and QE does not actually create any new money over and above that.

makes no difference to a banks ability to lend out money.

So what's the cause of sudden mortgage increase? I thought the QE somehow helped in more capital against mortgages.

The creation of bank credit is the driver of household residential property price inflation.
Bank lending to housing rose from $50,788 million (48.36% of total lending) as of Jun 1998 to $292,645 million (59.71% of total lending) as of November 2020 - source.

But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)

We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?

Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link

The Key government issued ~$50 billion net new government debt from November 2008 to December 2012 and yet settlement cash (monetary base minus circulating cash) moved from ~$10.00 billion to ~$7.00 billion over the same period.

11
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A surprise attack is always good, a build up of questions that catch them out when they're not anticipating it. I think Jacinda was caught out recently by Jenée with a similar tactic.

A surprise attack is always good, a build up of questions that catch them out when they're not anticipating it. I think Jacinda was caught out recently by Jenée with a similar tactic.

She was caught out because she had no comprehension of what was being asked. I don't necessarily condone her for that. The general public doesn't know either. However, it is telling when those who do understand (or kind of understand) see how JA deals with it.

Could not agree more.

Does HDPA have enough mongrel for you blobbles... I have heard her interview GR enough times to know that he is a spin wizard

"Fantastic Jenée. You are one of the best placed people to ask these questions of the government and one of the only journo's that seems to understand the issues. I have one request though - get more mongrel in you when asking these questions of the government ministers and RBNZ. They NEED to be pushed as to what they are doing. Ruffling their feathers and aggressively challenging their ideas (which appears to simply be blundering along blindly) is required at this time. For instance aggressively questioning GR on why he won't provide a DTI to the RBNZ is required, particularly when it will likely reduce house prices and secure the financial system. Asking why he is OK with the RBNZ printing $25,000 for every man/woman/child in the country and giving it to property owners and banks. Hard questions need to be asked and followed up."

17
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Great discussion there. Keep following your own instinct or whatever it is Jenée because it seems to be exactly what we need.
Especially at the 16:00 minute mark - Our dear leader would certainly be nodding along with a thoughtful sad frown.

Always good to listen to Jenée's views and observations. Darcy is a good interviewer too. Saw him being interviewed about crypto on a Granny Herald podcast. I thought he touched on many good points on the what, whys, and hows.

Jenee. Keep it up. Some of those biting questions shot at GR & ORR must have had them squirming. GRRRR.HORROR

20
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The separation is so obviously a pretense! The Reserve Bank is the right pocket of the state, and the Treasury is the left pocket of the state. As Jenée infers, the only reason that the Bank is buying bonds at a premium from investors on the secondary market, rather than directly at a lower cost from Treasury, is to maintain the illusion of separation. It's ridiculous.

As Jenée infers, the only reason that the Bank is buying bonds at a premium from investors on the secondary market, rather than directly at a lower cost from Treasury, is to maintain the illusion of separation. It's ridiculous.

Monetary Realism (MR) is a description of the fiat monetary system applicable to nations who are issuers of their own currency, but have outsourced the broader money supply to the private banking system.

Monetary Realism describes the complex institutional relationship between the government (public sector) and the non-government (private & foreign sectors) and how the monetary “machine” works to contribute to economic prosperity. Monetary Realism is based on the following principles:

• The primary role of “money” is to serve as a means of payment. Money can take many forms, but in the modern money system the final means of payment comes primarily from within the private banking system in the form of bank deposits. In other words, the dominant form of money in the modern monetary system is issued almost entirely by the private banking system.

• The monetary system exists primarily for private purpose in order to create a system for efficient exchange of goods and services. The private sector plays the lead role in helping to advance the well-being of the society in which money is used.

• In many market based systems such as the USA, the money supply is essentially privatized and controlled by private banks that compete to create loans which create deposits (money). Contrary to popular opinion, governments in such a system do not directly control the money supply nor do they create most of the money.

• The public sector (the government) plays a facilitating role in helping to regulate and manage the infrastructure within which the money system operates. If properly utilized the government can be an extremely powerful tool in helping to stabilize and create efficiencies within the money system. Link

The approach taken so far, which has seen monetary policy do the heavy lifting yet again, is almost certain to preempt a period of low or no inflation. This will further exacerbate the issues our economy already faced like wealth inequality, zombie companies, declining productivity etc. Even doing a U-turn on housing policies (itself unlikely) isn't going to remedy that situation.

10
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Everyone pontificates. We should do this, we should do that.. But only a single thing is needed...
At the point of purchase a deposit is required. FHBs save this deposit and pay income taxes on the earnings prior to putting it away.
Investors leverage equity usually using an equity release type scheme. When an investor releases equity on an existing property to buy an investment property.. the funds should be taxed at income rates.. They aren't selling their existing properties and being caught by the bright line tax. They are simply leveraging equity in an untaxed manner in direct competition to the FHBs paying tax on their income and savings. this should also happen when a single home owner leverages existing equity to by a second property... Come on Jacinda .. if you want to solve the problem this is all you need to do. Tax equity release.

Good input, but Jacinda only stated 'supply' is the issue. Not much differ to discuss about a patient with Nicotine, Alcohol or Gambling addiction... so much expert can uttering many variables to look at the issue in order to have some sort of control in place, for sure it's not just one solution being used, but in NZ? housing/property addiction is treated with one suggestion/basically a prolonged denial - makes you wonder, what is going to happen next?

This one thing will solve the problem and rebalance the market. An equity release should be treated as a sale and taxed accordingly as income. Home owners trading up wouldnt be caught because they sell existing and then buy. Anyone releasing equity to buy another property would be hit. The banks value the existing property before releasing the equity. If that value is above the original purchase price of the existing property then the difference should be taxed as a capital gain and added to income at the point where the new sale has settled ... So simple just need some leadership.. Call it the Hansford principle and make it happen.

Very good idea.

Expect it to be ruled out.

Jim Hanford, whilst I understand your point consider unintended consequences, I am starting a new business and to fund it and purchase assets I take out a larger mortgage- an effective equity release. You could of course create an exemption for this situation that may be beneficial if it leads to the creation of more business's.

Might be it's a good idea to ask the govt? what is their ideal DTI ratio to service the mortgage? in more realm of NZ productivity in general.

Nice one. Thanks Jenée.
At the end u mention about reserve Bank doing this (QR) bottom up not via banking sector. In that context, how does the current bond buying program helped housing? How's the more money banks get, via QE goes only in property? Is it the something to do with risk weight of property asset - RWA ?

Is it an option to make all new mortgages 'non Recourse'?

That is where the owners total liability is limited to their equity (I understand that the US uses this, Hence the Jingle Mail expression).

The purpose of these is to make the finance lender (banks), have skin in the game and hence more responsible and cautious.

Non recourse mortgages are part of some US states financial system but did not stop the sub prime crisis. I do like the idea of Banks having skin in the game hence accountability but this also requires shareholders ability to actually hold the Bank officials to account which currently is unlikely as a majority of Bank shares are held by institutions over which even the owners of those institutions have no effective way of influencing decisions. A new more accountable system of capitalism that shares rewards, risks & accountability in an effective way is required but is unlikely to happen.

It is far easier for the government to ask the RB to simply print money and distort markets..
Actually solving problems requires far too much work for a government in for 3-4 years and there is no incentive

They've already said they won't do anything about house prices... despite the crazy market for the last 12 years

Thanks for your work in 2020 Jenée. I hope you have a nice summer break and are ready to report on whatever 2021 throws at us (hopefully less 'exciting' stuff than 2020).

Not sure about RBNZ but most central banks around the world are precluded from purchasing government bonds directly by law. Besides, if a reserve bank buys bonds on the open market (from a trading bank) this is seen as evidence of an ‘’arm’s length’’ transaction. When a reserve bank pays a premium (lower yield) this enables the reserve bank to influence market yields for bonds of varying terms and lower the so called ‘’risk free rate from which all other rates are set” which of course is then adopted by the market to revalue bond portfolios and other investments accordingly.
Jenée’s discussion was interesting however nothing was said about the elephant in the room i.e., are the RBNZ policies actually achieving their stated purpose which is to increase consumer price inflation through lower interest rate settings? If the answer is no then why do they persist, particularly when one considers the peripheral damage being done to other areas of the economy such as a debt saturated housing market?
I’ve often thought it interesting that if it’s consumer price inflation the RBNZ bank wants through increased borrowing and spending then surely it needs to influence interest rates in the credit card market which presently are just short of 20%.

The RBNZ is buying NZ bonds on the secondary market. Their ownership of the total market has gone from about 5% at the start of 2020 to about 40% now. It will be 60% by the end of next year assuming no more hard lockdown's in which case it will be 100% as wage subsidy schemes are expensive.

The reason they buy on the secondary market & not from the RBNZ directly is to give a semblance of a free market. In reality the banks are buying from the govt & flicking onto the RBNZ making a quick buck on the way.

This is an inflationary policy. It may not be reflected in the CPI but it is reflected in asset prices/bit coin etc.

Rudy there is no such thing as a risk free rate, this was a term created by that financial pygmy cullen to validation a tax base. Govts do and have defaulted on Bonds -Russia, Argentina & Venezuela to mention a few. Life is a risk and the trick is to correctly evaluate that risk, monitor and mitigate, something that does not appear to being done globally. Global debt at approx 350T is 3 times greater than Global GDP and the Republic of Irelands is over 800% some of this debt will never be repaid.!

Governments can and do default on bonds expressed in other countries' currencies but typically not in their own fiat currencies. There is a big difference.
Keith W

Another news to create panic and FOMO. Where does it leaves average Kiwi and FHB if house prices which are already up 30% to 40% (officaly and average is 20%) and another 20% to 30% rise in 2021.

Government and RBNZ is creating a recipe for disaster as even now only economy in NZ is housing economy and government is not only confirming it but seems to be promoting as everything is tied to housing ponzi.

https://www.nzherald.co.nz/business/what-will-nz-house-prices-do-in-2021...

Jenee asking one or two questions may not help as politicans will ignore or give round answeres - what is needed is to highlight the issue in such a way that government is forced to act as left to themselves like John Key, now even for Jacinda Arden, housing crisis is a good crisis.

FM Roberston was suppose to annouce some measures to be taken to curb speculative demand after xmas holiday in 2021, should now be asked, what are they besides reintroducing LVR and possible DTI.

I talked to dairy consultant last week and he told me that his dairy clients had costs 10-12 years ago of $500 a cow on a $5 payout. Today his clients have costs of $1100- 1500 a cow some irrigated clients as high as $2000 a cow.
Drowning in cost increases not caught in the cpi. I need some new water troughs costing me over double the cost of the last lot I ordered 12 or years ago.

Change business then..its just not Dairy costs have risen then..or are they classed as a special industry?

that is not as easy as it sounds when you have debt, and what do you buy, rental houses?

Dairy has benefited from the speculative capital gains and political capital to avoid full cost (environmental impact) for decades... they’ve had their asset bubble... don’t cry now!

The CPI is not fit for purpose as a measure of purchasing power in the real economy. Bread and milk, sure - assets, not at all.

Is that just operating costs or what? From my calcs they would have been making huge returns previously like 1250 per animal just on the milk. Then 5 or 6 years ago the ms price dropped below 4 bucks and if they had debt they were going out of business certainly the 50 50 sharemilkers were squeezed. We just bought a dairy farm to run as an owner so wish me luck.

they must have been when interest rates were over %10. I think the smaller family businesses can do quite well.
I have a cousin with 1500 acres of sheep and beef, his rates are $57k and they are talking about rates doubling in the next ten years to 114k.

You would have to have over 10million on deposit to make enough to pay the rates and thats before tax.

$38 per year per acre..cheap as chips

it's not a dairy farm, he probably runs 1000 cattle, 60k is the gross trading margin on 200 cattle at $300 a head. Take away fert, wages, hay, debt servicing and so on, he probably has to run 400 cattle to make the 57k. 114k will take him out over time.

Vet bills, transport costs, weather events and govt imposed climate goals the list goes on. But are you sure you're not considering conversion to dairy or even hort?? Btw did you see the news item on visionary grape grower daniel le brun

I think farming has been financialized, be interesting to see what happens to all the debt, perhaps we just limp along. In the not too distant future NZ will have 1 trillion dollars of debt.

I have a vineyard now, one big mistake of mine. If I was in Malborough it would have been a great investment.

You mean fully priced?

What's up with the vineyard... HB good location, what variety?

Price is way back for private growers, last sale was $2800 a tonne now it would be $1400 a tonne. Reds don't have the volumes or prices of Savi Blanc

Didnt know that price was down so far.. I would have thought the opposite given the China Australia stoush ... price could be pandemic related if people not going out although some drinking at home. Hope it greatly improves

Been down for a while now, I should probably get off my butt and try again. It's an expensive hobby though.