By Bernard Hickey
The country appeared to breathe a collective sigh of relief last week when Reserve Bank Governor Alan Bollard cut the Official Cash Rate by 0.5% back to a record low 2.5%. See our full article here.
His view that it was a necessary insurance policy and confidence boost for an economy on its knees was widely accepted.
But here's 5 reasons why I think very low interest rates both here and overseas are not good in the long run.
They punish savers
Headline writers and interest groups almost always see the world through the prism of the borrower. Either they are in debt themselves or believe that the 'mortgage belt' are the dominant political and consumer force. New Zealand households owe NZ$183 billion, farmers owe NZ$47.8 billion and businesses owe NZ$73.3 billion. Yet households have also put NZ$97.4 billion into deposit accounts at banks.
Dr Bollard has previously commented that he gets the most complaints whenever he cuts interest rates as retirees and others who depend on those deposits see their income slashed. This week's decision is likely to cost anyone with NZ$200,000 on deposit at a bank around NZ$20 a week before tax. See all term deposit rates here.
They encourage borrowing
New Zealand has a debt problem. Our net foreign debt is approaching 90% of GDP, which is similar to the PIGS (Portugal, Ireland, Greece and Spain) who are in such trouble at the moment. Most of this is private mortgage debt owed via our banks to foreign creditors.
Lower interest rates just encourage New Zealanders to borrow more, which means more foreign borrowing.
They encourage risk taking
A side effect of the extremely low interest rates imposed by the US Federal Reserve and other central banks is that it encourages banks and others out into riskier assets.
Many investors in America who are reluctant to accept nearly zero percent from term deposits are pushing their money out into corporate bonds, emerging market bonds and even higher yielding shares.
This is exactly what the US Federal Reserve wants, hoping it will trickle down into investment in businesses and jobs.
Unfortunately most of the freshly printed US dollars being squirted out around the world are being pumped into higher commodity prices and investment in developing economies such as China and India.
Some of this almost free money is also finding its way to New Zealand.
Ironically one of New Zealand's biggest foreign borrowers at the moment is Kiwibank, which has borrowed hundreds of millions of dollars in hot money markets offshore in recent months because it is easier and cheaper to get than term deposits locally. See Gareth Vaughan's article on Kiwibank's offshore borrowing here.
Also, companies including Auckland International Airport, Mighty River Power, Transpower and Vector are planning to borrow at least NZ$1 billion the US private debt market this year. See Gareth Vaughan's article on foreign borrowing by New Zealand corporates.
They lower lending standards
Lower interest rates encourage those who can't afford to pay higher rates to borrow. Lower rates are often accompanied by a lowering of credit standards by banks.
The biggest banks have quietly been offering 95% loans through brokers in recent weeks, boasting of how many deals they have done and encouraging borrowers to increase the size of their loans to renovate and extend.
They blow up asset bubbles
The history of the last decade should teach anyone that low interest rates eventually blow up asset prices into bubbles that eventually burst.
The biggest cause of the sub-prime crisis in America was the slashing of interest rates after the September 11 attacks.
70 Comments
FYI from an emailer
Hi Bernard
I just happened to come across the article you wrote titled "Low rates not always best". I am no PhD in Economics but I do understand a little bit about Austrian Economics, which I regard is common sense organised.
Based on that school of thought, I think the government has done the wrong thing of lowering interest rates. In bad economic times, interests should be raised so that people would save more money allowing more capital available in the bank. Entrepreneurs and investors can then borrow money to build or expand factories and other businesses, which then create employment and increased production of goods. The increased production, combined with the increase in value of the dollar brought about by high interest rates, act to bring prices down. Once prices go down enough, and as more people get employment and earning wages, people would then spend money again and the economy would revive. I.e: deflation should happen before the economy recovers.
But I am not naive, during this time, there will be some hardship. But it is well worth it as the inefficient businesses get weeded out and new businesses (particularly goods manufacturers - the real economy) that the people really want and need are given birth. This is all part of the natural business cycle that has to happen for an economy to really rejuvenate, without the need for a central bank to intervene in it. In fact, the Austrian school would argue you do not need a central bank at all, for who are they to determine what is the best interest rate that reflects the combined wants of the millions of people acting independently in the free market?
The point is that lowering interest rates by the Reserve Bank is going to do more harm than good. No one can predict where these cheap money is going to end up. But with commodity being in shortage, look for more price increases in consumer goods and commodities. Stock prices may go up (though not real stock prices since commodities go up even higher). Worst of all, these cheap money will devalue the New Zealand dollar, making all of us that much poorer.
Regards
Michael
The problem I have with is is the hardship is usually suffered by someone else and not the poster....
Then there is austrian economics which I regard as a broken more than most other economics models.......
In effect we are seeing austerity in action in places like Ireland....its not pretty.
I odnt see that lowering rates is bad, unless its close to the zero bound and stays tehre....getting it back up to 5% which is regard as the norm should be fairly swift, if there is any recovery at all..
Which is why I think messing with teh OCR etc is now broken....
regards
I think that in the next 20 years there will be a critical mass reach in with economist abandon Keynesian model. They will learn that you actually have to do the opposite to what you would think you need to do to stimulate the economy. That the best way to stimulate the economy will be to raising interest rates and taxes not lower interest rates and taxes. I feel that the combination of lower taxes and even lower interest rates is having the same effect on the economy as too much sugar does to a diabetic. With the lower/lower model wealth distribution has become inverted and concentrated at the top. Money becomes worthless and therefore panic sets in and wealthy individuals start to act as if money needs to be hoarded and they don’t have enough, thereby destroy any economic growth. If money keeps losing it value then you will need more money to cover you existing positions thereby depriving the economy of the necessary fuel to get going again. I think that a smart economist will develop an economic model that shows the effect of raising and lowering taxes vs. the raising and lowering interest rates. I have no idea what the curve would look like but I have a feeling it would look like the classical supply and demand curves. Where there is a sweetspot where as you push and pull taxes and interest rates you can better tune the economy.
"I think that in the next 20 years there will be a critical mass reach in with economist abandon Keynesian model."
huh? I do not understand, this isnt english Troy....
So the two options are economists will abandon the keynesian model or move to it....well we are not on it...
To be clear, keyesian economics has not been "in charge" since the 1970-80s, it went out with Thatcher and Reagan, so we have seem moneterist/laissez faire/objectivist economics / politics model and that is what has failed so badly.
If you want to look at what has been succeesful the Asian economies have kept back money in the good times, building rainy day funds, even swatzeneger suggested it for california I believe (A soft republican). This model is close to keynesian, maybe depending on how you read it pure keynesian.....so the tax rate and govn spending is counter-cycle to the economy....so yes I agree with you in terms of raising and lowering taxes and public spending, jyst the opposite of it....OCR should really be touched day to day....maybe an adjustment once per year, the tax rate should be adjusted every 6 weeks instead.
regards
Steve,
Fair enuf. Sometimes I type faster than I can think and sometimes I think and nothing happens…LOL!!
I can no longer edit it since you replied to it.
BTW this is what i think the graph might look like:
http://upload.wikimedia.org/wikipedia/commons/8/8b/TS-Wasserdampf_engl.png
However i feel the "Pressure" lines would need to go in the opposite direction. So blue would represent Taxes with lower to higher going from left to right and green representing “interest rates” with lower to higher going from right to left. The red line represents economic output.
I also don’t agree that the Keynesian model was abandon in the 90’s. I believe Alan Greenspan applied it and has been in effect since 2001.
I think u'd give Greenspan a heart attack if he read that!!!!!!!.....he considers himself a libertarian-republican....if not an out and out objectivist....so to say he's been doing keynesian is almost funny...
The recent attempts to starve off depression are keynesian in nature, true, which is interesting because or who is doing it, but its too late and the damage too bad.....so now we see the freshwater / austrian / liberatarian school claiming keynesian isnt working....
man if you are in intensive care a quick injection of some pick me up is not going to get u out of bed let alone run 100m dash!....it might just keep you alive long enough until the body can repair itself....
eg
"Today’s freshwater economists don’t believe in Friedman-type monetarism; they’re two intellectual generations of intellectual retrogression beyond that. The first post-Friedman generation bought into the Lucas-type argument that no anticipated shock to demand can have any real effect; when that model failed, the next cohort turned to real business cycle theory, in which recessions are basically like bad weather that both reduces a farmer’s productivity and induces him to stay indoors.
I wish I could believe that this whole episode would lead to some serious soul-searching on the part of all macroeconomists. But while the likes of Olivier Blanchard are indeed reconsidering their views, the people who got things completely wrong are showing about as much self-awareness and remorse as, well, Wall Street."
Totally agree with taht last line, though its worse, I dont just see them being remorseful but they are actually trying to blame others!!!!!
regards
PS from,
http://krugman.blogs.nytimes.com/2011/03/14/roots-of-macroeconomic-igno…
A steam entropy graph.......
Been 20 odd years since I looked at that...I dont do steam turbines anymore....
For me the basics are simpler.......in order to flatten out the boom and bust cylces we need to remove money going up the curve of a boom and once over start to spend by stimualtng...
So the OCR rising puts money in the hands of foreigners, thats dumb IMHO....instead of OCR let the RB control the tax rate....so the tax rate goes up to contain the boom and the "spare" money goes into a rainy day fund.....as we go over the boom, reduce the tax to the nominal value and do public works from it, if need be then start to lower the tax rate....
regards
Justice what is it with you and AB? Look at the central banks around the world....in particualr the EU, OZ and the USA....we can clearly see that the central banks and Govns were hijacked by the finance sector and theor populations have all been screwed over as a result.....Now look at NZ, AB for me has acted responsibly, he resisted the Ozzie attempts to knee cap the RBNZ and take control, he kept qiuite good capital controls and has instigated tighter ones and he is looking for ways to keep bankrupt banks trading in a limited way and thank god he did/is.......
You know you lack total logic on this IMHO.
regards
Zirp rules Bernard...for us that's 2.5%. A bloody madness and Bollard ought to know it. He claims it's a confidence boost..That's total bollocks. He is out to fake some nice numbers. The question needs to be asked...who pressured him to go cheap for longer!
We now have savers who were oncall being robbed of returns to provide banks with the option to go fishing for more suckers willing to borrow loot.
On top of that theft, savers are seeing their capital robbed as planned debasement eats into the value of the Kiwi$.
And he would respond Wally.......no one pressured me.!.....it just popped into my head right after I exited Billy Bob's office in my usual backwards while bowing manner....and when I returned to tell him of this ..he said..facinating.! I was thinking along the same lines myself,..Bolly your a bloody marvels what you are...I'm going to borrow some cheap money and top up your pension fund......and don't forget ."it's all for the greater good no matter how daft it may seem.........errr the means justify the ends or whatever bla bla..............
Wolly,
If you think that the Banks are thieves then put your money in something else or somewhere else.
No one is forcing you to save with Banks unless you want the protection they provide (as I have said many times when was the last time a New Zealand Registered Bank did not pay out either the capital or interest on a deposit?)
The NZ economy was already in its double dip before Feb 22. One day's events has set us on course for a depression scale reduction in growth. Low interest rates are the least that can be done to avert a financial armageddon too.
I'm not sure that Aucklanders are grasping the scale of destruction. It's a reality that nearly every large ChCh CBD tower will either need demolition or major strengthening.
A large part of Canterbury University's campus will also need demolished - most of the large buildings are red stickered.
The city needs totally rebuilt - this is not something that will happen in 2 years or even 10 years, it could take decades to simply get back to where the city was. Much of the cost will need to come from the rest of NZ so to put it plainly NZ inc. is stuffed - hugely reduced revenue plus massive extra expenditure - and some genius wants higher interest rates? (For extra emphasis, I'm shaking my head in disbelief).
They punish savers
I'm a saver - but I don't see how sitting on term deposit is any better for economy. Saving is no sweat passive investment, and inflation is eating much into the interest anyway. What the government need to do is to make, say, first $5k income from interest or dividends tax free.
They encourage borrowing
I don't see why borrowing is bad, especially at a time when consumers are very cautious, which in turn is causing pain on domestic market.
It's not like a lower interest is the most important factor in ppl's decision to take up debt, it's their ability to repay, and how the value of their purchase would move in the near to medium future.
And if NO ONE is borrowing, how do the SAVERS to receive interest?
They encourage risk taking
Risk taking is arguably good.
Without risk taking we'd still be monkies.
They lower lending standards
not necessarily. the bank would lower lending standard if they have less customers ANYWAY, not because the interest is LOWER.
The bank need to found domestic LENDERS to partially fund the SAVERS.
Again, if NO ONE is borrowing, how do savers receive interest?
They blow up asset bubbles
NZ property market been flat, even when interest rate was at 2.5% last year, so this is doubtful.
Welcome to the new normal. house price = 3 years median income is no longer true. everyone want to live close to work, close to facilities. someone might think it's worth 3.5 years of their median income, someone might think it's worth 5. Then some oversears investers might think it's still too cheap for them.
Raise productivity, raise GDP, raise income. That's good for for us. Temporary low interest right now, is not necessarily bad and certainly not the ONLY thing bad for us.
Hauraki -
Raise productivity, raise GDP, raise income. That's good for for us.
No - with respect, that's nonsense from the pulpit of economic teaching.
Productivity ? In the old parlance, that was Kerr-speak for 'reduce wages to slavery levels". I go with 'efficiencies, though. We need all we can get.
GDP? Cant'y and Japan will ultimately be good for GDP. Which shows you what a nonsense measure it is. We're not 'better off', we just horse-traded more deckchairs per hour. The fact that the ship was sinking underneath the transactors, went unaccounted. GDP is a crock of shyte, as far as being a valid measure of social well-being.
Raise income? That's limited by the energy required to do work (3rd Forn Science, not rocket). All wealth is based on energy, and on the use of it to do things with real resources. The parasitic activities wouldn't exist without the real to piggy-back on.
So real incomes have peaked - in terns of real buying-power.
I see interest trending to zero, and concurrently, credit quantity doing the same.
Uninteresting times?
PDK
"I see interest trending to zero", I agree and i see no rationale in Bernards dogmatic drivel, All this BS about blowing up asset bubles and low quality lending, does he seriously think this is going to occur on the downside when banks are in defensive mode? and the general public are cutting their spending?
As for the Austrian (or Keynsian arguements for that matter) this depends on the great god of growth which as you point out will be slow or nil
As for Japan being good for growth, just wait until they fire up all their gas powered power plants running on LNG and start importing great gobs of refined product..then we'll see some interesting energy politics
Neven
Neven - chuckle.
It would appear that the emperor coutinues currently covered in raiment splendid, replete with suitably plagarised CofA motto:
On a roundel, a wall in fesse, fracted by three flashes of lightning in pile and issuant from the breach, water proper.
It was actually 617 squadron's, but could easily be Fukushima2.....
Bernard, some valid points here, but Bollard is hamstrung by his Reserve Bank Act mandate. Problems of poor lending and excessive risk taking are best dealt with through his alternative toolbox - you've mentioned the domestic funding ratio and reserve requirements etc. in previous articles. The Reserve Bank Act assumes that all growth is good and virtually dictates that interest rates shall be low. That's not going to change in a democracy until more than half of the population are locked out of economic participation. Any saver worth his salt can see that deposits are not the way to go - move further along the risk spectrum or have your savings wiped out. Overly Darwinian?
Poor mortgagors-NO!
The current high values of real estate and specifically the family home have been fired up by the easy money and the fact that prospective owners have been willing to think that low borrowing interest rates are their right for as long as they need them and for longer too to buy that rental property.
When compared to having a $300k mortgage at 6% it would probably be less painful in the longer term to have a $200k mortgage at 9% on a property they paid $100k less for.
In fact the repayments would be less as the result of having less capital to repay.
So I say keep the rates higher and lower the cost of the original purchase while rewarding those like myself (vested interest here) who did it the hard way 20 years back.
I certainly would like a bit more than 5% on my capital and one way to get it now is in shares but with a wide range of local and international coverage.
Correct on the recession being here for yonks MB but sadly very way off target otherwise.
Rates will rise because savers are not going to buy Piigs or American govt bonds or business junk bonds..in some cases there is no difference..munis are also stuffed...so expect higher rates and be prepared.
Bollard is already way behind the curve and post the election the ocr will have to shoot far higher and faster..driving the second great property drop as Gareth points out is needed to fit with historical patterns.
The full and final market plunge has to come. It's just a case of when not "if".
Meanwhile the currency is down 12.6% in three years. By 2021 at that rate, you will have lost 52% plus of your savings if you stayed in cash. or bonds!
Dunno, personally wouldn't earn NZD here and invest in AUD over there, the exchange rate is just too low at the moment.
Just got my job offer in Quuensland so we will head over for a year or two. Pay roughly the same as Auckland's salary but I know things are a bit cheaper like rental, electricity, petrol ($1.41 this morning). But don't believe about people get lots more money over there only a small sector of people get pay higher!
Crap interest rates. Try 12 month rate in USA 0.45% or UK 2.00%. CBA rate for 12 months is 6.10%. In NZ 12 month is around 4.60%.
Problem is that for a period of time NZ were used to high interest rates as the OCR was used to wring inflation out of the economy and there was a negative yield curve due to the high level of fixed rate borrowings. Bollard squeezed but it had limited impact as 90% of residential mortgage borrowings were fixed. and business and corporate borrowers were it as their facilities tended to be repriced more regulerly against cost of funds models.
At least now the OCR will have a more timely impact with floating now outmatching fixed and with positive yield curve borrrowers are preferring to float.
Hi Bernard. I'm not sure I agree with your reasoning.
You argue that low interest rates encourage borrowing. I think in the current environment it actually helps us decrease our debt. I think a good majority of the money saved on mortgage interest will be used to pay off more of the mortgage - so Bollard is just helping us get out of debt quicker.
You argue it hurts savers - but maybe it will encourage them to invest their money in something productive instead of giving it to the bank to loan to home purchasers.
You know that NZ is one of the most indebted countries in the world, and yet we have relatively high interest rates, so I don't think your assumption that low interest rates encourage excessive borrowing is 100% correct. Could it be that we are so indebted because we can't pay back our debt because we are paying so much in interest?
Invest your hard earned money in finance companies many of whom used to be recommended by this webiste (Hanover, Strategic, Geneva etc..). yes you can laugh! Truth is no-one knows where everything is heading so invest where ever your feel safe. Take any recommendations in this website very lightly!
Except if that's the banks' master plan they're not executing it very well by demanding 20% deposits now in most cases.
That's why low rates are not such a problem right now, because credit availability and to some extent demand, has dried up. The property finance machine has ground to a virtual standstill.
Wolly
If you think People in the 1970's were rocking up to their Bank with 25% or 33% deposit, cash in the Bank that wasn't the case at all.
20 years ago you could get 90% loans from a number of Banks (Countrywide and United were a couple) and Building Societies so low deposit lending wasn't something Bollards dreamed up.
Going back a little further Solicitors , Credit Unions and Building Societies would lend on second and third mortagaes (and at higher rates) to help people into homes. As well you could only have one loan for origional purchase and if you wanted to do some home improvements this was at a higher rate even though the Bank still had a first mortgage over the property.
These controls started to come off in mid 1980's and I can recall there being quotes for like housing, farming , busines loans and once the quota was used up that was that for the month. You had to re-apply.
As will while Banks are advertising they will lending up to 95% very little is being done in this space as the creteria (rightfully so) is very hard and only the cleanest and most credit worthly can get past go. (agree that in the past benchmark may not have been so high).
Soif you think their is some master plan by the Banks to borrow unlimited to the hordes:
you are not to be allowed to save enough for a large deposit..you are expected to borrow big with almost no deposit..to help the banks protect their bubble..so they can carry on farming the economy......
The real evidence out there in the trenches does not equate to your opinion.
To get a loan today you need:
A reasonable deposit (somehwere between 10% and 20%, more likely the latter)
Clear ability to service debt (not just signing a disclosure at to what your in come is)
Clear credit check ( forget it if there are defaults to other financial institutions)
Satisfactory security (30 square metre apartments don't cut it any more)
The old/new deal in economy is that you count if you hold a big negative against any financial institution, so here we go again building the debt pump and dump for the lower end consumers. They will borrow pay big premium for low purchasing power currency and on and on.
Jimbojones,
you correctly identify that the evidence does not point to low interest rates assocaited with low savings consistently,there are many countries who have run lower interest reates for ages and have better savings records. I am not advocating for low reates per se but Bernard s rationale does not seem sound IMHO. I have some money in fixed deposits as well but that does not influence my wider opinion on the this subject. As far as savers are moaning about low rates , it is a mtter of self interest, savers want more and those with mortgages also want some relief, it is greed both ways . Some of regular posters moan about debt based economy on one hand and in the same breath also want high interst rates. As for Mr Market, it is corrupt and exploitative, where is the so called free market? Is it just only low interst rates that encourage assett bubles ?What about reckless lending, NINIJA loans, corrupt rating agencies and fincial engineering ?
I hear we need fundamental changes ,well then do not advocate for one blunt tool :OCR
LOL, Nice basic lesson Bernard thankyou. Problem though is some who blog here on a regular basis who fell hook, line and sinker for the property 'ponzi scheme' are in blatant denial and won't except your lessons EVEN when you have the past decade of proof behind you.
Cheers,
Justice
Justice,
Can you explain to me with someone with a mortgage (which if I sold my home I could purchase one freehold in a reasonable part of town) exactly what am in denial of?
I assume you are sayiing all borrowers:
fell hook, line and sinker for the property 'ponzi scheme
My mortgage equates to approx 1.25 times my salary?
Imho it's not just cause-effect but more like feedback loop(s). Low interest rates is one of the loops (oh, and let's not forget tax gimmicking to move the cost of interest to someone else).
Offloading risk is the big driver, together with misrepresenting, hiding it and being bailed out. To institutions or funds "investing" on behalf of people who have no idea what's happening with their (mandatory/subsidised) savings. Ultimately to the entire population. This makes lower interest rates possible, positive feedback, see? Lower lending standards, more leverage, rising asset prices, causes and effects both. Take away the 'fraction' part in the fractional-reserve banking (reserve-less banking; savers take a hike), take away accountability and legal barriers (retail- vs. investment-, accounting standards), well ain't that a pretty picture, full throttle and no brakes.
So to summarise, just higher interest rates wouldn't save us. The misallocation and the wealth extraction wouldn't stop. Austerity anyone? Deflationary collapse maybe?
Risk (and the cost of it) should be clear and put back to the actual risk takers, willing an capable (of taking on the risk) individual investors. A lesson learned more than a couple of times before, no?
And then, I'm just guessing, rates would be higher.
Lower rates encourage borrowing and ease the burden for those in debt.It stimulates economic growth and thus provides jobs and the economy improves.
Still a healthy premium to US,UK,EU,Japan etc.
Bernard you are nuts.Drop rates to zero.Cut taxes.
You believe in raising taxes and interest rates to stifle growth.Something wrong with an individual who encourages growth in the public sector and advocates new taxes(your crazy levy idea!).
Don't worry about future inflationary pressures as there is no growth now.Bollard killed the recovery with last years rate rises.
Commodity bubbles push prices for the consumer but our real debt levels decrease with inflation!
PB... .
do u really believe the best way to grow is to borrow and spend..????
Cheers Roelof
Aw c'mon, Bernard,
What you've stated here is not opinion, it's fact. The opposite is also true.
One could make precisly the opposite observations by transposing
No. 1 spenders for "savers";
No.2 and 3 discourage for "encourage";
No.4 raise for "lower";
No. 5 deflate for "blow up,"
Seems that economists do this all the time...offer as opinion the obvious opposite facts.
Who was it who asked for a one-handed economist?"
Oh Canada, Oh Canada - oh clever, on the ball Canada:
http://www.mikestewart.ca/blog/tag/maximum-loan-to-value-ratio-canada/
The link goes here: http://www.fin.gc..ca/n11/data/11-003_1-eng.asp"In April 2010, the Government took additional measured steps to support the long-term stability of Canada’s housing market and continue to encourage home ownership for Canadians. Adjustments to the mortgage insurance guarantee framework included:
- Requiring that borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
- Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. [Now 85% from this month.]
- Requiring a minimum down payment of 20 per cent on non-owner-occupied properties purchased for speculation."
What can we learn? (Amanda first folks.)
Bernard, thoughts?
Cheers, Les.
Great concept, but a little like closing the gate after the horse has bolted if applied here now.
Or maybe force everyone with existing mortgages to refinance now based on the above criteria.
Re-evaluate everyones mortgage based on the current 5 year fixed rates, if they don't meet the standards they must sell and only purchase a lower priced property that allows them to meet the repayment standard.
Anyone with less than 15% in their owner occupied house must stump up with the extra equity or sell and purchase a lower priced property with a 15% deposit.
Anyone with an "investment property" with less than 20% must stump up with the extra equity or sell it and purchase a lower priced property that allows them to meet the threshold.
This is what the RBNZ should have done 8 years ago when they first had issues with the property market instead of just using the OCR.
meh - you sound like the kind of person some are advocating we should put in charge of rebuilding ChCh, especially given Joe's Mum isn't available:
http://www.stuff.co.nz/the-press/opinion/columnists/joe-bennett/4746276/Tsar-for-rebuilding-may-be-just-what-city-needs Like y' style, but anyway, I think, as usual, there are reasonable alternatives, to the way we do things now. A modification of those kinds of approaches might be useful, if implemented gradually (not in Czar like fashion ...) so that the RB could more effectively control inflation going forward, without relying solely on the OCR. Which, because its a corrupted price signal, does little to quell inflation originating in non-tradeables before it crucifies tradeables, in the broader sense (ie. not just ag.) Implementing something based on the Canadian approach could mean the RB could keep the OCR lower (and even lower) for longer to stimulate recovery, particularly when tradeables operators see they won't be the ones taking all the heat (via overvalued, overvol. NZD) when RB needs to tighten - because they could do more with these kind of prudential measures.Bernard, Amanda - thoughts?
Sweden, Norway (apparently) are going for LVR regimes as per Canada, yet Auz quite the opposite, re. your 10@10 - what do you think?
What implications are there for the looseness of the OCR regime, inflation, savings (real) if a robust LVR regime were introduced, in NZ, albeit loose for now however?
Les.
Thx John. This bit is interesting:
"In April 2010, the Government took additional measured steps to support the long-term stability of Canada’s housing market and continue to encourage home ownership for Canadians. Adjustments to the mortgage insurance guarantee framework included:
- Requiring that borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
- Lowering the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. [Now 85% from this month.]
- Requiring a minimum down payment of 20 per cent on non-owner-occupied properties purchased for speculation."
Bernard, Amanda - thoughts? (Mine - Banff is great skiiing! What a lovely country, except for the time I got mugged in Vancouver - so pissed, my fault.)
Cheers, Les.
Read it at the time you posted it... Main thing that impressed me (actions aside) was the 'deliberate intent' - the clarity of purpose contained in the simple statement:
"Supporting the long-term stability of Canada’s housing market" - positive and deliberate intention (can't judge if it would work).
For all I know, you could also charge a higher interest rate as well for loans on 'non-owner-occupied' properties.
I preferred the second point - that's the really scary one to me. House as ATM. Stop it altogether as far as I'm concerned. Unsure how badly it affects NZ - never found the data.
Well the cup has gone from CHC as most of us thought it would. The death blow for a lot of SME's now I suspect which is a real shame as last thing they needed.
It has been discussed among office staff...would be good that the LIONS perhapes do a tour down here in a couple of years and hold two test matches in CHC..gives those rebuilding something to look forward to.
@Michael (via Bernard) - "In bad economic times, interests should be raised so that people would save more money allowing more capital available in the bank. Entrepreneurs and investors can then borrow money to build or expand factories and other businesses, which then create employment and increased production of goods."
Two things - high interest rates that encourage people to save are exactly the same high rates that will _discourage_ said entrepreneurs to borrow to expand factories, etc. It's not like those savings are lent out at a rate lower than is being accrued on the deposit.
Also, banks don't lend saved money. When you borrow money you're actually borrowing nothing - the 'money' (actually, bank credit) is created with a click of a mouse. the savings are a regulatory necessity, but are only a tiny percentage of what's lent. (And when was the last time you were unable to access your funds in a bank because it had been lent to someone else? That's right, never.)
PI... r u sure about this..??? that's not my understanding.
"Also, banks don't lend saved money. When you borrow money you're actually borrowing nothing - the 'money' (actually, bank credit) is created with a click of a mouse. the savings are a regulatory necessity, but are only a tiny percentage of what's lent. (And when was the last time you were unable to access your funds in a bank because it had been lent to someone else? That's right, never.) "
Sure ... when a loan is made the money ( bank credit) is created with a click of the mouse.
BUT.. the banks have to "settle accts" at the end of each day. For this they use their reserves. Deposits are a part of those reserves.
It is a nonsense to imply that ..... "the savings are just a regulatory necessity."
If a bank can't settle its' accts at the end of each day.... then it is insolvent.
In a way we have two kinds of money.... Base money ( real money ) and Bank Money ( credit money ).
At the end of each day , all interbank settlements,are in "Base Money" thru accts held with the Central bank.
Monetary policy is not about entrepreneurs building factories or savers getting high interest rates.
Monetary policy is about maintaining the integrity and value of the "Money".
Allowing Money supply to grow at double digit rates creates a "fools growth"... Its' an illusion.... it is destructive... it accelerates the "division of wealth".
In 1991 m3 was $51 billion ... in 2011 it is $223 billion.
thats a compound annual growth of almost 8%.
With that kind of money supply growth.... current house prices don't seem so overpriced. ( what does look bad is that average wages have had compund growth at a far lower rate)
The high inflation in the non-tradable sector also makes sense.
In a closed economy ...large increases in money supply leads to increased demand..which leads to, generally higher consumer prices.... INSTEAD ...in the global world the impact of that increased demand has manifested as chronic balance of payments deficits.... because the increased demand has been met with an unlimited supply in the form of imported products.
Milton Friedman said that it was prudent to have money supply growing at a little above the rate of GDP growth..... Anything more leads to distortions and inflationary issues.
At the moment ... the Govt has stepped in to provide demand and stimulus in the form of large deficit spending... This has given the private sector the chance to get its balance sheet in order... The only sector that seems to be doing that is the Business sector.
Seems... to me... that the message is not about "rebalancing " anymore... but about "growth"... and "aggregate demand".
In March 2007 our total overseas debt was $198 billion.
In Sept 2010 it was $252 billion..... probably $260 billion now.
Yes Banks cant create credit at the click of a mouse.
Simplistically.
First there are limited to the amount of Lending (Assets) by the amount and type of Capital they have (shareholders funds). In general Banks in NZ need minimum of 8% capital on their balance sheet (as well different lending has diifferent wieghtings but in general Banks can lend twice as much against their capital base on residential lending than other forms of Lending).
Secondly, they have to have the funds to lend out, either being either Retail (term deposits, balance in savings accounts etc) or Wholesale deposits (either domestic or offshore by way of bonds, swap facilities etc).
A Banks balance sheet is no different to any other companys: Assets (Loans) = Liabilities (Deposits from all sources) + Capital (Shareholders funds).
Money man...
Banks ARE uniquely different to other companies.
The banking system as a whole can expand the money supply thru the creation of credit money ( IOU money ).
They do this by simply making new loans as "book keeping entries"... at the click of a mouse..... just as PI says.
HOWEVER
Just as u say...They are constrained, in their ability to do this , by their Balance sheet.... At some point the "IOU" is called in and they have to settle it..... with "real money"... ( base money )
This happens in aggregate ... in the banking system... ( Of course there has to be a demand for credit )
So... in balance sheet terms... they can create assets ( loans) out of thin air.... Not many other companies can do that...???????
Yes but individual banks still have to fund these Assets (Loans) by either retail or wholesale deposits (or during GFC the RBNZ agreed to provide any funding Banks required due to closure of offshore markets).
Just look at a banks balance sheet and show me where the IOU money is?
Look at a balance sheet of say SBS Bank and tell me how it can create credit. It needs deposits to fund its loans.
If banks could just create credit why are they fighting over deposits?
Money Man...
Banks can and do create credit....
They are uniquely different to ,say, finance companies who generally lend out only what they borrow in deposits.
Check this out ... read page 18 of this document
http://www.nzba.org.nz/assets/Uploads/Banking-in-NZ-06-final.pdf
Modern banking evloved out of the goldsmith days... Goldsmiths used to store gold for people and issued notes... over time, these notes became used as money.. The goldsmiths noticed that only a few notes were ever cashed in for the physical gold.... SO... in their greed and wisdom .. they issued more notes than there was gold ( ie. they made loans )... this was free money for them... UNTIL... too many people redeemed their notes for gold... and then the goldsmiths had to do a "runner".
Same happens today.... instead of gold we have "base money" ( real money).... and "Bank money" ( credit money or IOU money ).
EXCEPT... instead of having to do a runner... they now have a central bank to provide liquidity.
Banks fight for deposits ... because deposits are/ become "base Money".... ( gold in the gold smith days )
The magic happens when a bank makes a loan.... they don't lend out the deposits... they create "credit money" and lend that out..
The deposits go into the banks reserves and are used to settle accts thru the interbank payment system.. ( same as the goldsmith having to hand over gold if someone redeems a note )... see page 22 of that document.
It is a great business for the banks..!!!!!
cheers Roelof
Drug pushers in total control of economy....and don't we love it....get your stuff at the local branch...it's cheap now thanks to the drug lord deciding not enough users were using!...hey no worries man...it's not only legal to be users but your own govt is determined to get you hooked on the stuff.
I might add.... it is a risky game to loan out...."credit money"... because at some point, as those loans are used in the market place, the Banks have to make settlement with "real money".
issuing more credit money than u have real money can lead to liquidity problems ...and that was one the fundamental reasons Central Banks came into existence.... To provide liquidity whenever it was needed.... and it was needed.. ( banks are an integral part of the boom/bust cycle)
Because of this, Banking is a Public/Private partnership... and also beacause of the privilage the banking system has in creating credit.... I believe Banks should be very carefully regulated and controlled..... for the good of the country...????
cheers Roelof
I agree with Bernard Hickey, but Bernard you need to do the maths 90% of New Zealanders do not have 200,000 in the bank. In fact the average weekly wage is a myth most New Zealanders are unable to save.
I agree we should not keep borrowing but in my case I have a floating mortgage I make high repayments and would not consider borrowing more, so in my case lower interest rates are good
Roelof,
As per the article quoted by you the Bank still needs to be able to fund the loan from either wholesale or Customer deposits in variuos forms..
If it doesn't have the funds it will not be able to settle its account at RBNZ, hence its ability to create credit as you say, is still limited by the availability of funds via whatever source, wholesale, retail, offshore etc.
You are correct that it can create credit in a pure form if for example a bank lending money for a home and the vendors of that transaction in return despoit those funds back with same bank. It now has funds to to be used to settle its position with RBNZ.
Banks settle transactions with each other
through their accounts with the Reserve Bank,
with these accounts having to remain in credit.
This means that, when a bank makes a new
loan, the proceeds of which might be credited
to an account at some other bank, it needs to
make sure that it raises enough funds, either
in the inter-bank money markets or from customer
deposits to ensure that its net cash outflows
will remain near enough to zero, and so
that its position in its account at the Reserve
Bank will remain in credit.
Money man... yes.. you've got it.
BUT... I'm not sure if u quite realize how much they can expand the money supply by in a yr.
If u look at the monetary aggregates... they have expanded the money supply by 9% in a year.... $ 20 billion in a yr. ( of course this can only happen if there is a demand for credit )
$20 billion dollars of new credit ( no cost to the banks )... earning them interest.
Banks don't fund loans... they simply create credit. .... ( This is an important distinction )
The deposits are used to settle accts.
It is as if there are 2 parallell money systems.. One is "base money"... the other is "credit money".
Base money can exist without credit money but credit money can't exist without base money.
I know it is hard to get ones' head around.... but that is my understanding of it.
In a sense banks are juggling a lot of balls in the air ( credit money beyond their ability to settle ... just like the goldsmiths )... and when they start having bad loans ... they really have to clamber for "base money".. ( real money)... in the form of capital and deposits.
Cheers Roelof
Yes I understand the cretion of credit on a marco basis but for example when a Bank estblishes a swap facility with an offshore provider it is dealing with real money.
I recall prior to deregulation the Reverse Asset Ratio which was a tool used by the RBNZ to require Banks to have a larger amount amounts in reserve (by way of Govt Stock or Treasury Bill) as I understand as away for controlling the increase in money supply.
I also recall Social Credits fundamental policy was around increasing money supply but deceasing the speed in which it went around the economy. I just recall it being very inflationary like a big money press.
Yes... banks borrowing offshore are dealing with "real money".... I think they call it "wholesale funding".
The "magic" happens when they MAKE LOANS...
Real money is used to "settle accts" ...
If money supply grows by 12% in a yr.... that growth is in "credit money"
It is only the reserve Bank that can increase the amount of Base Money (real money) in the economy
AND ... yes ... it happens in a Macro sense... " the Banking System"... as a whole.
The flaw in modern monetary policy..., in my view,... is that money supply is allowed to be completely elastic... ie. it is simply the demand for "credit" that determines how much the money supply grows by.... AND central Banks try to influence the demand for credit by controlling short term interest rates.
Modern Central Banks believe that how much money supply grows by,.. is irrelevant.... I disagree...
Here is a great web site that is helpful when learning about money and the monetary system.
http://wfhummel.net/index.html#1
cheers Roelof
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