Memo to Graeme and Bill: Insanity is doing the same thing over and over again and expecting different results

Are we about to prove Albert Einstein right?

By Bernard Hickey

Leadership changes at the Reserve Bank are once-in-a-decade events so the arrival of a new Governor and the writing of a new Policy Targets Agreement (PTA) with Finance Minister Bill English offers a rare opportunity to change the way monetary policy is managed.

Former World Bank Managing Director and Treasury Deputy Secretary Graeme Wheeler is due to take over from two-term Governor Alan Bollard on September 25.

Ahead of his arrival, English and Wheeler will negotiate a new PTA and the current indications are it's unlikely to be changed much from the existing one signed in December 2008, which gives the central bank the mandate to target inflation at between 1 to 3% on average over the medium term.

That's a pity.

The current monetary policy framework is working with the government's fiscal policies, our floating exchange rate and a housing shortage to reinforce all the same old imbalances in our economy.

Government borrowing, safe haven demand from foreign investors for bonds and property, and a surge of reinsurance funds for earthquake claims has boosted demand for the New Zealand dollar. This has pushed our currency well above 80 USc and out of whack with a 30% fall in commodity prices in the last year.

Exporters are struggling and five years after the beginning of the Global Financial Crisis we have yet to see hardly any of the rebalancing towards exports and production everyone expected from 2008 on.

Bollard acknowledged as much in an excellent speech he gave this week that emphasised how little deleveraging of debt had actually happened and how little rebalancing had happened.

The tragedy for Bollard and the economy is the very reason there has been little rebalancing is the same reason he can more easily hit his 1-3% inflation target.

The high New Zealand dollar is proving very effective at doing the Reserve Bank's dirty work of slowing down the economy and keeping inflation low. Exporters face a double whammy of lower commodity prices magnified by a higher dollar. Meanwhile consumers and importers benefit from downward pressure on import prices.

As a result, New Zealand's current account deficit position is forecast to worsen towards 7% of GDP and we do little to pay down our still-high foreign debts.

It's a case of 'plus ca change, plus c'est la meme chose'. The more things change, the more things stay the same.

Yet again we see house prices rising (up 9.4% in Auckland in July from a year ago), household debt rising (up NZ$5.335 billion to NZ$NZ$187.951 billion in the last two years) and the New Zealand dollar rising at the same time as the economy slows down and unemployment rises (up to 6.8% from 6.7%).

There is the potential that the situation could be made even worse if the Reserve Bank uses its blunt instrument of a rate cut to offset the effects of a 'Euro-geddon' type meltdown in Europe. Safe-haven capital inflows and even lower interest rates for longer could see Auckland house inflation skyrocket and the New Zealand dollar strengthen.

Bill and Graeme must nut out some strategy to break this self-destructive nexus.

Before Wheeler's appointment, the Reserve Bank said it was looking at loan to value ratio limits and other 'macro-prudential tools' to reduce the risks of housing bubbles distorting the economy.

These are tools used in Hong Kong, Singapore and more recently in Canada to try to slow the housing sector without an economically damaging interest rate hike.

Wheeler and English should look hard at using these tools.

Otherwise they risk proving Einstein right: "Insanity is doing the same thing over and over again and expecting different results."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Read this guy he explains it all so well. He is not a nutter, I think he is just showing us what we do   not want to see.
Our ecomony is not ours, we have handed it over to finance and told ourselves again and again, there is no alternative.
So what do we do?
1. Do we stop trading the NZ Dollar every second? Can we do this? Say we put in a transaction tax on finance, you know like the transaction tax we have on bread. ( we call it a consumption tax but really it is a transaction tax). Would this work- not really most trading in the NZD happens outside of NZ by very few people who trade our currency when we are asleep. Not sure what do here? Any thoughts?
2. Lower transcation and labour taxes- right down to a realistic level- 10% or under
3. Bring in a transaction tax on finance- same as we have on bread- it doesn't even need to be at such a high rate
4. Bring the reserve bank under our control. Independence means independence from us not actually independent. So we need to control the actions of the bank more explicity . The idea of an independent Reserve bank has been shown to by such a lie.
5. Bring in loan to potential rental income ratios.
6. Bring in minimum deposits
7. Stiop allowing people who do not live here to buy property- Look at how the Danes have manged living right next door to rich germans- they do not let them buy the place up. It is not hard, it is not racists. If you want to own a house- in NZ it has to be your primary house.
8. Make farmers farm. If you want to be a diary farmer- you have to do the farming - we do this with Pharmacies- why not farms?
9. Bring in a land tax. Tax the land not the effort- all we do here is tax effort- even capital gains taxes are taxes on effort- or something close to it. Instead we need to tax the land itself- in the end the tax will simply offset the amount that can be pledged to make interest payments to foreign banks anyway.
Rising aset prices- are simply the inverse of rising debt. To get the debt under control we have to bring the creators of debt to heel.

I love Michael Hudson's analysis. It is tempting to scoff at his ideas but his knowledge is just so enormously impressive. I think the reason his ideas seem harsh is because we have all adjusted our lives to fit the rules as they are. I have a couple more suggestions:
10 GST on interest - we pay GST on bread but not on interest - that is just warped favouritism of the banking sector over the productive sector. Reduce GST to 10% but broaden the base to all goods and services.
11 No interest deductability as expense against income in any business.
12 Not just a financial transaction tax, but a quotation fee - so we don't get the high frequency traders here.

Yes a land tax but just like our FIF in reverse. For any asset we should  expect it to earn 5% and if it does not then impose an assumed income tax based on 5% income. That way speculation on capital gain costs tax each year and every year.
We could allow an offset allowance where the property is the primary residence of the taxpayer but only if occupied for a minimum period in each year. That would stop the overseas domiciled holders who spend little or no time here.

You aim for a steady-state economy.
No other course is valid.
Despite the wishes of one-note, don't-want-to-learn troll above.

..... once again , we're here to discuss issues , not to heap personal abuse upon fellow bloggers ...

All made irrelevant by the massive herd of elephants in the room. A well set out article on oil from the land of happy motoring.

Poor Hughey. That black stuff is the only thing that has hithertofore underwritten his precious 'incomes'.
Nothing new in that article, OMG, but the question always remains: with a depleting real energy input, how much of the wealth-generating expectation currently held (the ability to repay loans/mortgages, for instance) will actually eventuate?

Sure there's nothing new for those who follow this issue, but what is good is that it's penetrating the MSM - yet to see anything like this in NZ media, although I could have missed it.
I don't have a problem with cheaper housing and if it is sprawled out at least the dwellings have room for gardens for a bit of self sufficiency. In the end "everywhere" is going to be "too far" from everywhere else, so it pretty much won't matter.
As for debts, they are all unpayable anyway in a crash. The whole system will be replaced with something else. Banks can't foreclose on a zillion houses, "possession" will be nine tenths of the law.
Liquid energy will be comandeered and rationed by the govt to make it last much longer than we might expect, rail lines will quickly appear on roading already in place - the "trackbeds" are already there.
Very interesting times ahead.

Very unlikely roads will be used as trackbeds. Rail requires very specific gradient requirements, not to mention the radii of curves.

That's right, I should have qualified that point by saying parts/sections of the roading system could be used.

I think OMG's point was, we will replace / abandon cars....Trolley buses do not need shallow gradients, and diesel buses can be retro-fitted.   The problem with light rail is its $4500 per metre, and we have an energy and debt problem. Trolley buses just need overhead cable, cheap and easy compared to light rail.  Also railways only do rail, road does buses, push bikes....and walkers etc...
Poor old Phil B would be having a fit if he was watching in here.

Steven you are correct... Everyone set to try and reinvent the wheel. You could even run cables across the Harbour Bridge and that billion dollar bus lane from the Shore will actually be viable. No trains and no tunnels... Sigh... Alas still NO leadership!!!

I think the bus companies have signalled that trolley buses cost too much (buy and operate) so they want to get rid of them....
As per typical business they are only concerned with efficiency and not resiliance.......interesting how things will change....some transport has to have [bio-]deisel, ie farming....others dont......

Thanks for the clarification, steven. Slightly off topic but I was google map searching an associate's office address in Florida - zoomed down the highway, but took time to look at the road surface. There were potholes in the early stages of development everywhere. Not good!

Really the Reserve Bank is a done dog. Maintaining inflation at 1-3% assumes energy and other resources to underwrite that growth. Evidence points to increasing EROI for these resources, which shows we are already past the easy to get stuff.
Maintenaining that inflation target only sets us up for hyperinflation. As production declines then the only way to keep inflation in that target band is to increase the price of the reducing pool of goods.

What NZ really needs is Rupert Murdoch to come & buy up most of our left-wing liberal elite media and bring some intellectual economic debate to the table.  Then we stop the elitist trendy left from exploiting/dominating the minority fringe views on anti-mining, anti-drilling, anti-economic progess, pro-edu-dumbing down, etc. 
Once we get Rupert supporting politicians who can promote economic progress and unleash the real wishes of most kiwi hard-working middle-class battlers -   whose ancestors came here originally to set up farms & businesses and make a profit.    Not to setup a little France with meddling policy-makers & pro-teacher unions & tut-tutters on every economic potential.  

Thanks MortgageBelt.
Needed to have a wee laugh.  
Murdoc and intellectual economic debate.  mwhahahahahahahahaha


Mortgage-Belt - you realise your comments are a result of that dumbing-down themselves?
Only a twit would associate mining, drilling, with economic progress, then fail to factor in a finite planet.
Or someone educationally dumbed-down.  You didn't do economics, perchance?
That would explain it.

This is supposed to be a forum for good natured debate , not an open invitation for you to personally abuse anyone who's views you disagree with .

Both Hughey and Mortgage Belt are industry touts. Hughey, in particular, throws invective around by the shovel-ful, rather than do the homework. I quite like debate, but the aim should be for folk to learn from it.
Something you might like to think about yourself: EROEI comes to mind, and your nonsensical clinging to the hype about trillions of barrels of unconventional oil. If I may make a suggestion, it pays to start from an stance of not needing something to be so, when appraising whether something is indeed so.

what was good-natured about
"...elitist trendy left from exploiting/dominating the minority fringe views on anti-mining, anti-drilling, anti-economic progess, pro-edu-dumbing down, etc."
Seemed to be more on the contemptuous end of the spectrum than the good-natured end.
Ripe for some piss-taking in my view.  Especially when he promotes Murdoch as a beacon of intellectual debate.... hehehehe

From the mocking reaction -  I rest my case.
The NZ public has been hoodwinked by a media dominated by a left-wing elitist world-view that suppresses any reasonable, thoughtful discussion on economic and resource-use progress. Of course, in NZ only university faculties, teacher unions, environmentalists and copy&paste opinions from other elitist left-wing media outlets can have the supremacy in any debate on development issues.
I thought the following was a reasonable opinion:  But then I forgot - advocating economic progression is not allowed in our national debate!  Shutdown by shouting voices ...
"Then we stop the elitist trendy left from exploiting/dominating the minority fringe views on anti-mining, anti-drilling, anti-economic progess, pro-edu-dumbing down, etc. 
Once we get Rupert (or other think tanks) supporting politicians who can promote economic progress and unleash the real wishes of most kiwi hard-working middle-class battlers - then we can make some progress.... "

It's nothing to do with left, right, or any other political direction.
It's to do with physics and math.
Energy, work, exponential doubling-time, Gaussian curve, diminishing returns, depletion, finite resources.
Call them, collectively,  facts and truths.
Don't cloud the issue with your personal bias. (or the residual horse-poo that economics students come away with).

1.) make ridiculous and highly biased assertion unsupported by evidence.
2.) people disagree with ridiculous and highly biased assertion unsupported by evidence.
3.) declare victory on the grounds that people who disagree with you disagree.
Logic and debate - ur doin it wrong.
For your next trick, how about declaring that narwhals have been fitted with nuclear transponders by the Russian Navy in order to eavesdrop on your phone calls.  Then when a rational person questions this assertion, you can declare victory on the grounds that they're obviously IN ON THE CONSPIRACY and possibly even a greenie.  It'd be on the same level.

I'd recommend a game called minecraft as a great example of a flat earth where other limits actually make "progress" harded and might get through to you that the rubbish you spout is indeed rubbish.
Nothing like the blind who dont want to see.
Ppl came to NZ because back in the old country there were too many of them and they were starving. So when they landed here they had virgin territory that had masses of totara, rimu etc and they chopped it all down and kept doing that until it was gone or un-economic to ge the little left.
So it was a one time use...
and here you are wanting to do the same again because you think its progress....

Kettle calling pot black GBH.  The point is on one side, PDK's we have science and math and on the other, right wing mumbo jumbo.

Anyone who sees our media as left wing just has to be so far to the right he's long lost reality.
Maybe if you tried looking at who is employed writing opinion pieces in the media, I can name Rod Oram on the left. Otherwise Im hard pushed to think of any others v countless on the right.
Ppl came here to set up a seem to forget we have a democracy so ppl get to choose where that takes us.

Don't really know if this is a joke comment or not about Murdoch. The Murdoch Crime Famiy* already own a sizable amount of New Zealand media. The best idea would be tou use a fit and proper person test and then to force them to sell/ break up their dominant media interests in New Zealand. Murdoch would of course agree with this as he is a proponent of free markets and competition. As markets become less competitive through dominance of one or two companies these need to be be broken up to correct for markets failing. Murdoch and other neo cons would have no problem with tis, as they believe in creative destruction, free markets and competition.
* It has been well documented that the Murdoch Family is the head of a criminal orgainisation that has involved itself with bribing police, tapping phones etc. Many key underlings have now been charged in the UK and investigations have been reported on similar activities in the US. In other industries for example waste collection such behaviours by Crime Families are commonplace. In Media it is more unusual. For Crime families involved in Waste Collection etc it is OK for the media to call them "Crime Families' even when the heads of the Families are yet to be convicted themselves so it is fair that the same rules can apply to the Murdochs. 

NZ leaders? or world leaders?
The problem is our "leaders" cant or dont want to see the problems we face....its taken BE 4 years to fes up the GFC might last 20 odd years....Fesing up to peak oil ensures that "might".
Then here do we/they go?  admit its down hill from here...
I can see the riots now

The irony is that if NZ was "Balancing" its books we would then be an even safer currency ..... and a lot higher.   The other side is that then ocr could be lower again and the deleveraging could occur faster.
I think the worlds central banks are pushing on the string and the consumer is just using any extra money to pay off debt, incrrease savings or pay inflates ratesa nd energy bills.
All going well in another 10 years debt will be paid down and growth can return as the consumer has a spare $

Part of the problem I believe is that the $NZ strength seems to have little to do with whether we are balancing our books- because we haven't been for 40 years, and it's getting worse, and yet the dollar is very high. The only cause and effect at play is that the high dollar is a key cause of us not balancing our books. You are correct in that the closer we get occasionally to doing so, the dollar appreciates, putting another string of exporters, import substituters and tourism suppliers out of business, or at best grimly holding on.
Bernard's article notes that in fact household indebtedness continues to get worse, while of course the government, probably correctly in a recession, is also spending an extra $300 million a week more than it is collecting in taxes. It is moot whether it should borrow this from offshore, so sustaining a high dollar and perpetuating the cycle; or whether it should find alternative internal means. The exchange rate price signals are critical to a small trading nation; and yet our government and Reserve Bank ignore it, or pretend they cannot do anything about it.

Many of the posts on blogs like this suffer from confirmation bias, the tendency to favour information that validates one's belefs/worldview, and to be critical of that which doesn't.
That's why you shouldn't take a blogsite too seriously.

When the income-stream the employees/owners of the blog-site require, needs more folk to borrow (interest) then the bias will be towards more housing being (a) good (b) feasible.
Same with a newspaper - while purporting to purvey the truth, they require the fiscal status-quo-or-better, to survive.
There's a wee cracker from the ODT this weekend (covered as 'opinion', but not in their opinion page, nor will there be a 'balanced' opposing view).–-and-its-impact/
her CV is telling.......

As is the opinion of who's she has based her writing on,
Leonardo Maugeri has been one of the most distinguished top managers of Eni (the giant Italian giant oil&gas, ranked 6th among the largest international oil companies),
fasinating bio....
So right now in convential oil terms we have about 2.2Trillion barrels of which we have used about 1/2 in 100 this "new tech" takes us to 3 trillion....even if you ignore expotential growth ie maths the new half/way is a max of 50 years from now...funny how they dont mention that all this does is buy some time....(not that it does mind).....or now they mention the problems they dare not mention before now that its been "proved" they were wrong just like they knew all along.....

Not new. It has been published here before, in a slightly different manner
Some come to learn, but
Most people will not listen to others. They will respond positively to articles that confirm their beliefs or prejudices and negatively to those that don't. Regardless

If you're referring to my link, you're quite right, it's been here before.
It's a classic - one insider puts out a spiel, and a dozen or more spin it on.
It was Chaston who put it up originally, if I recall..........

Great link....funny if it wasnt so desperate.
"Finally we must note that Maugeri is well known for his hostility to peak oil, as is BP, which funded his report."

Spin rule 101 - you only need it when you're short on fact.

It's the other way around.  People preferentially perceive information that supports their beliefs and conclusions.  Which is an excellent way to miss or ignore much of the relevant information and get it wrong.

Personally I think they should ditch the commitment to not change rates too suddenly. This seems to be strangely counterproductive. If the RBNZ ramped rates up rapidly it would puncture the complacency which leads to excessive risk taking in the form of mortgages that can never be paid off.
I know it sounds bad, but they can then drop rates rapidly once the complacency is punctured. Stability leads to excessive risk taking. Bureaucrats seem to like to pretend the world is flat and unchanging, whereas in fact it is highly unstable in all things financial.

Yes, agree, I think it was you, we had this conversation once before. It is quite within the power of the RBNZ to smash interest rates down one week then slam them up double the next week. It would hit the cowboys right between the eyes. The RBNZ could make a bundle out of it. A defacto Tobin Tax. Central Banks are exempt from "insider trading" laws.

Let's hope the cowboys hit aren't as big as those that I worked for. One Friday night Banque de France raised O/N rates to 1000% trying to shake us out of our position - it was huge, I must admit, and we had already dealt to the Italians. That in itself was an interesting story with all sorts of London futures exchange panic over the size of the positions.

All that is required is unpredictability, done unexpectedly, and out of season.

Was the Banque de France targetting your outfit in particular?

At the end, no - others had joined my firm's trade with the same direction position. But we were the banker's banker for the instruments involved - the most significant market maker.
It must also must be noted I was just an inside dealing room observer, as I worked a US side product.  

Yes, bounce the rates around a bit . Up -down -more than 25 basis points at a time,  so these leeches don't know what to expect.
Over the last few years they have been able to rely on some certainty from Bollard and just sit there creaming us.

Crikey, that was a thoughtful reply there Mist.
I guess my quip about 'a mortgage that can never be paid off' was a reference to paying more than can be justified on the basis of income. However, if the Productivity Commission is right then the problem here is a physical supply issue, not a financial one at all. So I am mixing things up and causing confusion.
Whilst I wasn't suggesting whipsawing I thought there might be a case for a shot across the bows to stop over excitement before it got serious. That is, better to have a short period of high interest rates sooner than a long one later.

Your comparison to herd animal behaviour made me laugh. Mainly because it is so appropriate. Thanks for lhat.

I often refer to lemmings for good ppl think individually and in herds is very interesting.....hence when I see the term "rational markets" it just cracks me up.

Inflation is a measure of the value of money. The New Zealand dollar is worth less and less every year punishing savers and crippling our economy.
The burden of taxation falls on people who do things- people who work, people who employ other peple and people who make transactions.  (Company Tax, PAYE and GST) meanwhile capital gets a free ride, - no land tax, no financial transactions tax.
We have to move the taxation burden off oof people who do things and put that burden more on finance and property.
Asset price inflation is a cancer that destroys the host, it makes us less and less competitive as a country - it is our number 1 problem that we can solve if we take back control of our own currency and our own economy. We are behaving as if we have no control over these things- when we do.
We need to de financialise the economy- finance needs to be our servant not our master.

"We need to de financialise the economy- finance needs to be our servant not our master."
Plan B, This is absolutely the simplest way of explaining our current predicament. Finance has superceded the real economy and is slowly devouring it. It is a powerful force and hard to resist. Our electd representatives need to wake up to this and address the problem before it is too late. 

I think you're missing the point here. It's not attacking the "market" but it's noting that the power and flexibility of capital allows it to distort the market in a way that is, let's say, unhelpful.
The point of floating exchange rates was to allow for balanced trade outcomes over the medium term. Balance of payments deficits would be fixed by lower exchange rates. This worked for a while but since the deregulation of capital in the 80s on onwards, the capital account (international flows of capital) has completely overwhelmed the trade account (international flows of goods and services). 
This has come about for 2 reasons: the first is that surplus countries do not want to repatriate overseas funds, as it will push up their exchange rate. This happened first with Japan and now China, as well as other Asian countries, who don't want to experience another financial meltdown as they had in 1998. The second is that they can lend back to deficit countries at high yields.....more deficit, higher yields is a self-reinforcing cycle. 
This has now reached a new tipping point (as it did in 1914 and 1938). Now some might argue that this is the market in action....the surplus countries have outwitted the deficit countries and won the game of global monopoly. The surplus countries can now buy overseas assets with their surplus dollars and extend their empires (ie China in Africa). At some point though, deficit countries will say no more asset sales (not NZ of course!) and the people will become restless. You can buy our paper not our land, they will say. And so begins the battle.
The system is broken and not working properly. It's market failure writ large. But capital is a powerful beast and hard to tame once it's out of the paddock.

I agree with your main thrust there Plan B but I would point out that we do have a quite significant land tax called rates. Mine have been going up at 11% per annum for the last eight years. 

Well said. I would add that employment  has a lot to answer for. The employer-employee relationship sets up a situation that  treats people like children. So they act like ones. Imagine if the self employed real estate agents had been unionised during the recent downturn.

RB is there to ensure stability and safety....and if the average fixed mortgage is 18months then they have to see that far in the future....Im willing to bet you couldnt do that, so why expectthe RB to.
Problem is the cure could easily be worse than the assume it would be a little blip and all would be well which is ludicrious.
....maybe you should consider its more like flying an aircraft close to stall speed with the problems of laggy controls, dodgy engine, blindfold and an unknown stall speed.....get it wrong and we would have a death dive.
Drop rates, well the dive after a stall is along way, maybe consider just what happened to the US, Irish and Spanish housing name but 3.......30% losses....and the misaery that entails
but then the misery isnt yours to bear is it.

The RB needss to be told what to do.
1. Print our own money into existence- not all of it - justa tiny bit would be enough. If we continue to let foreign banks determine our money supply we are not a free country at all.
2. Loan to potential income from the property  rules for finacing property need to be implimented.
3. Controls on foreign ownership- if you want to own a property here and you are a foreigner - you have to live in it/farm it yorself

With AGW its 1....

Two factors seem to be at play that help to make some sense of what is happening to Canterbury. The financialisation of housing and disaster capitalism. Reading up on these two ideas will help expalin what is happening/not happening.
Housing no longer has much to do with building houses - it is now about asset price inflation and debt and Insuranace. That with the new ideology of never letting a disaster go to waste.