Opinion: Bernard Hickey gives his verdict on Alan Bollard's 10 years as Reserve Bank Governor and wishes him well for good job (mostly) well done

Opinion: Bernard Hickey gives his verdict on Alan Bollard's 10 years as Reserve Bank Governor and wishes him well for good job (mostly) well done
Dr. Alan Bollard, RBNZ Governor

By Bernard Hickey

Today was Alan Bollard’s last hurrah and he didn't disappoint.

He ended on a high note, which for a Reserve Bank Governor who hits his targets means a low note -- low interest interest, low inflation and a strong financial system. The things he is not responsible for, the exchange rate, unemployment and foreign debt, have also ended on a high note, which ultimately are the marks of failure of New Zealand's economic and political policy makers. To be fair to him, he can't be solely blamed for those bad high notes.

Dr Bollard also ended with a proverb, of which he has been fond. It appeals to his dry and often self-deprecating sense of humour. "Wise men make proverbs and fools repeat them," he said to laughter from the assembled journalists and economists before paying tribute to their role in communicating the Reserve Bank's activities.

I hope he celebrates his last Monetary Policy Statement news conference and parliamentary select committee appearance. He deserves at least a strong cup of coffee from his favourite café, Daniel's, next door to the bank at the bottom of the Terrace. That’s because Reserve Bank Governor Alan Bollard can retire on September 25 with his head held high.

He presided over monetary policy and New Zealand’s financial system during the most turbulent period in our economic history since late 1984, when a run on our currency forced a shock devaluation and nearly bankrupted the nation.

Alan Bollard has managed the blunt instrument of the Official Cash Rate (OCR) and the much less simple instruments of banking regulation through New Zealand’s strongest period of economic growth in 50 years and then its deepest and longest recession in 20 years.

During this period of extraordinary volatility punctuated by a housing boom and huge moves in the exchange rate, he broadly stuck to his mandated target of keeping consumer price inflation within his Policy Target Agreement of 1-3% over the 10 years of his governorship.

He also regulated and managed New Zealand’s banking system as it reacted to the near collapse of the global financial system in late 2008. Under his leadership (and despite a series of debilitating migraines he has talked about in his financial crisis book), Bollard had to deal with the imposition of a deposit guarantee scheme he did not want and the almost entire collapse of New Zealand’s finance company sector.

The Reserve Bank acted decisively to fund New Zealand’s ‘Too Big To Fail’ banks in late 2008 and early 2009 when they were cut off from international funding during the post-Lehman collapse freeze.

Simultaneously, Bollard slashed the OCR from 8.25% to 2.5% in a frenzied nine months over late 2008 and early 2009, much faster and further than either expected or previously delivered.

This was his finest hour. New Zealand’s banking system and economy coped much better than almost everywhere else in the developed world, at least in part to the Reserve Bank’s decisive and often brave action in the face of critics (like me) and all sorts of precedents.

The last four years has cemented Dr Bollard’s reputation as one of New Zealand’s finest public servants.

The judgement on the previous 6 years is not so glorious. He did meet his inflation targets, but many argue he missed the significance of the biggest build up in foreign and housing debt in New Zealand’s history. Some believe he held interest rates too low and for too long, particularly during 2006 when the housing market got a second wind. Bollard himself in his final news conference acknowledged the bank could have used 'macro-prudential tools' such as loan to value ratio limits to control that housing boom.

Ultimately, this buildup of foreign debt and the associated surge of capital flows that pushed up the New Zealand dollar, is limiting the New Zealand economy. It unleashed a structural strengthening of the New Zealand dollar that has restructured the New Zealand economy towards importing, consuming and borrowing and away from the very things we need -- producing, saving and exporting.

Dr Bollard stuck to his targets and kept the banking system stable and he delivered the best parables in the driest of styles. My favourites are his clever defence of not criticising other central banks: "One camel does not make fun of another camel's hump", and his explanation of how New Zealand's currency is affected by other central bank's actions: "When elephants jostle, what gets hurt is the grass."

But in the end, the New Zealand economy is weaker, more indebted, more unbalanced and monetary policy will have to be redesigned to deal with that legacy.

Dr Bollard could have challenged that, and may yet do that in his retirement. But for now he deserves that coffee and another panadol.

Go well Alan.

Here's another African proverb to go out on: “The lion does not turn around when a small dog barks”

Woof.

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I for one think you are being too kind, Bolly dropped the ball IMO.

Yes. Far too kind.
He was good at suggesting options and then completely ignoring them.
Perhaps those suggestions did not fit the PTA but then it has been up to him to have hiss PTA changed and he has not had the firepower to follow through.
Only a B- grade

Ditto, I concur, I second that, what he said.
 
Bollard himself in his final news conference acknowledged the bank could have used 'macro-prudential tools' such as loan to value ratio limits to control that housing boom.
 
Coulda, shoulda, woulda, didn't.
 
Ultimately, this buildup of foreign debt and the associated surge of capital flows that pushed up the New Zealand dollar, is limiting the New Zealand economy. It unleashed a structural strengthening of the New Zealand dollar that has restructured the New Zealand economy towards importing, consuming and borrowing and away from the very things we need -- producing, saving and exporting.
 
I think you've got this the wrong way around Bernard.  The importing, consuming and borrowing caused the buildup of foreign debt.  Without the demand there is no supply.  What really caused the restructuring away from saving (do we produce and export any less)?

Good points, Meh. Surprising how few grasp the concept that borrowing comes first. Even Paul Krugman is still banging on about excess savings - savings (credit) are the result of borrowing. 
Have a read of this:    http://en.wikipedia.org/wiki/Net_international_investment_position
Shows the result of decades of spending more than you produce as a country. Keep doing it and you rack up debt and/or have to sell your assets to such an extent that your economy is constantly being drained of wealth. Eventually national sovereignty is at risk as we are seeing in the countries at the bottom of the list. 
Live within your means, it's not even difficult. How utterly foolish we have been.

An interesting commnet, chicken and egg.....or are savings from profit....which someone borrowed to give you for the item...
I think PK's issue/problem  is like GBH's they both see it as a canceling out so of no import....unlike Minski and Keen. I think the latters are proving the more robust economics.
regards

..... I'm curious about the " frenzied 9 moths " that Bernard mentioned ....... is this a side of Bolly we never knew , genetic modification of insects ?
 
Or something even more sinister , injecting moths with alanbollic steroids ?
 
.... spooky !

Gummy
The job of editor of Interest.co.nz is yours for the taking.
Such eagle-like eyes.
;)
cheers
Bernard
PS Shoulda/woulda been months with an n...
 

Do you blame Dr Bollard for using the blunt tool he inherited (CPI only Targeting) or do you blame him for not innovating when the imperical data so clearly showed that it was required.
I think Dr Bollard gets a "B" for the use of CPI targeting and "F" for not insisting it wasnt enough.
It was obvious even before it all hit the fan what was happening yet we tried to use one tool to mange it all. Plain Dumb!
“I will argue that to not address the current problems that we have with tax and monetary policy will result in the shrinking of the productive and export sector, resulting in long-term balance of payments issues, continuing the unproductive investment in asset-based wealth creation, all resulting in increasing the divide between the haves and the have-nots to the detriment of New Zealand as a whole” 
  Selwyn Pellett :Inquiry into the monetary policy framework September 2007
Olivier Blanchard the head economist at OECD said in "The Wake of the Crisis" recently published....
" Let me conclude by repeating my basic message. We have moved from one-target, one-instrument world to one where there are many targets and many instruments" 
Seperately he notes that one of those targets is the exchange rate. Imagine that... the head economist at  the OECD saying a key target is the exchange rate.
          

I dont agree...considering how badly it could have gone and the straight jacket that is the NZ pollies I think we have gotten through pretty cleanly so far....
It isnt over til the fat lady sings of course...
regards

Dr Bollard is a asset to NZ . We have been lucky to have had such an astute economist overseeing Monetray Policy . He  has done a bloody fine job keeping us out of trouble.

Hi there Alan. Looking forward to your new job?

Nice work Mr Hickey.

Yes. Why bother bark yourself when you know a pack of hounds only too willing to bark at the lion for you.
 
Woof, woof, woof.

A less charitable view. Personally I don't find timidity and devotion to convention to be virtues. Guess like Keynes said, it's better for the reputation to fail with your peers than to go out on a limb and possibly succeed unconventionally.
http://unframednz.wordpress.com/2012/06/13/hello-world/

a very interesting link, well written. Thanks.

Im not sure on how clear you are on the context but Keynes comment is that is how bankers work as opposed to how he thinks they should work.  However its not just bankers, No one ever got fired by buying IBM, or Microsoft etc etc.
Also he has stood up the the RBA and kept his independance and proposed the open bank concept....so in some ways he is a little ahead of the crowd.
 
regards

The OBR has existed in concept for a long time but was just not codified under a single policy name. It can hardly be attributed to Bollard. I would suggest the banks with their financial and political influence regulate the RBNZ rather than the other way around.
 
Bollard was mind numbingly conventional and totally lacking in innovation or academic inquiry.

BH, I like your approach of don't burn the bridges.  Just in case of some cushy jobs going at the APEC when Bollard takes over the wheel.  Nice!
 

AB probably needs a new side kick....batman and robbing.
regards

At least in NZ the RBNZ has been able to quickly cut rates in a disaster - & we do not have 20 year fixed rates.

 "But in the end, the New Zealand economy is weaker, more indebted, more unbalanced and monetary policy will have to be redesigned to deal with that legacy. Dr Bollard could have challenged that, and may yet do that in his retirement."
 
Many would have preferred to see him make appropriate challenge before his retirement. That was his perogative given his apparent abilities and postion. However, he failed to use that perogative, sadly, to the detriment of NZ. Sure it could have been worse, but heaven help us if you were reporting this tenure as a failure Bernard: 
 
" ... the New Zealand economy is weaker, more indebted, more unbalanced and monetary policy will have to be redesigned ..."
 
Let's hope the next Governor can learn from the mistakes.
 
Cheers, Les.
www.changenz.co.nz
 

Considering we could still have had Don Brash....think how screwed up we could have been now.
regards

Can we really be that lenient on Bollard?
 
2003 was a disaster, 2008 was worse.
 
He was too slow to raise rates, then too slow to reduce rates, the only time he's had success is when he's had no option but to leave rates flat (as near to zero as we can probably have) for an exended period.  Is that a measure of success?
 
The economy has not transformed.  Standards of living have not relatively improved.  Poverty, un and underemployment still persist.  Hope and prosperity have certainly not swept the nation.
 
No he's not solely responsible, but could he have done better?
 
Yes.
 
Smooth growth (through better interest rate and regulatory conditions), better regulation of financial and insurance companies (SCF, AMI, Western Pacific) were things he could have improved.
 
He was not there just to decide whether interest rates rise or fall, he could have led change to better regulation (whether more or less) and better governance within the finance company sector.  Exchange rate interventions and quantitative easing could also have been achieved to NZ's benefit.
 
Overall, a review of Bollard's performance leaves a long list of what he didn't achieve.

Overall, a review of Bollard's performance leaves a long list of what he didn't achieve .... and a very short list of what he did.
 
So short it's three letters - OBR.
 
 

Considering that most NZers were on fixed mortgage rates which meant in setting rates he had to second guess where inflation etc was going to be in 18months odd it was no surprise he was behind in reacting......and the GFC was so fast it wasnt true...but NZ didnt melt down.
Bear in mind that successive Govns didnt and dont want regulation or anything else that might have tempered the boom times what do you expect.  You know we have the no8 bailing wire, self-regulation, buyer beware mentality....we are paying for that.
regards
 
 

Fully agree, maybe his hands were tied, else he did not want to try anyting too risky...

Go with a whimper Bolly...as that is the demeanor you have conducted yourself with during your tenure it is only fitting your parting announcement should be in character.
Your success in keeping inflation under control will serve as a candle in a sandstorm.
The wise person who coined the line...Waiting for God....had you in mind I'm sure.
Wheeler in the new guy...n...we'll  "wait n see some more"....as fools are left to repeat .
 
Enjoy your doughnut, all part of the service.

now bolly can remove his bum from the chair and guess what his hands have been under his bum all the time

it feels a little gloomy in here today so I'm bringing my input to Friday's funnies forward a day.
http://www.zerohedge.com/news/grand-theft-auto-fomc-city-bank-robbers-throw-cash-out-volvo-south-los-angeles?page=1
 
http://www.zerohedge.com/news/iphone-5-vs-iphone-4s-first-look
 
The giggles are in the comments.
 

yup Meh too funny...I like this...Since the getaway car happened to be a Volvo, they naturally failed to get away ...  or ,
luckily it didn't happen in New York or the cops would have shot 137 bystanders and counting......

The link goes to the second page Christov, first page has great references to Helicopter Ben and his QEing such as this gem.
I say they were spreading wealth and facilitating trickle down effect from the last round of quantitative easing. Money was picked up and spent shortly thereafter thereby contributing to consumer spending and GDP growth therefore helping economy recover. Cops chasing them for hours burned X amount of gas thereby contributing to government spending and further boosting GDP numbers. Plus, cops were busy in the process, thus employment in the government sector was positively affected. Of course Krugman will disagree and say what they did was not nearly enough and they should've picked a bigger car and throw money faster while not getting caught much longer, well they probably don't have a PhD. Amateurs.

Liked this comment by Chunga on page 1 .. deja vu people

Sorry, no rain for muppets.
Collecting rainwater now illegal in many states as Big Government claims ownership over our water
 

Bernard Hickey: Your next assignment, should you choose to accept, is as follows.
(a) Review your interview with Steve Keen and record your critique/reponse. Dont publish it.
 
Then, after Bollard retires
(b) hunt down Dr Allan Bollard, show him the interview, ask him to respond, and record it, then
(c) hunt down Dr Gareth Morgan, show him the interview, ask him to respond, and record it, then
(d) hunt down Dr Donald Brash, show him the interview, ask him to respond, and record it, then
 
After all are recorded and in the can
Publish them, over 4 days.

Bernard you act as though you have been negligently captured by Bollard just as he is by banks and polticians.
 
Your risible attempt to deflect the contempt in which the Governor should be held inflicts irreparable damage not only upon yourself but also on the principle of an independent "fourth estate".
 
Influential media players ennoble themselves by hijacking the concepts of 'freedom', 'independence' and 'public interest' for their economic benefit, while abusing those very same words to justify entrenched professional habits that uphold, or refrain from challenging, illegitimate centralised authority.

Bollard has been a Lieutenant in the greatest Ponzi scheme the world has ever known, even acknowledging the man is a mistake.

I think Dr Bollard should be remember fondly for his handling of the financial crisis, the type of guy you want at he helm during one of the worst finiancial crisis we have seen.
 
I remember that great book he wrote to cash in on the event, he admits going home early with a migrane that great night and slept through most of the crisis.
 
Yep they guy we needed at the helm for sure.

Im glad we...

  • Focused on a the price of a few commodities
  • Incentivised investment in Land based assets via tax distortions
  • Surprise surprise! land based asset prices blow out (biggest cost to average kiwi)
  • RBNZ lifted the interest rates to react to over cooked, debt fuelled asset prices.
  • Interest spread caused carry trade fuelling the raging fire.  
  • Carry Trade lifted exchange rate... killing export competitiveness
  • Current account jumped as wealth effect increased spending (while exports declined)
  • Asset bubble burst, banks propped up.
  • Unemployment rises while asset prices stay static…now rising again
  • Glad no one was hurt by these policies!

Hi Selwyn,
Nice to see you have something to contribute.....as always when it matters.

While I agree  I dont think these can (mostly) be laid at AB's door....lay them at successive Govns, and in particular HC and Co, sure.
regards

Selwyn - your comment should be comment of the day, especially given the number of thumbs-up it has.
 
"Bollard himself in his final news conference acknowledged the bank could have used 'macro-prudential tools' such as loan to value ratio limits to control that housing boom."
 
So why didn't he? It was his perogative, but he didn't use it, why not? Anyone?
 

My thoughts are well covered by pretty much everyone else. Understanding Bernard that your missive is like the polite farewell speech at a retirement function to someone who really needed to go, the only risk is that Wheeler comes in thinking that he should follow his predecessor's example.

Phhhhh, I can't believe what I'm reading!
Bollard was one of the most inept beyond belief useless SOB with a total arrogance and disregard to the economic realities. He is an economic traitor! 
A job at Mc D's would be too good for him. He was a gutless sod who NEVER had the balls to own up to his mistakes and huge bubble creation. On his way out take his passport off him

He didnt create the bubble, successive Govns by their inaction (at best) did.
Just think how well we would have done under say Don Brash (not).
regards

Steven, here in NZ he DID create the property ponzin bubble by following the Greenspan plan post 9/11. Do you really think NZ's ridiculous  house prices would be where they are now IF Bollard had hiked the OCR at proper increments from 2003 instead of sitting on his hands and pretending like all the other RB's that "all is fine" ? It was dead obvious what was happening by 2003 and what it would lead to by ANYONE who actually has a clue about real world economics. Bollard followed his US FED masters
 

I suggest you look at where Grenspan took the OCR and where Bollard took the OCR.  In terms of what happened the OCR is a blunt tool thats used after the fact.  It was and is the responsibility of the Govn of the day to deal with Ponzi schemes....both sides have failed.  Now sure Im sure AB will be sitting back and wondering if he could have done better, but hindsight is 20/20 as they say.
regards
 

The OBR has existed in concept for a long time but was just not codified under a single policy name. It can hardly be attributed to Bollard. I would suggest the banks with their financial and political influence regulate the RBNZ rather than the other way around.

Bernard . Bollard a pass on his school report from headmaster Hickey, What subject
did he excell in well it wasn"t economics or monetary policy .Its clear Bernard that his
real Talent is acting.
Baz

and your talent is obviously a stand up comedian.
regards

Considering that most of the tools the RBs around the world had to work with where removed in the 1990s Due to the Douglas/ regin/ thatcherism political agendas... resulting in the world wide cowboy economics ....our RB on world standards has done rather well.
It is very ignorant and easy to critisize a tradesman who is not allowed to use the tools of his trade to do a tradesman quality job.
The property boom, and subsquent events was created by politians, and made worse by politians by tieing our RB hands...maybe there is an arguement that the RB should be independant similar the justice system  
Yes in balance I do have to agree with Bernards comments.

No new laws were passed to give RBNZ the powers to use macro-prudential tools. That means they were there all along so why where they not used sooner?
That was the right tool kit to go too in order to stop run away house / farm prices not the OCR that kills exports and our countries balance sheet.
To those that blame successive Govts for this mess. It's not fair to level100% at the Governor, Treasury or @ Government. It is fair to say “Politics” didn’t serve our nation. But the politics is not that of just parties but of media, financial institutions, property owners, corporates and of course the officials that have their hands on the lever. The voice of the Earning Exporters was lost in all the noise and now it’s obvious with our current account deficit.    

macro-prudential tools
Section 9 of the Reserve Bank of New Zealand Act 1989 states that the Minister of Finance and the Governor of the Reserve Bank shall together enter into a separate agreement setting out specific targets for achieving and maintaining price stability. This is known as the Policy Targets Agreement (PTA). A new PTA must be negotiated every time a Governor is appointed or re-appointed ..
 
Without reading the PTA's that Bollard agreed to, it would be stupid of him if he didn't turn the job down, or reject the agreement, if he was required to do a job, but prevented from using the "necessary tools" to perform the job .. however you might define necessary ..

Selwyn - a better way to judge the performance of politicians and public servants with influence over the current account deficit would be to assess just how much their actions have contributed to it's reduction. On that kind of measure few would get better than D-

It reminds me of the battle commander who jealously achieved a combat objective, but with full appreciation of battle status, religiously ignored other targets/objectives - all well within range and capability - to the great detriment of the over-arching goal - win the war:

 

" ... he broadly stuck to his mandated target of keeping consumer price inflation within his Policy Target Agreement of 1-3% over the 10 years of his governorship."

 

"Bollard himself in his final news conference acknowledged the bank could have used 'macro-prudential tools' such as loan to value ratio limits to control that housing boom."
 
So why didn't he? No law change would have been required, as it hasn't been required to introduce other less focused ratios, eg CFR. The RB is independent of political influence Steptoe, so it was his perogative then, as it is now, but he didn't use it, why not?

"So why didn't he? No law change would have been required, as it hasn't been required to introduce other less focused ratios, eg CFR. The RB is independent of political influence Steptoe, so it was his perogative then, as it is now, but he didn't use it, why not?
 
Because of the political considerations, I discussed in my reply to comment to Steptoe, above. But theres also a certain selfserving byplay, on the part of the advice and pressure from the banking industry. I bet theres alot of behind the scenes activity that we don't see, though what is discussed in the media can be an indication. 
 
BNZ economist Stephen Toplis best expressed reaction to the Reserve Bank's proposals this week on ways to control the runaway housing market and thereby inflation.
"What on earth are these guys thinking about?"
 
 
His message should have been clear and simple -- inflation remains a problem mainly because rising house prices are making people feel wealthier and thereby encouraging spending. The bank must put up interest rates to quell this and will do again and again unless it sees a spending retreat.
Instead, we got a discussion on supplementary tools the bank might use to help the cash rate do the job of reining in inflation.
 
 
By raising the issue of the "supplementary tools", Toplis said the bank signalled Bollard didn't want to raise interest rates again.
"Just the suggestion that the bank believes other policy measures can achieve what the OCR can't, implies less likelihood of a future rate move," he said."
http://www.sharechat.co.nz/article/fa74d836/opinion-what-on-earth-was-the-reserve-bank-thinking-about.html
 
 
Of course banks have an interest in spruiking high interests on domestic capital, when they have unlimited global liquidity on tap, which increases the margins they can get on interbank lending. Now its a different story when access to global money flows are more constrained. You'd notice that bank economists are now less assiduous in "predicting" OCR hikes. Now they're saying that the OCR could be flat into 2014 and even that cuts could be in order.
 
 
Both banks have acknowledged that there is a chance that the OCR could be cut, particularly if a slowdown in China starts hurting Australia, New Zealand's largest trading partner.
BNZ head of research Stephen Toplis said though retail spending and the housing market were heating up, a high exchange rate, weak manufacturing figures and low consumer confidence all suggested a cut could be in order.
 
http://www.stuff.co.nz/business/money/7673713/OCR-could-stay-flat-till-2014
 
 
 

His mandate, is targetting inflation, the measuring rod he is measured by, is the CPI, and housing prices are specifically "excluded" from the CPI
 
By that measure, so long as the CPI base at the end of his tenure is no greater than 30% (flat) or 35% (compounding) than the CPI base at the beginning of his tenure, history will record him as having done a good job.

Consider the battle commander. You are his General. The commander won his particular battle, but because he didn't prosecute the other obvious objectives, well within his range and capability, you have lost the war. Does he get an accolade or a DCM?
 
Consider the princpal engineer delegating design authority of a particular task to a subordinate engineer with little experience in the particular task. What responsibility does the principal engineer have?

@iconoclast, you describe the functions of an automatom - a NZD 13.00 microprocessor can be programed to achieve the same negative feed back outcomes - no need for the NZD ~600,000.00 emolument.

Hey guys, I'm not defending him or being an apologist. Just pointing out that he was fulfilling the terms of his employment. Some years ago while on secondment to help a plant manager it took me some time to work out that his performance was measured by the quantity of product he got out the door. The fact there were 30% returns of defective product didn't matter to him. He was measured by the output, and thats exactly what he was going to do, and he did. That the plant was making a loss wasn't his problem. And that's a true story.

I'm fully aware of what the Reserve Bank's mandate is Iconclast. My comment was an attempt to explain and describe, the reasons for that mandate and the pressures that policy makers including the Reserve Governor, are under to ensure that the it doesn't extend beyond that currently stipulated.

Anarkist,  Re Stuff link:
 
Since then expectations of when interest rates would be hiked have been progressively moved back.
 
Yesterday, Bollard signalled that the strong New Zealand dollar, while hurting exporters, was helping keep inflation "low", allowing rates to be left lower for longer.
 
Cutbacks in government spending, and a move by households to pay off debt faster than before the global financial crisis, were also allowing it to maintain interest rates at a level it had previously said was "stimulatory".
 
Is it not the case that the RBNZ is following the Federal Reserve policy of frightening the horses of production and hence employment by continually extending the need to hold rates low for longer because they forecast global economic weakness into the near and distant future? Surely an unfortunate example of  vicious circle logic without foundation.
 
Business and their bank financiers are struggling to refute this central planning doom, hence the outcomes are self-fulfilling - speculators win the day leaving the hardworking and industrious pauperised.

"Is it not the case that the RBNZ is following the Federal Reserve policy of frightening the horses of production and hence employment by continually extending the need to hold rates low for longer because they forecast global economic weakness into the near and distant future? Surely an unfortunate example of  vicious circle logic without foundation."
 
Its not just the RBNZ who are following the policy of startling the horses, by broadcasting continual doom and gloom, as avowed by the latest statements from John Key. But the matter of low interest rates are just a sideline. The key agenda is to foister a degree of structural reforms on the developed world which otherwise wouldn't be politically acceptable. The IMF call it Torqueville's "Dangerous moment". That its more efficiaous to implement reforms rapidly in a tumultuous political environment, which hampers organized resistance to the changes.
 
My theme this evening is somewhat different. I still want to argue that when governments introduce reform is a dangerous moment. ..."Crises force significant policy reforms on a government. Hence my reference to a dangerous moment. In a crisis, there is little enough time to act, let alone think...Governments acting in a crisis situation appear to have a better chance of implementing reforms..."

http://www.imf.org/external/np/speeches/2004/091004.html

 

 

Media reports written by economic commentators are replete with admonishments that Europe, particularly the so-called PIIGSs need to improve their competitiveness, particularly by liberalizing their labour markets.  Its become apparent that these goals have become official European policy, and any ECB purchase of debt of the PIIGSs will be conditional upon implementing these reforms. 

 

 

"Draghi signalled earlier this month that the ECB may start buying government debt to reduce crippling Spanish and Italian borrowing costs but he also said any intervention would only come if governments requested euro zone aid first. That in turn would be linked to condition."

http://www.guardian.co.uk/business/feedarticle/10393031

 

 

Basically the German corporate and political elite are intent on imposing structural reforms which they had already implemented in the under Gerhard Schroder's government, yet still in 2005, Germany was still the sick man of Europe,  the ECB set their interest rates at 2%, and still there were persistent calls for rate cuts. 

 

 

The irony is that it is precisely the aggregate demand for Germany's export goods that provide the foundation for its current prosperity, and the success of its demands for structural reforms will mean an end to the current avenue for its productive surplus. 

 

 

"This characteristic of the contemporary German economy - an excessively low consumption share - has been repeatedly highlighted by Professor Peter Bofinger (the "token" Keynesian on the German Council of Economic Advisers). Thus German employment is dependent on finding someone "willing" to be the consumer of last resort and overconsume, i.e., run a current account deficit (financed by German and other banks), and until 2008 that was to a large extent the EU periphery. This is exactly analogous to the relationship between China and the USA over the last 20 years. German workers may have been content with this "exploitative" relationship since it guaranteed them relatively higher employment rates (by EU standards)."

http://silverberg-on-meltdown-economics.blogspot.co.nz/2011/12/standing-on-toes-of-giants.html

 

 

Its not just the focus on low interest rates that harm the productive and prudent, and reward the profligate and speculators  but the general anti-worker worldview that permeates modern economic commentary.

 

 

This is exactly analogous to the relationship between China and the USA over the last 20 years.
 
Not quite - Yes, Germany was and probably still is offering, what is in effect, vendor financing to foreign citizens for it's goods.
 
Whereas the US is/was liquifying it's own citizens causing them to use the kitchen ATM to purchase foreign Chinese imports - the Chinese exporter's USD receipts are exchanged for Yuan by the Chinese authorities and used to purchase US Government debt. A closed circuit operation undertaken to impoverish US working citizens at the behest of US corporates. I just cannot understand the shortsightedness of such a fatal undertaking as eventually US citizens collectively will not be able to liquify the US Treasury's liabilities to China. Calamity will be on view.

What do you mean liquifying its own citizens Stephen? Is it something to do with the US deficit. It is likely at least partly to fund the trade deficit with China (after all the US government would consume significant amounts of Chinese industrial produce), which the Chinese must recycle back into the U.S. Treasuries to maintain a constant exchange rate peg. I thought the current Dollar/Yen exchange rate was meant to be favourable to the US? Or is it the lost wealth effect of the currently prevailing interest rates that are at issue here?

Yes.
 
I thought the current Dollar/Yen exchange rate was meant to be favourable to the US? Or is it the lost wealth effect of the currently prevailing interest rates that are at issue here?
 
Not sure what you are getting at other than the Yen carry trade is all but dead as both regimes run ZIRP now?

You're right Steptoe, its definately political considerations and the now dominant neoliberal ideology which underpins the rhetoric in support of interest rate targetting as the only constraint on the credit flows within our liberalized financial system. The attitude of the likes of the Bank of New Zealand's head of research Stephen Toplis, typifies the anti-Labour world view, which permeates New Zealand commerce and policymaking appartus. I see it as a holdover from the turmoil of industrial relations of the 1970s and 1980s, which had such a dislocating effect on the New Zealand economy and society in general. I think the memory of that period still has yet a strong hold on the minds of individuals of a certain age in positions of influence. The "price stability" goal and the associated interest rate targetting mechanism provide powerful levers to prevent a resumption of the power of the workingclass. Essentially they are means stem the flow of the credit to the economy and virtually dictate its fortunes. As credit dries up, business confidance ebbs, and gives financial commentators a veneer of intellectual legitamacy to call for "labour flexibility", essentially "calling down" worker's living standards, something they'd never get away with in more a bouyant environment. 
 

"The Bank of New Zealand's head of research, Stephen Toplis, said the tightness of the labour market was the single biggest problem facing the economy. Job security left people feeling "bullet-proof" and comfortable spending up large both on housing and through the retail sector and becoming less resistant to price rises, he said."
 
http://www.propertytalk.com/forum/showthread.php?2738-Ron-Hoy-Fong-Will-The-Next-Boom-Be-The-Boom-Of-All-Booms/page52
 
 

" ... the now dominant neoliberal ideology which underpins the rhetoric in support of interest rate targetting as the only constraint on the credit flows within our liberalized financial system." - Steve Keen calls, 'The Priesthood', making the direct association between the champions of "neoliberal ideology" in the academe of economics - and faith, rather than an association with a proper scientific approach. 

FREE to a Good Home: "In the Wake of the Crisis"
For those that don’t tweet, I have ordered 100 copies of "In the Wake of the Crisis" published earlier this year to give away.  In 2011 the IMF invited prominent policymakers to consider the brave new world of the post crisis global economy. The book is captures their thoughts and is edited by Olivier Blanchard (Chief Economist at the IMF), Joseph Stiglitz (Nobel Prize Winner), David Romer and Michael Spence.
I had the pleasure of meeting Olivier Blanchard and Joseph Stiglitz last week in Washington and New York. Both men where amazing.  The book is an easy read on what needs to happen post GFC and of course how we got it wrong pre GFC. It seriously challenges (I’m being polite) the primacy of inflation targeting and the OCR as the only tool.  
Anyway 100 copies ordered and on their way from Australia to the first 100 people that request it. Email to Selwyn.pellett@prolificx.com with “In The Wake of The Crisis” in the Subject line and delivery address in the body of the email. Happy reading and the debunking of the status quo.

Considering the NZ dollar has lost 221% of its value against gold then yea he has done a bloody good job at keeping us poor!
Thanks a lot for all your hard work over the last 10yrs. On behalf of all NZers I wish you well in your new job, destroying what ever it maybe.