By Bernard Hickey
In five years of attending Finance and Expenditure Select Committee hearings on monetary policy and financial stability I haven't seen anything like it before.
Members of parliament argued openly in front of the Reserve Bank Governor, spoke over the top of the Governor and the tone of their questions and interjections had a sense of frustration and heat I hadn't seen before.
The hearing broke up with a procedural argument about whether to extend the hearing to ask the new Governor Graeme Wheeler more questions. National refused the opposition parties time to ask more questions.
For me, it was the first public event where two decades of political consensus on monetary policy broke down into the sort of acrimony that suggests the next five years of new Reserve Bank Governor could be difficult.
The consensus ended in policy terms before the last election when the Labour Opposition joined the Greens in talking about changes to the monetary policy framework, which is currently focused on using the Official Cash Rate to target inflation around 2%. Since then they have fleshed out proposals for using macro-prudential tools to manage monetary policy and the exchange rate. They also both favour capital gains taxes
The Greens have also proposed the Reserve Bank use Quantitative Easing (money printing) to buy Earthquake bonds from the government to help fund infrastructure development in Christchurch.
Greens co-leader Russel Norman, Labour Finance Spokesman David Parker and NZ First Leader Winston Peters peppered Wheeler with a range of challenges to his views on monetary policy, the exchange rate and Quantitative Easing. The opposition parties have joined up in more concrete ways in recent weeks to challenge the government and the Reserve Bank over the current monetary policy framework and settings that are associated with a currently high exchange rate. The opposition parties have called for a parliamentary inquiry into the decline of manufacturing sector jobs in recent years because of a high currency.
Wheeler repeated the views he detailed in his maiden speech on October 26 that Quantitative Easing was an act of desperation and the best he could do was use the OCR to keep inflation around 2%.
Asked about Quantitative Easing for New Zealand, he said: "We don't think that that's something that deserves serious thought at this point and there's plenty of room to use interest rates."
Asked about the use of QE elsewhere, he said: "Where they are is a sign of desperation in the United States, Japan and Europe."
Wheeler spoke about the exchange rate in an almost academic way about how the New Zealand dollar had become somewhat disconnected from commodity prices. He said he saw few factors that would lead to a significant depreciation in the New Zealand dollar any time soon, which he accepted.
Wheeler's restatement of his monetary policy orthodoxy increasingly frustrated the opposition members as the hearing went on. Wheeler's comments appeared more orthodox than those of his predecessor Alan Bollard.
The new Governor faces an uncomfortable five years and real uncertainty about being reappointed for a second term if a Labour/Green/NZ First coalition was to win an election due in 2014.
If the opposition persisted with a push to change monetary policy, it's now clear they would have to do it through changes to the Reserve Bank Act and the consequent removal of Wheeler, who has showed himself embedded into and wedded to the 1989's Act focus on pure inflation targeting and orthodox policy.
Resign or else
Previous attempts to change the Reserve Bank approach have involved changes to the Policy Targets Agreement between an incoming Finance Minister and the Governor. Wheeler's fierce defence of pure inflation targeting and hands-off approach to the currency and macro-prudential policy would make it very difficult for him to agree to substantial change.
Any new government would have to change the Act itself.
Given the clash evident at the parlimentary hearing today, that would mean Wheeler would have to resign or change his orthodox approach. Unlike Bollard, who appeared more pragmatic, Wheeler has locked himself into the current path.
New Zealand's financial markets and economy now face an uncertain new landscape where political calculations and a potential clash between the Reserve Bank Governor and a new government shake up thinking on where interest rates and prudential policy might end up.
The consensus around Monetary Policy and an independent Reserve Bank Governor ended today.
25 Comments
This is just play acting by the Greens and Labour. Unfortunately Wheeler has played into their hands. When the Great Recession II finally reaches NZ in the next few years, most probably before the next election, the Greens and Labour has plenty to hang round Wheelers neck. (and absolve themselves from all blame and even claim "I told you so " status)
Wheelers insistances on orthodoxy will cause him dearly.
Spot on Russel. It isn't indeed. But because it has been accepted as such, is why the likes of Steve Keen refer to the proponents as, 'The Priesthood'.
Cheers, Les.
Even if you don't like Steve Keen's Jubilee idea it is well worth reading his book Debunking Economics. Systematically and logically he doesn't challenge neo classical economics, he destroys it, turning all the maths and models back on the economists. Throw in some Michael Hudson for historical perspective and you wonder how anyone can believe the fantasy it is all built on.
Spot on Russel.
National have appointed this bloke for 5 years so the next government is stuck with him. If they wish to remove him then it costs the taxpayers a bundle for a broken contract
Any government signing any agreement beyond their elected period (including FTA) should have the approval of the opposition parties.
It is one thing for qualfied people like Steve Keen to debate and create change from within. This is the way forward.
It is quite another for unqualified politicians like Winston Peters and Russel Norman to use the situation for political gain. This is a very high risk road. Marc Faber would suggest this is the road that leads to wars and revolutions.
They're politicians. Everything's about political gain aka the Cabinet table inside the Beehive. Unfortunately in the MSM politicians and other "officials" are one of the few "legitimate" sources. Academics and journalists who fall too far outside the acceptable frame of debate, regarded as fringe, are ignored. Many bloggers here know of Keen even if they haven't read his work. How many kiwi's in general would know of him? 1%? How many times have you seen a discussion of Gareth Morgan's Big Kahuna on TV or one of the main papers. To most people he's just Sam Morgan's dad.
Keen is only interviewed in the Aussie media when he talks about property. The media isn't interested in a debate about neo liberalism or Minksy's credit cycle which challenge the heart of the Australian political and banking status quo. It's safer for your career to just report what politicians say without going looking for challenging ideas that can't or won't be "officially" verified or approved. Neat, simple, cheap, uncontroversial.
I find it hard to see good news here.
If this new and unwelcome trend is allowed to perputuate it could both, and at the same time, politicise and entrench policy and people to an extent as to render impossible useful and effective evolution of monetary policy in one of the most challenging economic environments in living memory and, should the politicisation of monetary policy be successful, likely to result in such extreme policy adoption not seen since the fascism and communism of the 1930's.
But how else do you break through the willfully stubborn belief system of the financial and political status quo. Its obvious the last 30 years have been a failure with most "growth" attributable to credit/debt and financial machinations rather than sustainable production. Yet the conventional solution offerred by Wheeler and National/Labour is more of the same. Are they really so intellectually blinkered or are their motives more sinister?
I look at like pregnancy, either you are or you aren't. There is no middle ground. Once monetary policy is a political football the whim of the elected controls all and the the elected is often those with the biggest promise.
We are not a generation or strong moral fibre or responsibility. We are a generation of rights and entitlement who get very angry when anything threatens that perceived entitlement.
Am with Labour, the Greens, and NZ First.
Without getting into the details, it seems clear that monetary policy can have an impact on economic growth, employment, and most certainly the exchange rate, current account and wealth creation.
To stick to inflation and banks not failing as the sole targets; and to the OCR as the only tool for inflation fighting (with the other tools stated yesterday, only to be used to stop banks failing, nothing else) is ideology gone mad. Especially when the rest of the world has long abandoned those constraints. Even if they are wrong, they've changed the rules; no point blaming them. he had the chance to articulate yesterday why he doesn't see any other targets or tools as being appropriate, or useful, and he merely said that the Act didn't provide for them. No reasons as to why addressing other issues may not work.
Looks like he has a job for 2 years.
It is all this banking money creation, at interest, that is causing the inflation in the first place. What the RBNZ is saying "we will allow the banks to cause inflation, so i can put up the interst rates for the banks, and inflation, not the banks will get the blame" That is what the RBNZ is saying.
I believe interest rates should never be allowed to go over 3%. Back in the 80's when interest rates went to 24% (due to the deregulation of banks) well why bother working when you can sit on your chuff and make all that interest for doing nothing.
All money should be earned through either work or investment in the productive sector.
I think everyone can see at least some of the problems. And I agree that main stream economic theory has been proven to have serious flaws in it's assumptions.
However, I am not in favour of change for changes sake. Things can get a lot worse.
And I have two major objections to politicians:
1. They are amongst the least qualified amongst the population.
2. They are very poorly motivated to make good long term decisions.
I would not suggest the status quo is the best we can do.
Good change happens by careful sustained hard work through complex issues.
Bad change happens because people are lazy, want something for nothing and make simplistic choices without thinking through real consequences.
That is why wars and revolutions always have unexpected consequences.
I don't understand all these comments. Economics is politics. Politics is economics. Monetary policy is politics. To say otherwise is arrant nonsense. As someone above said economics/monetary policy is not a religion but for the last thirty years it has been dressed up as a religion. Now we can see that the emperor wears no clothes. I'd alter the Bank Act to say the Governor as Head of a Department has to take instructions from Government and if he doesn't like it he can resign. He is a civil servant. To treat him otherwise allows an unelected person to control our economy. You can look at the EU to see what happens when such a situation occurs. Anyone for joining Australia now?
I agree with your comment that Economics is politics. Politics is economics, the subject used to be called, i think, Politcal Economics, but they dropped the political bit.
I would say that many of the people commenting would agree with you and hold a similar view.
The idea of likening Economics as a preisthood is a good one, It has also been extended to senior executives at Multinationals. The idea being that to rise up in these sorts of organisations be they business or government or pan government requires an adherence to the current orthodoxy and a use of language to conceal rather than to reveal. Banking and Economics have developed language that is inpenitrible and often without meaning. John Kay who writes for the FT has made a strong case for the Economics and Business elites as a preisthood.
I wonder if we are at the start of a reformation of sorts, the internet is allowing more and more people to see, as you say, thatthe emperor has no clothes. Once this understanding reaches a tipping point it will be difficult to keep people out of political economics anymore. Something that they have managed to do since soon after WW2.
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