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Matt Nolan says its not the RBNZ's job to pop housing bubbles - that's the government's 'fiscal' role

Matt Nolan says its not the RBNZ's job to pop housing bubbles - that's the government's 'fiscal' role
The ideal RBNZ governor?

By Matt Nolan*

I see that Bernard Hickey is suggesting we have the RBNZ pop the “housing bubble”.

And to do it the Bank should either ignore inflation targeting and hike rates, or do some magic with macroprudential tools.

Assume a bubble, so lets start with one.  I have a list of problems with this type of article even given that:

1. I am nervous about giving non-democratically elected officials too much scope to do “distributional policy”. This is the purpose of fiscal policy, and there is a thin line as soon as we start moving into alternative tools. The Bank recognises this, but the rest of us have to as well.  (For example, if we are sad about affordability, this is a fiscal policy issue – it has nothing to do with the RBNZ.)

2. In terms of financial stability – which is in the Bank’s mandate – they only care about a bubble insofar as it risks bank failure.  So the solution is to try to get banks to hold enough capital.  Given that, who gives a proverbial about a bubble.  If people are willing to overpay in this context, and there are no broad macro ramifications, there is no role for central bank action at all.

3. In terms of monetary policy, this matters only if it leads to an excessive increase in demand … in which case they lift rates due to their inflation mandate, there is no need to change anything in that regard.

4. And now given you’ve ignored those three points, dear reader, let me throw in something you might not have thought about.  How in the name of frik itself do you pop a bubble?

This last point is important; how do you pop a bubble?  

Lifting interest rates doesn’t usually do it – in fact if it is a “rational bubble” higher interest rates will lead to a larger bubble!

And if it is an “irrational bubble” why the hell will it care about a small shift in interest rates – if people are making magical capital gains, a marginal change in interest rates will be irrelevant to them.

Irrational bubbles are likely to be “interest insensitive”.  So interest rates miss the point.  And if the bubble is driven by “profit hungry leveraged investors” (so, incredibly risk loving people), then LVR limits have no impact – as they would never be borrowing off banks in the first place.

We are talking about expectations here, and we are assuming (as we have a bubble that is against the Bank’s forecasts) that the Bank can’t control expectations.  Then we are saying "wave a wand and fix it somehow".

All four of these points tell me that having the Reserve Bank “deal with a bubble” is ridiculous.

In fact, I find the entire discussion about bubbles so amazingly ad hoc and inconsistent that I cannot believe I haven’t written this post before! 

What have I been writing for the past six years?  (Here is a partial bubble history:  I see James wrote this on experiment economics.  I talk about Stiglitz and call him orthodox?.  I chat about the idea of using the CFR to control inflation – say no, it is more a “structural tool”.  I point to Marginal Revolution talking bubbles.  Bubbles and transfers from overseas.  Complaining new tools aren’t about stopping bubbles.  So yea, nothing actually talking about “what a bubble is and how it fits into policy”, opps).

And why aren’t more people making this point apparent?

This moves the entire debate to the issue of “are banks stable enough given systemic risk from an asset price realignment” and “is monetary policy appropriate given inflation and the output gap” … which is where everyone involved in policy would actually want it to be, right?

It also tells me that political parties saying that will get the RBNZ to do more are really showing two things:

1. They don’t want to take any responsibility for actual fiscal policy issues when in government (understandable, who would ever actually want to be in government! )

2. They genuinely don’t understand monetary policy or what a “bubble” is – and just walk around talking like they do. Hey, I can’t see a bubble when its floating around either – which is why I just try to think how it influences monetary policy and financial stability rules “before” passing judgment or opinion on what the Bank should do.

Honestly, the four points above are so incredibly fundamental, and so CONSTANTLY ignored, that I’ve had a lot of fun writing this post.

Now to get back to reading about solar power.


Matt Nolan first published this article on his blog TVHE. This version is without the emoticons that appear in the original (and it does not represent the views of Infometrics).

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So tell us Matt, why you are being ignored!



I agree with Matt

From everything I've read about Real Estate bubbles... and busts...   there is excessicve credit growth involved.   ( the credit growth gives the boom bust cycle a bigger amplitude)

So...  it is not the job of A Central Bank to pop a bubble BUT it is responsible for helping create one in the first place...  if excessive credit growth is a function of that Bubble.

( Having said that...  Raising interest rates tooo late in the cycle seems a bit sadistic.. and culpable and negligent.... in my view )

Pre GFC NZ  had credit growth in double figures... ( from memory...15% in 1 yr )


The problem our Reserve Bank faces is that we live in a Global world ...where we allow foreign capital to flow freely.We are affected by other countries excessive credit growth...  The departure of foreign capital could have a serious impact..??

Excessive credit growth.... and a real estate bubble popping  would probably put our Banking system at risk..   ( eg. if real estate falls by ...say... 20-30% )... the moment ... I don't think real Estate is in a bubble...   I think prices still reflect underlying fundamentals.....    and I don't think it has reached the "ponzi" part of  cycle...

Early days  yet.....  but I wouldn't be surprised if we do end up with one that ends with a bad bust.



The OECD said a few sensible things, in THIS report:

"Bird's Eye View of OECD Housing Markets" January 2010$FILE/JT03277653.PDF

Para 55. "Another concern is about the ability of monetary policy to thwart the development of a housing bubble without causing widespread damage to the rest of the economy. In a house price boom, prices increase strongly – often at double digit rates – and expectations of future prices are similarly upbeat.

Under these conditions, large policy rate hikes would be necessary to cool housing markets. High interest rates would crowd out sound and socially useful investments (Kohn, 2006). An additional difficulty for large countries and monetary unions is that housing market developments usually differ across regions or member countries. For example, during the latest housing boom, while prices were soaring in States like Florida or California, they were stagnating in many other parts of the United States. In the euro area, prices were skyrocketing in Spain and Ireland, but declining in Germany.

Devising an appropriate monetary policy response to asset price developments under these conditions is not easy."


They fingered the real problem HERE:

Para 33. "The factors driving housing supply are much less understood than those driving demand (Gyourko, 2009) as housing supply is driven to a large extent by local conditions, in particular the availability of land for building, infrastructure – especially transport – and building regulations....."


Matt, another brilliant piece.

I mentioned recently

When a bubble burts it is destroyed forever. You can build a new bubble with new materials but you cannot put the old bubble back together.

If we have a housing market bubble and it burts then the housing market is destroyed forever. You would have to restart a new housing market. from scratch.


As for #3

I see it differently and from two perspectives.

1) If we get an excessive increase in demand then that is due to fiscal poicy.

2) With globalisation we cannot get excess demand. NZ will never have enough $NZ to buy all the goods and services the world can sell us. We will get over-indebted first.



"This last point is important; how do you pop a bubble? " 

"Lifting interest rates doesn’t usually do it "


Ohhh how was the global bubble created again? Let's see.........hmmm OCR and bank interest rates dropped far too low for far too long post 9/11........

What did the RBNZ start to do (far too late I might add) around late 2007 to 2009? To try and create a "soft landing" ?(their words)

'Timing' and the amount....... with OCR movements is everything! 

The 'cost' of credit and borrowing can make or pop a bubble no trouble at all. The question is one of having the  will in the nations overall economic longterm interests and having no conflicts of interest. 


I describe the dilemma that central bankers face once inflated house prices are entrenched, as a "Mexican hostage stand-off".

They simply cannot put interest rates up by much ever again, without putting a whole lot of young households down the tubes. And probably a whole lot of property developers and their financial backers too.

Don Brash was right to complain in the 1990's that inelastic supply of land for urban growth was looking like making central bankers jobs very much more difficult.


Phil - but they will put them up sure as days and not necessarily by only a little. There is only one thing worse than the result you suggest, and that's the distruction of a currency through inflation. Yes, not an issue for at least another year, maybe years, but with what's happening in the world with money printing and negative interest rates it will lead to that eventually, it's just a case of when. There are two major bubbles left in the world; the bond bubble (everywhere), and a remaining housing bubble in a few countries (most certainly here). It will seem so obvious when it eventually comes, even to the current deniers, but then so was the 1990's stock market one, and the US sub prime housing one.


Agree. Warren Buffet said a couple of years ago now that US Treasury Bonds are in a “bubble” condition. I have been saying for a while that nearly ALL “sovereign debt” is now mere “paper money” sloshing around in the system as “liquidity”, when most of it is completely valueless. When this reality sinks in to the limited intellects of the investor class (however did they get their money in the first place?), what happens to the liquidity of the entire global finance sector?

Why do I say that sovereign debt is valueless paper money? Because ultimately none of it has a snowball’s chance in hell of ever actually getting paid back. The voters won't let the politicians do it. Whatever paying back is happening, is mere rolling over of debt. Investors are still playing the game for now. But sovereign debt is not a lot different, as “liquidity” in the global system, as “IOU’s” from a busted upper-class twit in a P G Wodehouse novel.


Um what if the RBNZ has got itself in a catch 22 where it removed house prices from the CPI so it can claim inflation on everything except asset prices is under control and therefore no need for interest rate increase; which has fueled further massive price increases; which has made property to big to fail and any significant correction potentionally fatal to the banks; so its stability mandate is now at odds with its (real) inflation mandate and it is stuck between a rock and a hard place, erring in favour of the banks and their profits to keep them "stable". They know there is an inflationary housing bubble but can't pop it with higher rates because it will wreck the banks. Hence their futile and feeble jawboning.


When has the RBNZ denied the big trading banks anything including reserves and emergency "liquidity" in order to protect them? Unless they are radically different in private, RB hard talk to the banks is the equivalent of being savaged by a poodle.


The removal of house prices from inflation statistics is an absolute disaster, and it was done all over the world at about the same time. The "experts" who were responsible are like enemies of humanity.


With respect, the only disaster here is that the public are woefully ignorant of what a CPI is and how it works. Similar to Matt Nolan's comments elsewhere, plenty of people walk around complaining about the CPI, but have no clue what it's really trying to to measure and how it relates to other macro-economic concepts.


In short, the CPI couldn't care less about an individual consumer. It's focus is on what all consumers are doing in aggregate and, most importantly, what their interactions are with the other sectors of the economy.


So, focusing on house prices, the issue is that selling and buying a pre-existing house is a 'net-zero' transaction; most of the money goes from one consumer to another. It never touches the business, or government, or any other, sector. So it's not captured as part of the flow of funds from one sector to another... which is exactly the way the CPI should work.


On the other hand, if you build a new house then that's a transaction with the construction sector, so the price is included in the CPI. All the legal fees, agent fees, and associated costs of sales and purchase, are included in the CPI - and always have been.


Phil ..I'm trying to understand ur comments...   What is the the underlying purpose of the CPI..???   What is it really trying to measure...and why..??

I've always assumed they used it to measure "inflation".....  which in aggregate .. is primarily a monetary thing..... and that it is/was the primary measure that the reserve bank uses...

cheers  Roelof



Hi Roelof,


Like I said, The CPI is trying to measure what's happening to the prices consumers are facing in aggregate, specifically for their interactions with other sectors of the economy. So it's looking at all the instances where money leaves the household sector and flows to another sector. There are other measures of changing prices as well - the producers price index, the import and export price indexes and so on, even the Labour Costs Index.


The internationally accepted terminology is that 'inflation' is usually interchangeable with 'CPI', partly because that's where we know the end-point of most transactions generally occur. That is to say, a chain of importers or producers can (maybe) pass costs on to each other in the production process, but at the end of the day the buck stops with a consumer that pays for a finished good or service - the final outcome of all those pricing decisions are reflected in the CPI. This is why the RBNZ's inflation target band is measured by the CPI.



Hi Phil...   Ok .. I understand what u have said so far.. I'm trying to understand why the CPI has to be limited to sectoral movements of money...  ( in terms of price changes... I don't really know why something that is "zero sum" should be ignored..?? )

Why are we interested in movements in the CPI..???     Just as we use a speedometer to help us control speed...    What are we using the CPI for.??    What are we trying to control by having the "CPI"..

I suppose the question I'm asking is... What is the underlying cause of  changes in aggregate prices..??....   as it must be that ..that the Reserve Bank is trying to manage..



Well Roelof, I have waited with patience for a realistic response to your probing questions, but I believe a florid view of what I think you are expressing needs an airing now: 
Workers (and unions) can get back in the game by demanding wages tied - not to cooked CPI (inflation) numbers but to money supply. If workers had their wages tied to money supply they would already be enjoying triple their current wages - and the US economy would be in ascent instead of falling out of bed trying to service the trillions of debt racked up by the protected rackets of Hollywood, Bloviating news anchors, copyright extremists and foes of actual free markets and honest workers in the US. Read article


It seems certain societies have to endure wage increases below the rate of inflation - hardly a suitable environment for an enthusiastic industrialist to sell wares. Read more


Britons face a persisting squeeze in living costs as they endure inflation triple the rate of basic pay growth, which was 0.9 percent in the three months through April.


There's a thought!






Some cracker graphs there, from the Fed to the burger-flippers.


The FTTM (green) line is classic ponzi, as is Federal, State and Local debt, M1, M2, M3 is telling (the wee uptick is the panic measures, hand in the dyke), RE Loans, Us Govt spending, Board of Govenor's total reserves,


Unsustainable (ponzi-type) growth always ends up just below the the level where the ramp started lifting off. Gonna be interesting. This time, there's not enough collateral for the global re-boot.