Friday's Top 10: Lessons from the Great Recession; The weight around the NZ economy's neck; Dilbert and more

Today's Top 10 is a guest post from Matt Nolan.

Each Friday we'll have a Top 10 from a range of different contributors, kicking off with Matt today.

As always, we welcome your additions in the comments below or via email to

See all previous Top 10s here.

Sunday was the fifth anniversary of the failure of Lehman Brothers – the event that represents the period when 13 months of difficultly in financial markets transformed into the Global Financial Crisis, and ushered in the ‘Great Recession’.

1. Lessons of the Great Recession
Ryan Avent at the Economist neatly goes over a series of potential lessons from the Great Recession.  Namely

· The importance of responsive monetary policy.

· The risk of unfettered capital flows without countervailing macroprudential rules.

· The scope for government action, and automatic stabilisers, in the face of a crisis.

· And my favourite – the importance of rules, norms, transparency, and evidence when making policy choice, both within and outside of a crisis.

2. Great Recession and trade
It is easy to talk about everything that has gone wrong since Lehman Brothers failed five years ago. 

However, there is at least one place where the world as a whole made good choices, not just compared with the decisions made during the Great Depression, but compared with the type of behaviour many would expect during this type of crisis – it avoided the temptation for protectionism.

The Economist recently noted that here, pointing us to the following paper by the Chicago Fed.

"The number of anti-trade measures implemented by the United States was less than one tenth of what had been predicted at the beginning of the crisis.”

3. Credit availability a binding constraint
During 2008/09 global trade collapsed. The first indicator was the sharp drop in the Baltic Dry index (implying there was a sharp decline in demand for sea freight services), followed by reports that exporters where more heavily reliant on credit than other firms.  This factor was fleshed out in this paper by the International Finance division of the US Federal Reserve.

“Even after controlling for demand, we find that financial conditions adversely affected sales during the crisis, and that the use of trade credit played an important role in the relative performance of firms.  In particular, when financing conditions deteriorated, the more financially vulnerable firms turned to trade credit from suppliers as a supplement to other forms of credit.  In addition, firms that were able to replace external credit with trade credit had better sales.”

All in all, this implies that credit availability was a binding constraint on exporters during the global financial crisis – a widespread view of what was going on at the time.

4. Probing the causes
Even so, whether this unprecedented collapse in global trade was due to movements in financial markets, or was instead solely due to how strongly global demand fell following the bankruptcy of Lehman Brothers is still an issue for debate.  Writers from Boston College and Banque de France stated the following.

“To summarise, according to our investigation, there is no major ‘puzzle’ in the magnitude of the fall in world trade observed during the recent financial crisis. Trade fell mostly because demand crashed globally and did so particularly in its most import-intensive component – investment. Moreover, the strong relationship between exports and imports in each country, due to the increased internationalisation of production and the strong dependence of the tradable sector on imported inputs, contributed to the simultaneity and unprecedented severity of the trade collapse.”

In this way, links three and four both admit there was a sharp decline in global demand, and a significant pull back in investment – but they disagree about whether this was due to the access of finance, or the fact people just did not want to buy! 

In truth, both factors will have been involved in driving this unprecedented decline – and it just goes to show how difficult it can be to split up potential causes when looking at economic data.

5. Avoiding protectionism at all costs
Given how far trade declined, there was a genuine fear – a panic even – among economists that this would lead to protectionism.  This fear was not without basis – subsidies in Europe were being ramped up in early-2009, and were being justified on the basis of unique economic conditions.

Barry Eichengreen, an expert on the Great Depression, was vocal with his calls that protectionism needed to be avoided at all costs with reference to the pain it caused during the Great Depression (here and here).

While many aspects of the Great Depression continue to be debated, there is all-but-universal agreement that the adoption of restrictive trade policies was destructive and counterproductive and that similarly succumbing to protectionism in our current slump should be avoided at all cost

And with incredible foresight he saw that a lack of global co-ordination around this issue could be misconstrued as a trade-war – a view that led to the inappropriate calls to strike during a “currency war” in more recent years.

But if the details of the problem are different, the solution is the same. Now, as in the 1930s, countries need to coordinate their fiscal and monetary measures. If some do and some don’t, the trade policy consequences could again be most unfortunate.

6. Worst case scenario for global trade avoided
Coming back to the present, the World Trade Organisation recently released a report on global trade here.  It is very long.  Luckily Timothy Taylor summarises it neatly for all of us

The bit I want to note is the fact world trade has rebounded, and is elevated:

We are in a world where we still want to trade with each other, and where the prior benefits of globalisation (diversity of products, affordability, etc) are still accepted.  The worst case scenario for global trade has been avoided.

7. But what about going forward for external trade in New Zealand – shouldn’t we be worried about the hollowing out of manufacturing?
Trade and innovation are seen as an important part of the modern economy, and part of the way we co-ordinate as a society.  Often the focus for potential types of trade and spillover effects is the manufacturing sector – but what about global services trade?  This is what is asked here by some World Bank economists and an economist from the Kennedy school of government.

Overall, these findings provide some support in favour of the optimistic view of services as a potential source of growth dynamism. They also suggest that we need to improve our understanding of how firms in the services sector innovate and increase productivity, and of whether tailored policies can promote trade and innovation in services.

8. Services matter
While link seven was about Chile, the ideas feed in nicely to the direction the Productivity Commission have headed – with their recognition that services matter.

“It is time for a mental shift. We have a strong understanding of our primary and manufacturing industries, and reasonably solid data to work with in those sectors. We need a better understanding of the myriad ways that services add value to our economy, our employment and our incomes”

9. The weight around the neck of the New Zealand economy
The big issue for the Productivity Commission is productivity, and in this instance service sector productivity.  Aaron Schiff from Covec and Eric Crampton from the University of Canterbury recently discussed this issue with relation to competition from imports.  To quote Aaron:

He [ed Roger Procter here] also points to New Zealand’s low level of international trade, as trade is a good substitute for local competition, especially in a small economy. Again I agree, but while exports are often the focus of policies around trade, I reckon there should be plenty of emphasis on imports.

Imagine you are a NZ firm in the bottom half of the productivity distribution. You are surviving and comfortable, not facing much competition. If you started exporting (to Denmark, say), you’d likely face competition from considerably more productive firms based over there. Unless you were really motivated to improve your performance, you probably wouldn’t bother with exporting and just keep serving the domestic market where there’s little competition.

 If low cost imports from productive foreign firms start coming in, maybe NZ firms will be forced to improve their game, or get killed off.

Essentially, within New Zealand we need firms, entrepreneurs, and households to focus on their comparative advantage – as I discussed earlier in the week.  However, New Zealand’s small scale has always made effective competition difficult.

With services becoming more important, this issue has become the weight around the neck of the New Zealand economy in terms of its relative performance – and as a result, trying to ensure that services in New Zealand are exposed to global competition looks like it is increasingly important.

10. The growing importance of trade in services
It turns out we can extend the ideas in link nine even further.

What happens if we are heading into a global world where different goods and services are “scarce”.  Via Marginal Revolution comes the following discussion about the “end of stuff” on Nemo’s blog:

As the economy moves to cheap, scalable hardware production and the only things that are scarce are good ideas (technology, design) and human attention (clicks, impressions, brands) the whole mindset of growth driven capitalism in Asia is going to be in for a profoundly rude awakening. All those rentier assets will not be worth much anymore and the ability of the state or a couple of tycoons to control the commanding heights of an economy will be profoundly impaired by the lack of commanding heights more than anything else.

We are moving into a world where trade in services is becoming more important, more valuable, and where it is removing the burden of distance from New Zealand firms.  The fact the world is changing, and that New Zealand firms and households have to be prepared to change with it, is an important point to keep in mind – both in terms of what we can expect, and what policies government should be putting in place.


* Matt Nolan is an economist at Infometrics, and an author at the blog TVHE. He specialises in looking at the household sector, and household economic data, but will offer an opinion on pretty much anything related to business and the social sciences.

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This whole piece focuses on trade and a recent article from a different source has caused me to reconsider my opinion of it. I happily admit my education here is lacking so am interested in what others have to say.
The article that caused me to think queried Free Trade. My position (for now) is that any business operating within a society has a social obligation (a contract if you will). This means they provide jobs, they have an obligation to pay a fair wage to enable their employees to survive, and perhaps even purchase the goods they provide, to pay taxes to support the infrastructure that enables them to distribute and sell their goods and services, and the social infrastructure such as education and medical and so on that they also benefit from, price fairly based on the cost of manufacturing and distributing the product or service, ensuring they are affordable and so on. Parts of this will be market driven, for example a market will not accept a product which is over priced (unless it is a crucial one supplied by a monopoly). Government will also play a role, but what place does import and export play. Multi-national conglomerates today demonstrate very little national loyalty, structuring their businesses to minimise or eliminate any tax exposure. Thus they get rich without meeting any of their social obligation to society (and lets not forget they are a societal phenomenon that requires society to survive) Imported goods do not support jobs with all the flow on effects. Free trade eliminates tariffs which would compensate to some degree, and also enable local manufacturing to develop and become competitive.
I guess the question in light of the articles provided here is what is the right model for the future of our world. Does free trade support ordinary people or does controlled trade work? Do our politicians understand the issue. Economists seem to be prejudiced, but a small number seem to be questioning what is happening.  

We complain about the high cost of building a house , but when we do get price competitive products entering the local market , we cry foul.
Fletcher group sought a got protection from imported GIB Board , supposedly due to "quality" issues .
The truth was the Gib in question came from Thailand BUT was made by UK firm Gypsum in thier Thai pant .
There never were or are any quality issues with the UK product, or the Thai product  , its was the orginal GIB ever made. 
Go Figure

All to simplistic.
If country A trades with country B such that for every $1 A sells to B it buys $5 back from B this is unsustainable. OK this to is too simplistic so looking on a global scale.
For every $1 counrty A sells to the world it buys $3 that to is unsustainable.
For global trade to work for all countries then it must have a zero sum. That is they must all have total sell = total buy.
If we have a global market where all countries have total sell = total buy. Then why not just import the products, services and materials you require and boost local competition.
As an added bonus we would not need to ship all sorts of products around the world that could be produced locally and so save the planet.
We allready have global services in terms labour. When the likes of Telecom wish to appoint a CEO they look globally but does it bring down the high sallary - NO
All these ideas are great so long as they upset someone else.

That sort of pinko thinking won't get you anywhere.

Sorry Mike, that one was intended for Murray86 at the top of the thread.

Excellent 10 thoughts. The Economist's reflections on the Great Recession in number 1 reassuringly to me reinforce all the key messages that I have tried to articulate over the last year or two here. Am very happy to concede they do a better job of the articulation:
The issue was entirely fixable (albeit with clear moral hazard) with monetary policy. Inflation in some countries may be the least bad solution out of the problem.
Unfettered capital flows were both a key cause (and ongoing even worse consequence) of the recession. Those dong the least fettering (like NZ) are likely to be the biggest long term losers.
Governments had plenty of options to expand activity, and deep asuterity was the worst response. As tragic as they were, the Christchurch earthquakes were very convenient for NZ, as it is difficult to imagine Bill English being bold enough or having the imagination to have acted without them.
Happy to allow you the transparency and accountability point, as clearly you are trying hard to explain economic concepts to those Kiwis willing to read a few of your articlaes.

How reassuring that the Economist magazine publishes an article which acknowledges the role that the financial sector plays in precipitating financial panics and economic criises, lol.
These so-called lessons, aren't exactly knew. They've been known for years, basically since the Great Depression, a crisis which shaped the regulatory regimes in countries around the world until neo-liberals hijacked the policy process in the late 1970s and facilitated the deregulation of the financial industry in the 1980s. 
You can't have a liberalized financial system and a stable economy. Its just not possible. Arguments that you can have a lightly regulated regime with so-called macro-prudential controls, which guaratee economic stability are just spurious You have the the cake and eat it too. It was macro-prudential controls like the Basel Accord which significantly contributed to the crisis in the first place. The powers that be knew the risks all along, but they just didn't care, because they'd been captured by the very industry which they were supposed to regulate. And anyone who believes that the banksters and the idiots who enabled them have been humbled and lost any of their power due to the damage they've wrought due to the Global Financial Crisis, they need to get a clue.

The dogmatic hubris inherent in the current RBNZ chairman's linked speech is astonishing given the fact rating agencies claim NZ banks lend at least 140% of local deposits.
The implication being the creditors of loans above the local deposit base are foreign wholesale lenders engaged in collateralised borrowing via currency swaps and thus exempt from the demands of OBR prepositioning.
If banks operate in widely diverse international markets, if significant numbers of depositors are expected to bear losses and are treated pari passu, there is reason to hope that the privately optimal level of bank capital globally will converge to the socially optimal level. In such a world, shareholders bear expected losses while bank creditors bear unexpected losses. In such a world, the role of the regulator is to protect taxpayers, current and future, from being exploited by bank shareholders and depositors.

"In such a world, the role of the regulator is to protect taxpayers, current and future, from being exploited by bank shareholders and depositors."
Personally I think its exactly what its there to do...avoid moral hazard and blackmail that the tax payers pay for.
Its simple its your money on deposit its your choice to put it there, or not, your profit, your loss.

My point is the depositors along with other unsecured creditors are not pari passu with derivative protected creditors and the then deputy governor could not have been unaware of the fact.
Thus, it is the regulators job to make these factors a matter of public record so depositors are no longer asymmetrically denied knowledge of the extent  foreign wholesale borrowing places their funding at risk without commensurate reward and collateral protection.

Since when is it the RB's job to point out every risk to an investor? Did the RB point out that getting 1% more off a finance company than a bank deposit was actually grossly under compensating for the risk? 
Surely its the "duty" of someone investing to make every effort themselves to understand the risks?
To me its the regulator's job to make sure no relevant information is hidden, and is easy to understand as far as practical and not to point out certain or all risks.....
Now if that knowledge isnt easily available then yes thats a failure...but if ppl dont go looking.....the tax payer should not be bailing them out if it goes wrong.
Though reality is even with the OBR I suspect there will be some bailing....because I dont see just one going, its a monlithic risk profile....they all will be darn close to going.
A good term btw,
Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally".

In Carr's own words.
In such a world, the role of the regulator is to protect taxpayers, current and future, from being exploited by bank shareholders and depositors.
When was the RBNZ mandated to undertake such ideological endeavours? Nearly every taxpayer is probably a bank depositor - which identity of the citizen are they empowered to save against the other?

Interesting thinking. So %9 would be reflecting high inflation caused by extra money being created via new debt, in that senario, to stop bubbles you need to increase interest rates or savings get eroded and things get out of hand pretty damm quick.  
 In the 80's we had inflation of which, the majority could have been caused by the high oil prices due to the OPEC cartel, either way I was paying over %18 for my o/d.  
 If all interest rates in the western lift together, then the ship could stay level. Manufacturing is complicated I'd put more blame on globalisation, and the high cost structure in NZ.  Migrants help to stop wage inflation.
  Im going to ask you again, 'what productice assets are backing your debt'? Because if we have alot of debt with out increases in production how, do we ever intend to pay it back. ( goes for AKL council too). The next question is how does inflation 'pan out' when there are no wage increases?  Less cosumptition, is that a killer for inflation?
 Thats why I believe we are going to hit the wall, just a matter of timing, I think you will see a severe bout of deflation and I don't think many Kiwis know how to handle deflation, after a lifetime of inflation. So interest rates could hit all time lows but as long as your assets deflate its not a good investment, like Japan. High unemployment falling government revenues could see us mighty exposed, as my Mum used to saywhen she was on the beach,' I may be a little over exposed but Im not underdeveloped', wish I could say the same for NZ
Debt is a claim on commodities at some date in the future, more usually debt is a future claim on the commodity of money, money arising from cashflow from production that will come in the future. Debt brings forward demand for money that has not yet been realised by the productive economy. The problem is when the debt gets so large that the prodcutive economy cannot ever realise the cashflows that will service that debt. Then you have a problem. Money is not the problem, debt is the problem.

A commonsense post, thank you.

"If all interest rates in the western lift together, then the ship could stay level. Manufacturing is complicated I'd put more blame on globalisation, and the high cost structure in NZ.  Migrants help to stop wage inflation."
But they won't Andrewj. 
The United States monetary policy  is more flexible than in New Zealand because they have to take into account employment as one of the variables in their calculations. The high revenues from their multinational corporations provide them with access to plentiful liquidity which is invested in U.S. Treasuries due to their "safe harbour" status, plus if the export orientated economies of South East Asia want to maintain their currency parity with the dollar they're forced to buy Treasury bills too.
Europe's montetary policy is crippled by the structural imbalances within the Eurozone, which is divided into the highly industrialised North (Germany, the Netherlands, and Finland) against the peripheral countries like Portugal, Spain, and Greece, who's growth was underpinned primarily by construction and real estate as their manufacturing industry was crippled by low cost competition from Eastern Europe and China. Portugal lost 15% of its manufacturing capacity once it adopted the Euro and with the construction industry collapse they'res little to replace it with.

USA, a country with %5 of the wolds population, spending %50 of the worlds military spending, while 48 million of its citizens receive food stamps.

While sadly true A.J., the gun economy / gun reliant economy is not one to be ignored.

Population Control

Luckily for the good old USA , Count , they're not reliant on guns for their economy , 'cos the manufacture of firearms & ammo is a mere $US 11 billion annually ( average 3.4 million rifles/shot-guns/revolvers/pistols ) .....
... which accounts for less than 0.1 % of their $US 15 trillion economy .....
McDonalds , by comparison , had revenues to the year 31/12/12 of $US 27 billion .... their burgers are big buggers , twice the size of the entire gun & ammo industry ....
... and if they get the population 100 % obese , they'll be too fat to get their lardy fingers onto the triggers !!!! ....
Maccas , a boon and a bun for a peaceful society !

AJ - we are all pawns and should never forget that.  And the best strategist will win the game.
I agree much of the debt is unproductive however the slippery sods pulling the levers determine the final outcome. I don't think any Politician, Bureaucrat, Banker or big corporate in bed with officialdom will lose any sleep over the outcome of average Joe Bloggs.
Can't see deflation coming anytime soon. Everything that is being undertaken is ensuring that house asset prices go higher.  When the GFC first started everyone was expecting to undergo a belt tightening excercise and that basically did not transpire. We already have inflation in land prices and that is not even monitored in the CPI. Inflation is being hidden a little like the foreign investors in housing in NZ. If you don't measure how can anyone dispute it. When JK said that people were more interested in Snapper than being spyed on he was right.  Most people are only interested in the small stuff not the big stuff. He just hid his message.
Politicians direct people's attention to areas they choose and desire. Bureaucrats interpret legislation as they desire twisiting the English language to implement policy. The big Corporates lobby and the average Joe Bloggs on the street probably wants to drink Lattes or Sav.

Have Financial Conditions really tightened in recent months? Stock prices have surged to all-time record highs. The S&P500 has gained 7.7% in three months, with Nasdaq up 12.4%. The small cap Russell 2000 has surged 11.3% in three months. The Nasdaq Biotech index has jumped 24.8%, increasing its 2013 gain to 53.3% (2-yr gain of 116%). Internet stocks enjoy a three-month gain of 12.6%. The average stock (Value Line Arithmetic) is up 11.2% in three months. Stock prices indicate the opposite of tightening.

Good point Zanyzane, Bollard acted in response  to calls by bank economists to slow the booming economy and rising wages which was the result of a historically high employment rate. 
"Dr Bollard briefed the finance select committee today just hours after he surprised many economists by lifting the Official Cash Rate to a record 8 per cent from 7.75 per cent.
He told MPs the inflationary outlook remained strong for the next two years –, an election must be held by November 2008.
National's finance spokesman, Bill English, said about one third of existing fixed rate mortgages would be refinanced in the next 12 months, with people moving from rates of 7.8 per cent to rates closer to 9 per cent."
"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."
Toplis said what came out of yesterday's mess was an easing of monetary conditions instead of a tightening -- the opposite to what was intended. The dollar fell sharply and bank bill futures rallied.
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"
In their June 2008 monthly policy report, the Reserve Bank all but admitted to deliberately engineering and prolonging the recession in a bid to "control inflation". 
“In line with falling house prices, we expect a substantial contraction in residential investment. High mortgage rates, low net immigration, falling real incomes & rising building costs also contribute to this outlook…..
“In contrast to New Zealand’s past contractions, we are projecting a relatively long period of low growth. The length of the downturn is in part required to keep medium-term inflation under control. A key risk is that the downturn occurs more quickly than anticipated, due to a sharper slowdown in the housing market, further increases in fuel & food prices, or weaker export demand."
Thankfully at least one reputable economist has called out the Reserve Bank for its fundamentally anti-labour, anti-growth world view.
"I find it incomprehensible that a state agency can publish an economic forecast containing an outlook of four consecutive years of negative or nil employment growth and yet no-one has been called to account to explain such a comprehensive failure of economic policy," he said yesterday.
Also don't you think it a little suspicious that the Reserve Bank have shown itself to be only too accomodating in its monetary policy to a National government, which has a Prime Minister with ties to the banking industry and which openly displays its anti-worker stripes? 

Good point Zanyzane, Bollard acted in response  to calls by bank economists to slow the booming economy and rising wages which was the result of a historically high employment rate.
There's more to the story that has been left unexplained by both of you.

I think I alluded to the bank's access to cheap foreign credit in my post above. I'm well aware of the issue and have discussed it at various times on this blog. 
Alan Bollard was only too cognizant of the issue though wasn't open as to the extent that it benefited the banks.

"A negatively-sloped yield curve has encouraged borrowers to take out term loans at relatively lower rates. Households in particular have favoured fixed rate mortgages, which now account for more than 80 percent of mortgage borrowing, and increasingly for longer terms. This has muted and delayed the impact of policy tightening in this cycle, although we have now seen the effective mortgage rate rise by around 110 basis points since its lows in late 2003."



Forgive me if I didn't understand the thrust of your argument, but it wasn't that obvious.


No I don't think it suspicious Anarkist.....I took it as a given , that the Reserve bank has been a captured organisation for some time now.
Bollard was the epitome of compliance to this Administration where dovish terminology was used repeatedly in allowing MFG export N.Z. to go to the wall, when the real term should have been utter capitulation to Foreign Banking interests. 

ZZ - you can pin it squarely on the fact that the RBNZ did not raise rates early enough in the period 2004-07, thus let inflation get to 5% and then had to raise rates to a higher than otherwise 8.25% to fix the problem. The RBNZ has since acknowledged their mistake, one can only hope they're not at risk of doing the same again now, but at least they have some recent history to remind them of the risk.

Nope exactly the opposite ZZ, eyes wide open  - what convinces you that low interest rates are the pancea for an economy ?  Go talk to those booming US and european economies with almost zero interest rates for the last 5 years, and bugger all for the few years before that...go to the US cities and states and talk to them about their massively under- funded pension comitments....go take a closer look at the high-risk yield-chasing banks and investors that are in the process of creating the biggest bubble of them all.....frankly when that blows, I'll be happy latching onto the tit of the nearest cow.

Grant A,
Yes and Alan Greenspan raised the discount rate 17 times in 2005-2006, which played a major role in precipitating the Global Financial Crisis. Many prime as well as subprime mortgages were on  floating or adjustable interest rates, which were tied to short term rate changes. Interest costs rose severely for borrowers who'd taken their mortgages out when they were lower only to find themselves unable to bear a further financial burden along with rising food and fuel prices. They had no choice but to default.
"Seemingly everyone in the subprime-mortgage world of borrowers and lenders was happy until the Federal Reserve began its series of 17 interest-rate hikes in the summer of 2005. As a result of rising rates, borrowers who received subprime mortgages in 2005 may soon be making monthly payments that are 25% or more higher than before . . . and lenders who okayed imprudent mortgages are rediscovering the hard facts of high risk."
Nobody here has said that low interest rates are a panacea, but high interest rates aren't either. Both the United States and Europe suffer problemes far more fundamental than mere low interest rates, which will require greater changes than altering the cost of borrowing to solve. This is the problem. Everyone has become so fixated on one factor that they're overlooking far more fundamental structural problems in the global economy.

Bulldust Anarkist - Yes, Greenspan was the problem but not for the reason you state. US rates have been in a one-way bull rally for 30 years. Every time Greenspan cut rates he never once raised them back to the level they were before (hence the 30 year rally of which he was a large part thereof). And once they couldn't go past zero, Bernanke, probably with no easy choice at that point, just printed and now has his successor probably trapped by it. He addicted that economy, and indirectly others, to a feast of lower and lower low rates and massive liquidity which is now in the slow process unravelling with very serious consequences...and as the saying goes, you go bankrupt very slowly, and then all of a sudden.

Low interest rates are the stimulus that keep a depressed economy going, high rates put on the breaks.  Simply, I think that's been proven enough in the last 50~60 years...I dont see any other valid model....
Zero interest rates in the EU etc are a symptom of a severe maliase caused by excessive energy price and not the cause.  Oil climbed in price over the last decade, corresponding to your time frame btw....but many ignore it.
Pension funds, etc, yep and they are un-sustainable....they take cheap capital extracted in a low  cost energy era and now expect to get a similar high or better return in a very expensive energy era.....they are all frankly going to go bankrupt..  I mean just where do you think these funds will find businesses able or willing to pay high interest rates plus high energy costs when ppl are not spending?
I think I saw a calculation that said to drop interest rates enough to compenaste for our state we'd need -6% and not 0.25%.....
The baby boomers caused the bubble we are in if nothing else by their numbers, let alone their excessive its pay for it time....
You seem to be in the Austrian camp, well congrats Greenspan the Austrian/Libertarian spent many years propping up his failing Austrian experiment instead of fixing its issues when he had the its too late, a champion can kicker.

Steven....  There is another way..
I think joseph schumpeter called it creative destruction...
This is where a recession is allowed to clean out the bad lenders as well as the bad borrowers...   where badly run or old businesses are allowed to fail....   where a recession is allowed to run its course.
It is not the baby boomers that caused the bubbles.
In my view the cause of all the bubbles is the model u subscribe too...  ie. low interest rates. ( interest rates lowered in response to a recession ).
This , so called model, does have an "endgame".... and that is when interest rates hit 0..
excessive credit growth , with its interest component, is the bane of todays world.
The fault of all that lies at the feet of Central Bankers and Politicians...

There is an opinion that there is another way, that of the Austrian school, my opinion is, its been disproven. In fact I  think that has been disproven frequently enough to say it doesnt work. 
I guess you could say theory works until it meets practice, then it doesnt....
However, lets say it could work in theory (just accept for a moment I dont agree) the punsihment you would inflict on a society to accomplish this is way to severe and could even collapse that society, think of the the resulting rise of Hitler. A cse of be careful what you wish for.  On top of that there is a theoretical assumption that actually the bad businesses go out of business and not the good ones (as cronyism / lobbying steps in) this "theory" very much isnt proven....actually the opposite.
"I guess you could say theory works until it meets practice, then it doesnt...."
Low Interest rates are a symptom and not a cuse, but like a drug they can and do cause side effects.
That you think its the low interest rates does indeed put things backwards (or maybe I should use opposite) aka Austrian school....a quite easy way to discern ppls politics/economics....
Pollies and maybe to a lesser extend Central bankers have been wedded to quasi-friedman/austrian economics and when their voodoo economics failed they reverted to quasi-keynesian.

Steven - Your comments are quite bumfuzzling at times.

Well I cant help with your understanding of either want to, or not, the information is out there.

And your pedigree is? Brain surgeon as well by any chance?

Stephen, again I see you attack someone who isnt of your political view point, that is some pedigree you yourself hold.
My opinion is my opinion and I'll change it if the evidence, data and logic determine my opinion needs modifying, what about you?

I'd grant him the point that fuel costs do have an influence on the troubles in Europe, but I don't think they're as significant as he claims. After all economic activity in Europe is far less energy intense than in the United States and China, and yet their economic performance has been worse. Added to that is the fact that Europe depends more upon natural gas to supply its energy needs and the prices have fallen, then I'd argue that the role played by energy in Europe's troubles is negligible. 
Fuel prices have actually stabilised in spite of the continued security/risk premiums which have in my view been a significant portion of oil prices, thanks to the United States formenting troubles in the Middle East since the invasion of Iraq. Its not a unfortunate side-effect. Its part of the plan. The oil companies have hijacked U.S. policy makers. 
The war has kept Iraq's oil production to 2.1 million barrels a day from pre-war, pre-embargo production of over 4 million barrels. In the oil game, that's a lot to lose. In fact, the loss of Iraq's 2 million barrels a day is equal to the entire planet's reserve production capacity.
In other words, the war has caused a hell of a supply squeeze -- and Big Oil just loves it. Oil today is $57 a barrel versus the $18 a barrel price under Bill "Love-Not-War" Clinton.
"The suspicion is that Bush went to war to get Iraq's oil. That's not true. The document, and secret recordings of those in on the scheme, made it clear that the Administration wanted to make certain America did not get the oil. In other words, keep the lid on Iraq's oil production -- and thereby keep the price of oil high.
Of course, the language was far more subtle than, "Let's cut Iraq's oil production and jack up prices." Rather, the report uses industry jargon and euphemisms which require Iraq to remain an obedient member of the OPEC cartel and stick to the oil-production limits -- "quotas" -- which keep up oil prices.
The Houston plan, enforced by an army of occupation, would, "enhance [Iraq's] relationship with OPEC," the oil cartel."
Don't you think it coincidental that all the countries in the Middle East that both the United States and al-quaeda are battling for control over are also oil producing countries or have gas/oil piplelines that have or will have running through them? In some cases, like Syria they're actually fighting side by side. 
"Clark said the aim of this plot was this: “They wanted us to destabilize the Middle East, turn it upside down, make it under our control.” He then recounted a conversation he had had ten years earlier with Paul Wolfowitz — back in 1991 — in which the then-number-3-Pentagon-official, after criticizing Bush 41 for not toppling Saddam, told Clark: “But one thing we did learn [from the Persian Gulf War] is that we can use our military in the region – in the Middle East – and the Soviets won’t stop us. And we’ve got about 5 or 10 years to clean up those old Soviet regimes – Syria, Iran [sic], Iraq – before the next great superpower comes on to challenge us.” Clark said he was shocked by Wolfowitz’s desires because, as Clark put it: “the purpose of the military is to start wars and change governments? It’s not to deter conflicts?”

There will be no peace. At any given moment for the rest of our lifetimes, there will be multiple conflicts in mutating forms around the globe. Violent conflict will dominate the headlines, but cultural and economic struggles will be steadier and ultimately more decisive. The de facto role of the US armed forces will be to keep the world safe for our economy and open to our cultural assault. To those ends, we will do a fair amount of killing."

"yet their economic performance has been worse"
However there are lots of factors.
In terms of worse, the US has one unemployment factor that says 8~9% and yet the true un-employment factor could easily be 16%+.....some countries in the EU are not "too bad" some awful...
Detroit has gone bankrupt, no EU city has yet....
I'd suggest fuel prices have stabilised because no one can afford to pay much more than the present rate...and such a high rate is having a significant impact on recovery.
Also dont lump gas prices in with transport fuel prices as simply "energy"  I odnt think thats rigourous enough.
Iraq war v oil price etc, somewhat too tin foil hat for me....Im not going to go there....but we greatly differ...

Yes unemployment is a major problem in the United States, like it is in Europe, but its a structural problem, however much New Keynesian economists like Paul Krugman will insist on denying it and advocating that all banks and governments need to do is throw money at the problem, no matter where its directed or how productive it is. 
The fact that employment in routine occupations has been disappearing is well documented by recent job polarization literature (Acemoglu 1999, Autor et al. 2006, Goos and Manning 2007, Goos et al. 2009, Autor and Dorn 2012). This literature finds that occupations focused on routine tasks tend to be middle-waged. Thus, the disappearance of routine occupations in the past 30 years represents a ‘polarization’ of employment because the middle of the wage distribution has been hollowed out.
"This is an important point: the existence of cyclical unemployment doesn't mean there's no change in the structural rate, too. The economy has been experiencing a structural change for decades. New technology and more globalization have changed the nature of work and the kind of skills American employers demand. Economist Josh Lerner believes that in order to understand structural shifts you need to look at employment by occupation, defined by on-the-job skills, not industry. He observed that manual jobs, such as traditional factory work, disappear during recessions and new job growth has been concentrated in high or low-skill jobs; this is often described as a "hollowing-out" of middle-skill occupations.
The economic factors that eliminated many middle-skill jobs have been unfolding for decades. But they didn't cause a gradual increase in the structural unemployment rate, as economists would expect. What happened was large discrete change following each recession. That's because cyclical and structural forces can interact. During recessions already vulnerable firms are more likely to close or have layoffs due to weak demand. The layoff may have been caused by a cyclical factor, the worker is structurally unemployed because his skills are harder to sell and his old job isn't coming back."

From what I read of what PK says no its not a case of "all banks and governments need to do is throw money at the problem, no matter where its directed or how productive it is."
There is it seems a fiscal multiplier greater than 1, so if a Govn spends $1 it puts anything up to $1.70 into the economy. 
In terms of BAU (which after peak oil I dont support) Im not so sure we have a structural un-employment that is now higher brought on by recent events.   Yes sure jobs have changed, but with years to migrate/train/retrain

Actually that is what he implies in his commentaries in the New York Times.
"Paul Krugman writes that officials “all too often” when assessing what to do about a recession “interpret the slump as ‘structural’, something that can be fixed only through painful reforms (which, when unemployment fails to fall, will be dismissed as just not enough) rather than as a shortfall in demand.”
In other words, the problem isn’t that capital has been misdirected such that now the economy needs to restructure by redirecting capital from those areas where malinvestment has occurred back towards sustainable productive ends. It’s just that people aren’t spending enough money."
Actually its happening faster than you give credit for, especially in countries like the United States and Germany which actively pursue a policy of capital intensity and labour substitution.
"Q: What's so interesting about accelerated depreciation?
A: The main reason I look at things like accelerated depreciation is to find what's missing from the economists' models that's causing them to get the job numbers so wrong. The old joke is, "we keep economists around to make weathermen look good." There's a touch of truth in that. But eventually they get it right. They've been just so wildly wrong that you have to go back to square one and figure out what are their models overlooking?The downside is that these sort of applications make companies so productive that they're actually able to do all these additional things with less staff. And the great irony of accelerated depreciation is it may actually have encouraged companies to buy these big software packages at a time when the recovery is somewhat delicate.
Q: So this explains why the job recovery hasn't been very strong?
A: I don't think it explains the entire situation. It explains some of it. The reality is, in a post-bubble environment -- and I think people very much have forgotten that the Nasdaq dropped 80% and new orders, especially in technology, across the economy fell off a cliff -- it's barely three years, and we're off to the races again. It takes a long time to work off the effects of a major bubble."

Actually depositors aren't on equal footing with bondholders, because at the core of the Open Bank Resolution policy, depositors are deemed to be unsecured creditors of the bank whilst bondholders have a priviledged position in liquidation proceedings. This premise is at the heart of global banking reforms. 
"Spain, Canada, and New Zealand have already adopted specific measures using the ‘bail-in’ approach to guarantee the solvency of the ‘too big to fail and too big to jail’ banksters using depositor money. For simplicity’s sake, a bail-in is pretty much the opposite of a bailout. In a bailout, which we all know far too well, everyone shoulders the losses of the offensive, insolvent institution. Think of TARP. However, that ‘socialization’ of losses tends to annoy folks; especially those who had no prior pecuniary interest in the aforementioned offensive institution. And yes, I do mean offensive...However, in a bail-in, instead of getting the funds from the general public, the strategy is to swipe (not write-down, not give a haircut, etc.) depositor assets. This is done by a bit of wordsmithing. Under previous customary definitions, depositor assets were also known as the bank’s liabilities. Obviously an insolvent bank has more liabilities than assets (in simple terms) and as such changing the status of account holders from ‘depositors’ to ‘unsecured creditors’ means the bank can ‘repatriate’ your money to pay off its bad debts."
The implications are even more dire than the author speculates. A little while ago I followed a link posted by Andrewj which discussed the new bank failure regimes which are being implemented around the world, which our Reserve Banks's OBR is derived from. In it the author, Ellen Brown, reveals provisions within the U.S. governments legislation which gives precedence for investment banks derivatives deals over depositors who I revealed above, are now deemed to be unsecured creditors. 
"Safe harbor status grants the privilege of being excluded from mandatory stay, and basically all other restrictions. Safe harbor lenders, which at present include repos and derivative margins, can immediately repossess and resell pledged collateral.
This gives repos and derivatives extraordinary super-priority over all other claims, including tax and wage claims, deposits, real secured credit and insurance claims.Critically, it ensures immediacy (liquidity) for their holders. Unfortunately, it does so by undermining orderly liquidation."
I was curious to see whether derivates were covered in the OBR scheme, but according to the New Zealand Banking Association the Reserve Bank has yet to clarify this. 

"Derivatives: The process of applying the haircut to derivatives still remains to be 

clarified. NZBA understands that the RBNZ will set up a small group workshop to 

consider this issue."



According to another article which I've found, Australian banks are lobbying the Australian government to incorporate provisions in their legislation which protect bank's derivative positions in case of a crisis. I would bet that the same is happening in New Zealand behind closed doors. Do you think John Key, Bill English, and Graeme Wheeler are likely to oblige?


"In the Australian Financial Markets Association (AFMA) 11 January 2013 letterin reply to the Australian Treasury’s September 2012 consultation paper,Strengthening APRA’s Crisis Management Powers,” we see clearly that our banks consider the issue of how derivatives would be handled in a bank bail-in to be “critical”:
Legal certainty around the enforceability of the netting and collateralarrangements in connection with OTC derivatives is critical to the stability of the market."

Im not aware I said,
"Actually depositors aren't on equal footing with bondholders, because at the core of the Open Bank Resolution policy, depositors are deemed to be unsecured creditors of the bank whilst bondholders have a priviledged position in liquidation proceedings. This premise is at the heart of global banking reforms."
Clearly this isnt the case.  Though the interesting thing with an OBR event is a depositor with no waiting period can remove money quickly, whereas a secured creditor cannot.
BTW, when I say bonds I mean "real" bonds, ie Govn ones and not corporate bonds which I regards as junk....I'd never buy a corporate/company bond.

I agree with the OBR, the depositor had money there to make a profit and is free to make a contract, or not.  The tax payer on the other hand is an "innocent party" being expect to take on the mis-calculation of others.
"offensive institution." indeed, personally I think bankers should be in and go to jail for this.

Foreign wholesale lenders have money calculated @ 40 % of retail depositor's there to make a profit, but due to the exigencies of collateralised/hedged lending their credits are exempt from OBR haircuts in the event of a local bank insolvency. I doubt the fine print makes it clear NZ depositors along with other unsecured NZ creditors will be exclusively  called upon to re-captalise their bank in the event of an insolvency event.
The RBNZ permits our banks to continue to lend 140% of retail deposits with thin capital retention rules ( ie12% of assets? at max) There is no room for error in such a situation and the rating agencies repeatedly say so.
Others are not so kind:
Here's the encyclical as presented to the House of Commons
 Loan-deposit ratio above 100% is like (untreated) AIDS. As it progresses it weakens the immune system of economy that safeguards against adverse events: natural disasters, wars, etc or sometimes unpredictable mood swings of market players. The current crisis was triggered by the collapse of subprime mortgage market (effectively overvaluation of assets). This time the system, for years having had been weakened by loan-deposit ratio above 100%, also collapsed altogether. It was a giant pyramid and it was bound to crumble anyway (for whatever direct cause). It was like a human suffering from AIDS whose death was not caused by AIDS directly, but by pneumonia, flu, infection, etc. However it is AIDS that made the curable illnesses lethal.
Until recently the world enjoyed a sustained period of high growth and low inflation and the fact that it came to such an abrupt end does not come as a surprise. It was in the very nature of the pyramid scheme mechanism. The deposit creation process with a ratio above 100% guaranteed impressive-looking economic growth figures. At the same time there were no extra cash hitting Main Street, as there was no extra cash printed. In this context, the high growth of property prices is no surprise. In their huge majority and extent, these are, in practice, cashless interbank transactions. The world stayed oblivious in this economic miracle like customers of a pyramid scheme being happy with the figures on their statements until they wanted to withdraw money. But like with any pyramid scheme, the financial system ran out of cash, with the outcome of a lack of liquidity, not high inflation.

I still maintain that really its up to the investor to make an informed decision.  If the investor isnt up to that dont invest or get professional advice before doing so.  I mean its almost like operating on yourself with a knife and fork for a hernia cause you got a pain lower down and the Internet says so.  I mean dont ppl go to GPs?
In terms of loans to deposits, there is leverage and it seems reasonable for there to be some leverage. The problem is just how much, certainly it seems excessive these a small drop in the housing market sends bank bankrupt/insolvent.  Now in the USA it seems far higher than here....We have 12%? whats the US even less than 1/2 that? EU?
Greg Pytel? I mean who? Is leverage bad or is it the growth caused by the changee and rate of change of leverage?
"The world stayed oblivious" really? I think some, a few yes were pointing out it didnt look very good.  Were others really oblivious or was it their political blinkers or big profits they were making? Further, more than a few more have been pointing out for years that the main under-pinning of the ponzi scheme, cheap fossil fuels was ending....
I find it interesting now things are going to custard just how many are whinning no one saw it and no one told them....that simply isnt true, ppl were saying, just fell on deaf ears.

Steven - If you think people have money in the bank to make a profit then you are mistaken.  There is hardly a profit to be made on the paltry amount of interest that is paid by the time withholding tax is deducted and inflation is accounted for.
The taxpayer is hardly an innocent party in all this as everyone over 18 has the right to vote and for 9 years people voted for Labour and it's coalition who did nothing but ensure the prices of housing went up in value and that is what has caused the banking issues.
Go test your theory on depositors being in a position to go down to their local banks and write a contract getting the bank to guarantee your savings....please let me know how you get on. 
The RBNZ's OBR is simply using other people's money to bail out something the RBNZ could not control nor had the brains to control. The more you regulate the more cunning those who are being regulated become. The more cunning those being regulated become the more bizzarre the behaviour of the regulators until you end up without morals and ethics. If people or business don't have the ability to pay then they are being dishonest and that dishonesty should carry a very heavy and harsh penalty. In fact all dishonest people should be marched into a town square and paraded around and humiliated for days. The lack of morals and ethics needs addressing.
If we raise children to take what they like off others what do we get? Lots of examples running around in NZ with their hands on the compulsory contributions to the public purse wouldn't you say!
If you raise children to get what they want by their own honest effort then you pretty much get honest capitalists.

Ppl put money in as a deposit and get what they get, its a profit even if small.  If its too small put it somewhere else more productive at I would assume greater risk, that is an investors decision.
Sure labour let house prices rise and I critise them for it, but really would Natioanl have been different?   you know let the ppl decide what to do....I find it strange you dont like regualtion and Govn interferring yet when they dont and a bubble forms you critise them for allowing it....
The tax payer is inocent in terms of the investors choice, or in other words we have moral hazard....
I dont fathom by what you mean by my theory, my comment is simple if you dont like the returns and risk take your money elsewhere.
The OBR simply stops a de-facto passing on of the costs to the tax payer, depositors have always been at risk....just the Govn guaranteeing their money has been its explicitly not.
children & honest capitalists etc now you are drifting off into make believe land IMHO...

Steven - I don't think your getting it. Investors have to look after themselves and I'm all for that. I bet many people have formulated plans for an OBR event. I for one am sick of having to take action because a bureacrat enforces me to. Having to keep one eye on the market and business and one eye on the Govt, Bureaucrat and all the Cronies becomes tiresome.
If you find it strange that I don't like regulation and Govt interference then you had better try and understand the reasons why. Just to clarify I have never said I think the market is in a bubble either. I have commented that it seems rediculous that people hang a noose around their necks for years paying off a mortgage.
House prices need to be afforable and I strongly believe that there are a number of distortions that have affected the supply side. There could well be issues that aren't measured on the demand side.
If you have afforable housing everyone has a better standard of living. Who the heck wants to live in some damp, mouldy, cluttered house for years not having a enough money to do anything about it? If people have some financial freedom they can spend their money on a better standard of living and that better standard of living flows through the economy into other sectors. They are also so less likely to require Govt handouts. If we have less Govt handouts then we can downsize Govt and bureaucrats.
If people can be self-sustainable then we are all better off.  So the taxpayer is not all innocent, as they like large Govt and Bureaucracy who tend to make stupid decisions that screw up the fundamentals of a good economy. Take the Greens and Labour...what policies have they ever implented that allows individuals to be self-sustaining? They both flout the word sustainable around but are really only ensuring a position that takes care of themselves first. You know the "we can sustainably sit in Parliament for ever if we implement these policies" attitude. Supporters of these clowns are nothing more than gullible and naive. Nats not much better either mind you it's just the pocket they pee in that is different.

The end of scarcity. #10. Really? Try telling that to many NZers trying for decent housing-and for some -food.

I agree with you there regarding housing and food.
But some things are already post-scarcity. See this slightly crude article for a good overview (

Well no JetLiner.  Some things have always been plentiful I would think.  Porn now.  But in hunter gather societys 10,000 years ago there would have been abundant firewood and clean water.  No competition for resources meant people could simply choose the best sites at will.
I don't really see the difference between scarcity and poverty and i see lots of poverty.   A significant proportion of people in New Zealand cannot afford to buy the things I can.  eg.  A decent daily coffee in an excellent venue.  When I leave Auckalnd airport i see masses of poorly maintained unhealthy deteriorating house.
There is scaricity of every item to decently house those people.
Existing health technologies these people need can't be made available to them, or for that matter almost any New Zealander.
The miserable few items people living in those houses can afford to buy are made by even lower income people in foreign countries.
The end of scarcity does show up many places I can see,

The state of affairs isn't due to material scarcity but due to a lack of purchasing power to access the material abundance. 
I pin the blame on the fundamentally anti-labour world view that infects our governing institutions and even the media. I think its likely a product of the crisis in labour relations during the 1970s. The baby boomers are so fixated on what happened during that time when the rising cost of living provoked militant industrial action. They'rve become obsessed with ensuring it never happens again that they don't realise that the world has fundamentally changed. I think its this fixation that informs the Reserve Bank of New Zealand's inflation targeting policy which I refer to in comments above. 
Labour reforms under the Employment Contracts Act and Employment Relations Act, have undermined the bargaining power of labour, whilst various governments have deliberately pursued a policy of bringing about a post-industrial society.
Manufacturing is particularly vulnerable to hikes in the OCR and interest rate rises, because they're industries which are most exposed to global competition. They can't absorb further costs cutting into their already slim margins, especially since interest rate hikes are inevitably followed by economic downturns which reduce orders of their products.  
We also have an economic regime that all but guarantees asset price inflation, whether its Reserve Bank reserve asset ratio weighting which has a pro-housing bias, taxation policy, and easy access to cheap credit from overseas.
This country is fundamentally in need of a public discussion about the issue.

I basically agree with you Anarkist on the part about the reduction of labour power.  Notably in the 1970s and indicator was that departments of  'Human 'Relations' became 'Human 'Resources' and the huge shift in power that illustrated.
And it reminds me of the discussion about the 'hollowing out' of the middle class we see here on  Or maybe it's the elimination of the middle class.
With that it seems not just to be a problem that "labour' has.  It's been well extended into the middle classes and smaller business.  eg.  People who I would regard as high income are just screwed if they live in Auckland and have to pay more than seven figures for a house.
But back at the scarcity level.  A lot of the writing does not even seem to be aware of the services and goods that are needed to keep them alive.  it's almost of the view that 3D printers will solve all problems.  Without noticing that all the people who build the roads, sewers and the thousands of roles that are similar.  That lack of awareness bugs me. 

I know what you're saying, but all those issues aren't REAL scarcities, but ENGINEERED scarcities. 
It may not sit well with people but we're fundamentally ruled by people who are enarmoured with the dogma predicated with ensuring scarcity for the majority of the populace. 
This elite first rose to prominence in the 1970s and openly voiced their agenda.
 “that some people will obviously have to do with less…It will be a bitter pill for many Americans to swallow the idea of doing with less so that big business can have more.” But so be it.
BusinessWeek, October 1974
. "One must face up to the bitter truth that only so long as the economy is de- pressed are we likely to be free of inflation" (Samuelson, 1970). "No one

in the world has a recipe for correcting our price performance without some unfortunate increase in unemployment. . . . [the public] should be

told the facts of life" (Arthur Okun, 1970). This is not bread, but a stone. Conservatives are not offering more. ". . . there is no other way to stop

inflation. There has to be some unemployment. . . . It is a fact of life"

(Milton Friedman, 1970).6 "The election will show whether the American people are mature enough to accept a sustainable (low) level of activity"

(Henry Wallich, 1970). ". . . this economy can no longer stand a real boom with low levels of unemployment without kicking off a rampant in- flationary spiral" (Alan Greenspan, 1972).8


Our media and our educational establishment have failed in their duty to subject these claims to proper scrutiny and have just swallowed it unquestioningly..


High housing costs like I've pointed out are engineered too, by constraining the supply of land that can be developed, skewing economic behaviour through taxation and bank asset ratios etc.



Its all our fault. We've failed to engange in the political process and in holding our leaders to account, whether its babyboomers, Generation X, or Millenials. We're all complicit. 

Reward and motivation is not what the economists thought.

Actually KH humanity have become sufficiently productive to fulfill the goal of the end of scarcity probably since at least the 1920s. In fact it was a big concern of American industry leaders and policy makers that the United States was so productive that industrial production would outstrip demand and thereby reduce the time workers needed to dedicate to labour. 
"In a 1927 interview with the magazine Nation’s Business, Secretary of Labor James J. Davis provided some numbers to illustrate a problem that the New York Times called “need saturation.” Davis noted that “the textile mills of this country can produce all the cloth needed in six months’ operation each year” and that 14 percent of the American shoe factories could produce a year’s supply of footwear. The magazine went on to suggest, “It may be that the world’s needs ultimately will be produced by three days’ work a week.”
Business leaders were only too aware of the potential political implications of a populace with sufficient leisure, who weren't fully occupied with earning enough income for day to day living. They would likely want greater participation in the political process and challenge the wealthy's control.
 John E. Edgerton, president of the National Association of Manufacturers, typified their response when he declared: “I am for everything that will make work happier but against everything that will further subordinate its importance. The emphasis should be put on work—more work and better work.” “Nothing,” he claimed, “breeds radicalism more than unhappiness unless it is leisure.”
Many would be aware of Karl Marx's accusation that the capitalist economy has an inbuilt tendency to overproduce their goods, flood the market, which results in a diminishing rate of profit and eventual economic crash. Few would know that it was a concern of classical economics Jean Charles de Sismodi and none other than Robert Malthus. In fact Robert Malthus advocated that unproductive classes should increase their consumption in order to absorb the goods which the working classes couldn't afford to buy, because of the unfair distribution of income. 
I'd argue that this overproduction was one of the chief causes of the Great Depression, because workers were encouraged not to consume but instead invest their incomes in the capital markets, which only increased industrial capacity and the tendency of the economy to overproduce.  Few would know that the Roosevelt New Deal was actually orchestrated by industrial magnates, who wish to control what was in their view "destructive" competition, prevent industrial overproduction, and maintain stable prices and therefore guarantee profitiability. 
"In his book “Successful Living in This Machine Age” (1932), Filene argued that the drive for lower wages and the privileging of investment over consumption had produced chronic overcapacity: “At a time when more buying was the need of the hour, [capitalists] were still calling upon the masses to refrain from buying goods, and to invest their savings in more production; and when industries languished from want of customers, they advised reducing wages, a process which must result in a further falling off of sales.” As in the stock bubbles of the 1990s and 2000s, financial experts in the 1920s urged ordinary Americans to emulate the rich by gambling in stocks. According to Filene, financial experts recommended that ordinary people “should better themselves by investing their savings and drawing either interest or dividends, instead of having to depend forever upon the wages which they might receive from week to week.”
After the abandonment of the rigidly controlled economy that followed in the wake of the Oil Crisis in the 1970s, focus shifted towards enabling the FIRE sector of the economy to absorb the excessive revenue generated by corporate profits. The excessive returns are larguely due to the maldistribution of income in Western post-industrial economies, the oil producing countries of the Middle East, and the export oriented manufacturing powerhouses of South East Asia. Policy makers were able to take advantage of the liberalization of the banking sector, which took place in the late 1970s which were driven by demands for higher profits by the multinational investment banks in the United Kingdom and the United States. 
Another strategy, which they employed was the creation of make work type jobs that didn't exist prior to the 1980s and produce very little that is actually  meaningful.
When all else fails, they all but ensure the occurance of periodic economic crashes. Nothing like an economic crisis to destroy productive overcapacity. 
He seemed to know what was slowly panning out. In fact, the year before Paul Volcker delivered the Fred Hirsch Memorial Lecture at Warwich University in England entitled ‘The Political Economy of the Dollar’. He stated: 

"A controlled disintegration in the world economy is a legitimate object for the 1980s."[16]

What did he mean by that? Almost a year later the world economy did start to go into freefall when Mr Volcker, starting the week of Oct. 6-12, 1979, "began raising interest rates, by raising the federal funds rate and increasing certain categories of reserve requirements for commercial banks. He kept pushing rates upward, until, by December 1980, the prime lending rate of U.S. commercial banks reached 21.5%."[17]

Matt Taibbi fact checks the Forbes Randian devotional piece from earlier in the week, summarising why Goldman Sachs is not more worthy than Mother Teresa (to be honest, when I read the Forbes article earlier in the week I thought it was parody)