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Chris Leitch argues the RBNZ's $53 billion government bond buying programme has proven to be nonsensical madness favouring commercial banks over taxpayers

Public Policy / opinion
Chris Leitch argues the RBNZ's $53 billion government bond buying programme has proven to be nonsensical madness favouring commercial banks over taxpayers

By Chris Leitch*

Having gone halfway to economic madness with its purchase of $53.5 billion in government bonds (IOUs for government borrowing) from the country’s commercial banks and financial institutions through its Large Scale Asset Purchase programme, the Reserve Bank has now gone the whole hog and decided to sell those bonds to New Zealand Debt Management (NZDM), a branch of the Treasury which manages the government’s borrowing, which sold those bonds to the commercial banks and financial institutions in the first place.

So the government is going to borrow from other banks and financial institutions so that it can purchase its own debt (bonds/IOUs) from its own bank (Reserve Bank) and pay a higher interest rate than what it’s paying to its own bank now.

Not only that, but the interest the government has been paying to the Reserve Bank generated profits for the Bank which it pays to the government as the owner of the bank.

The borrowing was effectively costing taxpayers zero.

That won’t be the case when the government borrows from the commercial banks to buy the bonds the Reserve Bank is selling back to NZDM.

The new borrowing will cost taxpayers plenty.

And the cost will be substantially greater over time as more official cash rate rises, like the one just announced, are implemented.

Tax will be going to the banks in interest payments, adding to the enormous and record profits they’re already making.

If you tried to devise a more ridiculous scenario you would be hard pressed to come up with one. It’s the ultimate in stupidity.

The Reserve Bank could have kept those bonds until they matured, with government paying the interest, which it got back through bank profits.

When those bonds matured (loans were due for repayment) the Reserve Bank could simply have written them off.

After all why would the government want to repay loans to the bank it owns (effectively repay itself), especially when the Reserve Bank is not a separate entity (such as a company) and it didn’t use anyone else’s money to buy those bonds in the first place.

It was created on its computers – digital fairy dust – with government backing.

That money creation was confirmed by Reserve Bank Deputy Governor Christian Hawkesby, who, when asked on TVNZ’s Seven Sharp programme on April 30th 2020 where the bank was getting the money the buy government bonds, said; “We’re creating electronic money to buy government bonds. Through this process we create money.”

This was doubly confirmed by the Bank’s Chief Economist Yuong Ha in the NZ Herald on August 14th 2020; "We create money … which is what central banks do, and have always done, but we then exchange it for assets [government bonds] and those sit on our balance sheet."

Selling the bonds/IOU’s back to NZDM (effectively government repayment of the loans) may be a cute book-keeping exercise, but that’s about all.

Entries on both sides of the Reserve Bank’s balance sheet (assets and liabilities) will go down, which is what would have happened had the bonds simply been cancelled – remembering that the digital money to purchase them was created from nothing in the first place.

But the new government borrowing, required to buy bonds the Reserve Bank wants NZDM to buy from it, will need to be paid back - even though the commercial banks create the money, in the same way the Reserve Bank does, that they purchase bonds with - and that will place an even larger burden on tax revenue.

The tragedy is that this nonsensical madness will be taking money out of taxpayers' pockets and transferring it directly into the pockets of the shareholders of the commercial banks, large institutional investors, and overseas pension funds.

Those entities should instead be investing in the country’s productive businesses, building economic activity, resilience, innovation, and exports.

Instead the government and the Reserve Bank are helping them to pick the pockets of taxpayers.

The effect of this stupidity for New Zealanders is less tax money left for government spending on hospitals, schools, poverty reduction, housing the homeless, and infrastructure such as roads, rail, water supply, and wastewater treatment.

The funding required for those things will in future be borrowed from private investors - as for example with the proposed four new entities the government is setting up to take control of water and wastewater assets from councils.

The funding for the work required to bring that water infrastructure up to standard, and to cope with an increasing population, will in future be borrowed from private investors - commercial banks, large institutional investors, and overseas pension funds, placing an additional burden on taxpayers (who are all water users) who, through water charges, will be providing a gold plated, 100% secured, long-term profit for the world's wealthy. 

Taxpayers will be paying twice, and getting less, all because the top priority is ensuring the bond market (the gambling casino for the rich) has plenty of ‘investment’ opportunities.

The ultimate in madness indeed, when the Reserve Bank could have provided its created fairy dust direct to the government at no cost to taxpayers, for it to spend on services for kiwis.

*Chris Leitch is leader of the Social Credit party.

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Money printer go BRRR
(Follow the link) 



Any change of a simplified diagram to dumb it down? would be easier to share and raise awareness :) 


I explained the situation in as simple a terms as possible here:…


Good article.


I really hope Swarbrick gets her select committee inquiry into our economic response to the COVID-19 pandemic.



As the demographic bulge keeps moving forwards, its becoming ever more vital that the younger generation get a say in what the future debt they are being signed up for is getting spent on.



$12b a year is a lot for younger generations to spend on social welfare that can be obtained even if you don't actually retire, regardless of need.  Particularly when those recipients were too frugal to "chip in" to help share the burden.  

Works out to be 29 years of a median income earner's total PAYE to fund 19 years of a single pensioner's payments.  

A bit of a slap in the face when we can't even find $1b per year to remove the need for student loans.  


I agree with the sentiment, but your arguments are weakened by your affiliation with Social Credit, a has been party with bonkers policies which only 1520 people saw fit to vote for in 2020.

I mean, a financial transactions tax to replace GST? Home loan terms will be adjusted according to family incomes? Or a financial policy undermining (usurping?) the independence of the Reserve Bank?  No thanks. Things are bad enough as it is.


So perhaps you'll tell us all what is wrong with a Financial Transactions Tax to replace GST? 
And why a group of unelected bureaucrats at the 'independent' central bank should be able to frustrate the economic and political will of an elected government?
It appears you have not read the financial policy in any detail to understand how the proposed National Credit Authority would function and who it would be responsible to.
Perhaps you still think that commercial banks lend money that people has deposited with them too?


After all why would the government want to repay loans to the bank it owns (effectively repay itself), especially when the Reserve Bank is not a separate entity (such as a company) and it didn’t use anyone else’s money to buy those bonds in the first place. It was created on its computers – digital fairy dust – with government backing.

That's right, the RBNZ registered a record of what it owed the banks which sold bonds to it.

The ledger is called -  Bank Settlement Accounts  and the RBNZ pays the current OCR to the account holders.

Allocated credit tiers for ESAS account holders will be removed, and all ESAS credit balances will be remunerated at the OCR. Link


If RBNZ tear up bonds, the following basically happens:

  • RBNZ assets go down $53.5bn
  • Treasury liabilities go down $53.5bn
  • Overall Crown net worth is unchanged (because the Crown own RBNZ!)
  • BUT... RBNZ now has a negative balance sheet - about $50bn in the red. Not a great look apparently for a central bank!
  • RBNZ would continue to pay interest (OCR) on around $40bn of deposits in institution's settlement accounts, which is where most of the balancing liability sits that was created when RBNZ purchased the bonds. The rest of the balancing RBNZ liability is sat in the Crown Settlement Acccount (very bloated at around $35bn)

If RBNZ let the bonds mature:

  • Treasury would have to 'pay' RBNZ the value of the bonds at maturity - about $53.5bn
  • In practice this means marking down the Crown Settlement Account by $53.5bn
  • This would reduce both RBNZ assets and liabilities by $53.5bn and the RBNZ balance sheet would be deflated back to normal. Hurray!
  • Oh, wait, the Crown Settlement Account doesn't have $53.5bn of credit in it. So, Govt either need to collect some taxes, 'sell' some bonds, or ask RBNZ for an overdraft (as per early 2020)

The plan therefore is for RBNZ and Treasury to take their sweet time and back out gently. What will be interesting is how much liability they decide to leave in institutional settlement accounts and whether they continue to pay interest (OCR) on these deposits. Paying interest on those deposits is a policy choice - not a legal requirement. The Crown could choose to hold a much greater proportion of its overall liability (debt) in settlement accounts earning next to no interest instead of in bonds. But that would beg the obvious bloody question - why give free money to investors when we don't need to? On that point I agree with the author.        


Paying interest on those deposits is a policy choice - not a legal requirement.

How else to anchor the OCR policy rate? Historical omo operations relied on repo drains or adds (RP&RRP) to maintain the rate at the desired set point - this is null and void with so many bank reserves on account.


Completely agree - I was only pointing out that the interest payable on reserves is a policy choice. When bank reserves are so large, and there is no interbank market, paying interest at OCR to anchor the policy rate makes sense.

I would also argue that the yield curve is a policy choice - but that's another debate (which I would be interested in your learned views on)


Smoke & mirrors by the big end of town & the state. Fronted by liars whom we voted for.


Unfortunately Mr Leitch does not seem to appreciate that there is a need to rein in the excess supply of money which has been  created by LSAP. Much of this money i currently sitting in settlement accounts waiting to be spent. Unless there is tightening of the money supply, this money will go round and round, bouncing from one settlement account to another. Yes, the RBNZ could simply cancel the Government debt associated with the bonds, but that would simply make the funny money inflationary game even worse. 

In contrast, RBNZ selling bonds back to the Government will lead to an increase (possibly lagged) in wholesale interest rates and that will flow through (also possibly lagged) into deposit rates.

The medicine that is necessary to bring inflation under control  will not be nice, and may well lead to a substantial recession, but most medicine is not pleasant to take.  Excessive LSAP plus excessive lowering of the OCR were the triggers that caused the wounds that we now have to deal with.


Keith - The money in those settlement accounts cannot be spent. See Standard and Poor's here -…

The problem is the bucket loads of money created by the commercial banks - mainly for asset speculation (pushing up house prices) instead of investment in production. The major driver of inflation at present is supply shortages (quite s lot temporary) not excess liquidity. The medicine needed to bring inflation under control is more production, not higher interest rates that become a cost to producers and therefore get added into prices - increasing inflation even more. A better remedy would be lower borrowing rates for the productive sector so they could invest in new technology to increase production (and self sufficiency).

If the government has to resort to borrowing from the private sector (which it will if the Treasury has to buy the bonds the Reserve Bank is proposing it should) that borrowing will be funded by more money creation by the commercial banks to buy the new government bonds. The result will be a direct transfer of money from the pockets of taxpayers into the pockets of bank shareholders.


The money in the settlement accounts can indeed be spent in the sense that it underpins credit creation. A consequence of credit creation is that money transfers to the settlement accounts of other banks. And so it does not disappear. That is the 'marvel' of how money circulates.  Without money in its settlement account, a bank could not create credit.
So, the banks can create credit as long as they have money in their settlement accounts. But it is the policies of the RB that create and constrain the amount of money in the economy.  Policies of the last two years have led to the settlement accounts having much greater credit balances, which can then be used to create credit for the benefit of people and companies in the broader economy. 


The only way that the overall balance in those settlement balances accounts can reduce is if Govt sells bonds (swaps liabilities in the settlement account for liabilities in the form of bonds), or if Govt taxes more than it spends - creating a net reduction in settlement balances (and a net increase in the Crown Settlement Account). Commercial banks can continue to create new money (extend credit) as long as they stay within their risk ratios - and these ratios are based on the total amount of safe assets they hold on their balance sheet. Banks only need enough in their settlement accounts to settle transactions between each other and RBNZ - and if their credit runs low, they can easily access additional credit from RBNZ or other settlement banks.



I agree broadly with the above, but with some caveats.

1) If all settlement accounts are included, with this including both the Government and the bank institutions, then running a tax surplus is neutral on this overall balance.  However, it does take funds away from the private sector. But this will itself be reversed once the Govt uses the tax surplus to reduce its own privately held bond holdings.

2) When institutions have big settlement account credits then it is somewhat like having a lot of money burning a hole in the pocket. And round and round it goes.

3) The RB makes a distinction between creating credit and creating money. I think that distinction is important.

4) It is Reserve Bank policies that can create money circulating in the economy. And that is what LSAP and FLP have done in the last two years. And it is those policies that have contributed to the current inflation. Low interest rates have also contributed to inflation, but that effect occurs because interest rates influence the rate at which the money goes round and round by influencing the demand for credit.

So, LSAP+FLP+ low interest rates has been a powerful mix and we are now seeing the impact of that.  That mix (albeit under differently named acronyms) has been operating not just in NZ but across the world, with the US and Europe being big drivers thereof. The Ukraine conflict is now the black swan  event that feeds into and exacerbates these happenings.



I broadly disagree with your comments.Here's why.

1) Governments hardly ever run a tax surplus. On the rare occasions they do, it means they have stopped spending on services essential to a growing population and growing economy - state housing, hospitals, schools, infrastructure and so on - and we're seeing the proof of that in all those areas now. You're right that a tax surplus does take funds away from the private sector. My point was that the government is proposing to borrow from other banks to buy back its own bonds from its own bank, not to use tax surpluses to do so. That borrowing will cost taxpayers - to pay the interest and repay the borrowing at maturity whereas the borrowing from its own bank does not have to incur either. It should not have tax surpluses in the first place - for the reasons stated.

2) Banks cannot create more credit than they have credit worthy borrowers willing to borrow - regardless of how big their settlement accounts are or how much those settlement accounts are "money burning a hole in their pocket".

3) I agree, but we use credit (digital money) as money (notes and coins).

4) To take the first and last part of your comment first, the Reserve Bank policy of very high interest rates in the 1980s did not stop the commercial banks creating credit and people borrowing. They generally did less,that's true, except of course the speculators like Equitycorp who eventually went belly up. Up until 2 years age the Reserve Bank was not creating any money (it was providing the govt with short term overdrafts). It is the commercial banks who create the money circulating in the economy. On average over the past 30 years they've added an additional $20 billion to the money supply every year (that's over and above replacing with new credit creation, the money that people have repaid). That of course, has jumped dramatically in the past 2 years.

Low interest rates have indeed driven inflation (mostly in assets like houses), but supply shortages caused by lockdowns are a very significant factor in the general increase in inflation. LSAP and FLP were a stupid mistake on the Reserve Bank's part. They resulted in asset speculation - benefit to those on the upper section of the economic ladder. As I argue - that credit creation by the Reserve bank should have gone to the government directly to spend on those in need of support because of the lockdowns. That would have been largely those on the bottom of the economic ladder. It should also have gone into state housing, hospitals, schools, infrastructure - assets that benefit the whole community.