Doing the same, but more of it, won't fix the housing problem

12.11.20

 

Dr Eric Crampton of the New Zealand Initiative, Finance Minister Grant Robertson, and Reserve Bank Governor Adrian Orr all appear to be singing from the same song sheet. Let's just keep doing what we've been doing, but do more of it and that will fix all our problems, tra la la.
Dr Crampton must have been fossicking around in the basement at the New Zealand Initiative and come across a cobweb-coated chest labelled neo-liberal bright ideas. In it he's found a little gem – a market where you can buy and sell futures contracts on house prices in a desired area.  Another neo-liberal market solution where people who have lots of money they can afford to lose, and those who haven't that they can't afford to lose, can have a gamble - a bet on the future price of houses.
It's similar to the bright idea that caused the 2007/2008 global financial crisis. That was triggered by get rich quick bankers whose idea was to package up house mortgages that were already in default or about to be, and market them as investments with high potential returns to greedy investors prepared to take a gamble.
Hard-working taxpayers ended up bailing out the failing banks, many lost businesses and properties, and the get-rich-quick bankers continued to get their big bonuses.
This time, don't bet on real houses - just the likely future level of price rises or decreases in the hope that when you want to buy a house you've made the right bet. As usual with get-rich-quick type schemes, few will win big, most will lose big.
Doing the same thing that got us into the mess we’re in, but more of it.
When the level four lock down was imposed and the government announced a financial rescue package, the first impression was that Grant Robertson had dug out some old Labour Party literature and finally read about Michael Joseph Savage and his use of the credit creation capacity of the Reserve Bank to invest debt-free money to build houses, create employment, and improve infrastructure, to build up the economy.
Oh the disappointment when it became obvious that the dramatic increase in government spending was going to be financed by a dramatic increase in government borrowing from commercial banks, pension funds, and private investors, with taxpayers footing the bill for interest and loan repayment. 
Doing the same thing that got us into the mess we’re in, but more of it.
After the dour financially conservative Reserve Bank governors of the last few decades, Adrian Orr seemed like a breath of fresh air.
The Bank already provided the government with a zero interest overdraft facility which it used on a regular basis, but suddenly, early this year, first $30 then $60 then $100 billion of newly minted digital money was to be put into the economy.
Perhaps during the lockdown Orr had been reading Social Credit policy.
But no.
Instead of that new money going debt-free to the government to spend on supporting those in need or building state houses or for healthcare, it was going to the already rich to increase profits for bank shareholders and executives, pension funds and wealthy investors, by purchasing the government bonds (IOUs) they already held, and the new ones they got by lending more money to the government.
With interest rates so low, that Reserve Bank money went into assets, mainly to housing, supported by a lending splurge by the commercial banks who ramped up money creation for lending on housing to help replace their tighter margins with an increased volume of interest income.
The Reserve Bank has just announced that a further $28 billion in newly created digital money will be available to commercial banks as a base on which to create even more money to lend. Much of that is likely to go into the housing market too, driving prices even higher.
Doing the same thing that got us into the mess we’re in, but more of it.
The result of Crampton’s, Robertson’s, and Orr’s actions will be a massive increase in debt, a greater transfer of wealth from the majority (hard-working wage earners) to the wealthy minority (bank shareholders and already wealthy investors), and even more people locked out of an increasingly overheated housing market.
So what should be done instead?
The New Zealand Initiative should put the lock back on the cobweb-coated chest and leave it to the spiders, lock the basement and throw away the key, and take up tiddlywinks - a pastime more useful than trying to resurrect outdated failed ideas.
Grant Robertson should actually dig out those campaign speeches of Michael Joseph Savage, and having read them, call in Adrian Orr for a coffee and a chat to arrange a zero-interest non-repayable line of credit from Adrian’s Reserve Bank – which the government owns.
Quite simply it should borrow from itself to fund a massive state house building program (using factory built pre-finished panels), infrastructure development, investment in hospitals and healthcare, and a substantial lift in low incomes - including those of beneficiaries, through targeted tax cuts.
Adrian Orr should stop feeding fuel to the housing market and use the Reserve Bank’s credit creation facility to provide zero-interest loans to local bodies for infrastructure - water, wastewater treatment, rubbish recycling, roading, and environmental projects, along with replacing any existing borrowing originating from credit creation by the banks. That money, when repaid to the banks, will be cancelled out of existence.
In addition it should make zero-interest funding available to innovative New Zealand businesses such as, for example, those house building factories, Haydon Padden's production of electric powered rally cars, and EV Maritime’s electric ferries, which could provide substantial employment and export income for New Zealand.
Then we might be heading in the right direction – an economy based on credit not increasing debt, where the infrastructure that business and the pubic need is put in place, where our most productive assets are in Kiwi, not overseas hands, and where wealth is spread to the majority not further concentrated in the hands of a minority.
Not doing more of the same thing that got us into the mess we’re in.