Raging House Fires, Banks, and Silly Statements

01 December 2020

Former NZ Prime Minister, John Key, while touring an engineering factory shortly after the Christchurch earthquake said ”If printing money is the way to go, and that’s going to bail out our problems in Christchurch, why don’t we just print lots of money and give it to every New Zealander and they’ll have a great Christmas. The reality is, it's a bit of a fool's paradise.”

The reality is, actually, that statement proved how illiterate Mr Key, now the chairman of ANZ Bank New Zealand and director of ANZ Bank Australia, was about money - or economics at all for that matter. Perhaps that’s now changed.

Because, despite Mr Key’s silly attempt to ridicule to idea back then, just eight years later the Reserve Bank is printing $128 billion in new electronic money over the next two years.

Not a word anywhere you’ll note, about ‘funny money’ – that charge laid at the door of Social Credit who have been championing the use of Reserve Bank money to support government spending for neigh on one hundred years.

But the way the Reserve Bank is channelling that newly created money, is fuelling a bush fire in house prices.

Instead of giving it to the government, which it could do by simply depositing it into the government’s account at the Reserve Bank (as a non repayable overdraft) and letting the government spend it into the economy on building infrastructure, providing more resources for hospitals, loans to small businesses, or funding state house building, it’s making banks awash with money by buying their holdings of government bonds (IOU’s) – some of which they only acquired a few days earlier by lending the government money they created out of thin air (wonder if John Key knows that), the same process the Reserve Bank uses to create the money to purchase the bonds from them.

Consequently the banks are creating even more money to lend on housing, driving prices ever higher. Their money creation increased the money supply in New Zealand last year by $32 billion.

The premium it’s costing for that money-go-round is around $11 billion, a cool profit for the banks, and roughly half what the government expects to spend on health this year.

All because the Reserve Bank and the Government are supposed to stay at arm’s length – a lightbulb moment somebody had in the mid 1980s because it seemed like a good idea at the time and which nobody appears brave enough to challenge. Why not?

 It’s time we did.

Since being nationalised in 1936 the Reserve Bank had existed quite happily as simply another government department doing its job – overseeing the financial system, providing the government and the country’s producer boards with a virtually interest free overdraft (which was great for our agricultural exports), and not contributing even more to the profits of the commercial banks by paying them interest on money in their settlement accounts (another silly idea from that lightbulb moment).

It’s time we wound the clock back for the future.

To when Michael Joseph Savage and John A Lee got stuck in to the task of building state houses, 5,000 in their first three years in government, financed by non-repayable no-interest Reserve Bank credit.

To when government departments were funded by government, not forced to borrow money on the open market, contributing to profits for fat cats.

To when the Reserve Bank acted to support government policy instead of against it.

Then the $204 billion borrowing debt and $4 billion annual interest bill the government is wracking up on the way to 2024 could be funded interest and debt free and taxpayers’ money could be spent instead on solving the child poverty crisis, providing free dental care, free urban public transport, better health care, or a multitude of other possibilities.

As Reserve Bank Governor, Adrian Orr, said in an interview with Bloomberg in April “Direct monetization, I know, has been heresy, taboo for a long time, but it’s only a long time in our lifetime.” “It’s not a mysterious issue. It’s just not how we’ve run business.” 

It’s an idea that has a growing tidal wave of support, including from former Finance Minister Michael Cullen, former Australian Treasurer, Paul Keating, BERL chief economist Ganesh Nana, and economist Shamubeel Eaqub.

It appears Social Credit might have been right all along.