This opinion piece is in response to this article.

Return to orthodoxy the last thing we need

30.07.21

 

As the Reserve Bank winds down its money creation programme (Quantitative Easing) some economists and commentators are calling for a return to orthodoxy – as if the economic regime that was being followed in the run up to 2020 was somehow delivering better results for the majority of people.

They either have short memories or simply don’t have anything better to offer.

It wasn’t.

A quick glance at annual reports from the Salvation Army, Monte Cecelia Housing Trust, Child Poverty Action Group and many others painted a dismal picture of growing inequality, increasing poverty, and rising homelessness.

None of that has improved since. It’s got worse, but it was going to under ‘orthodoxy’ anyway, the Covid 19 effects have simply amplified it.

Matthew Hooton is one of those commentators. I recall a candidates meeting last election where, as one of the guests, he smugly tried to trip me up with what he thought was a curly economic question. He lost.

He calls for a return to orthodoxy arguing that the “extraordinary success of the Reserve Bank Act 1989 in killing inflation means an entire generation have never experienced how evil it is”, going on to suggest that then governor Don Brash beat inflation in the early 1990s.

Since the whole world achieved that status, Brash can hardly be credited with being the slayer of the inflation dragon and nor can the Reserve Bank Act 1989.

The government owned Reserve Bank currently owns around 60% of the debt the government has incurred through borrowing. It has done that through a process known as Quantitative Easing. In layman’s language, digital money printing to buy that government debt off the commercial banks.

Because of the crazy money-go-round it’s used, it has cost taxpayers billions in premiums over and above the price of the actual debt. At least the interest payments taxpayers are funding on that 60% of government debt is now going to the Reserve Bank.

That interest will be funnelled back to the government, which owns the Reserve Bank, as profit for it to spend - instead of into the pockets of the overseas shareholders of the commercial banks (Bank of America and Chase Manhattan for example) that it would normally go to.

Why would anyone want to return to orthodoxy with its worsening inequality and with taxpayers subsidising the profits of those commercial banks – unless of course one had shares in the commercial banks or was an economist working for one.

Don’t forget the government has $40 billion that it’s already borrowed (which taxpayers are paying interest on) sitting in an account at the Reserve Bank – so it really doesn’t need to borrow more.

Perhaps it should send that back to the commercial banks that created it out of thin air in the first place, as they do with all money they lend, including for mortgages, overdrafts and businesses.

How much better for the country would it have been to follow the advice of the jointly prepared Treasury and Reserve Bank aide memoire the government received in May last year.

That report pointed out that it would have been much more efficient for the government to avail itself of ‘direct monetary financing’ – the Reserve Bank creating money (exactly what commercial banks do remember, when lending to borrowers) and putting it straight into an account for the government to spend.

That would have avoided the drain on taxpayer money being used to pay interest to commercial banks, and even the need to repay the sum borrowed.

After all, if the government is borrowing from its own bank, neither would be absolutely necessary.

Of course it could borrow from its own bank and to give the illusion of orthodoxy, pay interest and the original sum borrowed – effectively, as economist Ganesh Nana said, back to itself.

Either way the government would have billions to spend on hospitals, infrastructure like water and waste water, houses for those currently residing in motel rooms, and really alleviating poverty instead of giving lip service to doing so.

The Minister of Finance preferred to ignore that advice, largely because he wants to out-national National and establish himself as the new holder of the ‘rock star economy” title rather than doing those things which would benefit thousands of New Zealanders.

Falling into the trap of returning to orthodoxy won’t fix any of those issues. Orthodoxy hasn’t in the past and there is nothing to indicate it can or will in the future.

Returning to it would be like going back to the horse and cart, rather than revelling in the freedom that the new unorthodox internal combustion engine conferred on our forbearers of the early 20th century and eventually a transport fleet of EV’s or hydrogen powered vehicles on those living in the 21st.

I don’t know what those commentators drive, but I’ll bet they wouldn’t swap it for a horse and cart.