New Zealand's response to the global financial crisis has raised fascinating questions about the way forward.
I have been a student of the New Zealand economy for more than 30 years. The present political and economic environment presents some fascinating and unique features. Here is a my top 10.
1. Mighty River Energy has recently announced returns of approximately 7 per cent for the Government. The Government is proposing to sell 49 per cent of this business in its partial privatisation. This is to avoid having to borrow at around 3.5 per cent which is the current yield on 10-year government bonds.
2. A key reason given for the partial privatisations and the desire for a budget surplus by 2014 is to avoid increasing government debt and the risk of a credit downgrade by the international ratings agencies. These are the same agencies that gave triple A ratings to sub-prime mortgage securities before the global financial crisis. These agencies also reduced the credit rating on US government debt last year. The effect was the US Government is still able to borrow at record low interest rates.
3. The Government is attempting to achieve a budget surplus during the worst global economic downturn since the Great Depression.
History shows this is not a wise move as the reduction in government spending further reduces total demand in the economy, creating more unemployment.
4. While the Government is trimming spending to balance its budget, the Reserve Bank is maintaining record low interest rates in an attempt to get the private sector to borrow more. It was massive private debt levels, here and abroad, that led to this mess in the first place. If the Reserve Bank is successful it is likely to further pump up private debt levels and house prices in New Zealand.
5. New Zealand has the sixth highest house prices in relation to incomes in the world, behind places such as Singapore, Hong Kong and Belgium. This is a great place to live but we could hardly be described as densely populated or opulent in our housing.
6. There is no consensus as to whether New Zealand had a debt-fuelled housing bubble before the global financial crisis. If it did, then there has been no real correction as has occurred in the United States, the United Kingdom and other countries. If the banks are starting to recommence their old mortgage lending practices they are operating in very dangerous territory.
7. The Government has shown that if things turn nasty again it is likely to guarantee the big lenders as it did in 2008 because a total collapse of the financial sector would be disastrous. This creates a situation that economists call moral hazard. Lenders are aware that there is a strong likelihood that if our economy and housing market did crash the Government would step in to protect them. This implicit back-up can encourage risky lending.
8. Banks operating in New Zealand are posting record profits at a time when our economy has languished at, or near, recession for more than four years. Their returns on owner's equity hover around 20 per cent.
9. Most economic observers would agree that we need to rebalance our economy from debt-driven consumption spending to export-led growth. A key stumbling block is our high exchange rate. The primary reason for our high exchange rate is our staunch monetary policy which relies on short-term interest rates as its primary tool to crush inflation. Despite our low interest rates they are still above most of our trading partners. Many other countries have abandoned inflation targeting since the crisis. Some have effectively resorted to printing money. For this reason, New Zealand is seen as a good place to park money, driving up our exchange rate. Yet a primary reason for crushing inflation in the first place was to ensure our exports were competitive on world markets.
10. Events such as the Rugby World Cup and the Christchurch rebuild are not pathways to sustainable economic growth. Nor are welfare reforms likely to make much difference. The key questions we should be asking are, what are the pathways to sustainable and inclusive economic growth and what are the roles of the private sector and government in this process?
Peter Lyons teaches economics at Saint Peters College in Epsom.By Peter Lyons