The Reserve Bank warned this week that house-price inflation could spill over into wider inflation, and endanger the stability of the banking system. It also said the over-valued New Zealand dollar was hitting exporters and jobs.
And then it did nothing.
All it did was talk.
One fund manager jokingly referred to its statement as "open mouth operations".
Financial markets have watched the Reserve Bank's empty warnings for a decade. They then chuckled and pushed the dollar up by a full cent to about US84c. That day another exporter shut its doors, putting another 192 people out of work.
Looking back at the past decade of Reserve Bank actions is sobering. In 2002 mortgage-lending growth and house-price inflation were relatively modest, as was the dollar at just over US40c. The Official Cash Rate was 5.75 per cent.
Then Governor Alan Bollard cut interest rates in April 2003 and the housing market began to stir. A burst of competition between banks and a fall in fixed mortgage rates, powered by cheap foreign borrowing, started a fire under the housing market.
The foreign borrowing also pushed up the New Zealand dollar. By 2004 the Reserve Bank began to warn about the high currency and was noticing surprising strength in house prices. It put up interest rates, which simply increased pressure on the currency.
By 2005 and into 2006, the Reserve Bank found itself painted into a corner by its single inflation target and its single tool of the OCR. It even started investigating the use of supplementary stabilisation instruments, including loan-to-value ratio (LVR) limits. Eventually it decided not to adopt them. While it stuck to the orthodoxy of the Reserve Bank Act, the housing market and currency launched into the stratosphere.
Fast-forward to 2013 and it is doing the same thing again under its strict new governor, Graeme Wheeler. Faced with a surge in bank competition, cheaper mortgages, faster borrowing and a blast higher in house prices in the second half of last year, the Reserve Bank stuck to the script.
It is now looking at other "macro-prudential tools" to help it break free of its catch-22. It's an echo of the hunt for supplementary stabilisation instruments, which the Reserve Bank appears reluctant to try. A paper to the board last May even pointed to an IMF study showing countries with LVR limits had lower house-price inflation, and such a tool would be a useful add-on to the OCR.
Yet still the Reserve Bank dithers, saying last week it would put out a discussion paper by the end of March. Wheeler said in December that even if he had these extra tools he would not use them, because house-price inflation and lending growth weren't strong enough yet.
Now it's February and house-price inflation is at 10 per cent, and lending growth has doubled inside six months.
Banks are regularly offering 95 per cent mortgages, giving away thousands of dollars of "cash back". The NZ dollar is near record highs. Unemployment is at 15-year highs.
The current account deficit is headed for 7 per cent of gross domestic product. Yet still the orthodoxy reigns.
As Karl Marx said: "History repeats itself, first as tragedy, second as farce."
This policy trainwreck is nearing the farce stage.By Bernard Hickey