Sean Keane, Managing director, Triple T Consulting.
One of the most remarkable things about the post-Lehman environment is the swapping of traditional roles by some of the key economic actors. For some their assigned parts have not only been recast but have mutated into the very opposite of what they were seven years ago.
The market trauma delivered by the Lehman failure changed behaviours in the public and private sector. Private sector changes were driven by commercial and economic logic. The public sector changes have been more gradual and less scripted. They have however resulted in politicians donning the unfamiliar mantle of fiscal responsibility while central bankers have become the market's party animals.
Getting the central banks to do all the heavy lifting is asking too much of them. Governments fear abandonment by bond buyers, and they spend a good deal of time carefully explaining debt management and balanced budget policies to keep investors happy. Every Finance Minister's nightmare is the one Greece now finds itself in, where the government has no access to funding. Greek leaders are left with no choice but to cede economic sovereignty to Brussels and Berlin for a credit lifeline.
Old approaches to spending and borrowing simply don't work in this environment. Markets are quicker to punish weak fiscal discipline and broken promises, and governments are forced to honour the economic and the fiscal undertakings they have made.
Finance Ministers increasingly reject Keynesian expansion plans and have snapped shut the public purse. Instead they expect their central banks to do more of the heavy economic lifting than at any time in the past.
The central bank response has been to ease interest rates, and to keep easing until they eventually reach zero. In the case of the European Central Bank (ECB) they have gone even further and pushed deposit rates into negative territory. Those who wish to deposit money with the bank have to pay the ECB to hold their cash.
Unfortunately record low rates have not been as successful as expected in boosting growth and employment, and the global economy has continued to languish. As a consequence worried-looking G20 Finance Ministers have encouraged their central bankers to become ever more creative in seeking ways to lift economic activity.
Central banks now buy the bonds issued by their own governments in enormous size with the objective of driving down long term interest rates and loosening financial conditions. Since 2008 central bank balance sheets have increased by more than $8.5 trillion dollars, most of that number held in government debt.
These days rather than removing the punchbowl, central banks are increasingly expected by their governments to organise the party, spike the drinks and force attendees to partake to excess.
The buying has not, however, been restricted to such high quality assets. Under the broad description of "Quantitative Easing", central banks in some countries are now in the business of buying semi-government debt, private sector credit, and even listed forms of equity. The march down the credit curve has been ongoing and pervasive and has taken central banks far beyond their usual operating parameters.
We are fortunate in our small corner of the world that such drastic actions have not become necessary here. Our certainty that such things won't happen is however starting to weaken, as we watch Australia cut its official cash rate to a historically low 2.00 per cent.
Australia's Reserve Bank finds itself in the same position as others in that its government has outsourced the job of economic growth to the central bank, while withdrawing the assistance that fiscal policy really should be delivering at this point in the cycle.
The RBA eased last week despite having significant reservations about the effectiveness of lowering borrowing costs any further. The RBA Governor has also expressed concerns about the negative impact that every interest rate cut has on savers -- especially those who rely on fixed income deposits for their incomes.
The spillover to New Zealand from this is channelled via the currency markets. As Australia lowers its rates the NZD steadily appreciates versus the AUD, and the two currencies become almost equally valued. As good as this is for Kiwi morale, it's bad for New Zealand exporters and it worsens our national trade deficit.
The RBNZ doesn't operate in a vacuum. If the rest of the world is lowering rates then NZ finds it difficult to resist, unless we are willing to accept a stronger exchange rate. Governor Wheeler has been telling us for many months that our dollar is "unsustainably" and "unjustifiably" high, so clearly that's not something the bank will accept. The RBNZ is therefore being pushed by overseas events towards easing once again, despite the likely impact it will have on domestic house prices and the local equity market.
Swapping of roles is much to the liking, and the benefit, of government ministers. The modern financial framework was built around the idea that independent central banks were necessary to act in the best long-term interests of the economy by balancing the needs and desires of both savers and spenders. At different times one or the other group would be reined in by the central bank, often in response to fiscal expansions led by aspirational new governments.
These days rather than removing the punchbowl, central banks are increasingly expected by their governments to organise the party, spike the drinks and force attendees to partake to excess. Central bankers have become the ones wearing the paper hats and topping up the drinks, while Government ministers are quietly turning down the music and talking sombrely of fiscal discipline.
This transformation of positions is considerably more difficult for the central bankers than the politicians to get comfortable with.
The politicians benefit from the stimulus delivered by the central bank policy actions, but also from the ability to distance themselves from the actions that are being taken. This change is much to the liking of the politicians, though far less to that of the central bankers.
• Sean Keane is Managing Director, Triple T Consulting.
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