Stop wagging your finger and start hiking

Alan Bollard. Photo/Mark Mitchell

Reserve Bank Governor Alan Bollard has developed a finely tuned style of finger wagging lately. He has wagged his fingers at so many people and in so many directions he risks looking like a man who just waves his hands around a lot and doesn't actually do much.

On Tuesday he wafted a digit quite firmly at consumers, telling them not to resume their bad habits of 'borrowing and spending' as soon as it looks like house prices might rise. A few weeks ago he was telling off  the banks for keeping their floating mortgage rates too high. A few weeks before that he tightened up the rules on how the banks funded their lending and pointed them in the direction of local term deposits as the best way to raise money.

So let's get this straight. This week he is telling consumers not to take advantage of low interest rates to borrow more. Earlier this month he was telling banks they needed to cut their floating mortgage rates to encourage consumers to borrow more. Last month he changed prudential liquidity policy to increase lending rates a bit (discouraging lending) and increasing term deposit rates a bit (encouraging saving). Earlier in June he held the Official Cash Rate at a record low of 2.5 per cent, which is designed to encourage lending and spending while discouraging savings.

So what is it Dr Bollard? Should we borrow less and spend less? Or should we borrow more and spend more? Or would you like us to save more and spend less? Or should we do everything at once? Why do you tell us to do one thing with your finger and then do another thing with your OCR?

This is the fundamental problem for Dr Bollard. He cut the OCR to a record low and then promised to keep it there until late next year. Then, surprise, surprise, the housing market rebounded and banks started lending again to home buyers and investors. Some banks are even back lending 90 per cent of the purchase price to some home owners.

Now he is rightly worried that New Zealand's consumers and banks appear to have learnt nothing and are hell bent on accelerating the debt-laden truck into a brick wall of a credit rating downgrade.

So why doesn't he do something about it?

Firstly, he should stop wagging his finger and start hiking interest rates. Consumers and banks respond to real signals, not press releases and speeches. The OCR is obscenely low and is doing just one thing: encouraging borrowing and spending, and discouraging savings.

The great irony, of course, is that a higher OCR is likely to push up the New Zealand dollar and further hamper any shift in the economy to the productive sector from the consumptive sector.

He is caught in a bind that can only be solved by one thing, which he appear to be hinting at in the part of the speech which wasn't highlighted in the press release. That one thing is a credit rating downgrade.

I suspect Dr Bollard wouldn't mind too much if our credit rating was downgraded and our currency collapsed, now that financial markets have stabilised and a complete credit freeze is unlikely.

"In an ideal world, exchange rates and the price of risk capital move to correct the vulnerabilities caused by unbalanced spending," Bollard said.

"What is needed is for the New Zealand dollar to be persistently weak over the coming years, to encourage the needed business investment to be export- oriented and supportive of improvement in New Zealand's external liability position," he said.

"Over coming quarters, it may be the case that the exchange rate will be "corrected" to weak levels if the financial markets reappraise its appropriate level in light of our imbalances relative to our trading partners, and the outlook for those imbalances given the fundamentals. This is much as the US dollar is being reappraised currently."

Bollard appears almost to be pleading for foreign investors to lose confidence in us. As they should.

"History shows that the financial markets cannot necessarily be relied upon to focus on New Zealand's case relative to other economies in a timely and finely-tuned way, and price the New Zealand dollar accordingly. All that can be hoped is that, in the next phase of recovery in financial market sentiment and return of risk-seeking, the markets will be more discriminating about New Zealand. In the meantime, the onus on us is even greater to shift domestic savings behaviour in the right direction."

So there we have it.

Alan Bollard is hoping foreign investors will discipline our consumers/children. He's tried wagging his finger and he won't pull out the big stick to rap our knuckles with higher interest rates. He hopes now the school inspector will come in give everyone a good thrashing while he sits watching.

He should stop hoping and wagging and start hiking.

 

 

Bernard Hickey

 

 

Picture: Alan Bollard. Photo/Mark Mitchell