Opinion: Inflation rate doesn't measure cost of cheap loans for banks

Peter Lyons

The global financial crisis ended with huge amounts of money being put into the market.

The recent data on foreign house buyers was never going to be particularly revelatory or relevant. It is not the real issue — the concern about Chinese hordes gobbling up Kiwi weatherboards was always something of a red herring.

We have learned little from the global financial crisis of 2008. The bankers largely shrugged off the bitter protests and got on with business as usual.

Housing inflation in recent years has not been a peculiar Kiwi phenomenum. Foreign buyers are definitely an influence but they are a symptom as much as a cause.

Property inflation is the direct legacy of the medicine that has been administered since the GFC to support the banks.

This medicine has allowed bankers to get on with their highly lucrative business of creating credit. But it has also led to global asset price inflation, particularly in property and shares.

Each country had a uniqueness in how it administered its GFC medicine to resuscitate its financial sector. If this action hadn't been taken the world could have experienced a Great Depression similar to the 1930s. But 10 years later the medicine is still being administered, and the patient has become grossly distorted.

Yet any long-term, meaningful reform of the global financial sector has been largely abandoned. It is business as usual for the bankers.

The Reserve Bank in New Zealand has a current lending rate of 1.75 per cent, but neither you nor I nor any other business in New Zealand can borrow at this rate. The only businesses that can actually borrow at this rate are the registered banks such as ANZ, ASB, BNZ and Westpac.

The question that should be asked is why banks have such a privileged position in our economy?

The startling answer is that the crucial function of central banks is to act as a lender of last resort to the commercial banks to ensure they don't collapse when they stuff up their lending.

Critics of the bank bailouts during the GFC predicted rampant consumer price inflation caused by trillions of newly created computer money. But this didn't happen because much of this new money has seeped into asset markets, particularly property and shares.
Consumer price inflation only measures increases in the price level of goods and services; it doesn't measure asset price inflation.

So New Zealand's official inflation rate has hovered around 1 per cent for several years, allowing the Reserve Bank to keep its lending rate to the banks at 1.75 per cent. Meanwhile, property prices and our sharemarket have rocketed during this period. But this is not measured as part of official inflation figures.

A deregulated financial sector is still dangerously out of control — and it has official backing but with minimal accountability.

Peter Lyons teaches economics at St Peter's College in Epsom, and is writing a text called The Economists' Secret Handbook.