Infometrics

VSR: Very silly regulation?

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When discussing it’s new monetary policy Labour was keen to explain why they felt a change was necessary, and why a variable Kiwisaver contribution rate should be investigated.  However, to investigate such a policy it is important to ask some specific questions – this is what Gareth Kiernan did in this article (Infometrics link).

In announcing its new monetary policy proposals, Labour has shown an admirable ability to think outside the square. …. Unfortunately, there are a lot of problems with Labour’s idea and the assumptions behind it.

His list of 10 questions are:

  1. Should KiwiSaver be compulsory?
  2. Does New Zealand really have a savings problem?
  3. How good is Australia’s compulsory savings scheme for their economy?
  4. Do compulsory savings programmes actually increase savings anyway? 
  5. What effect do compulsory and limited-access savings have on the robustness of financing decisions?
  6. Is New Zealand’s permanent current account deficit really a problem?
  7. Are our ‘high’ interest rates really caused by our rigid monetary policy framework?
  8. How much of our mortgage interest payments go overseas?
  9. Does the export sector really need a lower exchange rate?
  10. What about compliance costs for businesses?

His answers to these questions give a case for why the VSR may not be good policy at all.  What are your thoughts?

 

 

 

Kirdan

Monetary policy 2.0?

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Labour wants to upgrade monetary policy, preserving inflation targeting but asking the Reserve Bank to reduce persistent external deficits. To help, the Reserve Bank might get to vary contributions to an enhanced Kiwisaver scheme and go a little further with macro-prudential policy. Getting kiwis to save more is probably a good thing. If successful, interest rates would be lower and ease the exchange rate a little. But the evidence-base is weak and there are many leaks since implementation and accountability frameworks are not clear. Better to leave the Reserve Bank to do what they do best – implementing flexible inflation targeting.

The problem as defined

Many commentators point out that New Zealand has high real interest rates and that the exchange rate is overvalued relative to an economy less reliant on borrowing from abroad (see below). That makes our exports less competitive and promotes consumption of imported goods over domestically manufactured goods.

The problem: high interest rates and an overvalued exchange rate

The problem: high interest rates and an overvalued exchange rate

 

Our persistent negative external balance – that nets our borrowing and imports from overseas against exports – largely reflects our savings choices. Of course, an external balance can also reflect imports of capital equipment for investment in the real economy but most likely reducing the external balance would reflect a useful rebalancing of economic conditions for New Zealand.
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Matt Nolan

Power prices: A rolling list of links

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It appears the people very much care about power prices, and that the organisation of the electricity industry is something people are discussing.  It is an interesting issue, but large chunks of it are outside my area of knowledge (even moreso than what I usually write about!).  Furthermore, unless we get a guest blogger in to write on the issue (email if you are keen) our current blogging line up isn’t going to cover this.

But we shouldn’t ignore it.  Here are some links I’ve spotted post EA Report – feel free to mention other links about the issue in the comments, and I’ll throw them up here.  [Our discussions pre-report can be found here, here, and here.  Also, neat post from 2009 I don’t feel I have anything to add to these at this point].

A set of three articles on Stuff with people arguing details about the Electricity Authority Report (here, here, and here)

Business NZ.

Fabians.

Gareth Morgan.

Wolak.

Note:  John Small has comments and links on earlier discussion here.

Matt Nolan

Housing shortage: When is a shortage not a shortage

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It is received wisdom that Auckland has had a housing “shortage” for a prolonged period of time due to insufficient supply.  However, on the face of it this is a bit strange as:

  1. Residential investment:  Yes building rates have been low during the past 7 years, but the value of residential investment in the prior 7 years was very high.  The “volume” was lower, but what does that mean (we’ll come back to it).
  2. Growth in rents have been low.  Low low low.

In this way many people have, justifiably, questioned the idea of a shortage.

However, there is one potential explanation that could match both these facts and still give us a “shortage” that can help to drive the high price for housing – a fundamental imbalance in the supply of “types” of housing.

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Matt Nolan

Immigration and monetary policy: Let’s be a bit careful

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Note:  I realise I have been writing about Labour’s policies and not other parties – I have been very busy, and only write about things when I get a chance.  If you want me to write about any specific party policy, email me, and I will try to have a go 🙂

Labour is talking about varying migrant visa approvals in a counter-cyclical fashion, as a way of helping out the RBNZ with monetary policy.  This bears some relations with stated thinking fro some members of the RBNZ [Update: Michael Reddell, the author of the paper, justifiably pointed out in the comments that the Labour type policy is not related to his work – and that my statement was unclear.  He is completely correct – his work and a counter-cyclical visa instrument are about different things, an important point to keep in mind!].  Now this isn’t about the level of migrants coming in – only the timing – so this isn’t a way of us shutting our borders.  I would like to keep the two issues separate in this instance, so we can think about the specific policy more clearly.

Furthermore, the focus here is very much on short term variation with regards to monetary policy – not a long term view of high interest rates and the real exchange rate.  This issue is much more contentious IMO, and deserves separate discussion.

Much younger (but far less charming) me, at the start of the blog, noted how inward migration boosts “demand” and “supply” in a monetary policy sense, so we need to consider our arguments carefully!  So the idea is that, when migrants first appear they have to set up in NZ and may not get integrated into the workforce straight away.  As a result, the first thing they do is “increase demand”.  The demand for housing, for building housing, for buying other non-tradable services pushes up the interest rate (although we also have to ask how they are getting the income to provide this demand – is it that they are bringing a capital inflow with them and this is the driver?).

As a result, lowering visa quotas when the economy is running hot and lifting visa quotas when the economy is cold could help to limit variability in interest rates right?  Well, not so fast:

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Matt Nolan

New Zealand’s bubble

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I know, I know, I’m very late to the party – while I was busily writing about factor shares and income inequality the big news in New Zealand was this discussion of how our housing market is a “bubble”!

A bunch of points have already been made about why the US to NZ comparison isn’t fair, our shortage of housing being key among them.  Shamubeel also did an excellent post last week noting how the framework for thinking about the issues wasn’t really there – and what was missing from each of the points raised.

However, there were a few things that didn’t get play that should have over the last couple of weeks.  As a result, and after conversations with a bunch of wonderful people who were interested in the issue, I thought I would do a blog post noting these points.  Here is what I said in the conversation:

Remember, New Zealand banks have already been stress tested on 30% house price declines – and found to still be solvent.

It would be fair to discuss risk if the conclusion was only a fall in house prices by itself.  But picking a gigantic recession for a small open economy, with a fragile global financial market, is virtually meaningless for planning purposes without a catalyst/narrative.  It sounds more like marketing than a real forecast.

We would need a situation with massive household bankruptcies for the NZ banking sector to struggle (loans aren’t nonrecourse).  To me that suggests our banks have strong power over consumers, and there are more important regulatory failings than banging on about bubbles.

Also, our external debt is mostly in NZD nowadays, with maturity of over 90 days.  Crisis happens, dollar drops, foreign investors have taken on that risk.  I find it surprising – but good for NZ.

The key points raised here:

  1. Unlike the US, NZ loans are not non-recourse.  People are still stuck with their mortgage if house prices fall.
  2. NZ banks have been stress tested on a large house price decline, and the banking system was still holding together.  We need to think about specific shocks to think about risk – the real fear is a massive drop in export prices, which leads to greater defaults in both agricultural and housing loans.
  3. Banks have changed their external funding significantly in recent years – with the maturity a lot longer and currency risk being shifted further towards overseas investors.  If a crisis strikes, this implies that the liquidity issues will be less severe, and the value of our gross debt will also drop (due to a lower currency) – a fortuitous situation!  These figures are all available on the RBNZ’s website if you want to check them out!

We aren’t like the US prior to their housing market imploding – we have our own sets of risks and concerns we need to think about.