Brash defends Reserve Bank Act

December 7th, 2008 at 5:13 pm by David Farrar

Don Brash writes an op-ed in response to Finlay MacDonald’s call for politicians, not the , to be in charge of determining interest rates. Brash responds:

He then goes on to argue that “plenty of people” see this act “as a relic of failed economic dogma, well past its due date for reform”, although he mentions only two people by name – Jim Anderton and that well-known economist Winston Peters.

Need more be said.

He links the Reserve Bank Act and similar legislation elsewhere to the current financial crisis.

Whatever the cause of the current crisis, nobody that I know of seriously suggests it was caused by our Reserve Bank, or other central banks, focusing on keeping inflation under control by keeping interest rates too high. Indeed, there are many observers who believe that the trigger for the current crisis was interest rates in the US being kept too low for too long, with the result that banks were encouraged to lend to a large number of borrowers of very marginal creditworthiness.

Excellent point.

First, the central banks of virtually all developed countries – certainly the United States, the United Kingdom, Canada, Australia, and the countries of the European Monetary Union – have removed monetary policy from the day-to-day influence of politicians. Why? Because experience over decades has shown that politicians have a tendency to manipulate monetary policy for their own political advantage, to the economic cost of their countries.

I can’t comprehend why anyone would want Rob Muldoon setting interest rates again.

Fourth, nothing about New Zealand’s experience since we reached price stability in 1991 suggests that focusing monetary policy on keeping average prices stable damages growth or employment. We’ve had some of the best growth in our history over the past 16 years, and, until recently, we had the lowest level of unemployment in the developed world.

Exactly. Emperical evidence is overwhelming that you can have low unemployment with monetarist policies. Likewise overwhelming evidence that you can eliminate protectionist trade barriers and have low unemployment.

Fifth, while dropping interest rates can stimulate economic activity in the short-term, all countries have learnt from bitter experience that, in the longer-term, using interest rates to try to get faster economic growth results only in damage to economic growth, as inflation makes it harder to interpret the price signals coming from the market. Sustainable economic growth ultimately depends on increasing output per person employed in other words, on productivity and tolerating higher inflation does nothing to achieve that goal. If it did, Zimbabwe (with high inflation) would be enjoying fantastic economic growth and high living standards, and the United States (with low inflation) would have poor growth and low living standards.

Whatever the problem is, high inflation is never the answer.

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133 Responses to “Brash defends Reserve Bank Act”

  1. Grant Michael McKenna (1,160 comments) says:

    Finlay MacDonald’s mind is made up. Don’t confuse him with the facts.

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  2. Rex Widerstrom (5,354 comments) says:

    Fifth, while dropping interest rates can stimulate economic activity in the short-term, all countries have learnt from bitter experience that, in the longer-term, using interest rates to try to get faster economic growth results only in damage to economic growth

    Oh really? Let’s look at the Reserve Bank of Australia’s performance (just to keep this theoretical, as Brash is trying to do). Up until as recently as March this year they were whacking mortgage payers with continuous .25 basis point rises in the cash rate. Between May 2002 and March 2008 the RBA raised the rate from 4.50 to a crippling 7.25.

    Either these Reserve Banking geniuses were entirely unaware of the calamity about to befall the world despite “interest rates in the US being kept too low for too long” or they were aware of the problem but had no understanding of the results of their constant rate rises, which included squeezing first home buyers out of the market in favour of speculative investors so that rents are now unaffordable and thousands are homeless.

    Suddenly, between September 2008 and December 2008 these staid, calm central bankers realised they’d screwed it all up and, in the space of just four months, slashed the official cash rate back down to 4.25 percent. You could almost hear the cries of “Oh shit, oh shit, oh shit…” coming from the RBA boardroom as they switched their heavy foot from brake to accelerator. But alas they were way too late to prevent the damage they’ve done to the economy.

    Now Australia is being faced with having to consider cutting back its superannuation scheme at a time when the value of investments in those schemes have sunk to record lows. So not only have borrowers suffered under central bank direction of the economy, so have investors – the majority of the population – as the value of their compulsory super has been wiped out.

    I’m not, of course, placing the blame for all this at the feet of the RBA. In fact quite the opposite. There’s little or nothing they could have done to prevent the underlying causes, but that’s the point – and meanwhile their meddling only made it worse.

    Giving one economic lever to the Reserve Bank and leaving others in the hands of politicians has several effects:
    – It means the two can sometimes pull against one another.
    – It denies politicians the right they should have – they were elected, after all – to make decisions and be able to implement them as they see fit, without interference (a fairly fundamental tenet of democracy, I would have thought).
    – It puts a group of unaccountable, unelected bankers in a role which has the potential to wreck the economy if handled wrongly, yet we have no say in their appointment (how many people can evern name the RBNZ board? (Without looking it up)).

    Politicians might get it wrong, but at least they’re susceptible to public opinion during their term and able to be sacked after three years. Sorry, but I’m with Winston on this one.

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  3. Redbaiter (13,197 comments) says:

    It cannot be denied that reserve bank anti-inflation policies were the enablers of a consumer blowout that was under pinned by overpowering government interference in the market. Government has its finger in every damn pie- a budget of $70 billion, state owned enterprises, massive taxation and redistribution, huge departmental budgets with much of the expenditure in those budgets going into totally unproductive sectors of the economy, and if the Reserve Bank had not acted in co-operation with the ideology of big government, by raising interest rates to combat the natural inflationary pressures generated by Klark/ Kullens policies, we would have been much closer to reality when the whole damn house of cards collapsed, and therefore with a lot less distance to fall. Or the collapse may not even have eventuated.

    “Whatever the problem is, high inflation is never the answer.”

    The answer is commercial reality and we deny that truth, with a Reserve bank or whatever, at our eternal peril. Government’s role in any country’s economy should be limited by a constitution to the absolute minimum. How can it ever work when (for example) the whole of the Klark government’s economic policy is largely focused on re-election rather than sound economic principles? Its all just complete baloney.

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  4. pushmepullu (686 comments) says:

    I would be happy with John Key setting the interest rate.

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  5. Redbaiter (13,197 comments) says:

    “Politicians might get it wrong, but at least they’re susceptible to public opinion during their term and able to be sacked after three years.”

    ..and rather than being a point for your argument its in reality the opposite. Politicians need to kept away from the reins of economic power for the very reason that their obsession with being elected/ re-elected will cause them to replace reason with appeal to the masses either by buying their votes or falsely promising them Nirvana. Governments should never be in a position to make either offer.

    “Sorry, but I’m with Winston on this one.”

    Well there you damn well go then.

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  6. Rex Widerstrom (5,354 comments) says:

    Redbaiter, two things:

    – Being a self-regarding hypocritical crooked dissembler doesn’t mean Winston is wrong in everything he says or believes.

    – You think giving control of monetary policy to the Reserve Bank stops politicians “appealing to the masses either by buying their votes or falsely promising them Nirvana”?!

    Yes, politicians are venal vote-buying cretins. But they’re elected, accountable cretins. The central banks have proved – by their belated and inept handling of this crisis (the Federal Reserve isn’t exactly blameless, remember) that they too are cretins. But they’re unelected and unaccountable.

    Not saying the politicians would necessarily have done better (though I don’t see how they could have done worse), just pointing out that at least they’d be answerable to the public for their ineptitude.

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  7. Kimble (4,439 comments) says:

    “which included squeezing first home buyers out of the market in favour of speculative investors so that rents are now unaffordable and thousands are homeless.”

    That doesnt make much sense. Higher interest rates DISCOURAGE borrowing to invest in property more than they discourage borrowing to buy a house to live in. Genuine home buyers would substituting rent with interest payments. Investors wont be doing the same.

    “It puts a group of unaccountable, unelected bankers in a role which has the potential to wreck the economy if handled wrongly, ”

    No, it puts people who don’t have anything to gain by meddling in the role. Can you IMAGINE what would happen if Labour politicians got to set the cash rate? It would never go up! It would come down by 1 percent every election year!

    The Australian economy was over heating. Inflation was getting high enough to be troubling. Interest rates of 7.5% are hardly crippling.

    Rex, for you to ever win your case against a central bank, you need to argue that inflation isnt a problem; and I dont see how any rational adult can still be making that claim.

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  8. Redbaiter (13,197 comments) says:

    Two things for then Rex-

    1) My view is that we should not have a reserve bank, but if we’re going to have one, it should be independent of government.

    2) The perceived need for a reserve bank is only a function of the delusion that governments can control economies. They can’t. They can control them as well as you can bail water out of a boat with a sieve. If economies can be controlled by government, why is the recession so universal??

    The economic downturn we’re experiencing or about to experience is an outcome of big government socialism, reserve banks, massive budgets and many other attempts by politicians and bureaucrats to interfere in the free market. It is not a failure of capitalism as the lying left propagandists would have you believe, it is a failure of Keynesian socialism, and we’ll go on having such events as long as so many of us think that government is the answer to every problem in our lives, including any economic problems we might have.

    I say it again- commercial reality is the only answer. Let the economy flow. Cut government back to the bare bones. We do not need politicians shaping our economy or our lives. You might Rex. I damn well don’t.

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  9. Rex Widerstrom (5,354 comments) says:

    Redbaiter – actually I’d be happy with your suggestion also. Happier, even. My suggestion above was framed within the polticial reality we have at present… I just don’t think any politician is brave enough to say “do away with the Reserve Bank altogether, let the market set the rates”.

    Hell, I don’t see why not. Why should interest rates require the control of some faceless bunch of know-it-alls in a Reserve Bank boardroom while exchange rates are set by the market?!

    My suggestion that politicians take it back is a compromise which would at least force them to respond to a variety of market signals and not purely inflation. But your concept takes that to the fullest extent.

    So we’re actually in agreement. I just don’t see your suggestion ever happening, but I’d be elated if it came to pass.

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  10. Kimble (4,439 comments) says:

    “The perceived need for a reserve bank is only a function of the delusion that governments can control economies.”

    So the problem in Zimbabwe has been caused by what, if not by bad government?

    Either way, the reserve bank isnt there to control the economy. It is there as a counteracting influence.

    The “free market” isnt going to stay free without government involvement of some sort.

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  11. Redbaiter (13,197 comments) says:

    “The “free market” isnt going to stay free without government involvement of some sort.”

    ..and there you have it folks, that thin end of the wedge that the left have used so successfully to bring us to where we are today..

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  12. Kimble (4,439 comments) says:

    “Why should interest rates require the control of some faceless bunch of know-it-alls in a Reserve Bank boardroom while exchange rates are set by the market?”

    Where would the market have interest rates be right now? Through to damned roof, that’s where. No one is willing to take risk. Go have a look at credit spreads, they are at all time highs. Without official rate cuts interest rates would be crippling.

    What would cause a turnaround? What would get people lending at lower, more reasonable rates again? How long would that take? Without the reserve banks, recessions would be deeper and last longer.

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  13. Rex Widerstrom (5,354 comments) says:

    Kimble says:

    That doesnt make much sense. Higher interest rates DISCOURAGE borrowing to invest in property more than they discourage borrowing to buy a house to live in. Genuine home buyers would substituting rent with interest payments. Investors wont be doing the same.

    In a market short of housing – as Australia is – investors are able to make a profit from investment properties (i.e. they’re not, in themselves, negatively geared). The TV and newspapers were full of stories of people who’d made a mint in the mines, “retired” in their late 20s and started buying investment properties. They owned dozens, some as many as 40 or 50, and were living, and living exceptionally well, off the income.

    They were also buying the fixer-uppers that were traditionally the preserve of first home buyers, renovating them, and selling them to other cashed-up buyers. As a result, commentators were predicting that the current generation of young Australians might never own their own home. For them, the crash (and the RBA’s belated wake-up call) has been something of a relief – though of course now they may not have a job to meet the lower mortgage payments. And of course the banks are refusing to pass on the entire rate cut.

    …for you to ever win your case against a central bank, you need to argue that inflation isnt a problem; and I dont see how any rational adult can still be making that claim.

    Of course it’s a problem. However it’s not the only problem and there are times when it’s appropriate to let it go above or below a narrow band. Like Redbaiter, I don’t think an aritificial mechanism like a central bank is an effective way of managing a small part of economic policy. Either government controls it all, or the market controls itself… but leaving it in the hands of some unelected board members?

    I wonder if those who are cheerleading the RBNZ know who’s on the board and that it includes mostly academics (who are rarely highly spoken of around these parts) and even Marilyn Waring. Nothing against any of these people personally, but they’re not the Oracles folks, they’re just a bunch of political appointments – like, say, Mike Williams.

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  14. Kimble (4,439 comments) says:

    I am not left wing.

    Government is vital for setting the ground rules for the market. What is and isnt fair behaviour. Protection from fraud. The establishment of a monetary standard. These are all vital things.

    Without property rights the modern market cannot function.

    A market without any restrictions would not prosper.

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  15. Kimble (4,439 comments) says:

    “As a result, commentators were predicting that the current generation of young Australians might never own their own home.”

    And that has nothing to do with interest rates being cripplingly high at 7.5 percent.

    And you havent addressed what I said, which was perfectly logical. Home buyers can substitute the rent they would have paid for the interest payments, investors cant. So home buyers arent as affected by higher interest rates than investors.

    “However it’s not the only problem and there are times when it’s appropriate to let it go above or below a narrow band.”

    “Let it go above” the band? And then what? What do you gain by doing that? Average price increases? Whats the point?

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  16. Redbaiter (13,197 comments) says:

    “I am not left wing. Government is vital for setting the ground rules for the market. ”

    Well, I’m not bashing my head against a brick wall of ignorance so thick it can produce a self contradictory statement such as that without knowing. You’re like so many left wingers. So immersed in a common delusion you cannot see yourself for what you really are. Believe what you like Mr. Kimble. (I never brought your one armed man story either.)

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  17. Kimble (4,439 comments) says:

    So property rights ARENT important in a properly functioning market?

    Do you know what property rights are?

    Do you know what a market is?

    If a person does not have confidence that the person selling them a good has the right to sell them that good then they arent likely to buy it, are they?

    Try and argue AGAINST property rights at kiwiblog, RB, I dare you.

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  18. Kimble (4,439 comments) says:

    Anyone that argues either for 0% or 100% government involvement in the market are equally delusional.

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  19. Rex Widerstrom (5,354 comments) says:

    Kimble asserts:

    Home buyers can substitute the rent they would have paid for the interest payments, investors cant. So home buyers arent as affected by higher interest rates than investors.

    No, homebuyers meet increased mortgage payments from a fixed income. First home buyers, in particular, are quite often young and on low(er) incomes, perhaps with young children, or at least wanting to have them. They don’t have a lot of excess income on which to draw when rates go up.

    Investment property owners, however, in a housing shortage (and that’s the all-important qualifier) just keep raising the rent to secure their margins. So in the last two years my rent, for instance, has risen by 30 percent. If I didn’t like it I could go join the many thousands of homeless as someone working in the mines would be only too happy to step in and take it over (they need somewhere to sleep in the “fly out” part of their FIFO work, and somewhere to garage the sports car).

    Such is the shortage that would-be renters were engaging in “auctions” at property viewings, offering up-front payments to secure the lease and offering to pay in excess of the rental being asked for. In that kind of a market, investment property owners could charge whatever they liked, and have done.

    And the RBA sat and twiddled its thumbs…

    Of course interest rates are by no means the only answer to this situation (there’s a raft of others, including land artificially locked up by government) but that’s my point – having one lever in the hands of the central bank, others in the hands of government and others (such as the exchange rate) controlled by the market just leads to a hodge-podge of contradictory actions and no real direction. I’d prefer Redbaiter’s idea of no central bank, or I’d reluctantly accept it returning to it’s pre-MPA role, but what we have now is the worst of both worlds.

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  20. Mike Readman (363 comments) says:

    “Whatever the problem is, high inflation is never the answer.”

    I completely disagree. Just look at the Middle East. High inflation plus high growth. I think high inflation is a good thing, just not runaway inflation.

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  21. Rod (180 comments) says:

    Oh dear, young fellas wanting to go through the hard way to learn the lessons of the past yet again … why not just make it easy on yourselves and learn the lessons of the past, and put your effort into improving productivity, attracting investment in businesses for economic growth (not lifestyle assets like housing and the junk that loads The Warehouse) and raising our position relative to other countries.

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  22. Rex Widerstrom (5,354 comments) says:

    I dunno… *sigh*. The Titanic’s sinking and all people can think of doing is clinging to the structure already in place (i.e. the hull) and trusting in the people who steered us into the iceberg – or at least didn’t see the thing looming out of the mist in time – to steer us out of danger.

    I’m not 100% certain that Redbaiter’s theory – that having no central bank and treating interest rates the way we do exchange rates – is foolproof but I do think we need to have a serious re-think about the effectiveness of the mechanisms we have in place now – and the MPA is a significant example.

    But by all means be free with the negative karma and I’ll see you all on the bottom of the ocean. I’ll bet the Reserve Bank board all have well-inflated life rafts though.

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  23. glubbster (344 comments) says:

    I’m with Kimble on this one. Rex, Readman, if you fellas have not yet learnt the lessons of the past ie Muldoonism and what that did to our contry than you are ignorant. Period. I’ll include Redbaiter in this you are a libertarian on economics aren’t you (no better than socialism). Go on to an economics blog, go read the fundamental principles of economics. Why we need a free market with regulation in place set by the Govt. Why we need an independent RB. Our RB is one of the best in the world. Politicians are not specialists in monetary policy, just like they are not specialists in justice (ie the role of judges re evidence and the law). Leave it to the pros. Politicians can do a number of things to stimulate the economy ie spending and tax cuts. Putting interest rates and currency rates in politicians hands is madness.
    Rex, the economy was never Winston’s strong point. In fact he did not have a clue. His views were all populism and simply hysteria.

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  24. glubbster (344 comments) says:

    Rex I dont think you understand what is happening at present. This crisis is driven overseas. There is not much our RB or our politicians can do now (despite how competent Key and his Cabinet are). The economic cycle goes up and down – get used to it as this will not be the last time it happens every decade. NZ will not fully recover from this for another 18 months to 2 years. Had Labour protected us from this economic storm, the effect would have been less severe. Rising interest rates was not the problem! Just as lowering interest rates is not going to suddenly get NZ back on track. The key current issue is the availability of credit rather than the cost of it. Its a worldwide problem. Lets get realistic. NZ is really an economic follower. We are an economic boom taker and an economic crisis taker. We take from Asia, from the US..do you see my point? We are small fish.

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  25. glubbster (344 comments) says:

    Productivity is a key focus. Building credible infrastructure such as fibre broadband, electricity generation and good new roads (not buying a train set) while drive productivity growth.

    Also good and wise regulation is important. A good example is in 2004 when Key realised the potential problems within the finance industry. He did not want to alarm anyone and lead a rush to the market so he privately told Labour in secret. They did nothing (lazy economically-illiterate socialists). Libertarians would have done nothing (like Redbaiter and other “true” idealogues). By not regulating the industry in time, many people lost their life savings.

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  26. glubbster (344 comments) says:

    will not while sorry (edit)

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  27. Redbaiter (13,197 comments) says:

    The Reserve bank even in an independent role still only acts as an enabler and a buffer while political stooges make the real decisons. Decisions that are in most cases not made on the basis of sound fiscal management but are only short term solutions designed to please the largely financially ignorant masses whose votes those politicians lust after.

    As long as people believe it to be a good idea to put most of what they personally earn and what companies earn and what the country earns into the hands of power seeking charlatans like Klark and Kullen, we’ll continue to suffer the pain of economic system collapse. The very idea that such people can control the economy to the overall advantage of every NZ citizen is logically flawed, and if one doubts the logic, then today the actual outcomes are there in their negativity for all to see.

    If Peter grows an apple, and sells it to Paul, there’s no need for any third party. They’re may be a perceived need if Keynesian socialists can make inroads into people’s thinking through fear mongering and necromancy, but there is no need in reality.

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  28. AG (1,827 comments) says:

    “As long as people believe it to be a good idea to put most of what they personally earn and what companies earn and what the country earns into the hands of power seeking charlatans like Klark and Kullen, we’ll continue to suffer the pain of economic system collapse.”

    Ummm … you DO know there has been an election, don’t you? And that John Key is now PM, and Bill English is Minister of Finance? And that banging on about Helen Clark and Michael Cullen makes you sound like an obsessive stalker who secretly wants to be loved, but just can’t get the object of their affection to notice them?

    You’ll need to come up with new forms of insult for the governing politicians. What about Qey and Unglish? Sounds sort of middle eastern/foreignish …

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  29. dime (9,972 comments) says:

    yea move on dude!

    It’s ok for Labour to talk about all the horrible things National did in the early 90’s.. but its NOT OK to talk about the government we had.. 2 months ago..

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  30. glubbster (344 comments) says:

    It is very simplistic to looks at things with Peter & Paul examples. But I can play that game too. What if Peter is s rotten man and sells good or service [x] to Paul. What is Paul is an old man who is ripped off by Peter. Peter then liquidates his company and goes overseas. Paul is left with a good or service worth nothing which he paid too much for to start with. Paul loses most of his life savings as a result. Peter has not committed any obvious crime here. This example highlights the need for regulation. The finance companies situation is the reality you forget RB.
    The RB is independent just like the judiciary is. Alan Bollard is not a Labour stooge. I prefer Brash but still respect Bollard. I think Brash knows a little bit more than you RB about economics so I will trust his judgment on the RB over yours!

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  31. AG (1,827 comments) says:

    “It’s ok for Labour to talk about all the horrible things National did in the early 90’s.. but its NOT OK to talk about the government we had.. 2 months ago..”

    No – Labour sounded increasingly stupid and out of touch when they did this.

    RB’s problem is he writes AS IF Labour were still the government. It might have been more fun for him when this was so, but wishing something true don’t make it so.

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  32. dime (9,972 comments) says:

    Maybe you underestimate the hatred people had for that government. Do you expect a victim of a crime to just get over it and never speak of it again?

    whats actually wrong with this statement?

    “As long as people believe it to be a good idea to put most of what they personally earn and what companies earn and what the country earns into the hands of power seeking charlatans like Klark and Kullen, we’ll continue to suffer the pain of economic system collapse.”

    if i said

    “As long as people continue to ignore their beliefs and follow leaders like Adolf Hitler, the world will continie to suffer”

    Get over it Dime, hes not in government? lol

    Are we not meant to learn from history? Arent you a teacher?

    I know it has begun already, the left realising they have to wipe the publics memory of the last govt, but it aint gonna happen for a while!

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  33. AG (1,827 comments) says:

    Dime

    It’s exactly this sort of grievance, victim mentality that is holding the country back.

    What’s “wrong” with RB’s statement that you quote is that it ignores its obvious implications:
    (1) JK and BE are “power seeking charlatans like Klark and Kullen” … in which case we need new insults (hence Que and Unglish);
    (2) JK and BE are not “power seeking charlatans like Klark and Kullen”, hence people no longer believe it is a good idea to put their money into the hands of such persons, and so the “pain of economic system collapse” has been avoided – hence the whole post is a hypothetical “what would happen if things hadn’t changed … but they have … but I wish they hadn’t ’cause I liked ripping on Labour so much … oh happy days, where have you gone???”

    As for the Hitler analogy – you really think Labour was like the Nazis? Perspective?

    Oh … and not a teacher. Always happy to learn at the feet of a master, though.

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  34. expat (4,050 comments) says:

    Mike Moore notes in his NZ Herald article that he suspects Labour lost support big time in the immigrant space as they were sick of seeing indigenous bludgers (of all races and religions) getting something for nothing from Labour while they slogged their arses off bettering their families futures.

    http://www.nzherald.co.nz/nz-election-2008/news/article.cfm?c_id=1501799&objectid=10546758&pnum=0

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  35. Redbaiter (13,197 comments) says:

    “But I can play that game too. What if Peter is s rotten man and sells good or service [x] to Paul. What is Paul is an old man who is ripped off by Peter.”

    But I’m not playing any game, I’m telling it like it is. Just as I suggested, self interested third parties come along and through fear mongering and other scams attempt to insert themselves into the transaction. For a slice of the action of course.

    Klark and Kullen will not prevent Peter from selling rotten apples or Paul from buying them. That duty belongs to something else. That something is called personal responsibility, (caveat emptor) and the more you shield people from reality the less capable they are of dealing with it. The perceived need for a third party to monitor transactions is just the thin end of the wedge of big interfering government. It generates its own need, but the initial premise for the need does not in reality exist. “Old men” have friends and sons and daughters. Leave people the fuck alone why can’t you?

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  36. Kimble (4,439 comments) says:

    “No, homebuyers meet increased mortgage payments from a fixed income. First home buyers, in particular, are quite often young and on low(er) incomes, perhaps with young children, or at least wanting to have them. They don’t have a lot of excess income on which to draw when rates go up.”

    True, but in your very next sentence you say that rents go up with interest rates, so the substitution effect still holds.

    “Such is the shortage that would-be renters were engaging in “auctions” at property viewings, offering up-front payments to secure the lease and offering to pay in excess of the rental being asked for. In that kind of a market, investment property owners could charge whatever they liked, and have done.

    And the RBA sat and twiddled its thumbs…”

    Your thinking is muddled. On the one hand you say that the housing stock was being scooped up by investors who would turn around and rent the property. And then on the other hand you would say that there was a shortage of rental properties.

    The problem you identify here is a housing shortage which has little to do with the level the RBA sets for interest rates.

    Lower interest rate environments favour property speculators.

    “Why should interest rates require the control of some faceless bunch of know-it-alls in a Reserve Bank boardroom while exchange rates are set by the market?”

    Where would the market have interest rates be right now? Through to damned roof, that’s where. No one is willing to take risk. Go have a look at credit spreads, they are at all time highs. Without official rate cuts interest rates would be crippling, and private investment would be obliterated.

    What would get people lending at lower, more reasonable rates again? How long would it take for investment to recover? What would cause a turnaround? How long would that take?

    History has shown the answer.

    Without the reserve banks, recessions would be deeper and last longer.

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  37. PhilBest (5,121 comments) says:

    A few points:

    Finlay MacDonald is an examplar of everything that is wrong with our MSM.

    Rex Widerstrom, the changes in Rentals have spent the last 8 years tracking way below the increases in house prices. This disparity is one of the signs that house prices have gone into an unsustainable bubble.

    Have you heard of Rodney Dickens? One of his last essays was on this subject.

    The underlying “problem” all over the Western world, is huge inbound flows of investment money from Japan, (particularly in NZ’s case), Saudi Arabia, China……(in the USA).

    Our Reserve Bank setting interest rates so high for years, resulted in NZ attracting much more than its fair share of this investment money. It is this investment money that has allowed for huge debt to be run up by NZ households in particular. Although by international standards our interest rates are “high”, NZ has been so hardened to much higher rates in past decades, that we have still had a maniacal borrow-and-speculate bubble in housing.

    Kimble:

    “which included squeezing first home buyers out of the market in favour of speculative investors so that rents are now unaffordable and thousands are homeless.”

    That comment is absolutely right. This happened to varying degrees all over the Western world, and THE DEGREE TO WHICH IT HAPPENED was overwhelmingly a function of just one thing: the extent to which land use for development was restricted by the authorities; to quote Don Brash’s Intro to the latest “Demographia” report.

    NZ just happens to be the worst case in the world, with the exception of the State of California. Snivelling Socialists like Finlay MacDonald now use what has happened as an excuse for MORE anti-freedom regulatory political tinkering with the economy, when it is their bloody fault in the first place.

    In Texas and other States where there was a “pro-development” framework, the speculative bubble occurred in housing CONSTRUCTION; PRICES remained low. “Sub-Prime” in California, involved people on a combined income of $80,000 per annum, buying a house for $800,000. In Texas, it involved someone on $40,000, buying a brand new home for $200,000.

    It is tragic that this absurdity seems to be escaping so many commentators.

    In the UK and NZ, we have ridiculously overpriced homes, a massive housing shortage, a whole generation priced out of the market, and NO new construction happening; our construction sector is dead in the water having been slowly dying for years in spite of housing shortages and high prices, and chippies are leaving the trade en mass.

    At least in Texas and much of the USA, there has been a lot of houses built and actual solid capital items now sitting there and a lot of workers earned good wages building them meanwhile. Here, all we have is huge on-paper increases in value of every old dump of a house that should have been selling for $150,000 max, if incomes were the guideline for lending rather than “capital gains”.

    Of course, government with the wisdom of Solomon would have ensured a happy medium; would have ensured that the inbound investment from overseas flowed into business activity that improved productivity and wages; and ensured that houses remained affordable and NOT the subject of speculation. This is perhaps the WRONGEST thing that has ever happened to Western economies; “total housing stock” and “mortgages” are HUGE values, several times bigger than the total sharemarket; governments now have a tiger by the tail and we are kidding ourselves if we think they can actually CONTROL events from here on; like if the Japanese investors panicked………?

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  38. PhilBest (5,121 comments) says:

    Kimble, the government’s job should be to PROTECT property rights. The free market would actually do an infinitely better job of everything else.

    We certainly would not be in this mess now, in a true free market situation with no central bank and no land use restrictions.

    I certainly now believe that central banks setting interest rates are just as much of a fatal conceit as any “planners” pretending to understand the whole economy.

    We can debate endlessly what interest rates, high or low, “do” to the economy; we simply do not have the required understanding; anybody arbitrarily setting them, will always be “too high” or “too low”, and doing more harm than good.

    We simply do not know what the true erosion of the value of our money is; all CPI indexes are arbitrary; there are probably NO existing interest rates at which anyone is actually getting a real return on their money; there is no incentive to save; young people have been buying houses in desperation, as prices rocketed faster than they could save money, so they desperately just hopped on the train regardless of ability to service the mortgage.

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  39. dime (9,972 comments) says:

    AG – I was starting to wonder who was teaching the children whilst you were trolling on here. Well, half trolling, half debating.

    Hitler analagy – just grabbed a name from history. Obviously they werent that bad.. Helen was more Stalin like :P

    I dont think redbaiter was inferring JK is like Clarke.. i could be wrong though.. red?

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  40. Redbaiter (13,197 comments) says:

    Fuck off AG, you child like perceptions are just soooo boring. With NZ bogged so deeply in the mire of socialism, it does not matter too much who the government is. We’re in so deep nothing can be changed for a long time, and then only in the smallest increments.

    What is important is that we at least start inching our way back out of the abyss, and that is the difference between Labour and National. There are few differences evident right now, but eventually with National there will be a more positive outcome. It is recognised that the Nats, not being so completely enamoured of the destructive ideology of socialism, are at least not going to drag us any further down.

    “i could be wrong though.. red?”

    Klark and Key are like chalk and cheese. Klark the ivory tower brain damaged academic who has never dealt with the real world and Key who made it out of struggle street on his own judgment and ability. No comparison.

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  41. AG (1,827 comments) says:

    “Obviously they werent that bad.. Helen was more Stalin like”

    Actually, I think Stalin was worse that Hitler. Not least ’cause he’s still viewed by many Russians (and some non-Russians) as a heroic figure to hero-worshipped. At least everyone (bar a lamentable fringe) thinks Hitler was a monster.

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  42. expat (4,050 comments) says:

    I think its highly likely the reserve bank act will be ammended in the near future as it has become very obvious that the current framework blows goats when it comes to managing imbalances in the economy. And I bet NZ isnt alone in that move.

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  43. expat (4,050 comments) says:

    The obvious analogy is Hulun = Piggy.

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  44. AG (1,827 comments) says:

    “What is important is that we at least start inching our way back out of the abyss, and that is the difference between Labour and National. There are few differences evident right now, but eventually with National there will be a more positive outcome.”

    Amazing. You do realise, don’t you, that this is the exact mirror image of the argument used by Trotskyists? Go far enough right, and you end up back on the left.

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  45. expat (4,050 comments) says:

    What, move enough to the center and you wont be on the edges? Speak sense man.

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  46. dime (9,972 comments) says:

    AG – yea i was taking the piss :P they were both monsters.

    althoughthe left probably dont mind Hitler as much… afterall, he was gay, used drugs and hated jews!

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  47. AG (1,827 comments) says:

    ” Key who made it out of struggle street on his own judgment and ability.”

    And his state house. And his mum’s welfare payments. And his state education, fully funded by the taxpayer from primary level through to University. Gosh … he really did it all by himself, didn’t he?

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  48. expat (4,050 comments) says:

    NZ used to have a safety net mentailty to welfare, now its just a way of life for many irrespective of the chances available to move on. A state of mind that has been enshrined by Labour.

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  49. PhilBest (5,121 comments) says:

    Kimble:

    “…….What would get people lending at lower, more reasonable rates again? How long would it take for investment to recover? What would cause a turnaround? How long would that take?

    History has shown the answer.

    Without the reserve banks, recessions would be deeper and last longer……”

    What was it Ludwig Von Mises said? There is no way of escaping the final crash that will follow increases in the money supply; all that further increases in the money supply do, is delay and worsen the extent of that crash.

    The bubbles are coming quicker and getting bigger – notice that? This time, it is housing and mortgages, and it a) involves almost everyone’s main asset, not just people who have surplus wealth that they have been speculating with; and b) it is much, much bigger than anything before, much too big for government’s to “bail out”. The US government’s trillions are just disappearing down a black hole and achieving nothing. 5 trillion SO FAR has been lost off the value of housing stock in the USA and the loss of equity involved is a handsome proportion of this amount. The US government’s total revenue is around 14 trillion per annum, they have run deficits as big as 1 trillion and their debt is up to 7 trillion, now 8, now 9………

    They can’t do it.

    Their house prices are still dropping; equity wipeouts of another ten trillion or more are quite possible.

    Their house prices have gone up far faster than their incomes, now they have to come back into line, but a lot of their “increased equity” has been blown in consumer spending meanwhile.

    Change the figures, and NZ is in the same boat.

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  50. Redbaiter (13,197 comments) says:

    “Gosh … he really did it all by himself, didn’t he?”

    Compared to Klark, the ‘rich’ landowner’s daughter who as a result of her dysfunctional family relationships developed a narrow sandal wearing hippie view of the world that has never changed and who has never had a real job in her life, of course.

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  51. llew (1,533 comments) says:

    And his state house. And his mum’s welfare payments. And his state education, fully funded by the taxpayer from primary level through to University. Gosh … he really did it all by himself, didn’t he?

    Yeah he did – while these things may have made things a bit easier (everyone had access to state education & bursaries anyway), it’d be churlish to disagree that he’s a self made man. Look how many with his beginnings don’t make anything of themselves.

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  52. AG (1,827 comments) says:

    Incidentally, how is working in the high finance industry more of a “real job” than being an academic? And is it better or worse to be (a) a ditch digger; (b) a welder; (c) a human resources manager; (d) a vice-president in charge of marketing? It would make it simpler to judge the relative merits of individuals if you were to draw up a complete table, showing the relative rankings of each occupation and its “real worldliness”. Look on it as a public benefit.

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  53. AG (1,827 comments) says:

    llew,

    I don’t deny or denigrate JK’s achievements. It’d be great if everyone had his ambition and drive. What I do deny is that (a) he did it all himself, and (b) that his example is somehow generalisable across the population as a whole.

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  54. Redbaiter (13,197 comments) says:

    “this is the exact mirror image of the argument used by Trotskyists? Go far enough right, and you end up back on the left.”

    Fuck off please. I said nothing like that. Your insistence on misinterpreting and misunderstanding everything that is written here is so boring. Go away and get an education. Like mosts leftists, your comprehension skills are about four out of ten. Piss off and only come back when you’re not going to waste everyone’s time with off topic infantile misconstrued trash.

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  55. AG (1,827 comments) says:

    “I said nothing like that.”

    Replace “National” with “Labour”. Then read it. Then check out any classic Trotskyist screed. Then shoot yourself.

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  56. llew (1,533 comments) says:

    What I do deny is that (a) he did it all himself, and (b) that his example is somehow generalisable across the population as a whole.

    OK, yes he had state assistance, but no more than anyone else in the country had access to at the time. He’d still have been disadvantaged in comparison to Helen Clark. And no his example probably can’t but it’s still quite some achievement & like I say, a bit churlish to diminish it.

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  57. Redbaiter (13,197 comments) says:

    “his example is somehow generalisable across the population as a whole.”

    It would be if the left ceased deliberately creating underclasses and preying on their vulnerability as a means to political power.

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  58. Chthoniid (2,047 comments) says:

    I think its highly likely the reserve bank act will be ammended in the near future as it has become very obvious that the current framework blows goats when it comes to managing imbalances in the economy. And I bet NZ isnt alone in that move.

    But is it the Reserve Bank that is the problem, or pressures they can’t influence?

    Much of the problem has been that fiscal policy has not been in sync with monetary policy. Fiscal policy has tossed money about like it was going out of fashion. It sustained a hot domestic economy, with some electoral payoff for Labour as urban-based seats tended to swing behind this strategy. It hindered the export sector, over-valued the NZD and led to a massive trade imbalance, but this tended to hurt rural voters who didn’t vote for them anyway. Oh, and future taxpayers who had few voting options anyway.

    We tinkered the the RB Act, so now that inflation can go to 3%- and since then inflation has often gone beyond that. What i suggest we really need, is tinkering with the Fiscal Responsibility Act to make it impossible to ‘hide’ ACC blow-outs.

    The main lesson we’ve learned from this, is that the RB has few options when the Govt is pouring billions of dollars into the domestic economy to keep itself in power.

    In the good old days, the RB had the goals of balancing the current account, maintaining low unemployment, keeping inflation low and maintaining economic growth. All with monetary policy. This was an appalling failure. Govt policy was mercurial and difficult to plan around (were they going to concentrate on inflation or u/e this year?). When we did have inflation, it was always the fault of sneaky foreigners (those Arabs with their oil again), or unreasonable union wage demands, or profiteering by greedy businesses. Government’s survived on the ignorance and prejudices of the general public, who for the most part did not link a promiscuous monetary stance to inflation.

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  59. pete (416 comments) says:

    Dr Brash, I’d like to introduce you to Mr Straw Man — oh, I see you’ve already met.

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  60. Redbaiter (13,197 comments) says:

    “Then check out any classic Trotskyist screed.”

    No thanks. Look what its done to you.

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  61. PhilBest (5,121 comments) says:

    Kimble:

    “…..What would get people lending at lower, more reasonable rates again? How long would it take for investment to recover? What would cause a turnaround? How long would that take?….”

    If I was going to buy a section on the edge of a main urban area for 30 grand, Kimble, would that be easier to get finance for than the same, identical section for 270 grand?

    THAT is our problem – asset valuations that are completely out of whack with incomes.

    Sources of finance need too, to be able to look at income earning and dividend paying ability of productive businesses; and make their decisions to lend money based on that; not on “capital gains”. Yet it is precisely THAT moral hazard that government and central bank policy is endeavouring to “restore” to the system……! We NEED the leverage cowboys to all bloody fall over now and get the hang out of the way of our ability to pick winners for our investment. And we desperately need new savings based on earnings.

    Instead of huge amounts of taxpayer money being committed, we need huge changes to taxation and the size of government, and we need to be earning enough and creating enough wealth, that the Japanese investors can look at the fundamental exposure of their investments and NOT pull them out. When they do, we’re doomed, we’ll GET small government anyway courtesy of the IMF. Trouble is, even if it doesn’t happen this year or next year, how long will we remain exposed for? How fast can we pay off an overseas debt exposure that is 130% of GDP, with no economic growth?

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  62. pete (416 comments) says:

    And Mr MacDonald, 1999 called, they want their suggestions for Reserve Bank reform back.

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  63. AG (1,827 comments) says:

    llew,

    You need to read the whole thread before you say this. RB made a claim (“JK did it all himself”). I pointed out the fallacy of this claim. To simply point out where RB is wrong is not to “diminish” what JK is or what he has done, unless you want to pretend his history is something other than it is.

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  64. Redbaiter (13,197 comments) says:

    (”JK did it all himself”).

    I did not make any such claim you boring brain damaged mental incompetent. Fuck off with your tiresome bullshit.

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  65. PhilBest (5,121 comments) says:

    From Robert Bruegmann:

    “The Housing Bubble and the Boomer Generation”

    “……These land use regulations and real estate tax policies have made possible, at least in certain highly regulated markets, one of the greatest transfers of wealth in American history. The primary beneficiaries have been existing landowners including a very large percentage of affluent boomers. The ones who have paid have been less affluent renters, younger people and all future generations of prospective homeowners.

    The existing homeowner in the Bay Area could watch the value of his house soar from a few hundred thousand dollars up into the millions without lifting a finger. Meanwhile the dramatic rise in land prices, because it has not been accompanied by a corresponding increase in salaries, has devastated the prospects of young couples, many of whom were forced to either leave the area or obliged to take on huge mortgage debt just to afford an entry level house. These same people are now bearing the brunt of the steep decline in housing prices and the wave of foreclosures washing over the country.

    One of the most remarkable things about this enormous transfer of wealth has been how little most people were aware that it was happening or what caused it. A few people – notably Bernard J. Frieden in his book The Environmental Hustle from 1979 – had sounded the alarm. More recently Wendell Cox and Hugh Pavletich at Demographia.com have made a similar case using substantial data from cities in the English speaking world……”

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  66. llew (1,533 comments) says:

    You need to read the whole thread before you say this. RB made a claim (”JK did it all himself”). I pointed out the fallacy of this claim.

    OK, technically the statement is fallacious, but since everyone else at the time had access to the same social services as JK’s mother, to suggest the social welfare system is responsible for JK’s success is nit picking. In my opinion of course.

    To simply point out where RB is wrong

    Ha! trying to trick me into agreeing with Redbaiter eh?

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  67. dime (9,972 comments) says:

    AG – you cite JK mothers welfare payments like it detracts from what he has achieved. Using that logic, no one is a self made man.. afterall, we all had help from our parents as children.

    Or does your strange logic only apply to those that came from beneficiaries.

    Is this just another case of a snobby leftists looking down on the plebs?

    also, there is a difference between recieving help to achieve your goals and being given something.

    occasionally you make a good point (well very rarely) but you really are just a troll. its boring.

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  68. Redbaiter (13,197 comments) says:

    “OK, technically the statement is fallacious,”

    Fuck..!! I did not make any such statement. The moron is lying. He has totally misrepresented what I initially stated. The dickwad has the comprehension skills of a piece of granite. Its a trait so common among the left.

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  69. llew (1,533 comments) says:

    OK, technically the statement is fallacious,”

    Hold your water, I mean the statement as quoted by AG.

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  70. bka (135 comments) says:

    “It cannot be denied that reserve bank anti-inflation policies were the enablers of a consumer blowout..”

    Redbaiter, how does this work? The RB controls inflation by putting interest rates up, leaving people with less money to spend.

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  71. Kimble (4,439 comments) says:

    “Kimble, the government’s job should be to PROTECT property rights. The free market would actually do an infinitely better job of everything else.”

    My point was that there are no property rights without government.

    “We NEED the leverage cowboys to all bloody fall over now and get the hang out of the way of our ability to pick winners for our investment.”

    They are falling over. The term “bail out” contains the conotation that the owners are being saved. That they are having their money restored. They arent.

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  72. Kimble (4,439 comments) says:

    “It cannot be denied that reserve bank anti-inflation policies were the enablers of a consumer blowout..”

    I deny it. So would most people who know what they are talking about.

    It must be strange world you live in, Reddy, where high interest rates increase consumption.

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  73. Kimble (4,439 comments) says:

    “We tinkered the the RB Act, so now that inflation can go to 3%- and since then inflation has often gone beyond that. ”

    Another problem was the softening of the specific target so that all the Reserve Bank had to do was “forecast” inflation to return within the band in the medium term.

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  74. Redbaiter (13,197 comments) says:

    “It must be strange world you live in, Reddy, where high interest rates increase consumption.”

    Accepting the premise of your argument (which is wrong anyway), how do you know they were increased enough?

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  75. PhilBest (5,121 comments) says:

    NZ has been a funny world, Kimble; those high interest rates have attracted foreign investors money, and all that investors money in the system did NOT result in a lowering of the interest rates; even at the high interest rates, Kiwis grabbed as much of the loan money on offer as possible, to buy houses to live in, to buy property to speculate in, and to blow on consumer spending, often against the security of their inflating house “value”.

    MATE. Can you please explain this, in monetarist terms? Low interest rates would have meant “too much stimulation”. So how did we end up with the worst of both worlds, a worse housing bubble than the Yanks, who HAD LOW interest rates while we had “high” ones? Please connect the dots for me. Are Yanks and Wall Street in particular, greedy and foolish? Then what do you make of a nation that didn’t even need the enticement of low interest rates to end up mortgaging and speculating themselves into economic destruction?

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  76. labrator (1,850 comments) says:

    It must be strange world you live in, Reddy, where high interest rates increase consumption.

    Well when high interest rates had the direct effect of driving our exchange rate to ridiculous levels, completely out of line with what we produce and its value, then yes, high interest rates increase consumption when coupled with the housing boom we had. Our dollar has bottomed because we dropped our interest rates and the carry trades unwound, as predicted. Uradashi bonds anyone?

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  77. PhilBest (5,121 comments) says:

    Thank you, Labrator, I was going to go on to say something like that. But it was not a “housing boom”, we have always had a housing shortage and still do; it was a “housing bubble”.

    What I am wondering is, do you have the answer to this, Labrator, how much of that Uridashi investment is still in NZ, and how much more unwinding can it do?

    Do you agree with my assessment above, that confidence needs to be restored to lending, through assets against which the lending is done, being valued realistically? We NEED a “housing boom”, we have not had one. We need 100,000 new sections at 30 grand each, NOT 10,000 new sections at 300 grand each.

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  78. PhilBest (5,121 comments) says:

    We will NOT “solve” this problem by attempting to keep the unrealistically valued assets pumped up with the introduction of new liquidity. We need new investment in new productive activity and that new investment needs to come from earned money, not “created” money. And it needs to be money left in the hands of those who earned it, not gouged out of them and redirected by government.

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  79. AG (1,827 comments) says:

    Llew,

    “to suggest the social welfare system is responsible for JK’s success is nit picking.”

    All I suggested was that the social welfare system enabled JK’s success … and Dime, it isn’t trolling to remind those so quick to hail JK as a Horatio Alger figure personified that he benefitted substantially from institutions and policies that they would like to see removed. That’s all.

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  80. dime (9,972 comments) says:

    huh? JK would like to get rid of welfare? and state schools? can you provide a link to where he said that.

    cheers

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  81. Redbaiter (13,197 comments) says:

    “All I suggested was that the social welfare system enabled JK’s success … ”

    A point that is mere speculation. John Key probably would have been successful either way, and like everyone, possibly could have done better if he hadn’t been hampered by a social system cynically designed by the power obsessed left to keep poor people dependent on socialist politicians.

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  82. glubbster (344 comments) says:

    Classic Reddy I knew you could come out with something like caveat emptor in an attempt to defend the indefensible. The problem is an informational gap ie the eg of finance companies – investors would have been hard pressed to know the true state of accounts. There are also people who can be scammed into buying things they really should not. It costs money to hire lawyers and accountants to scrutinise every potential investment for each individual. It is much cheaper to save these transaction costs by requiring adequate disclosure from the outset.
    This is a classic case of market failure. I guess we will never be ont he same page as you dont agree with market failure do you? Neither does Philbest by the sounds of it. I guess the financial crisis in the US shows how perfectly markets operate does it not! Has there been tighter regulation such as restrictions on lending and stronger disclosure laws, the crisis would not have been as pronounced. You see the difference between you and I is that I base my preferences on rationality, political pragmatism and overall efficiency criteria. Sometime free markets enable more inefficiency than is necessary with tighter contraints. Competition law is one good example. Reddy & Philbest, you both seem to base your preferences on a libertarian free market (no state intervention except for the absolute basics) ideology, which I have rejected.

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  83. AG (1,827 comments) says:

    Dime:

    “huh? JK would like to get rid of welfare? and state schools? can you provide a link to where he said that.”

    You misunderstand my meaning. JK has never advocated this. I don’t think he believes it would be good for the country, and he knows if would never fly politically.

    On the other hand, plenty of posters to this blog HAVE made such claims. See RB’s brain fart to follow your post.

    I think we’ve batted this back and forth enough now, yes?

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  84. labrator (1,850 comments) says:

    You’re right Phil Best, I did indeed mean housing bubble. Also, when I say the currency has bottomed, I didn’t mean it had hit the bottom. I’m going for low 40’s even high 30’s.

    I don’t have any figures for the bonds and carry trades as a whole and how much is left and how much has gone since they height. I’d also be interested in some corroborative evidence here.

    I’ve been following with interest your ideas on housing restrictions Phil, it’s good info, I’m working out my opinions on the matter, very busy at the moment.

    From moneyweek (uk) back in august:

    according to the Old Testament, during the reign of King Nebuchadnezzar, an ounce of gold bought 350 loaves of bread. If an ounce of gold today is about £450 and a loaf of bread about a pound, depending on where you shop, you can see that its purchasing power has been maintained. Yet in the UK, measured in bread, we’ve seen our pound’s purchasing power decline quite substantially – even if you shop in Gregg’s.

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  85. labrator (1,850 comments) says:

    This is a classic case of market failure.

    Would you mind defining market failure?

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  86. Redbaiter (13,197 comments) says:

    “The problem is an informational gap ie the eg of finance companies – investors would have been hard pressed to know the true state of accounts. There are also people who can be scammed into buying things they really should not.”

    For fuck’s sake. You are ignoring the core issue. You promote a system which removes people’s ability to look after themselves and make their own decisions, and then say you are needed because people cannot look after themselves or make their own decisions. This is just circular irrational bullshit, and if you had the brain of a gnat, you wouldn’t be writing so many words of such little consequence in such an endless and unproductive circle. I’ve already addressed this issue about three times, and it has apparently gone over your head each time. Another 4 out of 10 comprehensionally challenged leftist.

    People don’t need your crap, unless you convince them by scaremongering of that false need, which then generates its own perception of necessity. If you weren’t there interfering people would develop the means to discriminate against scammers and fraudsters themselves. You actually create the lamers and suckers who are conned by your nanny state attitude. How many times do I need to say it?

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  87. AG (1,827 comments) says:

    “How many times do I need to say it?”

    Apparently 4655 times, and climbing.

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  88. dime (9,972 comments) says:

    AG – i did! Apologies!

    Personally, id leave NZ if they did away with the welfare state.

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  89. Redbaiter (13,197 comments) says:

    “he knows if would never fly politically.”

    It will arsehole. All that needs to happen is that you lot are called on your lies and scaremongering and some honesty prevails. All it needs is an articulate counter argument and you lot have lost your main source of power.

    First steps first. In order to bring truth your media scum have to be dealt with, and we’re on the way to that. Without them, you’ll have fuck all. So get ready for it dirtbag. Your conceit and arrogance is in for a major adjustment.

    http://www.freerepublic.com/focus/f-news/2144624/posts

    30,000 media leftists fired this year in the US. Good damn riddance to a few thousand commie propagandists. After their fawning adulation of Obama, they’ve proved they’re worthless as objective news sources to even the most skeptical person, and its only going to get better for the right.

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  90. Ratbiter (1,265 comments) says:

    “All it needs is an articulate counter argument”

    Wise words! And then Baiter shows us how that’s done:

    “In order to bring truth your media scum have to be dealt with, and we’re on the way to that. Without them, you’ll have fuck all. So get ready for it dirtbag. Your conceit and arrogance is in for a major adjustment.”

    Honestly, Baiter, the only thing wrong with the “Lefty” mainstream media is that their comedy is no match for your pustular outbursts!

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  91. PhilBest (5,121 comments) says:

    Glubbster:

    “…..This is a classic case of market failure. I guess we will never be on the same page as you dont agree with market failure do you? Neither does Philbest by the sounds of it. I guess the financial crisis in the US shows how perfectly markets operate does it not! Has there been tighter regulation such as restrictions on lending and stronger disclosure laws, the crisis would not have been as pronounced…..”

    THAT was “market failure”……..?

    Glubbster, politicians in the USA were not only not interested in tighter lending criteria, they were into forcing the finance sector to do more “affirmative action” lending and lending to the disadvantaged; and they were bragging about the increases in home ownership that they had enabled. Fannie Mae and Freddie Mac got a brief from the government to take these subprime mortgages off the hands of the institutions that made them, that is what really got the bubble going in the USA. Note that there were already regulatory bodies with thousands of staff being paid fat salaries, and no-one from that sector gave any warnings about a crisis developing; in fact, the word from the top was to not rock the boat.

    Sure, the finance sector got creative in these conditions, they got to selling US mortgages in bundles on international finance markets. These international investors along with US domestic investors should just be told “caveat emptor” now; again, “bailouts” are NOT “the free market”. This particular political intervention in the way the free market SHOULD sort out this crisis, is heading for disaster. Read my post at 10.39AM.

    Note the role of anti-development policies, too. Read my post at 10.14AM.

    Then of course, where is the “free market” in having a central bank playing with the money supply and the base interest rate?

    I realise that this “market failure” narrative is the main one in the News Media, that is just a whole lot of pigshit thick lefty journos and op-ed writers and talking heads, supporting their equally pigshit thick favourite politicians.

    We are GOING to end up with “small government”. We either choose it now and work ourselves out of this politically-enduced-and-worsened crisis, or it gets chosen for us when we go bust like Iceland, with our government taking on bailouts and guarantees that are way, way beyond its power to actually handle.

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  92. PhilBest (5,121 comments) says:

    AH. I was just saying; at 12.25:

    “……..confidence needs to be restored to lending, through assets against which the lending is done, being valued realistically? We NEED a “housing boom”, we have not had one. We need 100,000 new sections at 30 grand each, NOT 10,000 new sections at 300 grand each……”

    Now it looks as though that pesky Melbourne regional authority has betrayed the tacit land-rationing collusion that has gone down up till now; they are flat out releasing land and building homes right now while every other part of Australasia is in doom and gloom mode.

    http://www.theage.com.au/national/melbourne-defies-new-homes-crash-20081204-6rpe.html

    EDIT: Oh, it looks from that article like Tasmania and Canberra are in on the secret too.

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  93. Redbaiter (13,197 comments) says:

    “the only thing wrong with the “Lefty” mainstream media ”

    If you knew what was wrong with the mainstream media, they wouldn’t be going broke all over the globe. I’ll tell you again seeing as you’re determined to remain in denial. People have had it up to here with left wing crap being presented as news and information. Great idea, putting leftists in charge of journalism schools and perverting that industry to your cause. Unfortunately, always only going to have a limited shelf life. Piss off half your market promoting ideological brain rot and you won’t last long. Obama was the dying gasp of a floundering industry, and once the truth of that disaster becomes known, the decline of the mainstream media will really accelerate.

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  94. Ratbiter (1,265 comments) says:

    “Piss off half your market promoting ideological brain rot and you won’t last long”

    Well I love your assumption that you represent half of “the market” of thinking, news-reading citizens!

    Wouldn’t it be a sinister intrusion of nanny state upon free-market journalism, if “we” get rid of all of the journalists who “we” believe don’t accurately represent the “true” right-centred way of things?

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  95. Kimble (4,439 comments) says:

    “Accepting the premise of your argument (which is wrong anyway), how do you know they were increased enough?”

    You dont live on the same planet we all do, Reddy, so if you are going to say something like this you need to tell us what YOU think the premise is. Then you could do the grown up thing and say how it is wrong.

    As for whether they increased it enough, I would like to hear how much it should have been increased by and why. In addition you could educate all of us by pointing out how the market would have set the interest rates any higher.

    “Low interest rates would have meant “too much stimulation”. So how did we end up with the worst of both worlds, a worse housing bubble than the Yanks, who HAD LOW interest rates while we had “high” ones?”

    First off, housing is not the be all and end all, so myopically focussing on that isnt too helpful in understanding the bigger picture.

    “Then what do you make of a nation that didn’t even need the enticement of low interest rates to end up mortgaging and speculating themselves into economic destruction?”

    Interest rates were low. 7.5 percent? 8.5 percent? These are low rates by historical standards. But more than that the concept of risk was all but abandoned, even in NZ. The prevalence of low deposit, and even no deposit loans, is proof enough of that.

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  96. Redbaiter (13,197 comments) says:

    “Wouldn’t it be a sinister intrusion of nanny state”

    Gawd you people are so brick shit house gangle footed gape jawed dumb. WTF has it got to do with nanny state???

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  97. glubbster (344 comments) says:

    Reddy, in theory your argument sounds neat and just lovely (except for the way you express it). In the real world, there are people who invest money that cannot look after themselves properly. Why have people been scammed by Nigerian scam operations if everyone acts rationally? This is another area where you and I differ, I think the state should protect people who need protecting, you think the state somehow robs people of their own independence. In think you overstate your case big time. I would suggest that disclosure laws and fair trade laws do not rob people of their own independence they protect them as a default rule. Having the prospectus of a finance company fully disclosed is a good thing and can be ignored of course if the individual investor wants to empower themselves as you seem to love this utopian idea. If the investor then stuffs up then he or she has no one else to blame. This is of course different to a socialist nanny state type of policy: “buy kiwi made” beign one classic example. Reddy, please give me some logic to back up your view rather than hyperbole.
    The second point is that despite your argument (which I disagreed with above), you fail to consider transactions costs such as the cost to gather the information which could be more efficiently passed on the the supplier.

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  98. Redbaiter (13,197 comments) says:

    “You dont live on the same planet we all do,”

    Before we go any further, can you provide the names of the people who have enlisted you as their spokesperson please Kimble. Or are you as delusional about this as all other things?

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  99. glubbster (344 comments) says:

    PhilBest, I consider the finance company example as one of market failure. Laugh all your like its the truth.
    I agree that the socialist policies (loose regulation) from the Democrats pre-2000 assisted the financial crisis just as much as poor (loose) regulation from the Bush-administration did. However, who is to blame is not the point. Rather, it is that loose regulation that is one of the main causes of the failure of the financial markets in the US.
    PhilBest, “bailouts” are not ideal, but necessary in this instance. If you prefer a worldwide economic depression good on you, but its not my thing and your view is not going to persuade me or the former President Bush, President Obama or Senator McCain, nor any of the US treasury. Nor John Key or Kevin Rudd. Nice waffle though.

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  100. Redbaiter (13,197 comments) says:

    “In the real world, there are people who invest money that cannot look after themselves properly.”

    Its not the “real world”, it is the socialist world, a construct of the nanny staters who in the pursuit of political power, persisitently work to undermine the ability of the population to care for themselves. None of your argument anyway supports government as the answer. Private and family based solutions exist for the care of people unable to make decisions for themselves

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  101. llew (1,533 comments) says:

    Before we go any further, can you provide the names of the people who have enlisted you as their spokesperson please Kimble.

    Count me in retrospectively, Kimble. Keep fighting the good fight.

    Might be a lot quicker to have those who elected Redbaiter their spokesman put their hands up though.

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  102. glubbster (344 comments) says:

    But not all people have access to family based solutions and sometimes it is family that are ripping them off. By private based solutions you mean accountants and lawyers right? Wouldn’t it be more efficient to have rigorous disclosure laws to ensure the information investors receive is true and correct? On your approach, a lot of that money will end up in the bank since many investors will decide they cannot trust their informational-asymmetry.

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  103. Redbaiter (13,197 comments) says:

    “Count me in retrospectively, Kimble. Keep fighting the good fight.”

    Wondered how long it would be LLew until you succumbed to your obsession. Now the pattern starts all over again. A series of infantile asides culminating in baseless and conceited assertions concerning my identity, or worse, threats of assault. Cheap loser. Get some treatment. BTW, perhaps you should just leave it to Kimble from now on. Seeing as he’s your nominated spokesperson, what need is there for you to ever contribute personally?. That said, I find it incredible that you would be of one mind on such worthless assertions as-

    -Higher interest rates DISCOURAGE borrowing to invest in property more than they discourage borrowing to buy a house to live in.

    -So the problem in Zimbabwe has been caused by what, if not by bad government?

    -The “free market” isnt going to stay free without government involvement of some sort.

    -Without the reserve banks, recessions would be deeper and last longer.

    -The one armed man killed my wife.

    Then again, there’s no accountin’ fer leftists…

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  104. AG (1,827 comments) says:

    “So the problem in Zimbabwe has been caused by what, if not by bad government?”

    Whitey done did it.

    Oh – I’ll vote Kimble my champion here too.

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  105. Redbaiter (13,197 comments) says:

    “But not all people have access to family based solutions and sometimes it is family that are ripping them off.”

    You cannot justify the existence of a massive overpowering socialist state on the basis that some people might some time get ripped off in some deals. That’s life for fucks sake. Its called freedom.

    Legislate all you want, it will still happen. The delusion that government can save us from every misfortune is the sad misconception that has brought us to where we are today. Fucked by socialism, and needing to climb back out of a very deep dark hole just to get halfway back to square one.

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  106. Redbaiter (13,197 comments) says:

    “Oh – I’ll vote Kimble my champion here too.”

    Good.

    Noted well. Kimble is spokesperson for AG and Llew Llewser.

    Only about another 6.7 billion people to go.

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  107. glubbster (344 comments) says:

    Kimble sounds like no leftie to me. He sounds like a good moderate National supporter. While National is a broad church, it seems your ideology falls well outside its walls Reddy. If National supporters are lefties that must make 95% of the country lefties. Or perhaps your perspective is based on an unreality. I think its great we have diverse views on here though but its a pity some people take it too personally.

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  108. glubbster (344 comments) says:

    Reddy, what happened to you to cause you to resent government so much?

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  109. Redbaiter (13,197 comments) says:

    “Reddy, what happened to you to cause you to resent government so much?”

    They hung my great grandmother for tax evasion.

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  110. llew (1,533 comments) says:

    A series of infantile asides culminating in baseless and conceited assertions concerning my identity, or worse, threats of assault. Cheap loser. Get some treatment. BTW

    Hey, you’re free to ignore me old chum. Hee hee.

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  111. glubbster (344 comments) says:

    Sorry to hear that.

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  112. Redbaiter (13,197 comments) says:

    “Hee hee.”

    Wow” Are you really that infantile??

    “Sorry to hear that.”

    That’s OK. My Great Grandaddy was killed at the Eureka Stockade, and my Great Great Grandma died in an English Concentration camp during the Boer war. Further back even, some of my ancestors died at the Battle of Culloden.

    Naaah- I made it all up.

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  113. Kimble (4,439 comments) says:

    “The second point is that despite your argument (which I disagreed with above), you fail to consider transactions costs such as the cost to gather the information which could be more efficiently passed on the the supplier.”

    This is a very good point.

    But I disagree about the finance company example being market failure, it is more like informational asymmetry, rather than a failing of the market process. Investors took on too much risk without enough of a return premium, but that is really a pricing problem. I dont think the naivety of a large number of consumers is necessarily a market failure, but it is something which can be addressed through mandatory disclosure of facts.

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  114. glubbster (344 comments) says:

    Reddy, I wouldn’t be so disrespectful to my great grandparents to make something up like that. In any event, I suspected you were lying but decided to err on the side of caution. And in your last post, you are sounding a bit like Phillip Ure.

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  115. Kimble (4,439 comments) says:

    Government isn’t always the problem nor the solution.

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  116. glubbster (344 comments) says:

    Sure Kimble I think we are on the same wave-length. I was trying to simplify it so Reddy could understand better. Perhaps we could call it a case of inefficent market outcomes which could be easily remedied through rigorous disclosure laws. But as usual for the Clark govt, by the time they reacted, the horse had bolted. This is why we cannot afford another reactionary government, which is highly political and politicised and not outcome driven (except for re-election) such as Clarks.

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  117. PhilBest (5,121 comments) says:

    Kimble at 1.53PM, you don’t mention me, it looks like you are responding to Redbaiter, but it was me who said these 2 things:
    (PhilBest)
    “Low interest rates would have meant “too much stimulation”. So how did we end up with the worst of both worlds, a worse housing bubble than the Yanks, who HAD LOW interest rates while we had “high” ones?”
    (Kimble)
    “First off, housing is not the be all and end all, so myopically focussing on that isnt too helpful in understanding the bigger picture.”
    (PhilBest)
    “Then what do you make of a nation that didn’t even need the enticement of low interest rates to end up mortgaging and speculating themselves into economic destruction?”
    (Kimble)
    “Interest rates were low. 7.5 percent? 8.5 percent? These are low rates by historical standards. But more than that the concept of risk was all but abandoned, even in NZ. The prevalence of low deposit, and even no deposit loans, is proof enough of that.”

    Kimble, you are one of the best on Kiwiblog and I haven’t seen any big disgreement arise between us before, or between one of us and Redbaiter. But I am surprised at what you have said to Redbaiter on this thread.

    Having said that, I think you and I are in agreement about the crisis that has gone down in NZ as well as the USA; you say

    “…..the concept of risk was all but abandoned, even in NZ. The prevalence of low deposit, and even no deposit loans, is proof enough of that.”

    THAT, my friend, puts you head and shoulders above the twats who think that we were lucky to have someone as good as Michael Cullen looking after our economy and that if only those greedy Yank capitalists hadn’t now stuffed up the world economy, everything would be sweetness and light in NZ. And besides the twats who say that, there are a lot of ignorant people who have just swallowed that line from the MSM. But credit where it is due, Bernard Hickey and Gareth Morgan and Hugh Pavletich have all got on TV at least briefly and talked sense.

    But where I part company with you completely, is in your dismissal of housing, you tell me I am myopically focussing on that and missing the big picture. Housing IS the big picture, it is many times the size of the share market, and what is more, equity lost in the housing market is the reason that this whole thing is getting out of hand in terms of the kind of money that governments are throwing at it. If it was just a bunch of people who had surplus money that they had now lost a proportion of in the sharemarket, no-one would be expecting “bailouts” using taxpayer money.

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  118. PhilBest (5,121 comments) says:

    Glubbster, “loose regulation” is one thing, “caveat emptor” is THE MOST IMPORTANT thing.

    We now have a situation where there is no point at all in anyone putting money into any low risk, low return investment. The entire industry just went high risk, backed by the taxpayer. We are kidding ourselves if we think that appointing a few thousand more regulators and letting government pick winners for the next few years is going to be the solution to moral hazard of this magnitude. We are going to get a worldwide crash, and the more taxpayer money and printed money that has been thrown at it meanwhile, the worse it will be.

    Americans and New Zealanders have been living on borrowed money for years, we have not used the borrowed money wisely, we have used it on property ponzi schemes and we are in no position to pay it back. The property that is our “collateral” is NOT worth what our pieces of paper say it is. Our net worth at the end of the day has to be based on what we have earned through work and production, not what we have bidded our assets up to using borrowed money. We have had property values double while our economy barely grew and was in fact headed in the wrong direction long term. There has to be something wrong with that picture, and no amount of greater “disclosure” by finance companies would have made the differrence between people seeing that or not seeing it.

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  119. HenryB (1 comment) says:

    “….to climb back out of a very deep dark hole just to get halfway back to square one”

    And when and where was this wonderful golden age and utopia represented by “square one”? Sometime before 1867 in the UK? or in Regan’s America?

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  120. PhilBest (5,121 comments) says:

    And no amount of “disclosure” by finance companies would have made any difference if the problem is that everybody thought, and still hopes, that property values can increase indefinitely, based on borrowed money, regardless of our income levels, just as long as nobody blinks, and that governments and reserve banks can maintain this unreality for us.

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  121. llew (1,533 comments) says:

    Housing IS the big picture, it is many times the size of the share market, and what is more, equity lost in the housing market is the reason that this whole thing is getting out of hand in terms of the kind of money that governments are throwing at it.

    Phil, I saw some figures a few years ago (but can’t recall & they’d be uselessely out of date now anyway), do you know by what factor the investment in the housing market exceeds the share market?

    Houses still exist even if the bottom falls out of the market, usually the house endures & regains its value when the market turns – if the bottom falls out of the sharemarket though, many share portfolios (along with the companies they’ve backed) just go up in smoke.

    I think you’re right in that housing has had quite some impact on this current crisis, but won’t a house’s value bounce back (eventually), in comparison to shares?

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  122. PhilBest (5,121 comments) says:

    If you haven’t seen these, DO look at them now:

    http://www.youtube.com/watch?v=2I0QN-FYkpw

    (TV clips of Economist Peter Schiff getting mocked by other panelists on TV shows over the last few years, for predicting the crisis)

    AND watch what he is saying more recently: start with this one

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  123. PhilBest (5,121 comments) says:

    Thank you for that considered post at 4.38, Ilew.

    You are quite right that the value of houses will bounce back; but so will the value of shares that are based on good solid earnings based on productive activity. It is the price of shares that is based on speculative activity, that should NOT bounce back; it is shares like those that people need to be “caveat emptor” about at all times.

    But property, because so many people are so heavily involved, does not collapse like stock markets do. Many house sellers simply take their house off the market rather than sell at a price that the market will pay. It has taken something like 15 years for houses in Japan to drop 50% in value from their peak.

    I am looking for some of the articles I have read recently, explaining this whole problem, here are a couple to go on with:

    Mark Thornton: “Housing: Too Good To Be True” Von Mises Institute June 2004.

    http://www.mises.org/article.aspx?Id=1533

    Christopher Mayer: “The Housing Bubble”. Von Mises Institute August 2003.

    http://www.mises.org/freemarket_detail.aspx?control=450&sortorder=authorlast

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  124. llew (1,533 comments) says:

    You are quite right that the value of houses will bounce back; but so will the value of shares that are based on good solid earnings based on productive activity. It is the price of shares that is based on speculative activity, that should NOT bounce back; it is shares like those that people need to be “caveat emptor” about at all times.

    Ta – that’s what I figured. And I was wondering what is/was/will be the ratio of good productive shares to the more speculative variety. But I suppose that “depends”.

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  125. PhilBest (5,121 comments) says:

    “The Bailout So Far” By Holman Jenkins, Wall Street Journal

    http://online.wsj.com/article/SB122826676533474525.html

    Which begins:

    “Here’s a fact to mull over: Washington a few months ago might have bought the entire stock of subprime mortgages for about half the money committed by the Fed and Treasury last week to prop up Citigroup and spur consumer and mortgage lending.

    True, had it done so, it might have irritated taxpayers and moral-hazard philosophers, since it would have meant relieving bank shareholders of their mistakes. But buying up bad mortgages would at least have left the private sector in charge of issuing new credit, which — however bad its performance during the housing bubble — would likely produce better results than government directing credit allocation in the economy.

    Sadly, that’s where we are today. Bless them for trying, but our firemen have done an objectively crummy job. They failed to douse the confidence/systemic-risk fire and now have moved on to fighting recession by turning credit allocation into a public utility. Vikram Pandit of Citigroup says: “We have gone from arm’s length, free market, just-in-time availability” of funding to a system where big credit-reliant businesses now have only one place to turn, government……

    And ends:

    “…….The U.S. was not Japan when we started but may be Japan when we’re done. Remember, the Japanese had a much more closed financial system when entering their post-bubble “lost decade” of the 1990s. We have venture capital, private equity, hedge funds, and an entrepreneurial tradition — one that is far from absent in banking. A reason the U.S. has been perennially “overbanked” (in the eyes of some analysts) is because investors keep starting new ones.

    All that may come to an end as cheap government credit drives financial entrepreneurs to the sidelines. We may be able to roll over the resulting mounting federal debt at cheap rates for a while if international markets are willing (there is still confidence in government at least). But unless Gerard Phelan catches the ball in the end zone and GDP bounces back strongly, the bailout’s end result may be towering tax rates, drastic spending cuts or serious inflation — or all three.

    Such is the Hail Mary being executed in your name by the federal government. Hold onto your hats and pray while the ball is in the air.”

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  126. PhilBest (5,121 comments) says:

    “The Fed Is Out Of Ammunition” By Christopher Wood, Wall Street Journal:

    http://online.wsj.com/article/SB122748912533552007.html

    “With an estimated $4 trillion in housing wealth and $9 trillion in stock-market wealth destroyed so far in the United States, there is little doubt that we are witnessing a classic debt-deflation bust at work, characterized by falling prices, frozen credit markets and plummeting asset values

    Those who want to understand the mechanism might ponder Irving Fisher’s comment in 1933: When it comes to booms gone bust, “over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.”……..

    “…….the Federal Reserve balance sheet continues to expand at a frantic rate, as do commercial-bank total reserves in an effort to counter credit contraction. Thus, the Federal Reserve banks’ total assets have increased by $1.28 trillion since early September to $2.19 trillion on Nov. 19. Likewise, the aggregate reserves of U.S. depository institutions have surged nearly 14-fold in the past two months to $653 billion in the week ended Nov. 19 from $47 billion at the beginning of September.

    But the growth of excess reserves also reflects bank disinterest in lending the money. This suggests the banks only want to finance existing positions, such as where they have already made credit-line commitments.

    Monetarist Bernanke and others blame Japan’s postbubble deflationary downturn on policy errors by the Bank of Japan. But he and others are about to find out that monetary gymnastics are not as effective as they would like to think. So too will the Keynesians who view an aggressive fiscal policy as the best way to counter a deflationary slump……..”

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  127. PhilBest (5,121 comments) says:

    “Don’t Look To Keynes” By Michael Costa – “The Australian”

    http://www.theaustralian.news.com.au/story/0,25197,24647510-7583,00.html

    “…..The notion that US economic problems are the result of the paradox of thrift is absurd. The US has been living well beyond its means for many years. Its savings rate is historically low and has even been negative in recent years. Personal and corporate debt levels are at record levels. The US has been living off the savings of other nations.

    How Krugman can equate this situation with the circumstances of the ’30s described by John Maynard Keynes in his General Theory is difficult to understand.

    Even if you accept Keynes’s analysis that lack of effective demand was responsible for the mass unemployment of the ’30s, you would be hard pressed to credibly argue, coming off the recent speculative asset bubble, that lack of effective demand has caused the present problems.

    As the recession bites, households’ ability to consume at the levels of the recent past will certainly be curtailed. But remember, this household expenditure was based on excessive leverage and clearly unsustainable. A period of economic contraction and financial deleveraging is the natural, albeit unpleasant, antidote to the excesses of the period.

    Certainly the Government should provide support to those caught up in the inevitable adjustment process. In many ways the automatic stabilisers built into the system already provide that support through the social security system.

    But what is absolutely clear is that attempting to maintain aggregate demand at the levels seen during the asset bubble is a recipe for further financial dislocation.

    The US budget is in structural deficit and not in a position to provide the level of aggregate demand required.

    Feldstein estimates that the financial crisis has already reduced homeowner wealth by $US3trillion and the value of the stock market has declined by a further $US8trillion…..

    “…..The present financial crisis is caused by the failure of government institutions, principally central banks, that were reluctant to burst the asset price bubble and are unwilling to accept the inevitable readjustment.

    Modern proponents of a liquidity trap thesis point to Japan’s so-called “lost decade of growth” as evidence of the failure of monetary policy alone to resolve economic downturns. They conveniently forget that part of Japan’s problem was that its central authorities were unwilling for many years to allow Japanese banks and other financial institutions to bear the cost of their mistakes.

    It’s arguable that a managed liquidation of technically bankrupt institutions may have resulted in a quicker adjustment process.

    The government’s role should have been the social safety net role of providing income and adjustment support to the people affected, not the institutions. Perhaps Krugman needs to put aside Keynes for a while and pick up Joseph Schumpeter.”

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  128. PhilBest (5,121 comments) says:

    “Deflation Now – Inflation Later”

    by Bill Bonner – The Daily Reckoning

    “The D-word is back,” says this morning’s Financial Times. “Could deflation be the next big shock to the financial system?”

    Where has the FT been? The world has never seen so much deflation. Stock markets around the world have deflated by about $10 trillion. U.S. housing has deflated by about $5 trillion. Oil has deflated to only half its high; it closed at $64 on Friday. Gold, down $13 on Friday, has deflated about 25%. Bear Stearns deflated to nearly zero.

    Even the bond market is beginning to deflate. Yields are rising, to 3.97% for the 10-year T-Note.

    The Dow rose 141 points on Friday. But year-to-date, the U.S. stock market – as measured by the S&P 500 – is down 35%. That means that U.S. stockholders alone have suffered a loss of nearly $5 trillion. And one in every five houses in America has sunk so low that it is now underwater; the mortgage level is higher than the value of the house.

    The FT must be talking about consumer prices. Prices you pay for milk and gasoline. They’re not going down yet. But they’re not going up so fast either.

    The headline U.S. inflation rate seems to have peaked out at about 5.5% and is now headed down. In Europe, the headline rate hit 4%. Now, that too is coming down. And everywhere you look, price cuts are beginning to appear. “Sale” signs are appearing in shop windows. Cheap flights are being advertised in the subways of Paris. Auction prices, according to an insider, are much softer than they were six months ago.

    One thing that is sinking to the very bottom of the sea is the cost of sea-borne transport. The Baltic Dry Index measures shipping costs…and gauges the health of the globalized marketplace. Shipping prices rise when orders are being placed…and delivered. When orders decline, so does the index. Well, based on the index, there is no need for Misters Smoot and Hawley. World trade is collapsing without them. The index has gone down 14 days in a row, so that shipping barely costs 10% of what it cost a few weeks ago.

    Deflation? What does that remind you of, dear reader?

    Japan! Of course. This is the trend your editor saw coming 10 years too soon – a Japan-like slump.

    “A deep and prolonged recession could raise the spectre of deflation of the sort that long plagued the Japanese economy,” says a fellow at the American Enterprise Institute.

    “Welcome to Hiroshima, mon amour,” was how we put it, with Addison Wiggin, in our 2003 book, Financial Reckoning Day.

    “If the United States were to repeat the Japanese experience, stocks could be expected to return to their 1995 trend line, with the Dow below 4,000, in the year 2012, at almost the very moment when America’s baby boomers will most need the money,” we warned.

    (Financial Reckoning Day seems to be here, at last. John Wiley & Sons, the publisher, asked for an updated version…stay tuned.)

    Meanwhile, “governments around the world are pulling out all stops to save the system and keep it running at all costs,” says a strategist at Saxobank.

    “All stops” are the things that keep the dollar worth something: the reluctance to spend too much…the reticence to ‘crank up the printing press’…the residual instinct to protect the integrity of the world’s dollar-based financing system.

    Where does pulling out all the stops lead?

    Peter Anderson, at RCM, took the words out of our mouth:

    “We anticipate more taxes, more regulation, a bigger government and a massive deficit. This sets the stage for a potential inflation bubble of massive dimensions, but that is unlikely to occur until 2011-2012 at the earliest. It is in that environment that the dollar is likely to resume its decline against both the euro and the yen.”

    Deflation now. Inflation later. That is our guess how the reckoning goes. Falling asset prices…followed by falling consumer prices…followed by “money from helicopters”…followed by rising prices…followed by the end of the U.S.-dollar based worldwide monetary system……

    “…….For the moment, cash is king. Dollars – and US Treasury obligations – protect you from losses in the asset markets. But don’t get too attached to your dollars. The king will mount the scaffold – sooner or later.

    Yes, dear reader, everything is going according to plan. But whose plan? It’s not the plan of consumers – who counted on having more and more money to spend. It’s not the plan of investors; they’re getting hammered by the markets. It’s not the plan of Bernanke or Paulson either; they’re desperately trying to stop it.

    No, it’s Nature’s Own Plan…in which bubbles always pop…what goes up eventually comes down…and people always get, neither what they expect nor what they hope for, but what they deserve.

    “Nature in her wisdom, and God in His grace,” we wrote in Financial Reckoning Day, “make sure people get what they’ve got coming…”

    Remember, a correction is equal and opposite to the deception that precedes it. A few years ago, we predicted that based on the level of mass hallucination in the markets in ’05-’06, the coming correction “ought to be a doozy.”

    Now we find out what a doozy looks like.”

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  129. lloydois (209 comments) says:

    Ah yes, the genius that is Michael Costa, our much lamented former treasurer. So good to see you have picked up on his great wisdom PhilBest. NSW didn’t deserve him.

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  130. Kimble (4,439 comments) says:

    Philbest I think we are on the same wavelength too. Dont get me wrong, I am for small government, and that governmental failure is a big cause of the mess the world is in at the moment. But have to take issue with people who say that government is always the problem and that markets will always function well if only they were left to their own devices.

    “But where I part company with you completely, is in your dismissal of housing, you tell me I am myopically focussing on that and missing the big picture. Housing IS the big picture, it is many times the size of the share market, and what is more, equity lost in the housing market is the reason that this whole thing is getting out of hand in terms of the kind of money that governments are throwing at it. If it was just a bunch of people who had surplus money that they had now lost a proportion of in the sharemarket, no-one would be expecting “bailouts” using taxpayer money.”

    My criticism of the focus on housing was more to do with Rex’s and Reddy’s insistence that the RBA and RBNZ got it wrong. Read back to what they were saying.

    I think the money being thrown around now is to reinflate the collapsed lung of investment. Nobody is willing to take risk at the moment because their faith in the banking system has been rattled (due in a large part to the actions of the bankers I might add).

    It isnt so much a bail out as it is a rescue of banking in general. If the banks were allowed to fall over, with zero support by the government, then we would be seeing the same sorts of things that we did when the US was entering the great depression.

    Good quote from Keynes over at The Visible Hand in Economics,

    “The market can stay irrational longer than you can stay solvent.”

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  131. PhilBest (5,121 comments) says:

    Thanks for that, Kimble. Yes, I see your earlier remarks in context now.

    “……I think the money being thrown around now is to reinflate the collapsed lung of investment. Nobody is willing to take risk at the moment because their faith in the banking system has been rattled (due in a large part to the actions of the bankers I might add)……”

    I think that confidence needs to be restored by allowing assets to resume realistic values. Of course no-one wants to take the risk in buying property or any investment that is still far too close in price to its peak value in what is obviously an unsustainable bubble.

    I am with the economists who say that our only way out of a debacle like this, is tax cuts combined with reductions in the size of government. What is needed is real money that has actually been earned by someone, being invested in things that are safe because they are not overinflated in value. But using taxpayer money to prop up a system in the middle of a bubble and keep assets overinflated in value, will end in disaster.

    Iceland is an extreme example of what can happen to a sovereign government that has introduced a guarantee of bank deposits. But they are still an example that should be taken notice of. It doesn’t matter too much if the deposits guaranteed are 100 times as much as the sovereign state actually has the financial capacity to handle a guarantee on, or 10 times as much. The confidence engendered by the state is sadly misplaced in both cases, and in fact increases the chances of meltdown rather than decreases it.

    And I think this rehabilitation of Keynes is almost as bad as a rehabilitation of Karl Marx, and will similarly bring grief on us all, just not as much.

    It is all very well to talk about markets remaining irrational, but there is no irrationality like what occurs, and is occurring now, as the result of governments trying to fix things.

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  132. PhilBest (5,121 comments) says:

    # lloydois (186) Vote: Add rating 0 Subtract rating 0 Says:
    December 8th, 2008 at 5:27 pm

    “Ah yes, the genius that is Michael Costa, our much lamented former treasurer. So good to see you have picked up on his great wisdom PhilBest. NSW didn’t deserve him.”

    Ah yes, thank you Illydois, doesn’t NSW deserve Bob Carr and his mob, don’t they deserve the huge amounts of bailout money from the taxpayers all over the rest of Aussie via the Federal Government, because Carr’s mob have been such paragons of fiscal management – NOT.

    I think the other states should revolt. One or two Premiers have made some pretty tough but fair comments.

    Same goes for the States in the USA who are now having their taxpayers money siphoned off to bailout the consequences of Californian and New Yorkian folly. I am starting to get quite sympathetic to the “The South Will Rise Again” movement.

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  133. expat (4,050 comments) says:

    The global Amway eh.

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