Labour abandons monetary policy bipartisanship

November 19th, 2009 at 11:00 am by David Farrar

Tracy Watkins reports:

Labour leader is calling an end to the 20-year consensus on .

Mr Goff is expected to use a hard-hitting speech to Federated Farmers in Wellington today to declare that the Reserve Bank’s policy targets – which influence interest rates and the dollar – are no longer working.

Labour came under pressure while in office to change monetary policy and signalled a rethink toward the end of its term but did not indicate what might replace the current regime. Mr Goff is not expected to spell out the alternatives in his speech today but will call for more work on the options.

This looks rather desperate.

First of all, it is of course correct that monetary policy is not perfect.

But I am reminded of the words of Winston Churchill about democracy – how it was the worst form of Government – apart from all the others that have been tried.

While there are some enhancements that can be made (and Dr Bollard has been doing some work on these), you can’t really make significant changes without allowing inflation to get out of control – and that just lowers the country’s standard of living – everyone gets poorer.

So to some degree Goff is just posturing to, unless he starts specifying what changes he would make. But declaring monetary policy is no longer working is silly, because of course it is. You can’t blame the high NZ dollar on monetary policy considering we have the official cash rate at a very low 2.5%.

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34 Responses to “Labour abandons monetary policy bipartisanship”

  1. Paulus (2,607 comments) says:

    Goofy is all piss and wind – desperate to try and make some personal impact with no substance to support his new “monetary theory”.

    Klark still has more opinion poll ratings well above Goofy as PM.

    Keep it up – the best opposition “leader” for New Zealand.

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  2. XChequer (298 comments) says:

    Excellent, Phil.

    Just when we need to start getting all of NZ on board and going in the same direction, you come along and do something that benefits only yourself – i.e creating more division within society with the aim of trying to enhance your own prospects to get some say in the direction of the country.

    Seriously, how, in the middle of a recession, could this move possibly help? The old adage “look to whom it benefits mosts” seems to apply here. This is not helping NZ, this is about building a platform from which to launch a Labour fightback, to encourage dissension and sow disquiet (as if there wasn’t plenty as it is).

    It annoys me that while serious issues are out there (and I don’t deny that a change in monetary policy is reasonable), Phil and his mates and the top of Labour are “fiddling while Rome burns”.

    And some would have these people run the country? Mmmmmm

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  3. Paw Prick (43 comments) says:

    . You can’t blame the high NZ dollar on monetary policy considering we have the official cash rate at a very low 2.5%.

    Our OCR may be low but it is the differential that is the problem. We still have the second highest rates in the OECD! that (and a government guarantee) makes NZ a very attractive place for foreign investment, (carry trade) which creates demand for NZD therefore increasing its value.
    Using the OCR to control inflation has failed! it is parallel with global inflation

    Shame it was Goff and not the ones who were elected for change who brought this up!

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  4. Chthoniid (2,043 comments) says:

    I’m very surprised by this.

    It does seem to signal that we should expect to pay higher interest rates if Labour gets back in- because the inflation risk is going to increase.

    The problems of the high NZD are not exactly those of the RB’s making. In the last few years of the Labour Governemtn, the conflict between Labour’s fiscal stance and the RB’s monetray target was acute. The real answer was to try and peg back Labour’s spending policies.

    The current situation seems to be driven largely by the weakness of the USD, coming out of America’s economic macroeconomic conditions. While I certainly hope that there will be a strong and sustained recovery of the US economy, I’m not sure what the NZ Government or the RBNZ can do about it.

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  5. Brian Smaller (4,013 comments) says:

    Given that Labour in government and opposition seem to believe in “Money-pixies-will-provide-nomics”, I don’t listen to what Goff says at all.

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  6. Chthoniid (2,043 comments) says:

    …of course, it’s one thing to state there is a problem, and another to explain what the solution is.

    We don’t seem to be offered any alternative as to what monetary policy would look like and how the RB would implement it.

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  7. Kimble (4,434 comments) says:

    “Using the OCR to control inflation has failed!”

    Yep, thats why inflation is at all time highs.

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  8. Redbaiter (13,197 comments) says:

    Government running monetary policy is like guiding a lava flow with sheets of plywood.

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  9. Countess (150 comments) says:

    Desperate !
    Compared to the silly waffle ‘authored’ by Key in the Last Post Goff is positively Churchillian
    Then again its what Leaders do. Lead. Change

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  10. Owen McShane (1,226 comments) says:

    Since my 1995 report to the Reserve Bank the Bank has been aware that local government policies that restrain the supply of land and apply massive compliance costs means that the real estate market is doomed to inflate because supply cannot respond to changes in the scale and nature of demand. The only way the RB can respond to these housing and land bubbles is to increase increase rates which impacts on the dollar.
    The current rise in house prices is because supply is even more constrained than ever because landowners and developers can no longer even think about manufacturing lots because the costs of creating a lot are now more than the sale value.
    The rising prices are not the result of a “strong market” but of a totally malfunctioning market.
    The Chairman of the Board, Arthur Grimes is more aware of this than most because he joint authored a seminal paper that demonstrated clearly that Metropolitan Urban Limits dramatically increased the price of land.
    You cannot blame low interest rates for our housing bubble. We have been one of the least affordable housing markets in the world and yet during those bubble years the RB had a high interest rate regime. INdeed international urban economists city NZ as the counter argument to those who blame cheap lending rather than constraints on supply.
    The planners refuse to learn. They say that we have unaffordable housing because we have not had sufficient Smart Growth (dense thinking.) And their response to have even more restrictive plans and in Tauranga they are now proposing enforced minimum densities.
    Here in Kaipara our new plan raises the minimum rural lot size from 2 ha (in effect because you could build two dwellings on 4 ha as of right) to 20 ha. Go figure. But no one will do anything about the real problem.

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  11. Inventory2 (10,299 comments) says:

    Perhaps Labour’s stance, given that David “Look at Me” Cunliffe is the Finance Spokesman has something to do with him not enjoying sharing star billing, as per this exchange at QT yesterday:

    ” Hon David Cunliffe: Now that Television New Zealand has admitted it was wrong to produce the “Plain English” ad, will he now admit that he was wrong to star in it?

    Hon Members: Oh!

    Hon David Cunliffe: I raise a point of order, Mr Speaker. I—[Interruption]

    Mr SPEAKER: I apologise to the honourable member. A point of order has been raised, and members must show some courtesy to this House. That is all I am asking for.

    Hon David Cunliffe: Clearly I caused offence by referring to the Minister of Finance as a star, and I withdraw and apologise.

    Mr SPEAKER: The honourable David Cunliffe will get to his feet and apologise for that discourteous treatment of this House. I made certain that the member’s point of order could be heard, and then he just abused the point of order process. That is not good enough, and I ask him to apologise to the House for doing that.

    Hon David Cunliffe: I withdraw and apologise.

    Hon BILL ENGLISH: I am flattered by the member’s description of my participation as “starring”, because in my understanding that is a description he usually applies only to himself.”

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  12. Mark (10 comments) says:

    To be fair David, the problem Goff alluded to with the exchange rate is not the level so much as the volatility.
    See http://www.pec.org.nz/wp-content/files/Lets-look-again-at-monetary-policy.pdf for some discussion.

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  13. NeillR (351 comments) says:

    “Our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible,” Mr Goff said in a speech to Federated Farmers in Wellington.

    Is Goff really that retarded? The policy targets were never intended to produce a stable exchange rate, nor to keep interest rates as low as possible. They were intended to maintain price stability (ie: keep inflation under control) as a result of the policies of the seventies that saw inflation running rampant.

    In fact, we hadn’t seen inflation like that until the early 00’s when Labour got back into power and opened the taps. They loosened the inflationary targets (by 50%) and then were singularly INCAPABLE of remaining within them. They allowed government spending to expand in an unfettered fashion, while the productive sector bore the brunt of Cullen’s economic mismanagement.

    So when Goff looks for answers to the high exchange rate and high interest rates, he need look no further than Labour’s own Minister of Finance who was an unmitigated disaster and an economic vandal.

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  14. Rex Widerstrom (5,349 comments) says:

    Owen McShane above highlights just one reason why the existing system is a failure — because an economy is a web of interconnecting policies; it’s not something that can be controlled with a single lever.

    Leaving government in charge of all the other buttons, levers and pulleys and handing over control of monetary policy to the Reserve Bank is akin to hopping in your car and asking someone else to be in charge of the brakes. No matter how well and how fast they react to your driving, you’re going to end up in a wreck. It might only be a fender bender here and there, but it’s still avoidable if things were different.

    Additionally, I’ve never felt comfortable about an unelected, unaccountable Board having control over such a vital aspect of the economy — the very definition of “power without responsibility”.

    I’m not at all confident Goff can come up with a viable alternative, but I’m certainly willing to hear him out.

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  15. wreck1080 (3,884 comments) says:

    Oi Goff, whats your alternative then?

    Helen got your tongue? No doubt.

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  16. Inventory2 (10,299 comments) says:

    Good point wreck – opposing the government is easy; suggesting credible alternatives – less so.

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  17. brucehoult (195 comments) says:

    What high exchange rate?

    Yes, the NZ$ is reasonably high against the US$ and the pound at the moment, but compared to the Aussie dollar, the Japanese Yen or the Euro we are either about normal or even a tad on the low side.

    I’d say the current situation is much more about the US economy than about ours.

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  18. labrator (1,847 comments) says:

    Well I’m disappointed that this hasn’t been embraced some what more here. The Reserve Bank Act has been criticised since it’s inception and it’s about time something changed. With the swings in our currency being so wild and unpredictable it’s becoming a harder and harder place to do business in NZ. It’s all fine waxing lyrical about entrepreneurs and growth but if you can’t do an accurate cash projection out more than 2 years without thinking about hedging then it’s time to worry about what base currency you’re working in and considering whether NZ is the best country to do business.

    We’re a very small country, significantly smaller than large numbers of cities in other countries. It seems a little odd that we allow ourselves to have a floating currency that offers no protection to business owners in NZ whilst allowing currency traders to decide the value of our exports.

    In terms of what can be done I’d be most interested in a currency fixed against a basket of our major trading partners adjusted regularly inline with our export ratio to each country rather than “one rate to rule them all”. Also, I don’t see why Goff has to have an answer, he’s not an economist and wasn’t elected to be. He’s raising the point that a lot of businesses discuss and bringing in to the open.

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  19. OldNews (38 comments) says:

    While agree with your general point, and would go futher to say this is just desperation on Goff’s part, one part of your post is quite odd.
    “But declaring monetary policy is no longer working is silly, because of course it is. You can’t blame the high NZ dollar on monetary policy considering we have the official cash rate at a very low 2.5%.”

    Our OCR is one of the highest in the developed world. Look at US, Japan, Britain, Euro Zone, all well under 1%. US under 0.25%. Whether our rate is low by historical standards is entirely irrelevant. It’s whether it low compared to the prevailing rates in countries who have savers who might be look for somewhere else to invest. If you’re Japanese or Belgian or American or Canadian why save in your own currency, when you can save it ours with our extraordinarily high interest rates – over 10 times higher than rates in US or Canada.

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  20. Chthoniid (2,043 comments) says:

    Not quite the whole story OldNews.

    Inflation in the UK is 1.1 to 1.5%. Latest CPI stats from the US are a 0.3% increase. NZ’s inflation rate is 1.9%.

    In real interest rate terms the difference is smaller, not the 10 x you are describing. Plus the extraordinarily low Fed or Bank of England rates being charged at the moment are very abnormal. Historically it’s been largely in a 2-4% band. In the UK there is a fairly clear attempt to transfer wealth from savers to debtors. Under such circumstances, it is hardly surprising UK savers are looking elsewhere,

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  21. David Farrar (1,889 comments) says:

    I still do not think the high dollar is due to the interest rate differential. We have not appreciated that much against other currencies. It is ore a case of a weak US dollar, and having higher inflation in NZ will not cause the US dollar to get stronger.

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  22. Pita (373 comments) says:

    Ah!… the clarity of vision brought about after only a few short months in opposition…a real “road to Damascus” revelation…I wonder if it will include some quantative easing or a fixing of the exchange rate?

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  23. PaulL (5,971 comments) says:

    In other news, Phil Goff seeks out the NZ First vote base. Presumably once he has succeeded in the transition to minority party espousing nationalist policies, it will leave room for National to move into the vacated space on the left.

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  24. Chthoniid (2,043 comments) says:

    The problem with fixing or pegging exchange rates is that you need a ton of cash to hold enough forex to defend it. That can expose you to very heavy losses, as the Bank of England discovered trying to defend it’s peg against Soros.

    Pegs sort of work if you have a lot of fiscal discipline as well- as Singapore has a times managed. But then, there’s not a lot of difference then to a float.

    The main (historical) factors driving the high NZD were the inconsistency in fiscal and monetary policy. Getting better consistency and alignment in fiscal policy would probably be a nice, safe way of lowering the value of the NZD. But it also means you wouldn’t be able to indulge in the spending binges Labour was fond of.

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  25. Paw Prick (43 comments) says:

    “!

    I still do not think the high dollar is due to the interest rate differential’

    Why else would anyone invest in the most indebted per population country in the world?? High returns and a government guarantee perhaps?
    we are the size of a small Chinese town but we have the 11th most traded currency in the world.

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  26. Chthoniid (2,043 comments) says:

    In the past- especially 2003-2008- the high NZ interest rates were an important driver of exchange rate appreciation. But that related to the spending path adopted by the Labour government. NZ has been almost unique for a long period in not having any guarantee of bank deposits.

    The rationale for the guarantee (late 2008) was a response to perceived risk driving currency flows. As our Current Account had risen to record levels, we remained dependent on foreign sources for covering our imports.

    The current interest rates in NZ are not high. An OCR of 2.5% and a CPI inflation rate of 1.9% only gives a real return of 0.6%. The willingness to hold NZ dollars at this point has more to do with the perceived risks of different currencies. The USD and the UK pound have lost a lot of favour. But this is not true of all our trading partner’s currencies- the NZD has for instance, depreciated against the AUD since early 2008.

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  27. Viking2 (11,413 comments) says:

    As has been observed the Reserve Bank Act is fatally flawed in that it is designed to only use one tiny participant in a large system to control the system. Doomed to fail and it has never done what its adherents said it would. At the time it was bought in the high inflation was already declining and continued to do so of its own accord. Like every attempt to interfere in a market place its doomed to failure.
    The reserve Bank Act should be required to consider NZer’s and the creation of WEALTH for the NZ economy. It needs to be paired with things like Tax rates but while the Reserve Bank Governors bonus apparently totally depends on his efforts to “control” (or hide or defer inflation”), then that’s all we will get.

    Didn’t agree with Peters about much but listened to what he had to say about this and agree that changes need to be considered. After all I think I’m correct in saying that any reviews have been run by self interested and not necessarily very intelligent politicians and the reserve bank staff.

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  28. getstaffed (9,186 comments) says:

    I still do not think the high dollar is due to the interest rate differential. We have not appreciated that much against other currencies. It is a case of a weak US dollar, and having higher inflation in NZ will not cause the US dollar to get stronger.

    Hmm, partly agree. Some of the relative value in our currency is due to Obama minting 100’s of billions of greenback dollars thereby causing it to devalue. Smart players in the US would have read the signals well in advance of Obama’s election and moved assets offshore to places where there was less potential for their governments to run the cash print presses 24×7. Places like NZ I’m guessing.

    But, we kiwi’s also have a lifestyle that outstrips our productivity. Don’t have the charts, but recall seeing the non-public debt levels climbing pretty consistently (while public debt has fallen) and that money’s gotta come from somewhere. Carry trade? It’s just a shame that this money has been used to inflate the housing bubble rather than improve our international competitiveness. Our children won’t thank us.

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  29. tvb (4,364 comments) says:

    This does not matter much because the Labour Party does not matter much. But under this policy of Labour’s, interest rates will be higher because with high debts people will think a Labour Government will try and inflate its way out of debt. The prospect of higher interest rates under Labour will probably give John Key another term in Government at least when things politically, perhaps in 5 years time get tight. Thanks Phil.

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  30. Johnboy (16,077 comments) says:

    It really will be exciting when the arse falls out of the $kiwi and the treaty lawyers discover that we colonisers owe the mowree even more to compensate for our lack of foresight to protect treaty settlements against inflation. It will make the pathetic wafflings of Key and Smith re the ETS bribe look like petty cash stuff.

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  31. wreck1080 (3,884 comments) says:

    Why doesn’t Goff have a chat with Don Brash.

    Brash had some ideas for controlling consumption. One was to vary the gst rate.

    It’s pretty tough though, the law of unintended consequences usually bites you in the bum.

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  32. tknorriss (327 comments) says:

    I don’t think there is a lot we can do about the weakness of the US dollar. So, the Reserve Bank can have little effect on the exchange rate due to forces much more powerful than anything the RB can do.

    One solution is for the government to control its spending and run surpluses. The surpluses can then be reinvested back into the economy in the form of tax cuts when the economy needs stimulation.

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  33. stuart munro (6 comments) says:

    Well it’s about time. A Labour party must represent the interests of the lower two thirds of society, and for the last 7 or so terms Labour has dropped that ball. This will be Goff’s chance to prove he has some credibility to his constituency, and Labour’s chance to prove there is something left besides the brand name.

    But I’m not holding my breath.

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