Bad John

March 7th, 2011 at 2:00 pm by David Farrar

On Breakfast this morning:

Corin: On the cost, 15 billion dollars now Treasury is saying, and 1.5% of GDP, does that make a cut in the official cash rate, some help for monetary policy, pretty much essential this week?

John: Well that’s a matter for the Governor, and it’s for him to decide and him alone to decide what happens on Thursday …

And that’s where ideally the sentence should stop. But the transcript continues:

but certainly the markets have factored in a likely cut in the official cash rate, and you’ve gotta say lower probably help the country, but that ultimately is a matter for the Governor

That is a subjective view that lower interest rates help the country. They don’t help long-term if they lead to excessive inflation.

On this case I agree with the PM, but the difference is I am not the PM. By making those comments, we have a possible headline that if Bollard does not lower interest rates that the “PM thinks Governor is not helping New Zealand”.

I’m a bit of a purist. I beleive there are only four people in New Zealand who should not express a view on what the Reserve Bank Governor should do – that is the Minister of Finance, the Prime Minister, the Leader of the Opposition, and the Shadow Finance Minister. They are all his current or future effective bosses, and any comments from them puts pressure on the Governor – even if unintended.

Also politically commenting is not wise. If the Governor happens to do what you say, then there is a suspicion he was pressured to do so. If the Governor does not do what you say, then the media will paint it as a row.

The bottom line is that while the public like having a Prime Minister who will answer questions on almost every issue and subject – potential changes to the official cash rate should be one you don’t answer except to say :”It is a matter for the Governor”

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34 Responses to “Bad John”

  1. ben (2,380 comments) says:

    Key has previously mentioned the same view, some time last week. So this is no slip of the tongue. It is a conscious decision to discuss the OCR. To what end is Key doing this, if not to pressure the Reserve Bank governor and thus undermine the essential independence of the Reserve Bank?

    Even Helen Clark didn’t cross this line, IIRC.

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  2. PaulL (5,981 comments) says:

    I fully agree with you DPF. I’ll just note that previous prime ministers and finance ministers haven’t felt shackled by those same rules – and holding your side to a higher standard than the opposition can be a bit like fighting with one arm tied behind your back. I still think we should hold the line, but certainly I can understand those who think otherwise.

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  3. backster (2,172 comments) says:

    On the other hand Bollard was a Clark appointment and Key may well be emphasizing what direction his government wishes to move to rescue the economy.

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  4. kowtow (8,487 comments) says:

    John Key is not a politician and cannot handle the media.

    He is the acceptable face of the National party. A party that the media love to hate when it’s looking dangerous. Look at their campaign against Brash.

    Key also benefitted hugely coming in on the tails of a very unpopular (at that stage) Labour party .

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  5. stephen (4,063 comments) says:

    Well what does Bollard have to worry about if Key is in effect ‘putting pressure’ on him? Re-appointment in a few years? A big thing of course but finding another RB Governor who will agree to unofficially give away some of his independence would be a very charitable ‘tricky’.

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  6. Manolo (13,780 comments) says:

    Another blunder from “smile and wave” Neville Key, the triumph of image over substance.

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  7. berend (1,709 comments) says:

    Come on DPF, John Key is printing $300 million a week, you really think he doesn’t have a very strong view that the governor should help him out a bit?

    John Key is bad for this country, that is the bottom line.

    We are borrowing for tax cuts, which weren’t even tax cats (budget neutral supposedly, less tax, more gst), and everything our government is doing is so sacrosanct that Helen Clark would be proud.

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  8. hmmokrightitis (1,590 comments) says:

    Was he wrong in coming out publicly and stating what he did and has? Damn straight.

    Can we honestly believe that behind closed doors under the last regime the same – and more – didn’t happen. Please. Tui ad. Doesn’t make it right, by any stretch.

    Must try harder JK, you need to be on your toes in front of the camera, and you are not.

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  9. BeaB (2,123 comments) says:

    God forbid we have a PM who talks to us as though we are adults. On second thoughts, after reading some of these comments…

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  10. OTGO (551 comments) says:

    Keynesian Economics: Economic theory following the principles of John Maynard Keynes, characterized by a belief in active government intervention in economic matters. Keynes argued that the solution to economic depression was to stimulate the economy through government expenditures as well as reduced interest rates.

    Well well what a coincidence! John Key(nes).

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  11. Mike Collins (166 comments) says:

    DPF “I’m a bit of a purist. I beleive there are only four people in New Zealand who should not express a view on what the Reserve Bank Governor should do – that is the Minister of Finance, the Prime Minister, the Leader of the Opposition, and the Shadow Finance Minister.”

    I would definitely add the Governor General to this list. Presume you would too DPF. For that matter, a number of other public servants probably shouldn’t pass comment either.

    [DPF: Yeah, so shall we say of those who normally give public commentary on issues.

    Interestingly heard Phil Goff on Drive Time saying that only PM and Fin Min should not comment, and that Opp Ldr can - and then called for the rates to come down]

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  12. ben (2,380 comments) says:

    BeaB: I don’t think this really has a lot to do with maturity. The PM violating the terms of the Reserve Bank Act but doing it in a very open and adult way doesn’t make it better.

    Fail.

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  13. DT (104 comments) says:

    Agree with you completely DPF. Its not so much a political criticism of the Prime Minister, but (and I have no doubt that his intentions were good) he should have been more careful. You can see that he TRYs to hedge things a little, but just doesn’t get it right, which is a bit of a shame.

    Anyhow, I am fairly confident (luckily) that Bollard will make his own mind up, but it is a bit look and a bad precedent. Similar to Crusher Collins saying that she expects the book to be thrown at earthquake looters (I hope so too, but the Minister shouldn’t say so publicly).

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  14. dog_eat_dog (781 comments) says:

    If I may be so bold, I feel it needs to be said that low interest rates are a big part of this country’s current predicament. All they encourage people to do is live beyond their means, be they property developers or beneficiaries. Instead of high interest rates encouraging savings and creating a larger capital borrowing pool to draw from (in part offsetting the higher borrowing costs of a higher interest rate), we now have the situation where many baby boomers have their retirement tied up in property, and will command high prices in order to keep them in their current lifestyle during their twilight years. It’s also lead to people borrowing more and more, leading to a push-inflation situation when it comes to housing, to the point where our incomes have no hope of keeping pace with increasing housing prices. Something has to give.

    Higher interest rates allow those who choose to save and to not take out debt to be rewarded for what is ultimately a prudent strategy in both the short and long term. Of course, increasing the interest rate by any meaningful amount would hugely annoy those with long-term mortgages who borrowed at the height of the recession at 100% of equity, and who very much have a vested interest in the value of their properties staying high. I’m not going to put any particular spin on this politically and blame anyone, but it is a shame when we have an acknowledged issue with creating a culture of savings and such a huge reliance on property for investment. Increase interest rates (perhaps even create a separate adjustable GST rate in the same fashion as the OCR in order to be able to mitigate the drop-off in spending), and make bonds and cash investments more attractive, as opposed to credit. If we can get our money back into reputable lending institutions, we will all benefit from a move towards savings. It’s about high time those who insist on spending up the inheritances that have propped up this country from one generation to another learn to support themselves, and it’s never ever too late to learn how to save money for a rainy day.

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  15. Christopher Thomson (376 comments) says:

    If I understand things correctly John Key did not borrow 300 million a week for tax cuts. That amount is what the last government promised as election spending and would have to be financed by borrowing the same amount. The tax cuts were neutral and there has not been borrowing to pay for them. Were we borrowing that amount before the tax cuts?

    If I’m correct then for goodness sake would those that use the phrase please stop lying it does you no credit.

    If I’m wrong I wait for the correction.

    [DPF: You are right. In fact the tax and compensating spending changes made by National mean that the Government will have to borrow $2b less money by 2014]

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  16. PaulL (5,981 comments) says:

    Christopher, depends a little on how you look at things.

    On the one hand, you’re exactly right – the last government created the hole in the budget, and the current government only redistributed that hole.

    On the other hand, this is opportunity cost discussions. If, for argument’s sake, the govt had increased GST without decreasing the upper tax rate (which was never a politically possible outcome), then we’d need to borrow less. So, in one sense, that income tax cut led to us borrowing – if we hadn’t had the cut then we wouldn’t need to borrow. Similarly, the existence of the Ministry of Women’s Affairs directly leads to us borrowing money – without the spending on the Ministry of Women’s Affairs we would borrow less. The failure to add interest to student loans is also directly contributing to this borrowing, as is the excessive middle class welfare associated with WFF.

    I think it is more productive to point out all the other contributors to the debt, rather than attempting to argue that the tax changes didn’t contribute. That’s a losing argument, and arguing on territory that your opponent has marked out for you and using their terms and definitions.

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  17. georgebolwing (854 comments) says:

    Backster: “On the other hand Bollard was a Clark appointment and Key may well be emphasizing what direction his government wishes to move to rescue the economy.”

    The whole point of the Reserve Bank Act is that the government of the day should not have the ability to set monetary policy. The Act defines quite clearly what the objective of monetary policy is (price stability) and the policy targets agreement between the Minister and the Governor set out how price stability is to be defined and what actions the Bank will take to achieve it.

    If the Government wants the Bank to pursue another objective, then the Government should use the procedure set out in Section 12 of the Act to direct the Bank to formulate and implement monetary policy for another economic objective. Thsi requires an order-in-Council that must be tabled in the House.

    The risk, for which there is considerable experience both in New Zealand and overseas, is that the result of the PM being seen to try and influence the Bank is that interest rates end up being higher than they otherwise would, so the PM is potentially acting in a way more likely to achieve the opposite effect than what he wants.

    And BTW, while Allan Bollard was appointed by the previous Government, it was on the recommendation of the Bank’s board. I have never seen it suggested that his appointment was other than on merit.

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  18. Caleb (479 comments) says:

    i have to go along with Dog.

    surely lowering intreset rates is to try and get people to borrow and spend even more money.
    are we not doing enough borrowing? the cost of living is going up and the single biggest expense is debt.
    not food or electricity or fuel.

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

    That is a subjective view that lower interest rates help the country.

    It’s a view everyone struggling with a mortgage or rent would agree with and one which the elected leader of this country is perfectly entitled to hold.

    If we don’t like how he’s running the economy we can get rid of him. The majority of citizens could name him, and every single one of them is entitled to vote for him. How many could name the Reserve Bank Governor? And of course none get to decide whether they like the job the holder of that office is doing, or whether they’d prefer their economy to be run in a different way.

    I agree with those who say that the most senior elected member of government having to drop coy hints about the way he’d like a key economic policy setting to be handled is both farcical and dangerous. But if we hadn’t bought into the belief that a key policy lever needs to be solely – and unaccountably in the hands of a room full of “faceless men” (and women) then Key could simply set the cash rate as he does other aspects of the economy.

    Like other economic advice it receives, advice from the Governor of the Reserve Bank could be made public by the government, along with its reasoning for accepting, or refusing, that advice. But the power to decide our nation’s future (and the cash rate has a significant effect on that) should always remain in the hands of people accountable to the electorate.

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  20. Don the Kiwi (1,757 comments) says:

    Surely lowering interest rates is to try and get people to borrow and spend even more money.

    Nah that’s bullshit. I think the populace have learnt by now that to borrow up to the hilt against real estate and spend is a very ’90’s thing to do, and most learnt their lesson in the 2000’s. Real estate is now not the investment it was – look at Chch.
    But the main point is that it will take pressure off people with mortgages – most of NZ I would say- and lead to a reduction in the value of the kiwi dollar which is still killing our exporters. And we just reduce imports because they’re a bit more expensive. Bit of a balancing act really.
    But I would really love to have my mortgage payments less, and then I can reduce my mortgage debt.

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  21. dog_eat_dog (781 comments) says:

    The dollar has been roughly where it’s at for some time now. It’s not exactly a new phenomenon. Our exporters have had plenty of time to react and plan for it. It also isn’t really helping when other economies are weakening, as opposed to ours just getting stronger.

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  22. Caleb (479 comments) says:

    Exactly, Don.

    Just the rise in fuel prices (from a lower dollar) will cancel out any export gain. Most exporters consume imported products, like raw materials and fertilizer. The government will of couse gain in tax.

    Im sure the main aim is to stimulate borrowing, probibly in business capital but more likely to happen in building projects.
    Money freed up by having lower interest rates is just as likely to be used to pay off debt, not helping in the short term.

    Maybe they are after an increase in inflation to help with our debt problem.. should kick in, mid second term.

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  23. Pongo (372 comments) says:

    I am surprised Bollard still has a job and hasnt come in for a bigger serve. Whereas every RB around the world wanted to make sure the recovery has taken hold our beloved governer raised rates twice last year and elevated our currency and choked off our recovery.
    The world is a different place where other central banks understood keeping rates low would allow people to unwind their excesses and would not return to over consumption, Bollard chose to fire first and nailed our recovery.
    NZ is odd in that no one ever questions the RB or the amount banks charge. Key should challenge Bollard and one of the main reasons is chrystal clear if you go back 12 months and have a look at the RBs forecasts and how badly wrong they are.

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  24. Ross Nixon (559 comments) says:

    Scrap the Reserve Bank. Why should a private company have such power? Who knows what links they have to world bankers and schemers?

    Roll its functions into the Treasury. NZ should be independent.

    [DPF: they are not a private company]

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  25. Viking2 (11,471 comments) says:

    ey should challenge Bollard and one of the main reasons is crystal clear if you go back 12 months and have a look at the RBs forecasts and how badly wrong they are.
    And do the same for treasury forever. Neither have any sort of track record of good predictions.

    Just the rise in fuel prices (from a lower dollar) will cancel out any export gain.
    Used to be the case but in the last couple of years our oil exports have been greater than our imports and that’s one of the things allowing NZ to survive at the present. If we had the huge imbalance that we did in the 90’s and early 2000 then we would be up the creek.

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  26. V (720 comments) says:

    Have you considered the role of a central bank, and why one man, ‘Dr Bollard’ even knows the what the price of money should be?

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  27. mattyroo (1,028 comments) says:

    dog_eat_dog said:

    The dollar has been roughly where it’s at for some time now. It’s not exactly a new phenomenon. Our exporters have had plenty of time to react and plan for it. It also isn’t really helping when other economies are weakening, as opposed to ours just getting stronger.

    That’s not entirely true dog, the NZD has been falling like a stone, and continues to do so, against the AUD, which is our major trading partner. By my charts, it is at a 19 year low, with no sign of support in sight. I’m picking the AUD to steadily appreciate against all currencies for a while, with us seeing a NZD:AUD bottom around 68cents.

    Against the USD, yes our exporters have had a long time to adjust, they certainly have had time to shift their focus, adjust their payment denominations etc. if they can. This is an exercise I have been through sometime ago with my own business, the only USD transactions I make are outgoing. I know that not everybody can adjust quickly, and in some cases maybe not at all, but if they want to survive, they have to.

    Same scenario as when subsidies were removed from farmers.

    I do agree with the premise of your 3.59, but as an exporter I like to see a lower OCR, as it weakens the NZD, however, we really need to encourage savings/investment in other ways. Oh to have some decent capital markets in NZ! When the revolution occurs, Mark Weldon should be against the wall before the Greens IMO.

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  28. Ross Nixon (559 comments) says:

    I don’t know if the following is true. Are there any experts conspiracy theorists out there today?

    The “RESERVE BANK OF NEW ZEALAND” – A private Corporation.

    It is owned by “THE GOVERNMENT OF NEW ZEALAND” – A private Corporation.

    That in turn is owned by “THE CROWN” – A Private Corporation.

    That in turn is owned by “THE CITY OF LONDON CORPORATION” – A Private Corporation.

    That in turn is owned by members of the small Banking family, less than 200 Members, who in 1895 owned five sixths of the world. [I assume they mean the Rothchilds - Ross]

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  29. bhudson (4,740 comments) says:

    The answers are, in turn:

    No;
    No;
    No;
    No; and,
    No.

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  30. Ross Nixon (559 comments) says:

    Perhaps things have changed from how they were set up in the 1930s?

    When the Reserve Bank Bill was before Parliament in 1933 an amendment of a quite ineffective nature was inserted giving the Government representation on the board of the bank. Of the nine members three were to be Government nominees: but once appointed even these minority representatives were not to be amenable to Government control, for they held office for five years and the Government was powerless to displace them during that time if dissatisfied with their conduct.

    Another amendment was made by Parliament at the instance of a private member, Mr. R. A. Wright. This provided that the shares should be issued only to British subjects ordinarily resident in New Zealand. It is to be assumed that the original draft permitting foreign ownership was not so framed without reason.
    http://theinfounderground.com/forum/viewtopic.php?f=41&t=13271#p51779

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  31. PaulL (5,981 comments) says:

    On interest rates being low. They don’t only impact mortgages. They also impact investment – when interest rates are low people start businesses, invest in capital equipment etc etc. Our interest rates are typically higher than many other places in the western world. A friend of mine just bought a house in California on a 30 year fixed interest rate of 3%. How’d that take you!! If you wanted to open a business, and you could mortgage your house at 3% for 30 years, you’d be more likely to take a risk.

    On the Reserve Bank setting interest rates (@Rex) – it makes sense that we just set them, if we don’t study the political economy too closely. If we do, we realise that typically what happens is NZers would push the govt to do things that actually aren’t in our long term interests, as political parties engage in a race to the bottom. Which is why you put monetary policy beyond reach, allowing the PM to say “I think interest rates should drop” and then blame the Reserve Bank governor when they don’t – giving him plausible deniability.

    Of course, I see the problem here. Once you start assuming that voters are too stupid to vote for what’s good for them, you may as well take most policy settings off the politicians and give them to an unelected group of gray men. Things like tax rates, levels of debt etc. Just tell the politicians how much they have to spend this year, and let them shuffle it around the board. Actually, maybe that isn’t a problem? :-)

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  32. bhudson (4,740 comments) says:

    Ross,

    http://www.rbnz.govt.nz/faqs/0149175.html

    Q. Who owns the Reserve Bank of New Zealand? Does it have shareholders?

    A. The Reserve Bank does not have shareholders. It is 100% “owned” by the New Zealand Government, with any extra revenue that the Reserve Bank makes going back into the Crown accounts. The Reserve Bank is not a government department, but is a body corporate whose finances are included in the Crown accounts.

    You might also want to refer to the Reserve Bank Act of 1989 and amendments.

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  33. francis (712 comments) says:

    Ever think of getting the new idiots filter from FB installed here, DPF?

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  34. Ross Nixon (559 comments) says:

    Bad idea. Then you wouldn’t see people making an error, being corrected, and (potentially) having their minds changed.

    Occasionally I think I might be wrong, but usually I am mistaken about that. Not in the above case though.

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