Does Labour even understand what the Reserve Bank is doing?

October 2nd, 2013 at 1:00 pm by David Farrar

Stuff reports:

As well as excluding first time buyers from the rules, would exclude areas where there was no need for them.

This story on suggests to me that Labour totally miss the reason the Reserve Bank is bringing in . It is not bringing them in to drop house prices in Auckland (even though there could be an impact).

It is bringing them in for financial stability of the banking system. They don’t want banks to have 100% of their portfolios with say only 5% deposits.

If you exclude some regions, then the banks may end up with too high a proportion of loans with little capital.

But the other thing Labour seems to miss, is that there is no universal rule that every loan must have an 20% deposit. The LVR rule is that 90% of their loans must have a 20% deposit. A bank can still do a mortgage on a 5% or even 1% deposit for some of their customers – just not more than 10% of them.

If you exclude say all of NZ outside the main centres and all first time buyers, then you are impacting just 30% or so of the housing market which means LVRs will not work in terms of their roles of protecting the banking system from a crash.

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62 Responses to “Does Labour even understand what the Reserve Bank is doing?”

  1. Paul Williams (880 comments) says:

    You mean the Reserve Bank Act 1989… yeah, I think Labour understands it well enough having introduced it.

    [DPF: Well they have renounced every other policy from the 1980s, so I don’t see how that holds]

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  2. Paulus (2,712 comments) says:

    But Labour can continue the work of the nationalised bank Kiwibank, and make them do what the want.
    They can use more taxpayers money to prop up Kiwibank’s solvency margin and allow them to give mortgages to anyone irrespective of their ability to pay the mortgage.

    Sounds like the Clinton/Obama’s sub prime mortgage again which did much to destroy the US economy.

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  3. In Vino Veritas (140 comments) says:

    I wonder how many snapper David Cunliffe will have to hold up to get the sack? He’s already got one in hand with his monumental foul up with the young investor, and now, with the solution Labour has come up with for Reserve Bank LVR’s, he has two. How many more to go?
    It is now abundantly clear that his Masters degree was definitely not gained with any input from the Harvard Business School. And he clearly didn’t learn much about finance and economics in his Master of Public Administration degree.

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  4. Ian McK (237 comments) says:

    Cunliffe and Parker are both liars, one over business failures, the other over qualifications, yet they still attempt to peddle their socialist doctrine. They are no better than their ex-Labour MP mate again standing for GWRC on their ticket, having dishonesty convictions suppressed by the court.

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  5. Zapper (1,048 comments) says:

    Paul, wow that is one hell of an assumption.

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  6. Paul Williams (880 comments) says:

    IVV, the world’s moved on from this non-issue, even Hooton has… you need a new attack, this ones blunt.

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  7. kiwi in america (2,314 comments) says:

    David you should listen to Kathryn Ryan’s interview with Arthur Grimes – the just recently retired Chairman of the Reserve Bank Board and one of NZ’s most experienced and respected economists
    http://www.radionz.co.nz/audio/player/2571176

    In the politest possible way he poured cold water all over the Greens’ and Labour’s policy to add exchange rate and full employment targets to the Min Fin’s inflation control contract with the RB Governor. Ryan tried pretty hard to make the left’s case but he patiently discredited it without getting at all political. It goes along with Labour’s inability to understand the LVR changes and underscores their financial illiteracy since Cullen retired from Parliament.

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  8. Michael (913 comments) says:

    I notice the media are letting Labour pimp the first home buyers, but not asking the question “How would you promote banking stability?” and “How will Kiwibuild restrain house prices if even you admit demand will exceed supply?”

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  9. Paul Williams (880 comments) says:

    Michael, you’ve not worked in politics have you? Confronted with ‘banking stability’ or ‘affordable homes’, most politicians know which issue to talk about.

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  10. Zapper (1,048 comments) says:

    Yep, Labour certainly knows “we’ll give you free stuff” is more effective than “we’ll not completely destroy the economy”.

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  11. Paul Williams (880 comments) says:

    Zapper, you mean like corporate welfare, e.g. Sky City?

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  12. dime (10,219 comments) says:

    Paul – sky city received corporate welfare? we wrote them a cheque? wtf?

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  13. Redbaiter (10,456 comments) says:

    The media have decided that they will get Cunliffe elected.

    What is National’s strategy for dealing with media bias?

    Bet they don’t have one, or else its the usual “lets try kissing their arses”.

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  14. Zapper (1,048 comments) says:

    what dime said. How much taxpayers money did we give Sky City?

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  15. Paul Williams (880 comments) says:

    Sweetheart deal on TVNZ property, dodgy dealing re additional pokies, commitments to compensate if laws change…

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  16. Nookin (3,571 comments) says:

    “Michael, you’ve not worked in politics have you? Confronted with ‘banking stability’ or ‘affordable homes’, most politicians know which issue to talk about.”

    I’ve got it, then. They are not ignorant — just dishonest by distracting attention from the real purpose of the new rules in order to achieve popular support. Why doesn’t that surprise me?

    What free stuff is Sky City getting, again?

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  17. dime (10,219 comments) says:

    “Sweetheart deal on TVNZ property” – how was it a sweet heart deal? did they pay 10 cents on the dollar? Doesnt TVNZ have a board?

    “dodgy dealing re additional pokies” – how is it dodgy?

    “commitments to compensate if laws change…” – unfortunately when you have far far left, marxist parties, contingency plans have to be put in place as business gets scared. rightfully so!

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  18. Zapper (1,048 comments) says:

    Right, so there was no corporate welfare.

    Just curious, all the jobs created by the convention centre are obviously of no use to you. Which jobs would you prefer these people to work in, or are you happy with paying them the unemployment benefit?

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  19. Rick Rowling (816 comments) says:

    Paul – how do those deals get National any votes?

    Compare with the great election purchases – WFF, interest-paid-for-by-other-people student loans.

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  20. NK (1,259 comments) says:

    The only thing Labour understands at the moment is what stupid policy it can introduce to get a few votes here, and a few there, with disregard for the consequences. The three stooges, when campaigning for leadership, totally over-promised. So is Cunliffe now. He will just create further distortions in the market for smart people to take advantage of. In other words, it will be more well intentioned regulation, with perverse incentives. This is Labour’s raison d’etre.

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  21. In Vino Veritas (140 comments) says:

    Paul, I don’t know whether it is “blunt” or not. After all, the Labour Party and the Green Party still attack John Key for being a banker and a money trader over a decade ago, so I guess peoples past is not off the table, wouldn’t you say?
    And the point I was making is that it appears the Cunliffes Masters from the JFK school does not make him as clever as he thinks he is (or give the impression he is), given his latest gaffes. Or would you describe them as not being gaffes?

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  22. Paul Williams (880 comments) says:

    Zap, so if the price of the jobs is less than the costs is it still ok? The PM picking winners is a good idea? The economic strategy for NZ is determined ad hoc?

    Either way, calling Labour cynical for wanting to help people into jobs is frankly ridiculous… Labour’s history is defined by assisting people into housing.

    And a better example of cynicism might be Key wanting to stop funding Aotearoa but still sucking up to Team NZ.

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  23. Sir Cullen's Sidekick (900 comments) says:

    Whatever Labour is saying – people like it. End of story.

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  24. Colville (2,318 comments) says:

    You mean the Reserve Bank Act 1989… yeah, I think Labour understands it well enough having introduced it.

    You mean like the way Hulun flaunted the GCSB law after writing the POS ?

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  25. swan (665 comments) says:

    From this I think we can take one of three things:

    1. Labour thinks the Reserve Bank is worrying too much about bank stability,
    2. Labour doesnt care if banks fail, as they will happily bail them out, OR
    3. Labour intends to credibly commit to not bailing out banks and considers bank stability to no longer be policy relevant.

    If:
    1. – Who made them the experts?
    2. – Why dont they tell us that
    3. – Great. But if you want to credibly commit to this you had better at the very least publicly announce it.

    So what is it Labour?

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  26. Lance (2,719 comments) says:

    @Paul
    So Labour is not cynical when it rails against the EVILS of gambling in relation to one site (SkyCity) yet is happy leave Lotto and small time pub pokkies in place?

    Methinks they are full of shit

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  27. bhudson (4,741 comments) says:

    yeah, I think Labour understands it well enough having introduced it.

    Clearly not – they have forgotten what RBNZ independence means.

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  28. KiwiGreg (3,278 comments) says:

    I don’t think you understand it DPF, or else you are being deliberately disingenuous.

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  29. Ed Snack (1,940 comments) says:

    Paul Williams, what a lot of crap, labour defined by getting people into homes is better defined as Labour is defined by its steadfast determination to purchase votes on the taxpayers back.

    And you committed the classic fail, by stating that Labour passed the Reserve Bank Act does not imply that this current mob have any understanding of what is in it and why it was passed. They simply want to get back to the old ways whereby the economy was the governments way to get re-elected by providing favours for its friends and voters at the expense of others.

    I’m not surprised however that you are keen to “move on”, with a fuck-up of this nature that’s undoubtedly the best plan, aided of course by Labour’s propaganda machine aka the Media.

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  30. Zapper (1,048 comments) says:

    Can you show the calculations where you came up with the price of jobs being less than the costs?

    Labour’s long past history may be defined by that. Their current policies (assuming Cunliffe wasn’t lying during the leadership campaign) will lead to people living on the streets, not helping them into housing.

    Let’s just hope he was lying – he’s shown he has no issues with lying so far.

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  31. swan (665 comments) says:

    KiwiGreg – please explain?

    The only way this idea of the provinices not needing to have LVR restrictions could be justified is – the provinces are at a lower risk of house price falls. So Labour are experts on the future price path of NZ’s regional housing markets??

    I recall a lot of conventional wisdom flying around in 2007 that it was Auckland prices that were going to fall the hardest. Actually this did not occur and they have outperformed the rest of the country (in general) since 2007. So if Labour is trying to pick the market I am very surprised at how confident they are!

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  32. Paul Williams (880 comments) says:

    Ed, I stopped reading after a few lines as you’re clearly missing the point. Labour’s lift in the polls is directly related to cutting through on housing affordability, energy costs and a tiring government increasingly misfiring…

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  33. Paul Williams (880 comments) says:

    Lance, speaking entirely personally, I’d be all for limiting pub pokies big time. I live in Sydney mate, they’re a scourge!

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  34. dime (10,219 comments) says:

    “I live in Sydney mate, they’re a scourge!”

    Dime moved to Sydney in 98. The pokies blew me away. they were just everywhere. id be out drinking with mates and one would vanish.. back 10 minutes later. “just put 50 bucks through the pokies”. wtf?!?! everyone i knew played pokies. i used to think how lucky we were that we didnt have them outside of casinos. then i come home and they had installed them everywhere.

    whoever let that happen should be shot. labour or national.

    im cool with casinos, but pub pokies?!

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  35. lolitasbrother (774 comments) says:

    Kiwi in America above
    thanks as always for your comments. I struggle with these issues of monetary policy.
    But it was good to hear from the top, Arthur Grimes .
    I fear so much a Labour / Green Govt I just tell my friends.
    ‘ get your money to Canada and now’
    I hope I am not misleading them.

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  36. Paul Williams (880 comments) says:

    Yeah Dime, I’m with you on that. Fortunately, some pubs are getting rid of them as a marketing strategy. My local bowlo, http://thepbc.org.au/, chucked them 6/8 years ago.

    Oh and incidentally, it was a State Labor government that let them run riot – an utterly corrupt and inept government that deservedly was chucked out two years ago.

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  37. RightNow (7,015 comments) says:

    Paul Williams (820) Says:
    October 2nd, 2013 at 1:05 pm
    You mean the Reserve Bank Act 1989… yeah, I think Labour understands it well enough having introduced it.

    Clearly they don’t. And that shows what you think and what is correct are not necessarily close together, and probably not just in this instance.

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  38. Ed Snack (1,940 comments) says:

    What’s up Paul, don’t like having your cheer-leading shown up ?

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  39. SPC (5,669 comments) says:

    Er both English and Key also wanted first home buyers exempted from the loan to value rules. It is not just a Labour thing.

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  40. Paul Williams (880 comments) says:

    Ed, you’re stuck in the details… lift your head up and look at the race… ’cause that’s what this discussion is about… shilling for National, hoping for a come from behind.

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  41. Grizz (613 comments) says:

    You can be sure Labour knows all abut the Reserve Bank. Ganesh Nana and BERL will keep them in the loop.

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  42. Cunningham (846 comments) says:

    SPC (3,393) Says:

    “Er both English and Key also wanted first home buyers exempted from the loan to value rules. It is not just a Labour thing.”

    That is true but they also left the RB to make the changes the way they saw fit (even though they may have have agreed with them) where Labour are going to bulldoze over them. They are independent for a reason and it is a dangerous precedent to set.

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  43. SPC (5,669 comments) says:

    Not entirely independent – when Bollard suggested the idea of placing surcharges on mortgages (targeted action) rather than the more blunt tool of increasing the OCR – English called that a very courageous option. Effectively he said if Cullen went along with it there would be a political cost that National would exploit. And no more was heard of it.

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  44. Paul Williams (880 comments) says:

    DPF: Well they have renounced every other policy from the 1980s, so I don’t see how that holds

    Oh, I must have missed the part during the nine years Cullen was Minister of Finance when he amended it…

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  45. swan (665 comments) says:

    Do you know what renounced means Paul?

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  46. unaha-closp (1,067 comments) says:

    >Ed, you’re stuck in the details… lift your head up and look at the race… ’cause that’s what this discussion is about… shilling for National, hoping for a come from behind.

    Cunliffe is channelling the economic policies of George W. Bush circa 2000 – 2007… loans for everyone because everyone needs a house… George W ran that populist schtick into 2 terms of office, its a proven vote winner… hey it might even work for David “the shrub” Cunners

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  47. Paul Williams (880 comments) says:

    swan, indeed I do… clearly Labour haven’t renounced the independence of the Reserve Bank. To suggest otherwise is idiotic. The current discussion is about LVRs. Clue-up.

    unaha, rubbish. Labour’s proposing capital charges on investment properties to cool demand, instead of LVRs, and increasing supply by building. Comparing that with the US no-doc loans is hyperbole.

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  48. swan (665 comments) says:

    Paul,

    You are neatly contradicting yourself. Just like Labour.

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  49. swan (665 comments) says:

    Paul,

    The purpose of LVRs is not to cool demand. You clearly don’t understand the role of the RB.

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  50. Paul Williams (880 comments) says:

    swan, do go on… I’m fascinated to hear your insights?

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  51. swan (665 comments) says:

    Paul, read the post. DPF has put it all up there. LVRs are about reducing the risks to banks of a fall in property values. The RB has said – if all the LVRs do is make FHBs get loans off their parents, that is fine as it serves its purpose.

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  52. seanmaitland (501 comments) says:

    @PaulWilliams – your maths is obviously terrible. Labour are well behind in the polls, and haven’t been close for years.

    Counting the Greens, Mana and NZ First vote as a Labour vote doesn’t count.

    Back to school boyo.

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  53. unaha-closp (1,067 comments) says:

    Labour’s proposing capital charges on investment properties to cool demand, instead of LVRs, and increasing supply by building. Comparing that with the US no-doc loans is hyperbole.

    You mean Labour are going to discourage business loans, whilst encouraging sub-prime loans. And at the same time building more houses…

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  54. Paul Williams (880 comments) says:

    Swan, I don’t care how David’s framed it. Listen to the Governor himself. This is about managing the demand imbalance. Again, clue up! A capital charge could’ve been implemented, supply could’ve been improved. The Government’s failed to act and now first home buyers suffer. National is on the wrong side of this. Simple.

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  55. Paul Williams (880 comments) says:

    Unaha, no; again. A simple interim exclusion on first home buyers is all that’s proposed.

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  56. swan (665 comments) says:

    Paul Williams,

    Fuck off or start providing some evidence for your lack of understanding. Here is the governer:

    http://www.rbnz.govt.nz/news/2013/5478390.html

    It is about financial stability. The bank is acting in their supervisory role. He is dismissing Labours idiotic interventions as being impractical or as eroding the value of the policy in the first place.

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  57. Paul Williams (880 comments) says:

    swanny, easy tiger, he’s also on focus on politics, here http://www.radionz.co.nz/national/programmes/focusonpolitics/audio/2570889/focus-on-politics-for-27-september-2013, saying precisely what everyone knows, and has done for years. NZ’s prudential arrangements aren’t precipitously worrying, NZ, like Australia, didn’t have hundreds and thousands of people with negative equity as did the US. The problem in NZ, partly a function of a small share market I concede, is the perverse incentives to invest in property… no capital charge, constrained supply, tax benefits… clue up swan…

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  58. swan (665 comments) says:

    Thanks Paul,

    So Wheeler didnt contradict himself – it is about financial stability. Soooooo what is your point again? Labour are happy to kneecap the RBNZ and thats cool? No worries bro we’re alright?

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  59. Paul Williams (880 comments) says:

    Swan, this is now pointless. If you can’t listen to that interview and the 30 second grab with the Governor and draw the simple conclusion, not even a new one, this discussion is a waste of time. Keep banging you head mate.

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  60. swan (665 comments) says:

    Yes it has felt like I have been banging my head against a brick wall.

    I hope you have learnt something. Perhaps not though.

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  61. Paul Williams (880 comments) says:

    Sadly, no swan, I’ve learnt not a thing. This is a partisan space and although I was being partisan, there’s a disconnect from reality here…

    The NZ property is over-valued, the investment incentives are distorted. At least one party is attempting to do something about it – something pretty bloody orthodox too. National’s not that party. It’s doing bugger all.

    So the Reserve’s stepped in and, absent guidance or direction, done what it could. Bluntly and to the detriment of first home buyers. If you can’t see the problem here, not see the political wedge its created… well, I only hope you’re not a Nat Researcher or Staffer…

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  62. swan (665 comments) says:

    Paul,

    Calling off the RBNZ is not “doing something about it”.

    If you are talking about Labours “Kiwibuild” pseudopolicy – well OK. Until they tell us what they are actually planning on doing I consider it empty rhetoric. ie. Everyone knows the issue in Auckland is development restrictions both in terms of greenfields development and density development. So will Labour override the district plans? Will they compulsorily aquire land? Will they nationalise supply chains? Will they run the scheme at a loss?

    If you know the answer to any of this, let me know!

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