Alexander on Labour’s monetary policy

May 2nd, 2014 at 10:00 am by David Farrar

BNZ Chief Economist Tony Alexander analyses the likely impacts of ’s . Some surprises as he summarises:

  • Long tern Kiwisaver returns will be reduced as savers are forced to buy more shares when prices are high and fewer when they are low. 
  • Volatility in the sharemarket will rise. 
  • Investors will have extra incentive to purchase residential property, thus pushing house prices higher. 
  • Overseas debt will tend to be boosted. 
  • Bank profits will rise.

Alexander explains:

In fact the policy as proposed would probably act as an incentive to raise one’s debt level thus boosting New Zealand’s external debt rather than lowering it as Labour would like. Why? Because the explicit reduction in the heights to which interest rates would go over the monetary policy cycle means the income shock from that tightening would be less. Borrowing money would become safer as interest rate variability would be reduced and the incentive to fix one’s mortgage interest rate reduced.

Thus while some of the commentary from Labour and others has been negative toward banks, their proposed monetary policy would actually boost bank profits because more people would stay on floating rates than going fixed and bank margins are greater on the former than the latter. In addition because people would borrow more money bank business and profits will be boosted. Plus earnings from managing the larger Kiwisaver accounts would be greater.

So Labour’s policy will boost bank profits. Excellent.

Now look at this from a portfolio investment point of view. The policy would boost Kiwisaver contributions when the economy was booming and presumably asset prices like shares rising firmly and at high levels. The tightening of monetary policy would lead to more asset buying out of the contributions and this would amplify the equity price cycle while forcing people to buy more when equity prices are high. Then when the economy is weak and Kiwisaver contributions get cut people would be buying fewer shares thus amplifying the falls in share prices while seeing people buy fewer long term assets when their prices were low. Thus Labour’s policy would achieve exactly the opposite of what is recommended for long term savers with regard to purchasing equities, namely steady monetary value purchases through the economic cycle or even boosting purchases when prices are cyclically low rather than running with the herd and contributing to boom then bust asset price cycles.

And lower average returns for KiwiSaver investments!

The policy would also tend to boost house prices because the risk of having a large mortgage posed by the potential for high interest rates would be reduced. Additionally, because of lower average borrowing costs and because of reduced returns on the likes of term deposits plus the increased volatility in share prices we would expect to see more investors divert toward residential property. This would again tend to boost house prices, reduce home affordability, and again bias the housing market against young buyers.

Not starting to look such a great idea, is it.

He is also unimpressed with blaming house prices on immigrants:

And is it migration which has been pushing Auckland house prices in particular higher? Not at all. Auckland house prices rose by 38% between January 2009 and July last year. It was in July that the net annual migration flow for NZ rose above the ten year average of 10,000 people on its way to the latest reading near 32,000. Thus prices soared during a period of below average migration gains.

And he also points out the stupidity of a certain statement by a certain spokesperson:

Also, if one were a spokesman on matters economic then it would probably not be a good idea to suggest one has low understanding of how monetary policy works by saying low inflation in the most recent quarter means no need for any change in interest rates. Monetary policy looks forward and cannot affect what has already happened – though with a time machine as proposed by Mr Wells one might give it a go. Monetary policy changes now affect inflation a year and a half down the track.

Ouch.

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36 Responses to “Alexander on Labour’s monetary policy”

  1. YesWeDid (1,048 comments) says:

    Hidden due to low comment rating. Click here to see.

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  2. EAD (1,128 comments) says:

    So you increase demand without increasing supply and that doesn’t cause prices to rise……..

    Damn……

    how did I ever get an A+ at econ101? (excuse the immodesty)

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  3. Psycho Milt (2,412 comments) says:

    Banks don’t like this policy. Uh, duh-uh – of course they don’t like this policy.

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  4. Bill Ted (93 comments) says:

    But who was the spokesman? That’s all I want to know.

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  5. Rich Prick (1,705 comments) says:

    So Labour’s “Big Tool” just fucks everything?

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  6. RRM (9,932 comments) says:

    The H.G. Wells reference is class.

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  7. beautox (422 comments) says:

    So typical unintended consequences.

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  8. Than (475 comments) says:

    Psycho Milt, by all rights banks should love this policy.

    Banks pass changes in the OCR on to customers, so the OCR doesn’t affect their profit on each loan. But when the OCR is low more people borrow. Same profit per customer but more customers equals more profit for the bank. More people borrowing equals more demand for housing equals higher house prices. Pretty much the opposite of Labour’s stated objectives.

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  9. Jack5 (5,137 comments) says:

    Alexander may or may not be right, but Alexander is an economist, no more, and he’s with the Bank of NZ, which in its history has three times had to be bailed out by the Government.

    The banks have their own irons in the fire when it comes to the economy, though bank economists in their own minds doubtless think they are being impartial, and some are impartial. However, sometimes they seem part of a hype storm.

    IMHO, economists’ tools, excellent for analysing the present and the past, can be weak in predicting the future.

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  10. mjw (396 comments) says:

    Looks like you can get access to the HG Wells time machine after all – Tony Alexander has just made use of it! Quick Tony, what will the lotto results be?

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  11. Fentex (986 comments) says:

    their proposed monetary policy would actually boost bank profits because more people would stay on floating rates than going fixed and bank margins are greater on the former than the latter.

    I don’t follow this logic – if banks make more off floating rates then I presume their customers are paying more than if on a fixed rate. Why therefore are people encouraged to pay more?

    It only seems to make sense if banks charge less for floating rates, but have a higher margin than with fixed rates. That doesn’t seem likely.

    And it only seems like it could be a question if floating and fixed rates diverged a lot – but this argument seems to be that Labours policy will make rates very predictable – therefore fixed and floating rates won’t diverge much, will they?

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  12. Evadne (88 comments) says:

    The whole report is well worth reading. I particularly like Alexander’s final point:

    “19. Members of the Opposition believe monetary fairies can make the exchange rate settle permanently
    lower by forcing interest rate cuts and printing money while letting inflation therefore go up. Given the nonzero
    possibility that such economically ignorant policies get introduced it is worth getting inflation protection
    by investing more in property – not less.”

    Ouch indeed.

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  13. Fentex (986 comments) says:

    And is it migration which has been pushing Auckland house prices in particular higher?

    It clearly isn’t true migrants are to blame – the numbers don’t stack up, and why would anyone suppose migrants don’t want the best deal they can get anyway?

    It’s cheap credit, general ease of borrowing, lack of capital gains tax, tax incentives for being a landlord and lack of other destinations for investment at fault.

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  14. srylands (410 comments) says:

    Psycho Milt are you an Argentinian politician? Because I have spent some time there. And allowing for the Spanish translation your posts sound just like the new Argentinian finance Minister – young stupid guy – who keeps on trying to explain WTF is going on. It is uncanny.

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  15. Jack5 (5,137 comments) says:

    Are our banks true capitalists any more? They know that in an economic collapse the Government will prop them up, as it has done to the Bank of NZ more than once.

    Knowing they are safe, they become political players, manipulating the system and pumping out mortgages of near (or in some cases in recent years more than) 100 per cent. I keep that in mind when I read the bank economists’ views usually almost deferentially reported in the MSM.

    The bank and finance company bailouts, while saving much short-term pain, have fucked capitalism. It no longer self-corrects.

    As for Alexander on exchange rates, am I mistaken in thinking he has taken part in promotions that entice Japanese mums to send their savings to NZ? This business would be threatened by any change that puts the NZ dollar into a declining phase.

    And it would be good if Alexander would post in this thread an analysis of why the Swiss cap on its franc is going to fail (so far it’s working!).

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  16. Albert_Ross (298 comments) says:

    Jack5 at 10:26, perhaps you’d like to show us examples of professions who have analytical tools that are not weak in predicting the future.

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  17. Cunningham (844 comments) says:

    YesWeDid (1,007 comments) says:

    “Its been less than 24 hours since a government minister resigned and in that time Farrar has managed no less than 4 posts criticising Labour.”

    It’s because they are so incompetent. How can you not criticise them when they keep fucking things up so frequently?

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  18. OneTrack (3,111 comments) says:

    YesWeDid – “Its been less than 24 hours since a government minister resigned and in that time Farrar has managed no less than 4 posts criticising Labour.”

    Honestly, who cares about a government Minister resigning? Because he rang up some and asked a stupid question that “looks bad”? There might be a story there if he hadn’t resigned.

    We have an election coming up and we have been waiting to see what Labour and the Greens will be bringing to potential voters. Such policies will affect the outcome of the election and, in turn, peoples lives. So I am not surprised most people here are more interested in policies.

    This is Labours first economic announcement – they themselves called it the “Big Tool”. But, for some reason, you expect DPF to ignore it and twitter on about phone calls?

    I don’t get it. I would have thought you would be happy that people are taking notice of Labour’s policy. However, I haven’t seen any feedback yet on what Finance Minister Norman thinks of it though. Maybe Mr Parker should have run it by him first?

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  19. NK (1,244 comments) says:

    Its been less than 24 hours since a government minister resigned and in that time Farrar has managed no less than 4 posts criticising Labour.

    Only 4? Labour has said and done about 25 nonsensical things since then, so 4 is letting them off very lightly.

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  20. dime (9,977 comments) says:

    “Its been less than 24 hours since a government minister resigned and in that time Farrar has managed no less than 4 posts criticising Labour.”

    this stooge is right. DPF – can we have at least 15 more posts telling us that the minister resigned? compelling stuff!

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  21. Kimble (4,440 comments) says:

    Its been less than 24 hours since a government minister resigned…

    You are expecting him to resign again today?

    Idiot.

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  22. Kimble (4,440 comments) says:

    Average KiwiSaver fees run at, what… 1.0 – 1.2 percent?

    Increase contributions by 4% and the banks get 0.04 percent of the extra money.

    How much is that?

    Well, take a conservative guess and say $2.5 billion.

    So around $10 million dollar in additional fees.

    I am sure if this was a National policy, the likes of Milt would be whining about John Key pushing the policy just to help his mates.

    But seeing as it is a Labour policy, the likes of Milt are resorting to the argument “banks hate making money”.

    Moron.

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  23. Bob R (1,377 comments) says:

    ***He is also unimpressed with blaming house prices on immigrants:***

    Why the Leftist rhetoric that questioning immigration levels is “blaming” immigrants, and by extension racist? It’s a classic Leftist tactic to accuse opponents of racism to shut down debate.

    Coleman’s Reserve Bank discussion paper in 2007 looked at the relationship between net immigration and house prices going back to 1962.

    “It shows that a net immigration flow equal to one percent of the
    population is associated with an approximately 10 percent increase in house
    prices. This size of this relationship, which has existed since the 1960s, is an
    order of magnitude larger than would be expected from the average change
    in the population and house prices in the long term.”

    http://www.rbnz.govt.nz/research_and_publications/discussion…/dp07_12.pdf‎

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  24. Jack5 (5,137 comments) says:

    Re Albert Ross at 11.02:

    I agree with you. I can’t give you examples of anyone with analytical tools that are solid in predicting the future. However, we usually accept that this is the case. Most forecasters, however, acknowledge the uncertainty of their forecasts.

    I think this is far less often the case with those economists working in banking, foreign exchange, etc.

    Positive scepticism is the way to treat economic forecasts, IMHO.

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  25. Kimble (4,440 comments) says:

    Oops, make that a million. Thats what I get for braining it in head.

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  26. Kimble (4,440 comments) says:

    Positive scepticism is the way to treat economic forecasts, IMHO.

    No need for skepticism, just treat them for what they are.

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  27. seanmaitland (501 comments) says:

    @YesWeDid – he did a post on that, and after resigning theres not much more you can do. Do you want him to keep posting the same thing over and over?

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  28. Albert_Ross (298 comments) says:

    Jack5 at 12:22, do you actually know any economists? Certainly they may sometimes be reported as having “predicted” something. But if you go behind that and look at what they actually said, you will find it hedged about with caveats as to the robustness (or otherwise) of and basis for the assumptions, the inherent uncertainties, the shortcomings in the data etc. Any economist who makes a forecast without setting all this out is a bad economist. No profession is free of bad practitioners.

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  29. Jack5 (5,137 comments) says:

    Re Albert Ross’s 1.15 post:

    Albert, do you read the outpourings from bank economists? Where are the caveats you speak of?

    Mind you, if bank economists hedged their releases with all that you mandate, no one outside the academic cloisters would read them.

    Regarding your question, Albert: of course, I know economists, and they fall into the usual Bell curve of intelligence and effectiveness – like the rest of us. IMHO, treating their words as sacred truth is as bad as the other extreme of regarding them as mere present-day descendants of Rome’s haruspices, who forecast the future by analysing animal guts. Perhaps, if some ancient Roman was sceptical in the street about a haruspex’s forecast, another Roman might have chided him: do you actually know any haruspices?

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  30. johnwellingtonwells (137 comments) says:

    The art of prediction is ” Give them a number, or give them a date – but never both”.

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  31. Monique Angel (291 comments) says:

    Ha ha. It’s just so cute how Labour’s Parker blindsided National. I’m no left winger but I believe Parker has something here just as labour Class of 1984 had meaningful input to the economic benefits of deregulating markets. Can’t wait to see the tits English rebuttal.

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  32. NK (1,244 comments) says:

    Ha ha. It’s just so cute how Labour’s Parker blindsided National.

    You can’t have read the scathing critique from the BNZ chief economist, Monique. From reading that, I think Parker has blindsided his own party.

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  33. bka (135 comments) says:

    He talks about Kiwisaver as if all of it was invested in NZ. If most of it is invested offshore, then a strong economy and an increased VSR would mean Kiwisaver schemes buying more overseas assets when our dollar is strong, fewer when it is weak.

    He talks about incentives to invest in property from the VSR part of the policy and leaves out the capital gains tax on anything but the family home, ring fencing losses on property, banning sales to nonresident foreigners and the intention to build a lot of cheap housing, which are supposedly disincentives. If these were to work in encouraging investors to look at other asset classes then Labour might not mind if borrowing increased.

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  34. hj (7,031 comments) says:

    He is also unimpressed with blaming house prices on immigrants

    as he was unimpressed by the Savings Working Group (hand picked government experts “a group of great thinkers”-Matt Nolan)

    The Savings Working Group two weeks ago released their report on New Zealand’s
    savings problem warning that we stand on the edge of an abyss. That terminology is
    somewhat sensationalist and hopefully hasn’t panicked anyone into leaving the country in
    case we go the same way as Greece and Ireland.

    However there is another study of migration and housing which finds that looked at from
    a local as opposed to national level one cannot find evidence of more than about a 0.2%
    – 0.5% lift in house prices. This study also suggests that maybe it is not the migrants
    (foreigners) affecting house prices if such an effect exists, but returning Kiwis – which is
    what we will examine here.

    http://tonyalexander.co.nz/regular-publications/newspaper-column/impact-of-migration-flows-on-nz-house-price-inflation/

    So migrants do affect house prices, but only when they are kiwis returning home!!

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  35. hj (7,031 comments) says:

    Government policies blamed for house prices

    Immigration and tax breaks for investment in residential property are being cited as the underlying causes of steep increases in the cost of housing over the past decade.
    New Zealand now boasts one of the highest rates of home unaffordability in the world as a result of prices rising far faster than incomes, and the government’s Savings Working Group blames that squarely on the policies of successive governments.
    Although “the favourable tax treatment of property investment” accounted for about 50% of house price increases between 2001 and 2007, the working group said, there was also strong evidence that rapid swings in immigration brought about price-rise “shocks”.
    There was a sharp spike in immigration in 2001, 2002 and 2003 and, said working group committee member Dr Andrew Coleman, it appeared that property prices did not fall anywhere near as greatly when immigration fell again.
    The report added that there was little evidence that immigration boosted local incomes. In fact, the need to build roads and schools meant that net migration contributed to the national deficit.
    “Migration is another issue that the government should investigate further,” the working group said. “There are indications that high immigration rates have pushed up government spending, house prices and business borrowing, and prevented necessary adjustments to the economy.”
    Coleman said the working group was not anti-immigration, but called on the government to investigate limits in the future, something Immigration Minister Dr Jonathan Coleman does not seem inclined to consider.

    http://www.stuff.co.nz/business/money/4622459/Government-policies-blamed-for-house-prices

    NZ/Aotearoa has a Finance Insurance REalestate (and Pork Barrel) economy .

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  36. hj (7,031 comments) says:

    4.2 Housing market impacts

    On balance, the available evidence suggests that migration, in conjunction with sluggish supply of new housing and associated land use restrictions, may
    139
    have had a significant effect on house prices in New Zealand.

    http://www.treasury.govt.nz/publications/research-policy/wp/2014/14-10
    Migration and Macroeconomic
    Performance in New Zealand:
    Theory and Evidence
    Julie Fry
    New Zealand Treasury Working Paper 14/10

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