This is a Facebook conversation I had with Don Brash, former Governor or the Reserve Bank of NZ, and former leader of the National Party on the current economic crisis.
Don, do you accept (or better still, have evidence to suggest) that governments (say the US or UK) are too cozy with bankers. When you look at how the US has bailed out the banks rather than plausibly supporting the creditors, might this point to an underhanded relationship between the two...for mutual (dubious, unenlightened) self-interest. And should not have the National Party have anticipated this crisis a decade ago...I know I did with a great many others. Why did NZ, Aust, Canada central bank governors allow it to go on... Perhaps you only want to speak for yourself? But perhaps you could also speak generally.
ADDENDUM: My criticism of US government fiscal and monetary policy extends back to 2000, however I only started blogging in 2005 – and continued my criticism.
Like · · October 11 at 2:46pm ·
Andrew, no, actually I don't think the US and UK governments have had too close a relationship with the banks. The reality is that the banks are at the very heart of the financial system - both the credit system and the payments system. The governments of the US and the UK (and of course of many other countries also) realised that the collapse of their banks would have had an impact on their whole economies which would have been utterly disastrous, so they bailed them out. Should they have regulated them more tightly to avoid the banks getting into trouble? Don't get me started! I blame the collapse of the banks in PART on the policies of some of the governments, in part on the greed and stupidity of some of the banks involved, and in part on the very tight system of regulation which actually led many people to assume taht the banks were effectively government guaranteed.
You ask why did NZ, Australian, and Canadian central bank governors "allow it to go on". I'm not sure I understand your question. The banks in those three countries are among the most robust in the world.
October 11 at 8:58pm · Like
By the last part of the question, I meant in terms of weighing into US, EU, Japanese govt policy decisions, an independent central bank believing that the substantive financial markets which underpin their demand have a substantive interest in 'sustained growth'. The policies of these govts have undermined global growth...that affects every economy. Say for NZ, does not the central bank have a mandate to preserve growth, thus weigh into international markets which affect their outlook?
October 11 at 9:05pm · Like
Andrew Sheldon I appreciate our banks are fine...more concerned with the broader economy, and the unsustainable interest rates which lured in home buyers, causing injury....not to mention the effects in equities.
October 11 at 9:06pm · Like
Andrew Sheldon We might reasonably expect the IMF to be independent...but sadly their role seems to be compromised by their need for OECD country funding
October 11 at 9:08pm · Like
Andrew Sheldon IMF says very little whilst 9 of 24(?) OECD countries have debts over 100% of GDP.
October 11 at 9:08pm · Like
Don Brash Not really fair Andrew. I've read plenty of IMF Papers which are highly critical of the enormous debts of many OECD countries.
October 11 at 9:19pm · Like
ADDENDUM: So does this reflect on the media’s lack of interest in bad news? Why might that be the case? It was very years ago to find a journalist offering critical views on the economic outlook. One of the few was Max Walsh, Editor-in-Chief of The Bulletin (Australia). Is the editorial content of the media skewed towards good economic news…even though there was a lot of critical economic analysis around from 2005-2008 outside of the mainstream media.
True, sovereignty lies with national govt...so what about central bank governors...what stops them from being more critical of foreign central banks and govts? They are independent from govt supposedly, so no embarrassment...just political integrity issue. i.e. Would Simon Power get a job with Westpac if he had an unfavourable Commerce Dept policy towards the banks....well, I know the answer because bank fees are a form of extortion...the basis of a class action in Australia as we speak.
October 11 at 9:46pm · Like
Don Brash Andrew, you are certainly right that central bank governors are reluctant to criticise other central bank governors. But who would you like Alan Bollard to criticise at the moment if you had your way?
October 14 at 9:20am · Like
Andrew Sheldon Ben Bernacke, ECB gov, all govts for adopting regulation which distorts rather than protects; for sanctioning extortion or 'numbers' rather rationality as the basis of political discourse.
October 14 at 9:49am · Like
Not sure that I understand your argument Andrew. To the extent that central banks are preoccupied with maintaining the value (purchasing power) of their own currency, I would have thought that most developed country central banks are doing OK at the moment (as measured by inflation, which is the only basis for assessing whether purchasing power is being maintained).
I share your concern that banking regulation may have actually contributed to some of the banking system problems, but central banks are certainly not the only ones (or even the main ones) to blame for the problems in the banking sector. In the US, for example, a lot of banking system problems stem from political pressures since at least the early nineties for banks to make loans to uncreditworthy, and marginally creditworthy, borrowers.
October 15 at 7:32am · Like
ADDENDUM 1: Actually, governments have a monopoly over the initiation of force. It was the Clinton administration who deregulated the banks in the USA; thus we ought to blame there for facilitating the actions of banks, which was largely acting ‘legally’ despite a few exceptions.
ADDENDUM 2: Actually, governments should be preserving a stable or fixed amount of currency relative to growth so that purchasing power actually increases. i.e. The amount of their wealth increases whilst the value of goods remains stable. We currently have ‘flat’ or ‘non-trending’ asset prices, no income growth, and rising product prices. i.e. We have inflation, i.e. Erosion of the real value of goods. It will not readily show up because govt masks the impact of the more volatile factors, i.e. rent, fuel, food,; arguing that they are too volatile to measure. True, but in the long run, they should not be ignored.
How can you be sure of that? How do you measure economic activity efficiently?
If central banks were duly concerned with preserving - or better still increasing purchasing power (as we live to progress I believe) - they would take measures which achieved maximum, but sustainable growth. Notwithstanding the fact they are confined to monetary policy, as an independent agency, there is no reason they cannot have an opinion on fiscal policy, and offer another element of accountability. Rather than debase their currencies, the US central bank lowered rates to extraordinarily low levels, govts like Aust subsidised great, Fannie Mae was instructed to offer the poor loans, creating a great deal of debt, and only in the last 3 years have we seen debasement of debt with quantitative easing...but there is more to come...causing more inflation. It’s about pushing the trauma into the future. If govt would only stop distorting the economy, each would be able to achieve growth of 8-12%...not the 1-3% we are accustomed to. The idea that we can only grow at these miniscule rates is because of govt...look at the Maritime Transport Act..calls to update it in 1998...its now 2011. It will happen now immediately after the election. Meantime priority 'distractions' for govt - aside from earthquake - rugby, seabed issue. One gets the notion, govt is about putting out fires, placing defensive.
October 15 at 8:13am · Like
Ultimately, I blame govt for being politicians rather than statesmen. They live within the system, lacking the ideas to change it. The problem is not the central banks per se its the govt which sanctions everything they do...its the idea that people really have any influence; that we have participation, choice?? We don't. We have a pretence of choice. We have a pretense of rationality within parliamentary debate...when really its a 'numbers' extortion game legitimatised by 'participation'. Tell me what participation I had in any piece of legislation. If I make a submission, what option do I have to hear criticism of my submission? None. How am I to know if it’s been read? Can't. There is a short range agenda to stay in power which means 'slow change' rather than selling ideas because our elected MPs have not developed a coherent philosophy before entering politics. I'd actually say you are better than most. But when or if you get substantive influence, you will become inaccessible, and centralised govt and universal suffrage will ensure you are motivated by the wrong priorities. You will become like the NP and Labour - 'constrained' by the system. Banks are custodians...they are not acting in accordance with their fiduciary duties; though you are right, govt requires no compliance from them. Another problem is the unconditional expropriation of wealth by taxation. Unless a voter has the right to renounce their sanction of govt by withholding tax, they are slaves. Representative democracy is slavery; we need a meritocracy where reason is the standard of value.
October 15 at 8:24am · Like
Andrew, I'm afraid I don't have time (and I'm not even in Parliament yet!) to reply to all your arguments. But let me just, in defence of my fellow central bankers, say that central bankers should not be increasing the purchasing power of their currencies (that would mean steadily average falling prices, or deflation). If money is to be used as a store of value, and as a measuring rod, it is important that it neither decreases in value (as with inflation) or increases in value (as with deflation). Most central bankers acknowledge that the only way in which they can help economic growth is by keeping the value of money stable, so that consumers and producers can use the price mechanism to inform their decisions. You obviously fear that successive rounds of quantitative easing will cause inflation. Yes, it may do, but it certainly hasn't done yet, and I strongly expect those central banks which have undertaken quantitative easing to reverse that process at the first sign of inflation.
ADDENDUM: Whose fault is that Don. You joined the ACT Party just 2 months ago, and his is the only opportunity I get to talk to you, and when the questions turn a little hairy, you evade them. That is govt; you don’t need to be a parliamentarian…you think like one merely as a candidate. You are over-qualified…that is the problem.
October 15 at 2:14pm · Like
Don, there is nothing inherently bad about increasing purchasing power; that is wealth creation. Yes, you can match the growth in money supply to productivity to stabilise prices, but that is not what the Fed Reserve has been doing. It has been stimulating debt levels with unsustainable low rates of interest....now there is a great deal of defaults, so debasement or recapitalisation is necessary to avoid default of that debts, say in USA, EU, etc. Mass transfer of wealth (via extortion). The poor suffer the most. Measures of inflation are entirely selective and arbitrary...just look at MS growth over productivity or economic growth.....to that you say, QE 'might cause inflation'? Ask yourself why QE is necessary at all? Why did asset prices rise so high? And how inflation is avoidable? Inflation will inevitably cause debt defaults among those not propped up. You seem to think there is no causal relationship between MS and productive capacity? It is true strong wealth creation in China and the developing world is offsetting OECD antics...but the relative distribution of capacity is going to create a productivity gap.
October 15 at 4:10pm · Like
ADDENDUM: Don seems to have stopped talking to me; so because he is focused on getting higher profile attention, I thought I’d bring this to the attention of the media, because they love a controversy.