Housing and Monetarism
by Brian Easton
The Reserve Bank cannot deliver affordable housing by itself. Its
actions have to be coordinated with the government's. Unfortunately
the monetarist framework of the Reserve Bank Act obscures this.

The tensions between the Reserve Bank and the Government over housing
policy go back to the mistaken economic thinking in the 1989 Reserve
Bank Act. Monetarism ruled and it is that underlying monetarist
approach which is creating the tensions.

I have no quarrel with the governance provisions which gave the
Reserve Bank independence in the operating of its monetary policies.
Many commentators, imbued with the tradition of the centralised
governing of New Zealand, do. They forget the time when Prime Minister Muldoon used to ring the Governor secretly telling him what had to do.
The Prime Minister can still do that, but to have the force of law it
has to be done by a letter tabled in parliament so that any direction
is transparent. So while the operating of monetary policy is today the preserve of the Reserve Bank, the Government still directs its goal.

I chose not to make submissions to the select committee considering
the bill: parliament was not listening to critics of Rogernomics.
However I checked that the proposed legislation did not rule out what
in my, and others’, opinion is the primary function of a central bank
– to maintain order in money markets. Fortunately there was a clause
which allowed the Reserve Bank to take action, in tandem with the
Treasury, to settle the New Zealand money markets as they went into
turmoil during the Global Financial Crisis. Other central banks did
too, implementing policies which are difficult to justify in a
monetarist framework.

My objection to the Act was the requirement that the Reserve Bank be responsible for price stability. This has (at least) three implicit assumptions.

First, it assumed the notion of price stability can be rigorously
defined. In fact an economy has numerous prices, many of which do not
move together. Currently house prices are on quite a different
trajectory to that of the majority of consumer prices. I’ll come back
to that, but share prices, land prices and the exchange rate all move differently too (as does do tradeable prices from non-tradeable
prices).

Second, there is the assumption that monetary policy can target
effectively any chosen price index. The fact of the matter is that
throughout the world central banks, including the RBNZ, have been
unable to prevent the current world disinflation – falling or
excessively low increases in prices. Monetary policy has only some
effect and it is heavy handed or slow or even ineffective.

Third, the Reserve Bank Act assumes that effective monetary policy can
be run independently of fiscal and other government economic policies.
We shall see it cannot.

(I read the official papers which backgrounded the Act. Not one
addressed these issues. The papers simply took the monetarist approach
which assumed that its underlying economics was not problematic. The
lacuna is reinforced in the recently published history of the Reserve
Bank which also ignores the issues.)

The relevance to the current situation is that, first, the RBNZ is,
rightly, concerned with (at least) two kinds of price inflation –
consumer prices and housing prices (which threaten the long-term sustainability of the economy). Second, it can use monetary policy to
target one or the other but not both, so it has been hunting around
for ad hoc instruments (like loan-to-value ratios) to target the
other. Third, its interventions are going to be ineffective unless
they are supported by other policy settings which are the direct responsibility of the government. These include contributing to
increasing the supply of housing, say by building more itself;
reducing the demand by an effective capital gains tax and easing back migration.

Altogether this means that the RBNZ cannot adequately restrain house
prices as long as it is also concerned with consumer prices. If it
were directed to primarily target housing prices, its impact would be
high interest rates, a brutal deflation and a long time to be
effective, especially if the government did not play its part.

For reasons which partly reflect a monetarist ideology and partly
because any effective decision is politically uncomfortable, this
government is unwilling to play. The Reserve Bank Act becomes a nice
little excuse for it doing hardly anything except facilitating the
private supplyside, thereby avoiding uncomfortable policies (in the
short term).

Meanwhile, that epitome of politeness, the Governor of the Reserve
Bank, has indicated that the government has to take more
responsibility for the unsatisfactory state of the housing market.
Hence the tension between the Governor's and the Prime Minister's pronouncements.

Just to be clear, there is nothing in this column’s analysis which
would upset an orthodox economist. Monetarism is not nearly as popular
among them as it is among do-nothing politicians and pop-commentators.

http://pundit.co.nz/content/housing-and-monetarism

_____________________

There are actions which the government can take, but they are wedded
to "the market (or someone else) will solve all problems". Labour, the
Greens and NZ FIrst are all (with different emphases) calling for
increased restrictions on immigration, doing something about taxing
capital gains, and just building some houses (instead of selling
them). Action is not someting National want to do - too many donors
are tied up with the current market distortions.

On Tuesday, 19 July 2016 10:09:20 UTC+12, Rich80105 wrote:

Housing and Monetarism
by Brian Easton
The Reserve Bank cannot deliver affordable housing by itself. Its
actions have to be coordinated with the government's. Unfortunately
the monetarist framework of the Reserve Bank Act obscures this.

The tensions between the Reserve Bank and the Government over housing
policy go back to the mistaken economic thinking in the 1989 Reserve
Bank Act. Monetarism ruled and it is that underlying monetarist
approach which is creating the tensions.

I have no quarrel with the governance provisions which gave the
Reserve Bank independence in the operating of its monetary policies.
Many commentators, imbued with the tradition of the centralised
governing of New Zealand, do. They forget the time when Prime Minister
Muldoon used to ring the Governor secretly telling him what had to do.
The Prime Minister can still do that, but to have the force of law it
has to be done by a letter tabled in parliament so that any direction
is transparent. So while the operating of monetary policy is today the
preserve of the Reserve Bank, the Government still directs its goal.

I chose not to make submissions to the select committee considering
the bill: parliament was not listening to critics of Rogernomics.
However I checked that the proposed legislation did not rule out what
in my, and others�, opinion is the primary function of a central bank
� to maintain order in money markets. Fortunately there was a clause
which allowed the Reserve Bank to take action, in tandem with the
Treasury, to settle the New Zealand money markets as they went into
turmoil during the Global Financial Crisis. Other central banks did
too, implementing policies which are difficult to justify in a
monetarist framework.

My objection to the Act was the requirement that the Reserve Bank be
responsible for price stability. This has (at least) three implicit
assumptions.

First, it assumed the notion of price stability can be rigorously
defined. In fact an economy has numerous prices, many of which do not
move together. Currently house prices are on quite a different
trajectory to that of the majority of consumer prices. I�ll come back
to that, but share prices, land prices and the exchange rate all move
differently too (as does do tradeable prices from non-tradeable
prices).

Second, there is the assumption that monetary policy can target
effectively any chosen price index. The fact of the matter is that
throughout the world central banks, including the RBNZ, have been
unable to prevent the current world disinflation � falling or
excessively low increases in prices. Monetary policy has only some
effect and it is heavy handed or slow or even ineffective.

Third, the Reserve Bank Act assumes that effective monetary policy can
be run independently of fiscal and other government economic policies.
We shall see it cannot.

(I read the official papers which backgrounded the Act. Not one
addressed these issues. The papers simply took the monetarist approach
which assumed that its underlying economics was not problematic. The
lacuna is reinforced in the recently published history of the Reserve
Bank which also ignores the issues.)

The relevance to the current situation is that, first, the RBNZ is,
rightly, concerned with (at least) two kinds of price inflation �
consumer prices and housing prices (which threaten the long-term
sustainability of the economy). Second, it can use monetary policy to
target one or the other but not both, so it has been hunting around
for ad hoc instruments (like loan-to-value ratios) to target the
other. Third, its interventions are going to be ineffective unless
they are supported by other policy settings which are the direct
responsibility of the government. These include contributing to
increasing the supply of housing, say by building more itself;
reducing the demand by an effective capital gains tax and easing back
migration.

Altogether this means that the RBNZ cannot adequately restrain house
prices as long as it is also concerned with consumer prices. If it
were directed to primarily target housing prices, its impact would be
high interest rates, a brutal deflation and a long time to be
effective, especially if the government did not play its part.

For reasons which partly reflect a monetarist ideology and partly
because any effective decision is politically uncomfortable, this
government is unwilling to play. The Reserve Bank Act becomes a nice
little excuse for it doing hardly anything except facilitating the
private supplyside, thereby avoiding uncomfortable policies (in the
short term).

Meanwhile, that epitome of politeness, the Governor of the Reserve
Bank, has indicated that the government has to take more
responsibility for the unsatisfactory state of the housing market.
Hence the tension between the Governor's and the Prime Minister's
pronouncements.

Just to be clear, there is nothing in this column�s analysis which
would upset an orthodox economist. Monetarism is not nearly as popular
among them as it is among do-nothing politicians and pop-commentators.

http://pundit.co.nz/content/housing-and-monetarism

_____________________

There are actions which the government can take, but they are wedded
to "the market (or someone else) will solve all problems". Labour, the
Greens and NZ FIrst are all (with different emphases) calling for
increased restrictions on immigration, doing something about taxing
capital gains, and just building some houses (instead of selling
them). Action is not someting National want to do - too many donors
are tied up with the current market distortions.

Easton is true to his lefty roots: suggesting that the government build >houses. What makes him think the government can magic up the
land to build these houses any better than the private sector? It still
comes down to supply of land to build them on, followed by supply
of builders to build them. Neither are created by waving the statist wand.

As to immigration... does he know that one of the largest contributors
to net immigration is the turnaround of Kiwis leaving to Australia into
Kiwis coming home? Not much can be done about that.

Rich80105<rich80105@hotmail.com> wrote:

Housing and Monetarism
by Brian Easton
The Reserve Bank cannot deliver affordable housing by itself. Its
actions have to be coordinated with the government's. Unfortunately
the monetarist framework of the Reserve Bank Act obscures this.

The tensions between the Reserve Bank and the Government over housing >>policy go back to the mistaken economic thinking in the 1989 Reserve
Bank Act. Monetarism ruled and it is that underlying monetarist
approach which is creating the tensions.

I have no quarrel with the governance provisions which gave the
Reserve Bank independence in the operating of its monetary policies.
Many commentators, imbued with the tradition of the centralised
governing of New Zealand, do. They forget the time when Prime Minister >>Muldoon used to ring the Governor secretly telling him what had to do.
The Prime Minister can still do that, but to have the force of law it
has to be done by a letter tabled in parliament so that any direction
is transparent. So while the operating of monetary policy is today the >>preserve of the Reserve Bank, the Government still directs its goal.

I chose not to make submissions to the select committee considering
the bill: parliament was not listening to critics of Rogernomics.
However I checked that the proposed legislation did not rule out what
in my, and others�, opinion is the primary function of a central bank
� to maintain order in money markets. Fortunately there was a clause
which allowed the Reserve Bank to take action, in tandem with the
Treasury, to settle the New Zealand money markets as they went into
turmoil during the Global Financial Crisis. Other central banks did
too, implementing policies which are difficult to justify in a
monetarist framework.

My objection to the Act was the requirement that the Reserve Bank be >>responsible for price stability. This has (at least) three implicit >>assumptions.

First, it assumed the notion of price stability can be rigorously
defined. In fact an economy has numerous prices, many of which do not
move together. Currently house prices are on quite a different
trajectory to that of the majority of consumer prices. I�ll come back
to that, but share prices, land prices and the exchange rate all move >>differently too (as does do tradeable prices from non-tradeable
prices).

Second, there is the assumption that monetary policy can target
effectively any chosen price index. The fact of the matter is that >>throughout the world central banks, including the RBNZ, have been
unable to prevent the current world disinflation � falling or
excessively low increases in prices. Monetary policy has only some
effect and it is heavy handed or slow or even ineffective.

Third, the Reserve Bank Act assumes that effective monetary policy can
be run independently of fiscal and other government economic policies.
We shall see it cannot.

(I read the official papers which backgrounded the Act. Not one
addressed these issues. The papers simply took the monetarist approach >>which assumed that its underlying economics was not problematic. The
lacuna is reinforced in the recently published history of the Reserve
Bank which also ignores the issues.)

The relevance to the current situation is that, first, the RBNZ is, >>rightly, concerned with (at least) two kinds of price inflation �
consumer prices and housing prices (which threaten the long-term >>sustainability of the economy). Second, it can use monetary policy to >>target one or the other but not both, so it has been hunting around
for ad hoc instruments (like loan-to-value ratios) to target the
other. Third, its interventions are going to be ineffective unless
they are supported by other policy settings which are the direct >>responsibility of the government. These include contributing to
increasing the supply of housing, say by building more itself;
reducing the demand by an effective capital gains tax and easing back >>migration.

Altogether this means that the RBNZ cannot adequately restrain house
prices as long as it is also concerned with consumer prices. If it
were directed to primarily target housing prices, its impact would be
high interest rates, a brutal deflation and a long time to be
effective, especially if the government did not play its part.

For reasons which partly reflect a monetarist ideology and partly
because any effective decision is politically uncomfortable, this >>government is unwilling to play. The Reserve Bank Act becomes a nice
little excuse for it doing hardly anything except facilitating the
private supplyside, thereby avoiding uncomfortable policies (in the
short term).

Meanwhile, that epitome of politeness, the Governor of the Reserve
Bank, has indicated that the government has to take more
responsibility for the unsatisfactory state of the housing market.
Hence the tension between the Governor's and the Prime Minister's >>pronouncements.

Just to be clear, there is nothing in this column�s analysis which
would upset an orthodox economist. Monetarism is not nearly as popular >>among them as it is among do-nothing politicians and pop-commentators.

http://pundit.co.nz/content/housing-and-monetarism

_____________________

There are actions which the government can take, but they are wedded
to "the market (or someone else) will solve all problems". Labour, the >>Greens and NZ FIrst are all (with different emphases) calling for
increased restrictions on immigration, doing something about taxing
capital gains, and just building some houses (instead of selling
them). Action is not someting National want to do - too many donors
are tied up with the current market distortions.

Other than the last (presumably added) paragraph which is fatuous and not in >the same intellectual league as the article, this is a reasoned analysis but at
the end of the day it is opinion only. There is no clear suggestion about how >to sort out the housing situation or anything else for that matter.
Tony

If people struggle to afford a house in Auckland then one solution is to not live in Auckland.