Talking Heads

The Sixth Opinion

The jokes about economists are legion.  It’s all in good fun, but as with most jibes, there is usually a bit of truth in each.  Economics has not been called the “dismal science” for nothing.  Was it not Winston Churchill who growled one day, “if you laid all the economists in the world face down, head to tail . . . well, that would be a good thing to do”?  And was it not Winnie who also grumbled that he would give half his kingdom to meet a “one-handed economist”? And some long forgotten sage observed that if you meet two economists you will always be blessed by at least three opinions.

So, we are regaled by the pronouncements of one Shamubeel Eaqub, rated as one of the country’s top economists.  Entering into the spirit of the discipline of economics, we wish to give him the two handed salute.

On the one hand, Shamubeel Eaqub hit the nail right on the head when he opined recently on the state of politics in this current election season:

“What scares me are the policies that we see in the fringes and the fringe parties and they scare me a great deal because a few of them, quite frankly, are quite mad,” he said. “So when you vote on the 20th of September, you’re not voting for National or Labour, you’re trying to keep out the influence of some of those crazy policies.”  Eaqub said he did not want to go into the parties or policies he was most concerned about. “I don’t want to get into bad-mouthing particular political parties. Most of the small parties are not pursuing policies that are good for New Zealand – they are pursuing policies that are good for a small constituency.”

Take a bouquet and a bow.  Now, on the other hand . . .

Eaqub also said the Reserve Bank was “stuck in the 80s” in its preoccupation with inflation control and shouldn’t be raising interest rates in the current economic environment.  The central bank has lifted the OCR by one percentage point to 3.5 per cent this year.  “When you look at the companies you invest in, how many are increasing margins rapidly? How many of those businesses are raising prices? New Zealand is not in a strong growth, high-inflation period,” Eaqub said.

What misplaced rubbish.  Firstly, in defence of the RB, it is subject to the law and the law says it must focus almost exclusively on controlling inflation.  In this vital point, it is different from most other quasi-independent central banks, who are also charged with maintaining employment, and stimulating economic growth, which sets them conflicting objectives oftentimes.  In the bad old days, the New Zealand currency and interest rates used to be manipulated by rogue Prime Ministers who would pick up the phone in the dead of night and order up a rise or decline in interest rates, usually to ensure favourable public opinion just before an election.  New Zealand’s economy used to be more centrally controlled than East Germany’s.

It was to prevent this perfidy that the Reserve Bank Act legislatively created the independence of the central bank from such craven political “interventions”.  It also deliberately made the mandate of the bank more narrow by law, which meant that would not be subject to political interference, and the bumbling uncertainty that comes from many opinionated economists, Mr Eaqub notwithstanding.  Any changes to this Act would have to be done publicly and after due process, usually legislative process, via the parliament.

Secondly, New Zealand is a very small economy and subject to all kinds of distortions.  One of these is a volatile housing market, easily exposed to rampant speculation.  Much of the problem lies with a lack of housing supply, which, in turn, is highly priced, due in no small measure to the stifling regulatory blanket choking new housing development.  The costs to get local government approval to build a house are rapidly becoming one of the most significant imposts.  Approval comes at the price of tens of housands dollars spent satiating the appetites of the highway robbers that masquerade as local councils.  The ultimate blame should likely be laid at the feet of the nation’s greenists who are pathologically opposed to any human economic activity.  Long ago it was construed to be destructive to the “natural” environment.

Therefore, it is no surprise that at the first signs of economic recovery out of the most recent recession, the housing market rapidly became speculative and banks returned to high-risk lending.  The inefficient, highly regulated, tightly controlled, supply delimited housing market controls the inflation cycle in New Zealand.  The RB has focused most recently upon killing that goose off before its fools-gold eggs were laid.  It’s been a near run thing, and it’s not over yet.  Shamubeel Eaqub should know better.

It is the speculative market in housing which produces so much fools-gold and which, in turn, restrains New Zealand companies trading in other sectors from growing their earnings sustainably.  But, no problem. Without doubt another economist would have a sixth opinion on the matter.

The Calibre of the Modern Politician

Behold the Wonders

The calibre of politicians leaves much to be desired.  We suppose in democracies a society tends to get the politicians it deserves, but nevertheless we tire of our representative pontificating with sonorous solemnity about things they know very little.

In New Zealand the independent Reserve Bank (made independent to prevent politicians meddling with the money supply in a self-interested attempt to garner public support) is charged with the integrity and solvency of the banking system.  To that end it has recently stipulated that mortgage lending banks require house buyers to put down equity of 20 percent of the purchase price or more, for 80 percent of their mortgage books. This effectively stops reckless lending by banks in its tracks.

New Zealand escaped the worst of the debt and housing crisis in the global financial crisis of 2008 and onwards.  But its housing market is overvalued now by prudent measures, and the market is showing signs of overheating in large population centres.  Some banks have been behaving recklessly.  Hooray for the RB.

Enter stage left the empty principled, void minded politician.  They realise immediately that this new policy will hurt some people–in the sense that an injection at the doctor’s might hurt.  It causes some pain to prevent much worse afflictions in the future.  Hah–time to whip up some electoral support.

Labour leader David Cunliffe ramped up pressure on the Government with a public meeting with Kanik Mongia, 23, an IT consultant, who had mortgage pre-approval for a 90 per cent loan cancelled by ASB because of the LVR changes. He was seeking $450,000 for an investment property.

Cunliffe said there was need to cool the property market, especially in places like Auckland, but the new lending rules would have “unintended consequences” on first home buyers. “Unfortunately they are taking it out on the hide of first home buyers like Kanik, and that’s not what we want. We want young people to be able to get into their homes and we don’t want young speculators driving prices through the roof,” he said.(Stuff)

Lots of commentators have mocked the stupidity of choosing a “first home buyer” as poster boy who actually wanted to make a speculative investment, not purchase a house to live in.  But if banks were allowed to continue their reckless lending of requiring only a 10 percent deposit from house buyers, it is precisely the “first home buyers” who would likely end up with negative equity and forced mortgagee sales when the housing market turned down–as it eventually will.  What then would Cunliffe turn to?

Would he let the speculative home purchasers watch their houses being repossessed by mortgagee sales?  Would he nationalise the banks?  Would he doll out socialist dollars to inject fresh equity into houses underwater with debt?  Would he scrap the Reserve Bank Act and make the Reserve Bank once again subject to the whims and venal lusts of politicians?  All of the above, no doubt, would be on the table.

And all this, because Cunliffe failed to exercise basic moral precepts of integrity and demonstrate true leadership when it was needed.  Why has he thus failed?  Because of his lust for power, and because his moral compass is not calibrated so as to direct him away from bribery and corrupting the electorate, and because he does not have the smarts to realise that he would risk turning New Zealand into Spain, or Italy, or Greece.

Ignorance and corruption.  Behold the modern politician.  What wonders secular humanism has wrought.