The criticisms levelled at the Reserve Bank over its introduction of loan to value restrictions for mortgages suggest a frightening ignorance about our vulnerabilities exposed by the global financial crisis. The move had been well signalled and the primary goal is to ensure the stability of our financial system. We should be more concerned that the banks fail to perceive any concerns themselves.
It is worth summarising the key features of the GFC to emphasise our vulnerability to future financial shocks. The GFC was the outcome of a combination of circumstances rather than the actions of a few greedy bankers. The emergence of major new players in the global economy such as China , Russia and India has unleashed a huge pool of cheap labour and manufactured output on the world economy.
These countries are seeking to export their way to prosperity. Many have been running massive trade surpluses. They have recycled these surpluses back to developed countries in the form of easy credit. Meanwhile, most Western economies deregulated their banking sectors in keeping with their belief in free markets. These deregulated banks eagerly acted as conduits for the huge pool of credit available on world markets. Until 2007, banks in New Zealand made full use of easy overseas credit to flood our mortgage market creating massive housing inflation.
The Reserve Bank even sent a delegation to Japan to discourage it from lending to us. In the United States the pool of decent borrowers quickly dried up so the sub prime mortgage market was born. This eventually viciously exposed the frailties of the international money merry-go-round.
The other key feature that has impacted on many developed economies has been the growth in income inequalities. The real incomes of middle and lower income earners have largely stagnated. But this stagnation has been disguised by easier access to credit in the form of credit cards and consumer and mortgage finance. Previous generations found it much harder to access credit. People have been encouraged to live beyond their means.