Fran O'Sullivan: Oops ... he's hit a bollard

It's that time of the year when little children put up the tinsel and dream about all the presents they'll get from Father Christmas.

But I'm finding it hard to dispel a different sort of picture.

The vision of Reserve Bank Governor Alan Bollard glued fast to the seat of a runaway car that won't respond to his repeated attempts to put the brakes on.

On the side of the road is Finance Minister Michael Cullen not sure whether to keep his Santa suit on and distribute all those cunning election bribes he promised during the campaign or throw the bag away and try to help Bollard arrest the runaway car.

Word around the corridors of power is that the Government's economic toughies are preparing for a hard landing scenario some time in the New Year.

Sceptics will observe that is not the type of scenario that either Cullen or even National's John Key were banging on about just a few weeks ago when they were slugging it out on the campaign trail.

There's since been a re-reckoning, as any amount of verbiage over the last few weeks from Bollard and Cullen alike attests.

Cullen deservedly earned a reputation as a tough fiscal manager in the first five years of the Clark Government.

But right now his reputation as fiscal Scrooge - the guy who ramped up his Budgets so there was little left for any potential competitor to spend on getting control of the Treasury benches without having to cut Government spending dramatically and (horrors) even borrow a bit - is seriously under threat.

Even Bollard, without naming names, is hinting that the Government (read Cullen) is increasingly looking like a fiscal spendthrift as the election bribes come home to roost.

Bollard may have statutory independence. But he is not really in the position to administer a good bollocking.

Quite why Cullen felt people would be bothered by the Government borrowing to give them tax cuts to fund their own debt I have never been able to fathom.

All he has done is create yet more Kiwi bludgers by expanding Work for Families.

He's locked into a corner on tax cuts but, if he does not move, this could be his last throw of the dice.

Trouble for Bollard is that some informed folks are suggesting that runaway car is really a metaphor for a central bank whose singular raison d'etre - using high interest rates to clobber inflation - is becoming suspect.

I've no pretensions to being a monetary policy expert.

But after years of watching the RB in action, it's not difficult to detect when the market has got the measure of the gamekeeper. Ask Don Brash.

After years of pushing against the market tide, the former Reserve Bank Governor finally fessed-up to the fact that central bank policies at one stage became dangerously out of sync, nearly tipping the economy into full-out recession. These are not the words Brash used but the effect was the same.

The present Reserve Bank Governor has been dishing out quite a lot of stick at pesky consumers for loading up on mortgage debt to buy houses (a sensible measure when property price inflation was and arguably still is riding high) and maxing the credit cards.

But ramping up interest rates has proved to be a blunt instrument to deal to Kiwis intent on a Christmas spendup.

All Bollard is doing is dishing out an interest rates bonanza - great for net savers and offshore investors in Government bonds but ruinous because of the way the hot money inflow is also pushing up the currency.

This real-world effect runs counter to central bank ideology which says offshore investors will take fright at our large balance of payments deficit, repatriate funds in favour of another more stable destination and dump the currency.

But the self-righting effect which was drummed into all economic journalists when the New Zealand dollar was floated two decades ago does not work quite like that.

Those offshore investors have taken the logical view that any currency drop will be more than offset by the real interest rate dividend they will make betting against the bank.

If Bollard and we are not careful they will continue to up the ante against the bank until interest rates get seriously stratospheric and ultimately cripple mortgage holders and exporters alike.

In the mid-1980s, interest soared well above 20 per cent, further exacerbating our difficulties as people simply capitalised debt and helped send New Zealand into a serious post-crash recession.

Will Bollard do any better?

My contention is that under his current policy settings it remains logical for consumers to continue to splurge on imported products while the exchange rate is high.

But the smart money - just like it did last time we went through this in the late 1990s - will use the opportunity to truck cash out and invest it in Australia or further afield, to quarantine reserves from the ultimate crash (when it comes).

But there's another solution worth considering.

Now that the New Zealand dollar is close to parity against the Australian dollar, it might be an opportune time to launch a common currency.

The Reserve Bank of Australia could then administer monetary policy and we might get a more sane outcome than the present destructive path our runaway bank is embarked on.