KEY POINTS:
Monetary policy needs mates. It always has.
But the Reserve Bank and the Government need to look further afield in the quest for measures that will help curb inflation without hammering the export sector than the trio Governor Alan Bollard referred to last week.
One would be a return to one of the last spasms of Muldoonery - moves to ring-fence tax losses from residential property investment.
Another requires Inland Revenue to bash its head against the brick wall of judicial reluctance to impose a capital gains tax on residential property.
And, third, using the regime intended to ensure a sound banking system for the different purpose of making the central bank's task easier when doing monetary policy.
Finance Minister Michael Cullen, whose political skills deserted him when talking about a mortgage interest levy, is proceeding more gingerly now.
He told a Deutsche Bank international investor mission on Tuesday there were no formal proposals on any of this yet and any policy option would need broad support.
When officials reported a year ago on six potential "supplementary stabilisation instruments", the one they liked least was ring-fencing.
To tax experts of a certain age, this is a flashback to a provision, Section 188A, Sir Robert Muldoon introduced into the tax laws in the early 1980s. It was to say the least unpopular, except perhaps among tax accountants who made a good living working out ways around it, and was one reason Sir Robert Jones founded his party.
When it was repealed in 1990, the IRD is on record as describing it as bad tax policy.
Other countries have similar provisions, including the United States, Britain, France, Germany and Canada. But that is a group of countries with different experiences in terms of housing cycles. There is no obvious correlation with this particular tax provision.
That said, econometric modelling by Westpac economists found quite a big effect from the rise in the top marginal income tax rate in 2000. By increasing the value of the tax shelter from negative gearing, that tax rate rise pulled down the rental yield investors needed and pushed up house prices.
But their bottom-line conclusion is that adjustment has probably run its course. The flipside is that a cut in the top tax rate would be desirable for this reason, with the other more familiar ones.
There are also calls for the IRD to be more aggressive in enforcing existing law on taxability of profits from the sale of non-owner-occupied houses bought with the purpose or intention of resale. One problem is that the tax laws ought to be enforced all the time, not just when it would reinforce the effectiveness of a monetary policy tightening.
The bigger problem is that it is easier said than done. The judiciary have taken a narrow view of this provision and the IRD has its work cut out persuading them housing investment should be subject to a capital gains tax.
That leaves the option of using the Reserve Bank's other role, the prudential supervision of the banking sector, to kill two birds with one stone.
One version would allow it to vary the amount of capital banks need to carry to back their mortgage lending, requiring more in the upswing of the cycle when lending criteria might otherwise become more lax.
Another variant would be to vary the loan-to-value ratio, that is, the amount of equity the borrower has to put up. These ideas may well make sense from the standpoint of ensuring the financial soundness of individual banks and the banking system as a whole.
If they are adopted, it should be for that reason and not because it might make monetary policy easier. One objective per instrument is usually best.
The risk for the Reserve Bank with the two-birds-with-one-stone approach is that the banks will suspect a cyclical tweaking of capital adequacy or local-to-value ratios is being done for non-prudential reasons.
That might encourage them to have another go at getting the task of banking supervision outsourced to the Australian regulator.
The bigger danger is that it could trigger a structural shift in the way mortgages are financed that could end up lessening the regulatory oversight.
In the United States, only a minority of mortgage debt is now held by banks. Most, some US$6.5 trillion worth, has been securitised and is held by Wall Street investment vehicles.
The riskier "sub-prime" end of that market, perhaps a fifth of the total, is starting to totter, triggering jitters in financial markets.
The last thing New Zealand needs is an incentive to go down a similar path.
There is no doubt the banks' vigorous pursuit of home buyers' business, squeezing their margins in the process, has made Bollard's life more difficult.
But it is a bit rich for an inflation-fighting central banker to rebuke any industry for being competitive.
The problem of how to curb inflation without inflicting an unacceptable level of collateral damage on the export sector remains.
The seat of the problem is the widespread conviction that the best way to accumulate wealth is not to save money but to borrow it and put it in bricks and mortar.
In part, that is a rational response to the tax laws' lenient treatment of housing on the one hand and stringent treatment of superannuation savings on the other.
National leader John Key's comments on the Agenda current affairs show on Saturday were interesting in this context. He said he favoured reducing taxation on investments other than housing and spoke approvingly of moves by George W. Bush and Peter Costello in that direction.
The preference for housing runs deeper than the tax laws, however, in attitudes born perhaps of the insecurity of the Great Depression or memories of the era of high inflation. Changing that mindset will not be easy.
The link between interest rates and the exchange rate is not a simple mechanical one. But as long as the banks need to raise a third of the money they lend overseas, it is idle to expect to decouple the two.
