Reserve Bank governor Adrian Orr must be seriously considering his position this weekend. He should either resign or set out to solve one of the world's big problems.
I hope he takes the second option, but resignation must be a real possibility. This month he made announcements that riskedadding further fuel to a rampant housing market and declared resurgent house prices were not his concern, not part of the bank's brief.
This week Grant Robertson sent him a letter asking him to make house prices his concern. When a Minister of Finance puts a request in writing he is not really asking. It was an unprecedented but necessary challenge to the bank's statutory independence and amounts to a declaration of no confidence in the governor and his decision-making committee.
Orr is going to have to do better than his first response this week, which was to tell Robertson the Monetary Policy Committee already takes house prices into account when making its decisions as, "these are important transmission channels that affect employment and inflation".
This is a standard contention of monetarism that accepts, even welcomes, rising property values when an economy needs a stimulus. Rising values are said to have a "wealth affect", encouraging the property owner to spend more in the real economy that employs people.
Well, maybe, but as far as I can see rising house values mostly encourage owners to buy more houses, putting prices further beyond the reach of those without a house of their own. That is a social problem not a monetary one.
Robertson's proposal – to simply add house price stability to the Reserve Bank's targets – would be the wrong solution. This Government has already blurred the focus of monetary policy by adding an employment target. Monetary policy has proven it can contain inflation but it can't do more.
Monetarism has become a victim of its own success. Those who opposed its introduction in the 1980s and doubted it would stop inflation, came to see it as a magic wand for everything. Robertson's suggested additional target brings to mind Mike Moore's old retort: "What about tooth decay?"
House price inflation is not the same as consumer price inflation. Photo / File
National's new "Shadow Treasurer", Andrew Bayly's suggestion – to tag new lending for productive investments, not houses – is not much better. Governments should not dictate investment decisions to that degree.
Act leader David Seymour's solution, to include house prices in the bank's measure of inflation, would confuse the picture too.
House price inflation is not the same as consumer price inflation. When people buy houses they are not expending wealth, they are building it, they are saving. They are looking to amass more wealth than they will get by saving their money in a bank. Therein, I think, lies the problem and the solution.
It's a problem for the world. Monetarism has proven much less successful at stimulating economies than it was at stopping inflation. Higher interest rates can induce people to save money rather than spend it, thereby reducing consumer spending and stabilising prices. But the converse does not follow.
Lowering interest rates is supposed to induce people to take money out of savings and spend it, thereby stimulating consumption and generating economic growth. But lowering interest rates does not have that effect if the money taken out of banks is put into savings in the form of appreciating assets such as stocks or real estate.
When central bankers wonder why low interest rates and other monetary loosening devices they have applied adopted over the past 20 years have failed to stimulate much economic growth, the answer should be obvious. Stockmarkets and housing markets have boomed instead.
The savings effect seems so obvious that I can only wonder why the world persists with monetary stimulants. A fiscal device, government spending, is probably much more effective when an economy needs a boost.
I'm not an economist, just someone who listens to economists and I've not heard the savings effect even discussed. It could lead to the conclusion that central banks would better contribute to lifting an economy out of recession by finding ways to discourage excessive savings in any form. That's the task I hope Adrian Orr takes on in response to Robertson's request.
But we will get nowhere if he really believes the economy's rebound from the pandemic lockdowns this year depends on continuing monetary injections. Nobody knows. The economy has never been suspended by government order before, a rapid rebound may be natural.
If the bank stops lowering interest rates, cans a planned additional lending programme and restores loan to value restrictions without delay, the governor might save his job. If it can prevent monetary injections becoming unproductive property inflation, it would not the first time the RBNZ has broken new ground in central banking, and the governor might be in line for a prize.
