First scratch: National wants RBNZ to attach strings to FLP so banks lend to businesses

Bayly says Govt must tell Governor Orr "to stop throwing more and more printed money at our overpriced housing market"; Cullen wants direct financing of Govt infrastructure spending

TLDR: Andrew Bayly and Michael Cullen just lit the blue touch paper on a massive debate about the future of the Reserve Bank’s $128b programme of money printing to lower interest rates, which has sparked a new housing boom.

Cullen wants the bank to directly fund Government infrastructure spending with that printed money, and Bayly wants the central bank’s cheap lending to banks to be directed to businesses, farmers and new house-building, rather than just buying existing homes.

Make no mistake: the political consensus in favour of an independent inflation-targeting central bank is dissolving as we speak.

My view: The Reserve Bank is just a third of the way through its programme and mortgage rates could fall to just 1.5% next year, unleashing another 20-30% rise in house prices. That is politically unsustainable at a time when property owners just got $100b richer through the value of their homes and Jacinda Ardern is refusing to spend $5.2b more to raise benefits more because she says the Government is short of money.

The Reserve Bank should be directly funding a $100b programme of Government infrastructure spending over 10 years to massively improve housing affordability and address climate change by flooding the housing market with 100,000 new homes and building the public transport and water infrastructure needed to reach carbon net zero by 2050.

The post-1989 era of focusing the Government on having an independent inflation-targeting central bank and limiting the size of Government (to around 30% of GDP in NZ) by targeting net debt of 20% of GDP is politically unsustainable when the fallout of Covid-19 is hitting young renters, Māori, Pacifica and women hardest, while property and share owners celebrate hundreds of billions of unearned and untaxed wealth.

These should be bi-partisan targets where independent authorities (RBNZ, Kāinga Ora, NZTA and the Climate Commission) pull the infrastructure, tax and spending levers to achieve that.

We should be targeting just a 10th of poor families spending more than 30% of their income on housing (it trebled to 55% over the last 30 years) and getting on track for net carbon zero by 2050.

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‘Government must rein in Reserve Bank now’

National’s Shadow Treasurer Andrew Bayly has put out a statement calling on the Government to ‘rein in the Reserve Bank now’ by sending a letter of expectation to Adrian Orr that would immediately mandate him to attach strings to its Funding for Lending Programme of money printing for near-zero-percent interest rates for banks.

The comments followed those from former Labour Finance Minister Michael Cullen this morning that he wanted Reserve Bank reform, in particular changing from money printing and bond buying to lower interest rates through the secondary market, to lending that money directly to the Government to build infrastructure and housing. (Stuff)

Bayly wants the Reserve Bank to only lend the money to banks to businesses and house-building, rather than existing houses.

“The Reserve Bank’s funding for lending scheme could pump up to $28 billion into the banking system but there would be no requirement for that money to flow into productive parts of the economy. Instead, it’s likely the new funding will flow straight into the already unaffordable housing market, when it could and should go towards new house builds, local businesses and our agriculture and horticulture sectors.” Andrew Bayly

Bayly said the current runaway housing market was not sustainable. He cited figures showing housing lending has increased by $8.7b, while business lending has fallen by $6.1b and lenders to farmers and housing developers was flat.

“The worrying thing is that the Reserve Bank is only about a third of the way through its quantitative easing programme, so the problem is not going away. Unless something is done, house prices and the value of other assets will continue to sky-rocket as investors look for higher yields than they can get at their local banks. This is bad for first-home buyers. It will make it harder for them to compete with investors and raises the prospect of an asset price bubble pop when things eventually return to normal.” Andrew Bayly

Bayly said there was a fundamental lack of supply and the Government needed to replace the RMA, free up more land for housing and get more houses built.

“While we support the independence of the Reserve Bank, we believe the Government can no longer afford to cross its fingers and hope for it to do the right thing. The Government needs to take this situation seriously and tell the Reserve Bank to stop throwing more and more printed money at our overpriced housing market.” Andrew Bayly

I welcome your thoughts in the comments below.

Cheers

Bernard