BRYCE EDWARDS:  Will the Govt act on mega bank profits and reform the banking sector?

Dr Bryce Edwards writes – 

The corporate retail banks are making mega profits on the back of Government policies and indirect subsidies of recent years. As a result, there are calls from across almost the whole political spectrum for greater regulation of the banking sector, including windfall taxes. But will outrage turn into action?

Prime Minister Jacinda Ardern led the charge against the banks this week, warning the likes of ANZ – which announced recently that its profits were up 20 per cent to a record $2.3b – that they are at risk of losing their “social license” to operate here.

The Prime Minister sounded tough, but she was also quick to admit that she has no intention of taking any action or changing the rules. The Finance Minister Grant Robertson was also fast to rule out any reforms or further investigations.

Critics have said that Ardern’s plea for the banks to have “self-reflection” is wishful thinking in the extreme. The Green Party’s finance spokesperson, Julie Ann Genter, put forward this analogy: “Expecting banks… to put people ahead of profit would be a bit like putting the fox in charge of the hen house.” Continue reading BRYCE EDWARDS:  Will the Govt act on mega bank profits and reform the banking sector?

ANZ (while chalking up a $2bn net profit) says it is helping build future prosperity and security for Aotearoa

Australian  banks  aren’t  popular  in  NZ,  right?

They  make  huge profits, then  ship  the booty back  to  the  greedy  shareholders  across  the  ditch.

That’s  the  refrain  from many straitened Kiwis  who  nevertheless are disinclined to switch to using  NZ-owned  banks.

There are  other  New Zealanders  who  find   the  services  of  Australian   banks quite  satisfactory,  and  see  the  scale  of  their   businesses  as  a  reassuring  haven  for  their  savings.

This  week  ANZ New Zealand  cracked  the  $2 billion  mark in net profit  for  the  first  time.

Chief Executive Antonia Watson said the 8% increase in profit was a result of a combination of pent-up post-pandemic economic activity and a buoyant housing market. Continue reading “ANZ (while chalking up a $2bn net profit) says it is helping build future prosperity and security for Aotearoa”

Heartland considers becoming a bank in Australia, where it is doing good business with its reverse mortgage policy

Heartland Group Holdings, the parent company of Heartland Bank, is eyeing up becoming a bank in Australia.  CEO Jeff Greenslade   says “it’s  a pretty exciting” opportunity.

The group this week announced a record profit of $95.1m as well as a $200m capital raising.

The  go-ahead  company said it was at the early stage of possibly acquiring start-up bank Avenue Bank in Australia.  If this goes ahead Avenue Bank will become the company’s vehicle in Australia.

But the intention also would be to make the NZ Heartland Bank a subsidiary of the Australian operation. This would require RBNZ approval and Heartland said contact with the RBNZ about this was at an early stage. Continue reading “Heartland considers becoming a bank in Australia, where it is doing good business with its reverse mortgage policy”

Don’t expect too much if we get negative interest rates

Are central bankers jealous that epidemiologists are the rock stars of the current crisis?

There is talk that both the British and New Zealand central banks might institute negative interest rates as part of the policy response to the Covid shock.  Continue reading “Don’t expect too much if we get negative interest rates”

PGF pumps millions into Wairarapa water projects – but who will own the water?

The providers of public handouts are back in action and the Point of Order Trough Monitor has sounded its first alert for 2020.

Wairarapa water projects are the beneficiaries of a $7.11m boost from the Provincial Growth Fund, announced this morning by Parliamentary Under-Secretary for Regional Economic Development Fletcher Tabuteau.

This is a significantly greater lump of money than the PGF investment of $800,000 which Tabuteau announced in May last year for Wairarapa Water Limited to investigate the development and construction of community water storage.

The money was to help the company to review and update a 2015 pre-feasibility study which investigated six potential water schemes in the region and to align the study to recent climate change projections and current Government policies regarding small-scale water storage schemes for communities.

Today Tabuteau said two projects will receive funding:

  • A $7 million investment in Wairarapa Water Limited for the pre-construction development of water storage (and associated distribution) infrastructure at the Wakamoekau site in the Wairarapa.
  • $110,000 to the Wellington Regional Economic Development Agency Ltd led by the Wairarapa Water Resilience Committee to develop and produce a Wairarapa Water Resilience Strategy.

Tabuteau has become fluent in speaking the language of Beehive largess: Continue reading “PGF pumps millions into Wairarapa water projects – but who will own the water?”

Crackdown on the banks was not as severe as had been feared – RBNZ board might have had a muffling effect

The roll of drums sounded  for  many  months — but the  Reserve  Bank’s call  on  how  the country’s banks could  withstand  a  one-in-200-year financial  crisis  landed  with  less of  a bang, more  like a whimper,  last week.

At least, that’s how  the  markets  interpreted   the  decision of the Governor,  Adrian  Orr,  whose  early  belligerence  had struck terror  into  the boardrooms of  trading banks,  particularly those with  headquarters across the  ditch.

By Monday, economists decided the changes, being softer  than  originally  proposed,  would  prove less of  a headwind  to the economy than   initially envisaged.

The overall  level  of  capital  required    will  still  have  to  rise  from a minimum of  10.5%  currently to  18% — -but the banks  will have longer to raise the capital. And  the RBNZ softened  what  it will consider as tier one  capital  to include redeemable preference  shares, offering  a cheaper  way to  raise money. Continue reading “Crackdown on the banks was not as severe as had been feared – RBNZ board might have had a muffling effect”

There’s more to Libra than meets the eye

Confused by Facebook’s Libra proposal for a digital currency? The commentariat seems unable to decide if it’s a giant money-laundering cum tax-dodging scam or redundant on the grounds of necessity.

You might want to look at it from Mark Zuckerberg’s point of view.  The digital revolution has collapsed the cost of storing, transmitting and verifying data.  So we ought to be in a new golden age of money management: instantly and costlessly sending money around the world.  Er … not quite.  Somehow your bank wants you to spend more time with it than you would like, preferably bringing multiple forms of ID, whenever you have a new way of using your money.

Continue reading “There’s more to Libra than meets the eye”

Fallout from the Hisco affair is bound to spread to RBNZ moves to regulate bank capital

Pressure may be mounting for  a  broad  inquiry into  the banking industry following recent incidents involving  the biggest trading  bank in NZ.

Agriculture  Minister  Damien  O’Connor  said this week  banks  are  “bullies”  (according to a  Radio NZ report).  It’s a  sentiment shared  by  many  New Zealanders.

This  sentiment has  been rekindled by the departure  of ANZ’s CEO  David Hisco  who, it had been found, passed off charges for chauffeur-driven cars and the cost of storing his wine collection as business rather than personal expenses.

ANZ suffered a couple of regulatory blows last month with the Reserve Bank forcing it to hold more capital against housing and farm lending from June 30 and to use the standardised model for calculating its operational risk capital (ORC) rather than its own internal model.  That’s because it had been using a modified internal model for calculating ORC since December 2014 without first getting RBNZ approval. Continue reading “Fallout from the Hisco affair is bound to spread to RBNZ moves to regulate bank capital”

Is Modern Monetary Theory voodoo economics?

Difficult times make for questionable thinking.  So soon you might be hearing a little more about Modern Monetary Theory (MMT) – a slippery body of theory which has emerged from the low interest rate environment which followed the 2008 global financial crisis.  It’s hard to pin down but at its heart is the belief that modern governments which can print their own money have fewer constraints on increasing spending and raising public debt levels than suggested by conventional economists and central bankers. MMT is finding popularity on the left wing of America’s Democratic Party as a painless way to pay for renewable energy and state-run healthcare.

The latest person to say we should take this seriously is Mr Ray Dalio, an American billionaire who opines on public policy (his full argument is here and a Bloomberg summary is here).  Mr Dalio thinks that interest rates and inflation will remain low; central banks, unable to cut interest rates below zero, will run out of ways to stimulate the economy with monetary policy; and fiscal policy will step into the gap in imaginative ways (for example, printing money to finance state spending, buying assets, writing off debts or even cash handouts).

As is often the case with this sort of thinking, there is a body of truth providing the seedbed from which the theory grows.  This can make it more tricky to distinguish sound conclusions from flawed. So it’s noteworthy that MMT has caught heavy duty flak from both ends of the political spectrum. Take the following analyses from economists Paul Krugman and Scott Sumner – who have clashed ferociously on almost every aspect of economic policy over the last ten years.

A Nobel prize winner of the centre-left, Mr Krugman is just the man MMTers would like on their side. He was a strong proponent of the inadequacy of monetary policy both during and after the 2008 global downturn, and a leading advocate of fiscal expansion. But he is very clear on the parameters of this policy and in this column he makes equally clear that he thinks many of the claims for MMT are based on defective reasoning.  An example of his customary trenchancy: “So let’s be clear here: Are MMTers claiming … that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers …”.

On the other side of the fence, Mr Sumner is a market monetarist theorist (note – different sort of MMT).  His thinking runs in a line from Milton Friedman and Anna Schwartz’s pioneering work in the 1960s on the monetary history of the United States. He believes monetary policy should be more market and less model based in order to keep inflation low and better manage unusual demand shocks like the 2008 slump. The key variable is using interest rates to keep nominal GDP growing at a stable rate.

In his assessment of MMT, he says that mainstream economists (read Mr Krugman) are sometimes a little sympathetic towards its claims when the economy is depressed and interest rates are zero, because they think monetary policy may not work and fiscal policy is more powerful. Mr Sumner has no truck even with this carefully-circumscribed sympathy.  His view: “In 2013, we saw how even at the zero bound for interest rates, monetary policy is still more powerful than fiscal policy. A dramatic $500 billion reduction in the budget deficit did not lead to the growth slowdown predicted by many Keynesian economists. It was fully offset by expansionary Fed actions and much more aggressive forward guidance.”

Lacking Mr Krugman’s or Mr Sumner’s qualifications, a lay observer with a moderate historical knowledge might ask if Mr Dalio is really wise to assume that the world is stuck in a permanent cycle of low inflation and interest rates.  It’s true, as Mr Dalio points out, that Japan has been there for several decades now and has successfully run up a huge government debt of 250% of GDP.  But this has been possible because Japan’s numerous old people like cash savings and are happy to lend to their government at screamingly low nominal (and real) interest rates.  The government has recycled those savings into spending on schools, police and, with some irony perhaps, pensions.  All very neat so far.  But bear in mind that there is a commitment – eventually – to repay those resources – say if a grandparent wanted to help a son buy a house or help a granddaughter pay for her education.  If this were to happen on any scale, the government will have to divert real spending to do this.  Or find a creative way of writing down its obligations.

Nor is Japan’s approach to the current economic climate the only option. Switzerland faced roughly similar circumstances but its government reduced debt to less than 30% of GDP.  New Zealand also lowered its government debt to GDP ratio, but its businesses and consumers borrowed heavily at low real interest rates to invest in highly productive assets like dairy farms or rental housing.  This has been a great trade – so far.  But if there is a change – as yet unforeseen – in global savings, consumption and investment patterns, we could see higher global real interest rates (remember how high rates were needed to defeat inflation in the 1980s and 1990s?). Some NZ investment decisions might then look a bit silly with hindsight. And MMT will certainly be much less appealing (no doubt its supporters will transition smoothly to making the case for capital and interest rate controls).

Acculturation at our central bank – Orr branches into spiritualism (maybe to give more mana to money)

Our financial ecosystem seems well and truly rooted.

Point of Order doffs its cap to Michael Reddell for alerting the public to the Reserve Bank of New Zealand’s plunge into political correctness.

Reddell draws attention, too, to the awful reality that a great deal of government improvidence goes undetected by the Point of Order Trough Monitor, which limits its surveillance to the profligacy of the inhabitants of the Beehive.

In particular, he has highlighted the Reserve Bank’s recruiting a “cultural capability advisor Maori” and wonders what this bureaucrat will do in an agency with three main jobs, none of them involving direct dealing with the general public – Maori, European, Chinese, Mexican or whatever:

  • the Bank issues bank notes and coins.  That involves purchasing them from overseas producers, and selling them to (repurchasing them from) the head offices of retail banks;
  • it sets monetary policy.  There is one policy interest rate, one New Zealand dollar, affecting economic activiity (in the short-term) and prices without distinction by race or culture.  Making monetary policy happen, at a technical level, involves setting an interest rate on accounts banks hold with the Reserve Bank, and a rate at which the Reserve Bank will lend (secured) to much the same group.  The target – the inflation target, conditioned on employment (a single target for all New Zealand) – is set for them by the Minister of Finance.
  • and it regulates/supervises banks, non-bank deposit-takers, and insurance companies, under various bits of legislation that don’t differentiate by race or culture.

Continue reading “Acculturation at our central bank – Orr branches into spiritualism (maybe to give more mana to money)”