Norman Russel William: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
Norman Russel William: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
[Volume:657;Page:6046] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I stand to speak on behalf of the Green Party. The Green Party will be supporting the Crown Retail Deposit Guarantee Scheme Bill. We think that it is a very sensible thing to have a time-limited extension of the retail deposit guarantee scheme; in fact it is essential. It is essential to maintain confidence in the banking sector. Over time I hope we can see the end of this scheme and I am sure that we will. 
The framework for this whole bill and the current situation we find ourselves in is the international financial crisis which put the New Zealand banking sector along with the entire global banking sector in the position where the taxpayer had to come to the rescue of the banks. All around the world taxpayers had to come to the rescue of the banking and financial sector for the simple reason that the banks and the financial sector were too big to fail. It was simply impossible for us to contemplate having a major failure in the New Zealand banking sector because the impact of that on the New Zealand economy would have been very very significant and very negative. 
We had little choice I believe but to introduce the retail deposit guarantee scheme when it was introduced in the lead-up to the election and over time to slowly wean ourselves off it. This legislation is a step in that direction and I think it is good. However I think we need to look a little more broadly. Although this is a fine thing to do it is really a band-aid to deal with a larger problem. 
One of the interesting things that came out of the banking inquiry was that we need to have a broader discussion and debate about the banking sector in New Zealand and about monetary policy. For me one of the key things that came out of the discussion was that it is all very well to have bills like this in order to maintain the stability of the banking system in a crisis but the overall stability of the banking system in New Zealand and the New Zealand economy has much larger problems than something that a short-term retail deposit guarantee scheme can fix up. That really cuts to the chase about monetary policy and the impact of monetary policy on the New Zealand economy. 
We have relied on the official cash rate as our tool for monetary policy for many years now—for a couple of decades—and I think that now in the midst of a global economic crisis surely is the time when we have the space to rethink whether relying on the official cash rate as our only mechanism for monetary policy is sufficient. 
To look at that matter we have to look at the problems that we have got ourselves into with the official cash rate. One of the key issues that has developed is that as the official cash rate has gone up we have attracted large amounts of capital into New Zealand. Foreign capital has flooded into New Zealand via the banking sector and has then been passed on to the housing market. It has been drawn into New Zealand because our relative interest rates have been much higher than in other places. It made a lot of sense for overseas investors to send their billions of dollars to New Zealand because it was a safe place where they could get a good rate of return. However the impact on New Zealand was that the banks simply passed that money on to what they thought was the safest way to get a good return on their money which was the housing sector. 
The housing asset bubble has been one of the key problems for the New Zealand economy and in the long run it is one of the key challenges for the New Zealand banking system as well. The asset inflation in the housing market presents a long-term structural problem to the New Zealand economy in a number of ways. 
The fact that all this hot money was coming into New Zealand means that we have an overvalued exchange rate. The overvalued exchange rate has meant that the New Zealand tradable sector has been in recession now for 5 years. It is one of the key contributing factors. The overvalued exchange rate driven by the high official cash rate and high relative interest rates has meant that the tradable sector in New Zealand has suffered. New Zealand manufacturers try to compete with imports and it is harder for New Zealand exporters trying to compete overseas. That has been one of the key impacts and as a small trading nation New Zealand cannot afford to have a long-term recession in our tradable sector. 
The second part of it is that as the money has come in our level of overseas debt has now got to a very high level. Our net international investment position is now minus 100 percent of GDP. We are second only to Iceland in the OECD in terms of our net international investment position. That is not sustainable. We are adding billions and billions of dollars in overseas debt year after year and in the long run that will undermine the New Zealand banking sector if we do not address our overseas indebtedness. The interest payments alone on our debt are greater now than our trade surplus. We had a very small trade surplus in the last quarter but largely we have had a trade deficit. We are borrowing money to pay the interest payments on our overseas debt. 
Another part of it is that as the housing sector received more and more money through the banks which was borrowed from overseas and drawn in by the high official cash rate we had inflation driven by the housing sector. People felt wealthier and they spent more money because the value of their housing kept going up and up. We had inflation. The official cash rate was meant to be dealing with inflation but in fact it was encouraging inflation until it reached such a high point that it crushed the whole economy. 
High interest rates had a detrimental effect on the productive sector of the economy. It was difficult for businesses to borrow money because they had the high interest rates that the Reserve Bank was trying to use to crush inflation. All of these things together had a very negative impact on the New Zealand economy and ultimately a very negative impact on the stability of the New Zealand banking system. 
We need to say that the official cash rate by itself does not work to maintain the stability of the New Zealand banking system. It does not suit the New Zealand economy in the long run to rely on this tool so we have to look at some alternatives and we need to put those alternatives on the table. Some of those alternatives are around trying to control the demand for investment properties—that is a capital gains tax excluding the family home. We have to start having a serious discussion about that. 
We also have to look at ring-fencing the losses on investment properties. Whether that is done through loss attributing qualifying companies or other forms we need to ring-fence those losses. We need to target the demand for investment properties in order to try to keep control of the housing sector. We must remember that median house prices doubled between 2002 and 2007. That rate is not sustainable. It was funded by borrowed money that we now have to pay back as a nation. On the other side of housing we need to make sure that we have more of a supply of housing particularly social housing and affordable housing. 
In terms of maintaining the stability of the banking system—which this bill is trying to address but we need other mechanisms as well—we need to look at increasing reserve ratios for bank lending into the housing market. We need to target the problem directly. It is very difficult for the Reserve Bank to suppress inflation across the whole economy by trying to use official cash rates and interest rates when the key driver of that inflation is the housing market. We know that the tools are available for us to address that situation. One of the tools is that for every dollar that banks loan into the housing market we can insist that they leave a certain percentage on deposit at the Reserve Bank or held in reserve by the bank. Effectively that makes it harder for the banks to loan more and more money into the housing market. 
If we want to target the source of inflation then rather than crush the entire productive sector of the economy and make it hard for every business in the country we should target the source of the problem which is what is coming out of the housing sector. The housing sector has remained flat now for some time and it looks like it will continue to move sideways but if there is any indication that we are going back to another housing asset bubble then the Government has a responsibility to act quickly to deal with that. We know the ways to do that. We have the tools available but we have to expand our imagination beyond the official cash rate. By itself it is simply not enough. 
We have a range of tools that we can use to address one of the key drivers of inflation in our economy—which is what is coming out of the housing sector—without destroying the entire tradable sector and without destroying the entire productive sector of the New Zealand economy. We need to make it easy to be a manufacturer in New Zealand. If we are serious about stabilising our economy which is out of control then we have to make it easy to be a manufacturer in our country. We have out-of-control levels of debt which is a major problem and eventually that will impact on the banking sector. We can only stabilise the economy if we have the courage to face up to one of the key problems in the New Zealand economy right now and a key problem over a number of years—that is the funnelling of billions and billions of dollars of borrowed money from overseas into the housing market. 
Although I commend the Government for introducing this bill which the Greens will support I say the Government needs to think beyond current monetary policy. It is a pity the Government was not involved in the banking inquiry because some of the debate actually happened there. It is the debate that our country needs to have if it is to right itself economically and if it is to have a prosperous and sustainable future.