Norman Russel William: Motions — Reserve Bank Funding Agreement—Ratification 
Norman Russel William: Motions — Reserve Bank Funding Agreement—Ratification 
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Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I rise to speak to Government motion No. 3 about the Reserve Bank’s funding arrangements and agreements. The Green Party will be supporting this motion. This motion raises much broader issues which the previous speaker David Cunliffe from the Labour Party has discussed. I think the member addressed those issues well. I will address some of the issues with regard to how we can deal with some of the underlying objectives of the Reserve Bank. Its objectives are to keep inflation low to maximise employment and also to have a stable currency. These objectives are not all part of the Reserve Bank of New Zealand Act currently. One of the changes that needs to be made is that some other objectives need to be incorporated within the Act as they are in the governing legislation of other reserve banks around the world. 
I will discuss this issue particularly in relation to the asset bubble that we saw through the 1990s and into the beginning of this century which has only recently collapsed since the global financial crisis. That was the housing asset bubble in New Zealand—a classic example of why the current policy settings do not work. A classic asset bubble came out of the housing market. The Reserve Bank tried to squash it because it saw it as a source of inflation within the economy—quite rightly because households felt they were richer so they were spending more—and it tried to squash it with higher interest rates. But increasing the interest rates only drew more capital into New Zealand. At least in the short to medium term that blew up the housing asset bubble even further by drawing in more and more capital which was attracted to the high interest rates in New Zealand. The banks were very happy to funnel that capital into the housing market and to clip the ticket along the way and make a very fine profit. 
The other side was that as banks increased the interest rates they increased the cost of borrowing for the productive sector. They also drove up the value of the New Zealand dollar as more and more money came into New Zealand and drove up the cost of the dollar and that made it harder for the tradable sector. In many ways that was not the ideal outcome and monetary policy was not acting in the best interests of the New Zealand economy. It was adding to the imbalances in the New Zealand economy particularly through the destruction in the tradable sector—that is businesses that are competing with imports and businesses that are trying to export—by driving up the value of the New Zealand dollar. It also made it harder for the productive sector because it had to borrow at high interest rates. 
It seems to me that this is a classic example of where the Reserve Bank not only needed to have multiple objectives and more than one tool but also needed to have the different tools in the tool box operating together. If we were to address the housing asset bubble we needed to take much more of a comprehensive approach to deal with it. 
The first thing was that a capital gains tax excluding the family home would have had some downward pressure on the housing asset bubble. The Reserve Bank does not have access to the means to introduce a capital gains tax but in terms of having a comprehensive approach to dealing with things like asset bubbles it was one of the tools in the tool kit that the previous Government did not use but could have used during its last term when the housing asset bubble came up. 
The other side of it was to change the tax system particularly with regard to loss attributing qualifying companies. In the tax system these companies were set up to encourage speculation in the housing market so this tool could have been used in parallel with anything that the Reserve Bank had pushing up interest rates in order to try to reduce the asset bubble. We could have also limited the sale of New Zealand land. The Greens support a policy of having New Zealand land for New Zealand citizens residents and entities. Limiting the sale of New Zealand land would have also placed downward pressure on the housing asset bubble. The other side of it was to increase the manufacture of public housing to also put some downward pressure on the housing asset bubble—particularly in the rental market where affordable public housing was so short. Furthermore we could have had urban development rules that would have encouraged medium-density housing around transport routes. 
These kinds of measures may seem a long way from monetary policy but they are totally connected to monetary policy because the Reserve Bank was trying to deal with a problem coming out of the housing sector by using one tool which was interest rates or the official cash rate. The problem is that trying to use the official cash rate to address a very complicated problem like the housing asset bubble simply did not work. In fact it had all of these negative consequences. What we needed to do was to use all of the tools available to us. Some of those tools were available to the Government such as urban development planning so that we could have an increase in the supply of medium-density housing which would mean more public housing. Some of the tools were available to the Government and some of them were available to the Reserve Bank. Putting all of these tools together would have allowed us to address the issue that was obvious to everybody which was that we had a housing asset bubble. 
A lot of people did not want us to address the housing asset bubble because they were making a lot of money out of it. The banks were part of the problem and the real estate and property sector was part of the problem as well because they were all making a fortune out of it. But it was really bad news for the New Zealand economy. What we need to do in terms of reforming our approach to monetary policy is to say that these different tools and levers need to work in sync with monetary policy and need to support it. 
The other side of it which I think we need to explore is the use of capital adequacy ratios which is a Reserve Bank tool. But it should be used explicitly not just for prudential reasons but for monetary policy reasons. The Reserve Bank currently uses prudential policy to have the secondary monetary policy effects which is fine but we need to say that it is OK to use some of the prudential measures directly for monetary policy purposes. We need to be open about it. 
The capital adequacy ratios can work in different ways. One way is to target the asset bubble class themselves. We need to say to the banks that if they want to lend into the housing market if that is the asset class that has the bubble then they need to have a greater proportion of cash on hand or triple A rated assets on hand before they can lend into the housing asset bubble. That makes it harder for the banks to lend more and more money into the asset class that is of concern in terms of a bubble. We can change the capital adequacy ratios in order to directly target the asset bubble rather than simply using interest rates across the board to push up the price of money across the whole economy. 
The other way we can use capital adequacy ratios is in a counter-cyclical way. That is we say to the banks that during the normal business cycle during the upswing when it seems like they can lend more and more money because we are seeing the inflation in asset prices we can increase the capital adequacy ratios and relax them during the down cycle. Instead at the moment during the up cycle the banks look at the value of the assets and can lend more and more money based on the value of those assets. All they do is inflate the bubble. Then on the downward side as the value of the assets is static or the banks are short of credit they close down credit right across the board which means that it exaggerates the downward trend on the other side. We need to use capital adequacy ratios not only to target particular asset bubble classes but also to reduce in a counter-cyclical way these kinds of bubbles. Those are a number of tools we have available to use in parallel. 
The other tool that I think we have not really considered properly in New Zealand is the use of a Tobin tax. A Tobin tax is a tax that applies to international currency transactions. It has been supported by the Canadian Parliament previously and I think we need to have a position working with other countries to support a Tobin tax right across the planet. The idea of a Tobin tax is to increase the cost of international currency trading which if you like puts a bit of grit in the wheels of international currency traders so that it slows down the movement of currency trading. New Zealand has a problem with a very volatile currency which has a dramatically negative impact on the productive sector in New Zealand so that if we were to slow down some of the volume of currency trading we could slow down some of the volatility in the New Zealand dollar which would be tremendously helpful. 
The other part of it that I just want to touch on very briefly is that we have some issues and there will be further issues around structural inflation pressures which the Reserve Bank struggles to deal with. Oil is likely to become a structural inflationary pressure in the New Zealand economy over time. As the price of oil continues to go up it will have continual inflationary effects in New Zealand. I think we need to think carefully about how we can reduce the vulnerability of the New Zealand economy to oil price shocks that are very likely when the previous Government did the opposite by making us more dependent on oil. We also need to empower the Reserve Bank to look not just through short-term price shocks which it is currently empowered to do but also through long-term structural price shocks. If we say that oil prices in the long term are bound to increase then it becomes a structural inflationary effect on the New Zealand economy and we need the Reserve Bank to be able to look through that as well. 
The last thing I will say is that anyone who has seen the movie  
Inside Job 
 currently on at the film festival and anyone who has seen the tax avoidance activities of the New Zealand banks will know that it is absolutely essential that we have a strong regulator. For that reason we support this funding agreement.