Norman Russel William: Reports — Complaint Regarding the Medicines Regulations 1984—Consideration of Report of Regulations Review Committee Briefing from the New Zealand Baha’i Community—Consideration of Report of Foreign Affairs Defence and Trade Committee Report from the Parliamentary Commissioner for the Environment on Change in the High Country: Environmental Stewardship and Tenure Review and Related Briefing—Consideration of Report of Primary Production Committee Reserve Bank of New Zealand’s Financial Stability Report November 2009—Consideration of Report of Finance and Expenditure Committee 
Norman Russel William: Reports — Complaint Regarding the Medicines Regulations 1984—Consideration of Report of Regulations Review Committee Briefing from the New Zealand Baha’i Community—Consideration of Report of Foreign Affairs Defence and Trade Committee Report from the Parliamentary Commissioner for the Environment on Change in the High Country: Environmental Stewardship and Tenure Review and Related Briefing—Consideration of Report of Primary Production Committee Reserve Bank of New Zealand’s Financial Stability Report November 2009—Consideration of Report of Finance and Expenditure Committee 
[Volume:659;Page:8433] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 I move  
That the House take note of the report of the Finance and Expenditure Committee on the Reserve Bank of New Zealand’s financial stability report November 2009. 
 It is great to have an opportunity to talk on this report because it contains a quiet revolution in monetary policy in New Zealand—a very quiet revolution that has gone largely unnoticed but is actually changing some of the policy fundamentals in our country. The Reserve Bank is leading that revolution. I will note very briefly some of the key points that came out of the financial stability report before I get into some of the detail. 
The Reserve Bank pointed out that the global financial system has stabilised but is still quite fragile. Lending standards for residential borrowers have eased but the Reserve Bank is encouraging banks not to return to some of the earlier mortgage practices of lending that created some of the instability in house prices. The Reserve Bank also has been urging the large commercial banks not to restrict their business-sector lending unduly. There has been a problem with businesses in New Zealand gaining access to the credit they need because the banks have really dried up on providing credit to the business sector. The Reserve Bank also pointed to one of the problems we have in New Zealand which is one of the most dangerous parts currently and that is the level of indebtedness in farming. If there is a subprime mortgage crisis equivalent in New Zealand it will be in the farming sector. The Reserve Bank also pointed to the need to lift savings in the medium term. New Zealand obviously is highly dependent on inflows of foreign capital and we need to increase savings to reduce that. And it talked about a new prudential liquidity policy which I will come back to. 
This report is interesting in a number of ways and I want to start with the first one which is about the New Zealand dollar. The Reserve Bank states very clearly that the ongoing strength of the New Zealand dollar is a major problem for our economy. In the view of the Reserve Bank the dollar is rather overpriced. The reasons for this are multiple but they are linked to the fact that investors or speculators are driving up the value of the New Zealand dollar in part because they see New Zealand as a safe place to invest money and partly because we are a commodity producer. A number of commodity producers around the globe have had their exchange rates go up as commodities have recovered and international speculators have bought those currencies. In particular we have seen it in Brazil another commodity exporter. The problem of course with the overvalued New Zealand dollar is that it is extremely damaging for the tradable sector in New Zealand—that is domestic producers who compete with imports and the export sector. The higher the value of the New Zealand dollar the harder it is for the tradable sector. If we do not have a healthy tradable sector we cannot afford to pay our way in the world and in the long run we will have to borrow money which is of course what New Zealand has been doing for many years. 
There is a very interesting discussion within this report about some of the options around how to deal with the overvalued New Zealand dollar and I want to touch on just a few of them. One of the options Brazil has introduced is a small tax on incoming foreign capital. It is a 2 percent tax. The idea of it is to restrict some of the speculative foreign capital inflow going into the Brazilian currency in order to try to restrict the high level of the Brazilian currency and there is a discussion of that in this document. It is one of the options on the table for us. Another option on the table is a level of quantitative easing. The quantitative easing in the United States is undoubtedly part of the reason why the US dollar has been falling as the US Government has effectively been printing money. One of the policy options on the table for New Zealand to bring down the New Zealand dollar is to engage in some quantitative easing. It has risks in terms of inflationary risks but it is one of the policy options on the table. Another policy option on the table that we need to discuss and it is unfortunate that we are not having this debate very widely—it is only within very narrow circles—is the sterilising of capital inflows. As capital inflows come into New Zealand it is entirely possible to establish a policy that says that 50 percent or more of those foreign capital inflows must be deposited with the Reserve Bank at relatively low interest rates with the result that it becomes extremely untenable for those foreign capital inflows to come into New Zealand. So that is another one of the policy tools on the table. 
I think that perhaps one of the most interesting policy tools on the table with regard to the New Zealand dollar is that which has been promoted by the economic consultancy Business and Economic Research Ltd which is to announce that the New Zealand Government has a maximum level that it wishes the New Zealand dollar to go towards and if the New Zealand dollar goes over that level then the New Zealand Government will simply start printing money and of course will devalue the currency. The idea of this is that if it is announced and the New Zealand dollar does then go over the target level we actually do start printing money and bring down the value of the New Zealand dollar. We will have to do that only once before foreign currency investors get the message that the New Zealand Government is not willing to tolerate the value of the New Zealand dollar going over a certain level. It is a very interesting proposal that Business and Economic Research Ltd has been promoting and I think it deserves proper discussion and debate within New Zealand policy circles. So far there has been reasonably limited discussion on it. 
The other part of this report that I think is quite fascinating and revolutionary in its own way is the discussion of the Reserve Bank policy mechanisms. We are now seeing open acknowledgment by the Reserve Bank that monetary policy does not work. One of the paradoxes is that when Phil Goff came out and said that he was breaking the consensus on monetary policy the Government reacted with horror but in fact the Governor of the Reserve Bank has already broken the consensus on monetary policy. One of the extraordinary paradoxes that is not understood within policy circles and certainly is not understood more broadly within the New Zealand community is that the Governor of the Reserve Bank has already decided that monetary policy as it has been exercised for the last 20 years does not work so he has changed it. He has done it very quietly he has done it within the legal framework and he has done it rather carefully. 
What he has done is look at the crossover between monetary and prudential policy objectives. Monetary policy objectives are obviously around the stability of prices. Prudential policy objectives are around the soundness of the banking sector. Basically what the Reserve Bank has done is say that there is a crossover between these two objectives—monetary and prudential policy objectives—which is around leaning against assets booms. In particular of course the asset boom that has been of most concern in New Zealand has been the housing asset boom but it is only one potential type of asset boom. There can be all sorts of asset booms and we have had many of them over the years. What the Reserve Bank is saying is that we can lean against these asset booms to achieve both objectives. I should explain how that is done. For example if the housing asset bubble is a driver of inflation it is a monetary policy concern. The way in which it works is that as households feel richer as their houses become worth more and more then those people tend to spend more money. Because their houses are worth more they spend more money so they drive the inflationary cycle. At the same time the housing asset bubble is a soundness issue. It is a prudential issue because these housing asset bubbles threaten the stability of the financial system. 
So the bank is proposing to introduce a series of policies that are basically counter-cyclical that have both monetary policy objectives and prudential policy objectives. In the time I have here I will not go into them at any length but they are around bank liquidity policies—that is making the banks seek longer-term funding. They are around counter-cyclical bad debt provisioning—that is making the banks provide for bad debts on the up-cycle of the boom rather than doing it just on the downward cycle. And they are looking at capital adequacy ratios—at varying capital adequacy ratios or at least setting a capital adequacy ratio that acts in a counter-cyclical way against a housing asset bubble which would achieve both monetary policy objectives and prudential policy objectives. 
These are minor revolutions in the way that monetary policy is being conducted in this country. They are happening in a very quiet way but for those people who are watching this space they are a very significant change. Of course the Governor of the Reserve Bank as usual talked about how we need to change the tax treatment of investment properties which is something the Green Party wholeheartedly endorses in order to send capital into the productive sector rather than the non-productive sector. There is a lot else in this report. I recommend that people read it. It is a fascinating report. Thank you.