The Reserve Bank Covid-19 Recovery Direct Funding Petition
Positive Money NZ’s Petition to Parliament
The Government’s own bank, the Reserve Bank, should directly fund the Covid recovery and essential infrastructure, cutting out the financial middlemen and cutting out debt.
This petition has now closed. However, please keep reading to see the response and get some background to this important and ongoing campaign.
And check out details of our full submission to Parliament.
What is the problem?
The way the Government is funding the Covid recovery is actually causing new problems. It’s inflating house prices, increasing inequality and too little is reaching the productive economy where jobs are created. There is a better way.
Currently, the Government finances the Covid recovery by selling Government bonds to banks and investors, who then sell them to the Reserve Bank. It’s a bit of a money-go-round — a very profitable one for banks, expected by Treasury to earn them a staggering $11.1 billion profit at the taxpayer’s expense.
The Reserve Bank plans to create up to $100 billion in new money to buy back bonds from local and foreign investors. This is a process called Quantitative Easing (QE).
But the problem with using private banks and the financial system to introduce this new money into the economy (as we do presently) is that too much of it goes into the speculative economy, pushing up the share market, causing house prices to skyrocket and further increasing inequality.
Petition Updates and Parliament’s Response
Our petition closed with 782 signatures. It was presented to Parliament on 1 July 2021 and was received by Duncan Webb, the Chairman of the Finance and Expenditure Select Committee.
- Here is a link to our petition and related documents on the New Zealand Parliament website.
- We made a written submission to the Finance and Expenditure Committee in support of our petition.
- Here is a link to the Petitions Committee response to our submission and petition
- And here is the Treasury’s response.
[VIDEO] How to waste £445 billion: The failure of quantitative easing (Positive Money UK)
What is a bond? Government borrowing explained.
When the Government borrows, it sells bonds to investors. A bond is basically a promise to pay a fixed sum (its ‘face value’) plus interest at a time in the future (‘maturity’).
Investors can hold these bonds until maturity, collecting interest, or they can resell them to other investors. If the interest rate on the bond is higher than today’s market rates, the investor can sell their bond for more than face value and make a capital gain. On the other hand, if general interest rates start to rise, that bond will sell for less.
Where does the $100 billion come from?
Basically, from ‘out of thin air’ via a computer keyboard — often referred to as money printing. The $100 billion comes simply from typing accounting entries into the ledgers of the Reserve Bank and the private banks and large financial institutions that hold special accounts with it.
Note that ‘money printing’ itself is not bad — in fact, it’s essential for a growing economy. What can be bad is how that newly-issued money gets into the economy.
- When it goes directly to the Government first, it is spent into the economy to buy public goods and services which benefit all Kiwis, and boost productive businesses and jobs.
- When it goes first to banks, it’s lent into the economy, too often for speculative purposes and unfairly favouring the already well-off who can afford to borrow.
How much is $100 billion?
Here are some examples of what $100 billion can buy:
- It could repay the entire Government debt.
- It could pay the median wage to almost two million Kiwis for an entire year (or fund paid work for the next half a century for every unemployed Kiwi who can work.)
- It could buy about one-third of the entire output of New Zealand’s economy for a year.
- It could finance every dollar of spending by the Government for an entire year.
- It could finance our entire Police force for almost half a century.
- It could buy a minuscule reduction in interest rates. Believe it or not, the Reserve Bank has spent about $60 billion so far, trying to reduce interest rates by a fraction of a per cent (while inflating house prices by much more than that and making savers worse off.)
How should the Government finance the Covid recovery?
By selling bonds directly to the Reserve Bank instead (i.e. borrowing from its own bank, a process called ‘direct monetary financing’), the Government could direct funds to infrastructure and economic recovery. All this, without burdening our children with massive debt.
We petitioned Parliament to require the Reserve Bank to issue these Covid recovery funds directly to the Government.
This will enable them to flow directly to both infrastructure and the productive economy — where goods and services are produced and jobs created — and away from financial speculators.
We believe the Government can do this right now, within existing legislation.
We are repeatedly told there is no money to fund infrastructure and essential services, while current policies continue to pump billions of dollars into a speculative housing market that continues to drive up house prices and rent.
There has been heated debate over the past year whether to allow the Reserve Bank to continue to drive up house prices through quantitative easing (QE) or to direct them to use the new money they create for the direct purchase of Treasury bonds (aka direct monetary financing).
The main argument used against direct monetary financing is the claim that it can cause inflation. But the current system also causes inflation — of assets, especially housing. We would argue that house price inflation will decrease significantly with the redirection of these funds to the productive economy.
Moreover, the Government will be expected to manage the pace of spending, while the Reserve Bank uses its existing tools (monitoring unemployment and the Consumer Price Index) to help guard against general price inflation.
What’s the catch?
Surely it can’t be this simple? Well, it is. The decision is a political one, not financial or technical. We issue the money but we choose to give it to private banks and investors first and let them decide what to do with it.
Unfortunately, they speculate on houses and financial assets. Real investment in the productive economy has actually gone down, in spite of this flood of money.
Let’s tell our Government to make the political choice that helps our country, economy and people, not a wealthy few.
Has this been done before?
There is a precedent for the Reserve Bank directly funding the productive economy under the first Labour government in 1936. The programme, which continued through World War II, never produced inflation as scaremongers predicted. In fact, it ushered in our most prosperous and egalitarian decades.
Four reasons for the petition
We owe it to ourselves
When the Government borrows from its own bank, it is both the lender (the Reserve Bank) and the borrower (the Treasury). And any interest paid is returned to the Government by the Reserve Bank in its annual dividend.
It’s like borrowing from your own savings account to build a house and promising to pay it back in a few years.
It’s better for the economy
The money from this direct monetary financing is spent directly into the economy by the Government as it pays for goods, services and infrastructure. This spending boosts the sales of firms and leads them to hire more workers and pay better wages. Productivity improves as our infrastructure is expanded and modernised and our workforce is healthier and better educated.
Building, not speculating
When we cut out the financial middlemen, the money goes directly to building things of public value. But the current system has fed the speculative economy instead.
Too much of the new money issued is used to speculate on shares and property, and too little ‘trickles down’ into the real economy where jobs are created.
It’s fair
Inequality rises when these vast amounts of public money go first to private financial gatekeepers. The rich get richer as they take the first cut, boosting the wealth of a few by speculating on shares and property.
When they are bypassed, every dollar of public money is spent directly on public goods and services, every Kiwi benefits, the real economy is stronger, and the gap closes between the rich and the rest.
Why the Petition?
The Government, through its own bank (the Reserve Bank), has the power to issue new money to rebuild our nation without leaving massive debts for the next generation, or fueling more speculation.
The petition tells the Government to use this power for the good of the people, not speculation and the private wealth of a few.
Want to learn more?
Here are some resources that will help you to further your knowledge of this important subject.
- Reserve Bank fuelling housing boom with printed money, says former Finance Minister Michael Cullen (link)
- Reserve Bank ‘asking for trouble’ with cheap lending, ‘completely out of touch’ – economist Shamubeel Eaqub (link)
- Reserve Bank repeatedly warned Government money printing would lead to house price inflation (link)
- Economist Brian Easton says building more houses will not reduce house prices by much; house prices will boom until speculation based on leveraged borrowing is addressed (link)
- Two unasked questions, as Reserve Bank builds costly housing hopes (link)
- Raf Manji urges the RBNZ not to make the mistake of previous overseas QE programmes by focusing entirely on supporting the financial markets (link)
- Treasury, Reserve Bank told Government it could just print money to pay for Covid-19 (link)
- Aide Memoire: Quantitative Easing and Monetary Financing Compared – Treasury/Reserve Bank memo to Finance Minister Grant Robertson (PDF)
- VIDEO: Dr Geoff Bertram – How do we pay for Covid-19? (link)
- Gareth Vaughan looks at why we should reframe the discussion on government spending (link)
Check out the Positive Money website where you can find out more about how money works and what we can do to reform the money system to benefit everyone, not just a few.