In November last year, we raised our concerns about the Reserve Bank’s Large Scale Asset Purchases programme (LSAP) and proposed a better alternative. Finance Minister Grant Robertson responded — unsatisfactorily in our opinion. The letter below highlights our concerns and corrects some points.
Hon Grant Robertson
Minister of Finance
Minister of Cyclone Recovery
17 March 2023
Dear Grant
Response to your letter of 27th February
Thank you for your letter of 27 February in response to our letter to Minister Allan.
Please note that we are not anti-banks. Banks have a role to play in a productive economy, but as they are creators of the “vast majority of money in circulation” (Reserve Bank Bulletin Vol. 86 No. 1 Money creation in New Zealand page 15) too much money is pumped into the speculative economy and not enough is put into the productive economy, where goods and services and jobs are created.
- We agree with your contention that low inflation is the best contribution to a stable economy. However, the CPI is used to measure inflation and it excludes increases in the cost of land and the sale of existing properties. If they were included in the calculation, it would provide a better indication of inflation as well as the effectiveness of the current measures to control it.
- You also mention that banks “as financial intermediaries, contribute to economic development, and assist with the efficient allocation of resources in the economy”. We take issue with two points in this statement.
Firstly, the use of the term “financial intermediaries” can be confusing and needs to be used with care as financial intermediation has been used to describe the false practice of bank’s lending out money from customers savings, being intermediaries in the exchange of funding. The reality is that banks create the money, when the loan is taken out. There is no intermediation in that sense.
The second issue is the contention that banks “assist with the efficient allocation of resources in the economy”. Banks create and lend money with a profit motive, which you also mention in your letter. What is not mentioned is that the vast majority of created money is pumped into real estate.
This is relatively low risk for the banks, with a good profit margin and causes distortions in the economy. Too much money is injected into real estate while the productive sector is starved of liquidity. This is not, to our way of thinking, “an efficient allocation of resources”.
Small to medium sized businesses, which make up the vast majority of our productive sector, find it very difficult to obtain finance from the banks without putting real estate up as collateral. The sector therefore struggles through lack of funding for expansion and research and development opportunities.
- We also draw attention to your comment that the $55 billion spent on the Large Scale Asset Purchase programme was effective in restoring functionality to the financial system and providing monetary stimulus by lowering interest rates in the economy. Market dysfunction was dealt with early in the programme and much more was spent after this, inflating house prices to dangerous levels.
Rather than engaging in Quantitative Easing, a better use of the Reserve Bank’s balance sheet is Direct Monetary Financing. Money can be created to finance infrastructure projects such as the Cyclone Gabrielle recovery and the cost of a managed retreat from flood prone areas, Three Waters and climate change initiatives.
The Canadian experience over forty years has shown that Direct Monetary Finance is not inflationary and we point you to the paper “Is Monetary Financing Inflationary? A Case Study of the Canadian Economy, 1935–75”.
Your Government has a number of challenges ahead and we encourage you to consider Direct Monetary Financing as a means of avoiding a recession and providing funding for much needed infrastructure projects.
We thank you for responding to our letter to Minister Allan.
Yours Faithfully,
Don Richards
Positive Money New Zealand National Spokesperson