To: Members of the Petitions Committee, New Zealand Parliament
cc: Dr Duncan Webb, MP (the MP who received our petition)

Follow up to our petition, “The Reserve Bank Covid-19 recovery direct funding petition”, published 1 July 2021

You may remember that our petition called on the Reserve Bank not to embark on its Quantitative Easing programme (Large Scale Asset Purchase Programme – buying up bonds on the secondary market). As we cautioned, it would lead to a speculative share and housing bubble and would create a legacy of higher mortgage debt.

We suggested that by selling bonds directly to the Reserve Bank instead, the Government could use those funds for infrastructure projects and economic recovery, without the burden of external debt.

Unfortunately, $55 billion was created by the Reserve Bank and provided to the private banks.  To put that figure in context, the Government received a record tax take of $107.9B this year, and the Reserve Bank created more than half that amount and provided it to financial institutions. This had the totally predictable result of pushing up house prices and contributing in part to a new round of inflation.

The idea was to lower interest rates and provide liquidity for the banks. While interest rates did come by half a percentage point for a few months, they took off again due in part to the massive influx of money. Following is an extract from Bernard Hickey’s article “The dirty little secrets inside our nation of inflation”, in which he laid responsibility for a significant portion of the inflation at the feet of the Reserve Bank.

“The supply of money increased in the form of easy and cheap credit, and that is solely the responsibility of the Reserve Bank. Astonishingly, in retrospect, it removed the LVR controls that had been in place for seven years and had kept a relative lid on inflation. The central bank also slashed the OCR to 0.25% and proceeded to print $55b to buy Government and council bonds to lower long-term interest rates. That translated into mortgages as low as 1.99% for almost a year. That was the spark that landed in the tinder box of tight supply. Here’s what the spark looks like in chart form.”

Hickey went on to say that, “House prices then ratcheted up 40% and destroyed another generation’s hopes of becoming homeowners”.

We reiterate our stance.  Quantitative easing provides excessive liquidity for private banks which inflates asset prices and creates harmful distortions in the economy. 

Far better to engage in direct monetary financing where money is created by the Reserve Bank (like it did for our QE spend-up) and provided for infrastructure projects for the benefit of New Zealand Inc.  The level of money creation does not need to be at the rate provided for QE, but it can be an option for flood remediation projects for our embittered cities and towns, funding for transport infrastructure or other such programmes.

This would have the added benefit of freeing up tax money earmarked for infrastructure projects.  That money could be used for tax cuts or for pay claims for nurses, emergency responders, defence force personal and social welfare initiatives such as child poverty.

As a bonus for the Reserve Bank, it would remove the headache of how to “unwind” its QE programme.

Further Information

Here is a link with more information, plus our submission in support of this petition.

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