Our current money system doesn’t work for ordinary Kiwis

PART 2: Excerpt from Positive Money NZ’s submission to Parliament’s Finance and Expenditure Committee, September 2019.

Our main concerns about New Zealand’s current debt-based money system are 1) the unfairness of the way this debt is created, 2) its direct role in high house price inflation, 3) the fragility it causes in our banking system, and 4) the indirect role it plays in starving public services (such as health, education and housing) of vital funding.

The unfairness of our debt-based monetary system

Private banks create most of our money ex nihilo (out of nothing) and then ‘lend’ this money to us with interest. Nearly every dollar that exists in the economy today was created because somebody went into debt.

As the banks create the money themselves, the main constraint is people’s ability to take on higher and higher levels of debt. Banks make enormous profits from money creation (more than five billion dollars every year — $12 million dollars a day) and most of that money disappears overseas. This is a huge drain on our economy.

In order to create enough money to keep our economy running smoothly, more people must take on debt than pay it off. When business confidence falls, banks become reluctant to lend money causing the available money supply to shrink. This subsequently creates what is known as the ‘bust’ cycle or a ‘recession.’ Conversely, when business confidence picks up, banks are eager to lend money and we have a ‘boom’ cycle and, in most cases, inflation.

This boom/bust cycle is an artificial construct based on the willingness of people to take on more new debt than what gets repaid. As more and more funds are siphoned out of the economy to service public and private debt, more and more families struggle to meet basic needs. Meanwhile, the government is increasingly starved of resources to maintain infrastructure and fund basic services.

When used productively, credit creation (and the debt that results) can be good for people, good for business, and good for the economy. Presently however, private banks are using credit creation to generate large profits for themselves while creating poverty and hardship for an increasing number of New Zealanders.

Although the state has the power to create the money supply at no cost, we instead choose to rent our money supply from private banks, at interest. We also allow them near total discretion in deciding where the credit they create will be directed.

At present, banks are pumping far too much credit into housing, creating house price and rent inflation. When high housing costs stretch their budgets, low income families take on more credit card and other private debt (from banks) to bridge the gap. Instances of financial hardship increase as payments to service this private debt increase.

Our present government’s Budget Responsibility Rules, which are a form of austerity, results in pressure to cut public spending and produce a budget surplus. This, in turn, removes money from the economy, requiring families to take on even more debt.

The role of private money creation in high house prices

For decades, commercial banks in New Zealand have expanded the money supply much faster than required to support economic growth. In the thirty years from 1989 to 2019, GDP grew by a factor of 4.2[1]. In the same period banks expanded the money supply by a factor of 8.8[2].

Banks expanded the supply of NZ dollars more than twice as much as was needed for economic growth and allocated more than 90% of new money to buying houses. The results have been sky-rocketing prices – creating some of the most unaffordable housing in the world[3] — and in turn creating unsustainable debt, poverty, and hardship for regular New Zealanders.

Much has been written about the causes of high demand (e.g., immigration, population growth, speculation by investors, and foreign buyers) and about lack of supply (e.g., Resource Management Act restrictions, council inefficiency, lack of infrastructure, land-banking), but almost nothing has been said about the second cause: excess money[4]. Unlike goods inflation (which has a target band of 1%–3%), there is no such limit on house price inflation.

In our view, the root cause of the issue is that banks decide what quantity of money to create and where to inject it into the economy. Because capital ratios imposed by the Reserve Bank dictate that banks must hold more capital for business loans than for housing loans, mortgage lending becomes more profitable.

Banking fragility under our current money system

Under our current money system, private banks hold only a small fraction of deposits as cash- on-hand available for withdrawal. For example, according to its financial statements at 30th September 2018, the ANZ Bank held 0.2% of its deposits as cash [5].

During normal times, this level is sufficient to cover the day-to-day cash transaction needs of customers. However, in times of economic crisis, a lot of people may try to withdraw their money all at once (a ‘bank run’). Under this scenario, banks will have grossly insufficient cash reserves to service all of their customers with chequing and savings accounts.

Nearly 97% of the money we use to conduct business is not cash, but electronic money created by private commercial banks when they issue loans. We swap these electronic deposits back and forth amongst ourselves when we are paid wages and buy our goods and services.

Again, during normal times this arrangement of paying by swapping bank deposits works well. However, if a bank is in financial trouble (perhaps due to making risky loans?), then its deposits become unavailable when depositors seek to withdraw their funds.

When banks become too big to fail

Due to their key role in creating 97% of our money supply, the functionality of the New Zealand economy depends on private banks remaining solvent. This is particularly apparent in an economy the size of New Zealand’s, as our largest banks are considered ‘Too big to fail’. A failure of one bank puts the whole economy in jeopardy. Historically when a bank failed, the government was forced to step in and bail out the bank, usually at great cost to taxpayers.

During the financial crisis of 2008, the Reserve Bank provided ‘crisis liquidity facilities’ to banks, the government guaranteed ‘wholesale funding to enable banks to continue to issue debt’[6], and the government guaranteed deposits at banks and finance companies, eventually paying out over $2 billion to depositors of failed finance companies.

With the passage of the 2013 Open Banking Resolution (OBR)[7], the New Zealand government shifted responsibility for bailing out banks from taxpayers to creditors and depositors. In order to keep a failing bank open, the OBR allows the Reserve Bank of New Zealand to freeze a portion of all the failing bank’s deposits and liquidate the assets of shareholders and unsecured creditors. It will then (if necessary) ‘haircut’ the depositors by essentially confiscating a proportion of their chequing and/or savings accounts to recapitalise the bank.

In theory, the Reserve Bank of New Zealand (RBNZ) controls the money supply by setting the Official Cash Rate (OCR), the interest the RBNZ charges banks on overnight loans (reserves). The implication is the RBNZ can control the total volume of money in the economy by controlling the interest charged on reserves. However, in practice, the OCR has very little impact on the amount of money in circulation. Evidence shows banks create deposits when they make loans and seek out reserves later.[8]

At present, the RBNZ sets out ‘capital adequacy requirements,’ requiring banks to hold a minimum percentage of the loans they issue as capital. At present this percentage amounts to a weighted average 10.5% [9], though big banks are allowed to develop their own capital adequacy regimes (some 4% or less) depending on the level of loan risk.[10]

The RBNZ enforces these capital adequacy requirements very weakly if at all, as shown by recent scandals at Westpac [11] and ANZ.[12]

The major banks strenuously oppose efforts by the RBNZ to increase capital adequacy requirements to 16%. New Zealand’s largest bank (ANZ) is threatening to withdraw services from New Zealand if this new regulation is adopted.[13]

Why regulation isn’t working

Conduct by banks is meant to be monitored by the Reserve Bank. However, the rules are so complex and the Reserve Bank so under-staffed that the Reserve Bank can only perform ‘light handed’ oversight. Basically, banks monitor themselves and calculate their own risk, with the Reserve Bank occasionally providing oversight and only after the fact.

With banks creating more than 97% of our money supply, while holding insufficient cash and reserves to protect themselves during a crisis, financial trouble at one bank can threaten the entire New Zealand economy. In an ideal monetary system designed to work for ordinary Kiwis, the power to create money would return to the state.

Underfunding of essential public services

Finally, we’re very concerned about the way a growing debt burden is used to justify starving our public services of adequate funding. It’s extremely discouraging to see New Zealand nurses and teachers striking for the first time in a generation. Our current Labour-led government is reluctant to restore de facto spending cuts in health and education, in the mistaken belief they must increase debt to do so [14]. The ballooning DHB deficits [15] [16], long waiting lists for urgent specialty services, [17] [18] [19] [20] [21] and difficulty in recruiting doctors and nurses [22] (which also relate to health sector underfunding) are equally disheartening and problematic.

We also see the detrimental effect of inadequate funding in the worsening homelessness crisis [23] and the continuing absence of public housing options. This, in turn, is leading to a growing number of housing grants for motel accommodation [24]. Data shows New Zealand now has the highest house prices relative to income in the OECD. Each quarter the number of families needing help to pay for accommodation grows. At last count, 13,500 households were on the state house waitlist and about 66,500 families were living in state housing (defined as living in a public housing placement and receiving the Income Related Rent Subsidy).

According to Treasury, demand for assistance will only continue to increase, as the national average asking price for rent creeps above $500 a week. Many of those in need will be low- income families – 1 in 5 of those currently on the Accommodation Supplement are working households. However they will also include burgeoning numbers of retiring baby boomers who have not bought property and cannot afford rent. [25]

Changing the way money is created in New Zealand could begin to address these funding crises within weeks or months, without raising taxes and without increasing borrowing or debt.

Full submission here.


  1. Reserve Bank of New Zealand, hm50.xlsx, June 2019
  2. Reserve Bank of New Zealand, hc50-long-run.xlsx, July 2019
  3. 15th Annual Demographia International Housing Affordability Survey: 2019, page 20
  4. Bank of England blog https://bankunderground.co.uk/2019/09/05/houses-are-assets-not- goods:-what-the-difference-between-bulbs-and-flowers-tells-us-about-the-housing-market/
  5. ANZ Bank New Zealand Limited, Annual Report and Registered Bank Disclosure Statement, page 16, note 7: Coins, notes and cash at bank $204M; and page 25, note 13: Total customer deposits $104,055M. 204/104055 = 0.00195 = 0.2%
  6. Reserve Bank of New Zealand, Banking Crises in New Zealand – a historical perspective, Chris Hunt, pages 26-27
  7. https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-resolution
  8. The Roving Cavaliers of Credit (Steve Keen) https://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
  9. https://www.rbnz.govt.nz/research-and-publications/speeches/2017/speech-2017-03-07
  10. https://www.rbnz.govt.nz/regulation-and-supervision/banks/prudential-requirements/ information-relating-to-the-capital-adequacy-framework-in-new-zealand
  11. https://www.stuff.co.nz/business/98917293/reserve-bank-slams-westpac-over-serious- noncompliance
  12. https://www.investing.com/news/stock-market-news/anz-under-fire-from-nz-regulator- government-over-risk-controls-governance-1905399
  13. http://werewolf.co.nz/2019/07/gordon-campbell-on-the-aussie-banks-latest-excuse-for- jacking-up-bank-fees/
  14. https://www.theguardian.com/world/2018/jul/09/new-zealand-teachers-and-nurses-to-hold- first-mass-strike-in-a-generation
  15. ‘DHB deficit explodes to $423 million, more than double last year’ https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12255017
  16. https://www.rnz.co.nz/news/national/337781/doctors-plead-with-ministry-over-canterbury- dhb-cuts
  17. ‘Cancer sufferers wait up to six months for treatment – It’s costing lives’ https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12228383
  18. https://www.rnz.co.nz/news/national/397625/counties-manukau-dhb-s-care-delays-for- women-labelled-calculated-neglect
  19. https://www.stuff.co.nz/national/health/113394611/auckland-dhb-urgent-colonoscopy-wait- times-increase-after-doctors-visa-issue
  20. https://www.stuff.co.nz/southland-times/116143159/southlanders-waiting-months-to-see- specialists
  21. https://www.waitematadhb.govt.nz/assets/Documents/news/OIA-publications/OIA- response-wait-times.pdf
  22. https://www.asms.org.nz/news/asms-news/2019/08/06/more-investment-in-hospital- specialist-workforce-needed-to-tackle-ballooning-deficits/
  23. https://www.tvnz.co.nz/one-news/new-zealand/waiting-list-state-housing-hits-record-high
  24. https://www.rnz.co.nz/news/national/398741/homeless-moved-from-cars-to-motels-it-s-just- shifted-the-problem
  25. https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12276935

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