Those who do not learn from history are doomed to repeat it and our Reserve Bank has chosen to repeat a costly mistake, says Positive Money national spokesperson Don Richards.
“While the $12 billion Covid-19 stimulus package to workers and small businesses was launched with great fanfare, a relief package 2.5 times greater ($30 billion) for the financial markets was slipped in with barely a whisper,” he says.
Under the scheme called ‘quantitative easing’, the Reserve Bank will buy up Government bonds from financial institutions to stimulate investment by providing liquidity.
“This did not to work when done overseas during the Global Financial Crisis (GFC) of 2008 and it will not work here,” says Richards.
Rather than providing funding to financial institutions, a better (and proven way) of stimulating investment and injecting money into the economy is to have our Reserve Bank buy Government bonds directly from the Treasury for use in infrastructure projects and direct fiscal stimulus.
“The lesson that should have been learnt from the GFC is that during a crisis people and businesses are reluctant to take on more debt offered by the banks as they are uncertain about their future, and their ability to service additional borrowing.
“Providing financial institutions with additional liquidity to make loans which no one wants or can afford is not the way to solve the problem,” he says.
Kiwi economist Raf Manji stated that “there is not going to be any new ’investment’ whilst businesses are going bust, and people are frantically working out how to pay basic bills and stock their cupboards. This is exactly the problem that the post-GFC approach experienced”.
In addition, the so-called mortgage holiday being offered by banks is far from a holiday. Mortgage holders will still be charged interest and payment will be deferred to the end of the term of their mortgage. This arrangement will provide banks with even more profit.
The direct purchase of Government bonds by the Reserve Bank is being done to great effect in Japan, China and Canada and means that the money will stay in New Zealand for the benefit of New Zealanders rather than being used by financial institutions to pay bonuses for top management, predatory buying up of companies that have fallen on hard times or simply disappearing overseas.
“Businesses in the real economy have been asked to prepare for the worst while financial institutions are receiving money that they do not require. Better to put that money where it is needed most – in the hands of struggling kiwis,” Richards says.