Well Played, Bollard

My team of the year is the Reserve Bank of New Zealand. 

Listener: 27 December, 2008 

Keywords: Macroeconomics & Money;  

United States President-elect Barack Obama talks about a “crisis of historic proportions”. We are certainly in the midst of New Zealand’s greatest financial crisis, far more serious than the 1984 run on the dollar, which was unwound in a couple of months. 

The extent to which the crisis will shift from Wall Street (the financial sector) to Main St (the whole economy) is unclear. The hope is that the international economic crisis will be sufficiently contained, and the local financial one dealt with, so we end up with a relatively short recession rather than a depression like those of the 1930s and the 1880s. Given this threat, the shallowness of the public discussion is extraordinary. Even the Act Party campaigned in my electorate on “law and order”. Perhaps the economic issues were considered too difficult to bother the public with, although the outcome of those will have more impact on us than any other event of the year (including the election). Most journalists seem to find it all beyond them, and those commentators who aren’t there to promote their businesses are not particularly informed either. 

Perhaps the nadir was reached when, on October 8, the New Zealand Herald devoted its entire front page to a story headlined “Pressure on for BIG interest cut”, accompanied by a three-column-wide red arrow pointing down. It was indicative of the degree of newsroom panic that the page design broke one of the most fundamental rules of journalism: mixing opinion with fact. 

Sobriety returned three days later with an editorial titled “[Reserve Bank Governor Alan] Bollard right not to bow to panic attack”. 

Quite right, too. The Reserve Bank and the Treasury (joined at the hip on this crisis) know what they are doing. A major issue is how the public sector helps the private sector get through its mistakes, without dumping the entire cost on the taxpayer, while easing the economy through the recession at minimum cost. 

Various interlinked problems arise, but at the heart of ours is the amount of household debt. Most New Zealanders borrowing from a bank did not appreciate that the ultimate source of the loan was offshore. Those who want to roll over their loans – perhaps because they have a prudent mortgage or because they have over-borrowed – need someone to lend them the new money. But lenders are not as enthusiastic as they once were. 

What makes it tricky is the loans have to be paid off in foreign currencies, but the Reserve Bank can issue only New Zealand dollars. Once the international markets have settled down, the foreign money will be there, but the interest charges may be burdensome. 

The wrong decision could add tens of dollars to your weekly mortgage, and millions of dollars to the annual tax bill. The technical issues are complex, but the officials – unlike the press – are not panicking even if they are worried. So far they appear to have succeeded, although the razzmatazz of politics has gone on as if there is no economic problem. 

Officials will have been scrupulous in working within the law, and they will have been briefing opposition finance specialists (including Bill English when National was in Opposition). The task has been to get the job done democratically without inducing unnecessary anxiety in the people. 

I would nominate Alan Bollard for man of the year, except he would say it is all thanks to his team. So, although we have had some stunning sporting performances in the past 12 months, I propose the Reserve Bank of New Zealand as 2008 Team of the Year. 

Next year the financial crisis will spread into the economy, although we don’t yet know how seriously. I hope that in 12 months’ time I can recommend the Treasury, led by Secretary John Whitehead, as the team of 2009.