The Global Financial Crisis iii (Index)

Writings on the Long Recession from October 2010 to December 2012

This is the third entry which summarises the Global Financial Crisis and its aftermath.

The first index ( covered the period from August 2007 to March 2009 The trigger was in the US sub-prime market crisis in August 2007, about a year before the September (‘Lehmans’) crisis which ended all doubt there were deep problems. (New Zealand’s economic production also peaked in mid to late 2007, but I was not aware of this at the time.)

The second index ( covered the period from April 2009 to September 2010, when it seemed that not only had we had a major financial crisis in September 2008 but that the effects would be prolonged.

By now the GFC had morphed into what may be called ‘The Long Recession’. On reflection it is surprising that I gave so little weight to the possibility of a Second Great Depression. From the beginning I had thought the best analogy – although of course none are perfect – was the Long Depression of the late 1880s to the mid 1890s (although the US and Australian story is a little different).

Little happens in economic terms during a Long Recession although of course there is lots of politics. (Much of which is avoiding addressing any issues) So the third index in this series has a different structure. It has three sections. The first, labeled by an H, brings together the relevant historical research I was pursuing (at the time I was – and am – writing a history of New Zealand from an economic perspective). The second, labeled by a T, sets out some theoretical concerns which were troubling me and, I hope, evolving. Only the third section, labeled by a C, is like the earlier indexes and sets out the sequence of my contemporary writings during the period.

Some History

[H1] The earlier indexes include historical material too, and much of what I report here is a continuation of that research. Growth and Recessions of Economic Output: 1861-1939 ( is an appendix for the history I am writing. It was published on the website so that people can access the technical material.

[H2] Imbalances in a Small Open Economy: New Zealand and the Great Depression ( was a paper to the Asia-Pacific Economic and Business History Conference, San Francisco, February 2011. As well as presenting a paper on the conference theme, I was exploring the relevance of the Great Depression to contemporary circumstances.

[H3] I gave Five Great Stagnations ( to a Treasury seminar in July 2011. It points out that the New Zealand (market) economy had already experienced five long recessions in which there had been no substantive economic growth for seven and more years. (The longest stagnation had been in the pre-market economy in the 500 odd years from the Polynesian arrival to the European arrival.) Virtually every economist alive today has grown up in an environment dominated by the post-war growth models and takes the growth process for granted. Moreover, there have been three major economic stagnations since 1945.

I am not saying the paper was decisive but I have the impression that shortly after it was presented the serious part of the economics profession gave up the notion of an early recovery and began working on the assumption that we were in for a long recession. Of course many had come to that conclusion earlier – well it was nearly four years since the economy had peaked – but afterwards there were few who thought of a recovery before the second half of the current decade while some talk about the early part of the next one (i.e. after 2020). That does not mean the non-serious have been converted; business, politicians and superficial commentators continue to talk about an upswing soon. If there is one, the informed expectation is that it will be a period of very slow growth.

Theoretical Preoccupations

There have been a number of theoretical preoccupations which influence the general framework of my thinking, but also appear in some of the commentary (where however confident I may be, I may be working them through as I write). Here are a few which had a more independent life.

[T1] Debt and Equity in NZ’s International Investment Position ( is a note I wrote to myself in December 2010, indicating my continuing preoccupation with our overseas debt. I think one of the things that came out of it (or may have happened anyway) was the separating out related party debt in the official measures. I am sure I was not responsible for the change in tax laws.

[T2] I was asked to be on a panel in June 2011, and prepared the following note: Sectors and Prices: Exportables and the Real Exchange Rate ( As it happens the panel took a different direction, and it was not used. But it is a useful summary of my thinking at the time – despite the self-mocking style – and informs much of my commentary about this time.

[T3] I was on another panel and presented Concluding Comments to the Macroeconomic Imbalances Conference: June 24, 2010 Wellington ( can see here my preoccupations not unrelated to T2, but in the context of the conference.

[T4] What Are Our Economic Priorities? ( was presented in Nelson, Wellington and Takaka between August 2011 and February 2012. It may seem to be some distance from the Long Recession, but it is mulling over the following question. Politicians have built economic policy objectives around economic growth; what are we to do if there is a period of economic stagnation (other than promise – and fail to deliver – the growth)?

[T5] I was asked to present to a series on ‘uncertainty’ and economic perspective. Hence Economic Uncertainty ( Aside from setting out the economic distinction between risk and uncertainty, the analysis has considerable relevance to explaining how the financial system created the Global Financial Crisis. It knew a lot about risk, very little about uncertainty and even less about the distinction.

[T6] Some time in 2012 I saw my way through a problem that had been puzzling me for three decades: how to model an open economy with three sectors. (The conventional models have two – exportables and importables – and so lack a non-tradeable sector.) Satisfyingly the model leads to a a locus – a formal mathematical relationship – between Net National Savings and the Real Exchange Rate ( Basically the more a country borrows overseas the higher its real exchange rate. I had known this before – see Boom Time Rats ( for a verbal account – and knew savings was crucial in macroeconomic management. But now I could formally model it all. Its implications are wide, and informed my economic commentary through much of 2012 (and earlier). It is a great challenge to the conventional wisdom which focuses on interest rate manipulation to reduce the exchange rate. It wont work unless it also addresses national savings. [C29]


The commentary is an ongoing dialogue. Picking it up in October 2010 means omitting the continuity in the earlier dialogue (detailed in the two previous indexes).

[C1] A Feudal Future? ( Once more I am going on about New Zealand’s foreign debt. That and related issues do not go away for the next two years. Come to think of it, it has been a problem for the previous 170 years, and is likely to be a challenge in the next 170. (Listener, October 2010)

[C2] Flatter and Flatter ( Reporting to the public the likelihood of a long recession. Some commentators still dont get it. (Listener, October 2010)

[C3] Growing Pains ( A continuation of the previous column, a little more prospective . (Listener, November 2010)

[C4] Time for a New Strategy ( A follow up of the previous three columns, with a focus on policy alternatives. (Listener, November 2010)

[C5] Bring out Your Dead ( A review of the Governor of the Reserve Bank’s book on the Global Financial Crisis. Terrific account of how it happened – in New Zealand anyway – and how close we ran to a domestic financial crisis. The second edition has an endorsement by myself and Don Brash on the front cover – that two such contrasting economists could do so says a lot about the book. (NZ Books, Summer 2010)

[C6] Possums in the Headlights ( The subtitle ‘We need to do what is necessary now, before we head down Greece and Ireland’s path’, says it all. It is interesting that at this stage I was coupling the Greek and Irish situations. Later I focus on Greece. (Listener, February 2011)

[C7] Who Wants Asset Sales? ( Yes it is about macro, because of the need to think about savings policy. (Listener, March 2011)

[C8] Consensus Rebuilding ( Responding to the Canterbury Earthquakes and the run up to the budget. (Listener, April 2011)

[C9] Will the Budget Be Fair? ( Pre budget review. It was not particularly. (Listener, April 2011)

[C10] Christchurch Earthquake Tax ( Probably the greatest missed opportunity of the government. The tax would have contributed to the fiscal position and national savings and it would have enabled the government to share the burden of the destruction and reconstruction of the earthquake more fairly. That is why I kept coming back to the issue [C8], [C20]. (Listener, May 2011)

[C11] Not in Denial ( This was a note I wrote – ‘Listener’ style – in response to the popular critics of the 2011 budget. (May 2011).

[C12] Our Big Lean Greek Wedding ( Reviewing the budget. The theme of the last four columns (and the note) has been that prudence requires a reduction in the fiscal deficit but it should be done fairly. The government followed only half my message. (Listener June 2011)

[C13] US Debt Default – Where to from Here? ( When I was studying in America in 2005 I came to the view that the US political system was dysfunctional (see also [C3?]). This gave me the opportunity to illustrate to Listener readers. There is a lot in the column about the global financial system too., for it is so dependent upon the US’s one (Listener, August 2011)

[C14] Households Cause Balance Sheet Problems ( I believe that the GFC was a balance sheet problem, and that the Long Recession will not be over until the balance sheets of the world are in better balance. (Many other apparent economic paradoxes – such as the meaning of money – are best explained with balance sheets.) I have never had the opportunity to elaborate this analysis; for various reasons the ability of a Listener column/essay to do it is limited. This is as close as it gets. (Listener, October 2011)

[C15] Loose Regulations Sink Economies – and Buildings ( Linking light-handed regulation – using a New Zealand example – to the causes of the GFC. (Listener, October 2011)

[C16] Stopping the Credit Crunch ( Surveying both the government’s economic forecasts and strategy in the context of international lending. Fortunately the international monetary pressures turned out to be not as severe as I expected. (Listener, December 2011)

[C17] Europe’s Economic Struggle ( An end of the year review which focused especially on the difficulties the Greek economy was facing, linking back to New Zealand. ‘It’s a bit like watching a motorway pile-up in slow motion. The roads are wet, the vehicles too close, no one is giving way and – egged on by their passengers – the drivers are being irresponsible.’ (Listener , December 2011).

[C18] The Too Hard Basket ( Opening the 2012 year with the view that the government was avoiding making the hard decisions, with the consequence that we were piling up future troubles. I got an unusual amount of strong positive feedback on this one. I guess I’ll be saying much the same thing in the 2013 opener and the 2014 one too – except the cliff will be closer. (Listener, January 2012)

[C19] Germany Must Make Adjustments Too ( While most of the attention is on those countries running serious savings deficits, this column pointed out that there had to be adjustments by the surplus countries too. Keynes would have approved. (Listener, February 2012)

[C20] A Canterbury Earthquake Levy Would Be Prudent ( last chance for the earthquake tax was looming up – repeating C10. It was left in the too hard basket. (Listener, March 2012)

[C21] New Zealand Should Tax Financial Transactions ( A financial transactions tax is popular, but far more complicated than the public thinks. I finally got around to setting out my position; that we should be a ‘fast follower’. I may say that some of the informed feedback was more cautious, although there is considerable agreement on the follower strategy (let others make the implementation mistakes first). The financial sector is, of course, opposed. (Listener, March 2012)

[C22] NZ Government’s Influence on Economic Growth ( It is common to lambast the government for failing to promoted economic growth in order to purse one’s policy agenda – which is usually riddled with self-interest. When a prominent Rogernome had the audacity to do so – given the poor record of their management – matters had to be corrected. But just beneath the surface of the column is the likelihood that governments cant accelerate economic growth by much anyway. (Listener, April 2012)

[C23] Issues New Zealand Faces: the International Context (

It is not often that one gets a good opportunity to do a pre-budget review; I seized it to talk to the NZIIA about the international context. Most pre-budget commentary assumes that a budget can be made without reference to overseas trends – a serious blindness when the country is borrowing heavily. (Address to the NZIIA, May 2012)

[C24] Could Auckland Have a Greek Crisis? ( I had done some consulting work on the Auckland Council Plan, which showed that it was very dependent on future heavy borrowing. (See for my report.) I wrote this as an article for the New Zealand Herald, submitted it, but they did not even acknowledge receiving it. If Auckland’s local paper is so insensitive to the issue, the answer to the question has to be ‘yes’. (Unpublished paper, May 2012)

[C25] Government Budgets: The Ceremony and the Reality ( The post-budget review focusing on the fiscal strategy; it seemed to me to be over-optimistic. Could not resist quoting from Yeats’ ‘The Second Coming’. (Listener, June 2012)

[C26] Chartering Through the Long Recession ( As I mentioned earlier, there is a tendency to use a crisis such as the Long Recession to pursue goals which are ideological and self-interested, but which do not address the real issues. (Listener, June 2012)

[C27] Lifting the Age of Retirement ( Although not strictly an macroeconomics column, it is included here to illustrate my continuing preoccupation with fiscal prudence and savings. (Listener, July 2012)

[C28] Another Financial Crisis on the Rise? ( China has been central to New Zealand’s weathering of the Global Financial Crisis. How sound is the Chinese economy. All economies have problems but careful observers of the Chinese one have concerns which could result in it collapsing – a second shock in the Global Financial Crisis. It hasn’t happened yet, but the possibility cannot be dismissed. I mention that I supervised a thesis on the (South) Korean economy during the Asian economic crisis, and learned much which has relevance to China (particularly the close relations between banks and industry). One lesson is that a Chinese economic collapse – since all economies suffer crises the issue is ‘when’ not ‘if’ – is likely to happen differently from a Western collapse at the particular level, but be much the same at the general level. (Listener, September 2012)

[C29] The Power Myth of the Reserve Bank ( There is a well known saying that to every problem there is a solution which is simple, easy to implement and wrong. Thus is New Zealand’s conventional wisdom on the over-valued exchange rate. This may be the first time I was explicitly referring to the model described in T6. Some statements by the new Governor (Graeme Wheeler) shortly after suggested the RBNZ is not too uncomfortable with this analysis. I should confess however, that the proposal that the RBNZ should think about how to regulate the banks to encourage savings is not the wisdom of all the informed. (Listener, October 2012)

[C30] Housing: a Pricey Problem ( To repeat the previous point. The popular solution to the price of housing is simple, easy to implement and wrong. Here I set out a more comprehensive analysis, anchoring the housing market into the Global Financial Crisis, the Long Recession, and New Zealand’s savings shortage. Balance sheet analysis in working undereanth this, of course. C14. (Listener, November 2012)

[C31] US Cliffhanger ( Given this was written in November, it proved prescient about the goings on at the end of the year. The punch line is in the last sentence and repeats the forebodings in C13. (Listener, December 2012)

[C32] Party Till We Drop ( It was only doing this review that I realised that the final 2012 column repeated the first one – and indeed that of many other columns for the year – that New Zealand is avoiding making the hard decisions with the likelihood of compromising its viability in the future. Sigh. (Listener, December 2012)