Last week I wrote about how the Reserve Bank has got it wrong by reducing interest rates to close to zero, and then pushing them up at a rate of knots when inflation, that they created, started to hit. Some of you disagreed with that opinion, and in particular some took a ‘suck it up’ point of view; ‘it has all happened before, and we all survived’ scenario, with which I disagree. But maybe I didn’t explain my thoughts clearly enough, so I will try again. You may still disagree, but at least I will feel better if I have made myself a bit clearer, which I hope to do.
March 2020 saw the first lockdown. None of us knew what was going to happen. I remember travelling south on an almost completely empty Cook Strait ferry on the very last day of travel. The roads were empty and already goats had taken over on rural roads where cars used to be. Above all though, business people had no idea what would happen to them. Wage subsidies were already being rolled out, but there was so much uncertainty. Everyone stayed home – apart from those that had to go to work – and many would much rather have been allowed to work, but could not. They were very strange times.
I worried about my clients. I had no idea if their businesses would survive, and to be honest, nor did they. We didn’t know how long it would all go on. In the end, the first lockdown lasted seven weeks and then people were allowed to return to work, albeit in limited circumstances. Gradually, life returned to normal. You might expect that clients’ GST returns for April/May 2020 – affected by lockdowns – would have shown very low turnover. Not so. Many businesses reopened their doors in mid-May and hit the ground running. Some were able to work from home, of course, but not all, and in a few weeks many had recovered a significant portion of their normal turnover for the period.
After that, life in New Zealand really did get back to (almost) normal. Sure, we had no overseas tourists, or foreign students, as we were living in our own little hermit kingdom, but for most of us, things were fine. Former employees of the travel industry found jobs elsewhere. Tourism operators were doing it tough, admittedly, but farmers – the backbone of our economy – were doing well, as the rest of the world still had to eat. A lack of immigrants meant we had to plug the gaps they created with home-grown talent…and we didn’t have enough of it. New Zealanders, unable to travel overseas, took trips around the country to support our tourist industry and spent their money on home renovations and high-priced goods. We were doing better than countries that had refused to close their borders and our government, data in hand, kept reminding us of it. Little ol’ New Zild was doing just fine.
And so it was until August 2021, by which time other countries were starting to get over the pandemic. New Zealand never suffered the overwhelmed hospital system that many other countries did, and with closed borders we were able to contain the disease. By August 2021 we had had 18 months of good economic conditions, compared to other countries that had kept their borders open and had suffered much more.
Where am I going with all of this?
The general policy overseas was to provide relatively generous handouts to businesses during the pandemic in order to help them to survive. This went on for most European countries for about 18 months, but in New Zealand the worst was over for us after about 7 weeks because we still had closed borders so our case numbers were reasonably well controlled. Many of us think that it all went wrong after August 2021, when the entire country was locked down at Level 4 because of one solitary Auckland case. Economically, however, it went wrong long before that.
Overseas countries were forced to provide economic stimulus to protect jobs and businesses, to avoid severe economic recessions everywhere. New Zealand didn’t need that. Apart from the first lockdown, we were doing just fine. The lockdown in 2021 was simply not necessary, and the resulting government handouts should never have been given. Why on earth were businesses in the South Island forced to close for weeks when there was not a single case of COVID on the whole island? We didn’t need the stimulus – we were doing OK. The Government simply panicked. But as overseas countries were dropping interest rates to record lows, just to provide some economic stimulus, our Reserve Bank did the same.
They completely ignored our good economic data and followed the world trend.
And by doing so, they have created inflation that was completely unnecessary.
When excessive stimulus is applied to a relatively healthy economy the results can be disastrous. All the Reserve Bank did was create a swathe of cheap money for people who could afford to pay more. Thus, house prices went through the roof.
There have always been other factors at play in the housing market – lack of supply, lack of land zoned for housing, lack of housing infrastructure – but add very cheap money to the mix and we really do see too much money chasing too few goods. No one in the Government, especially the Minister of Finance, really understands basic economics, and so they relied on the Reserve Bank governor to act in the best interests of the country. Instead, he followed the policies of other countries, whose economies had suffered much more with COVID, and created a massive economic stimulus that was completely out of kilter with a healthy economy.
Now you might see why I think ‘Suck it up’ is not the answer this time.
Those people who bought houses at the top of the market may have done so because their choices were limited. In previous recessions, there was always a reasonable supply of rental accommodation, but not any more. Now they are facing massive interest rate increases because the Reserve Bank should never have dropped interest rates to the low levels that they did. The buoyant economy that we had never justified such low rates.
But it is too late now.
So spare a thought for those who bought houses because they weren’t just afraid of missing out, but were afraid of sleeping on a park bench. That is actually a world problem, or – more accurately – a developed world problem. But if a country has a governing bank that gets it so wrong, because they assume that all the factors affecting other countries affect us too, when they don’t: that is criminal. All of you calling for Jacinda and others to face trial for acts of criminal negligence need to add the Reserve Bank governor into the mix. He should have known better but he didn’t. And now a lot of people are going to suffer for years because of his incompetence.
