Quantitative Easing: An Obituary | Stuff.co.nz
NOTICE: New Zealand’s version of quantitative easing will die on Friday, but has seen so little action in recent months that it might as well have died months ago.
Reserve Bank Governor Adrian Orr announced his disappearance via a press release last Wednesday amid a sea of inflationary panic.
QE has spent its life buying public and local debt with Reserve Bank money, keeping the price of that debt low by moving a few numbers on a spreadsheet.
However, this is not how most people will remember it.
* The summer clash between Finance Minister Grant Robertson and Reserve Bank Governor Adrian Orr over housing
* Infrastructure and housing could still be hand brakes in a post-Covid world
* Who is the government borrowing money from to pay for the response to Covid-19?
* Raising the cap on money printing to $ 100 billion and buying US bonds as options for the Reserve Bank
Instead, they’ll look fondly the way they envisioned it: an inkjet printer in Orr’s office spitting out tickets with an audible “brrrr” and Deputy Governor Christian Hawkesby passing the prints through. to the place of Finance Minister Grant Robertson.
News of his impending death prompted economists to give eulogy on his passing.
Computer science economist Brad Olsen was the first.
“He did his job,” he said. “Anyone who owns a house would say that helped, anyone who doesn’t have one would throw stones at you. “
Equally enthusiastic was Kiwibank’s chief economist Jarrod Kerr: “Yes, it was successful.”
Effervescent praise also flowed from strategy and risk consultant Raf Manji: “He did what he was supposed to do,” he said, before adding that he wished he had stopped. do what he was supposed to do several months ago.
Quantitative easing was born overseas in the throes of the global financial crisis, with central banks using it as a tool to stimulate the economy beyond lowering already low interest rates.
When Covid-19 hit our interest rates were close to zero and people like Kerr nervously watched the prices of public debt bonds around the world.
The buyers of these bonds were unsure of how to price them. Since government bonds form the basis of interest rates on other forms of debt, this would spill over into the rest of the market.
“I’m not sure if panic was the correct word, but they certainly weren’t trading in a way you’d expect, and it reminded us, very briefly, of the [global financial crisis], which is not pleasant, ”Kerr said.
This is how the Large Scale Asset Purchase Program (LSAP) was born. It was initially capped at $ 30 billion, with the Reserve Bank only being able to hold a maximum of 50% of all government bonds, but then expanded to $ 100 billion with a limit of 60 %.
His expenses would never reach the latter total; when his death was announced, only $ 53 billion had been spent.
Buying so many of these bonds forced investors to invest in riskier assets. In New Zealand, the word “active” is roughly synonymous with the word “home,” which is one of the reasons house prices have skyrocketed.
Kerr said everyone was a little embarrassed by this much-anticipated side effect now, but that was kind of the point.
“Let’s pretend house prices are down 30% today … in fact most people would be pretty nervous right now and not spend accordingly.”
Manji said the mistake was that the Reserve Bank just didn’t turn off the tap quickly enough.
Everyone feared a liquidity crisis, but in reality parts of the economy linked to the movement of people had just been extinguished. Everything would be fine if we could continue to trade goods across borders. All of this should have been clear to the Reserve Bank by August.
“I don’t think people were quite ready to go, oops, actually we have to turn the tide.”
Kerr said another problem was that we hadn’t borrowed enough. Government bond purchases were already slowing, as each quarter the government triumphantly announced rating upgrades and borrowed less than promised.
“He [quantitative easing] sort of died of natural causes. “
It was the big mistake. We did not look at QE enough to allow enough new homes to be built, as more and more homes were being bought.
Kerr said the Reserve Bank had played with a few municipal bond purchases but never really came out with its “ears stuck” and promised to use its unlimited balance sheet to suck up municipal debt.
A commitment of this magnitude would have allayed exaggerated fears of downgrading the board’s debt.
Or the government could have just borrowed the money itself and given it to the boards, subverting the debt ceilings.
“We ended up with this gaping hole and insufficiently funded municipalities. It’s New Zealand’s problem there, ”Kerr said.
“This is the reason why we have a housing market that is up 30%. You will see the interest rates go up [now], but I don’t think you’re going to see house prices drop. “