Last week I wrote up some thoughts on negative nominal interest rates, and how important it is that finance ministers and central banks start treating as a matter of urgency the elimination of the regulatory constraints and practises that make it impossible for policy interest rates to go materially negative. If they won’t, they need to raise inflation targets, but that would be a distinctly inferior option.
In that light, it was encouraging to read the blog of Miles Kimball – one of key academic proponents of action in this area – and learn that he was talking overnight on exactly that topic at the annual central bank chief economists’ workshop hosted by the Bank of England. The annual BOE meeting is an important and interesting forum (I got to go once) and typically John McDermott, chief economist at the Reserve Bank, attends. The link to Kimball’s slides (“18 misconceptions about eliminating the zero lower bound”) is here.
I don’t agree with everything in Kimball’s presentation. In particular I still think he puts too much weight on government providing the answer, rather than just getting out of the way and providing greater scope for market innovation. But then there is (or should be) a much greater urgency to addressing the issue in most of the rest of the advanced world, where policy interest rates have now been stuck at or near zero for a depressing number of years now.
The obstacles to negative nominal interest rates have been around as long as banknotes, but haven’t mattered very much in the past – after all, despite the occasional peripheral discussions and local experiments during the Great Depression, there was then a mechanism to generate recovery – breaking the link to gold. That option isn’t available this time. Kimball rightly compares creating the ability to take nominal interest rates materially negative to breaking off gold in the 1930s.
In countries where interest rates have not yet hit zero, such as New Zealand and Australia, the Minister of Finance (who controls the gateway to taking legislation to Parliament), the Treasury (as chief economic adviser to the governments), and the Reserve Bank (as, in essence, implementation agents – and to some extent the institution that benefits from the current system) need to be planning now to ensure that these old restrictions don’t impede the ability of our countries to cope with the next severe downturn. This isn’t just something of academic or obscurantist interest – it is about unshackling one limb of macroeconomic policy so that it is ready when it is needed. And as I’ve noted before, at 3.5 per cent our OCR is less high now than most of policy rates were in 2007 in those countries now stuck with the near-zero lower bound constraint.
And two other brief items:
I drew attention some weeks ago to the work Ian Harrison had been doing on earthquake strengthening requirements, an area of policy which appeared to have the makings of another government “blunder”. A group Ian is associated with called EBSS (Evidence Based Seismic Strengthening) now has a website, and it includes a brief critique of the government’s revised proposals in this area announced earlier this month. Those changes seem to amount to a step forward, in reducing the extremely heavy cost burden that the government had planned to impose on building owners, to mitigate extremely low probability and low cost risks.
However, as the EBSS paper notes, the new proposals still seem a long way short of ideal. Now that I’m based at home I’m often down in the Island Bay shopping centre. Many of the older buildings there – including one housing the excellent and popular butcher – are yellow-stickered, but I neither notice among other people, nor feel any myself, any unease in using them. Sometimes I wonder if that is just a short-sighted perspective, oblivious to the risks, but that is where numbers help. This quote from the EBSS paper caught my eye.
As a point of comparison, flying has similar characteristics to earthquakes. There is a very small chance that there will be a catastrophic event that results in death. The chance of being killed, per hour, when flying is 4000 times greater than being in a typical Auckland ‘earthquake prone’ building. For New Plymouth buildings it is about 600 times greater, and for Wellington 20 times.
We fly because we know that flying is very safe. But the Auckland, New Plymouth and Wellington buildings will be shunned because they will be falsely identified as ‘high risk’ when there is overwhelming evidence that they are not.
And finally China. I must have missed the reports of the recent Chinese government instruction to banks that they must keep lending on local authority projects even if those local authorities can meet neither interest nor principal commitments on existing debt. Christopher Balding has an excellent summary of what an edict like that seems to mean. As he puts it “the Chinese bailout is starting to bail fast”.