Year: 2018

The Fed and Lehmans

Michael Reddell Financial stabilty, USA

On the day of the US mid-term elections it seems appropriate to have a US topic.

I read a lot of books each year.  Many of them provide a fresh angle on some or other issue I’m interested in, but few lead me directly to change my mind.  Professor Laurence Ball’s The Fed and Lehman Brothers is one of the exceptions.   I wasn’t pre-disposed to expect much from Ball (a professor of economics at Johns Hopkins university): my impressions of him were formed by his visit to New Zealand 20 years ago when, as Reserve Bank professorial fellow at Victoria University, he somewhat embarrassed his hosts by suggesting that the conduct of key elements of fiscal policy should be handed over to independent technocrats.  Interesting idea I suppose, but given that the point of spending public money on the fellowship had been to buttress public support for an independent Reserve Bank, it didn’t really help, especially in an election year with Winston Peters in the ascendant.

But the new book looked intriguing. As it turned out, it was much more than that, and I’d go as far as to call it a “must-read” for any serious student of the 2008/09 financial crisis.

It is a very careful and detailed study focused largely on one question: could the US authorities have lawfully prevented the failure of Lehmans that fateful weekend in September 2008 if they had wanted to?   Key decisionmakers have claimed, at the time and subsequently, that there were no lawful options open to the Fed (Bernanke, for example, is quite explicit in his claim that the authorities could only have intervened in breach of the law).  Ball shows, pretty conclusively, that such claims are simply wrong.  The decision not to provide liquidity support to the Lehmans group was just that, a choice.  And he goes on to illustrate that although in law any decision to have provided liquidity support (or not) rested solely with the Board of Governors of the Federal Reserve, in fact the key player was the US Secretary to the Treasury, Hank Paulson, with the Fed apparently deferring to his preferences.

Under the Federal Reserve Act as it stood in 2008, the Fed could lend to non-banks (as Lehmans then was, and as Bear Stearns had been) only in “unusual and exigent circumstances”.  Most commentators will agree that in September 2008 –  a year into an unfolding financial crisis, shortly after the US government had intervened to support the mortgage agencies –  that particular strand of the legal test could readily have been passed, in respect of a major investment bank closely intertwined with the rest of the wholesale financial system in the US and abroad (Lehmans had major operations in London).  The other strand of the legal test was that any loans had to be “secured to the satisfaction of the Reserve Bank” making the loan.  There apparently wasn’t much (or any) case law on this provision, but it was generally accepted within the Fed that the Federal Reserve shouldn’t be lending if they weren’t pretty sure of getting their money back.

But what wasn’t in the statute was a requirement that the borrower itself still be solvent (positive net equity).   A financial institution’s directors would presumably have quite severe limits on their ability (or willingness to risk doing so) to trade while insolvent, but from the point of view of the Federal Reserve, considering providing lender of last resort liquidity support, the relevant issue wasn’t the solvency of the institution, but the adequacy of the specific collateral the Fed would receive to cover any loan.  Nonetheless, senior policymakers have since claimed that Lehmans was insolvent and that, in any case, there was insufficient good collateral to support a loan of the size that might have been required.    Ball challenges both claims.

He does so using an array of published material, including regulatory filings, bankruptcy examiners’ reports, and the report (and supporting documents) of the Financial Crisis Inquiry Commission.

On the solvency front, one issue Ball has to grapple with is that when Lehmans was placed in bankruptcy there proved to be a considerable shortfall in net assets: not just shareholders (who lost everything) but creditors lost significant sums (and some court cases are still unresolved).   But that is a quite different issue from whether there was positive net value in the business at the point where the decision not to provide liquidity support was being made.  Economists have long recognised the concept of “bankruptcy costs”, and Ball makes a pretty compelling case that the bankruptcy process itself resulted in significant transfers of value to other parties that would be unlikely to have occurred in a more orderly process (the three areas he singles out relate to the termination of derivatives contracts, the fire sale of subsidiaries, and the disruption of various investment projects (mainly in real estate) that Lehmans was party to.  But on a going concern basis Ball concludes his detailed analysis this way

…the best available evidence suggests that Lehman was on the border between solvency and insolvency based on realistic mark-to-market accounting, and it was probably solvent based on its assets’ fundamental values.

As noted earlier, the critical (legal) criterion wasn’t about institutional solvency, but about the specific collateral the Fed could have obtained.

You might have assumed –  in a hazy way I think I did –  that by the end Lehmans wouldn’t have had much decent collateral left.  Perhaps you assumed that if the Fed had lent, it would all have been “secured” on dodgy commercial real estate loans.  But, as Ball demonstrates, that view is quite wrong.    Lehmans had been funding a large proportion of its balance sheet (as was the norm then for investment banks) through repos using fairly high-quality securities (ones that Fed was happy to accept), and the run on Lehmans primarily took the form of counterparties not being willing to roll over this repo finance (itself an interesting phenomenon, given that repo contracts should have left any counterparty with a clean ownership of the collateral security in the event of bankruptcy). But to the extent the repos didn’t roll over –  and it was clear they wouldn’t have on the Monday morning without Fed support – Lehman would still have been left with the (good quality) securities.  It also had long-term funding on its balance sheet, which couldn’t go anywhere in the short-term.  Ball demonstrates that Lehman had sufficient volumes of good quality acceptable collateral that it could have secured a large enough Fed loan to have replaced all its short-term funding if necessary.   The numbers would have been large, but as Ball points out no larger than the amounts injected into AIG a few days later (for a risky equity stake), or lent to Morgan Stanley a short time later.

There is an important distinction to be made here.  The issue Ball is dealing with is not whether the US authorities should have taken over, and recapitalised, Lehmans.  His argument –  nested in the liquidity provisions of the Federal Reserve Act –  is that liquidity support could (lawfully) have been provided, and that had it been provided it would have opened the way to a less costly, less disruptive, resolution over the following months.  Perhaps it would have been possible to inject more private equity to the holding company and enable it to continue as a going concern.  But if not, the prospects for a takeover of the business would have been greater –  for example, a key obstacle to Barclays taking over Lehmans was the need for a shareholder vote which would have taken at least a month –  or it would have been possible to have sold subsidiaries –  including the valuable asset management subsidiary –  in a more orderly and competitive process.  At worst, a more orderly wind-down would have been facilitated.

One of the other things Ball documents is the work that had gone on inside the Fed over several months, right up to the fateful weekend, on possible liquidity support mechanisms for Lehmans.  It seems pretty clear that there was never a presumption inside the Fed that if a private buyer was not be found that Lehmans would simply be left to the tender mercies of the bankruptcy administrator.  (In fact, as he notes even when Lehmans was forced to file for bankruptcy, the Fed provided substantial liquidity support to keep the New York broker-dealer subsidiary open for several days until Barclays committed to purchase it.)

So why didn’t the Fed prove willing to provide liquidity support for the whole group?  Ball argues, pretty conclusively, that the key player here was Secretary to the Treasury, Hank Paulson.  In law, the Secretary to the Treasury (or anyone else in the Administration) had no role in such decisions.   And it is not as if, in the specifics of the time and system, Paulson had any greater political legitimacy than, say, Bernanke.  Both were appointed by (outgoing) President Bush, and both had been confirmed by the Senate.   Presumptively, Paulson was likely to be out of office in January 2009 no matter who won the election, while Bernanke had more of his term to run.  But, of course, the politics around Wall St “bailouts” had been turning increasingly nasty since the Bear Stearns intervention (where the Treasury had got involved, implicitly underwriting the Fed’s credit risk) and Paulson –  a strong personality –  was quite open that he didn’t want to be remembered by history as Mr Bailout.  Perhaps the distinction between well-collateralised liquidity support and (actual or implicit) equity support got bypassed in the heat of the moment.

But the other relevant aspect, given the political aversion to more “bailouts”, seems to have been a sense within the Fed that the pressures on Lehmans had been so well-foreshadowed, over months, that its failure wouldn’t prove that disruptive.  Key players now claim that that wasn’t their view –  Bernanke is on record claiming that he always knew it would be a “catastrophe” –   but Ball demonstrates that such claims are simply inconsistent with what the Fed was saying or doing at the time.  For example, the FOMC met two days after the Lehmans failure.  Had the Fed thought the Lehmans failure would prove “catastrophic”, or even just aggravating the severity of the recession, a cut to the Fed funds rate would surely have been in order.  There wasn’t one.  And the published records of the meeting show no sign of any heightened concern or anxiety about the financial system or spillover effects to the economy.  If that was the prevailing view at the top levels of the Fed, it makes more sense as to why central bankers would defer to political pressure not to have provided (liquidity) support for Lehmans.

Central bankers don’t emerge with much credit from Ball’s book.  Anyone can make mistakes in the heat of the moment –  even a large institution with a deep bench like the Federal Reserve –  but what is perhaps more troubling is the suggestion (which seems pretty convincing to me) that key players (Bernanke, Geithner and Paulson) had been spinning the situation in their memoirs, rather than confronting the specifics of the data and the law.  Perhaps I become a bit more sympathetic than I was to (former BOE Governor) Mervyn King’s choice to avoid memoirs, and a defence of his involvement, in his own post-crisis book.  Thank goodness then for the efforts of a careful, apparently dispassionate, academic like Ball.

Of course, to agree with Ball’s conclusion that the Fed could have provided liquidity support to Lehmans if it had wished to do so is not to immediately jump to the conclusion that they should have done so.   Although it isn’t the focus of his book, it is pretty clear that Ball thinks such support should have been given.

A counter-argument could have a number of strands:

  • first, Lehmans had been under pressure for months to raise additional outside equity, and had failed to do so.  Had they done so, even at deeply discounted prices, it is unlikely that the wholesale run would have developed as it did (and even had it done so, the politics of liquidity support might have been different),
  • second, had Lehmans been a bank supervised by the Fed it would probably not have been allowed to stay open even as long as it did without new capital.  In bankruptcy courts, the relevant test might be whether there are still positive net assets, but bank supervisors who are doing their job should have been intervening pretty strongly –  including using directive powers –  before any question arose as to whether net assets were still (perhaps barely) positive, and
  • third, there is still the unanswered question (which may never be satisfactorily resolved) as to just how much the Lehmans failure exacerbated the recession.  Counterfactual history is hard.   The consensus view at present is that the adverse effects were large, but if much of the disruption would have happened anyway –  even if Lehmans had been left limping for a couple of months on liquidity life-support –  the case for intervention is weaker than many would allow (and, for example, AIG’s plight was largely unrelated to the Lehmans failure).  After all, there is a salutary place for market discipline, including around the urgency of injecting new capital when dark clouds loom.

I was one of those who tended to welcome the decision not to “bail out” Lehmans (better still not to have intervened around Bear Stearns months earlier) but I probably haven’t distinguished clearly enough between liquidity and solvency support.   The latter option –  which wasn’t something the Fed could have done anyway –  isn’t the focus of this book, but Ball does make a pretty persuasive case around liquidity support, including based just on facts that were available at the time (on the aftermath, no one could be certain).

I could still mount a counter-argument based on the first couple of bullet points above.  Providing liquidity support in such circumstances would have sent a signal to boards and managers of other institutions that any urgency to raise new capital, at deep discounted prices, was less than it might have seemed.  On the information availabe at the time, that would have been unfortunate.   Then again, within days that whole argument was tossed out the window as the authorities rushed to respond to a deepening crisis.

But perhaps what finally gets me over the line in thinking the Fed made a mistake, in not lending and in deferring to Paulson (in a politicised time six weeks out from an election), is an assessment of the probabilities.  Perhaps the Lehmans failure really wasn’t that big a deal.  Perhaps the Fed at the time was justified in its view that a failure could be managed without too much spillover downside.  But operating in a world of heightened uncertainty, no one could really know.  There had to be a chance that simply allowing Lehmans to go into bankruptcy –  the largest bankruptcy in US history, all done in rush –  would prove very very disruptive and economically costly.  But if providing strongly-collateralised liquidity support, quite possibly at a high interest rate and with ample haircuts, could have alleviated that risk –  even if it was only a 10 per cent risk – it is hard not to conclude (even without the benefit of hindsight) that the central bank should have acted.  After all, lender of last resort provisions are put in statutes for a purpose –  and not just a decorative one.

 

 

That will be $2 million and would you like fries with that?

Michael Reddell FMA, Reserve Bank

Yesterday afternoon the Governor of the Reserve Bank and the chief executive of the Financial Markets Authority released their report on bank conduct and culture.  Despite highlighting several times in the report that this was really none of their business (of course they phrased it more bureaucratically: “neither regulator has a direct legislative mandate for regulating the conduct of providers of core banking services”), they’d spent an estimated $2 million of public money to mount their bully pulpit, lecture the banks, lobby for more powers for themselves.    And yet, rather lost among the soundbites –  especially those from the Governor loudly lamenting the apparent risks of “complacency” – was this simple summary (from the second page of the Executive Summary)

…culture and conduct issues do not appear to be widespread in banks in New Zealand at this point in time.

Perhaps these regulatory agencies should stick to their core responsibilities, assigned by law.   Developing a culture of doing excellently what Parliament asked them to do, of being open and accountable to citizens, and avoiding overreaching their mandate (relying on implicit threats) would be good to see from both the Reserve Bank and the FMA.  All government agencies should know their limits and stick within them.  Perhaps their respective boards should be asking some hard questions of management.

Oh, and dealing effectively with complaints made against, or to, the agencies themselves would also represent quite a (welcome) change.  Physician heal thyself.

But getting back to the report itself, the simple truth is that there just wasn’t much there.  Not much economic analysis –  just somewhat ad hoc “sermons” –  no cross-industry comparative analysis, and not even the simple acknowledgement that in institutions run by human beings mistakes will be made from time to time.

Perhaps there is something in the line that it was rather a once-over-lightly review.  Perhaps too neither institution really had a strong interest in finding serious problems –  just enough for the Governor to advance his ambitions with more portentous lectures on how private businesses needed to run themselves better.

But it was well-known for months that the review was underway.  There was plenty of opportunity for any serious systematic issues –  whether in a single bank or across the system –  to be brought to light by those adversely affected.  And, as it happens, as part of the review the FMA and RBNZ commissioned a poll, surveying the experiences people had had with their own banks, and their trust in banks and the banking system.   It isn’t clear from the published report how the (on-line only) sample was selected, but I thought the results were quite reassuring.

There was this summary, for example

culture 1

It often seems as though every second shop I go into has staffed trained to attempt to sell products I don’t want or need (“City Council rubbish bags?” I’m routinely asked –  and never buy –  at the local New World), so if only a quarter of bank customers have had staff offer them financial products they don’t want or need, bank marketing must be a bit better targeted than I’d realised.

There is also a degree of unrealism about some of the questions.  I’m quite sure that when I’ve dealt with my bank they have rarely put my long-term financial interests first.  Why would they?  They are a profit-maximising private business looking to maximise value for shareholders, but through a repeat-game business where alienating the customers is often detrimental to the longer-term interests of shareholders too.  (And for many products the bank may have no idea what my “long-term financial interests” actually are.)

Or there was this question.

Q: ‘After purchasing a financial service or product, such as credit card, insurance, loan, term deposit, KiwiSaver, etc., has someone followed up to ensure the product continues to meet your needs and is still suitable for you?’

culture 2

Surely even at best this is only a nice to have?  Annoying calls from firms “just following up to see that everything is okay” have a cost (to the recipient too).  And there is some (considerable) onus on customers.  If I reflect on this question, I probably have a couple of credit cards I no longer need –  and am paying a small amount to the ANZ for each year – and no one has rung to check whether they are still “meeting my needs”.  But I don’t expect them to.  I’m an adult.

I’m not totally laissez-faire on such matters.  There are dangers that long-term contracts, hard to get out of, could be sold to people who simply don’t understand them. (Occupational pension schemes that people had no choice but to join are another example.)  It is reasonable for society to have (legal) protections built into the system.  But this report highlights precisely no systematic problems.   The report briefly, and reasonably, mentions a class of “vulnerable customers”, but again it was not apparent that there are either systematic problems or easy solutions.

Perhaps the most publicised part of the report is the initiative by the FMA and Reserve Bank to try to get all banks to stop sales-related incentives for frontline staff.   Given that the two institutions acknowledge that their legal mandates are limited it isn’t clear how much this is more than bluff, bravado, and a bit of pushing at an open door (some banks already being in the process of phasing out such incentives).  I hold no brief for specific remuneration practices, but I was struck by how little actual analysis there was in the report, including the role of sales-based incentives in a whole range of other sorts of firms and industries.  I didn’t explicitly check, but when I bought a car a few weeks ago I didn’t assume other than that the salesman would be benefiting personally if I happened to buy a car from him.  No doubt he knew that I knew.  There are risks, and one deals with them by some mix of dealing with reputable firms (invested in their brand), mechanic checks, and so on.  It isn’t clear in what respect the FMA and the Reserve Bank think basic banking products are so different.   There are no perfect ways of resolving agency issues (even within organisations), again something missing from the report.  Then again, rhetoric is cheap and serious analysis is hard (and grabs fewer headlines).

One of the Governor’s consistent themes is that banks –  and indeed private business more generally –  are too short-term in focus. He never produces any evidence to support his claim, or to back his view that he is better placed than private shareholders and managers to appropriately factor in time horizons, conditioned on the huge uncertainty everyone faces.   It shows through again in this report.  There are several claims that banks are too focused on short-term customer value or satisfaction, but no evidence is adduced to support this.   Frankly, I’d find it a little surprising if it were true.  Lifetime customer value is an approach that has been around in the marketing etc literature for 30 years now (and the basic idea won’t been unknown prior to that), and if banks really were just prioritising the short-term presumably they’d run into trouble eventually?  And yet New Zealand (and Australian) banks –  outside the immediate post-liberalisarion period –  have been both stable and profitable over many many decades, and haven’t even been losing customers to newer better providers more willing or able (or something) to meet customers’ long-term needs.

So, overall, I wasn’t impressed.  From the beginning, the review looked like a bit of power and influence grab –  especially by the new Governor, playing politics – bidding for more resources.  It came at a time when the banks –  legitimate private businesses (not, as the Minister of Finance put it this morning, operating as some sort of “privilege”) –  were (and are) in a weak position to stand up for themselves (given the bad stories from Australia).  And so banks, who face a market test every single day –  not just the share market, but customers with the ability to take their business elsewhere –  have to quietly put up with lectures from senior bureaucrats who’ve never faced such tests, never had to put their ideas or products to the market, deferentially swearing to go along and do as Orr and Everett say.   And, of course, if the banks do end up having to put in place more reports, more systems, more compliance checks, well, the burden of regulation always falls less heavily on big established players than on small operators or new entrants.  And so the big players –  more deft at playing the political/bureaucratic games – don’t really have much to worry about.  But customers might.

None of this is to suggest that ethics and morality (two words absent from the report)should be unimportant in business.  Without them, the basis for trust –  central to well- functioning markets and societies –  is corroded and eventually lost.  But it also isn’t clear that yet more mandated reports, yet more boxes to check, yet more rules to get legal sign-off on compliance with, is any sort of real substitute for the sort of personal and institutional integrity many hanker after.  I’m a trustee of a couple of superannuation schemes, which the FMA is responsible for regulating, and I’m struck by the sheer cost and additional complexity new waves of rules add –  even rules specifying the maximum number of words in one specific report –  and the contrast between that and the likely value being added for members.  And the improbability that the thicket of rules will really do much the stop the rogues.  Or even to cultivate a culture of honour and decency –  as distinct from formal compliance –  among the promoters and adminstrators of such schemes.

Deposit insurance, OBR etc

Michael Reddell deposit insurance, Reserve Bank Act reforms

This wasn’t going to be the topic of today’s post, but I see Stuff has a story up based largely on a conversation I had late last week with their journalist Rob Stock.  (NB In the first version I saw a couple of hours ago a rather important ‘not” was omitted from this sentence “But a big bank failure was imminent, he said”).

New Zealand is being tipped to join the rest of the OECD in having a government-backed bank deposit guarantee scheme.

Under the Reserve Bank’s Open Bank Resolution scheme (OBR), depositors at a failing bank might have to take a “haircut” with some of their money being taken to recapitalise their bank, and get it open for business again quickly.

But former Reserve Bank head of financial markets Michael Reddell is tipping an end for OBR following the release of a discussion paper into the future of the Reserve Bank.

The background to this was the release last week of a joint Reserve Bank/Treasury consultative document as part of phase 2 of the review of the Reserve Bank Act.  I haven’t yet read the whole document, although a reader who has tells me it is a fairly substantive (and thus welcome) piece.  But when Rob Stock got in touch to suggest he would like to talk about the reappearance of the OBR (Open Bank Resolution), I read the relevant section (chapter 4) on “Should there be depositor protection in New Zealand?”

Stock is not a fan of the OBR option and was uneasy as to why it was appearing in the consultative document.  My response was along the lines that OBR had played a key role in Reserve Bank thinking about failure management for almost 20 years now.  Any new consultative document (especially a joint RB/Treasury effort) had to build from where policy/rhetoric had been but that, nonetheless, my read of the document suggested a clear framing pointing towards (officials favouring) New Zealand adopting deposit insurance.

Treasury has favoured such a change for some years, while the Reserve Bank had historically been quite resistant –  mostly, on my reading, because they take a rather naive wishful-thinking approach which ignores twin realpolitik pressures that ministers will face if a major bank is at the point of failure.    They believe in the value of market discipline (as, surely, in some sense most people do) and don’t want to do anything that might acknowledge that it isn’t always going to be a feasible (political) option.   In my view, in reaching for something nearer a first-best model in an idealised world, they increase the chances of third or fourth best outcomes.  A well-run deposit insurance scheme isn’t perfect, but offers the prospect of a decent second-best set of outcomes.  And, for what it is worth, would bring New Zealand into line with the rest of the advanced world.  As the consultative document makes clear, of the OECD countries only New Zealand and Israel don’t have deposit insurance, and Israel has already indicated that it is going to introduce a scheme.

As I noted, it was hard to see why any of the parties in the current government would be resistant to introducing deposit insurance (the Greens had been openly calling for such a reform) and there had been signs that although the “old guard” of the Reserve Bank had been resistant to deposit insurance the new Governor was likely to be more receptive. (And in the off-the-record speech Orr gave a few months ago, it was reported that among his comments was “deposit insurance is coming”.)   National had been resistant, but relevant context for that included the way they were landed with the aftermath –  and losses – of the retail deposit guarantee scheme after coming into government late in 2008.  The retail deposit guarantee scheme bore almost no relationship to a proper deposit insurance scheme –  being introduced at the height of a crisis, primarily covering unsupervised institutions and then knowingly undercharging those institutions for the risk being assumed.  But it is relevant (together with National’s bailout of AMI) in revealing how politicians are likely to behave under pressure in a financial crisis.

Why do I favour deposit insurance (as a second best)?   I’ve covered this ground in other posts, but just briefly again.   I see little or no prospect that, in event of the failure of a major bank, politicians will let retail depositors lose their money (reliance on OBR assumes exactly the opposite interpretation).    If so, it is better to force depositors themselves to pay for that protection up-front, in the form of a modest annual insurance premium.

At present, with the four biggest banks all being subsidiaries of Australian bank parents, the failure of a major domestic bank is only seriously likely to occur if the parent is also in serious trouble. (And the 5th biggest bank is government owned –  enough said really.) If the parent isn’t in serious trouble, there would be a strong expectation that the parent would recapitalise any troubled subsidiary and/or perhaps manage a gradual exit from the New Zealand market.

It simply isn’t very credible to suppose that if the ANZ banking group is failing, and the New Zealand subsidiary is also in serious trouble, a New Zealand government will let New Zealand depositors of ANZ lose (perhaps lots of) money while their Australian cousins and siblings (often literally given the size of the diaspora), depositors with the ANZ, are bailed out by (or covered by deposit protection by) the Australian government.   It isn’t as if there is any very credible scenario in which the New Zealand government’s debt position had got so bad that the government could claim “we’d like to help, but just can’t”, and the optics (and substance) would be doubly difficult because it is generally recognised that a concomitant to making OBR work would probably be to extend guarantees to the liabilities of other (non-failing) banks –  otherwise, in an atmosphere of crisis transferring funds to the failing bank will look very attractive to many.

My view on this is reinforced by the practical examples of bailouts we’ve seen.  Sure, the previous Labour government let many small finance companies fail without intervening, but then the deposit guarantee scheme happened. AMI policyholders were bailed out, when there was no good public policy grounds (other than the politics of redistribution etc) for doing so.  And, beyond banking, we had the bail-out of Air New Zealand in 2001. In the account of that episode that Alan Bollard (then Secretary to the Treasury) told, uncertainty about what might happen in the wake of any failure was a big part of the then Prime Minister’s decision.  It would be the same with the failure of any systemic bank.   It isn’t an ideal response, but it is an understandable one, and one has to build institutions around the limitations and constraints of democratic politics.

(The other reason why OBR is never likely to be used for big banks, is that in any failure of a major bank, trans-Tasman politics is likely to be to the fore, with a great deal of pressure from Australia for the failure of the bank group’s operations on both sides of the Tasman to be handled together/similarly.  It was a little curious that nothing of this was mentioned in the chapter of the consultative document.)

If there is no established depositor protection mechanism and if politicians blanch at the point of failure –  as almost inevitably they will –  then in practice what is most likely to happen is that everyone will be bailed out.   And that really would be quite unfortunate  – big wholesale creditors, who really should be on their own (and able to manage risk in diversified portfolios), losing along with granny.   And so one argument is that deposit insurance allows us to ring-fence and protect (and charge for the insurance upfront) retail depositors, while leaving wholesale creditors to their own devices in the event of failure.  In other words, a proper deposit insurance scheme could increase the chances that OBR can actually be used to haircut the sort of people (funders) that most agree should lose in the event of a bank failure.

There were a few things in the Stock article where I’m quoted in a way that at least somewhat misrepresents what I said.

Reddell said he expected the deposit insurance to win out and the scheme to be run by the Government.

An EQC-like fund would be created to collect insurance premiums from all depositors, with no banks allowed to opt out, he said.

The question here had been about which private insurer would be strong enough to provide the deposit insurance.  My response was that it was most unlikely such a scheme would be run through a private insurer –  they too can become stressed in serious crises –  and that what one would expect would be a government-run and underwritten fund, accumulating levies over the decades, and helping to cover any losses in the event of a major failure.

The premium would be about 10 basis points on deposits, so a deposit account paying interest of 3 per cent, would be cut to 2.9 per cent, with the rest funding the deposit guarantee premiums, Reddell said.

Here the question was mostly about who would bear the cost of the insurance. My point was that one would expect the cost to fall primarily on depositors (rather than say, borrowers or shareholders).  The size of any premium (which should be differentiated by the riskiness of the institution) would be a matter to be determined, and varied over time, but I did note to Stock that for an AA rated bank that cost might be quite modest.   I noted that although CDS (credit default swap) premia had increased since, in the half decade or so leading up to the 2008 financial crisis the premia for Australasian banks had typically been only around 10 basis points.

In other guarantee schemes each depositor only has a maximum amount of their money guaranteed. The paper mentions $50,000, but Reddell said the scheme, if introduced, would have a cap of around $100,000.

My point was that a cap of only $50000 (an idea mooted in the paper) didn’t seem particularly credible, and based on the levels of coverage in many overseas schemes (and under the deposit guarantee scheme) I would expect any deposit insurance scheme cap to be at least $100000.   Set the cap too low and it will end up being unilaterally changed at the point of crisis, with no compensating revenue to cover the additional insurance being granted.

And finally

But a big bank failure was not imminent, he said.

“Canada has gone over 100 years without a big bank failure. There’s no reason to think we will get one in the next few decades,” he said.

Of course, failures are always possible, but much of the mindset and literature is too influenced by either US examples (where the state has had far too big a role in banking), or those from emerging markets.   Canada provides a very striking contrast, but even in New Zealand or Australia the only period of systemic stress in the 20th century was in the period (the late 1980s) when a previously over-regulated system was deregulated quite quickly and everyone (lenders, borrowers, regulators) struggled to get to grips with applying sound banking practices in an unfamiliar environment.   A once in a hundred year systemic bank failure is something authorities have to plan for, and given the choice between collecting modest annual insurance premia for a hundred years to cover some (or even all) of the cost of bailing out retail depositors, and doing nothing and (most probably) bailing them out anyway, I know which second-best alternative I’d choose.

I hope the government agrees, and acts to implement a deposit insurance regime for New Zealand.  There are lots of operational details to work out if they do, and those aren’t the focus of this consultation document, but deposit insurance is the way we should be heading.

On Poland and economic performance

Michael Reddell New Zealand economic performance, Uncategorized

Next week we mark the 100th anniversary of the end of World War One.   Whatever else –  good and ill –  the resulting peace process ushered in, it led to the restoration of an independent Poland.   I was reading an article the other day by a British writer, resident in Poland, reflecting on 100 years of (renewed) Polish independence, which in turn prompted me to dig out some economic data.

My own reflection on Poland is that it is hard to think of a place in the western world (say, present day EU, other bits of western Europe, and western European offshoots – eg New Zealand, Australia, Canada, US, Argentina, Chile, Uruguay) that wouldn’t have been preferable to live in over the last 100 years or so, at least as judged by material criteria.   Perhaps if you were German, you have to live with the guilt of World War Two, but most of Germany was free again pretty quickly.   Romanians and Bulgarians might have been poorer on average, but they largely escaped the worst horrors of the German occupation.  To its credit, Bulgaria managed to largely save its Jewish population, while the Polish record was patchy at best.  With borders pushed hither and yon, and not a few abuses of other peoples (notably ethnic German) post-war, sanctioned by the state, the place then settled into 40 years of Communist rule.   There is a lot to admire about Poland, but I wouldn’t have wanted to live there any time in the 20th century.

In economic terms it has always been something of a laggard.   Here from Angus Maddison’s collection of data are estimates of real GDP per capita for 1870 and 1913 for the UK, France, Germany, the territory that was Polish, and New Zealand.

poland 1

Real GDP per capita in Polish territory (mostly ruled by Russia) was about a third of that in New Zealand.

The Maddison database has annual data for Poland from 1929 (excluding the period of the war), and that ratio of Polish GDP to New Zealand GDP seemed to show no real trend whether pre-war or in the communist years, averaging just a bit more than a third.

poland 2

Relative prices – including the purchasing power parity exchange rates used- matter quite a lot in these cross-country comparisons across time.  So not too much should ever be put on any particular levels estimate.  The Maddison database only comes forward to 2008 and the most widely used current numbers are those from the OECD.  On their calculations, at the end of communism Poland was a bit better off (say, relative to New Zealand) than in the Maddison numbers.  Polish GDP per capita in 1990 is estimated to have been about 44 per cent of that in New Zealand.

Here are the OECD estimates for the period since.

poland 3

On OECD estimates, Polish real GDP per capita hit 75 per cent of that in New Zealand.

Here is the OECD estimates for real GDP per hour worked (for which there are no longer-term historical estimates, but we can safely assume the ratio was very low on average –  perhaps averaging 35 to 45 per cent –  in the century prior to 1990.  In 1993, when the Polish data start the ratio was 43 per cent –  almost exactly the same as for real GDP per capita.

poland 4

Last year, Poland’s labour productivty reached 82 per cent of that of New Zealand.

All of which is clearly very good for Poland.   And it clearly isn’t just that they’d thrown off the shackles of communism: as the earlier charts show, Poland had been a laggard in the 19th century, and in the first half of the 20th century.

But, of course, part of the good news in these charts is a reflection of New Zealand’s own poor long-term performance.

Here are the latest OECD labour productivity (real GDP per hour worked) estimates for the same group of countries as in my first chart above.

poland 5

Last year, for the first time, Polish real GDP per hour worked passed 50 per cent of that in France and Germany.  100 years ago, of course, both France and Germany would have lagged well behind both the UK and New Zealand.

Perhaps Poland will go on to achieve much greater convergence with the other big European economies in the next few decades – we can only hope so –  and yet one can’t help wondering whether the leaders of a newly independent Poland wouldn’t have been rather disappointed if they’d been told that 100 years on their successors and fellow citizens would still be achieving only half the output per hour of the French and Germans.

Then again, they’d probably have been astonished to learn that 100 years on they’d be managing 82 per cent of average New Zealand productivity (and even 63 per cent of that of the British –  leading global power a century ago).

Hard to think though how disbelieving our own leaders would have been 100 years ago if they were told how far we would have fallen relative to these other countries, notably including Poland.     With none of the excuses –   wars, shifting borders, genocide, or decades of communist rule.

I might have a look at the data for a few of the other post World War One emergent countries later in the month.

Restructuring the Reserve Bank

Michael Reddell Adrian Orr, Reserve Bank, Reserve Bank Act reforms

Seven months (and counting) into his term as Governor, Adrian Orr still hasn’t deigned to deliver an on-the-record speech on either of his main areas of statutory responsibility (monetary policy and financial stability) but he has this morning done what it seems almost all new CEOs –  public sector and private sector –  now do, and restructured his senior management, ousting or demoting several top managers, elevating one or two, and opening up a raft of vacancies.  Public sector senior management restructurings seem to generate most of the Situations Vacant business for the Dominion-Post newspaper these days.

A few people have asked my thoughts on the restructuring, so…..

As a first observation, I give credit to the Governor for resisting the temptation of across the board grade inflation (although there is at least one example, see below).  Every public sector senior management advert one sees –  I pay attention mostly because my wife has been in the market – is full of Deputy Chief Executive roles (not infrequently five or ten of them).  The Bank’s Act constrains the number of Deputy Governor positions (only one, in the bill before the House at present) but if he’d wanted to, all these SLT positions could have been designated Deputy Chief Executive roles.  As it is, having resisted title inflation, the Governor might find some potential applicants a bit more hesistant than otherwise: an Assistant Governor (even for Economics, Financial, and Banking) may sound less glamorous than a Deputy Chief Executive title.

This is the new structure, which looks a lot like those for all manner of public sector organisations.new-leadership-team-structure

Three of those positions are filled straight away.

Appointments to Senior Leadership Team
Geoff Bascand – (Currently Deputy Governor and Head of Financial Stability) has accepted a role on the SLT as Deputy Governor and General Manager of Financial Stability.
Lindsay Jenkin (currently Head of Human Resources) has accepted a role on the SLT as Assistant Governor/General Manager of People and Culture
Mike Wolyncewicz (currently Chief Financial Officer and Head of Financial Services Group) has accepted a role on the SLT as Assistant Governor/ Chief Financial Officer Finance.

Of those two appointments (Bascand and Wolyncewicz) seem sensible and appropriate.  Bascand currently holds a statutory Deputy Governor appointment and would have been hard to shift even if the Governor had wanted him out.  His role is slightly –  though perhaps sensibly – diminished as he will no longer have overall senior management responsibility for financial markets.

To be blunt, the new Assistant Governor for People and Culture has the feel of tokenism on two counts.   The first count relates to the current tendency for HR managers to be given glorified titles and to report directly to the chief executive (the message supposedly being “we value our people”, as if organisations never did when HR was a fairly low-level support role).  Line managers are the people who convey (by their actions mostly) to staff the extent to which they are valued (or otherwise).   And the second relates to the incumbent, who just is not particularly impressive.  As someone put it to me, perhaps she might be okay in some modest commercial operation, but she never showed any sign of being suited for a key leadership role in a significant policy organisation.  But….she is a woman, and in promoting her Adrian Orr manages –  after 84 years –  to have a woman in a top tier role (although still not in a key role in policy or operational areas, the raison d’etre for the organisation).   It will have been an easy win to simply grade-inflate the Manager, Human Resources role.  After all, as he said a few months ago

We will be working actively. We are just going to have to be far more aggressive at getting the gender balance balanced,” Orr said in a recent interview

(And before I get angry emails or anonymous comments from past or present Reserve Bank staff, I will reiterate my view –  and it is only mine –  that there are no conceivable grounds on which Lindsay Jenkin would be in the top tier of a major policy organisation other than her sex.  I wish it were otherwise.)

In the entire restructuring, the person one should probably feel most sorry for is Sean Mills, Assistant Governor and Head of Operations, whose job is dis-established and who is leaving the Bank, having joined under a year ago.  I suppose he knew the risks –  taking on a direct report job in the hiatus between Governors, when no one had any idea who the new Governor would be or what structure he or she would prefer.  I’ve never met Mills, and have heard nothing good or bad about him, but it is always a bit tough to lose your job after less than a year.

Two long-serving key senior managers –  both in their roles for 11 years now –  are demoted as part of the restructuring, one perhaps a bit more obviously than the other.

The first is Toby Fiennes, currently Head of Prudential Supervision.  His role –  a big job –  appears to have been split in two.

Toby Fiennes (currently Head of Prudential Supervision Department) has accepted the role of Head of Department for Financial Stability Policy and Analytics.

with one of his current managers (very able) taking up the role responsible for actual oversight of financial institutions.

Andy Wood has accepted the new role of Head of Department for Financial System Oversight.

I always had some time for Fiennes (although I’ve probably criticised speeches and articles here) and thought him in some respects the best of the main departmental heads.  Perhaps it is just that the job has gotten so big that the Governor no longer wanted one person doing it, but the new role is much-diminished relative to what he has been doing for the last decade.   And Geoff Bascand already had the key overall financial stability role, so there was no possible promotion opportunity.

The bigger, and more obvious, demotion is that of (current) Assistant Governor and Head of Economics, John McDermott.

John McDermott (currently Assistant Governor and Head of Economics) has accepted the role of Chief Economist and Head of Department for Economics in the Economics, Financial Markets and Banking Group.

After 11.5 years as a direct report to the Governor, and almost as long with the Assistant Governor title, McDermott loses both.

I’m always hesitant to write much about McDermott.  He was my boss for six years, and while we had our differences we sat across from each other for years and exchanged views on all manner of work and family things.  I liked him, was looking just the other day at the personal gift he gave me when I left the Bank, and I was genuinely pleased to applaud his daughter’s award the other night at the Wellington East Girls’ College prizegiving.

Unfortunately, I don’t think he was the person for the role he has held for eleven years, and which he never really grew into or made of that position what it should have become.  He has a strong track record as a researcher, and apparently was for quite a while the most widely-cited New Zealand economics researcher, but the key senior manager for monetary policy –  effectively a deputy governor without the title – required more than McDermott had to offer.   In public view, this was apparent in speeches and Monetary Policy Statement press conferences.  And thus, sad as it perhaps is for John, I think the Governor has made the right choice.  Whether McDermott stays for much longer in the diminished position he will now take up perhaps depends a lot on who gets vacant (and crucial) new role of Assistant Governor for Economics, Financial Markets, and Banking).

Two other senior managers in core roles leaving the Bank

Mark Perry (Head of Financial Markets)…..elected to leave the Reserve Bank.

Bernard Hodgetts (Head of Macro-Financial Department, who is currently seconded as Director Reserve Bank Review in the Treasury) has also chosen to leave the Reserve Bank after he finishes his role leading the review.

The Head of Department for Financial Markets won’t be an easy role to fill –  I wouldn’t have thought there were any obvious internal candidates.

Three more comments on the review:

  • even if a role like “Assistant Governor, Governance, Strategy and Corporate Relations” is the sort of title one sees in lots of government agencies, it feels like another example of grade inflation.  Presumably this involves the communications functions, the Board Secretary, and churning out the myriad hoop-jumping documents like the Statement of Intent.  People with “strategy” in their title in public sector organisation are rarely at the heart of what the organisation do.
  • there will be a lot of focus on who gets the role of Assistant Governor, Economics, Financial Markets, and Banking.  This is (slightly) bigger role than Murray Sherwin held 20 years ago, without the benefit of the Deputy Governor title.    We will have to wait until the adverts appear to see whether the Governor is after a policy leader (someone who really knows this stuff) or a generic public service manager.  If –  as I hope –  the former, it has been speculated to me that the Governor may try to attract back to the Bank the current Treasury chief economist Tim Ng (whose talents would be better used doing almost anything than wellbeing budgets).  Another possibility is the current Treasury deputy secretary for macro, Bryan Chapple who has a central banking background and led some of the financial markets reform work at MBIE.  No doubt there will be others applying, especially as the holder of the position is almost certainly to be a statutory appointee to the new Monetary Policy Committee.
  • this restructuring also probably helps clarify who will be the four internal members of the new Monetary Policy Committee.  The Governor and Deputy Governor will be members ex officio, and it is hard to see how the other positions would not be given to the Assistant Governor, Economics, Financial Markets,and Banking) and to John McDermott, as head of the Economics Department.

Overall, the restructuring is quite a mixed bag.   There are some good appointments and some poor ones already, and quite a lot will depend on a handful of the remaining appointments (especially the quality of person they can attract to that Assistant Governor role –  which, notwithstanding my earlier cautions about grade inflation, really should be a deputy chief executive position, both for recruitment reasons and for the stature and standing of the person in international central banking circles).

If I have a caveat about the overall structure, it is probably that the Bank would be better for having at least one senior policy person –  whether as Deputy Governor or so Advisor to the Governor –  who didn’t have a demanding line management role.  Such roles aren’t uncommon in other central banks, but I guess it depends on the Governor’s own preferred operating style.

And since I have the opportunity of a post about the Bank, I should note that I have not abandoned the issue of the Governor’s total non-transparency in respect of his speech about transparency to the Transparency International AGM (at which he was introduced by the State Services Commissioner, who has responsibilities for open government).  I am pleased to see this issue has had a little bit of media attention, including this article which pointed out that 90 per cent of Transparency International’s funding comes from the taxpayer.  I have an Official Information Act request in with the Bank for any briefing notes or text the Governor used, for any recordings that may exist, and if none do for a summary of what was said (memories –  very fresh, since I lodged the request within hours of the Governor delivering his speech – are official information too.   I don’t expect much, but there is a point to be made –  all the more so given the topic, the audience, the introducer, and the funding source for the body to which he was speaking. I can’t imagine Orr said anything very controversial, in which case why the secrecy? And if what he said was controversial –  foreshadowing for example Monday’s forthcoming culture review – it shouldn’t be said only to select private audiences.  It was simply an unnecessary own-goal, some sort of silly reassertion (perhaps Wheeler like) of a Reserve Bank perception that it really should be above such trivial matters as disclosure, transparency and the Official Information Act.

 

Local listing for banks: a case for one in particular

Michael Reddell Banking, Uncategorized

There was a very strange article in the Herald yesterday from one Duncan Bridgeman claiming that it was, in the words of the hard copy headline “Time to force Aussie banks to list in NZ”.

What wasn’t at all clear was why.

Bank profit announcements seemed to be the prompt for the column

Australian banks reaping huge profits from their New Zealand customers is a perennial scab that gets ripped off every time financial results come in.

I’m not persuaded the banks earn excessive profits here, but I know some other serious people take the opposite view.  But even if they are right, surely that is a competition policy issue –  the case for one of the new market studies perhaps, and any resulting recommendations.  There is nothing in the article explaining how forcing the Australian banks to sell down part of their New Zealand operations would affect, for the better, competition in the New Zealand banking services market.

The other prompt appear to be industry developments in Australia

Meanwhile, Australia’s big banks are starting to move away from vertical integration, partly because of conflicts of interest but also because their financial services model is unlikely to sustain the same profits over the longer term.

Suncorp, ANZ, CBA and NAB have all divested their life insurance operations. The latter two have also announced plans to spin off their wealth management operations. Westpac remains wedded to these areas of business but is expected to follow suit at some point.

And just last week financial services firm AMP, also heavily damaged by the banking royal commission, announced the sale of its wealth protection unit to US firm Resolution Life for A$3.3 billion and divulged plans to offload its New Zealand wealth management and advice businesses through a public offer and NZX listing next year.

But not one of those divestments has anything to do with core banking operations, unlike the approach Bridgeman appears to be proposing for the New Zealand bank subsidiaries.

A not unimportant word that one –   subsidiaries.  Presumably Bridgeman is fully aware, even though his article doesn’t mention, that all four Australian banks do the bulk of their New Zealand business not through branches, but through legally separate New Zealand subsidiary companies, with their own boards of directors (and statutory duties). (New Zealand compels them to do so, at least in respect of the retail business).

But when I read this paragraph I had to wonder if he really did appreciate that.

But if ever there was a time to raise the prospect of some form of domestic ownership and oversight of the banks, it is now.

The problem is it will never happen unless the Aussie banks are forced to by our politicians and regulators. After all, the last thing the banks want right now is another regulator to answer to.

Yet, why should it be accepted that four of this country’s five most profitable companies are effectively regulated in Australia?

The New Zealand subsidiaries are fully subject to New Zealand law: competition law, prudential regulation, financial conduct law, health and safety law.  The lot.  (Even the branches are subject to much New Zealand law, but leave them aside for now.)   The Reserve Bank of New Zealand sets minimum capital standards. minimum liquidity standards, disclosure requirements and so on.

Of course, since the New Zealand subsidiaries are part of much larger Australian-based banking groups, APRA’s regulations and requirements for the group can also be binding  –  not on the New Zealand business itself, but on the group as a whole.   APRA can, in effect, hold the local subsidiaries to higher requirements than those set by our Reserve Bank  (in just the same way that shareholders might voluntarily choose –  perhaps under rating agency pressure – higher standards than a regulator might impose), but it can’t undercut New Zealand standards for New Zealand operations.  Daft as they may be, New Zealand LVR restrictions are binding on banks operating in New Zealand.

Bridgeman goes on

Theoretically an Aussie bank could offload 25 per cent of the institution’s New Zealand assets and list the shares here separately. That would bring tax advantages to New Zealand investors who can’t use Australian franking credits, even though they are dual listed.

I presume he means selling off 25 per cent of the shares in the New Zealand subsidiary (rather than 25 per cent of the assets).  It would, no doubt, have tax advantages for New Zealand investors (and thus, in principle, the shares might command a higher price), and yet the banks haven’t regarded it as worth their while (value-maximising) to do so.    Bridgeman doesn’t look at question of why (presumably something about best capturing value for shareholders by holding all of the operations in both countries, and being able to  –  subject to legal restrictions and duties –  manage them together).

And he also doesn’t note that if, say, ANZ sold down 25 per cent of the shares in its New Zealand operation, the subsidiary will still be regarded by APRA as part of the wider banking group, and prudential standards will still apply to the group as a whole.  As they should –  after all, with a 75 per cent stake there would be a high expectation (from market, regulators and governments) of parental support in the event that something went wrong in New Zealand.

There is a suggestion that the article is a bit an advertorial for NZX

If a quarter of these assets were listed that would bring about $12.5b of capital to the local stock exchange – a badly needed injection at a time when the main market is shrinking.

But even then it isn’t clear what is meant.  It isn’t as if there is a new $12.5 billion (I haven’t checked his numbers) of local savings conjured up.   Buying one lot of shares would, presumably, mean selling some other assets.  In a country with quite low levels of foreign investment, the initial effect of any such floats would be to reduce that level further.  (Of course, in practice quite a few of the shares in any newly floated New Zealand subsidiaries would be picked up by foreign investment funds, leaving the alleged benefits of any compulsory selldowns even more elusive.)

Bridgeman ends with a rallying cry

And right now the Aussie banks are distracted with a battle on their home turf.

It’s the perfect time for some Coalition politicians to show some backbone and make a case for a change in this direction.

It might have appealed to Winston Peters once upon a time, but even if it weren’t a daft policy to start with, Bridgeman may have noticed that business confidence is at rather a low ebb right now.  Arbitrarily interfering in the private property rights of owners of private businesses – even if largely Australian ones –  wouldn’t be likely to do much to instill confidence in the soundness of policymaking.

As it is, they could start closer to home.  If governments really did want to focus on getting some more bank representation on the domestic stock exchange –  and it is not obvious why they would –  perhaps they could look at the New Zealand banks first.  After all, only one of them (Heartland) is sharemarket listed.  And the biggest of those New Zealand owned banks –  Kiwibank – is actually owned by the government itself.    In fact,  by three separate goverment agencies (NZ Post, ACC, and NZSF), none bringing obvious expertise to the business of retail banking, none themselves facing any effective market disciplines.  I’d be all in favour of a well-managed float of Kiwibank  (although once floated it might not last long as an independent entity).  There are good reasons (they’ve been there for years) for the government to consider seriously that option.  But there are no good reasons to force well-functioning locally regulated foreign-owned banks to sell down part of their operations in New Zealand.

 

Did state houses make much difference to housing supply?

Michael Reddell Housing

I’ve been among those suggesting that the KiwiBuild programme –  even if it involved the government itself directly commissioning the building of new houses that no existing developer already had in prospect –  was unlikely to increase overall housing supply very much, or affect overall average house prices very much.  It was never clear how such a programme could affect overall housing supply very much.  For it to do so, there would have to be large unexploited profits left sitting on the table by private developers (properties selling for far more than it would cost to bring new developments to market).  If that isn’t so –  and we don’t see any obvious signs of such unexploited opportunities – whatever the government itself builds or commissions is just likely to mostly displace and replace houses that the private sector would have built.   (There is another possibility, that the government not only displaces most private building, but goes on building at a loss even beyond that point, but there is nothing in the PR around the programme to suggest that is what they have in mind.)

I also know the line the government and its defenders run that somehow KiwiBuild will “work” –  whatever that means –  by building particular types of houses the market isn’t providing.  But even to the extent that is so, what of it?   If the morass of regulation makes it uneconomic to build many new moderate-sized homes (although do recall that the flagship houses are four bedrooms), demand reallocates.  Decades ago many young couples started out with a brand new (small) house in a remote suburb with few facilities and not even a lawn (I’m just old enough to remember our (new) street in Christchurch where what would become front lawns were planted with potatoes, apparently to get the impurities out of the soil).  These days they don’t.   But is there any sign that the prices of the existing modest-sized houses have increased disproportionately relative to house prices more generally?  I’m not aware of any, and that isn’t really surprising, when by far the biggest issue in high urban house prices is land prices.   And KiwiBuild does nothing at all about them.

In my post earlier in the week, I mentioned the state house building programme initiated by the first Labour government, and often touted as the inspiration for today’s KiwiBuild programme.   In passing, and thinking as I wrote, I wondered if the (substantial) construction programme associated with the state houses programme had made much difference to overall housing supply.  It wasn’t something I’d ever given much thought to previously, but once one begins to think about it, of course it makes sense to doubt that that massive state intervention really made much difference on that specific count.  (It is quite probable that it materially increased availability for some –  small –  class of potential tenants private landlords were reluctant to touch.  It is also clear that it chewed up vast amounts of land, probably rather inefficiently – a couple of weeks ago I was driving through a state house neighbourhood a few blocks from where I grew up in Auckland and marvelled  –  not in a positive way – to see such small state houses on such large sections.)

There isn’t any easy way to compellingly answer my question.  Perhaps some academic researcher could turn their attentions to it at some point.   But out of interest I dug out a few charts.

This one (from Te Ara) shows the stock of state houses.

stock of state houses

(Interesting to see that the stock actually dropped a little during the term of the Kirk-Rowling Labour government).

And this chart shows annual data for both the number of new state houses built and those existing ones sold (something initiated by the 1950s National government).

state-houses-built-and-sold-graph

One way of looking at whether there is prima facie reason to think the state house programme might have made much medium-term differenc is to look at the population to dwellings ratio.

This chart is drawn from census data reproduced (up to the 1970s) in Bloomfield’s collection of New Zealand historical statistics.

person per dwelling.png

The spacing isn’t even –  censuses were skipped in 1931 and 1941 –  but all I really wanted to highlight was the strong downward trend over the 90 years from the mid 1880s to the mid 1970s.  The only interruption to the trend was in the single inter-censal period from 1916 to 1921.  It is more or less what one would expect, as people got wealthier, families got smaller (and, at least late in the period, divorce got more common).    Had the state not been building, there isn’t much reason to suppose that –  over time, and in the absence of building and land use restrictions –  the private sector would not have done so.  After all, they had done so in the decades prior to the state housebuilding programme (I was little surprised to see that even over the period encompassing the Great Depression –   1926 to 1936 –  the population to dwellings ratio fell).

Sadly, what might have been the cleanest test –  the 30000+ state houses built in the first decade or so of the programme –  also happened to mostly coincide with World War Two and the period of tight controls on all manner of things (including existing house sales) in the years following the war.  And government-imposed credit constraints remained an issue for the private sector for much of the post-war decades.

But I’d suggest that the burden of proof is really on the advocates of KiwiBuild to show that even very big government-inspired housebuilding projects really make much difference to the overall housing supply situation in the long-term.  After all, when the government owned many of our banks, most of our power companies, most of our radio and TV, and so on, mostly it didn’t supplement the stock of private businesses, it (rationally, from a private sector perspective) displaced them or crowded them out.  If the government were really serious about fixing the housing market, and making housing once again affordable for working class families, not just helping along well-paid professional couples, they’d free up the urban land market.  Sadly, there is no more sign of that under this government than under its predecessor.

On which note, there is a column today on interest.co.nz by Peter Dunne in which he begins thus

Kiwibuild is beginning to look more and more like no more than one of Edmund Blackadder’s cunning plans.

He has some good lines

It is worth recalling that in its election policy just one year ago Labour promised that it would “build 100,000 high quality affordable homes over 10 years”. The policy went on to talk about curbing homelessness through building affordable homes in the $350-450,000 price range.

The implication was unambiguous – Labour’s approach was going to be far more activist than National, and Kiwibuild would be Its primary policy to deal with homelessness and the housing crisis.

and

So far, just 18 Kiwibuild homes have been built, and another 447 are on track for completion by July 2019, leaving a shortfall of 535 on its first year 1,000 homes target.

Put another way, a first year achievement rate of just under 47%. And there has been a subtle but clear rewrite of the Kiwibuild objective.

According to the Kiwibuild website, the objective is now the much more passive one to “deliver 100,000 homes for first home buyers over the next decade”.

So, no longer will the government build “100,000 high quality affordable homes”. And no longer does “affordable” mean $350-450,000, but $650,000.

Moreover, now the plan is merely to “deliver” 100,000 homes, which, in the best Blackadder fashion, means accumulating all the new homes already being built over the next 10 years by the private sector anyway, and dressing them up as Kiwibuild homes.

But it is perhaps worth recalling here that Peter Dunne was a minister in the previous National-led government, and in particular held the one vote in Parliament that was sufficient to block the reforms (inadequate and insufficient as they would have been) that National was seeking to make.  I hope I don’t need to say again that I’m no defender of National’s record –  and lack of courage –  in this area in government, but it is a little rich for Dunne to snipe from the sidelines (legitimately in substance perhaps) when he personally blocked beginning to tackle some of the root causes of our obscene housing market failure.

 

On the background of Zhang Yikun

Michael Reddell China, NZ politics, Uncategorized

Last week the original Chinese version of the article below appeared in the Chinese-language magazine Beijing Spring.  It is about the background of Zhang Yikun the (non-English-speaking) Auckland businessmen who suddenly emerged into the public spotlight recently when Jami-Lee Ross released a tape of a conversation with National Party leader Simon Bridges.  Zhang Yikun had, it appeared, arranged/facilitated a set of donations to the National Party, totalling $100000, and had discussed with Bridges and Ross the possibility of another ethnic Chinese MP, apparently naming as a possible candidate one of his own employees/associates.  Once the spotlight fell on Zhang Yikun it turned out that he had had extensive associations with senior figures in both main New Zealand political parties.  And both he and his associate appear to have extensive involvement with the PRC’s United Front programme.

The article was written by Chen Weijian. The full version of his article, in Chinese, is here.  When it appeared Anne-Marie Brady described it as a “must read”.  The English translation below was done by Daisy Lee, an Auckland-based China researcher (with a few suggestions from me to improve the flow for an English-speaking readership).     The translated version omits some detail that is in the original article, and reorders some material (but from the fuller version I’ve seen, this version omits nothing that is central to his case).   I offered to make the translation available here.

I asked for some biographical material and this is what I received

Chen Weijian is Auckland-based prominent Chinese political commentator.

He is the chief editor of online pro-democracy magazine Beijing Spring. The magazine was established in the United States in 1982 and the current president is Wang Dan, one of the most visible student leaders in the Tiananmen Square protests of 1989.

Immigrating to New Zealand in 1991, Chen Weijian and his brother Chen Weiming  published the weekly Chinese newspaper “New Times” from 1996 to 2012.  Chen Weiming is a famous artist and sculptor known for his works of the 3-meter bronze statue of Edmund Hillary and 6.4 meters tall Goddess of Democracy.

In late 1970s when Chen Weijian lived in Hangzhou city of China,  he founded a private magazine Silent Bell which was banned by the Chinese government as illegal publication.

On my reading, the author’s key point is that the evidence of Zhang Yikun’s close association with the Chinese Communist Party, and the high regard in which he is held by the Party, is crystal clear.  Among that evidence is his very rapid ascent in various significant organisations that are part of the party-state’s overall United Front programme.

Chen Weijian’s article reinforces my view that New Zealand political parties and political leaders should steer well clear of those individuals like Zhang Yikun who are so closely associated with the Chinese Communist Party; a Party that is the source of so much evil at home in China, and which seeks to control the Chinese diaspora (and turn it towards Beijing, challenging the ability of migrants to become loyal to the country they’ve settled in) and to neutralise political opinion in countries around the world, including New Zealand.   There is no sign that such people –  and Zhang Yikun appears to be one of the most important of them in New Zealand –  have the interests of New Zealand and New Zealanders at heart in their interactions with, and donations to, our political parties.  And yet our politicians court him, and honour him.

If it is of use to anyone, I have put the text below in a separate document available here

State patriotism by Chen Weijian Oct 2018

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State patriotism 

By Chen Weijian

4 June 1989 was a bloody day that cannot be erased in Chinese history. The Chinese People’s Liberation Army (PLA) opened fire on unarmed students whose blood stained Tiananmen Square. 29 years later, on the same day, a New Zealand overseas Chinese leader, former PLA member Zhang Yikun, received the New Zealand Order of Merit.

On September 12th, Zhang Yikun was formally honoured at Government House. The news was even covered by China’s CCTV: a star in the overseas Chinese community was on the rise. But while awaiting his spectacular future,  Zhang Yikun this month burst into public view in New Zealand following his undeclared $100,000 donation to National Party.

The question of what political donations are legal and illegal is a matter for the relevant authorities. What I want to talk about is Zhang Yikun’s political background in China and the role he has been effectively playing in New Zealand as a “patriotic overseas Chinese” leader.

In his motherland, China, Zhang Yikun has held quite a few resounding political titles which distinguish him from all the other community leaders of the CCP’s United Front organisations in New Zealand.

In 2012, Zhang was elected as the vice chairman of Hainan Provincial Federation of Industry and Commerce.

The website’s home page says the Federation is a group of people’s organisations and chambers of commerce under the leadership of the CCP.  It is a bridge between the Party and the government to connect with the private sector.

That all members of the Federation must serve the party’s interest was explicitly addressed by Sun Chunlan, the minister of the United Front Department, when she spoke at a national training conference in July 2017 to the chairmen and party secretaries from all of the provincial Federations of Industry and Commerce.

She said then that “where the work of the Party and state is progressed, the Federation of Industry and Commerce should organize the  majority of people in the non-public economic organisations to follow”.

Zhang Yikun’s superior, the chairman of this Federation, is a famous businessman, Chen Feng, the co-founder and chairman of the Chinese conglomerate HNA Group.

HNA is known in New Zealand after the Overseas Investment Office declined its $660 million bid to acquire ANZ Bank’s UDC Finance last December.

Ranked No. 205 on Forbes 2017 China Rich List at $1.7 billion, Chen Feng is also a former PLA member.

It is unclear if Zhang Yikun’s wealth in China can be compared with Chen Feng’s holdings in HNA,  because on several Chinese websites Zhang is only declared as the chairman of Hainan Lian Sheng Fa Industrial Co., Ltd.  and there is no information about the company’s financial position.

However, one thing is certain: Zhang Yikun is not a normal business person, otherwise he would not have been able to become the vice chairman of the Hainan Provincial Federation of Industry and Commerce.

In Hainan province, Zhang Yikun plays an important role in another United Front Organisation, the Hainan Provincial CPPCC (Chinese People’s Political Consultative Conference ) where he was promoted to the Standing Committee in January 2013.

A Brief History of the CPPCC in its website explains that the CPPCC, established in 1949, is a creation of the CCP which combines the Marxist-Leninist theories on united front, political parties and democracy, with China’s concrete practice.  In its new century and new stage of development, China’s united front has further expanded and become the broadest possible patriotic united front composed of all socialist workers, builders of the socialist cause, and patriots who support socialism and the reunification of the motherland.

Five months after he was elected in the Standing Committee of the CPPCC, Zhang Yikun was nominated by the United Front Work Department of the Hainan Provincial Committee as a “ Builder of the Socialism with Chinese Characteristics.”

At the top of a list of criteria, any potential nominee is required to have good political quality, resolutely support the leadership of the CCP and the socialist system, the party’s line, and its principles and policies.

Chen 2Southland District Mayor Gary Tong says Zhang Yikun, posing here with John Key, is well known in central government.

While Zhang Yikun has been diligently fulfilling his political responsibility in China, he has also been highly committed to the United Front Work in New Zealand.

Although he has been in New Zealand for nearly 20 years and is still unable to speak English, it has not affected him networking with politicians.  Gary Tong, the mayor of Southland, who is currently travelling with Zhang in China, said that Zhang is well known in central government and has close links to high level ministers and MPs. They include National Party leader Simon Bridges, former PM John Key, party president Peter Goodfellow, Deputy Leader Paula Bennett, Auckland Mayor and former Labour leader Phil Goff , current Justice Minister and former Labour Party leader Andrew Little and other senior politicians.

Chen 3Auckland Mayor Phil Goff at Zhang Yikun’s house wearing a gifted Chinese costume.

Among them, Auckland Mayor Phil Goff, who was in Hong Kong on 4 June 1989, and saw the massacre on live broadcast TV. The experience had moved him and he has showed sympathy for activists in the past.  For example, when Wei Jingsheng, a famous Chinese democracy activist visited New Zealand, Goff invited him to lunch at Parliament. Times have changed, and though Goff is still particularly fond of China, his favour now seems to rest with interests associated with the CCP.

In New Zealand, Zhang appears to have been almost fated to succeed. He is admired by many immigrants who have been working hard for small achievement. Zhang talks of his own success quite modestly, as if “ I was not intending to pursue wealth, but prosperity just landed on me without my intention”.

Zhang Yikun was born in a village called Nigou in Puning County of Guangdong Province.   In 1990, at the age of 18, he joined the People’s Liberation Army in China. Joining the army was an opportunity for a rural youth to get out of the countryside. In his brief time in the army, Yikun was promoted to the headquarters.   In 1992, he was discharged, and started to work at the government of the Hainan Provincial Special Administrative Region. The fact that he was able to transfer positions implies that he was already well-regarded, since only those who were could get such transfers.

In 1996, Zhang Yikun was sent to the (prestigious) Chinese Academy of Social Sciences for postgraduate study. This in-service postgraduate program is specially designed by the CCP for the training of its officials. Having joined the army at age of 18, his education was at most an intermediate level. What led to him, an official with only an intermediate school education, being sent to an institution for higher education? We can only speculate.

Soon after his arrival to New Zealand in 2000, he ran his own restaurant called “China Yum Cha Restaurant”,  located at a premium location near Princes Wharf in Auckland. Unlike most Chinese immigrants who start washing dishes and cutting vegetables, Zhang directly became the boss of a large-scale restaurant (and subsequently opened another two restaurants). He had never run his own business in China nor apparently had any opportunity to make extra money. His monthly wage was just 800RMB in 1996. A large investment was required to finance this restaurant, so we can wonder where did the money came from?

Since then his business has becoming extremely successful. He has successively founded New Zealand Huanglian Group Ltd, HLG property Management Ltd, New Zealand Huanglian Natural Food Ltd and KCC Construction Ltd. The penthouse of 175 Queen St Auckland, the most expensive commercial building in New Zealand, has become the heart of his business empire. His business has developed to encompass multiple fields and multiple countries.  Activities include property development and management, export and import, commercial investment.  Several overseas offices have been set up in Hainan province, Guangdong province, Hong Kong and Thailand.

After establishing his business empire, Zhang Yikun began to build his career as an overseas Chinese community leader. Unlike Steven Wai Cheung Wong, the former head of the United Chinese Association in New Zealand,  who had to cultivate his relationship with the Chinese consulate for some years for his dreamed position, Zhang Yikun’s political promotion has been as astoundingly rapid as his commercial success.

In 2015, he formed the New Zealand Chaoshan General Association (CGSA),  for people from Chaozhou and Shantou district of Guangdong province, and has taken the role as the chair of the International Chaozhou Federation after two years.

Undoubtedly, Zhang Yikun is treasured by the senior Chinese politicians or he wouldn’t have been given this significant role to unite those wealthy ethnic Chinese who are valuable to the CCP in their attempts to expand China’s global influence.

As just one example of his connections, on 3 September 2015, Zhang Yikun was invited to Zhu Ri He military base in Inner Mongolia to watch the military parade. He stood on the viewing platform watching the armed forces marching, various new types of military vehicles and missiles in the parade, and the aerial display. He emotionally said, “as a military officer, seeing the country is strong, (my) feeling of pride is rising.”

In New Zealand, he has been frequently visited by high level Chinese delegations. On 8 June 2018, his former comrade, Luo Baoming, the former party secretary of Hainan province, now the vice chairman of OCAC (Overseas Chinese Affairs Office) was warmly hosted by Zhang Yikun and his CGSA in Auckland.

At the reception dinner party, the two Chinese MPs who have made such a contribution to the New Zealand-China relationship, Jian Yang and Raymond Huo, witnessed how this senior OCAC official praised Zhang Yikun.

“The fulfilment of China’s dream needs the overseas Chinese community leaders like president Zhang Yikun who has the strength and passion for the state patriotism”.

State Patriotism! Here we have Jian Yang, former officer lecturer of a PLA spying school, and his fellow PLA veteran, Zhang Yikun, both members of “New Zealand Veteran Association” (Zhang Yikun is the president of the association), standing together to welcome a high ranking Chinese communist official, is it a coincidence?

Chen 4Jian Jian Yang (far right) and Zhang Yikun (second from right ), the two former PLA members greet Luo Baoming, the vice chair of OCAC

If the above is not enough to set the scene, here is another photo. This one was taken on 30 August this year in Beijing. Zhang Yikun is staring at the display wall of propaganda and listening. The display wall is themed in communism red, titled “Always Go With the Party” and next to it is the symbol of communism, the hammer and sickle.

Chen 1 Zhang reading the “Always Go With The Party” display banner in Beijing on 30 Aug 2018

The New Zealand government granted him a high honour on 4 June, the day the whole world commemorates the young students whose lives were taken by the evil party. Zhang Yikun, the former PLA member, carried his honour back to Beijing to express his love to the party.

Is his beloved country New Zealand or China?  There is nothing wrong if he says he loves China.  But in reality, he loves the Communist Party and is following the steps of the party forever. Of course, we can’t simply conclude just from a photo that he wants to follow the party all the way. For that, we should see what he has done in the past and what he is doing now.

The revelation of Zhang’s donation has brought back to fore stories that had been dormant for a while. The National MP Jian Yang, exposed last year for his hidden past as a PLA intelligence officer and teacher in PLA spy school, and later sitting in the Foreign Affairs committee of Parliament.  And now, another (former) PLA member, Zhang Yikun has emerged on the stage.

New Zealand is the land of the long white cloud, often described as the last pure – uncorrupt – land in the world. Unfortunately, it has been polluted by CCP’s Human Common Destiny. The clean-up of the pollution may have begun, but completing it will take time.

Too few mortgagee sales?

Michael Reddell Housing, Uncategorized

This chart appeared in an article in yesterday’s Herald, heralding (so to speak) mortgagee sales of houses hitting the lowest level for more than a decade.

mortgagee sales

The chart isn’t clearly labelled, but it appears to be quarterly data.  Elsewhere in the article, it is noted that the peak in annual mortgage sales was 2616 in 2009 –  the trough of the last recession, when the unemployment rate had risen quite sharply and nominal houses had fallen quite a bit (down 9 per cent nationwide in the year to March 2009).

In many respects, one wouldn’t wish a mortgagee sale on anyone.  But one also wouldn’t wish any individual to find themselves overstretched and having to sell the house themselves (and thus not a mortgagee sale).

But, equally, risk is part of a market economy.  And the housing stock financed by mortgage isn’t just the (sympathetic) case of the first home buyer owner-occupier, but also investment properties, beach houses, and fancy houses (the Herald story includes a piece about a pending mortgagee sale of a $3 million house in St Heliers).   In a country of almost five million people (and more than 1.8 million dwellings) one might reasonably wonder whether a mere 250 to 300 mortgagee sales in an entire year is lower than might be, in some sense, entirely desirable.   After all, the nature of taking risk –  and both purchaser and financier do –  is that sometimes things will go wrong.   The optimal number of mortgagee sales is very unlikely to be anywhere near zero.

The key combination of factors that tends to drive the number of mortgagee sales sharply upwards is higher unemployment and falling nominal house prices occurring together.  If unemployment rises but house prices stay high then even if the borrower runs into servicing difficulties they can usually sell the house themselves, repay the mortgage, and move on, without the additional and humiliation of being sold up by the bank.   If nominal house prices fall but unemployment is still low, borrowers will typically still be able to service the debt, and banks are reluctant to sell up people with negative equity who are still servicing the debt, even though they are legally entitled to do so.

We had that combination in 2009 (although in neither case to extremes) and you can see the consequence in mortgagee sales in the chart.

What is often lost sight of is that in a properly functioning housing and urban land market, mark to market losses on houses shouldn’t be uncommon, even in nominal terms (with, say, a 2 per cent national inflation target).   In such markets, land use can readily be changed in favour of housing development, and new houses/apartments readily consented and built.  In such markets there is no reason to expect a trend increase in real house prices, even if the population is growing rapidly.  Across a full country, some areas will do well and some not.  So some localities will more often see, perhaps modest, trend falls even in nominal house prices.  And, of course, without ongoing maintenance individual properties would depreciate in most localities.

For those who doubt that such things are possible, I could bore you with charts from US cities where the markets function well, but instead I will use it as an excuse to reproduce what was for a long time one of my very favourite charts (written up here), showing prices for a street of houses in central Amsterdam from 1628.

herengracht11

There are ups and downs, but over several hundred years no strong trend.

And, of course, that is now what marks out housing markets in New Zealand (and Australia, and various other places, including parts of the US, where land use restrictions have become binding).   In recent decades there has been a strong upward (regulation-facilitated or induced trend) in real (and even more strongly in nominal terms) house prices.  As I noted yesterday, REINZ numbers show that over the last five years prices in Auckland and out of Auckland have averaged 8-9 per cent increases every year.  And that was on top of substantial increases in the 1990s and the 2000s.  It isn’t that easy (although not impossible) to get yourself into a position where the bank sells you up when house prices are rising that strongly.  But in a well-functioning market, we wouldn’t see such pervasive trend increases.

It is interesting that the number of mortgagee sales is now lower than it was in the mid 2000s (even though the housing stock is bigger now than it was then).      The unemployment rate has come down quite a long way, but is still about a full percentage point higher than it was in 2006/07 (and underemployment rates linger high).  For the sort of people –  a diminishing number –  who can afford a house anyway now, unemployment probably isn’t a big consideration now.  But, again, in a well-functioning housing market –  in which the Prime Minister wasn’t doing photo-ops with professional couples who’d won the lottery to buy a subsidised four bedroom house, but appearing with a working class couple of similar age able to buy their first house in one of our larger cities –  it might well matter more. Downturns hit harder people in less skilled jobs, and with more marginal attachments to the labour market.  In a better functioning system, more of those sorts of people would be buying houses, and some would end up unlucky and having to sell up later.   That is the “price” we pay for better access to the home ownership market.

The other relevant consideration is access to finance.   If a bank won’t lend more than, say, 40 per cent of the value of the property, it would be extremely difficult to ever see a mortgagee sale (only, say, idiosnycratic shocks such as the house burning down when the borrower had forgotten to pay the insurance bill or some such).     At the other extreme, of course, if banksare  lending 115 per cent of the value of the property –  in some over-exuberant mood in which everyone believes property values only ever go up, and where new buyers want to have extra cash for, say, fancy furniture, then it doesn’t take very much to go wrong for there to be lots of cases of negative equity, and potentially lots of mortgagee sales.  Mostly –  and to the credit of the banks –  we’ve avoided those sorts of excesses.

But for five years now we’ve had the unprecedented situation of the Reserve Bank limiting how much banks can lend to individual purchasers of residential properties (LVR limits).   We went through successive waves of these controls, and although they were eased somewhat last year binding restrictions are still in place.   The economic case for these controls was never robustly made (the Bank could never quite get round the fact that its own stress tests kept showing that banks were in fine health, or that mortgage lenders –  public and private –  had for decades been lending 90 per cent LVR loans in New Zealand and been able to managed the associated risks).

The Reserve Bank has been keen to boast about how effective these controls were in limiting the amount of high LVR lending banks were taking on.  They always presented this as “a good thing” even though they could never demonstrate (a) that banks were safer as a result (all else equal, banks need less capital when they have fewer risky loans),  or (b) that their judgement on prudent lending standards was better grounded than that of willing borrowers and willing lenders, with their own money at stake, or, incidentally (c) what other risks banks might have chosen to take on to keep up profits if prevented by regulation from lending to housing borrowers.

There wasn’t much doubt, though, that LVR controls applied tightly enough –  and the RB controls became increasingly tight – could restrict the amount of high LVR housing lending.  And high LVR loans will be disproportionately represented among those where a mortgagee sale eventually occurs.  So, even in a period of moderate unemployment, it is quite likely that LVR restrictions have reduced the number of mortgagee sales.

But it simply doesn’t follow that that is a good thing.  The other side of the same equation is that some people who would otherwise have been able to purchase a property using credit, whether owner-occupiers or investors, won’t have been able to do so.   Perhaps those people will have got into the market a few years later, but in the interim they will have missed out on the opportunities of home ownership –  and in most localities, being forced to wait means the entry price will be higher than it would have been if Reserve Bank controls had not intervened.   Those are real missed opportunities, while regulations skewed the playing field (cheaper entry levels) for cashed-up buyers.

In a well-functioning market, house prices rise and fall (although typically not that dramatically) and it is unlikely anyone will be much good at forecasting the movements that do happen.  With the best will in the world, and the best countercyclical monetary policy, economies will fluctuate, and some people who’ve taken on debt will find themselves unable to service the loan.  Painful as that no doubt it, it is only one of the many potential vicissitudes of life –  probably not the end of the world if you are in your 20s and have decades to get back in the market.  The alternative to expecting that a reasonable number of people will eventually have to sell up, in a world of uncertainty and unforecastability, is to have credit policies so tight that they also exclude substantial cohorts for much longer than necessary from being able to enter the housing market at all, whether as owner-occupiers or investors.

I don’t wish a mortgagee sale on anyone, any more than I’d wish a business failure or a redundancy on anyone. Even the transactions costs associated with any of these of events are often non-trivial.   But without them –  while still in a world where the future can’t be foreseen – we’d be living in an economy so cossetted that many opportunities –  for individuals and for the economy as a whole –  would be missed.  In the housing market, between regulatory restrictions on access to housing credit and other regulatory restrictions which impart a strong upward bias to real house prices, we are probably in that sort of situation now.  Too few people can get into the market at all, and too little risk may well mean we are in a position where a higher level of mortgagee sales might be desirable for the efficiency of the economy, the financial system, and the housing market itself.

Is that the best you can do Prime Minister?

Michael Reddell China, NZ politics

There was a headline on Newsroom this morning “Ardern softly raises concern over Uighurs”.  That sounded interesting, even if that “softly” word was a bit of a giveway.  Here is what the article actually said

Ardern told media at her weekly post-cabinet press conference that she was concerned by the Uighur’s plight, although she had not recently been briefed on the subject.

She said she might raise her concerns at a future meeting with Chinese officials, but made no firm commitment.

“Generally speaking we take the opportunity to raise issues of concern,[but] it would be pre-emptive to say what I would discuss,” she said.

Presumably she was asked a question and had to say something.  That she was “concerned” was about as weak as you could possibly get –  by contrast her Labor counterpart in Australia yesterday managed a “gravely disturbing”.    The Prime Minister apparently went on to play down the issue further by specifically noting that she hadn’t been briefed recently.  When a Prime Minister cares about an issue, the briefings will come quickly.

And then, in case anyone (businesses, donors, Yikun Zhang or the like) was worried that she might have said too much, when asked if she would raise her concerns with the Chinese government she couldn’t muster more than “I might”.

This for one of the gravest and most large scale abuses in modern times, being committed by a Security Council member.  And the Prime Minister having called only recently for “kindness” to be some watchword of policy.   Not much on display if you are a Uighur.

The Newsroom article, which seemed to be doing as much as possible to put the Prime Minister in a good light, ended with this comment.

Ardern flagged human rights concerns in a recent meeting with Li Xi, the Party Secretary of Guangdong Province, who visited earlier this year, as reported by Newsroom.

And so I clicked through to that article to refresh my memory.

“We acknowledged of course we are both countries on different development paths, that the nature of our political systems, but that we’ve always as our two countries found ways to discuss those differences in a way that works for our relationship, and I put human rights under that category,” Ardern said.

The detention of Uighur Muslims in Chinese “re-education camps”, the subject of concern by a United Nations panel, was raised under that banner, Ardern said.

Asked of Li’s response to the human rights issues, Ardern said: “It was heard and received.”

I suppose it is good to know it was mentioned, but a mere mention in a private meeting hardly seems likely to bother Beijing.  And hardly likely to reassure New Zealanders that our elected “leaders” actually care much about the imprisonment of a million people, for little more than being who they are, let alone the more recent report of those Uighurs not in prison having regime spies forced on them, living in their houses to report on their attitudes and behaviours.

As it happens, we have a PRC perspective on the Prime Minister’s meeting last month with Li Xi, available on the PRC embassy website.  This was the meeting where, so the PRC reports, the Prime Minister suggested strengthening relations between the Labour Party and the Chinese Communist Party (emphasis added)

New Zealand is ready to deepen bilateral cooperation with China in economics and trade, tourism and innovation, strengthen party-to-party exchanges

Isn’t there quite enough obsequious praise of Xi Jinping, courting of CCP-connected donors etc from Labour figures already?

Of course, the PRC account doesn’t mention the Prime Minister raising any human rights issues (which isn’t to suggest they weren’t mentioned) but how seriously do you suppose they would have taken any concerns anyway when they can report that the Prime Minister said this (again, emphasis added)

Ardern said New Zealand and China have something in common in improving people’s wellbeing, protecting the environment, and enhancing coordinated development, adding that the development strategies of both sides are highly compatible, with broad room for cooperation.

I guess at the most reductionist level there is something to the first point: both governments probably do want to lift the wellbeing of their people, although in the PRC case even that is arguable (control and submission to the interests of the Party seems more paramount).   But it is a statement that is devoid of meaning, or moral content, when you contrast what a free and democratic society might mean by such statements, and what a regime that runs mass concentration camps, allows little no religious freedom, little or no freedom of expression, and no lawful vehicle for changing the government might mean.   As for “development strategies” being “highly compatible”, is the Prime Minister giving a nod of approval to strategies that involve widespread theft of intellectual property, the absence (boasted of by the chief justice) of the rule of law, growing state control of even private companies (let alone a massive credit-fuelled, and highly inefficient, domestic boom that ran for some years)?  It is just shameless pandering.

I don’t suppose the PRC is going to change any of its policies because New Zealand expresses disapproval, but what we hear from the Prime Minister and from the PRC’s reports gives us no basis to think the PRC would even believe that New Zealand governments cared.

Which is a good opportunity to include this tweet I noticed yesterday from someone abroad who comments on China issues.

The Churchill quote –  from his famous ‘iron curtain” speech – is very apposite, but in the specific New Zealand context, and the way our politicians court the regime and fear doing or saying anything even slightly controversial, the commentators own line was a nice place to end.

It comes back to the values, not bank balances, we want to have for ourselves and for our children.