Coronavirus economics and policy: 25 March

Typing the date I notice that in the Christian calendar today is the Feast of the Annunciation –  the announcement of a coming Saviour and Redeemer – and that today it is nine months until Christmas.  One can only wonder how things will be, here and abroad, on Christmas Day 2020.

But what about current policy and related issues?  First, to get out of the way a couple of important, but less central or immediate issues.

The first is around accountability.  Personally, I’m uneasy that Parliament is simply closing down for the time being, in the middle of one of the most severe crises in our history, with an unprecedented usurpation of power by the executive.  But whatever the shorter-term questions, challenges etc (that the planned Select Committee is unlikely to do much about) there will be a need for a serious reckoning with how the authorities, political and official, handle all stages of this pandemic –  those past and those, perhaps over many many months –  still to come.  After the 1918 pandemic, the New Zealand government set up a Royal Commission, which reported back within about six months.  The report is here.   It seems like a good model for a variety of purposes: accountability, documenting issues and experiences, and learning from what worked well (and what do not) for future pandemics.     It would be a welcome commitment to openness and accountability if the Prime Minister would now commit that once the pandemic is passed such an independent and powerful Royal Commission will be established (in case there is a change of government before then, ideally that would be endorsed –  or done jointly with – the Leader of the Opposition.

In the meantime, a serious commitment to accountability and openness –  around contentious and highly uncertain re effect policies (and even choices not to act) –  would be enhanced if the current government would commit to the pro-active release of all Covid-related papers going to Cabinet, to Ministers, and to government agencies and officials who have either independent policymaking power or delegated authority to set operational policy on these matters,  (There might perhaps be a few  – very few exceptions – around national security, but openness builds trust –  or exposes weaknesses, which in turn is a basis for correcting and improving things.)

The second is around economic data.  New Zealand’s official data are pretty mediocre at the best of times –  one of only two OECD countries with only a quarterly CPI, badly lagging GDP numbers, no monthly read on the unemployment rate, and so on.   It is hard not to imagine that the official data will only get much worse this year, with long delays even if adequate numbers are finally able to be patched together.  It would be helpful for analysts if Statistics were to give an early outline of their plans and contingency plans.

But in the meantime, it would also be highly desirable if the authorities (whether SNZ or economic agencies like MBIE, the Reserve Bank or the Treasury) and getting together a timely public dashboard of high-frequency administrative data.  Things it might cover could include, for example:

  • daily or weekly new welfare benefit applications,
  • weekly bank credit data
  •  weekly data on electronic payments
  • daily or weekly arrivals data

These –  and no doubt others –  would be valuable not just now as we tumble into the abyss, but through all the inevitable ups and downs –  perhaps quite volatile ones –  in the coming months.   If/when we eventually get official data it will be good for the economic historians (and the Royal Commission) but for now we need a range of timely high frequency data (no doubt all stuff that could be compiled by people working from home).

What I really wanted to focus on today is the announcement by the government and the banks (and the Reserve Bank) yesterday afternoon.   There were very few details in the announcement, but what we know is this:

The package will include a six month principal and interest payment holiday for mortgage holders and SME customers whose incomes have been affected by the economic disruption from COVID-19.

The Government and the banks will implement a $6.25 billion Business Finance Guarantee Scheme for small and medium-sized businesses

The scheme will include a limit of $500,000 per loan and will apply to firms with a turnover of between $250,000 and $80 million per annum. The loans will be for a maximum of three years and expected to be provided by the banks at competitive, transparent rates. The Government will carry 80% of the credit risk, with the other 20% to be carried by the banks.

The Reserve Bank has agreed to help banks put this in place with appropriate capital rules. In addition, it has decided to reduce banks ‘core funding ratios’ from 75 percent to 50 percent, further helping banks to make credit available.

Take the “payment holiday” first.  I guess it was always likely for customers that were only fairly modestly indebted and had a fair amount of collateral to offer –  indeed, in those circumstances the willingness to offer such an extension is obviously sensible and mutually beneficial.

But do note that this offer by the banks  –  how much was it a genuine offer, and how much were they coerced into it –  includes (or seems to) all existing residential mortgage and SME borrowers.  Just on the mortgage side, that includes those who will have taken on loans in the last year or two with LVRs well in excess of 80 per cent.  It seems highly likely that market-clearing house prices will be falling at present, perhaps really rather a lot, even if the market is highly illiquid and there won’t be any open homes for the time being.   And although people don’t have to stump up with the cash for the next few months, interest is still accruing.  Floating first mortgage rates are still around 4.5 per cent, and on a $500000 mortgage a household will  run up perhaps another $12000 of debt in the coming six months.    An 80 per cent LVR last month could easily be a 100 per cent LVR next month, and worse than that if the security had to be realised in the near future.   Typical business lending interest rates are higher than those for residential mortgages.

I am not, of course, suggesting that banks should waive the interest.  But these continued high interest rates just reinforce the absurdity of the Reserve Bank Monetary Policy Committee simply refusing to cut the OCR any further, having cut it by only 75 basis points in the biggest economic slump of our lifetimes.  Setting monetary policy in a way that delivered, say, zero per cent low-risk retail lending rates would deliver real sustained relief to borrowers, and treat depositors as is appropriate at present (time having no value, or even negative value).

And what of the business loan guarantee scheme?  It looks relatively attractive to the banks, especially as (at present) there is no sign of any guarantee fee, however modest, and will enhance/underpin to some extent and for some classes of customers their willingness to lend a bit more.  Since banks know their own customers they still need to make decisions about which firms are likely to survive, with enough prospect or security that the bank is likely to get its money back.

But I doubt it will be that attractive to many businesses at all, and they may be something of an adverse selection problem in those who actually seek to use it.    And those interest rates –  the official statement says “competitive transparent rates”, while RNZ this morning referred to them as “normal commercial rates”.  Time has little or no economic value at present, at least across the economy as a whole.  Risk-free rates should be negative in a deflationary slump like this, and normal commercial rates –  which always carry a risk margin – probably should be pretty much zero.  That is hundreds of basis points less than firms are, and will, actually pay.  Fixing that would provide real relief, and perhaps a bit more willingness to take on a bit more debt, but the Minister and the Governor simply refuse to do anything about it.

But if debt service relief –  real relief, not just delays –  would be of considerable help, the real issue remains the dramatic slump in revenue many firms have already seen and that many more are just now beginning to experience.   And there is extreme uncertainty about (a) how much worse things might get (bounded at zero revenue I guess, but often with fixed outgoings), and (b) when, and how strongly even then, things might improve.  No one knows, and certainly your typical owner of a modest-sized business doesn’t.  Many of them won’t have much collateral, and they will have low profit margins at the best of times (Martien Lubberink at Victoria yesterday highlighted that The Warehouse group seems to fit that bill), and for many it won’t be obvoius why it is worthwhile to borrow, rather than to simply close down now and perhaps get lucky enough to be among the earlier people to realise any remaining assets.  Even if there is a robust business there five years hence, it won’t be so for the current owners if they take on lots of new debt in the interim.

It may get a bit tiresome to keep reading it, but the government’s approach still does not seem to recognise –  or if it recognises the point, be willing to do anything serious about it –  that the biggest issues around the survival of firms is dramatic income loss and extreme income certainty.  While they avoid confronting that more and more businesses will close by the day.

Which, of course, brings me back to my income guarantee proposal, guaranteeing households and firms (to the extent they maintain paid employees) 80 per cent of last year’s net income for the coming year.    It is the sort of national economic pandemic insurance policy we might well have signed up to if we’d thought seriously enough about the issue 20 years ago (experts have always advised that a really severe pandemic would be along one day).   We can’t –  or shouldn’t –  go offering that level of comfort indefinitely, but given the position successive governments have kept net public debt to (zero per cent on the best OECD measure), we can –  and should –  certainly do it for a year.  It buys both firms and households (borrowers) and banks a reasonable amount of time.  If, perchance, economic life looks like returning to normal in six to nine months, it would have served its purpose, and avoiding many liquidations and insolvencies.  If there is still huge uncertainty, or worse, by then, everyone can start adjusting further.  It isn’t a policy that will or should save every firm, or perhaps even every household, but it would offer a valuable affordable buffer –  one that we’ve either paid the premium for in the last 25 years (getting/keeping that low debt) or could do so over the 25 years after the crisis in over.

And we should back it up with a 20 per cent (legislated) temporary cut in wages (and probably rents).  There are plenty of households that are going to do just fine economically this year, even as the economy’s capacity to generate returns has slumped dramatically.  It is about fairness, shared sacrifice, (and perceptions thereof) and about actually easing the burden on some of those firms (whose “profits” are now deeply negative) everyone wants to hold together if we can.  Complement it with a windfall profits tax if you like for the few firms that might do exceptionally well through all this.

I really hope it doesn’t take much longer before the government is finally willing to confront that “income loss and extreme uncertainty” nexus, and be prepared to take steps that meaningfully address it, in ways that help stabilise for now (and to the extent possible) firms, households, and (thus) underpinning the ability of banks to lend.

Oh, and what stops them just getting on and doing the little it would take to dramatically cut interest rates?

24 thoughts on “Coronavirus economics and policy: 25 March

  1. So some people went to a Hereford Conference toured the North and South Island, stayed at hotels. Someone from (or at) Owera went to Milford Sound while the convoy system (bus only) was operating. Bus to farming venues. Someone must be busy tracing all that?

    Notice our PM not wearing a mask but the PM of Slovenia has a cloth one matching her impressive attire?


  2. If one thing comes out of the present situation on mortgage lending , it is that the risk levels that allowed banks and other lenders to extend credit and lift house prices well over any reasonable limits is proven.
    Stupid loan to income levels sometimes over 10 should have sent signals.


  3. I strongly agree Michael that there must be a Royal Commission to investigate the government’s handling of the pandemic and to make recommendations for addressing future crises of this nature which are virtually guaranteed, especially if China continues to do nothing about its appalling live animal markets. There are many important questions to be raised about our border controls, which in terms of disease monitoring appear to have been limited to asking people if they were “unwell” and handing out leaflets, and our ability to quarantine large numbers of people. I would personally like to know who was responsible for allowing the Ruby Princess with its subsequently proven 48 cases of COVID 19 on board to enter our ports and land its three thousand passengers including in Wellington on 14 March.

    Liked by 5 people

    • I would only think that the use of a Royal Commission will be based on its terms of reference. Hindsight is 20/20. I suspect it will either be an endorsement of the actions taken with some tweaks or improvements or a critical report that will be made public but forgotten as future governments make decisions that will impact the effectiveness of any responsibility in the future. If there are good learnings out of it then it would be useful.

      It would be a good review of learning thought. The challenge that we face in the future with the current Level 4 is that we need to know if the rest of the world have managed things well before we can be comfortable that we can release the restrictions.

      Micheal, can you please look into your history sources and see if you can see if there are any patterns for recovery once the pandemic has ceased? I would be interested in past economic performance after such events.


  4. There is no chance of a successful Royal Commission. It will be hamstrung from the outset, documents will be redacted to protect those involved. Then it will finally be wound up after 7 years and coming to the conclusion it was handled sort of okayish.

    Still it would line the pockets of those lucky enough to get the nod to be on it, so there would be something good come out of it.


    • That is a significant risk, although even a compromised royal commission would be better than nothing, in terms of documenting experiences etc.

      Appointment of the Commissioners – ideally strong and independent people, not looking for future govt appointments would be best – would obviously be critical.


      • Fortunately, that miserable mean Cullen won’t be around to be appointed by herself.
        You will need to find some labourers somewhere to get people who don’t want to be stuffed in the trough for the rest of thier natural.


  5. “I really hope it doesn’t take much longer before the government is finally willing to confront that “income loss and extreme uncertainty” nexus, and be prepared to take steps that meaningfully address it….”

    I have no such hope: the life experience of the government (both politicians and most senior mandarins) is as recipients of secure employment incomes. I don’t think any of them has ever had to meet a payroll or produce and sell products and services that others will voluntarily buy. So they think of income as something that is provided by employers and through the welfare system, not as revenue that is always at risk of being choked off.
    It seems unlikely that ministers will get meaningful advice on the impact of the collapse in business revenue and the uncertainty in when it might recover, and to what levels. But even if they got it, they would not understand its importance or its urgency.

    Liked by 2 people

    • I agree. The shock will wake them when they realise they have collected no GST, petrol tax, road tax, ACC, paye, and all those other taxes they steal from people.

      And please note I have not seen a single suggestion from any of the MP’s that they will be like so many other leaders and chop their incomes. Not one of them. The list mp’s should be cut to the $585.00 the the govt is providing for others and the few that will be actually working should be chopped back at least to the average wage. That will be plenty for what most of them do.

      Liked by 1 person

      • This must be the dumbest Prime Minister and Finance Minister we have ever had. There has been no deaths and 4 maybe community spread and we shoot the entire NZ population to cull a disease with the probability of eradication next to zero.


      • I think the latest official numbers had more community spread cases. More generally, if you did not test, you did not find, and testing has really only been ramped up in the last few days.


      • I am thinking that is already widely in the community. We are guessing that the timeline starts in Wuhan but given that patient zero cant be tracked anywhere in the world, this is already more than a 12 month spread and the time line is wrong. If the timeline is wrong then our resources are better spent on more hospital ICU beds than on feeding a starving and jobless population.

        People are already complaining about price gouging but in reality our imported products prices will keep rising as the NZD goes into freefalls.


      • Iconoclast. Not too sure why my credibility is even an issue. Stick the facts.

        Fact: Jacinda Ardern basically offered a $4 billion bribe to NZFirst as payment to form a government. No strings or controls attached, spend it with whoever and whenever they want to. Clear as day that makes this government the most corrupt we have ever had.


    • The Decision makers and the business effect

      Comment seen on today
      Bills keep rolling in, I have two truck loads of cancelled orders to put away and cannot do business. It would have been better to have shut down the arrivals back in January and then i would still be in business.


  6. The floating mortgage rate might be 4.5 percent but that is not where the bulk of the money is – Competitive term rates were about 3.5 percent before the OCR reduction and dont seem to have moved very much.
    If people can borrow more at what should be closer to 2.5 percent then than is not an onerous claim on the future for most.


  7. As a small business owner I agree with your push for a reduction in interest rates. Being able to increase debit sounds like a good idea short term but with overdraft interest rates still in the double figure range and business that borrows money at that rate with no knowledge of future income is potentially setting itself up for future stress and liabilities that could easily distroy the business.

    Liked by 1 person

  8. the problem with relying on a reduction in the OCR is that the transmission to borrowers who actually need the relief is highly uncertain. Some thing as direct as a maximum interest on bank lending would have some of the desired effect. – say 6percent, accompanied by no reduction in lending limits.

    Nice to have the Governor say that the banks are sound and well capitalised. If that turns out not to be true then they can be nationalised at a very low price -say $1 As the Govt is already taking much of the marginal credit risk so its not a huge additional step, well not in the context of a war economy


  9. Seems (depoait taking) bank interest costs are the main issue? Thinking out loud (big risk), why doesn’t the government g’tee interest costs on debt owed by a business that has been forced to shut and on mortgage interest / rent (?) a stranded employee owes; the central bank creates the loan for the government via fiat, the government uses it to pay the interest due, the bank pays a fee for the g’tee which means it ends up earning akin to a government bond; all other contracts are sorted privately during lock down; we all repay the debt via our long term productive capacity; a very square circle but that the circular flow of money is the point I guess to prevent asset liquidation….?


  10. A Royal Commission is essential. Not to point the finger, Not ‘Who allowed the Ruby Princess'” to come to NZ” but “What information was available to the people who allowed the “Ruby Princess” to come to NZ?”. Trying to identify who to blame will only put all on the defensive to so the truth will not come out and lessons will not be learnt, let alone applied.

    Liked by 2 people

  11. Michael,

    Your continued advocacy for zero or negative interest rates ignores the commercial reality that, in periods of stress, such as this, the risk premium in interest rates will rise. This as true (maybe even more so) in a period of prospective deflation. Lenders will price in the risk of lending such that, even in periods where the zero default rate might be zero or negative, bank lending rates will be positive. Equally, bank funding rates are unlikely to go to zero or negative given that depositors, especially at the wholesale level, are factoring in the increased (but still low) risk of bank default. As credit markets globally tighten further, that risk premium is likely to rise. I therefore view your stance on negative interest rates as commercially unrealistic and inconsistent with how a well functioning market could be expected to operate.

    As for Ian’s suggestion of regulatory caps on interest rates, I think that would be daft. Such regulatory responses rarely produce desired outcomes. They distort risk pricing in both funding and lending rates and impede efficient credit allocation.

    The smartest way to address borrower stress is to provide targeted income support for a defined period, together with debt servicing holidays. If the lockdown is effective in markedly lowering infection rates to a low level, then we should be able to progressively normalise things after 4 to 8 weeks. Border controls will need to continue for months to come, but if the quick result (15 minute) tests, which are apparently under development, can be deployed as a prerequisite for boarding a plane or ship bound for NZ, or at leadt on arrival here, then maybe the economic damage can be reduced to a significant degree.

    What is needed now are the indicators (eg infection rates etc) that will be applied for a progressive easing of restrictions after this 4 week period.


    • Thanks Geof. On your first point, a short-term risk free rate should probably be -5 or even -10 at present, so to suggest retail rates around or a bit below zero still assumes reasonable risk premia.

      Will try to address your points and Ian’s in another post tomorrow.


  12. No one in power appears to be talking about the FUTURE! what are the scenarios, what are the contingency plans, are we still going let tourists in, what about getting reinfected, are we going to take more care with immigration and getting the right people and not just a bunch of no-hopers, are we going to reinvest in our own manufacturing again …..

    Collectively our politicians have little management experience and very little life experience, and even less in the way of brain cells.


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