Liam Dann on defending the status quo

Liam Dann continued his series of defending the status quo on banking and monetary policy (here and here) this week with his column on Reserve Bank policy. While I appreciate Dann’s contribution to the discussion, his failure to offer a single positive solution effectively denies the huge difficulties our productive sector is facing or the crisis in housing affordability.

The closing of the Oamaru woollen mill is an example of the kind of crisis we’re in. The mill was founded in 1881 and, since then, has survived eight economic recessions and two depressions – including the Great Depression – but couldn’t survive the current economic settings under this National Government. For 200 workers, the impact will be particularly devastating.

Unlike Dann, I believe our export and manufacturing sectors are worth fighting for and I’ll continue to work constructively on new policy that might help rebalance the New Zealand economy towards productive enterprise not property speculation.

I have put together a suite of measures that will help address the high New Zealand dollar, favour productive investment, and address housing affordability. The suite of measures that I’ve been proposing (since 2007) include:

  1. A lower Official Cash Rate and the use of complementary tools to otherwise control house price inflation – like loan-to-value ratios. A lower cash rate will take pressure off our overvalued exchange helping our export and manufacturing sectors and the valuable jobs they create. Loan-to-value ratios help curb bank lending excesses that fuel house price inflation and can be designed to exempt first home buyers or target high-priced homes, as has been done in Canada, Finland, Norway, and Sweden.
  2. A capital gains tax (excluding the family home) to remove the current tax incentives to speculate in property. This will help reduce demand for property.
  3. Limit the sale of land to New Zealand citizens and permanent residents only. Australia, Hong Kong, China, and Singapore have similar policies which help limit property speculation and dampen demand.
  4. Increase the supply of affordable housing. Our Green Jobs initiative would see the state build an additional 2000 new energy-efficient state and community houses.
  5. Help lower-income families into their first home through our Home for Life package announced last month. Our progressive ownership policy will give families that are otherwise locked out of the housing market a pathway to home ownership.

Lian Dann can continue his quest for a silver bullet solution – the kind that neo-liberal market reformers promised in the 1980s – but I prefer to roll up my sleeves and look for smart, practical reforms that will help move New Zealand towards a fair, prosperous, and more sustainable economy.

We owe the mill workers of Oamaru nothing less.

Russel

18 thoughts on “Liam Dann on defending the status quo

  1. Yes – if you keep doing what you’re doing, then you will get the same results you’re getting now. I guess if you are doing well from the status quo and you don’t care what happens to the community or the environment, then you probably would defend the status quo.

    Well said, Russel.

  2. Russell, other things that might help

    Lowered immigration, perhaps a moratorium for five years, other than for humane reasons, to relieve at least some pressure on the housing market. High immigration rates are an acknowledged factor in the demand for housing and the pressure on house prices.

    Another string to the bow would be to require banks to deposit money with the government, interest free, eg for every dollar loaned, 50 cents or any other effective amount, would be sequestered with the government, for say two to five years, renewable as long as the housing market is inflated.

    I would also suggest a rigorous examination of the construction industry, the cosy cartel that runs building materials and other building services in this country. This needs to split up or more adequately controlled. Prices for timber, bricks etc are way above Australia’s and many other countries, we are being ripped off

    Also I would suggest there should be no GST on new private houses up to a certain value. If bought for rent then GST should be paid, even if initially lived in privately. Commercial buildings also to continue to pay GST.

    I am sure there are many other direct steps a government could take to stop this nonsense. I believe 80% of all private indebtedness overseas is related to the mortgage market, so not are only overvalued homes causing distortions in the domestic market, they are a major part of our continued and worryingly high balance of payments deficits.

  3. Won’t work.

    The problem is mostly supply-side.

    Your plan will restrict supply-side further, except in showcase areas where some lucky people get to win housing lotto before the scheme falls over due to lack of affordability.

    One area you could focus on, and do some good, is in terms of the building materials cartel.

  4. Thanks Arana, well I did actually address the supply side by suggesting an immigration moratorium, this would have an effect of reducing demand and increasing the supply of homes that actually are built for people living here now. If we continue to import many thousands of people, we’ll never catch up.

    My suggestions are not a replacement for increasing supply, Russell has already suggested some mechanisms, they are additional. There needs to be more controls on developments too, developers should be required to develop a certain number of low cost housing in any new development, at the moment the profits are all in the more expensive homes.

  5. Help lower-income families into their first home through our Home for Life package announced last month. Our progressive ownership policy will give families that are otherwise locked out of the housing market a pathway to home ownership.

    If it’s a home for life, why on earth would anyone bother owning it? Just pay the “rent” and let the “owner” pay all the bills.

    What are you going to do if a person doesn’t even pay rent? Kick them out? That will look good on the telly.

    Do you really believe this stuff, Russel? Of is this just something you put out there to lure potential voters?

    The historic average Govt 10-year bond rate is 8.1%. How can you charge $200 a week and say this costs the taxpayer nothing?

  6. If it’s a home for life, why on earth would anyone bother owning it? Just pay the “rent” and let the “owner” pay all the bills.

    Maybe the kids would like to have a dog. Maybe paying rent forever isn’t what you want to do. Maybe if you own a home you are going to try to take CARE of your home. Maybe you are making poor inferences about the 10 year bond rate… because with the current economic situation, which is NOT going to improve, that rate isn’t apt to be getting anywhere near 8.1%.

    Do you really believe that the current system can work in ANY way? You’re as bad as Key… no… that’s unlikely as you are probably not actually dishonest at heart… certainly not to the degree he is.

    Capitalism based on fractional reserve fraud is finished. The collapse is underway and we’re in a Wiley Coyote moment, suspended over the abyss, no supports, but as long as we don’t look down gravity has no effect (cartoon physics at their finest). Just how long this can last is open to question… but I don’t think Key will get to walk on air through the next election… and the next crash his mates create will make the last one look like a trip to the bouncy castle.

    It doesn’t work.

    …and why the fnck do you reckon the government needs to borrow money?

    I suggest you read some Steve Keen. More understandable than Minsky anyway.

  7. Maybe the kids would like to have a dog. Maybe paying rent forever isn’t what you want to do. Maybe if you own a home you are going to try to take CARE of your home. Maybe you are making poor inferences about the 10 year bond rate… because with the current economic situation, which is NOT going to improve, that rate isn’t apt to be getting anywhere near 8.1%.

    No. They sign onto the scheme so the house is “theirs for life”. They only ever pay the rental amount – $200. There is no incentive, whatsoever, to pay the further $100 each week to take on ownership. If they were savvy, they simply take that $100 and invest it elsewhere.

    The 30 year average for 10 year government bonds is 8.1%. At the moment, it’s 3.78%. Wasn’t Russel talking of QE? What do you think happens to interest rates when you engage in QE?

    Even without QE, that figure will rise. In Decemeber 2010, the 10yr Govt bond was 5.99% (rental cost = $346 per week). In December 2007, the 10yr Govt bond was 7.78% (rental cost = $449 per week). If you’re not adjusting the rent with the bond rate, then the taxpayer is losing money hand over fist.

    Also, who’s paying the rates, insurance, maintence and everything else when the “owner for life” is not paying the extra $100 to own? Even if they are, who is paying those costs whilst most of the house is still state owned?

    The scheme is too ridiculous for words.

  8. and why the fnck do you reckon the government needs to borrow money? … Because the government doesn’t have any money.

    Slightly more accurately; the only money the government “has” is money they’ve taken off us, or borrowed in our name.

    If they don’t take enough off us to cover what they are going to spend on us then it has to come from somewhere!

  9. and we’re in a Wiley Coyote moment, suspended over the abyss, no supports, but as long as we don’t look down gravity has no effect (cartoon physics at their finest). Just how long this can last is open to question…

    That is indeed a big question. I suspect it is quite a long time, like well after I’m in my box.

    … but I don’t think Key will get to walk on air through the next election…

    He may not walk on air, but he’ll still be in the Big House. I offered to eat humble pie for Phil over this last time, but the pie stayed on the table.

  10. Slightly more accurately; the only money the government “has” is money they’ve taken off us, or borrowed in our name.

    Yep, that’s what I mean. It’s just cashflow. The government has no money.

    So, where’s Russel going to get all this cashflow to fund all these houses?

    That is indeed a big question. I suspect it is quite a long time, like well after I’m in my box.

    Yep. They can keep pushing this one out for generations.

  11. Can someone explain this Green “plan” to me?

    Boris and Hopi are life partners. They have no money and they’re a poor risk, which is why the bank won’t loan them anything. Still, they qualify for a “house for life”.

    They pay $200 a week. They have an option to pay an extra $100 a week, which (supposedly) pays the house off over a lifetime.

    Who is paying the rates, insurance, and maintenance?

  12. According to Twitter, Russel discovered fractional reserve banking recently and appears to be suspicious of it.

    He’s right of course, except that he wants to engage in the same thing – making more money out of absolutely nothing. Which on the face of it has been commonplace in several countries, but wherever it has been used to “finance” state spending it has led to ruin.

  13. “According to Twitter, Russel discovered fractional reserve banking recently and appears to be suspicious of it.

    He’s right of course, except that he wants to engage in the same thing – making more money out of absolutely nothing. Which on the face of it has been commonplace in several countries, but wherever it has been used to “finance” state spending it has led to ruin”

    The use of greenbacks by Lincoln didn’t lead to ruin. But where such policies have appeared to “lead to ruin” there were usually other factors in operation.

  14. The global economic system is seriously impaired in terms of dealing with reality.

    http://boards.fool.com/connect-the-dots-the-butterfly-effect-30533985.aspx

    _____________

    According to Twitter? Who is Twitter?
    Is this a trustworthy source? :-)

    _______________

    The Green Party has been on to the fraud of fractional reserve for quite some time.

    http://blog.greens.org.nz/2011/01/18/whats-the-matter-with-fractional-reserve-banking/

    This thread came after about a year or so of commentary on the board.

    You might also consider that we “discovered” Steve Keen, and follow his economics fairly closely.

    “except that he wants to engage in the same thing – making more money out of absolutely nothing.”

    You might be forgiven for thinking that, but that isn’t really what he wants to do. Most of us want the dollar to be redeemable, and to end the fractional reserve banking system entirely. It is fundamentally unsustainable.

    Dealing with the current situation with our currency overvalued and NEEDING to be suppressed, immediately, that is yet another issue.

    As for financing state spending, we’ve got other ideas than simply printing money, and mischaracterizing them as you do is simply wrong.

    The State always gets money to spend by way of taxes (broad usage).

    The money the State issues into circulation for everyone to use (some of which is returned as tax) is not money the State can simply spend.

  15. Why is our currency over-valued? You don’t think NZ producers are worth what they are? i.e. 80% of the value of Australian producers?

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