New Zealand’s ‘Haka’ Act Shows Why There’s A Bubble In Bubbles

New Zealand is tiny by economic standards, but it’s a giant in central banking circles.

While working in Washington in the mid-to-late 1990s, I was struck by how often conversations with Federal Reserve officials turned to Wellington. Taking place at Reserve Bank of New Zealand headquarters were some of the globe’s most tantalizing experiments with inflation targeting and creative central bank mandates. Fed bigwigs I interviewed regularly at the time—Alan Greenspan, Janet Yellen, Alan Blinder—could not seem to get enough of RBNZ intrigue.

Vanguard RBNZ is at it again. In February, lawmakers in Wellington directed Governor Adrian Orr’s team to add housing prices to the list of key variables when making interest rate decisions. This monetary mission creep, as critics see it, is turning heads around the globe.

Orr’s balancing act here is increasingly shared by current Fed Chairman Jerome Powell in Washington, European Central Bank head Christine Lagarde in Frankfurt and Bank of Japan chief Haruhiko Kuroda here in Tokyo. The surge in property values in the Covid-19 era are intensifying inequality troubles everywhere.

Certainly, Reserve Bank Australia Governor Philip Lowe has his own challenges balancing booming real estate values and stagnant wages. Suddenly, decisions about tapping on the monetary brakes, or hitting the accelerator a bit more, are infinitely more complicated than they were in late 1996.

On December 5, 1996, then-Fed Chairman Greenspan asked a question that still bedevils central bankers 25 years on: “How do we know when irrational exuberance has unduly escalated asset values?”

This, remember, was at the height of the dot-com bubble. And the reaction was extreme. Days later, Greenspan was summoned to Capitol Hill to explain his apparent break with laissez-faire capitalist orthodoxy. Republicans were apoplectic. Greenspan never asked about froth again. The tech bubble got bigger and bigger before it crashed.

Today, Orr finds himself in the crosshairs of apoplectic lawmakers—and pushing back against accusations that he over-stimulated asset markets. They argue that ultra-low Covid-era interest rates drove housing to unsustainable levels. Unattainable levels, too, for all too many New Zealand families.

Lawmakers do have a point: New Zealand is, for better or worse, one of the hottest housing markets anywhere. Heady demand has house-price inflation surging more than 30%. It also has elected officials pointing fingers—and engaging in the political equivalent of haka.

During a tense clash with politicians last month, Nicola Willis from the opposition National Party asked: “Reflecting on how badly wrong the Reserve Bank’s forecasts have been on house-price growth, do you think you turned the money hose on too hard in 2020?”

Orr was not having it. “Thank you for your sharp and pointed question,” he replied. “No, I stand by everything we’ve done and I’m incredibly proud of everything we’ve done as being critically necessary

As per usual with dustups between central banks and politicians, the truth lies somewhere in between. Sure, Orr in Wellington, Powell in Washington, Lagarde in Frankfurt and Kuroda in Tokyo could have thought more about asset-market fallout when saving a cratering world economy in 2020. Absolutely.

But a mistake politicians have been making since the 1990s is now coming back to bite them: handing the keys to central bankers.

In the mid-1990s, a period of remarkable peace and prosperity for developed nations, lawmakers were keen to let monetary officials drive the economy. A liquidity nip here, a tuck there, a big blast of cash over that way and government officials could focus on other things.

In 1994, when Barings Bank collapsed, it was Greenspan, then-Bank of England Eddie George and Deutsche Bundesbank President Hans Tietmeyer saving global markets. After Southeast Asia crashed in late 1990s, Greenspan’s posse even made the cover of Time magazine as the “Committee to Save the World.” Around that time, when the ironically named hedge fund Long-Term Capital Management imploded, they saved the day again.

In 2008, when Lehman Brothers did the same, the central-banking cavalry rode to the rescue. Since Covid-19 hit, these unelected economists have been our saviors, our therapists, our priests and now our lightning rods. Not to defend Orr here, but what did governments expect abdicating virtually all responsibility to a handful of unelected math enthusiasts would get us?

Since the 1990s, a succession of elected officials from West to East, from North to South, had scope to build more inclusive, less volatile economic systems with safety nets and guardrails. Most chose instead to fob off the hard decisions to central bankers.

Orr’s counterpart in Washington is about to have his own moment in the spotlight as President Joe Biden mulls whether to replace Powell. Is Orr correct to object to parliament’s change to RBNZ’s mandate? As he put it in December: “Adding house prices to the monetary policy objective would be unique internationally, which could make monetary policy less effective and impact financial market efficiency.” 

Economists are debating this topic as we speak. But lawmakers could easily slap taxes on real estate transactions, limit leverage, demand higher down payments, ban foreign purchases or multiple property purchases by anyone or impose any number of so-called macroprudential speed bumps. Why risk angering the public, though, when central banks can to the dirty work?

This abdication of responsibility is now a bubble all its own. True to form, the RBNZ is getting there first. But this is a dilemma borne of complacency that will soon be moving to centerstage everywhere.

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