Labour leader Andrew Little still wants to stiff-arm banks:
. . . ‘I stand by the stance I took, which is to get very heavy-handed with the banks. Because the truth is when the banks fail to follow the signal that the Reserve Bank is sending, that’s keeping money out of the back pockets of ordinary Kiwis, and I will always fight for their interests and for their rights. If the banks don’t want to play ball when it comes to the way we run our monetary policy, actually, there’s only one outfit that can really take them on, and that’s the government.’. . .
The Reserve Bank is independent because it’s not the government’s role to set interest rates.
Retail banks are independent businesses and it’s not the government’s role to tell them what interest rates they should charge.
Interest rates are at historically low levels. They are higher in New Zealand than in many other countries which is partly a reflection on overseas investors’ perception of our economic and political stability.
That would be threatened by any stiff-arming of banks by government.
State intervention would also make business more risky for banks, the lenders and their borrowers.
Little’s not the only politician on the left who wants the government to get involved in banking.
Green co-leader James Shaw wants it to give $100m to Kiwibank which Prime Minister John Key described as dangerous:
He told Morning Report he did not support the idea, as the bank would be asked to make “non-commercial loans” – putting it in a weak position.
He said the Greens were using a state-owned enterprise (SOE) to bring about a policy goal.
“But to do that would be highly dangerous, because what you will end up doing is being in a position where you’re effectively asking them to make non-commercial loans, and potentially non-commercial returns.”
Mr Key said that would be “very poor public policy” and could lead you to a situation where the bank had to be bailed out. . .
Jim Rose at Utopia points out other flaws:
Note well that the $100 million capital injection is to expand in to commercial banking. More aggressive passing on of interest rate cuts may jeopardise credit ratings if this lowers the profitability of KiwiBank. KiwiBank has an A- rating. . .
KiwiBank is minnow in the mortgage market and a pimple in commercial lending. Rapid business expansion is risky in any market, much less in banking. . .
The proposal to use KiwiBank to lower mortgage rates does not add up. KiwiBank does not pay much in the way of dividends to fund such a foray. KiwiBank is already far more leveraged than any other New Zealand major bank.
Rob Hosking points out that while the policy might have political appeal it is bad economics:
Somewhat lost in all this is the risk of a policy that will encourage New Zealanders to take on more debt. . .
New Zealand’s current account deficit has been there since 1974 and although it is now lower than the peak it reached a decade ago, it is still firmly in the red.
The Scandinavian and North European countries might be running larger household debts on their balance sheets, but these are internally funded: Norway and the Netherlands, for example, are running current account surpluses of around 10% of GDP as opposed to New Zealand’s 3% of GDP deficit.
So they can afford to run up those debts.
New Zealand cannot. And a drive to push interest rates down – a taxpayer-funded drive no less – sounds more than a little foolish given New Zealand’s long-standing economic and financial vulnerabilities. . .
Shaw’s suggestion of $100m sounds like a lot of money and it is far too much for taxpayers but it wouldn’t be enough to help many people.
Besides, if people can’t borrow money at the current very low rates, it would be a dangerous move for them, the banks, any other creditors and the wider economy, to try to make it easier.
When Labour was in power in the 1980s interest rates were higher than 20%. When it was in power in the noughties, interest rates were in double figures, well above current rates.
There were several reasons for that and the big one which politicians could have influenced was high government spending and mismanagement of public money.
If Little and Shaw want to keep interest rates low they should be supporting the current government’s efforts to keep a tight rein on its spending and developing policies which would continue that.
That is far better policy than either stiff-arming banks or using more taxpayers’ money to prop up Kiwibank.