Large Scale Squandering By The Reserve Bank

The Reserve Bank is embarking on a scheme that will squander $28 billion, according to Don Richards, the National Spokesperson for Positive Money New Zealand (PMNZ).

Through its so-called Funding for Lending programme, the Reserve Bank will provide $28 billion of additional funding to commercial banks to bring down interest rates — rates which are already at a historical low.

The problem, as a former Reserve Bank manager Michael Reddell points out, is that the banks are not funding-constrained. Banks are awash with central bank provided liquidity as total settlement cash balances were about $7 billion pre-Covid and are now about $24 billion, according to Reddell.

He believes that the banks will not use much of the Funding for Lending money anyway and will probably sit on it.

This seems to be a very expensive transfer of money for a reduction in a fraction of a percentage point on the interest rates. The lower interest rates will only further fuel the overheated property market, making housing even more unaffordable for new home buyers.

“The Reserve Bank needs to stop giving money to the banks as the money is not making its way into the productive economy,” says Richards.

“We need to eliminate the middle man and provide the funding directly into the job rich sections of the economy. As an example of what has worked, the wage subsidy cost half of what the Reserve Bank will be giving to the banks and yet it provided a direct and ongoing stimulus to the economy.”

Another option could be to provide the money to the Government to spend on infrastructure projects such as roads, schools and housing. The first Labour Government did something similar during the Great Depression in the 1930s and that got us out of a deeper financial hole than the one we are in currently in.

“So rather than provide $28 billion for the banks to sit on, let’s try something that has proven to have worked,” Richards says.

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