Reserve Bank toolkit missing an essential item

Further use of the Reserve Bank’s new monetary policy tools will actually do more harm than good to the economy, says Positive Money national spokesperson Don Richards.

In a recent Bulletin the Reserve Bank trumpeted its additional monetary policy (AMP) tools which work by changing the interest rates faced by borrowers and savers. Interest rates are at a historical low and the items in this toolkit provide billions of dollars to the banks on the premise that the money will be lent into the productive economy. The problem is the money is not getting into the productive economy, while a lot of New Zealanders are doing it tough.

“One example of the misdirection of funds was the Large-Scale Asset Purchase (LSAP) programme. The Reserve Bank spent billions of dollars repurchasing Treasury bonds from banks and investors, with the latter making a tidy profit at the Government’s (and taxpayers’) expense,” Richards says. “It also had the predictable effect of inflating the housing market as all this liquidity went looking for a home – literally.”

Richards says there is a better way. “Direct Funding, where the Reserve Bank buys up Treasury bonds directly from Treasury would cut out the middlemen. In addition to eliminating the mark-up, this would significantly reduce the debt burden facing future generations.”

“Independent analysis of the British experience showed that for every dollar spent buying up bonds on the secondary market, as the LSAP does, just 8 cents found its way into the productive economy where jobs are created and goods and services sold.”

“With Direct Funding, on the other hand, it is estimated that for every dollar spent, it is multiplied up to $2.80 being injected into the productive economy,” he says. “All this without further inflating asset prices and increasing inequality.”

Direct funding can also provide money to fix our failing infrastructure. We are repeatedly told there is no money to fund infrastructure and essential services, but the Government continues to pump billions of dollars into the financial sector.

Richards states, “Positive Money New Zealand recently submitted a Petition to Parliament calling on the Government to mandate the Reserve Bank to directly finance the Covid recovery and other essential infrastructure. He says it is time to stop providing money to the banks, and put it where it is needed most.”

About Positive Money

Positive Money NZ is an independent, non-profit group advocating for monetary reform in New Zealand. Our patron is Bryan Gould and we are part of a global movement of organisations, the International Movement for Monetary Reform, campaigning to change the way money is created so that money serves society.

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