In New Zealand we have the "Reserve Bank Act".
Which basically requires the reserve bank to kill the rest of the economy, whenever Auckland house prices, or wages, rise.
Originally enacted, as a circuit breaker, to cap excessive inflation in the 80's, politicians have kept it, long past its use by date, because in their limited view, what works once, briefly, will work perpetually.
It could be argued that it was somewhat successful in curbing very high inflation, on that limited occasion, though others would note that the end of very high inflation ended with the slowing of the rise in oil prices.
Now, every time the New Zealand productive economy struggles off its knees, the reserve bank delivers another knockout.
Howdaft. Puts it so much better than I can. I have republished his article here.
I have highlighted some in bold.
"The issues of house price rises in
Auckland and Christchurch is prompting comment that it may be time for
the Governor of the Reserve Bank to raise interest rates. It
is noted in the media that an increase in interest rates will result in
foreign money seeking higher returns to enter the domestic market and
this will also increase the value of the already overvalued dollar.
What hasn’t been commented on is
that an increase in interest rates will also penalise every business and
household in the country including everyone resident in Auckland and
Christchurch who already have a mortgage and have no intention of buying
or selling a home. There will
be no beneficial behaviour change within that wide group who are not
seeking to get further into debt but it will impose hardship and
constrain the rest of the economy. The
interest rate rise would be imposed simply as an attempt to limit price
rises in response to artificial shortages of housing in two localised
parts of the property market.
The more sensible action would be to
address the cause of these shortages rather than attempt to alter the
market response by raising interest rates.
The Reserve Bank Act is not only
completely ineffectual at slowing property prices it is the root cause
of property price inflation. Because
the Reserve Bank Act obliges debtors to pay over the market price for
debt, it also guarantees lenders greater than normal market returns on
investments. The result is that foreign cash looking for high and secure returns has flooded into the New Zealand property market. The
banks are incentivised to actively inflate the property market because
of the high returns it provides (thanks to the Reserve Bank Act) and
because of the flood of money that they have to invest. As
a result the more the Reserve Bank increases interests rates above the
natural rate for the marketplace the more money that flows into the
property market, the less risk averse lenders need to be because they
receive higher margins on loans and this results in banks adopting laxer
lending practices, this then leads to property price inflation which
results in the rate of increase in capital value of the property (in the
overheated parts of the market) to exceed the cost of debt - for a
while at least – the negative real rate of interest in this small part
of the property market consequently further incentivises borrowing.
The end result is that we are as a
nation carrying far more debt than is necessary for the economy to
function effectively, we have a ruinously over valued property market,
we have a grossly overvalued exchange rate, we are bleeding our scarce
foreign earnings on interest payments on all the debt and meanwhile our
productive sector is crippled by both the cost of borrowing and by the
over-valued and highly unstable exchange rate, Instead of suppressing
inflation, the Reserve Bank act causes inflation.
The Reserve Bank Act is singularly the most stupid element of the reforms of the 1980’s. It is utterly illogical in that it defies the simplest of precepts of economics. The answer to the problem of inflation is simple. If
a government wishes to increase the cost to the consumer of any element
of the economy without increasing the supply of that element it imposes
a tax not a compulsory price increase – alcohol and tobacco are
excellent examples of this concept in action. The government also targets only those activities it wants to constrain. So when it taxes alcohol it does that based on alcohol content – it doesn’t tax all liquids.
A tax also allows for redistribution
and targeting by the government to occur so if the tax imposes on lower
income households this can be resolved through social payments with the
tax on debt as a source of funds. Similarly the tax can be linked to the asset class or region causing the problem so there may be a lower tax on business debt. This
is not difficult; the banks already set interest rates by the manner in
which the debt is secured, the tax could be similarly targeted. This
is only one possible mechanism as there are is a range of possible
taxation responses to this problem which these need to be linked into a
wider strategic review of the role of taxation in the economy.
At a more fundamental level any market failure or physical circumstances causing the price pressure also needs to be addressed. Auckland
prices are being driven by a range of other policy actions by
government that put inflationary pressure into the market. These
include allowing uncontrolled foreign ownership of residential real
estate, immigration – from both within New Zealand and from off-shore -
and from a failure to fully price the true cost to the national economy
of growth of the major cities and the cost of internal migration of
business and residents. Property
in the larger cities but particularly in Auckland is being subsidised
in a number of ways while the rest of the national market is in one form
or another languishing with surplus housing and infrastructure. In
addition to fostering policy that actively inflates the cost of housing
nationally and causes our international debt to be excessive and our
currency to be over-valued we are not as a nation using our existing
investment in infrastructure wisely.
We need to be asking ourselves
collectively why we, who as a nation have the highest natural capital
per capita and arguably the best system of society in the world, are one
of its debt basket cases. We are only being prevented from being another Greece or Cyprus by the dairy industry. We
also need to ask why we are not so much better off as a nation when
countries like China and Singapore are doing so much with so
comparatively little. The
answer is quite simple and that comes down to the vision and courage of
their political leadership, could I commend you to read George Monbiot’s
recent post
http://www.monbiot.com/2013/04/22/the-self-hating-state/
as it very accurately describes the malaise that we have inflicted upon
ourselves with our reforms and our reliance on “The Market” to provide."
Kean on the "Roving Cavaliers of Credit" or How Bankers got to Rule the World.
“”In some ways these conclusions are unremarkable: banks make money by extending debt, and the more they create, the more they are likely to earn. But this is a revolutionary conclusion when compared to standard thinking about banks and debt, because the money multiplier model implies that, whatever banks might want to do, they are constrained from so doing by a money creation process that they do not control.
However, in the real world, they do control the creation of credit. Given their proclivity to lend as much as is possible, the only real constraint on bank lending is the public’s willingness to go into debt. In the model economy shown here, that willingness directly relates to the perceived possibilities for profitable investment—and since these are limited, so also is the uptake of debt.
But in the real world—and in my models of Minsky’s Financial Instability Hypothesis—there is an additional reason why the public will take on debt:
the perception of possibilities for private gain from leveraged speculation on asset prices.”"
Kean describes exactly the real world effects of current monetary policy.
Both Cyprus and Greece show how Democracy can be overturned at the wim of bankers trying to protect their income, from pushing up asset prices, with loans they should never have been allowed to make, with money they have produced out of thin air. A power only a democratically controlled Government should have.
Recent moves towards legislation, to take money from us to bail out failing banks, again, by the New Zealand Government , shows who our politicians really work for!