Thursday, 23 October 2008


BusinessDunce Alan Bollard has just dropped the Reserve Bank's cash rate by a full percentage point.  One whole percentage point.  Think about that while you think about these comments, from Mike Shedlock's Global Economic Trend Analysis:

We are in this mess because the pool of real savings has been depleted and it is time to stop spending and replenish savings.

And these comments from Frank Shostak's article 'Good and Bad Credit':

    Neither the Fed nor the Treasury is a wealth generator: they cannot generate real savings. This in turn means that all the pumping that the Fed has been doing recently cannot increase lending unless the pool of real savings is expanding. On the contrary, the more money the Fed and other central banks are pushing, the more they are diluting the pool of real savings.
    We suggest that decades of reckless monetary policies by the Fed have severely depleted the pool of real savings. More of these same loose policies cannot make the current situation better. On the contrary, such policies only further delay the economic recovery.
    By impoverishing wealth generators, the current policies of the government and the Fed run the risk of converting a short recession into a prolonged and severe slump.

So now you've read those comments, and you've had a chance to think them through, and keeping in mind Henry Hazlitt's "one lesson" -- i.e., that "the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups" -- here's a few questions for you to consider:

  1. What Should Alan Bollard Have Done (WSABHD)? 
  2. And what, in your view, will be the effect of what he has just done on the pool of real savings?
  3. What will that do to our chances of real economic recovery?
  4. What's the single best way to "unfreeze" the flow of credit (NB: you can cheat on your answer by reading Shostak's answer two-thirds of the way down here).
  5. Have central bankers like Alan Bollard and Ben Bernanke learned the correct lesson from the Great Depression?
  6. When will they admit they've failed and resign?


  1. 1. Alan should have cut the rate even further to around 5%
    2. Not much.
    3. It increases our chances because it (ever so slightly) encourages 'productive' investment from businessmen in NZ.
    4. To reinforce the underlying strength of the NZ economy and banking system.
    5. I doubt Bollard has even heard of the Great Depression.
    6. He will not do so...(failures in life seldom do).

  2. I make 3 1/2 answers wrong, and just 2 correct.

    The clue is your wrong answer on number two.

    Put it this way, here's two supplementary questions:

    2A: If he'd increased interest rates, what do you think that would do to the pool of real savings?

    3A: And when the shortage of credit is supposed to be the problem here, the key to real recovery, how do you think one expands the pool of real savings from which real credit comes?

  3. In my answer to question 2, and following on into question 3, I was meaning 'savings' in terms of 'productive investment' (e.g businessmen investing in their own companies and creating employment and exporting etc), rather than 'savings' as in term deposits.

    Curiously, few New Zealand businessmen view the 'goodwill' value of their companies as being worth much; for instance the average businessman who owns a company making $300,000 per year in profits does not see his company as being worth about $1.5 million.
    All rather odd and almost unique to this Country, (but that is what you get after 5 generations of the 'New Zealand Disease')

    His rate cut makes some sort of difference but not much.

    2A ..increasing interest rates would have been a disaster. The reason for this is there has been little incentive in recent months in NZ to 'invest' productively. Rather than bother with actually being in business you could simply sell up and put your money in Government Bonds and receive 6.5 - 7%
    The incentive should be to invest in proper businesses and this goes some small way towards that.

    3A In New Zealand there is not actually a savings problem, generally speaking - all the billions which is in term deposits or other 'retail' investments sitting idle.
    The problem is that everyone is telling themselves there is a problem and scaring themselves.

    Were we to highlight to the World that New Zealand is a good place to invest when compared with much of the rest of the World, capital would pour in.
    Helen Clark seems more interested in 'attack ads' then on doing so.

  4. If Bollard was acting independently he would have not moved or moved .25.

    Unfortunately he is a weak man - what he says in private is different to what he does. Brash didn't care what politicians thought - Bollard is very susceptible to political pressure.

    Politicians want to be seen to be 'doing something' - no matter if it makes NZ less attractive to investors, which his 1.00 move does - so he moved.

    There is no grand, evil ideological reason for it. It's politics.


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