That’s a question thrown to me recently at a cottage meeting in Auckland. Some said yes. Some said no, citing its cuts-everywhere-but-not-tax Budget in May. I don’t know. Nor did I understand the question fully.
John Maynard Keynes, as described in Wikipedia, was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice. He advocated that government intervention through fiscal and monetary measures is warranted to ensure economic growth and stability.
It is good to learn that our Reserve Bank is tightening its rules on the issue of core funding ratio (CFR) and encouraging our banks to compete much harder for term deposits.
In recent years, New Zealand banks have had an unusually high proportion of offshore debt maturing within one year. The failure of Lehman Brothers in September 2008 and similar stories of the troubled British bank Northern Rock highlighted the intrinsic problems, such as the vulnerability of any banking system in that situation to a severe global liquidity shock.
As Bernard Hickey noted in the NZ Herald http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10618147 that if financial markets froze, ”our banks would not be able to roll over their debt.”
The Reserve Bank has therefore set the 75% minimum CFR as “a challenging but achievable” target for our banks, to ensure a higher proportion of stable funding and a reduced reliance on short-term offshore funding.
Our banks’ current CFR is now around 65%. To meet the target they have to compete much harder for term deposits and limit their lending growth by keeping mortgage rates higher. The side effect of the CFR has been described by the Reserve Bank as an automatic stabiliser for the economy. To some extent it was welcomed as it would help raise interest rates without the central bank having to raise the official cash rate (OCR). However, at least three more issues would naturally flow from here:
(1) Given our savings habits (“Kiwis are poor savers”), if KiwiSaver is a good policy to increase savings then what should the National-led Government do to strengthen the scheme?
(2) As the NZ Manufacturers & Exporters Association pointed out in its submission http://www.mea.org.nz/documents/609-nzmea_submission_parliamentary_banking_inquiry.pdf on the Multi-Party Banking Inquiry led by the Labour Party in 2008 that the use of the OCR as the sole monetary policy tool had allowed banks to defy the intent of the Reserve Bank. “OCR had failed to restrain inflation in the non-traded sector and has brought headline inflation into the target band only at the expense of a battered traded economy.”
Our economy relies largely on our export and the “must trade” imperative has to be at the forefront of our policy design. Does the Government have any policy in that regard?
(3) New Zealand is small so we must be smarter. As University of Auckland Vice Chancellor Professor Stuart McCuthcheon specified: http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10619568 “over the last thirty years, our educational institutions have created a $2.3 billion per annum export education industry – now the fifth largest export earner in the country. We can surely do it again with research.”
Certainly but will the Government reinstate good policies such as the R&D tax credits and Fast Forward?
Whether Keynes has any influence on the Government does not matter. What matters is whether the Government has real policy to help grow our economy and increase our productivity.
Whether our Prime Minister will be loved forever – as a super sales rep – depends not just on his great smile but more on the products he’s selling – the audience at the cottage meeting agreed.
if you dont understand economics raymond, it is better to quote the wikipedia article youve copied and pasted from and not just pass it off as your own.
“John Maynard Keynes, 1st Baron Keynes, CB (pronounced /?ke?nz/ canes) (5 June 1883 – 21 April 1946) was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice. He advocated interventionist government policy, by which governments would use fiscal and monetary measures to mitigate the adverse effects of business cycles, economic recessions, and depressions. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots.”
From http://en.wikipedia.org/wiki/John_Maynard_Keynes
I thought the Reserve Bank was providing ‘their own’ money to the Banks anyway. Im sure there is a fancy name to disguise the reality of ‘propping the banks up’.
Mel, Raymond credited Wikipedia. Its right after the words ‘John Maynard Keynes’. Did you get out of bed on the wrong side?
ghost I didn’t see the credit when I made the comment, maybe raymond edited his post after my comment
Thanks. Maybe my fault. I had some tech problems in inserting the links to the references.
a link to Wikipedia should be inserted.
The Irish are doing the anti Keynesian approach. The are slashing government expenditure, getting rid of 15bill euros worth out of the 60 billion euros total.
To the Irish the deficit is everything. Of course they had to bail out their banks big time so In a way thats where the governments /peoples money is going.
The result unemployment is 12.5%, the economy will shrink by 15%. Who knows when the decline will stop.
The countries that followed Keynsian policies have done better- with higher deficits- Key and English have ridden on the coattails of the last Labour budget but will have nothing to offer for the election year ( other than tax cut s ?) when the economy will have stalled and we will have the wasted years much like the last 6 years of the Bolger Shipley period
Did you know that Fed Chairman Ben Bernanke said that it is in the government’s interest to increase inflation because it erodes the value of the nation’s debt?
John Key, hear that? Alan Bollard?
Inflation not only erodes the debt, but deflates the value of the currency, which is good for exports.
Two pretty big issues in NZ, debt and exports. Care to cut the interest rate some more, take on some debt, and spend?
The essential message of keynes was the same as budget advisers have made for years. Ie take taxes when the economy steams along (booms) so there is money there to prop it up in the bust. Simple cashflow management, and Dr Cullen could have done better explaining this rather than offering ‘bubblegum budgets’ for the media & Brash to target.
This govt and the outgoing one both have both just sat back during the crisis and watched what happened overseas before following. Cant believe they are ’stuck’ to any economic theory (cant believe the Nats can read to begin with).
And Wrong Bernard Hickey. No other country has followed our “world leading” monetary ‘disaster’ policy. Phil Goff seems to understand now how it works but I guess this is a hard sell as it flys over the heads of the media therefore middle NZ.
We have consistently had the highest interest rates in the OECD and the has hamstrung every attempt to move our economy forward. This new measure on its own will give stability but with Ruth Richardsons monetary policy statement in 1993 (targets changed since then) it will act as a double handbrake on the economy. What this did was reduce all consideration of monetary policy to inflation, so any time one part of our economy (Auck houses/rural exporters/Educ/Tourist) starts becoming profitable the interest rates raise, exchange rates raise and this stomps on the progress made in this sector and all others. This then means that the only way to increase profits is to stomp on internal cost (Wages/rent/taxes).
If the Irish are suffering it could be again that they have reduced their economic focus to one objective (all participants (business/employees) are then subservient to achieve one goal of the state).
The big problem we have to solve is how to repeal this policy without suffering short term with inflation from imports while we raise wages and begin to produce some of the Chinese imports with home growen products.
The mindset we should have is to favor borrowers (productive sector) over savers (non productive), not the other way around.
The problem with the Irish is that they went on to the Euro when they were already experiencing a housing bubble. The ECB kept interest rates low and threw petrol onto the fire of the property boom. It’s a classic example of how damaging the fractional reserve – central banking – fiat money system is. Now Keynesians are talking about more and more regulations to on the banking sector, but at the same time they want cheap money for banks through low interest rates and then they actual want inflation to eat away at the income and savings of workers. We want people to save more not disencentivise saving and go the keynesian path of consume consume consume.
I’m with Jeremy.
Low interest rates are key.
To answer raymond’s question, Keynesian economic theory has had a major influence on government fiscal policy over the years. He was out of favour during the reagan years when the trickle-down, supply side economic theory was in vogue, however, this economic crisis has shown that the friedman approach to economic sustainability and wealth (let the market’s decide) is fundamentally flawed. Michael Cullen certainly understood this and it is why NZ headed into this rcession in relatively good shape – it was also the reason why Dr Cullen legislated for tax cuts for those on lower incomes in order to stimulate the economy, as opposed to the Nats tax cuts, which have had next to no effect on economic growth. Its a long and involved topic, but Labour and Phil Goff (and Rudd and Obama etc) get it where English doesn’t.
Our Governments have kept interest rates artificially high with the reserve bank act. The effect has been to expand the money supply as people are happy to lend at the inflated rates (They would have still lent at lower rates) but this means extra interest payments go to lenders. Less money left in NZ for spending, investment and consumption.
Inflation acts as a natural counter to the expansion of money supply when interest rates and lending are too high. But this was artificially restricted in New Zealand.
The constant increases in interest rates whenever our exporting economy peaked over the parapet delivered a double blow to our industries of higher interest rates than competitors and a higher dollar as lenders bought NZ currency. It was also a bonanza for currency speculators such as J Key.
A Keynesian would have done almost the opposite.
“Whether Keynes has any influence on the Government does not matter.” – why bring up the subject then?
“The countries that followed Keynsian policies have done better- with higher deficits.” they haven’t done that well and these deficits have to be reigned in. Keysian economics in the form of Gordon Brown has destroyed the UK, can’t blame the banks or the American’s for the mess he created. Before comments about the cuts the coalition are making, bare in mind the cuts Brown & co announced, the coalition are simply implementing NuLabours cuts.