On the benefits of public ownership of ports

The productivity commission some months back asked a series of questions relating to Port Ownership and port efficiency.  The Productivity Commission is a stalking horse for the “privatisation” of public assets, their agenda appears to be driven by Dogma, it is most improbable that true efficiency even comes to the hindmost parts of their consciousness when contemplating these matters.  The questions raised by the Productivity Commission speak for themselves.  As I hope do my responses to them.

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Q1   Are there important issues that may be overlooked as a result of adopting an economic efficiency perspective for this inquiry?

1.        Ports are “enabling” infrastructure, their existence allows other economic activities to occur.  The whole of system effect needs to be considered when considering the “economic efficiency” of current services.  A simple example of this for is that without a port with log handling facilities and without a log service whole log exports are uneconomic within quite a short haul from a port.  Rail or road transport to another port do not appear to be viable economic options.  The profitability of the log export market to the regional economy, with a port and bulk log carrier services, is probably more significant than the profit on the port yet without a port this sector of the economy is rendered unprofitable.

2.        Ports are public infrastructure.  In the short term Ports can be run as stand alone enterprises with profit as the primary motivation for the business activity but in the long term the business is there to facilitate regional trade in the same manner that the road network does, not to make a profit.  There are times when Port investment needs to consider the “whole of economy” value ahead of profitability, and overall regional economic performance needs always to be paramount.  The original investment in developing  most of the Port Infrastructure only occurred because they were constituted as local authorities and could invest community money.  On pure direct economic returns the investment in the creation of port facilities would unlikely ever have been viable, but the overall value to the economy of the investment in port infrastructure and of the wide variety of businesses that are now facilitated by that investment has made it more then a sound investment, in each community the Port is an essential element.

3.        Ports and airports removed from community control also lend themselves to “gate keeper” or “highway robber” roles in the economy.  They provide the owner control of an essential monopoly with the power to tax the economy dependent on the services of the Port.   This highway robber effect is evident with Auckland Airport. 

Q2   Is the framework described in Section 3.2 appropriate for this inquiry and are there any important issues that might be missed?

1.        The most important issue missing in this is that “economic efficiency” is not the primary determinant of a viable economy. Infrastructure services have a “whole of economy” effect that unlock potential or enable activity. Most of these services are not necessarily possible to provide profitably while also maximising the economic potential of the region, some of these services even provided at least cost do not realise the full potential in the economy.  

2.        The consideration of third party costs is missing.  Much “economic efficiency” in the narrow “Neo Classical” sense is actually a transfer of costs or a loss of economic opportunity onto a third party dependent on a service.  The cost reduction provides a saving to the “efficient” infrastructure provider but a cost to the infrastructure user.  That is why infrastructure is publicly owned, it is cheaper to aggregate costs to minimise them through collective or public monopoly enterprise than it is to undertake them individually.  Road networks are a classic example; telecommunications are another that should be.

3.        It is possible to maximise the economic efficiency of all of the individual components of the economy in isolation from one another while at the same time reducing the scale or capacity of the whole system.  New Zealand suffers badly from a lack of realised potential through an inadequate investment in infrastructure and through over pricing.   This is primarily because the narrowest of economic efficiency measures are applied to these infrastructures where privately owned with investment decisions and because existing infrastructures are increasingly being run for profit rather than for realising the fullest economic potential from the broader economy.

4.        New Zealand also suffers from a lack of strategic control over its supply lines.  The whole concept of dependency on the investment whims of third party maritime freight service providers for the provision of the most profoundly essential service to our trade dependent economy seems unsound to put it mildly.  We are price takers in everything we do.  The country needs to break out of that mind set.

5.        In most rural parts of New Zealand the community holds public ownership of these assets in very high regard.  The strong ethic of community ownership recognises the significant indirect economic values that this report fails to recognise.  Ports were built using community money, the fact that community ownership is not as coherently represented in the market as private investment is, does not mean that it holds any lesser rights.  Council also owns its share as a majority holding in a publicly listed entity.

Q3   Which components and component interfaces warrant greater attention? What is the evidence that they are inefficient? What contribution could changes make to an improvement in the overall efficiency of the freight system?

1.     Nationally we need a vision that identifies the potentials within the economy and how these might be realised.  Particularly the cross linkages and displacements

2.     There is no future proofing, no conceptualisation of trends and drivers for change in the manner in which the economy will function in the face of fuel cost increases and changes in technologies and changes in market place dynamics.

Q4   What environmental considerations should fall within the scope of this inquiry? What issues are of particular importance?

1.     The cost of fuel and the introduction of a carbon cost is going to enhance the value of coastal shipping as the most fuel efficient form of bulk transport.

 Q5  To what extent is there effective competition for customers between New Zealand ports? Has this led to lower prices and incentives for productivity improvements?

1.        The small ports and national rail freight capacity do seem to be used by the major customers of the country’s ports to effectively develop competitive freight arrangements.  However non-freight cost components do seem to play a significant role in port users’ freight decisions.  Particularly space for port related facilities such warehousing and bulk storage and regional business opportunities seem to drive port freight flows.  The report does not seem to contemplate “whole of journey” costs. 

2.        Most major commercial relationships relating to port activity appear to be negotiated by parties with reasonably equal market power and that would indicate that the outcomes are likely to be fair and competitive.  The service decisions of the individual shipping companies seem to have a far greater influence on service levels and costs than the cost of port operations.

Q’s 6 – 12 Relating to Port productivity

1.        Most of the measures of port productivity are spurious for the greater proportion of NZ’s ports.  Many NZ ports are still based on infrastructure that was built prior to containerisation.  Substantial parts of the asset base are either fully depreciated or have a minimal residual or salvage value.  Most of the smaller ports have less sophisticated freight handling capacities but also have lesser overheads and most have intermittent services than these being mentioned in the benchmarking measures.

2.        Profitability is also a misleading measure.  The residual value or current value of port company assets is unlikely to bear any resemblance to their replacement value.  The key measure is the level of service provided to the regional economy.  A satisfaction survey would be the most effective means of achieving this.

Q 14 Does New Zealand have too many ports for a small country? If so, what barriers are inhibiting rationalisation?

1.        Given that each port appears to be economically viable the answer is clearly no.  The existing port assets are “stranded”, even if fully depreciated and run at a minimum of reinvestment they are clearly providing sufficient operating surplus to justify their existence.  The fact that ships still visit and freight still passes through them and given that there is no constraint on road or rail freight to other ports and that there is a clear cost advantage in the existing coastal freight network indicates quite clearly that we do not have too many ports. 

2.        If there were too many ports freight forwarders and shipping services would sort that out rapidly as there would be cost savings in freight aggregation at fewer larger ports.  If anything the smaller ports are keeping the bigger ones honest.  It is also important in this discussion to remember that a number of regional industries are port dependent. 

3.        The removal of elements of the coastal trade from a port may only result in higher overheads for the residual industry dependent port activity. If Bluff was only operating to service Tiwai and the fishing fleet it would still need nearly the same operating assets as it does with container and break bulk trade.  It would still need channel maintenance, pilots, tugs and an administration but it would have less than half the vessel berthings to carry the over head.

Q15     Has local-authority ownership of majority stakes in New Zealand’s commercial ports inhibited, enhanced or been neutral for the development of a more efficient and productive port sector?

1.        Most Ports are run on a day to day basis, on a commercial model at arms length from their local government owners.  An independent Board of Directors is likely to be the most important aspect of governance and ownership.

2.        Local government as owner is important for the same reason as the local government ownership of roads is important.  There is a greater strategic purpose to ownership that warrants for public ownership of the asset.  This does not mean that substantial elements of the commercial function of a Port cannot be conducted by private enterprise either as owner or contractor but ownership and determination of levels of service needs to be determined by the community for the community’s greater interest.  The asset also needs to be administered in a way that maximises the hole of community benefit from the infrastructure.

Q16     What changes in governance, regulations or ownership would offer the best means to improve port performance for exporters and importers?

1.        Elected members and staff of the owning authority need to be excluded from membership of the board of the port operating company.  Port companies need professional boards otherwise there do not appear to be any significant issue around port ownership other than that there needs to be regional infrastructure plans that tie port investment into long term strategic objectives for regional infrastructure.

Q 29    The objective of a port company under the Port Companies Act is to ‘operate as a successful business’. Should airport companies owned by local authorities have the same single objective rather than the multiple objectives specified in the Local Government Act?

1.        The concept of these infrastructures as strategic asset is as valid as it ever was.  Airports function as significant community gateways and air services have a much greater import to the community they serve than the direct value to the airline operator.  Air services are essential to business viability in provincial New Zealand and to the entire domestic and international tourism industry.   Airports are the entry point to the regional and national economy.  The most “commercial” of the nation’s airports do not operate for the benefit of the broader economy and exercise significant gate-keeper power and act as revenue collectors rather than service providers.

s5 Interpretation Local Government Act 2002

Strategic asset, in relation to the assets held by a local authority, means an asset or group of assets that the local authority needs to retain if the local authority is to maintain the local authority's capacity to achieve or promote any outcome that the local authority determines to be important to the current or future well-being of the community; and includes—

(a)     any asset or group of assets listed in accordance with section 90(2) by the local authority; and

(b)    any land or building owned by the local authority and required to maintain the local authority's capacity to provide affordable housing as part of its social policy; and

(c)     any equity securities held by the local authority in—

(i) a port company within the meaning of the Port Companies Act 1988:

(ii) an airport company within the meaning of the Airport Authorities Act 1966

Q31 Should the future size and shape of New Zealand air freight services be left to market forces and individual airport owners, or do lumpiness and interdependence (including with investments in connecting parts of the overall supply chain) call for a more deliberately coordinated approach?

1.        Certainty of freight service is essential to investment in export-based industries.  Airfreight-dependent Horticulture and manufacturing in particular needs to be assured of certainty of access to export markets for years into the future before an investment decision can be made.  Some services may also be seasonal.  International freight via regional centres, a number of which are international flight capable or could be made so with a modest investment would create opportunities for much higher value crops to be grown on land that traditionally the highest value use has been pastoral agriculture or dairying.

Q57 Should decisions on investments in ports and in the associated infrastructure links to ports be left to the judgements of the individual suppliers of the separate components? Or would some sort of overall strategic plan provide useful guidance and some assurance that complementary investments will happen?

1.        Strategic infrastructure planning is essential.  This should be conducted at both regional and national levels and be integrated across all infrastructures.

Q58     What is the scope for greater consolidation of ports, greater vertical integration of ports with domestic transport operators, or more use of long-term agreements between shippers and port companies, as possible means to overcome coordination problems and achieve more efficient international supply chains?

1.        At a national level it may be of benefit to negotiate multi year shipping service agreements however these could interfere with existing good working relationships between port companies and shipping lines and exporters.   These could disappear with little reference to the regional economic impact of their loss.  This lack of self determination as to levels of services is a root cause problem.

2.        If hub ports are to be used it is probably more logical to use existing hubs in Australia or Asia as tends to happen anyway.

Q64     Are import and export opportunities excluded or constrained by the lack of access to international freight transport services? Are there changes in institutions, policies or regulations that could lead to better outcomes?

1.        The lack of reliable airfreight particularly between the regional airports and markets in the eastern seaboard of Australia is considered to be preventing or limiting the development of horticulture.  This is an example of the enabling potential of infrastructure.  Without a reliable airfreight service from the South to potential markets the horticulture industry cannot develop and there will not be a freight service while there is no industry.  A very substantial potential for export of high yielding crops is left unrealised because there is no mechanism for establishing the freight links necessary for growers to establish businesses. 

2.        This is the classic infrastructure issue; without the necessary infrastructure there can be no businesses and without the businesses there is no demand for the infrastructure.  This is where political leadership, public investment and strategic vision come into play.  It is these components that seem to be missing from the picture.  Efficiency isn’t the problem it is the lack of strategic leadership and strategic investment that are the problem.

Q68     Are import and export opportunities excluded or constrained by the lack of access to international freight transport services? Are there changes in institutions, policies or regulations that could lead to better outcomes?

1.        A number of export activities are dependent on specific freight services being available regionally.  Bulk log exports are a simple example.  A broader issue is the unrealised potentials issues that come from there being no regional airfreight and the effects that has on the horticultural potential of the region.  The only way this could be realised is for a government funded development strategy with guarantees of freight services being established. The market left unaided would not initiate this. Certainty of access to international markets is not possible under the present arrangements.

Q74     What factors would favour the choice of decentralised vs. centralised strategic planning?

1.     Integrated infrastructure plans are required at both regional and national levels.  The regional level is the primary level for integrated “whole of economy” planning.

Q78 Has this issues paper covered the key issues? What other questions need to be asked?

1.     The paper has failed to consider the whole of economy value and the whole of economy function of freight infrastructure focussing instead on the narrowest measure of value.

Q79     What are the most important issues for the Commission to focus on to achieve the greatest improvements in the efficiency and productivity of New Zealand’s international freight transport services?

§   Invest in freight infrastructure for its whole of economy value

§   Freight infrastructure must be publicly owned at least at the extent of the serviced community determining service levels.

§   Plan for freight infrastructure as a set or system of interrelated economic functions at both the regional national level.

More on Muldoon

It is my understanding that it was a deliberate strategy.   Muldoon came from hard times, he understood scarcity.  Muldoon also had a strong social conscience, he was obsessed by full employment.  When the financial crisis of the early eighties arrived he set up the PEP work program which again while it had its flaws it did wonders ( I ran a large one as a part of some other things I was doing) - these schemes got ruined by the unions in the end - but for a while it soaked up unemployment and crime disappeared in our area as everyone turned up for work- not always the most meaningful work - but it occupied people when times were tough.

The real fallout from Muldoon is the opening he gave Roger Douglas to destroy so much that was good about out public service and our society.  Again there was no doubt that much needed reformed about the public service but  Roger didn't reform he destroyed.  Muldoon saw the need for social justice Roger just saw that as economic inefficiency.  Our society since Roger destroyed the old moral order has since resulted in one after another of our leading economic institutions acting in ways that were nothing short of blatantly dishonest.

It is to the point where now we trust none of them.  That is why all the "capital markets"want to buy public infrastructures, they are guaranteed secure returns on assets that can't evaporate.  There is nothing else that can be trusted, the share-market is just an unregulated casino, the property market has flared and died,  investment banking has tanked taking $Billions with it.  Entrepreneurship has been severely eroded by the blatant untrustworthiness of the instruments of the marketplace. Those within society who have less power and advantage see their institutions acting with impunity and with a complete lack of morality and think well why should I be any better.

But I digress, the main intent of my commentary on Muldoon was the need for a strategic plan and for leadership from those who we elect to represent us.  For the past three decades we have been coasting pretty much on what was done in those days while our leadership has succumbed to pettiness and dog-whistling.  Nothing much has been built in Auckland in the way of major infrastructure that wasn't started by the old Ministry of Works Town Planning group.  Even Transmission Gully was drawn up in the 1980's.  The point I was making was that we haven't had a leader (for all his warts) since Muldoon.

Governments have a key role as strategic planners, markets can't plan. While much negative stuff is said about China the reality is that China has a plan that is working and we don't.  John Key's three big ideas so far are to build $50 Million of cycle trails to nowhere, the rugby world cup and asset sales.  This is the agenda of someone with no idea and not the vaguest concept of a plan - other than to sell everything.

When Muldoon was in power China was in the throes of the cultural revolution.  Then we used to look at China with disdain or at least mild bemusement.  Thirty years later China is on the way to owning us as we are in the process of becoming serfs in our own country with John enthusiastically selling us into serfdom.

Meanwhile we live in the most well endowed country on the globe in terms of natural capital per capita, much of that we don't value, lots we don't care about and the rest we don't use very efficiently.  People who don't value and care for their resource base, or who don't understand its true value, are on on the pathway to extinction.  The Maori experience is a classic example of that circumstance.  When the European arrived they saw a vast unexploited resource while the Maori were living at the upper limit of what their technologies allowed.  Quite a number of early Maori were rapid adopters of European Technology but many just used it to settle old scores and sold their assets to acquire guns to deal to old adversaries.  Infighting takes much less vision and leadership than adapting.   They to also had the problem of their leaders taking the guns and blankets and leaving the broader populace to their fate just when times were changing.  We are at a similar epochal horizon and we are stuck with leaders with no vision and no courage.

Even with their rapid adoption of the new way of doing things the Maori didn't adapt fast enough and they were divided while confronted with a common threat. They didn't see what was coming until it had arrived and was overwhelming.  They were confronted with a new moral and philosophical order they did not understand.  We are at a similar point in our history.  We are confronted by the challenges of demographics, energy scarcity, global power shifts and the radical changes that advances in computing are presently and increasingly will unleash upon society and the economy.  Much of what we do now we will not be doing in twenty years time or even ten.

Last week I finished uploading my entire CD collection, today I put them into a large trunk to put under the house.  I will never need to play them again.  It is unlikely that I will ever buy another one, it is far easier to do it on iTunes.  That is a metaphor for what is ahead of - as both threat and opportunity.  It didn't seem so long ago that CD's were a wonder that would be with us for a very long time, and now they are very nearly unnecessary.

In ten years time what will our universities look like, in twenty our hospitals.  One good academic can already teach to millions.  Surgery will be performed by robotics, diagnosis will take place on a microchip.  These technologies are here already but they aren't yet ubiquitous, they very soon will be.  manufacturing wil rapidly change as well.  The logic of vast industrial enterprise and of equally vast cities is likely to be turned on its head.

Meanwhile we have vast billions of people wanting to live the way we do but we do not live on a planet that will allow that. We have a labour force of billions just when it suddenly seems that they may be unnecessary.  How will that pan out?

Last time something like this happened, old Mother England put them all on ships and unleashed their labour surplus on an unsuspecting primitive world.

We the descendants of those who were unleashed have arrived at the end of that epoch and we have no leaders and we have no plan.

Muldoon Vindicated

Muldoon’s Think Big Projects are still vilified as all that is wrong with government getting involved in Commerce.  Muldoon spent a fortune (in those days) on a wide range of projects that were intended to make the country energy self-sufficient.   The process was not always well considered and it was hugely inflationary, though that was also caused by more than Think Big.  Much of what was wring with Think Big was more a failure of execution than of logic as Muldoon did unfortunately have the habit of surrounding himself with some of the worst stooges in politics.

Muldoon foresaw the need for this country to address the scarcity of energy that a growing world population and shrinking resource base would create.  He was reinforced in those views by the oil price shocks of the 1970’s.  These shocks arose from the occurrence of the oil production peak in America.  It was then that America lost control of the global price of oil.  When this happened the oil rich middle-eastern countries decided to get the real value of their product out of the market place. There were lots of political reasons as well but it wasn’t until America became an oil importer in 1970 that OPEC had the power to affect the US domestic oil price.

Muldoon initiated hydrocarbon exploration in Taranaki.  He drove investment in hydroelectricity, thermal power stations and reticulated gas networks.  He pushed for the electrification of the North Island Railway.  He also drove the conversion of a large part of the vehicle fleet to run on compressed or liquefied natural gas. 

What neither Muldoon nor the Oil Sheiks expected was the American response.  This was to install puppet regimes in places that allowed the oil companies open access to much of the world’s oil.  And also the Alaskan and North Sea finds.  This allowed America to eventually get the price back from US$40+ per barrel to below US$20.

Oil Price 1861 2010 Source EIA

That stuffed Muldoon’s calculations completely.  He had done his sums on the price staying high.  Instead we had a thirty-year glut of cheap oil.  All his projects looked like white elephants or worse – a vast drain on the economy.

But Muldoon wasn’t wrong, just that his timing was bad.  In hindsight he wasn’t even that wrong with his timing as nearly everything he caused to be built has contributed hugely to the economy over that period.  The real problem was that no one understood the true value of what he had built until now, when the cost of energy is being priced closer to its real value to society.

Now the time has come when the true farsightedness of his investment decisions are becoming evident.  This paper released this week by the International Monetary Fund puts it quite succinctly (for a paper of this sort) in the introduction to the paper.

The Future of Oil: Geology versus Technology IMF Working paper 12/109

We discuss and reconcile two diametrically opposed views concerning the future of world oil production and prices. The geological view expects that physical constraints will dominate the future evolution of oil output and prices. It is supported by the fact that world oil production has plateaued since 2005 despite historically high prices, and that spare capacity has been near historic lows. The technological view of oil expects that higher oil prices must eventually have a decisive effect on oil output, by encouraging technological solutions. It is supported by the fact that high prices have, since 2003, led to upward revisions in production forecasts based on a purely geological view. We present a nonlinear econometric model of the world oil market that encompasses both views. The model performs far better than existing empirical models in forecasting oil prices and oil output out of sample. Its point forecast is for a near doubling of the real price of oil over the coming decade. 


http://www.imf.org/external/pubs/cat/longres.aspx?sk=25884

The point this paper makes is that regardless of price, oil is getting harder to find and more expensive to extract. This simple fact is made more complicated by billions more people expecting to have an oil-supported lifestyle. 

Here in NZ the problem is compounded by the fact that we are also getting poorer relative to those who want to buy oil.

The simple fact is that if we don’t have energy we don’t have a modern economy.  Muldoon saw that.  He also saw that renewables such as hydro-power were an investment that produced what is in effect a perpetuity.  The value of the output only grows with time while the historical cost diminishes.  Unfortunately accountants and economists apply discount rates to perpetuities that emphasizes the short-term cost and undervalue the long-term benefits.  The same narrow view overlooks the fact that society and the economy that feeds it needs energy and the availability of energy to the economy has a value far greater than its market price.

And as for leadership, name one prime minister since Muldoon that has left a legacy that would be particularly missed as much as the assets built during the Think Big era.  There are none.  Indeed in most cases the loss of their legacy would be an improvement.

As with much of human endeavour there was plenty that was wrong about Muldoon and his reign but there were some things he did that we should be forever grateful for.  As with all things we should look at this time when government did serious visionary stuff and wonder why we are now so supine infront of a government who's only strategy is to sell us to the highest bidder.

Interestingly enough most of what they are now selling as so valuable an investment are the very Think Big assets that Muldoon has so long been ridiculed for.


How quickly we forget the inconvenient bits.

Roger’s legacy – the fallacy of economic efficiencies under a neoliberal regime

In the 1980’s Roger Douglas in his foolish belief in the righteousness and efficiency of the market place laid waste to the public service.  He sold of all sorts of public assets and functions of the State often at fire sale prices and sometimes with the most dubious of procedural integrity.  What he also sold was the power for government to act as agent for the nation.  

In the good (relatively!) old days before Roger a Minister got things done by  allocating a budget and directing the relevant Head of Department or Ministry to get on with the job.  Now this wasn’t perfect but that is a foible of democracy.  Roger didn’t change the quality of the governance he only changed the manner in which they can take action.  Unfortunately for the worse.

Much of the advice Roger listened to came from lawyers and accountants and partners in the big consultancies.  These people are not known for their altruism.  What these people want is more business for themselves.  They of course told Roger that they could do it better than some boring old public servant on a tenth of a consultants pay.  Roger being a dogmatist and not a thinker took to this as THE ANSWER.  So we got a country run by economists and bankers and accountants and lawyers in place of public servants.  Now if you want to get an accountant or a lawyer to do your bidding you have to write laws and regulations and pay big bills.  You can no longer just get on the phone and give orders to your lowly paid and subservient bureaucrat.

So Parliament started writing laws to get done what once was done with a few phone calls and the honest hard work of a dedicated public service (not always but mostly) with the results being obvious in the graph below.

This figure illustrates the growth in Volume of legislation (Acts and Amending Acts) on the NZ Statute Book by year of enactment from p23 Improving Public Access to Legislation PriceWaterhouseCooper for the Parliamentary Counsel Office 1999

And so everything became expensive and complicated and hard to do.

As the graph shows law making went exponential with Roger’s reforms.  Where before the reforms parliament was busy if it passed 15 new pieces of legislation a year quite quickly it was passing 150.

And while parliament was busy passing all this legislation it stopped doing anything else.  It lost any vestige of strategic view it had and instead become bogged down in a vast complexity of select committees and parliamentary debates.

The accountants and lawyers and consultants loved it.  Every new law bought more work for these parasitic elements of the economy.  And so we became a country bogged down in a vast complexity of vested interests playing with legislation.

But for all of this legislation and for all of the expensive minds working in the system we now get less done than we ever did before the reforms and nothing got cheaper or more efficient.

Even dear old Bill English lamented recently that the non-productive part of the private sector share of the economy (lawyers, accountants, bankers and consultants) was growing far faster than any other sector of the economy.

This legislative binge has also bred a whole new public service that is about writing and interpreting rules and managing information rather than doing anything useful.

In hindsight Rob Muldoon might not have been so bad.  At least he got things done.  But more about that in another post.    

The Reserve Bank Act

Or why we are broke.

The Reserve Bank Act defies the most basic logic in economics - the law of supply and demand.  It is also most profoundly contradictory that the most essential component of the market, the price of debt has to be determined by regulatory fiat – surely the market should be able to sort that out.

At a conceptual level the Reserve Bank Act and the mediaeval practice of bloodletting have the same basic premise, that draining the essential life fluids from the fevered body will make the patient well.    All it achieves is to weaken the body further.  Deathly pallor is mistaken for a fever cured.

The most basic failure is that when some element of the economy is over-heating the cost of debt is increased indiscriminately draining economic energy from the innocent and the guilty.  The RBA slows the economy by transferring wealth from the productive sector of the economy to the banking sector.

Unfortunately it drains money from the productive sector and from households far more effectively than it drains money from the speculative sector.  The speculative sector of the economy is driven by higher returns and higher risk and often the risk is displaced onto the lender through default when things go wrong.  The mortgaged businessman or householder cannot escape so easily.

Fundamentally the Governor of the Reserve Bank raises the cost of borrowing to reduce demand for new debt to reduce inflationary pressure in the economy.  This is perverse for while it is targeted at reducing the creation of additional debt it also punishes those who already are in debt.  The indebted cannot immediately reduce their indebtedness so must pay the imposed cost of borrowing.  Their demand for debt is highly inelastic. 

This is where the true perversity of the Reserve Bank becomes apparent.  At the same time that the Governor increases the cost of debt to existing and new borrowers he also increases the rewards to lenders.  It is at this point that the basic illogicality of the Reserve Bank Act becomes clearly apparent, the Reserve Bank Act incentivizes the introduction of additional debt into the economy. 

The higher interest rates draw in new lenders with a higher resistance to risk, along with the careless and the greedy.  These new lenders draw in their equivalents among the borrowers.  So putting the price of money up makes the problem much worse by increasing the riskiness of all debt funded activity.  It also drains resources from productive activity by increasing the cost of debt while fuelling speculative activity by increasing the supply of less risk averse lending.  The past decade is testimony to that.

A deeper fact is that this whole artifice is a substitute for the fact that the government has relinquished its right to issue currency to the banks and uses the Reserve Bank Act to moderate the rate at which the banks create it.  This doesn’t work. 

The foreign banks have also abused the process to inflate parts of our economy, principally property and shares, so that they can push more debt into our economy and in doing so expropriate our Nation’s wealth creating ability.  We have been stupid enough to think that this is a good thing.  

The difference between the overnight cash rate in Australia and New Zealand over the past decade meant that Banks could borrow in Australia at a low interest rate and lend in New Zealand at a higher rate.  They would be stupid not to.  We are stupid to encourage them to.

In the past several decades it has only been a limited range of economic activity that has been inflationary.  To illustrate this, the decade 2000 to 2010 saw property values treble yet government figures indicated that the Consumer Price Index was never above 3%.  So interest rates stayed relatively low while the returns on speculative investment soared.  The real rate of interest on debt against property was in the order of -10% annually.  This meant that anyone with a mortgage was getting 10% growth in asset value after the cost of debt.  Everyone else was paying interest at about 2-3% more than the underlying economic activity warranted.

We are now in a position as a result of the Reserve Bank Act that the entire gross export earnings of the dairy industry is consumed by paying the interest on all of the debt this country has accumulated over the past two decades.  


And we wonder why we are selling our land and our national assets to ;pay the bills.  It is because we are governed by the stupid and the greedy and the doctrinaire.

The Answer is simple

The simple fact is that if the Governor wants to increase the cost of money but not increase the price of money then the Governor should be able to impose a tax on borrowing.  If the governor wants interest rates to provide a 4% return to the lender but impose a 6% cost to the borrower to dampen both supply and demand for debt then the only logical way to do it is to impose a tax equivalent to an annual interest of 2% to establish the difference between price and cost.

That resulting tax income could be put to all sorts of good uses within the economy and it would achieve exactly what the government intends to achieve.

To be really subtle the tax would need to be variable according to the target sector of the economy.  This might sound complex but it isn’t.  Banks achieve this level of differentiation simply through the nature of the security against which the loan is raised.

But again it is not that simple.  


It is not that simple because the Reserve Bank Act is not the only fundamental flaw in our monetary and fiscal world.  But more on that some other time!

Subsidising “capital markets” through asset sales

Investment banker Rob Cameron a key player in the lead-up to the Government's decision to float stakes in State enterprises says the attempts to sell that to the public have been a disaster. Radio NZ

These “assets” aren’t assets they are essential services.  They are fundamental to the growth and dynamism of the economy.  They are owned by the public for good reason and that good reason is that they are monopoly services that need to be run as a single system for the benefit of the whole economy.   These essential services exist to provide the whole economy with electricity.  They do not exist to subsidise or to provide secure shelter for private capital.  If they are to be run to maximise returns to shareholders they will not be run to maximise the benefit to the whole economy.

Mr Cameron says the taskforce recommended the sales as a means to boost the sharemarket to the benefit of investors and capital-starved businesses. 

This comment proves how duplicitous Mr. Cameron truly is (or how plain bloody stupid).  If he was a really clever banker this should not be a problem.  How can “capital starved” businesses gain access to more capital through the government absorbing multiple billions of this apparently scarce capital so that it can spend it on activities that should be funded through taxation.  

How will the economy grow when it is parasitised by "bankers" like Mr Cameron?

And led by Bankers such as Mr Key.

Mr Cameron is only trying to by seek a subsidy on his investment activity.  If he was a real investment banker he would be looking for real investments in productive enterprises.

This man is self-serving.  It is people like him who have taken us to the bottom of the OECD, to being among the most indebted countries in the world.