Adrian Orr – The Reserve Bank’s Revolutionary Governor?
I’M BEGINNING to suspect that Reserve Bank Governor, Adrian Orr, is, at heart, a revolutionary. The decision of the Reserve Bank of New Zealand to nearly double the “Big Four” Australian banks capital requirements – from 10.5 to 18 percent – has deeply shocked financial communities on both sides of the Tasman. What Orr has triggered in the minds of the Australian bankers is a truly fateful question: “At what point does our involvement in the New Zealand finance sector become unprofitable?” It’s a question fraught with potentially revolutionary implications for New Zealand’s economic sovereignty.
The reaction from the Right confirms the boldness of Orr’s move. The consensus among those opposed to the Reserve Banks’s decision is that it will make it harder for the Australians to perform to their shareholders’ expectations. In other words, Orr stands accused of reducing the Australian banks’ profitability. New Zealanders are being warned that they will have to endure higher interest rates on their borrowing, and lower rates for their savings, as a consequence of Orr’s actions. National’s Finance Spokesperson, Paul Goldsmith, is predicting a substantial hit to the country’s growth prospects:
“The two primary effects of today’s decision will be higher borrowing costs than would otherwise have been the case and businesses and farmers will find it harder to access the funds they need to grow.”
The NZ Initiative (the successor organisation to the dark knights of Business Roundtable) echoes Goldsmith’s fear:
“The RBNZ’s decision to increase the capital banks are required to hold will have adverse effects for borrowers and the wider economy. The effects are likely to be felt most acutely by high loan-to-value borrowers, the rural sector and small-to-medium-sized enterprises.”
Exposed in these statements, however, is a reality which both authors would undoubtedly prefer to keep hidden from New Zealanders. Namely, the degree to which we have become slaves to the financial power of Australia. Not only that, but how little – if anything – our ruling class is prepared to do to defend (let alone rebuild) New Zealand’s economic sovereignty.
A party calling itself “National” might have been expected to applaud the Reserve Bank Governor’s decision to protect New Zealand depositors from the worst effects of a catastrophic financial collapse. Instead, we have its finance spokesperson chiding the Bank for daring to twist the Kangaroo’s tail. Meanwhile, the front organisation for the country’s biggest capitalists mutters darkly about the need to curb the Reserve Bank’s powers.
It bears recalling that the “independence” of the Reserve Bank Governor was for decades held up by these same neoliberal capitalists as the most compelling justification for passing the Reserve Bank Act. Interesting, is it not, how the ruling class’s support for the Bank’s independence lasted no longer than its Governor’s first attempt to regulate (albeit modesty) the behaviour of Australasian capital?
For those few adherents of “democratic socialism” (still the official ideology of the NZ Labour Party BTW) who continue to soldier-on, however, the reaction of big capital is extremely instructive. It points the way to how the Australian banks might one day be “persuaded” to relinquish their dominant position in New Zealand.
Way back in the early-1990s, when Jim Anderton’s Alliance was considerably more popular than the Labour Party, I remember being contacted by one of the Alliance’s policy activists with an intriguing question. He wanted to know, in practical terms, how one might go about re-nationalising privatised public enterprises without the legally required compensation payments bankrupting the nation.
Whew! That was a poser! Where to begin? Why not with a country that had already confronted and solved the problem? How did the largest surviving communist state – the People’s Republic of China – deal with/to the private sector? The answer proved to be both remarkably shrewd and surprisingly simple.
What the new communist government of China did, in the early 1950s, was to pass a law requiring all existing capitalist businesses above a certain size to make the Chinese state a 25 percent shareholder in the enterprise. Naturally, such a large shareholding would also entitle the state to be represented on the enterprise’s board of directors. As the years passed and the new regime consolidated itself, the legislation was amended constantly. Year by year, the state’s shareholding in the enterprise was increased – along with the number of its directors.
Unsurprisingly, the value of these enterprises’ shares plummeted. Seeing which way the wind was blowing, all those Chinese capitalists with a lick of sense offered-up their business’s remaining shares to the state. The latter generously agreed to take these off their hands – albeit for a handful of cents on the dollar. In this way, China’s largest capitalist enterprises were legally, peacefully – and cheaply – acquired by the state. As an added bonus, most of the by-now-former capitalists took what was left of their money and ran – to Taiwan, Singapore and the United States.
So, that was how you did it. By deploying the state’s legislative and administrative powers against the entrenched economic power of private enterprise. Far from sending in the revolutionary guards to seize, in the name of the people – and without compensation – the banks, insurance companies, department stores and factories, a democratic-socialist government would send in … its lawyer.
Like the ruthless, clear-eyed hero of the television series McMafia, the state’s representative will patiently explain to the people who used to be in charge, the new rules of the game:
“From now on” he’ll quietly inform the Chairman and his CEO, “your bank will be obliged to meet a capital requirement of 18 percent. In two years’ time that will rise to 25 percent. Three years after that the Reserve Bank’s CR will be 33 percent.”
“But that will ruin us!”, the Chairman and the CEO of the Aussie bank will wail. “We will have nothing to offer our shareholders.”
“With respect to that”, the young, clear-eyed lawyer will respond, with just the flicker of a smile, “the Minister of Finance has authorised me to make you the following offer …”
This is a pretty good illustration of why getting rid of physical money and changing it into digital currencies is a bad idea. The wealthy 1% with the aid of low interest rates will just take it and invest it in other places. Once you break open your piggy bank it loses all security. So completely divorced from the financial economy are the most vulnerable of society and the wealth and income gaps widen as interest rates go down, down, down.
So interest rates must go up as a result of an aggressive takeover of retail banking. That will take a lot of re-education so no one has to go to gulag. What’s at stake is public banking. New Zealand already has a public bank in Kiwi Bank. What public banks are supposed to do is hold private banks to the standards of providing public services that are typical the first services to go in restructures and downsizes. It’s a good way to hold private banks to account and a good way to measure wellbeing.
What the honourable member from Epson, not for Epson, Mr Goldsmith fails to comprehend is that public banks don’t have to make a profit. If a public bank does make a profit it goes back to the government in taxes. If a public bank doesn’t make a profit it’s because it’s able to give loans to people and business a private bank wouldn’t, thus leaving the door open for payday lenders charging 10%-20% interest.
Anything thing is a private bank will give loans for luxury housing because it profitable. But a public bank can also give loans for less profitable low cost housing. because society needs things to run a certain way, and private banks need society to run in other ways. So this is very important for those who voted for Kiwi Bank and important for for those who want a fair shake.
How brilliant , … how incisive.
A peaceful , bloodless way in which to conduct the financial revolution.
It is rather ironic that what I term the ChiNational sell out party” calling itself the ‘National party’ would object ,… seeing as how so many of them have intricate and lucrative yet servile business deals with them… and that the same country they brown nose to was also the country to provide us with the template on how to ‘persuade’ those parasitic foreign financial institutions to relinquish their monopoly’s and their price gouging .
This method doesn’t just include the massive 5 billion profit per year extracted from the New Zealand economy and thus also the stranglehold they hold over for example, housing , loans and interest rates ,… but also could extend into other odious private concerns who have monopolized our basic infrastructural necessities… think power and water for a start…
Think also large tracts of productive lands that were treasonously sold for a song, or airlines, rail networks and the like during the Roger Douglas / Ruth Richardson years…
This indeed, … sounds revolutionary, or more correctly,… counter revolutionary . In favor of the people of NZ, – not for a handful of overseas investors and their local political stooges.
I like it.
What a marvelous development.
Don’t you just love to hear bankers bleat??? I wonder also how many New Zealanders are aware of the law passed by key and co, on haircuts? The O B R stating that if those same aussie banks got themselves in to trouble they could dip in to your accounts to tide them over, as apposed to them carrying deposit insurance???
An article on the subject by Rachel Stewart.
http://www.stuff.co.nz/manawatu-standard/opinion/9988749/OBR-policy-a-scary-bank-secr
Mr Orr has certainly displayed more spark than most of the Labour Caucus.
If, by what looks an increasingly slim chance, the Govt. is reelected, there are ample other opportunities to curtail Capital. Just two being; Refining NZ–Marsden Point could be renationalised and the oil company consortium relegated, and returning power generation and supply to full public ownership.
Reducing fuel and power costs–whats not to like about that for most NZers?
2020 is truly Labour’s year of delivery or they will die in the whole of failure just like alliance/social credit/TOP/United future/ACT and all the others before them.
2020 is Labour’s year to win or loose. – time will tell.
Lose lose lose……
Maybe the good Gub’ner could draft a counter proposal that would slap some serious regulation on the Banking Cartels that would give them a better idea of how to behave themselves in our l’il patch?
I feel the Reserve Bank is merely trying to come up with a soft regulation to show the Au Banks that the RBNZ is still awake enough to apply a little handbrake action. After all, the RBNZ has allowed these insidious B-Worders to completely cut off the first home buyers by requiring massive deposits (15-20%) in cash up front, completely wiping out their Kiwi Saver or any other savings vehicle they have to get on the ever increasing upward extension of the Housing ladder. The public credit window has been closed for years already in NZ. We’ve become the feeding grounds for the Loan Sharks, and Hired Purchasers which doesn’t seem to get much attention or concern from the RBNZ. Nor do the Big Food, Big Oil, Big Electro-cutioner’s, Big Landlorders et al that seem to feel entitled to raise costs at the whim of the market managers on the NYSE /NZX, who send preliminary price hike reports to the RBNZ and the Banks for examination and approvals and give them a head start on forecasting the next quarters profits.
It would be wonderful if the RBNZ was actually doing something to reel the Banks in and force them to comply with fair trading policies in the general public’s interest, other than timidly asking them to up their cash holdings in case their house of cards comes tumbling down.
Please show these Banker’s some teeth, or are we to assume that this issue will go the same way as a CGT, or TPPA-II, or a new Tax Law to help balance the playing field.
If you look in the old NZ Official Yearbooks, the capital requirement was about 33 per cent during the mid-1960s, around the time (1966) that Keith Holyoake invoked the Economic Stabilisation Act to curb housing inflation (nothing like the housing inflation that would happen later, of course). For the point is that as the capital requirement goes down, so the banks find that they can lend more to all sides in the bidding auction, driving up prices and also the mortgage interest repayments and profits offshored. Any downward movement in this number creates windfalls. Paul Goldsmith himself wrote in a book called SERIOUS FUN that “Real money is often made at the point of discontinuities: when seismic shifts occur in the economy, such as from a regulated environment to a deregulated one, or from state enterprise to privatisation. Such conditions provide the opportunity for a few smart entrepreneurs who are in the right place at the right time to prosper extraordinarily.” Except, now, things are going the other way, taking us back to the Holyoake years. Who’s laughing now? (https://aucklanduniversitypress.co.nz/kiwi-keith-a-biography-of-keith-holyoake/)
Oh yes,… they eyed wealthy NZ with greedy , longing eyes and told us it was about çhoices’.
Oh yes, it was about choices alright,… their choice to shaft the NZ public and cause long term infrastructural , social and financial decay for most of us and wild riches for the few of them. Think Roger, Ruth and Jenny. And their mates Fay and Richwhite and the crowd over at the Business Roundtable. Now calling themselves the NZ Initiative.
Think sell offs , shares and privileges made on the backs of generations of tax payers building a New Zealand that in 1969 , was the 6th wealthiest per capita in the world after Denmark.
Then think after 1984 , at one point recently , – being the 32nd globally in the world , – after Mexico. Theres your neo liberalism for you right there.
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“Real money is often made at the point of discontinuities: when seismic shifts occur in the economy, such as from a regulated environment to a deregulated one, or from state enterprise to privatisation. Such conditions provide the opportunity for a few smart entrepreneurs who are in the right place at the right time to prosper extraordinarily.”
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Anyone starting to feel nauseous right about now then ?
You should be.
Dont worry , its a normal reaction , so I hear.
Just watch the Neo-Lib machine come out to play. Chinas restructuring is a grand example to follow. Thanks Chris to enlighten us/me I didn’t know. But do we have to go communist to achieve the same?
But what do “capital requirements mean exactly in this day and age. If you look up NZ banking system on Wikipedia it says we are on a “deposit reserve system” which we were once upon a time. But when this was under discussion in John Key’s time he said that our system was based on the banks being allowed to lend to a limit tied to their capital assets rather than their deposits which is the system the BOE describes as it’s yardstick . Using the term “capital requirements” rather than ” deposit reserve ratio” (which is what would be referred to in old yearbooks Chris Harris) , is consistent with this concept.
And as the vast majority of a bank’s assets if you look up their balance sheets ,are their outstanding loans it seems to make this “restriction” rather meaningless. The more money they have lent the more they are allowed to lend. The move might be more for public perception than any real restrictions on the banks.
And with foreign investor companies falling over themselves to take up the new carbon credit offers by the government to plant trees on farm land, and paying far more for it than a farmer can afford to pay, Is Mr Orr going to impose these restrictions on their countries banks as well? Of course he is not and can not. So what this does is to further greatly disadvantage local enterprise cf. foreign buy up of New Zealand.
D J S
All this percentage relates to is the amount of “real” money the banks must hold on their books as a portion of their total loans. In other words they actually need to borrow it themselves rather than simply making an accounting entry when a loan to a home buyer is created. This is the reason they don’t like it. They now need to pay to borrow that money, just like everyone else has to. Many people do not understand this and think it all comes from bank deposits. This is the real magic money tree. And before the critics describe this as fantasy, the Bank of England has created a useful report on the subject, but also has a quick summary here:
https://www.bankofengland.co.uk/knowledgebank/how-is-money-created
The section on Can banks create as much money as they like? refers to retail bank capital requirements.
A few years ago the IMF contracted two economists to study and determine if there was any restriction at all on the amount of money banks could create. They found that ultimately there was none. It was a while ago and I haven’t got a reference at my fingertips but I’m sure Google would oblige.
D J S
From your link … “Can banks create as much money as they like?
No, they can’t.
Regulation limits how much money banks can create. For example, they have to hold a certain amount of financial resources, called capital, in case people default on their loans. These limits have become stricter since the financial crisis.
Banks also risk going bust if they lend out money left, right and centre. For instance, people borrowing money will probably spend it. If they make payments to people who have accounts at other banks, their bank will need to transfer the money to that other bank by sending it some of its electronic central bank money. So if one bank lends out too much money, at some point it will not have enough electronic money in its account with us to pay the other banks.”
If you follow this and think about it no money except the 3% cash ever leaves the banking system. It just moves from a loan account in one bank to deposit in another. It is never in either client’s hands. This means that to remain secure all the banks have to do is co-operate which they do. If one has lent more than they have received on deposit that day they borrow from each other overnight at a very low rate to keep the book’s straight. If a bank can’t get an overnight loan from other banks they can borrow at a slightly higher but still very low rate from the reserve bank which creates the money on the spot to lend to that bank. I think that in this day and age it is a mistake to think of banks as seperate entities. They work exactly as they would if there was only one bank. And as far as I can see they can’t very well go “bankrupt” (which term did originate from banks going broke) separately . If one goes down they will all go down and it will be because interest rates won’t cover the cost of paying staff.
D J S
This statement: “New Zealanders are being warned that they will have to endure higher interest rates on their borrowing, and lower rates for their savings, as a consequence of Orr’s actions.”
is utter nonsense. To meet those reserve requirements BOTH borrowing and saving interest rates will have to go up. This must happen in order to incentivise people to put their savings in term deposits (or equivalents) as opposed to housing or the stock market. A natural consequence of raising saving rates (to get people to save) is that the lending rates also go up. (Just like right now both saving and borrowing rates are historically very low – the banks make their money on the interest rate spread).
there is kiwi bank ,tsb ,co op bank the local credit unions people need to vote with there feet. we don’t need to use the Aussie banks and with online banking the expensive branch network becomes less important
there is a river of money leaving new Zealand if we use local banks at least the money will stay in the country
imagine how much of the kiwisaver fees are leaving the country as well via the big four banks it easy to turn the tap off
Adrian Orr made a really good decision to increase the capital banks. This decision is indeed revolutionary because his choice was risky to make due to the fact of how the media would respond to it.