Joe Hendren

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Monday, June 11, 2007

Bollard sells the bucks

Very pleased to hear the news tonight that our Reserve Bank has intervened in the currency market.

In order to prevent the speculators pushing the New Zealand dollar up to stupid levels, the Reserve Bank sold around 1.5 billion of the Kiwi, causing the dollar to fall from a post float high of US76.20c, back to US75.25c.

Even if the fall in the dollar is temporary, the exercise was totally worth it, as the currency speculators have been given a lesson that the New Zealand dollar can drop. The recent rise in the Official Cash Rate (OCR) to 8% created a situation that the late Bruce Jesson called a "one way bet". Speculators could buy Kiwi with almost certain expectation the value of the Kiwi would rise. This situation may be great for the bank balances of the speculators, but it is bad for the New Zealand economy, particularly for manufacturing.

National leader John Key used to be a currency trader.

Those who make a living from sucking the life out of other lifeforms are generally called leeches.

It is likely that Reserve Bank Governor Alan Bolland is expecting to increase the OCR again in a few months time, and he wants to discourage overseas currency traders from profiteering from his decisions.

Fairfax Media are claiming this is the first time in 20 years the Reserve Bank has intervened in the currency market in this way. About time. Some would say the action taken today by the Reserve Bank today is long overdue. It is a very small step towards regaining democratic control over our economy.

Update: Oliver has a good post on Bollard's action on Quest for Security.

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At 12:11 pm, Blogger Oliver Woods said...

Good to see there are others who strongly support the Reserve Bank's actions! Now just to bring it back under direct Goverment control...

At 2:53 pm, Blogger Rich said...

You think we should have a fixed currency rate?

Zimbabwe has that. The official rate is something like Zim$ 250 to the US. The black market rate is about 50,000 to the US. Needless to say all currency trading takes place on the black market and wealthy people do most of their transactions in US dollars.

Ok, so that's an extreme case but even if the official rate isn't that much out of alignment to true value, you will still get periodic currency crises.

I think it's much better to sort out the fundamentals. We need a range of capital taxes to burst the housing bubble and allow interest rates to be brought down, thus allowing the dollar to stabilise.

At 9:34 pm, Blogger Joe Hendren said...

Hi Oliver,

I quite agree about bringing the Reserve Bank under government control. But in the post above I wanted to congratulate Bollard for taking the step that he has, and if I turned this into an argument about the so called independence of the bank the post would have been quite different.

The whole notion of the Reserve Bank being independent is a myth. The only independence it possesses is independence from democracy, while those with the big dollars, such as the currency speculators are able to control the economy. There has even been occasions where currency speculators have blackmailed a government with a capital strike and forced it to change govt policy (this is an extreme example of what can happen under a floating currency Rich!)

Meanwhile, the politicians have independence from responsibility - a bit like the Health Boards, but worse.

The Reserve Bank can never be really independent as there is always going to be a fundumental tension in its work. One of the reasons the bank gave up on the Mortgage Levy last year was that it would have involved the Reserve Bank in the inposition of an variable effective tax, and since Charles I lost his head, its been a cast iron constitutional principle that only parliament should have the ability to impose taxes (I think this is an issue with SOE power companies as well, but thats another post!)

Great to see another Sutch and Jesson fan in the NZ blogsphere Oliver - will be adding you to my links. Keep up the good work on your blog :)

At 9:53 pm, Blogger Joe Hendren said...


I guess my general attitute to a floating exchange rate is one of scepticism - through people like JK Gailbraith and Jesson I have come to appreciate that floating exchange rates have not always been regarded as the "fashion" they are now.

If we do have a floating exchange rate one thing I believe would discourage the outright speculation is a Tobin tax, a small tax on international currency transactions that could be used to fund international organisations. This would make the global economy more stable, and independent funding could do a lot for releasing international organisations from effective US control.

A capital gains tax on all but the family house, a land tax on unimproved land would help. Aussie states also have stamp duties on some property transactions, with concessions for first home buyers, which I think is pretty important.

PS: I was actually the Reserve Bank report on alternative stabalisation measures (Feb 06) earlier today. While I would like to see more capital restrictions on the banks and loan to capital restrictions on mortgages, the possible effect of these on first home buyers has given me food for thought. I am currenty mulling over how to hit the mortgages on the investment properties without hurting first home buyers..any ideas?

At 9:04 am, Blogger Rich said...

I'd favour the following:
- a house price inflation target band, maybe 0 to 5% *below* average earnings until we get back to affordability.

- various adjustable measures to enforce this, including:

- CGT on investment properties

- CGT on personal property sales over say $750k

- a mortgage levy on mortgages above maybe $400k

- shared ownership schemes to allow people to have guaranteed indefinite occupancy without paying for the *investment* element

None if this would affect the average home buyer negatively. It would have some effect on those trading up and expecting a profit - but they only get that at the expense of those who don't yet own houses.


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