Friday 6 December 2019

Adrian Orr – The Reserve Bank’s Revolutionary Governor?

New Zealand's Underarm Banker: It bears recalling that the “independence” of the Reserve Bank Governor was for decades held up by 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?

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, 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 essay was originally posted on The Daily Blog of Friday, 6 December 2019.


Unknown said...

Cool story Chris.How come you don't live in China?

Trev1 said...

Orr's decision is actually a massive own goal for New Zealand Chris, with an estimated cost to the country of about 0.4% GDP. A very expensive and unnecessary insurance policy. We were fortunate during the GFC that our major banks owned by Australian and New Zealand shareholders were well managed and did not go belly up. Quite a contrast with what happened in Europe and the US, not to forget New Zealand owned and operated finance companies who destroyed so much of the elderly's savings with impunity. A thoroughly dumb decision.

Guerilla Surgeon said...

Christ here we go again. Call comment unknown how come you don't live in Nazi Germany? Honestly, comments like this and absolutely nothing to the discussion.
The number of times you see/saw in various forums:
How come you don't live in Venezuela?
How come you don't live in Russia?
How come you don't live in China?
How come you don't live in Cuba?
Or variations on that theme, and utterly bloody meaningless.

Nick J said...

Trev, you might wish to consider the phrase "privatising the profits socialising the losses".
During the GFC our banks were as vulnerable as any, you say they had Aussie ownership, check upstream and they too are owned offshore.

What happened in the GFC was that losses were socialised across the worlds tax payers. The whole thing represents the greatest heist ever. We the citizens were forced to bail out the too big to fail banks who raised new loans to themselves guaranteed by the citizens who were then also charged the interest.

That raises the question. If capital can force the citizens to underwrite them, is this really market capitalism? In markets companies are born and die. Why not banks? If the state represents a life support service for capital might the state not reasonably own the bank for the citizens?

Tom Hunter said...

Well this is certainly an interesting take on the reasons behind this move, and it's possible that Orr is doing this with long-term Old Zealand objectives in mind.

But since we can't read his mind we can only go on his history - which is that he's very much a product of the 1980's Rogernomics revolution and has ridden that horse to wealthy ends - and what has been written about this move by the RB with his approval.

And that is that it's all about shoring up these banks to make sure they don't land in trouble when the next recession hits, especially if it's a financial-led recession like that of 2008/9.

Having said that it seems like it's a waste of time, as economist and former RB employee Michael Riddell has been hammering away at for some months now.. I'll leave you to read the detail of those comments, but I summarised them here at NoMinister some months ago, The Impact Of Regulations.

The best one sentence summary of such complexity that can be made is to say that there is little point in a subsidiary having a higher capital ratio than its parent, when if the parent goes down overseas the subsidiary will too, and that these increased capital asset rations will actually increase the profits going to foreign owners.

In short, none of this makes any sense even in terms of its own objectives - but I still don't think that means that Orr is secretly planning some nationalisation of Aussie or other foreign-owned banks, which brings me to this comments of yours:

What the new communist government of China did, in the early 1950s,

That didn't work out too well for them for three decades, which is why in 1980 the Communst Party - despite all the boasting it's propagandists and home and aboard - gave up controlling the economy in this way and in 1980 allowed private enterprise, private property and market places to once again operate - in a constrained manner. First in the countryside for farmers produce, where "miraculously" food production increased while prices dropped and the wealth of private citizens increased, and then later for other products and services in the cities, where the same thing happened.

There are still SOE's in China. but even the Communist Party leadership see them as relics that are being held only for as long as their former workers take to die off. As far as their SOE banks are concerned they're basically piggy banks holding billions in ownership of the old SOE's: toxic assets the banks are forced to hold, as well as lending on new infrastructure thats not being used and therefore making no returns. State-owned or not, that catches up with SOE banks sooner or later, as New Zealand found out.

greywarbler said...

Trev1 contains a lot of assumptions.
'an estimated cost of about 0.4% GDP.' Real firm figures? -'estimated', 'about', by whom, in what period, in what year; is this immediate and what would be the flow-on effects. Would there be more interest in NZ banks of which there are a number? It was interesting to find that Bank of NZ doesn't yet offer same-day-transactions although a number of NZ banks have adopted this. But why do a good job and improve services when NZ is so laid-back that we can just be walked over!

We didn't go belly-up in the GFC, why, because we had regulations. We will now improve those and be able to stay upright during the next failure of the financial cycle.

'not to forget New Zealand owned and operated finance companies who destroyed so much of the elderly's savings with impunity.' I do forget which NZ finance companies destroyed savings. Please specify, your undefined talk does not inform? I remember a National Party highly-placed MP being involved in some failure decades ago, and a television personality praising and inviting investment in a well-known financial house that crashed before Long. These failures would be less likely to happen with tighter regulation, though of course it should remain balanced.

But perhaps you haven't the stomach for investment and price movements. You should stick to indexed funds, apparently they do better than the managed ones. Or write to the North Pole with your requirements as Santa seems very reliable and generous to the good and just.

Anonymous said...

Strawman ad hominem stuff by them I think, as it avoids them neecomposing cogent counter argument.And I say that as someone more on the Right.

Trev1 said...

@ greywarbler: the estimate (0.41%) is the sum of the Reserve Bank's own figures for the lower growth which is likely to result from higher interest rates, and the increased income transfer to overseas shareholders.

Scouser said...

I believe Orr is doing this because he thinks we're due a major financial crisis as the GFC wasn't really addressed. Its symptoms were tackled via enormous gobs of debt and big US banks were bailed out in the pretty standard rent seeking behaviour of large US companies in the US. We now have huge amounts of cheap debt chasing overvalued assets and one of the perceived contributors to the Great Depression was trade wars so he may very well be right but who really knows as two major depressions in a row is unusual and we have major likely growth out of China and India to offset any crisis.

The Ozzie banks got lucky in the GFC as they got late in to the whole collaterised debt fiasco and had minimal exposure. They do, however, make extraordinary profits by international standards on a pro rata basis and even more so in their NZ subsidiaries. One of the biggest killers of profit for banks is bad debt and bad investments and they don't have a lot of it in NZ as they just don't take the same level of risks here as their Ozzie parents don't let them. They take risks in Oz as there is a quid pro quo on the 4 pillars policy but no similar levers here in NZ. NZ banks didn't suffer much at all during the GFC because as far as I am aware they just didn't have any junk debt like the Yanks despite assertions earlier in this thread.

However, pretending that almost doubling capital requirements for lending won't have a cost effect is naive. Estimating how much is essentially financial masturbation with too many variables and is also economic modelling, which is, by definition, inaccurate. Despite that, Orr is making a heck of a big call, which is probably wrong but is definitely adding significant financial costs to the economy.

Chris, by implication, postulating that NZ could emulate China and get away with nationalisation at that level without serious financial effects is nonsense but I'm guessing you know that and are just making a point. Plus, that behaviour arguably hurt even a larger economy like China's.

greywarbler said...

The wise passing judgment on Adrian Orr is funny when looked at closely.
All transparently are more concerned about a period of restraint in their areas of interest (or dividend) - making money as fast as possible, and up the rest of you.

The dear little 18 year old lad in Monday's paper repeating oft-told tales of the very young showing consummate capital accretion skills, by carrying off some money-making scheme or other is an example of your highly developed financial accretion skills. Entrepreneurship once was selling lemonade to a lemon orchard with some new ingredient, now it is with Daddy lending son $200,000 after he worked his butt off part-time at a fast food place, and saved all his dough, for a deposit on a house. Ingenious young fellow; who would have thought of that. e&oe

You all make me sick. You don't want anything to change; you don't know how to live poor, you haven't had the practice that you insist on large numbers experiencing. That'll larn 'em. I asked for the local library to buy Our Kids - The American Dream in Crisis by Robert D. Putnam. It looks at how the USA has split asunder with College educated kids gaining fortunate certainties of lifestyle, and the lower third with no certainties but diminishing hope for a reasonable struggle with some security and bits of enjoyment; not often found. If your library hasn't got it, then ask them to buy it, but there is also an all NZ borrowing system with a charge less than buying the book yourselves.

Sorry folks, the good times are coming to the end. The helicopters are crashing, the drones are spoiling and spying, the hot air balloons are exploding, the fires, the torrents, the earthquakes, the eruptions, the extinctions of insects, it's all happening. Count your money while you have got it and spend it on useful stuff while it is still available. Money is a chimera, look up the word it's a doozy.