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On Adrian Orr’s Lending Scheme, The Collins Reshuffle And The Trump Coup

Does anyone under 50 know why “Muldoonist” is a bad word? David Seymour was one year old when Robert Muldoon lost the 1984 snap election. With that in mind, Seymour’s calling out of Reserve Bank governor Adrian Orr’s recent stimulatory actions as “Muldoonist” and “unorthodox” (while slagging Orr himself as a “liability”) should be treated as a tantrum best handled by putting Seymour back in his cot again, until he cries himself to sleep. The adults have got this.

What Orr has been doing – from quantitative easing to the new RBNZ ending scheme - is entirely orthodox, internationally. Yes, the same measures required to combat the socially damaging forces of the Covid-19 recession will also pour some fuel onto the housing market. It is up to the government to mitigate this – by increasing the housing stock or through changes to fiscal policy. And the house price problem isn’t something that Adrian Orr (or Grant Robertson) invented. As Westpac chief economist Dominick Stephens recently pointed out, the current regime of very low interest rates is the over-riding cause of the house price surge and this is a global problem:

"New Zealanders like to imagine that New Zealand-specific factors are driving our house prices like housing supply here or council restrictions there, but the fact is that all around the world a big drop in interest rates has sparked a huge increase in asset prices of all types, including housing markets in many cities and in share prices all around the world."

Obviously, no-one wants to fuel – or crash - the housing market. But by the same token, we’re also trying to head off a major recession caused by a once-in-a-century pandemic. In response, monetary policy settings have to be stimulatory. As Stephens explains, the counterfactual (ie a deflationary spiral, a deeper recession, higher unemployment) would do even worse socio-economic damage than the price of housing:

“[The Reserve Bank] had to reduce interest rates to prevent inflation dropping away, but that has sparked a house price boom and the lift in prices is causing widespread concern around society, and is also a threat to financial stability." Stephens said the RBNZ made the point however, [that] the counter-factual would have been worse. "Had they not reduced interest rates in recent years, New Zealand may have slipped into deflation, which is absolutely terrible and would produce worse social outcomes than rising house prices."

Exactly. And to fend off those deflationary pressures and to foster employment – and both those goals are part of Orr’s official remit - the RBNZ plans to channel a further $28 billion into the banking system. This will be via a Funding For Lending Programme (FLP) that’s intended to reduce the borrowing costs for households and businesses. The scheme commences in early December and will operate independently of the RBNZ’s $100 billion quantitative easing programme. Here’s a rough outline:

The FLP will give banks access to cheaper funding and in turn reduce borrowing costs for individuals and businesses. The programme will be set at the rate of the Official Cash Rate with the size of the programme set at 4% of each participant's total loans and advances. A conditional additional allocation of 2% of eligible loans will then be made available, for a total size of 6% of eligible loans, the central bank said.

Bank economists are in general agreement about the likely effect :

Nick Tuffley, chief economist at ASB, said the FLP would "drive down bank funding costs and feed into economy-wide interest rates". Tuffley said the programme, and stronger than expected economic recovery, could reduce the need for further Official Cash Rate cuts.

So….this isn’t just a slush fund for property investors. Yet in recognition of concerns that some of these funds could go into the rapidly re-heating property market, the RBNZ has re-imposed the high loan to value ratio (LVR) lending restrictions (aimed on investors) that it lifted at the outset of the pandemic. Theoretically, further targeted measures against property investment lending are possible. But it seems unlikely that the Reserve Bank will order the banks to restrict the sectors able to access the FLP. To repeat: the scheme is consistent with the current interest rates regime which – despite the effect that low rates have had on house prices – is meant to counteract the wider deflationary forces that are being unleashed by the pandemic. As the RBNZ concluded: 

The Monetary Policy Committee agreed that monetary policy will need to remain stimulatory for a long time to meet the consumer price inflation and employment remit, and that it must remain prepared to provide additional support if necessary.

That makes sense. Only an ideologue still pining for the 1980s heyday of market liberalism would be condemning as “Muldoonist” what is actually a sensible set of monetary policy responses to the pandemic. (By not attempting to fence off property investors from the FLP, the Reserve Bank could even be accused of being too laissez-faire.) Overall though, the risk of a further rise in house prices is the price we pay (a) for Labour’s ongoing refusal to consider introducing a meaningful capital gains tax and (b) for keeping the economy ticking over. In an imperfect world, none of the options are painless.

Crushing the caucus

Supposedly, the smart thing to do is to keep your political rivals close to you, on the inside of the tent. This week though, National Party leader Judith Collins tried a bracingly different approach. She demoted her two most recent predecessors (Simon Bridges and Todd Muller) dumped her former shadow Finance Minister (Paul Goldsmith) and raised a relative unknown (Andrew Bayly) from the obscurity of a number 17 list ranking to the number three slot in the party‘s parliamentary wing.

To be honest, a reshuffle in the Opposition ranks as big news only within a small radius of Parliament. As this column a few days ago, it is accepted wisdom that Collins will not be leading National into the 2023 election. Chances are, this re-arrangement will fade away like a mirage, as soon as it becomes convenient for Collins’ replacement to make their move.

Long before the blade fell, it had been made known that Paul Goldsmith was going to pay a heavy price for his campaign gaffes as shadow Finance Minister. Goldsmith has now plunged from 3rd to 12th, and to rub salt in the wound, he has been handed responsibility for Education. Teachers may not appreciate the fact that this counts as a demotion. There’s another old saying that those that can, do; and those that can’t, teach. In Goldsmith’s case, the rule would seem to be that those that can’t read or count, get to become the shadow Education Minister.

Not that Collins hasn’t seen the wisdom of fostering a few new allies, too. Bayly has been given the new role of shadow Treasurer and parachuted into the party’s number three position. (Reportedly, Bayly was formerly a member of the British Parachute Regiment.) Michael Woodhouse, who made his own series of gaffes alongside Muller earlier this year, has been given Goldsmith’s old job as shadow Finance Minister. Interestingly, the shadow Treasurer (and front bench newbie) has been ranked above the shadow Finance Minister. What will they be doing in the shadows?

Ultimately, none of this probably matters. It is not as if the Ardern government is going to be brought to its knees by National’s efforts. Labour’s eventual demise (if it happens) is likely to be by its own hand - either by actions that misfire, or by inaction born of political timidity. In the meantime, National needs to do little more than stay open for business.

That said, this reshuffle won’t do much to heal a divided caucus. Besides demoting the party’s two former leaders. Collins has done no favours to a potential future leader, Christopher Luxon. Labour may have vaulted newcomer Ayesha Verrell straight into Cabinet, but Collins has put Luxon fourth from the bottom, and given him relatively minor roles in local government, iwi development and associate Finance. Under the current management, Luxon will be needing to pull himself up by his own bootstraps.

If nothing else, the sheer bloody-mindedness of the reshuffle has made it worthy of note. If this turns out to have been one of Collins last chances to settle a few scores, she seems to have made the most of the opportunity.

Coup Watch

Donald Trump’s refusal to concede defeat was initially annoying, then laughable, then pathetic. But now it looks menacing. Just because an attempted coup looks amateurish doesn’t mean it can’t succeed. The refusal to concede defeat may not simply be transactional. It may be more than a means of keeping the base fired up for January’s Senate runoff elections in Georgia. Half of America is being primed to ignore the election loss. That is Trump’s style. After all, as the Atlantic noted, Trump managed to sell failure to 70 million Americans.

He’s now attempting to convince the same 70 million people that the votes cast for Democrats are by definition, illegal. I’m not kidding. Elizabeth Harrington, the spokeswoman for the Republican National Committee has been tweeting out some swing state county poll numbers where Biden’s turnout this year exceeded Hillary Clinton’s in 2016 - as if that in itself amounts to evidence of fraud.

It must have been fraud at work in those swing states, Harrington claims, because in some of the Democratic strongholds Biden’s vote went down. Woooo! Harrington’s argument completely ignores (a) the effect of the pandemic on turnout in Democratic safe seats and (b) the fact that Biden won the popular vote by nearly 5 million. Some people methinks, liked Joe Biden more than they liked Donald Trump. Especially in those parts of America (e.g. Alleghany County in Pennsylvania) where their lives and jobs depended on it.

Can Trump succeed not merely in invalidating the election result but in overturning it entirely? There is a method, set out in this New Yorker article by Harvard Law School professor Jeannie Suk Gersen. By December 8th states have to certify their election results. On December 14th the Electoral College has to certify the election outcome. Well, the states run by Republicans could simply nominate a competing slate of electors in the swing states they control. Faced with two sets of electors, the outcome would then go to Congress where (unfortunately, according to Gersen) the matter would be voted on by state delegations (more of which are Republican) and not by individual House members, the majority of whom are Democrats.

So that House vote could simply void the election result, ignore the popular vote count, and declare Donald Trump to have secured a second term. Coup accomplished. Yeah, it sounds far-fetched. But read the Gersen article. Feel worried. Surely by accident, Trump has suddenly fired a lot of the officials in the Pentagon and security agencies who disagree with him. Defence Secretary Mark Esper for instance, was fired for refusing to indulge the White House desire to use the US military to suppress the Black Lives Matter protests.

Trump has now replaced the likes of Esper with his own military hardliners. Such as for example, Anthony Tata - a one star general and sometime Fox commentator who once publicly denounced Barack Obama as a “terrorist leader.” We expected an “October surprise” before the election. Now that Trump has lost the election but seeks to cling to power regardless, there may now be a “November surprise” coming down the pike instead.

This could take the shape say, of a military attack on Iran. In order to use the military to control domestic unrest, and/or for a possible foreign adventure, Trump has spent the week stacking the Pentagon, NSA, and FBI with his loyalists, while denying the President-elect access to security briefings. Again, feel worried. This all looks like the groundwork for a coup. Surely not, right? Surely, surely not.

The Law Won

If you choose to fight the law, lets all hope that natural justice will prevail:

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