Bollard: we have avoided a 2nd Great Depression

Reserve Bank governor Alan Bollard said in a speech to a Hawkes Bay business audience this morning that early signs of global recovery have now emerged, and that we have avoided a repeat of the Great Depression.

However, world growth will likely be subdued for the next year or two, and the current low international interest rates, expansion of liquidity & central bank balance sheets, and fiscal stimuli will be necessary for some time, he said.

The key to New Zealand’s economic recovery now will be household savings, investment in the tradable sector, and deeper funding markets Dr Bollard said.

"New Zealand looks likely to start recovering ahead of the pack. But this is an opportunity to rebalance. Getting the sort of sustainable recovery we want will be assisted by: first, greater savings by the household sector, to reduce the need for foreign funding of the economy; second, investment in the economy's productive base, particularly in the tradable sector; and third, greater durability and depth in funding markets, including a lengthened maturity structure for bank funding.

"A clear risk over the medium term is that households resume their 'borrow and spend' habits before they have paid down some of their existing debt. This could be triggered by renewed moderate house price inflation, and needs to be avoided."

Getting households to save more would have the added advantage of creating a more stable source of funds for business investment and expansion - reducing reliance on foreign funding, which would contribute to more stable and lower interest rates.

If, or when, stronger world demand and a weaker New Zealand dollar eventuate, it would be the signal that investment needs to move to the tradable sector to help correct the current account gap.

"We hope that, in the next phase of recovery in financial market sentiment and return of risk-seeking, the markets will be more discriminating about New Zealand," Dr Bollard said, in another message to the foreign exchange holders who stubbornly refuse to let the New Zealand dollar slide enough to lead an export-driven recovery.

The Reserve Bank understood that interest rates are a blunt instrument to curb excessive borrowing, and "We see prudential policy potentially playing a greater role in the future", Dr Bollard said, in reference to New Zealand banks’ newly increased liquidity requirements.

The Reserve Bank’s focus is beginning to shift to keeping inflation expectations anchored, the macro-economy stable, system liquidity available and the financial system stable, so that funds keep flowing and relative price signals work during the nascent recovery.

"The New Zealand economy has taken knocks in this crisis, but some form of recovery is now on the horizon. Our opportunity is to use this time to rebalance the economy for the medium term”, Dr Bollard said.

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US and UK deficits are the main issue that the global economy faces at the moment, they still haven't found a solution. It ain't over yet and I believe Bollard is to euphoristic. The 1929 recession lasted nearly 3.5 years, the average recession almost 15 months. This one is not average.

Building and Construction is down, Transport and Logistics is down. Major issue at the moment will be retail. Some are already in trouble, others will be soon. This is a major shunk of employment at jeopardy and will impact spending when retailers go into receivership and/or liquidation.

I'm not pessimistic, just realistic as one should be when in business. Calculate with worst case scenarios, risk management and cash management is key. Look at ways to increase revenue, lower cost and overall company's efficiency. The strong and smart will get there, the ignorant competition will get harmed.


I was optimistic till I heard Mr B says we are out of trouble. This guy couldn't pick last weeks Lotto.


Who is this guy Green that keeps pulling the trigger and has only shot himself.

"New Zealand looks likely to start recovering ahead of the pack", oh brilliant who will we be selling our goods to at world prices to. Commodities prices trend to the marginal cost of production, and we will be competing with every other farmer who will be given tarrif protection by their Government.

All the farms that were bought / traded during 2007 and 2008 all done on overseas borrowing based upon $7/kg and an exchange rate of high $us0.70s. Well farm values are dropping like stones because the value of the commodity used to support the business case has also dropped, and is facing huge head winds. There is still demand, but others are prepared to meet the demand with lower yet "subsidized" prices.

Bollard has to stop NZs borrowing to finance consumption, or worse still to finance buying a house to rent to someone and use depreciation and LAQCs to make a low quality investment look good compared to investing in productive enterprises that make something that a person overseas wants to buy.

He is right about the risks, but he is wrong if he thinks mum and dad are going to listen to his jaw boning.

If you want to encourage people (investors) to do something put incentives in place or at least ensure the playing field is balanced.

Why do the financial markets refuse to let the $nz slide? I'm not sure but you would have to say they think its a safe bet that the $nz will not drop under the current regime, and its always how does the $nz compare to others, less bad comes to mind. In 12 months time every one will tell us why the exchnage rate is now 0.xxxxx and I for one hope it is lower than it is today for the right reasons.


What Bollard predicts is irrelevant when considered closer to home and issues that really do affect New Zealanders.

For instance - what about our record high house prices?

THe long term running average house price (according to the RBNZ website) is 2.9 times the mean average income.

The NZ medium house price is 4-5 times the mean average income and Auckland is 6.6 times the mean average income.

The point is - we have so many other issues at home that are still going to choke our economy. It wouldn't matter what happens over seas, we are still loaded with issues on our own shores.


Bollard has made plenty of predictions in the past that have never come true. Only one year ago he predicted the economy would flatten out by year end.

Fat lot of good he was on that one, so believe him now. Perhaps Bollard has no idea what will happen.


Not a fortune teller. Economics is better at telling us why things happened, and what the implications are, than what's going to happen.

Personally I agree with Johnno that house prices need to fall back to historical norms relative to incomes, and would add to Chris that banks' greater liquidity requirements under the new prudential policy will see increased competition for deposits, which will increase the pool of funds available for productive investment.

Unfortunately Dr Bollard appears unable to pass legislation for a capital gains tax that would fundamentally rebalance the playing field from unproductive residential real estate investment into more productive avenues.


Mitchell-Hall, thanks for your comments

I think the Govt could pass changes that would make a difference...
1) Dismantle LAQC with imediate effect
2) Disallow depreciation on residential rentals
3) Only tax capital gains when property, other than an <b>individuals own home</b> is sold <b>and</b> the proceeds are not used to buy another property.
4) Pressure banks to limit loan size in relation to registered valuations (2 at least) on property

uncomfortable with 4) but the ability to get around loan to equity ratios is part of the problem.


Get a better formula The whole world have tried your useless theories and yet they are in depression mode go figure.


Greetings All. In spite of a PhD in banking I don't regard me as an eonomist. How boring. But I'm a bean counter which is a step up from auditors who go in at the end of a battle and "bayonette the dead".

Hi Chris ... great comments.

There's more to debate. It seems that you have a "mind". I like your number (4).

I'm trying to keep warm and not snort like a pig!


Why do people continually cry for a capital gains tax as if it's the saviour for affordable housing in NZ, like some paper Robin Hood from the IRD?

It's not. And won't be. Ever. Only the IRD and government will benefit. And LAQCs? Get over that too. 90% of your gov ministers have them (including Helen with her 7 houses and others still in Labour).

But then why such an insular view NZ? Just look at the USofA. They've had a capital gains tax for ages and it's worked a treat for them, huh? It's saved them from wild speculation and ensured their housing market is still in great shape.

Oh, wait...

Sometimes I wonder if the NZer solution for everything and anything is to impose a tax, raise a tax or tax a tax (tax on rates?).

What happened to the ingenuity thing or was that just from the marketing department?


What is this guy smoking? Do these guys at the Reserve Bank do any research and if so what comics have they been reading? I suppose he isn't the thickest guy on the planet, that goes to Al Gore.


The banks don't listen to him.

Why should we?


Oh dear ... you,re all blowing smoke out of your a--es. Scary thing is you're all allowed to vote.
Bollard should be knighted, but wait ... he's not a sportsman or a break dancer ... that'll damn him for sure in this introverted little backwater.


How about you help us reverse the trend on the recent net migration figures ?


"New Zealand looks likely to start recovering ahead of the pack"

and the latest breaking news

"Pigs have been seen flying over Wellington"


No need for capital gains tax

Just need to correct the distortion that negative gearing creates in our tax system.

Years ago(in the days of Sir Robert) you were restricted as to the loss you could claim from what were described as 'specified activities' - farming and rental houses being two examples. Limit the loss offset on those two to $10000 per year against your other income (the balance to be carried forward to future years and offset against future income) and you will take away most of the incentive to invest in those types of activity. Nobody can moan about that because under tax law you are prevented from ending into a scheme with the principal intention of avoiding tax(note avoiding not evading)

I might add for family assistance purposes business losses are not taken into account but rental losses are(that is your other income is reduced by the rental loss so your Family Assistance goes up). That is an utterly ridiculous distortion of the tax system and a further boost to the bubble of residential property. Got to be eliminated.


Investment bubbles occur when the wrong signals are sent to the market and the majority believe "this time its different"

US house prices rose like a rocket because very low teaser interest rates were offered (5 years at super low rate then rise to market rate) another reason is low doc loans were encouraged, you could tell porkies about your income and get a loan. Then there are the No-Recourse loans that were offered, the basic idea is if you default the bank has no recourse to you personally all they can do is sell the house to recover the loans. These things all led to a massive increase in the number of people buying homes (people who used to rent), and eventually "this time it was not different" the low income brigade started to default, except now it wasn't two weeks rent in arrears, it was a loan for $100s of thousand. The house flicker could no longer find a bigger fool to buy their over leveraged property(s). So the property market crashes, especially in areas where there was huge growth, and the consequences flowed to the Financial Sector who had bundled all these poor loans into CDOs and miraculously found they were Investment grade and sold them to ING et al who sold them to you guessed it Kiwis.

In NZ, it is belief that house values always go up, the hype, the tax regime which favours investment in leveraged housing, people believing that borrowing against their house to buy cars, boats, play things is the way to happiness. The demand for money to spend is met by banks and overseas lenders who are only too happy to take the interest off the Kiwi who wants to spend now and earn latter.

A new tax is not the whole answer to our own smallish bubble in housing , but removing incentives that lead people to make dumb decisions from an economic perspective is essential.

People are concerned that China is buying up assets the world over. We should step back and ask how can they do that. The simplest answer is they "save" and invest wisely. Yes there will be problems as China grows, they will have bubbles to deal with, but they have the savings / reserves to fall back on.

Time to do some work, to make a buck, 99c to spend, 1c to save (bliss).


Wise words once again Chris, keep 'em coming.


We've had more people coming here than leaving this year. That includes people returning from Australia, so not sure if you mean we need to export more people...


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