January 13th, 2014

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2014: Evolution not Revolution

I’ve been somewhat remiss in posting to this blog over the last half of 2013. Instead of talking  about politics and policy, I decided to jump in and be involved directly. To that end I stood for election in the October 2013 Christchurch City Council elections and was elected in my local ward. The last few months has been a blur of briefings, updated and meetings, with many crucial issues to be dealt with.

It’s a great opportunity to be involved at the micro level of local government and will certainly help shape some of my more macro level thinking. I will be posting about specific Christchurch issues on my public Facebook page but will still be posting here on broader policy questions.

I have been reading lots of posts about the “ten things” to watch for in 2014 and predictions galore, from the meltdown of the Chinese shadow banking system to the partial breakup of the Euro. I’ve given up trying to predict specific outcomes but we are, I believe, still in a long process of transformation, both at the global economic level and in the social sphere as well. That transformation is likely to keep throwing up small scale conflict, civil wars, major power Sabre rattling, financial crises and resource challenges. Realism is still the order of the day but the forces of change will continue to dilute the desires of the super egos in charge of many of our missile carrying nations. The collaborative movement, building on the back of Occupy, will continue to bring new ideas to the social enterprise and business spaces. Like the early days of social networking and dating sites, it’s unclear how this change will finally manifest, but I expect some major shifts in the way we work, the way we finance that work and how we engage, both at the social and political level.

The political space is one area where change is long overdue. There has been no new serious attempt to reframe the left-right tennis match and put it into concrete policy proposals. The 2014 NZ general election offers that’s opportunity. How the different parties shape their messages, vision and philosophy is going to be very interesting and I hope that we get something a little different from what has been delivered up in previous elections. With all the major global themes swirling around, it’s definitely time for some vision about where NZ is heading as a country and society, and how that vision can be achieved. I’ve read one article recently, which struck me as a good place to start this conversation. It’s fair to say that it came from the more liberal end of the political spectrum (on the left hand side). It generated plenty of interest and it’s fair to say I’m strongly supportive of the proposals in some form. What engaged me even more is that a response came from the conservative end of the spectrum, which explored the same issues from a different perspective, landing up with different proposals, but with enough similarity to allow for a decent conversation.

The five topics covered are:

– Unemployment.

– Universal basic income.

– Land Value Taxation.

– Ownership of productive assets.

– Public banking.

Read both articles and see which one resonates more. They are not that far apart in reality and my hope is that people will see that and start talking to each other rather than shouting at each other.

We certainly need that conversation more than ever. The question for us here in NZ is whether the major parties are up for it, or whether it will be left to the minor parties to do the job. It could also spark a new political movement. It feels like anything is possible.

August 10th, 2013


Bad Haircut Day

As any lady will tell you, a trip to the hairdresser is a serious business. A bad haircut is not a good day out and could spark major dramas, which may reverberate for a long time. A trip to the bank, however, is generally not considered high on the list of things that could go wrong but in the last few months that has changed.

Banks have been pulling down the shutters for sometime now, starting with the very public collapse of Northern Rock in the UK. Long queues of customers outside a bank is never a good look and the UK government wasted no time in stepping in to guarantee the deposits of Northern Rock, fearing, quite rightly, a panic and a run on the banks. Nearly 6 years on, governments are still none the wiser about how to handle the situation where a bank falls into funding problems and finds its assets falling below its liabilities. The wholesale guarantee of deposits was a short term answer to a difficult situation and forced many countries, including NZ, to follow suit.

Since the parlous days of 2007/2008, time has passed, QE has reflated financial markets and deposit guarantees are no longer de rigeur. In fact, there has been a shift away from any kind of government underwrite and a move towards what is known as “The Haircut”. As the metaphor implies, this is not a wash and blow dry but a loss of hair. Whether it’s a trim, a short back and sides or a number one, is unknown. But be clear, this will not be something you are likely to be happy with.

The Haircut was made famous during the blow up of the somewhat shaky Cyprus banking system. Depositors woke up one morning to hear that their banks had been closed and they could not access their funds. Again, as we saw with the GFC, lax bank lending and dubious bank investments had created a very unstable situation for depositors. The new banking model, so glorified by the deregulated delights of the last 30 years, had allowed banks to lend or invest first and then look for deposits afterwards. This shift to banks as speculators, rather than lenders of deposits, had created poor incentives and a spiral of greed, as the search for easy yield saw voracious amounts of new lending. As is always the case, the party ended in tears and recriminations all round. The original Cyprus Haircut recently upgraded to a full Brazilian Wax (ouch!), with depositors foregoing a whopping 47.5% of their original funds.

So what for New Zealand? Well, the Reserve Bank has promoted an Open Bank Resolution approach, which essentially sees the banking system operating within the spirit of caveat emptor or for the layman, learn to read bank’s balance sheet (good luck with that). Deposit insurance is seen as a moral hazard, which makes absolute sense, but only if you have a very advanced understanding of how to work out the risk and liquidity profile of your bank. Let’s face it, so far we haven’t seen any evidence that even the central bankers can do this job. Still, the intent to make depositors responsible for where they stick their funds is admirable, if somewhat hopeful. So with that in mind, it pays to make cursory inspection of the capital structure of a bank, so you can see where your deposit ranks. (Long time readers of this blog will already know that a bank deposit is an unsecured liability of the bank!). Go figure. Essentially, bank shareholders take the first hit, which is appropriate, and if that cash runs out, then the scissors move down the line from unsecured bondholders to depositors and the dreaded covered bondholders. Let’s really hope we never get down that far, because I wouldn’t want to be picking over the legal carcass of a covered bond. Messy. Gareth Vaughan gives a clear explanation here (make sure to read the comments also).

I think the OBR has merits but really the Reserve Bank has a lot of work to do with its communication of the policy, as well as its explanation of how the banking system actually works. I’d prefer to see even a small deposit guarantee scheme (e.g. $50,000). It will allow the majority of the population to sleep well at night. And yes, the banks can pay for it (and afford it without breaking sweat). Generally speaking, the NZ banking system is well capitalised but it has some weaknesses in its reliance on overseas funding, though that has been reduced measurably with the increase in the Core Funding Ratio. There is more work to be done, especially around education, but we are moving in the right direction. This is just as well, since I for one, have no interest in waxing!


April 6th, 2013

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We are The People

It was a pleasure to host Icelandic Democracy activist Hordur Torfason and his husband, architect Massimo Santanicchia, in Christchurch a few weeks ago, as part of their New Zealand tour. Hordur is a wonderful speaker and spoke at both Lincoln University and the Aurora Center in Christchurch. He also held a more intimate session with some Arts Scholars at Canterbury University, which allowed for some fruitful discussion. I was very impressed by his calm demeanor and his overall approach to activism. He is no firebrand, as he prefers to articulate a more engaging approach. He does this by questioning people and drawing them into the construction and creation of any particular response or action. As a good journalist might do, he asks “why”, “how”, “what”, “who”….he often provides the “when”. He switches the popular activist discourse of action to discussion; “Does anyone understand what has happened?”; “What can we do about this?”; “Does anyone want to meet the same time and place next week?” and so on.

This approach creates a more open and iterative process of dialogue, where some form of consensus or action points may appear. Multiple and varied demands may be distilled down to have a more refined focus. In the aftermath of the Icelandic banking collapse, Hordur inspired the Cutlery Revolution and a process of introspection, investigation and reformation. With a background as a singer, songwriter, actor, playwright, poet and artist, Hordur uses creative methods to engage with the issue at hand, enabling people to be involved and have some input. The influence of the creative artist is detailed in Louise Amoore’s “Global Resistance Reader“, specifically in Part 4, with contribution from De Goede and Bleiker. They show that by using music, poetry, dance, comedy and other artistic forms, the activist can reframe the traditional discourse offered by the embedded elites and, thus, undermine their implied seriousness and, ultimately, their legitimacy.

He offers some important lessons about the problem of corruption, even in supposedly highly transparent countries, political oversight, and problematic links between politics, money and media. This has deep resonance for New Zealand, which has suffered similar problems for many years, under both political hues. In the end, people do have power and, most importantly, if committed, organised and engaged, can exercise that power at any time. One point that struck me was that the larger the disconnect between citizen and government, the more opportunity there is for both loss of engagement and control. In large countries, this is a real problem. It need not be so in smaller states, where access to representatives is easier and there are smaller degrees of separation between people. Finally, Hordur exhorts us to all be vigilant, as we can have no complaints if we just sit back and allow stuff to happen to us. For me this calls into question an issue I have been thinking about for sometime, namely our transformation from citizens into consumers. This has been a core part of the neo-liberal experiment, which has seen people focused on their interaction with the market, leading to a subsequent loss of connection with the concept of citizenship and a one way relationship with the state. I believe this is where our ultimate problems lie and, for me personally, this is reinforced by the Icelandic experience. The slow collapse of the post-modern debt-based financial system is a symptom of this malaise. The bubbles of change have been fermenting in many countries over the last decade and point to a subtle shift in how people view their relationship to the market and the state. Hordur’s story about Iceland is part of that process and is worth listening to. I’ve selected a talk Hordur gave last year, as it is quite focused and succinct and just 30 minutes of your time. Enjoy.


February 2nd, 2013

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The Great Transformation: Addendum

Karl Polanyi began his famous 1944 treatise, “The Great Transformation”, with the following words:

“Nineteenth-century civilization has collapsed. This book is concerned with the political and economic origins of this event, as well as with the great transformation which it ushered in”. His thesis was “the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society”. As we continue to make our way forward in the 21st Century, Polanyi’s words are worth reconsidering. He noted that the success of the Industrial Age was based on four key pillars: a balanced international system, a stable financial system, the self-regulating market and the liberal state. The end of the balanced power system towards the end of the 1800s was the signal that the almost 100 years of near peace, was coming to an end. When the gold standard failed, it was the end. Polanyi notes,

“The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system….to liberal economists the gold standard was purely an economic institution; they refused to consider it as part of the social mechanism.”

When we look at the implosion of the current debt based monetary system, it is worth pausing to re-consider Polanyi’s thesis. As Europe considers the all or nothing integration and the US climbs slowly off its knees, the social importance of a stable and high functioning monetary system is slowly being recognised. This has been seen in the amazing efforts of global policymakers to try and fix the banking system, mainly by flooding it with new liquidity. Whilst this policy shift has seen a stabilisation of the system, serious structural problems remain. Many of those problems have been noted but little, so far, has been done to deal with them. At the same time, austerity, the normal medicine, is no longer regarded as a economic panacea, with both the social and economic impacts hitting hard.

But out of the chaos has come a shift in focus. Initially the response to the GFC was to protect the banks, to bail them out and, in repairing their balance sheets, to use them as a conduit for recovery in the general economy. Unfortunately, that plan didn’t work, for the simple reason that trying to get people to borrow, when they are trying to pay down debt at the same time, is simply unworkable. Still, the money flowed in and continues to do so with QE2Infinity, and continues to boost equity markets as bonds start to lose their shine. However, in the last 12 months there has been a gentle stirring amongst policymakers and researchers and a new focus on the process of money creation and how banking works and impacts the real economy. If anything, the GFC can be seen as a crisis of finance itself and this has finally brought the spotlight and interest into a somewhat arcane area, normally populated by monetary reformers.

One paper to catch people’s attention is “The Chicago Plan Revisited”, an IMF working paper by Jaromir Benes and Michael Kumhof. Interestingly, Jaromir was at the RBNZ from 2006-2008 as a research advisor, so I presume they will have read it. It’s an excellent paper and explores themes familiar to anyone who has been reading this blog over the last 5 years. To those new to the subject, it’s a very useful read as to how the banking system is currently structured. Benes and Kumhof investigate the way in which banking works currently and the proposal of Irving Fisher’s 1936 Chicago Plan, which called for a separated monetary and credit function. Again, readers familiar with the research of my colleague, Lowell Manning, will know he has done extensive work on Fisher’s Equation of Exchange and so it’s heartening to see a new look at Irving’s work.

Their conclusions were fourfold and supported the claims made back in the original plan that separation money creation and credit provision would:

1) Lead to much better control of the business cycle by providing a more stable monetary platform.

2) Eliminate bank runs.

3) Dramatically reduce net public debt.

4) Dramatically reduce private debt, as money creation no longer requires simultaneous debt creation.

This is quite a major shift in thinking within the hallowed halls of the IMF (it should be noted that this is not official IMF policy) and signals a recognition that those of us who have been talking about this issue for many years have finally been heard. It has even made the mainstream media and has even provoked some interesting commentary on banking and financial modeling at the Economist. The most important realisation from this research is that the business cycle is completely in the hands of the banks. Put simply, the banks are in charge of the economy. This will surprise many people, including many bankers, but will now allow us to have a proper debate as to what constitute a stable, efficient and equitable monetary system. The understanding that finance has such an enormous social, as well as economic, impact (and of course environmental) will hopefully see this shift transform into major systemic change. It is a long way from where we are now to a full 100% reserve backed system but it is possible that we can take incremental steps along the road.

Here is a video with Michael Kumhof explaining the Chicago Plan Revisited


August 23rd, 2012


Steve Keen: Public Talk in Christchurch

Steve Keen is in New Zealand to present a range of seminars in Auckland and Wellington. He is also coming down to Christchurch to give a public talk. Details are below. It should be an interesting event.


Public Talk in Christchurch on September 8th at the University of Canterbury 

Economist Steve Keen in New Zealand 6-10 Sept 2012
Author of best-selling book Debunking Economics, Steve Keen is Professor of Economics and Finance at the University of Western Sydney. He is a speaker of international renown and a voice of reason in confusing financial times. He was recently interviewed by Kim Hill on Radio NZ National and he’s crossing the ditch in September to talk to New Zealanders about the economy.
Professor Keen will present an evening public lecture in Christchurch:

Saturday 8th September at 5pm – C1 Lecture Theatre, University of Canterbury, Arts Rd, Ilam
Professor Keen will provide an overview of conventional economic theory, briefly cover its short-comings in dealing with the current financial situation, and outline his analysis as described in his book Debunking Economics. He will bring his discussion of the global economy right up to the present, and take a look at issues in New Zealand, including the housing market, debt levels and asset ownership, that affect our nation’s economic well-being.
Q: Who will benefit from attending the Steve Keen public talk? 
A: Everyone who wants to understand the economy.
(Economists, analysts, policy-makers, academics, politicians, public servants, teachers, students, investors, home-owners, renters, business owners, commentators, monetary reformers, financial advisers …)
See www.talks.co.nz for further details on his Auckland and Wellington seminars.


August 8th, 2012

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The Currency Conundrum

A story in this weekend’s NBR outlined how the exchange rate was still the major concern for NZ exporters. With the NZ$ at 52p and 0.65 Euros, it’s not hard to see why that is the case. On the other hand, strong commodity prices over the last few years have helped the trade balance into positive territory on occasions, negating the effects of the strong currency. So on balance, although the currency is clearly too high, it is not so out of whack that our trade balance is deeply negative.

Currencies are primarily a method for exchanging goods and services between different nations and, therefore, an important component of international trade. When countries have a surplus or deficit in their trade accounts, they need to deal with the foreign currency surplus or deficit. Theoretically, the exchange rate should adjust to rebalance any surplus/deficit and so restore an overall balance. That’s the general idea behind floating exchange rates. It was certainly the crux of the plan that Keynes proposed at Bretton Woods back in 1944, as he knew that trade imbalances had contributed to general global political instability in the previous world wars. However, the US, with its tail up, insisted on the US$ as the centre of global trade, and thus we have seen the global imbalances continue for the last 70 years.

Prior to the 1980s deregulation bonanza, a serious balance of payments deficit could see a country on its knees, going cap in hand to the IMF to borrow the deficit, as was the case with the UK in the 1970s. There was some form of censure and limit to imbalances, with draconian lending measures, added to a sharp devaluation in the currency, bringing about the appropriate rebalancing. Fast forward to 2012 and we see many countries running persistent current account deficits (ultimately accumulated balance of payments deficits plus borrowings to fund them) without a care in the world. New Zealand is a prime example of this. So why is NZ not being called in to see the IMF to explain its large overseas debts and why is the NZ$ not 15-25% lower?

Therein lies the modern conundrum. As the financial system has been flooded with surplus currency, the demand for safe ports has increased. This has seen deficits overlooked as surplus countries have sought to keep funds out of their domestic systems, this keeping their currencies weaker than they should be and actually reinforcing the imbalance in trade. In effect, they have lent back the surplus to the deficit countries, in return for a nice yield. The obvious problem is that surplus countries have amassed too great a surplus and so created instability in what is, at best, a volatile international system. At some point, one would reason, there must be some major adjustment as we saw in the late 1980s with the Plaza and Louvre Accords, but instead, a dependency is created, where deficit countries become addicted to debt…debt they have been fed by surplus countries. This metaphor of addiction is all too real. In the end, when repayment in demanded, what can deficit countries offer? They cannot sell their goods, as the currency is too high. All they can offer is their assets….land, companies and other resources. That’s generally not too popular, as we have seen here with the Crafar Farm sales debacle but in the end the piper must be paid.

Added to this is the new headache of currency reserve diversification. The Euro and the $, not to mention the Pound, are not in favour at the moment. The SFr has a line underneath it as well, and this leaves few options for liquid currency investments for major holders of cash, namely sovereign countries and major corporates. An example of this is the A$, another major deficit country, which has seen major inflows in recent times from all manner of investors, including Apple and Google. This really is madness: Major US corporates having to store cash outside the US because of a loss in faith in their domestic currency. This is set to continue and cause serious problems for Australia, a country where growth is slowing and commodity prices, which normally support the currency, falling. Thus, the capital account has overwhelmed the trading account, with investment flows having more impact on currencies than the simple price of goods and services. Foreign direct investment is lauded as both necessary and positive for an economy to prosper, yet it indicates that countries are not in a position to finance their own activities. The irony of this contradiction seems to be lost on policymakers, who have clearly drunk too much of the global capital kool-aid.

At some point, and when is anyone’s guess, these flows will reverse. Recent and past history tells us that this is not likely to be an orderly event. For the foreseeable future, the real economy will continue to struggle as currencies are priced on a non-production related basis. More and more,  we will see jobs being exported from deficit countries, rather than goods and services. Some central bankers, the RBA and RBNZ in particular, seem to believe they can do nothing about this problem. This is primarily due to the over earnest and somewhat naive adherence to strict inflation targeting and singular focus on monetary policy to the detriment of the real economy. The world of global finance has shifted considerably in the last 20 years and a fresh look at the problem of a persistent current account deficit is warranted. To simply ignore this is a recipe for further financial disaster, as Keynes clearly predicted back in 1944, and with every possibility that the wheels of the global financial system will completely fall off.






"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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