Posts Tagged ‘christchurch earthquake’

May 28th, 2012

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Drowning in Debt? QE making you Queasy? Try Monetary Dialysis

As Spain heads to debtors prison, questions are being asked about the viability of the whole Euro project. It’s become clear that a large scale monetary union without fiscal integration, is not a viable long-term structure. Distortions in interest rates and currency levels are good for some but not for others. Add in the corruption of the entire financial system and you have a recipe for disaster that impacts everyone.

Quantitative easing is also not working. Why not?

Quantitative Easing first entered popular language during the 2008 Global Financial Crisis. Central banks, specifically the US Federal Reserve (FED) and the Bank of England (BoE), tried to provide stimulus to their economies by buying securities from banks, with a goal to reduce monetary conditions and, thereby, hoping to induce an increase in lending and hopefully, as a result, new economic activity.

As interest rates fell to zero, the Fed began QE1 in November 2008 with a $600 billion purchase of Mortgage-backed securities (MBS). It did this by creating new credit in its own account and then exchanging this for the MBS held by the banks. The purpose of this was threefold: to improve bank balance sheets, raise the price of securities (and therefore reduce interest rates along the yield curve) and stimulate new borrowing. This was not an entirely new policy, as Japan had been engaged in the same process for over 10 years, though with limited success. The Bank of England followed suit in March 2009 and started buying UK Government bonds and a limited amount of other high-grade assets.

The initial impact was felt in the asset markets with the price of stocks, bonds and commodities all rising. In fact, rising commodity prices were seen as an unwelcome side effect of QE, given that QE was supposed to boost lending and, therefore, economic activity, specifically new jobs. Banks were supposed to be lending these excess reserves, not speculating in financial markets. The reality was that banks had no interest in lending and businesses and consumers had little interest in borrowing. The central bankers had failed to note that they were in the middle of a huge debt bubble and that `trying to offer new debt into a market saturated with the stuff was hardly going to be a winner.

There is no doubt QE helped restore confidence to the financial markets and, as a side effect, helped steady the general economy. Whether it actually worked in the manner it was supposed to, is highly debatable. As Bank of England governor, Mervyn King, stated when giving evidence to the UK Treasury Committee on QE,

“I can’t guarantee that it (QE) means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done”.

In terms of impact, the US bailout of the auto industry had more success with over 1m jobs saved. Whilst the financing aspects were contentious, the outcome has been positive. As Obama aides noted, direct government funding enabled the auto industry to survive and this would not have happened if it had been left to the market. Setting aside the merits of saving the US auto industry, what was crucial and different about this policy was that it involved direct stimulus into the real economy, where people are employed to make products.

As Nouriel Roubini noted, the US Government would have been better off just spending the new credit used for QE directly into the economy. He suggested, in a co-authored 2011 paper, that there should be a massive infrastructure rebuild ($1.2 trillion) in the US, which would create jobs and lay the foundation for “a more efficient and cost-effective economy”. He further noted that the crisis had been exacerbated by “inadequate action” by policymakers who had an “inadequate understanding of what ails us”.

It’s clear that policymakers have not stepped back and tried to understand both the causes and outcomes of the crisis. In a debt deflating environment, no amount of new debt is going to help the problem. Until the bad debt has been cleared, new investment is unlikely to happen and the economy dies a slow death. One option that hasn’t been considered, as Roubini alludes to, is to actually stimulate the real economy directly i.e. the economy that produces real goods and services. Governments can actually print new money and spend it directly into the economy through infrastructure projects. That way the money directly enters the economy and supports real economic activity, in a way that QE was supposed to do but never did.

We actually proposed this type of policy in 2011, immediately after the devastating February 22nd Christchurch Earthquake. A direct injection of $5 billion of new money was suggested, as a way of financing new and necessary infrastructure for the rebuild of the city. At that time, this was calculated to save around $200 million a year in financing costs and avoid further increases in government debt.

Ironically, the Minister of Finance rejected this, on the grounds that it may cause “an adverse combination of high inflation, arbitrary wealth transfers and a loss of confidence in the creditworthiness of New Zealand”. This response supports Roubini’s position that policymakers simply do not understand the problem. In the case of New Zealand, the Minister of Finance seems to be quite happy to keep borrowing money and worsening the financial position of the country.

As has been seen, inflation is non-existent in a debt deflating economy. Of course, any new injections of new money must be carefully monitored and be at a level which is not likely to cause over stimulation of the economy. As Willem Buiter, a former external member of the Bank of England’s Monetary Policy Committee notes, an injection of base money “even in huge amounts, need not become inflationary ever”. Buiter goes on to state that “any inflationary increase impact of the enlarged stock of base money on the stock of bank credit or broad money can be neutralized by either raising bank reserve requirements, or by raising the remuneration rate on excess reserves held by banks”.

Thus, inflationary concerns can be set aside when this double-sided process is undertaken. This type of intervention has been called “Monetary Dialysis”, where clean money comes into the system (newly minted e-notes) and replaces or causes a reduction in debt money (bank credit) in order to keep the money supply at a prescribed level. The key is that the process is managed within the same framework that current monetary conditions are dealt with. No new legislation is required and the process can begin immediately. The RBNZ is already developing a new suite of macro-prudential tools and will be well placed to manage this policy shift.

In this process, all the objections raised by the Minister of Finance are dealt with. Infrastructure is rebuilt, people are employed, goods and services are provided, inflation is stable and money is saved, as there are no financing costs incurred. This really is the ultimate point: its is not about not having enough money, it is whether you have surplus labour (unemployment) and resources (capacity in the economy). This was the stark lesson of the Great Depression and it’s incredible that it still hasn’t been properly understood.

As to the creditworthiness of New Zealand, it is more likely that this will improve, as the overall level of debt falls and the productive economy recovers. What’s not to like about that?

 

March 17th, 2011

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Dinosaur Economics: Bill English loads up more debt

Bill English, the NZ Finance Minister, has predictably gone for the traditional response when considering how to pay for the rebuilding of post-quake Christchurch: he wants to borrow $10bln and add further to the mountain of debt New Zealand already struggles under.

At current government bond yields this is likely (presuming the issue is in longer term bonds) to cost over half a billions dollars a year. That’s right $500-550m a year in cost, just to access the money we need.

Bill English has our recent proposal to use new public money in front of him but so far we have heard nothing back on it. Other than an earthquake levy, which has been ruled out also, there are no other proposals on the table.

I look forward to hearing why the Finance Minister thinks paying $500m a year is a good idea for something we could do ourselves.

March 5th, 2011

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A Green Dream: Executing a Vision for Christchurch.

My last post on rebuilding Christchurch produced some interesting feedback. Most were excited, the odd one horrified and a few came through with some alternative thoughts and modern examples. The videos I put up were meant to provoke people into thinking and questioning: what is a city, what do we need from it and how can we make it work for each other? I wanted people to release themselves from previously held beliefs and challenge them, test them out: does it really make sense, does that really work, does it enable, does it support?

It’s one thing to have fantastic futuristic designs but are they practicable? maybe, maybe not. They are certainly buildable. We should not forget that we are moving into a resource challenged time. By 2050 we could have 9 billion people living on this planet. So we do need to build smart, we do need to think about the nature of the built environment as well as the type of city people want Christchurch to be. We have a wonderful brand being well known as the Garden City, as well as being a city with a strong record in technology, manufacturing and the arts. It has a strong farming hinterland and wonderful natural assets reaching from the sea to the snow.

It can easily build on all of those strengths. Here’s a recent example of a city flattened by an earthquake.

On January 17th 1995, Kobe, a city slightly larger in population to Auckland, was hit by a massive 6.8 earthquake, which shattered the city and killed nearly 6,500 people. The total cost was $102 billion. The rebuild process was difficult but according to this 2005 report, the economy eventually recovered to about 75-90% but with the loss of much of its port business. The government was the major funder of the rebuild and tried to focus on specific industries such as biotechnology. Whilst it’s not particularly known as an eco-city or rebuilt along sustainable principles, Kobe was ranked no 9 in the list of world eco cities in a 2010 Mercer report (Wellington was no 5). The lesson Kobe offers are that rebuilding takes time, the economic impact is major and recovery is a long term process.

But Christchurch is very different to Kobe. It is really a very low rise city and should no doubt remain that way. We don’t need some gargantuan high rise marquee building though there is certainly room for some interesting design structures. The human-building interface is very important to the people of Christchurch and that is probably were the focus should be. I agree to some extent with Gerry Brownlee, the Earthquake Minister, that we should only keep the very best of our heritage buildings (The Cathedral, the Arts Centre, the Provincial Buildings and other key sites) and build around them. How we define the best of them and which ones to invest in will no doubt be a heated topic. It’s important to keep the fabric of the city in place whilst recognising that a new layer will emerge.

How we execute this is the tricky bit. There needs to be representation and there needs to be leadership. We will need input from outside especially from people with expertise in sustainable design, both buildings and urban planning. The demolition bit is easy. As Gerry says

As I’ve said repeatedly, heritage is both forward and back and from this point on, we decide what the heritage of this city will be“.

That’s a good start as long as we know who the “we” will be. Perhaps a good place to start is to set out a wish list and work from that. So here’s some of my wishes for how we approach this:

- People first: This must be a people centered process both in design, form and function. We want a living, breathing, vibrant and safe place to live and work with buildings and green spaces that sing to us.

- The Garden City: This is a wonderful brand but needs updating. We can incorporate ideas related to the Garden: permaculture, hydroponics, leisure, tranquility, beauty, shelter.

- Zero waste: We can make Christchurch the greenest city in the world. Recycling is great but true efficiency is in designing wasteless products and systems.

- Ecological clustering: We can create business clusters where organisations can leverage off each other. We can focus on our core strengths and build around that expertise as well as minimising waste streams

- Hagley Park: This could become our Central Park. Surrounded East, North, West and South by business and residential areas. This could help the CBD spread but keep itself anchored at the same time.

- Trains: This is a bit of a long shot. But we have train tracks going through key areas in the city and a train station in a potentially key area. With the current rebuilding we could look at a city loop to connect into the north south line from the central station. If there was ever a time to look at light passenger rail then this is it. We could also fit cycling into this work as well.

- Energy: All new buildings to be fully fitted for solar and small scale wind and then be connected to an integrated grid for feed in tariffs.

As people start to put their wish list together, we will start to see common themes appearing. That may be the best way to get a bottom up blueprint for rebuilding and redevelopment. So I invite readers to list their 5 top wishes below.

Then we can bring in the experts to make it all happen :-)

March 1st, 2011

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A Green Dream: Rebuilding Christchurch as a Sustainable City

170 years ago Christchurch was just a dream, a utopian vision of a green and pleasant land, planned out in England and transported by boat,

the London-based Canterbury Association envisioned Christchurch as an English utopia in the South Pacific. They planned an orderly, tiered society (the first settlers had to brandish a reference from an English vicar attesting to their ‘sobriety and respectability’), with an aristocracy and the Church of England as its head and an underclass of artisans and minions to serve them. They named their fledgling city after an Oxford college (Christ Church) and laid it out like an English city, complete with a Cathedral, University and a boy’s school, Christ’s College, modelled on Eton”.

170 years later it’s been challenged by natural forces and has come off second best: down but not quite out. The CBD has seen between 25-30% of buildings completely destroyed and another 25-30% seriously damaged. The Eastern districts, long known to be built on land of dubious quality, are in serious distress. How does a city recover from this type of disaster?

Well the first thing to remember is that cities have been completely leveled before and have been rebuilt. Lisbon is a fine example of this. On November 1st  1755 an earthquake and tsunami pretty much flattened the city killing tens of thousands and causing damage that reverberated Europe wide. The people of Lisbon responded in an incredible fashion. Wasting no time

On December 4, 1755, little more than a month after the earthquake, Manuel da Maia, chief engineer to the realm, presented his plans for the re-building of Lisbon. Maia presented five options from abandoning Lisbon to building a completely new city. The first plan was to rebuild the old city using re-cycled materials; this was the cheapest option. The second and third plans proposed widening certain streets. The fourth option boldly proposed razing the entire Baixa quarter and “laying out new streets without restraint”. This last option was chosen by the king and his minister.[13]

I would like to consider option 4: razing the entire city and starting again.

Why don’t we demolish the whole CBD and start again, create another utopian vision, this time for a sustainable city: a living breathing system with an integrated energy grid, hi technology buildings in an urban landscape designed for people, creativity and innovation. Of course, we could and should repair and keep our finest historical buildings: the Arts Centre, the Cathedral, the Museum, Christ’s College and any others of a similar standing. There may be some key sites we will have to rebuild but let’s get real: many buildings in Christchurch are/were a complete eyesore; many streets are not that exciting to walk down (for example Colombo Street); many tired shops with very average retail offerings. Many will not be missed and as the most over shopped city in the universe, we can surely survive the loss of many of these. The key challenge will be in how we managed our old heritage with our future one.

So let’s dream a little, not so much as think big but dream big. This is a chance for a new beginning just as it was 170 years ago. We have the opportunity to shape a new future, to create a world leading city and environment, to lead the way and to create new jobs in a hi technology based ecosystem. Our CBD could be smaller and nestled into and around Hagley Park. We simply need better, smarter and healthier buildings, not bigger ones.

I’m going to share some design thoughts just to give people a taste of what dreams can generate, what imagination can create. We want to create something amazing out of this…to somehow make those we have lost proud of what we chose to attempt, to make good out of bad.

Start dreaming now. Lisbon managed it in 1755. I’m sure we can.

About

"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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