controlling the money supply

excellent piece in the herald today by bryan gould. best bit:

In neither case is it likely that the Reserve Bank or those who advise them will notice what is staring them in the face - that the most obvious, and easily dealt with, cause of inflation in our economy is the high and fast-growing volume of bank lending.

Private sector credit has grown by six times over the past 20 years, from $44 billion in 1988 to $266 billion in 2008; the largest and fastest-growing element in that credit growth has been bank lending on mortgages for the purpose of buying residential property.

and this:

If the key to controlling inflation is to limit the growth in the money supply, why not deal with the fastest-growing element in that money supply?

If the Reserve Bank is ready to improve the banks' liquidity at times of credit stress, why do they not intervene to restrain that liquidity at times of inflationary pressure?

we are constantly told that the leading cause of inflation in the economy is overspending by the government. hardly ever is the role of banks mentioned, nor has there been any public pressure for restraint on the level of credit being made available. it could be because people are unaware of the wider consequences of that full-geared rental property; or just that they are happy counting their potential profits as the value of their property has been (until recently) rising.

in any case, the reserve bank has never been under any pressure to place limits on the availability of credit. on the contrary, last week mr bollard was chiding banks for being too tough in their lending policies. is he really saying that the way to improve the economic downturn is to get people into more debt? i'd say it was better to reduce interest rates, so that people had more discretionary cash from lower loan repayments, not from increased borrowing.

mr gould suggests that the reserve bank hasn't been challenged because:

the bank economists who dominate the economic policy debate in the media have a vested interest in diverting attention away from it.

it's really frustrating to hear people like tony alexander and other bank economists given the amount of airtime that they do. it's clear these people are not independent, they are paid to ensure the organisations they work for remain profitable. yet their commentary is taken as authoritative and many of them have regular columns in the business pages of our newspapers.

just as the real estate institute or individual agensts are often called on for comment about the property market. these guys are interested in ensuring that people continue to buy and sell more properties, and they're not really concerned if you have mortgaged yourself to the hilt to do so. neither are they concerned with the consequences of large numbers of people doing just that. they aren't a source of independent advice.

the most difficult problem is that the level of financial literacy of most nz'ers is pretty low. we're not that much interested in economics, and it's a subject that is often more theoretical than practical. i certainly hated studying it, and found it a real bore. yet the impact that economic decisions by government, big business, banks etc have on our daily lives is massive.

we need to improve our understanding of these issues. because until that happens, we will continue to accept what self-interested commentators are telling us, and we won't press for change in the areas where change is most desperately needed.