Central bankers draw parallels with 1987 crash

Internationally, doubts about whether the traditional relationship between interest rates and growth rates even still exists are being voiced.

OPINION: Irrespective of who forms a government this week, Winston Peters can count on a win of sorts on one of the subjects he’s campaigned on relentlessly for nigh on 30 years – the conduct of monetary policy.

Peters’s objections to the way the Reserve Bank targets inflation rather than a basket of indicators of economic health is kind of oldfashioned. In essence, he sees the issue purely through the lens of the strength and volatility of the New Zealand dollar.

His analysis and policy prescriptions have changed very little since he latched onto the issue in the mid-1980s.

Lately, however, there have been wider questions of whether 1980s monetary policy doctrine is appropriate as we approach 2020, and Peters finds himself in increasingly good company.

Labour has been wanting an unemployment target inserted into the Reserve Bank’s Policy Targets Agreement for some years.

And National has been pushing the Reserve Bank hard on how well it is exercising its powers ever since 2014, when former governor Graeme Wheeler was seen to have stalled the economy unnecessarily by raising interest rates too early.

A review of monetary policy ordered by Steven Joyce, after he took over the Finance Minister’s role from Bill English, is way past its reporting deadline, and Joyce is said to have taken so much interest in who will replace Wheeler as to risk interfering with the central bank’s statutory independence.

Internationally, doubts about whether the traditional relationship between interest rates and growth rates even still exists are being voiced by some of the most senior practitioners of the dark art of inflation control.

The topic was a backdrop for last weekend’s annual meeting of the International Monetary Fund, in Washington DC, where hopes that the global economy is ‘‘normalising’' a decade after global financial crisis are hedged with concerns that the cure has laid the seeds for the next global financial crisis.

‘‘Our framework for understanding inflation dynamics could be mis-specified in some fundamental way,’’ United States Federal Reserve chairwoman Janet Yellen said last month. Meanwhile, the

labelled central bankers the ‘‘new masters of the universe’’, replacing Wall Street for their role in saving the world economy from deep post-GFC recession by massive monetary pump-priming.

The trouble, the suggested, was that central bankers ‘‘might not understand what makes a modern economy tick and their well-intentioned actions could prove harmful’’.

And in a parting shot before becoming Speaker in the new German Parliament, that country’s hawkish finance minister, Wolfgang Schauble, warned that unwinding the US$11 trillion (NZ$15.3 trillion) of government-backed debt created by post-GFC ‘‘quantitative easing’’ (QE) may not be a cakewalk.

‘‘Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt,’’ he said.

magazine picked up the same theme, with its cover story on ‘‘the bull market in everything’’.

How long can so many classes of assets can remain as highly valued as they appear to be now, especially as QE debt underpins those values and that QE is coming to an end?

The parallels with the conditions before the 1987 sharemarket crash have attracted media attention both offshore and in New Zealand, where the NZX 50 index cracked 8000 for the first time last week.

Of course, there is always some doom-monger somewhere forecasting an imminent financial catastrophe. What makes the current harbingers worrying is their source – the very central bankers and policymakers who oversaw the run-up of post-GFC debt that created the potential for new bubbles to pop today.

At least, in New Zealand, the Government’s finances are in good shape, running fiscal surpluses and with Crown net worth improving.

However, for heavily indebted private households and firms, the outlook may not be so rosy if global conditions were to turn suddenly for the worse again.