Quantitative Easing: An Obituary

Tuesday, 20 July 2021

Infometrics economists mull quantitative easing in 2020.

OPINION: New Zealand’s version of quantitative easing will die on Friday, but has seen so little action in recent months that it might as well have died months ago.

Reserve Bank governor Adrian Orr announced its demise via a press release last Wednesday amid a sea of inflationary panic.

Quantitative easing spent its life buying up government and local government debt with the Reserve Bank’s money, effectively keeping the price of this debt low by moving around a couple of numbers on a spreadsheet.

However, this is not how most people will remember it.

* Infrastructure and housing could still be handbrakes in a post-Covid world

Reserve Bank Governor Adrian Orr has announced an end to quantitative easing.

* Who's the Government borrowing the money from to pay for Covid-19 response?

* Raising cap on money printing to $100b and buying US bonds tipped as options for Reserve Bank

They will instead fondly look back on it the way they imagined it: an inkjet printer in Orr’s office spitting out banknotes with an audible “brrrr”, and assistant governor Christian Hawkesby running the printouts down to Finance Minister Grant Robertson’s place.

News of its impending death prompted economists to push out teary eulogies at its passing.

Infometrics economist Brad Olsen was first.

“It did its job,” he said. “Anyone who owns a house would say it helped, anybody who didn’t would throw some rocks at you.”

Kiwibank chief economist Jarrod Kerr says quantitative easing has been successful.

Kiwibank chief economist Jarrod Kerr was similarly effusive: “Yeah, it was successful.”

Effervescent praise flowed too from strategy and risk consultant Raf Manji: “It did what it was supposed to do,” he said, before adding that he wished it had stopped doing what it was supposed to do several months ago.

Quantitative easing was born overseas in the throes of the global financial crisis as central banks used it as a tool to stimulate the economy beyond the cutting of already-low interest rates.

When Covid-19 hit, our interest rates were close to zero and people like Kerr were looking nervously at soaring bond prices for government debt around the world.

House prices shot up as investors put their money into housing assets.

Buyers of these bonds were not sure how to price them. Since government bonds are the basis for interest rates on other forms of debt, this would have flow-on effects for the rest of the market.

“I don’t know if panic was the right word, but they certainly weren’t trading in a way that you would expect, and it reminded us, very briefly, of the [global financial crisis], which is not nice,” Kerr said.

So the Large-Scale Asset Purchase (LSAP) programme was born. It started out capped at $30b with the Reserve Bank only able to hold a maximum of 50 per cent of all government bonds, but later expanded to $100b with a limit of 60 per cent.

Its spending would never get anywhere near this last total; when its death was announced just $53b had been spent.

Raf Manji says the quantitative easing tap should have been turned off earlier.

Buying up so many of these bonds forced investors to put money into riskier assets. In New Zealand the word ‘’asset’’ is pretty much synonymous with the word “house”, which is one reason why property prices soared.

Kerr said everyone was a little awkward about this very much intended side-effect now, but it was kind of the point.

“Let’s pretend house prices were down 30 per cent today … actually the majority of people would be pretty bloody nervous right now, and not spending as a result.”

Manji said the mistake was the Reserve Bank just did not turn off the tap fast enough.

Everyone feared a liquidity crisis, but, really, parts of the economy connected with the movement of people had just been switched off. Things would be fine if we could continue trading goods across borders. All of this should have been clear to the Reserve Bank by August.

“I don’t think people were quite prepared to go, oops, actually we need to reverse this.'

Kerr said another problem was we did not borrow enough. Purchases of government bonds were already slowing as each quarter the Government triumphantly announced ratings upgrades and that it was borrowing less than promised.

“It [quantitative easing] kind of died of natural causes.'

This was the big mistake. We did not lean enough into QE to enable enough new housing to be built as more houses were being snapped up.

Kerr said the Reserve Bank played around with a few council bond purchases but never really came out with its “ears pinned back” and promised to use its unlimited balance sheet to suck up council debt.

A pledge on this scale would have removed overblown fears of council debt downgrades.

Or the Government could have simply borrowed the money itself and given it to councils, subverting debt caps.

“We’ve found ourselves with this gaping hole and councils which are insufficiently funded. That is the New Zealand problem right there,” Kerr said.

“That is the reason why we have a housing market which is up 30 per cent. You’re going to see interest rates rise [now], but I don’t think you are going to see house prices fall.'