Morena Gaylene! It enters the public domain by us sharing and teaching the topic, until it reaches critical mass. Please share it widely, as a post; and a conversational topic. ….this is how we do it :)
Yes, I have been passing on and shared on my FB feed. And there is a convergence of minds on this as well. I want to write to Craig Renney and Opportunity Party asking if they will be catalysts for this change of approach
Perhaps they do understand this analysis, Gaylene. They are cut from the same cloth as those who changed the constitutional rules, and they benefit from it mightily.
I like this explanation. I need to understand it better and then to be able to story it to others so that it is clear and defensible and made patently clear to these people that it is wrong and needs to change. Its those conversations that can make the difference one at a time a thousand times over through a thousand different people doing it in concert. I will print it write all over it and hopefully at the end of that process have a better idea and i can ask intelligent questions to make it as clear to me as i need to make it to others
Banks had lending restrictions removed decades ago and are happy to lend bigger and bigger mortgages because they make more interest the bigger the loan.
That is it.
No reason to take risks on infrastructure projects or risky business ventures when they can keep pumping up the housing market.
If you cannot get a million dollar loan on a house that is *really* worth half that...the price can't inflate.
Thanks Tadgh, very clear explanation. People are not fooled by low inflation smack talk when they know their household economy has been sliding backwards for years.
I don't see any alternative political party suggesting a change, unless it's embedded in the Greens somewhere.
When they increase the OCR I doubt that has ever caused a drop in the CPI or inflation reduction (rate of change of prices faced by consumers today) because the increased interest-income supplies the currency needed for the credit. Unless there is a big difference between propensity of savers to spend and borrowers to save.
Also, the floor interest rate set by the CB determines the floor forward price premium which is the short term interest rate floor. (Markets only determine fluctuations around these floor rates, roughly speaking.) So they are causing all the base inflation. So RBNZ/Tsy comprehension is all backwards.
The effect of the interest rate rise is far worse, because it directly promotes massive inequality. Who are those big savers again? (In $ terms, not percentage terms!)
In the macro unemployment and inequality are the killers. Both need reducing to nearer zero. Best IR policy for this is a permanent zero rate. It is not inflationary. Only a change in the IR causes asset price adjustments. All other prices are functions of other factors and other policies.
It is the crippling inequality increase, I think (no proof), that causes an ease in the CPI, I think because firms see drop off in sales, so they stop price gouging. But obviously it is more complex than this. Just adding my2cents worth.
I found this hard to digest in its original form, so I got Claude to give me a summary. I also asked for a critique from the perspective Steve Keen writes from, primarily, that government spending still competes for real resources — labour and materials, all of which are only available to the extent that affordable energy is - here's what I got out of that conversation, I hope it's helpful:
RBNZ Confessions — A Readable Summary & Heterodox Commentary
THE ARGUMENT IN PLAIN LANGUAGE
Stopford's core thesis is deceptively simple: the Reserve Bank doesn't decide what money builds — commercial banks do. The rest of the article unpacks why this matters and who benefits from the arrangement.
1. The OCR is a lever, not a steering wheel
The RBNZ sets the Official Cash Rate, but actual lending rates are shaped by offshore funding costs, bank balance sheets, risk margins, competition, and capital rules. The RBNZ moves a reference point; banks set the real price. More importantly, price is the wrong question. The question that matters is: where does the money go?
2. Banks create and allocate most of the money supply
When a bank makes a loan, it creates new money. This is not controversial — the RBNZ, the Bank of England, and the Fed have all published this. Banks don't lend out savings; they conjure purchasing power into existence through credit. The critical implication: banks don't just set the price of credit — they decide the direction of it. And they do so based on private incentives: collateral quality, regulatory treatment, and risk-adjusted return.
3. In New Zealand, that allocation overwhelmingly favours housing
Asset-backed lending (mortgages) is low-risk, well-collateralised, and capital-efficient for banks. Lending to productive enterprise is riskier and less attractive. The result: credit flows into existing assets rather than new capacity.
4. The inflation target has a structural blind spot
CPI — the metric the RBNZ targets — excludes house prices. It measures consumer goods inflation, not asset inflation. So the RBNZ can "succeed" on its own terms while households experience ballooning costs through housing and debt servicing. The Household Living-costs Price Index (HLPI) captures this better, but isn't the policy target.
5. When inflation is fought, households absorb the pain
Rate rises squeeze mortgage holders and household spending. Demand falls. CPI drops. But the underlying structure — where credit goes, what gets built — doesn't change. The system stabilises without improving.
6. This wasn't an accident — it was legislated
The late-1980s and early-1990s reforms (Reserve Bank Act, Public Finance Act, asset privatisations — collectively "Ruthenasia" and "Rogernomics") removed sovereign credit creation and developmental mandates. Price stability became the sole organising principle. The question of where credit should flow was handed entirely to private balance sheets.
7. The system persists because incentives align around it
Banks profit from asset-backed lending. Advisory and consulting ecosystems are built around the current framework. Regulatory careers exist within it. International institutions reinforce it. No conspiracy is needed — just alignment.
8. The conclusion
The system isn't broken. It's delivering exactly what its incentives produce. The question isn't whether it works, but who it works for and what it builds. Stopford frames this as a constitutional problem, not a technical one.
---
COMMENTARY FROM A STEVE KEEN PERSPECTIVE
Where Keen would agree strongly:
Credit creation is the main game. This is Keen's life's work. His Debunking Economics and Minsky-based modelling demonstrate that endogenous money creation by banks is the primary driver of economic dynamics — not the central bank's interest rate. Stopford is correct that the OCR is a weak, indirect instrument compared to the actual flow and allocation of bank credit. Keen's empirical work shows that change in private debt is the key macroeconomic variable, and central banks are largely passengers.
Asset price inflation vs CPI is a real distortion. Keen has argued extensively that excluding asset prices (particularly land) from inflation measures creates exactly the blind spot Stopford describes. The "Great Moderation" that central bankers congratulated themselves on was really a debt-fuelled asset bubble they were structurally unable to see.
The post-1989 NZ framework is a case study in neoliberal institutional capture. Keen's broader critique of the economics profession — that it teaches a model of banking (loanable funds) that is factually wrong — applies directly to the intellectual foundations of Rogernomics. The architects of those reforms genuinely believed banks were intermediaries, not creators of money. The institutional design followed from that error.
Where Keen would push back or add nuance:
Sovereign credit creation isn't a magic fix. Stopford (drawing on his wider body of work, not just this article) leans heavily toward the idea that if the government could create money directly, it could simply fund hospitals, housing, and infrastructure without constraint. Keen would be more cautious here. He'd agree the loanable funds framing is wrong, but he'd note that government spending still competes for real resources — labour, materials, energy. The constraint isn't financial (the government can always create NZD), but real — inflation from spending beyond productive capacity. Keen isn't MMT, and he'd be wary of the implicit MMT framing in Stopford's broader project even if the credit analysis is sound.
The Minsky dimension is missing. Keen's key contribution is modelling the instability that endogenous money creates. It's not just that banks allocate credit badly — it's that the credit cycle itself is inherently destabilising. During booms, banks extend credit against rising asset values, which pushes asset prices higher, which justifies more credit — a Ponzi dynamic. This article describes the direction problem (credit goes to housing) but not the dynamic problem (that this process is self-reinforcing until it collapses). Keen would say the instability is as important as the misallocation.
"The system works" framing is too generous. Stopford's rhetorical close — "the system isn't broken, it's delivering exactly what its incentives produce" — is elegant, but Keen would say this understates it. In Keen's framework, the system is inherently unstable and periodically produces debt deflation crises. It's not just working for the wrong people — it's building toward its own failure. The 2008 GFC, which Keen famously predicted, is the proof case.
Land and rent need more emphasis. Keen has increasingly aligned with the classical/Georgist insight that land is the key asset class distorting credit allocation. It's not just "housing" in the abstract — it's that banks lend against land values, which are a monopoly rent, not a productive investment. A Keen-informed version of this article would make the land/improvement distinction sharper.
Overall assessment of veracity:
The factual claims in the article — about how the OCR works, about endogenous money creation, about CPI excluding house prices, about the 1989 reforms — are substantially correct and well-supported by the RBNZ's own publications. This is not fringe analysis; it's what central banks themselves have acknowledged but what mainstream economic commentary still largely ignores.
The political framing — who benefits, what "Ruthenasia" was designed to achieve — is more interpretive, but defensible.
The main weakness from a Keen perspective is that the article is stronger on allocation than on dynamics — it describes where money goes but not the inherent instability of the credit cycle itself. And the implied solution space (sovereign credit creation) needs more guardrails than Stopford typically acknowledges.
Verdict: Sound diagnosis. The heterodox critique would say it doesn't go far enough on systemic instability, and that the implied prescription needs more rigour around real resource constraints.
How does this analysis enter the public domain? Why do Luxon and Willis not understand this? It is all so very dismal.
Morena Gaylene! It enters the public domain by us sharing and teaching the topic, until it reaches critical mass. Please share it widely, as a post; and a conversational topic. ….this is how we do it :)
Happy weekend!
Yes, I have been passing on and shared on my FB feed. And there is a convergence of minds on this as well. I want to write to Craig Renney and Opportunity Party asking if they will be catalysts for this change of approach
Bless you bud! Please do
Perhaps they do understand this analysis, Gaylene. They are cut from the same cloth as those who changed the constitutional rules, and they benefit from it mightily.
They don't care to understand it because it works for their voters. Big business and rentiers.
The way the system works and has since 1985 is a success for the upper 10%.
Nothing is inevitable bud. We are more powerful than we realise. But yes, big change takes time and effort.
Great analysis - allocation of resources to house price inflation is at the heart of all our infrastructure issues.
100% ….financailisation and asset price inflation is also behind the fall of the west
https://www.cfr.org/reports/leapfrogging-chinas-critical-minerals-dominance
I like this explanation. I need to understand it better and then to be able to story it to others so that it is clear and defensible and made patently clear to these people that it is wrong and needs to change. Its those conversations that can make the difference one at a time a thousand times over through a thousand different people doing it in concert. I will print it write all over it and hopefully at the end of that process have a better idea and i can ask intelligent questions to make it as clear to me as i need to make it to others
Banks create 95% of the money / issue the loans.
Banks had lending restrictions removed decades ago and are happy to lend bigger and bigger mortgages because they make more interest the bigger the loan.
That is it.
No reason to take risks on infrastructure projects or risky business ventures when they can keep pumping up the housing market.
If you cannot get a million dollar loan on a house that is *really* worth half that...the price can't inflate.
Thank you Donal! Please do!
Happy weekend :)
Thank you Donal! It’s a process. Keep going, and thank you for carrying the torch. We can, and must, do better
Thanks Tadgh, very clear explanation. People are not fooled by low inflation smack talk when they know their household economy has been sliding backwards for years.
I don't see any alternative political party suggesting a change, unless it's embedded in the Greens somewhere.
Bless you Alan. I can’t see it in any party (yet). Greens and top are closest; without being very close
These points need to hit home:-
*Mortgages have become the golden goose for banks since deregulation in the late 80s and 90s, bar none*
*It is the banks that have created 95% of all money in the last 25 years*
*90% of all private debt / loans are for home loans. This is up from 30% 3 decades ago*
*With no effective limits on lending banks are INCENTIVISED to grant bigger and bigger loans for the same asset as they make more interest*
🎯
Good article. "Where the money goes" is critical.
When they increase the OCR I doubt that has ever caused a drop in the CPI or inflation reduction (rate of change of prices faced by consumers today) because the increased interest-income supplies the currency needed for the credit. Unless there is a big difference between propensity of savers to spend and borrowers to save.
Also, the floor interest rate set by the CB determines the floor forward price premium which is the short term interest rate floor. (Markets only determine fluctuations around these floor rates, roughly speaking.) So they are causing all the base inflation. So RBNZ/Tsy comprehension is all backwards.
The effect of the interest rate rise is far worse, because it directly promotes massive inequality. Who are those big savers again? (In $ terms, not percentage terms!)
In the macro unemployment and inequality are the killers. Both need reducing to nearer zero. Best IR policy for this is a permanent zero rate. It is not inflationary. Only a change in the IR causes asset price adjustments. All other prices are functions of other factors and other policies.
It is the crippling inequality increase, I think (no proof), that causes an ease in the CPI, I think because firms see drop off in sales, so they stop price gouging. But obviously it is more complex than this. Just adding my2cents worth.
Thanks bud. I appreciate your contributions, and I agree with you
I found this hard to digest in its original form, so I got Claude to give me a summary. I also asked for a critique from the perspective Steve Keen writes from, primarily, that government spending still competes for real resources — labour and materials, all of which are only available to the extent that affordable energy is - here's what I got out of that conversation, I hope it's helpful:
RBNZ Confessions — A Readable Summary & Heterodox Commentary
THE ARGUMENT IN PLAIN LANGUAGE
Stopford's core thesis is deceptively simple: the Reserve Bank doesn't decide what money builds — commercial banks do. The rest of the article unpacks why this matters and who benefits from the arrangement.
1. The OCR is a lever, not a steering wheel
The RBNZ sets the Official Cash Rate, but actual lending rates are shaped by offshore funding costs, bank balance sheets, risk margins, competition, and capital rules. The RBNZ moves a reference point; banks set the real price. More importantly, price is the wrong question. The question that matters is: where does the money go?
2. Banks create and allocate most of the money supply
When a bank makes a loan, it creates new money. This is not controversial — the RBNZ, the Bank of England, and the Fed have all published this. Banks don't lend out savings; they conjure purchasing power into existence through credit. The critical implication: banks don't just set the price of credit — they decide the direction of it. And they do so based on private incentives: collateral quality, regulatory treatment, and risk-adjusted return.
3. In New Zealand, that allocation overwhelmingly favours housing
Asset-backed lending (mortgages) is low-risk, well-collateralised, and capital-efficient for banks. Lending to productive enterprise is riskier and less attractive. The result: credit flows into existing assets rather than new capacity.
4. The inflation target has a structural blind spot
CPI — the metric the RBNZ targets — excludes house prices. It measures consumer goods inflation, not asset inflation. So the RBNZ can "succeed" on its own terms while households experience ballooning costs through housing and debt servicing. The Household Living-costs Price Index (HLPI) captures this better, but isn't the policy target.
5. When inflation is fought, households absorb the pain
Rate rises squeeze mortgage holders and household spending. Demand falls. CPI drops. But the underlying structure — where credit goes, what gets built — doesn't change. The system stabilises without improving.
6. This wasn't an accident — it was legislated
The late-1980s and early-1990s reforms (Reserve Bank Act, Public Finance Act, asset privatisations — collectively "Ruthenasia" and "Rogernomics") removed sovereign credit creation and developmental mandates. Price stability became the sole organising principle. The question of where credit should flow was handed entirely to private balance sheets.
7. The system persists because incentives align around it
Banks profit from asset-backed lending. Advisory and consulting ecosystems are built around the current framework. Regulatory careers exist within it. International institutions reinforce it. No conspiracy is needed — just alignment.
8. The conclusion
The system isn't broken. It's delivering exactly what its incentives produce. The question isn't whether it works, but who it works for and what it builds. Stopford frames this as a constitutional problem, not a technical one.
---
COMMENTARY FROM A STEVE KEEN PERSPECTIVE
Where Keen would agree strongly:
Credit creation is the main game. This is Keen's life's work. His Debunking Economics and Minsky-based modelling demonstrate that endogenous money creation by banks is the primary driver of economic dynamics — not the central bank's interest rate. Stopford is correct that the OCR is a weak, indirect instrument compared to the actual flow and allocation of bank credit. Keen's empirical work shows that change in private debt is the key macroeconomic variable, and central banks are largely passengers.
Asset price inflation vs CPI is a real distortion. Keen has argued extensively that excluding asset prices (particularly land) from inflation measures creates exactly the blind spot Stopford describes. The "Great Moderation" that central bankers congratulated themselves on was really a debt-fuelled asset bubble they were structurally unable to see.
The post-1989 NZ framework is a case study in neoliberal institutional capture. Keen's broader critique of the economics profession — that it teaches a model of banking (loanable funds) that is factually wrong — applies directly to the intellectual foundations of Rogernomics. The architects of those reforms genuinely believed banks were intermediaries, not creators of money. The institutional design followed from that error.
Where Keen would push back or add nuance:
Sovereign credit creation isn't a magic fix. Stopford (drawing on his wider body of work, not just this article) leans heavily toward the idea that if the government could create money directly, it could simply fund hospitals, housing, and infrastructure without constraint. Keen would be more cautious here. He'd agree the loanable funds framing is wrong, but he'd note that government spending still competes for real resources — labour, materials, energy. The constraint isn't financial (the government can always create NZD), but real — inflation from spending beyond productive capacity. Keen isn't MMT, and he'd be wary of the implicit MMT framing in Stopford's broader project even if the credit analysis is sound.
The Minsky dimension is missing. Keen's key contribution is modelling the instability that endogenous money creates. It's not just that banks allocate credit badly — it's that the credit cycle itself is inherently destabilising. During booms, banks extend credit against rising asset values, which pushes asset prices higher, which justifies more credit — a Ponzi dynamic. This article describes the direction problem (credit goes to housing) but not the dynamic problem (that this process is self-reinforcing until it collapses). Keen would say the instability is as important as the misallocation.
"The system works" framing is too generous. Stopford's rhetorical close — "the system isn't broken, it's delivering exactly what its incentives produce" — is elegant, but Keen would say this understates it. In Keen's framework, the system is inherently unstable and periodically produces debt deflation crises. It's not just working for the wrong people — it's building toward its own failure. The 2008 GFC, which Keen famously predicted, is the proof case.
Land and rent need more emphasis. Keen has increasingly aligned with the classical/Georgist insight that land is the key asset class distorting credit allocation. It's not just "housing" in the abstract — it's that banks lend against land values, which are a monopoly rent, not a productive investment. A Keen-informed version of this article would make the land/improvement distinction sharper.
Overall assessment of veracity:
The factual claims in the article — about how the OCR works, about endogenous money creation, about CPI excluding house prices, about the 1989 reforms — are substantially correct and well-supported by the RBNZ's own publications. This is not fringe analysis; it's what central banks themselves have acknowledged but what mainstream economic commentary still largely ignores.
The political framing — who benefits, what "Ruthenasia" was designed to achieve — is more interpretive, but defensible.
The main weakness from a Keen perspective is that the article is stronger on allocation than on dynamics — it describes where money goes but not the inherent instability of the credit cycle itself. And the implied solution space (sovereign credit creation) needs more guardrails than Stopford typically acknowledges.
Verdict: Sound diagnosis. The heterodox critique would say it doesn't go far enough on systemic instability, and that the implied prescription needs more rigour around real resource constraints.