Reforming reform
HOST:
So we’ve got an expensive economy?
MINISTER:
Yes.
HOST:
And low productivity?
MINISTER:
Yes.
HOST:
And most credit goes into housing?
MINISTER:
Yes.
HOST:
And the central bank targets inflation… that excludes housing?
MINISTER:
Correct.
HOST:
And the government made it harder to invest?
MINISTER:
We improved fiscal discipline.
HOST:
So the system creates money…
and directs it away from production…
and ignores the inflation it does create?
MINISTER:
That is one interpretation.
HOST:
It’s the only one that matches the data.
1. LIBERALISATION: CREDIT CREATION FREED, ALLOCATION UNGOVERNED
Institution → Rule → Mechanism → Outcome
Institution: NZ financial system (post-1984 reforms)
Rule: Removal of controls on credit and bank lending
Mechanism: Banks free to expand lending without quantitative limits
Outcome: Credit flows to highest-return collateral (housing)
Evidence:
“All controls on… credit… were lifted… banks were freed from any quantitative limits on their lending growth.”
Implication:
The state stopped directing credit
The system defaulted to collateral logic
→ Land wins. Always.
2. MONETARY POLICY: PRICE OF CREDIT, NOT ALLOCATION
Institution: Reserve Bank of New Zealand
Rule: Reserve Bank of New Zealand Act 1989 → price stability (CPI target)
Mechanism: OCR adjusts cost of borrowing, not where lending goes
Measurement: CPI (partial inflation basket)
Outcome: Stable CPI coexists with asset inflation
Evidence:
Inflation targeting formalised as primary objective
Critical mechanical point:
OCR = price signal
Banks = allocation authority
So:
The system controls how much it costs to borrow, not what gets built
3. MEASUREMENT: CPI EXCLUDES CORE COST DRIVERS
Institution: Stats NZ / RBNZ policy framework
Rule: CPI as inflation target
Mechanism:
Excludes house purchase prices
Excludes mortgage principal
Weakly captures housing cost dynamics
Outcome:
Housing-credit inflation ≠ “inflation problem”
Policy does not respond to it
This is your “honest weights and measures breach”:
→ What matters (housing, land, credit expansion)
→ is not what is measured
4. FISCAL/ACCOUNTING: PUBLIC CAPITAL DISCOURAGED
Institution: Public Finance Act 1989
Rule: Accrual accounting + debt framing
Mechanism:
Public investment shows up as debt increase
Political narrative = “cost” not “asset formation”
Fiscal discipline rules constrain issuance
Evidence:
Act embeds reporting, borrowing control, and fiscal responsibility framework
Outcome:
Sovereign development credit collapses
Infrastructure investment becomes politically harder
5. COMBINED SYSTEM EFFECT (YOUR CORE CLAIM)
Now stack the layers:
MEASUREMENT → POLICY → INCENTIVES → CREDIT → STRUCTURE → OUTCOME
1. Measurement
CPI excludes housing-credit dynamics
2. Policy rule
RBNZ targets CPI only
3. Incentives
No penalty for housing credit expansion
Strong penalty for CPI inflation
4. Credit allocation
Private banks dominate
Lending flows to housing (best collateral)
5. Economic structure
Housing-heavy economy
Underinvestment in productive sectors
6. Outcome
High asset prices (expensive economy)
Weak productivity (unproductive economy)
6. WHY THIS PRODUCES “EXPENSIVE”
Mechanically:
Credit → flows into land
Land prices → rise
Housing costs → rise
Wages → must rise to compensate
Business costs → rise
→ Entire economy reprices upward
But:
CPI only partially captures this
So policy does not correct it
7. WHY THIS PRODUCES “UNPRODUCTIVE”
At the same time:
Credit is not flowing to:
Industry
Infrastructure
Energy systems
Export sectors
Because:
These are riskier
Less collateralised
Longer horizon
Meanwhile:
Public sector no longer fills the gap (post-1989 fiscal/credit constraints)
→ Capital formation collapses outside housing
8. THE CRITICAL ABSENCE: PUBLIC DEVELOPMENT CREDIT
Pre-reform system (simplified):
State + banks → co-produced capital formation
Post-reform system:
State retreats
Banks dominate
Allocation = private return logic
Result:
The system no longer has a mechanism to build the real economy at scale
9. YOUR CORE LINE — NOW FULLY LOCKED
You said:
“When mis-measurement hides housing-credit inflation; and public development credit disappears, private mortgage lending becomes the dominant channel…”
That’s exactly right.
In TBLR form:
CLAIM:
Institution: RBNZ + Treasury + financial system
Rule: CPI targeting + credit liberalisation + fiscal accounting constraints
Mechanism:
Housing inflation excluded from target
Credit allocation left to private banks
Public investment discouraged
Measurement: CPI (partial), not housing-credit system
Outcome:
Mortgage-dominant credit system
High costs (housing-led inflation)
Low productivity (underinvestment)
10. THE NON-OBVIOUS INSIGHT (THIS IS THE KILL SHOT)
The system does not fail despite its design.
It produces these outcomes because of its design.
It stabilises CPI
While allowing asset inflation
While removing public capital formation
While delegating credit allocation
→ That combination selects for:
Property speculation
Infrastructure decay
External dependence
Sorry for the trite comment. Im bothered a lot by the thought that the talk now is of possibly 3 interest rate hikes this year because of inflationary pressures. Pretty much summed up in your post yesterday Taghd. It is actually hard to think of a worse outcome for those people with mortgages. While those with savings will benefit. It feels like vandalism of the economy. For what? Surely the extra hardship we all feel at the pump is extracting enough out of the economy without the Aussie banks getting a share.