by Alan Bollard with Sarah Gaitanos. Auckland University Press, 2012, 253 pages.
To most New Zealanders, Alan Bollard is the distant Governor of the Reserve Bank, the man who pushes up their mortgage rates or causes an over-valuation of the exchange rate – the man who is always there like the Grinch that stole Christmas, eager to spoil a good party.
Well, that’s a role which the Governor often has to play for the long-term good of all New Zealanders – a bit like a parent who has to limit her teenage son’s access to alcohol.
But Dr Bollard’s latest book also shows him to be intensely human – a man who is deeply concerned about the effect of his actions on ordinary New Zealanders, a man who is totally loyal to New Zealand, a man who gets tired and even gets migraines, and a man with a delightful sense of humour.
There have been lots of books about the crisis through which the world has come over the last couple of years, but none to my knowledge written by a central bank governor who was in the thick of the action throughout – until now.
For anybody interested in the New Zealand economy, this book is a must read. It is highly readable, with just the right amount of detail. Dr Bollard leaves the reader in no doubt at all that the world was closer to economic Armageddon than it has been since the ‘thirties.
Perhaps I enjoyed it more than the average punter because of course I know personally many of the people whom Dr Bollard discusses, both inside the Reserve Bank and overseas. By coincidence, I was myself in Washington having dinner with one of the Governors of the Federal Reserve System in late September 2008, less than a fortnight after the collapse of Lehmans and the near-collapse of AIG, and can certainly confirm that Dr Bollard captures well the sense of panic which was then engulfing the financial centres of the world.
Fortunately, at no stage did I have to deal with a crisis of the magnitude that he has had to steer us through. But I have some understanding of the stress, the worry, and the adrenalin generated in a crisis – think the collapse of DFC (still our largest ever financial collapse), the near collapse of the Bank of New Zealand during the election campaign of 1990, the fear that Y2K would cause a run on the banks, and the panic of September 11, 2001. It is at times like these that a Governor appreciates the loyalty and professionalism of his staff, and Dr Bollard is generous in acknowledging the quality of his colleagues.
For me, there were two particularly worrying things which he highlights. First, with a very tiny number of exceptions, nobody saw this crisis coming. Most commentators, including Alan Greenspan, were confident that the brave new world of derivatives had enabled the global financial system to spread risk to those most able to carry that risk. Yeah right! The brave new world of derivatives served to spread the effects of the collapse of the American housing market far and wide, both within the US and well beyond. Perhaps the most sinister effect of this was that nobody knew just which financial institutions were most exposed to the American housing market, so that the only prudent course of action was to pull back, and lend to no other financial institution. The money markets of the world froze.
Dr Bollard compares the situation to the devastation and the panic wrought by the bubonic plague in medieval Europe – nobody quite understood where death would strike next, nor what could be done to stop the carnage.
But equally worrying is the point he makes again and again, that at the root of the crisis there were some deep-seated imbalances in the global economy – characterised by excessive savings in some developing countries and by seriously inadequate savings in some developed countries, notably including the United States and New Zealand.
Unwinding those imbalances is the challenge we face now. China and some other countries need to save less. The United States and some other countries need to save more. In our own case, there are encouraging signs that New Zealanders are, for the first time in many years, beginning to save a little more. But there is a long way to go. New Zealand entered this crisis with a relatively low level of government debt. But that situation is changing: as the Minister of Finance reminds us from time to time, he is now borrowing close to $1 billion every month.
But the real headache is private sector indebtedness: despite the mortgage rates we love to complain about, we have borrowed like there was no tomorrow for the last two decades and much of that borrowing has been funded from overseas. If we are to reduce our vulnerability to future shocks, we’ll need to borrow quite a bit less and save quite a bit more.
Dr Bollard has done us all a service by reminding us what can happen if we don’t.
Copyright © 2024 Don Brash.