As we all battle COVID-19, some spending is stopping, suddenly.
For many businesses it is like stepping into the void. Already in a few days New Zealand has over 27,000 wage subsidy applications. That is a lot and it’s just the start. Sadly, higher unemployment will happen as many of us battle in the grandstands against something we can’t see while we all wish the very best for our brave medical specialists at the front line.
Turning back to the business implications, it’s clearly not good enough that we observe businesses shutting up, suddenly. So I think we should move even faster to support households, businesses and the financial system. I don’t have the answers. Others are working on new policies, I am sure. This note is to encourage implementation quickly.
The policies don’t have to be perfect; we can make adjustments.
We have generally universally welcomed the initial responses: to close the borders, to give us a clear warning scale for our responses, to encourage social distancing especially for our most vulnerable people, and mostly to wash our hands. But right now, this week, we can do more to protect people, get cash to people and to shore up the financial system, which is strong – but perhaps now is the time to make it unquestionably strong.
So I think we should do a lot more. This is only my opinion and I would not have been writing this last month.
Anyone who knows me will know I am very optimistic about people, innovation, and the capacity of society and businesses to adapt and thrive. So this is not a negative perspective; it is a let's get on and move faster viewpoint.
We know that moving fast against covid-19 is good.
Match quickening health moves ...
We should match this with moving even faster to protect households and businesses and jobs.
What more can we do in terms of financial policy?
Many New Zealand small businesses have recourse loans to their house. That is: if they can't repay their loans, the bank could take their home. Many business owners will probably want to protect their homes ahead of their business.
A cash crisis this week for our banks was headed off by the Reserve Bank of New Zealand when it provided an open tap for domestic short term liquidity and in the foreign exchange markets. We effectively printed a lot of money and that was good and totally necessary.
... With even more economic supports
But looking across the Tasman, we can see just how hard we may need to go to supporting banks so they can support households and businesses. The ultimate goal right now is to keep as many jobs as we can. The 27,000 applications for wage subsidies in only a matter of days was far higher than I would have expected and indicates the scale of the looming challenges.
Australia thinking bigger
Action in Australia for the banks could be the start of a road map for New Zealand.
I was pleased to see large cuts to interest rates here, but in Australia those cuts have come with a commitment to lend at those low rates for three years. Rates will stay at those levels in Australia until the economy returns to full employment anyway – and that could be some time. The Reserve Bank of Australia also kicked in, buying Australian government bonds at a fixed yield providing a strong signal which allows banks to be certain in setting interest rates on fixed term mortgages.
Most Australian banks sliced their fixed term mortgage rates by up to 0.7% last week; many also cut their business loan interest rates as well. But the big policies included the provision of a facility to lend at 0.25% to companies for up to 3 years, and up to A$90 billion of new lending. It is clear that Australia is thinking much bigger than New Zealand.
The RBA governor, Philip Lowe, said as much when noting “the focus is on supporting businesses and households and further help will be required and additional policy measures will be announced shortly”.
The language used, I think, is as important as the action.
It seems clear that the banks have started to get the nod. Late this week, two banks announced large packages of support for businesses in Australia, which included deferral of principal and interest, new, much cheaper home and business loans and fast facilities for unsecured lending for existing customers. Some banks also deferred all credit card payments. One bank calculated this was equivalent to a A$1,834 per month improvement in cash flows for the typical household.
This is a very quick way to get money into households. And it could change decision-making regarding cutting jobs.
This was in Australia, not New Zealand. These are the headlines we need to see in New Zealand in my opinion.
What does NZ really need?
What do we really need? Despite Australia moving quickly to support businesses and the financial system, some financial analysts are pushing for a lot more. They suggest all banks should move to interest-only mortgage payments supported by the central bank. This would be a huge stimulus.
More importantly, new small business non-recourse business loans (unsecured lines of lending) should be available with no risk weight for the banks in their prudential requirements. This could be the big circuit-breaker to keep people employed.
Housing market risk
I understand there are moral hazard problems in not tying in loans to consequences. But right now, the opposite could drive some very negative behaviour which could spill over to the housing market. We should avoid that at all costs.
Already both in Australia and New Zealand there has been some easing in the capital buffers for banks. Right now these should be eased sharply.
Likewise, the strict bank covenants that many companies face on their lending need to be waived for the time being (for as long as it takes), giving space for new lending and capital.
Finally, if a very large increase in spending by the government is to be effective in New Zealand, I think it needs to be paired with a extraordinary expansion of the banking system’s balance sheet.
In other words, the Reserve Bank of New Zealand needs to purchase government and possibly other bonds, and in these circumstances, probably indicate they will look to also buy other loans and credits as needed.
This is not the GFC
This is not a view I supported for New Zealand during the global financial crisis where I was concerned about moral hazard and bailing out banks.
However, today we face something we need to confront with fast action.
Fortunately, the RBNZ has already laid out a playbook for aggressive quantitative easing, and it seems to me the earlier the better, given the likelihood that the government increases spending and wants to get cash to households and businesses.
However, after listening to a many conference calls from medical experts and overseas financial experts, and despite the proposed very large fiscal expansion, I still don’t think the proposed economic and financial response to the crisis is as large or as urgent as the health response that I hear our top medical advisers urging.
The risk of caution and BAU thinking
If covid-19 comes to our shores in the way many expect, the void we are potentially heading into will need further extraordinary measures, and the risk of moving slowly seems very large.
We can always pare back our financial and economic policy response, but right now companies and households need a lot more financial security, and the price of that security seems small.
The additional shock last week was the package arranged for Air New Zealand. It seems unusual to arrange a loan at penalty interest rates. Either offer unlimited financial support or put in money as equity.
Perhaps we shouldn’t be so precious about how things are done right now. Australia is offering effective unlimited lines of credit at 0.25%, we offered the Air New Zealand board a limited package at interest rates of 7% to 8%. I must be missing something.
In a way it probably only matters to the minority investors in Air New Zealand, but as an indication of the extraordinary capital requirements we may need elsewhere in the economy it seemed to be a poor steer. The cost of capital should be close to zero.
It may be that the covid-19 virus does not move to widespread community infection.
Let’s hope for that and it may be that we can avoid further social distancing and the closure of some of our country for a 3-to-6 months or longer.
Let's hope the world’s medical scientists find a standard of care for covid-19 with one of the many clinical trials now underway, and even better that a vaccine is available before the next Northern Hemisphere winter.
Better still, right now I am hoping that widespread community transmission is not underway in New Zealand, and that we avoid a tidal wave of cases overwhelming our hospitals. It is easy to catastrophise and that isn’t very useful in finding solutions. So I will continue to listen to the official advice and the real medical experts. As I listen I am still backing our scientists and the medical leadership to find solutions, and thanking hugely our doctors and nurses for the long haul in the months ahead.
At the same time while I am sure we will get further fiscal stimulus; that needs to be supported by brave and fast action in our financial system; action that is unprecedented. Faster and more.
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