Orthodoxy under challenge

The first time I ever saw Prime Minister John Key, other than when he was giving a speech or holding a press conference, he was pressing the flesh at the opening of very pleasant new digs for JBWere's private wealth management unit in Wellington, a year or so ago.

Key was clearly among friends.

I was reminded of that evening earlier this week when a remarkable document arrived from JBWere's highly rated head of strategy for New Zealand, Bernard Doyle.

In it, Doyle said New Zealand has to wake up to just how much the world has changed since the global financial crisis, and that this country's relative immunity from its worst impacts may not last.

The Reserve Bank needs to start using "a blend of creative credit easing and New Zealand dollar intervention", he argues.

And, for good measure, the Government needs to intervene to save Solid Energy's Spring Creek mine. That's because it's too big an employer on the West Coast, the skills that reside in its operations are too hard to replace, and the volatility of international coking coal prices are too great to justify a swift closure.

Doyle went further, saying the Reserve Bank should be "very worried" about the stability of the New Zealand financial system.

Key dismissed that warning as "nonsense", but Doyle's intervention may come to mark a sea change in the national debate between sticking with the economic orthodoxy of the past 25 years, and looking again.

That's because, although the Government might ignore Berl economists, Labour or the Greens mounting these arguments, Doyle's comments constitute friendly fire.

It also came in the same week the Government shot down NZ First's private member's bill trying to broaden the Reserve Bank's objectives beyond simply curbing inflation.

Signs of weakening business sentiment have also emerged in the first half of the week, ahead of this morning's gross domestic product figures for the June quarter - a result so uncertain that forecasters are picking anything from a slightly shrinking to a modestly growing economy.

All of these factors coincide with the departure of Reserve Bank governor Alan Bollard (whom Doyle has virtually accused of complacency) and his replacement by expatriate Graeme Wheeler, who has worked at the highest levels of the World Bank in recent years.

If anyone knows what the global financial crisis looks like from the inside, and the state of international thinking on innovative monetary policy responses, Wheeler should be the man.

Yet Cabinet signed off Wheeler's new policy targets agreement on Monday, Key told media, with "only minor amendments". But with new macro-prudential tools at his disposal to help snuff out a nascent Auckland housing bubble, and a dollar that has been stuck for more than a year at above US80 cents, Wheeler may want to test Bollard's relaxed assumptions sooner rather than later.

Certainly, he will be egged on by Labour's finance spokesman, David Parker, who has been trying for months to get traction on the issue of getting the kiwi down, and the Greens, who have called for quantitative easing - printing money - within the past 12 months.

Although Parker's thinking is still evolving, he is convinced inflation targeting has failed New Zealand, as indicated by a high dollar that is hurting exporters badly, and three decades of current account deficits that show no signs of improving.

"It really annoys me when monetary policy says it's everyone else's fault," he says.

"Central banks didn't effectively manage asset price bubbles" in the last decade, and the Reserve Bank of New Zealand was out of step with the international trend to what Doyle described as "breaking all the rules".

Both Parker and he suggest we need to break a few ourselves - that New Zealand's orthodox, "straight bat" predictability is part of our problem.

In the wacky world of monetary policy signalling, taking some heat out of an overvalued dollar might be no more difficult than simply behaving less predictably.

A sudden burst of negative news about how the New Zealand economy is stagnating, and perhaps less stable than it appears because of its uncompetitive exchange rate, could help too.

At its simplest, Doyle sees potential for an unexpected whiplash blow to the New Zealand economy as the global financial crisis grinds on.

The slowdown in Australia and Asia and the slew of big local restructurings by Norske Skog, Rio Tinto and Solid Energy all signal the potential for more retrenchment to come.

In the meantime, New Zealand is simply "importing other people's problems" by sticking with much the same formula for monetary policy while the rest of the world engages in what Parker calls "competitive devaluation" to try to restore economic growth.

BusinessDesk's Pattrick Smellie has been awarded the Air NZ-British High Commission business journalism scholarship to spend 10 days researching and writing stories in Britain, based at the Financial Times in London.