Wheeler speech close to politically fraught

VERNON SMALL
Last updated 09:00 01/11/2012

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Vernon Small

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OPINION: If the Government changes in 2014, the new Reserve Bank governor may have written one of the longest resignation letters in history.

Graeme Wheeler's first speech as governor last week won wide approval from the mainstream bank economists and from commentators for its orthodoxy and consistency.

It could have been written by Don Brash, just as his first statement on monetary policy could have been penned as a farewell note from Alan Bollard. As one reporter noted, the typeface was different but there was little else to distinguish it from his predecessor's view.

But the prevailing orthodoxy, which was in place towards the end of Dr Brash's reign and when Dr Bollard took the tiller, is no longer the dominant political view.

Where once in the House that orthodoxy had an overwhelming majority, with the support of National and Labour, the current policy-targets agreement and Reserve Bank Act have a bare majority of perhaps one seat: National, ACT plus United Future.

For that reason, what may once have been a statement of the cross-party obvious sailed dangerously close to the politically fraught in Mr Wheeler's first speech.

His attack on the efficacy of quantitative easing around the world and its usefulness in New Zealand attracted the most comment.

QE is a key Green policy and a lever Labour would allow the bank to use at its own discretion.

But Mr Wheeler also enthusiastically rejected the notion that monetary policy could bring down the exchange rate - an issue where Labour, the Greens, New Zealand First (and possibly Mana and the Maori Party) are on the same page.

In a paragraph that has not been widely discussed, he even argued that cutting the official cash rates to lower the dollar - an implicit option in the Opposition's approach to monetary policy - could instead push the kiwi higher.

''If we reduced the OCR without sound reasons the exchange rate might drop initially but rise later when the inflationary implications of the rate cut became clear, especially if the belief was formed in the meantime that the central bank's commitment to price stability was wavering,'' he said.

Not surprisingly, the speech prompted a certain amount of (mostly private) fear and loathing on the Opposition benches.

Green co-leader Russel Norman left the impression that Mr Wheeler would either have to change or be changed if National was ousted in 2014.

''It is a very conservative neo-liberal view from the 1980s and 1990s. His ideology is a real throwback - and the neo-liberal view is entirely discredited.''

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Could the Greens work with him, and vice versa?

''If he is comfortable with a different framework. It depends on his response if Parliament wants to adopt more modern settings. It's up to him, really.''

Labour's David Parker would not be drawn on whether he could work with Mr Wheeler. And he pointed out that the governor is bound to defend the current regime and is therefore forced to argue that ''the status quo is right''.

But he reiterated Labour's call for changes to the Reserve Bank Act's primary focus on inflation, arguing that the current policy had failed during the Asian crisis, during the asset bubble and liquidity splurge in the 2000s and with the current overvalued exchange rate.

''The Government says it can't do anything about the exchange rate, and that it is up to the Reserve Bank. The Reserve Bank says it can't do anything either, yet both say our exchange rate is overvalued.''

And he is unimpressed by Mr Wheeler's solution to the high exchange rate: that labour (with a little ''l'') should pull its belt in another notch and save more. ''It's not the Reserve Bank's responsibility: it's always someone else's fault.''

Even with a strong Budget surplus under Michael Cullen the current account was still out of control, so savings alone cannot rebalance the economy, Mr Parker argues.

Of course, politicians and state employees have a finely honed capacity to adapt to new circumstances. Labour lackeys can become trusted advisers under National and a ''high priest of Rogernomics'' - as Opposition leader Helen Clark famously called Mark Prebble - ran the Department of the Prime Minister and Cabinet under Prime Minister Clark, no worries.

So Mr Wheeler may not have to worry about his job after 2014.

But he might like to ponder the boundary between advocating for the current regime, as he should and must, and attacking alternative views that he may in future have to implement ... and defend.

- © Fairfax NZ News

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