The Politics And Reality Of Pandemic Monetary And Fiscal Policy

scoop.co.nz · Feb 17, 2026 · Collected from GDELT

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In this missive, first I'll address the specific politics associated with this announcement about a "Review of Covid-19 Monetary Policy". Then, I'll enlarge my comments to include fiscal policy: alleged attempts, in New Zealand, to use fiscal consolidation to 'bring the economy back to surplus'. Then I'll settle both matters – efficacy monetary policy and fiscal policy – by comparing and contrasting New Zealand with two Euro nations, Italy and Netherlands. (I might have used Sweden, the home nation of New Zealand's Reserve Bank Governor – but it's somewhat 'middle-of-the-road' in this context.) Italy and Netherlands together show a contrast in monetary policy with New Zealand, while showing a contrast in fiscal policy with each other.I will note that, while the announced Inquiry is formally about either inflation or cost of living matters (not the same as each other, though routinely muddled) from 2022 to 2024, much of the political chatter was about a brief period of house price inflation. So, I'll address this matter first, without reference to other countries.Inflation of residential real estate pricesReal estate inflation (or the lack of it) – especially the once-routine price inflation of freehold dwellings which is the background to a moribund political discussion about capital gains taxes – has become a sensitive issue. The third real estate bubble this century – late 2021 to mid 2022 – proved to be stillborn after its gestation; a mirage, unlike the bubbles of 20032008 and 20122017. This has made a certain segment of New Zealand society grumpy, because people who were convinced that you could not lose money by 'investing' – speculating – in property ended up losing sometimes substantial sums. Others found out, begrudgingly, that to make money from property, you actually should have tenants; the 'fundamentals' of any financial market is its investment yield. Advertisement - scroll to continue reading The supposition of a vocal segment of these grumpy folk is that they were somehow tricked into buying houses in 2021 – before the Covid19 pandemic peaked, though in the Delta midst of pandemic pandemonium – through an insufficiently conservative monetary policy. While this concern is largely grounded in hindsight rather than in historical reality, it was a valid concern in one respect.The interest rates in the middle eighteen months of 2020 and 2021 were very low by New Zealand standards. These low rates were accompanied by quantitative easing. Money from Reserve Bank bond purchases sat in the New Zealand banking system, because intended traditional borrowers did not take advantage of the easy borrowing conditions. Essentially, ordinary businesses couldn't borrow more because their levels of uncertainty and debt were too great (akin to a balance-sheet recession), and government wouldn't borrow because of New Zealand's austere post-1984 political culture. Mainstream economists, who once liked to lecture about the importance of price signals, felt unable to recommend government to respond to monetary price signals.So, there were some enticing Faustian invitations to speculators, magnified by these failings of others to respond to monetary policy. And inducements for first-time house-buyers; who, in our overfinancialised world, have little choice but to become speculators too. When the pandemic ended, money from banks flowed elsewhere, especially into ordinary businesses including primary producers. It was this renewed confidence in New Zealand's trading future that drove post-pandemic monetary flows. For banks, lending on overpriced housing took a back seat. Interest rates ended up playing little role in determining where the post-pandemic money went. This should not be surprising; nobody these days who borrows at three-percent to buy a house expects the interest rate to stay at anything like that level for the duration of a mortgage.Increasing Consumer PricesRe inflation more generally, anyone who remembers 2008 and 2018 would not associate high-interest rate policy settings with low CPI-inflation, or low interest-rate policy settings with high inflation. In early 2008 the OCR was 8.25% and annualised inflation had grown to 6% by the middle of 2008; In early 2018 the OCR was 1.75% and annual CPI inflation was 1.1%. Throughout the 2010s' decade, historically low interest rates struggled to nudge the CPI inflation rate up to its two-percent policy target midpoint. New Zealand almost had negative price-inflation in 2016. Interest rates had been slashed to 2.5% in 2009. Long-term interest rates (ie ten-years ahead) became even lower, despite many warnings that inflation would appear at any time like some dark phoenix. Consumer prices only increased by 17% for the whole decade.Both periods – the mid2000s and the mid2010s – experience real estate bubbles. During the first, interest rates were high and rising; in the second they were low and falling. Monetary policy cannot provide an obvious explanation for such bubbles. Except that, if monetary policy deters money from flowing into productive investment and consumption, it will flow instead into speculative 'investment'; one form of the latter is the residential real estate market. (Importantly, as per the international carry trade, restrictive monetary policies actually draw money into a country from the rest of the world, simultaneously bringing-about more rather than less money, and raising the country's currency exchange rate, thereby discouraging money flows into manufacturing and farming.)Vice versa holds, too. If, for whatever reason (ie including monetary policy), money flows into productive investment and consumption, then it will not flow into speculative activities. Further, the flow of money into residential real estate is contingent on the appeal of alternative speculations.A Political Stunt?RNZ News 10am 12 Feb 2026:"A former economist for the Reserve Bank says the Finance Minister should have launched a review about decisions made during Covid-19 as soon as she came into office. The government is launching an independent review of the central bank's response to the pandemic. The findings will be made public in September, just a few weeks before the election. Michael Reddell told Morning Report a review will shed light on how mistakes were made." (We note that this comment presumes that mistakes were made. The question contains a contentious premise. It's like the question commonly asked around 500 years ago: Should witches be hanged, or burned?)Reddell: "I think everyone throughout that period was operating with good intentions (damnation through faint praise), but the Reserve Bank and a lot of other economists badly misjudged how pandemic economics worked. As a result, we ended up with a very high inflation [not true, though the pandemic and the Russia-Ukraine war added substantial real costs to the global economy] and fiscal losses on those bond purchases and the recession we've had to cope with in order to get inflation squeezed back out of the system."(By 'fiscal losses on bond purchases' Reddell means losses to the Reserve Bank on purchases of bonds from the banks, not from the government; he's trying to refer to quantitative easing; see above. We note that this kind of jargon becomes a big ‘switch-off factor’ to the public, while enhancing the mystique of the 'monetary bankers'; defining monetary bankers as technocrats - economists like David McWilliams - who have a druid-like sense of their own importance. Refer to my The New Alchemy: Democracy, and the Church of Money, Scoop, 13 February 2026. Re that commentary, we note that such jargon becomes a big 'switch-off factor' to the public, while enhancing the mystique of 'monetary bankers' [defining monetary bankers as technocrat economists rather than democrats or traditional bankers – economists like David McWilliams – who think and act like druids].)"Michael Reddell says a key question is what led the Bank to misunderstand what the inflation risks were for so long." (Were the risks longlasting or was the misunderstanding longlasting?)The first big issue is the continuing nationalist focus, where 'we' is New Zealand, and as if nation states' policymakers are fully responsible for circumstances that are both global and market in their very nature. Another issue to examine is about how those with condemning opinions based on hindsight were themselves thinking at the time; we should exclude those ardent monetarists who, in the last 20 years, correctly predicted twenty of the last two (both minor) inflation episodes.We note that the first thing this government did was to amend the Monetary Policy Targets Agreement; in such a way as to upwardly change the policy bias of the agreement. The Remit came into effect on 20 December 2023. (See Remit; and see 3 Strategic Choices in Inflation Targeting: The New Zealand Experience, IMF eLibrary.)New Zealand comparisons with Italy and NetherlandsI look at the two most relevant mainstream economic indicators: changes to consumer prices (ie CPI inflation), and to changes to per person gross domestic product (GDP). Then I look at the two most discussed policy indicators; the central bank interest rate (the OCR in New Zealand) as an indicator of monetary policy, and the fiscal balance as an (imperfect) indicator of fiscal policy. Finally, I look at each country's public debt, which is widely (though incorrectly) claimed to be the nemesis of all economic problems.changes to consumer pricesAnnual Average Increases in Price level [IMF data] 2019-232023-25 New Zealand4.8%2.5% Italy4.1%1.5% Netherlands4.8%3.2% Main takeaway: CPI inflation in New Zealand is and has been similar to Netherlands and significantly higher than Italy.economic growth per personAnnual average increases in per capita GDP output [IMF data] 2019-232023-25 New Zealand1.1%-1.0% Italy1.5%0.7% Netherlands0.9%0.6% Main takeaway: while New Zealand's economic growth per capita was comparable to both It