How to cost taxpayers $6 billion – and counting

Dr Bryce Wilkinson
Insights Newsletter
26 November, 2021

It is easy to squander taxpayers’ money if you are a central bank. The losses amount to a few thousand dollars per household, but hardly anyone is aware of it.

This is how it works.

First, look for a great pile of assets to buy. Then buy a big chunk of them. Sure, you must outbid everyone else, but you have the ultimate ATM.

Suppose the assets were selling for $1 before you started buying and you drive them up to, say $1.10.

Of course, even you have to stop buying at some point. That is when things can turn sour. Asset prices might drift back to $1 because the biggest buyer – you – has dropped out. Your paper losses mount. Oops.

Those who sold to you are smiling. They can now buy the asset back for $1 and keep the profit.

But the losses are not your problem. Treasury has promised taxpayers will pick them up. Genius.

This, in a nutshell, is the Reserve Bank of New Zealand’s Long-term Asset Purchase Scheme (LAPS).

It did indeed target a great pile of assets. At the end of February 2020, $77 billion of government bonds were potentially available for purchase. Government deficit spending rocketed that up to $138 billion by the end of October 2021, more than $75,000 per household.

The RBNZ started hoovering up these assets under the LAPS scheme from March 2020. Initially, it bought between four and seven billion dollars a month.

Prices rose sharply, reducing the cost of new borrowing. The RBNZ was pleased to take the credit for this.

The RBNZ stopped buying in July 2021. By then, it had bought $53 billion of government bonds. That is about $30,000 per household.

But the prices of these bonds have fallen since July, lifting the cost of new borrowing (ie interest rates). By the end of October 2021, the RBNZ’s losses had reached $5.8 billion. But for the indemnity, the RBNZ’s equity of $2.76 billion would be negative.

The losses for taxpayers look set to rise by many more billions. Rising inflation expectations depress bond prices, lifting interest yields. Taxpayers are enduringly exposed because the RBNZ has badly mismatched its assets and liabilities.

Under the indemnity, the RBNZ can shrug its shoulders and keep its massive gamble open. But someone should be accountable. Surely it is Treasury and the Minister of Finance.

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