Jane Kelsey warns we're in for economic doom if we don't stop trying to make money from money

By Jenée Tibshraeny

University of Auckland Law professor Jane Kelsey warns New Zealand is headed down the same path as Greece and Ireland, as the conditions for a major economic crisis are ripe.

Kelsey has launched a brazen attack on the “neoliberal” system we’ve been living in since the 1980s, in her newly released book, ‘The FIRE Economy’.

She says our free-market capitalist society has created a “FIRE” economy – an abbreviation for an economy that’s had its wealth created by the financial, insurance and real estate sectors.

Kelsey, who’s perhaps best known for speaking out against the Trans-Pacific Partnership Agreement, warns we’re in for a major economic crisis, if we don’t change tack soon.

The book details how ‘financialisation’ has progressively hollowed out the New Zealand economy, and burdened households and the country with unsustainable debt.

Kelsey argues the housing bubble, finance company collapses and the insurance hangover from the Canterbury earthquakes are symptoms of a market fundamentalism that celebrates easy profits and risk, and treats the people and communities who lose as collateral damage.

She’s concerned New Zealand is in a “cocoon” or “state of denial”, where we’re labelled as having a rock star economy, yet the likes of the International Monetary Fund is saying we have dangerous levels of public and private (including foreign) debt and exposure to the FIRE economy.

“Even though what’s in there [the book] might seem radical in terms of the debate in New Zealand today, it’s not radical in terms of the international debate at all”, Kelsey says.

New Zealand ticks boxes of crisis trigger checklist

She points out the IMF has made a checklist of triggers that have resulted in crisis. The first four have been common causes since the 1970s, while the second four were new to the Global Financial Crisis. She says New Zealand ticks almost every box:

  • A credit boom and rapid financial expansion
  • Rapidly rising asset prices, especially housing
  • Financial ‘innovations’ that rely on favourable economic conditions
  • Financial liberalisation and innovation
  • A sharp rise in household debt and defaults
  • High leverage backed by illiquid assets
  • The growth of complex derivatives in the shadow banking system
  • The depth of international financial integration

Kelsey is concerned too much finance sees money put into “making money out of money”, rather than into the productive economy.

“There’s a point at which the money-go-round actually can’t continue.”

Re-regulating our economy

Kelsey says it’s not just the economy that needs to be changed, but the way it’s regulated – the entire financial infrastructure.

She writes, “Cabinet directives and Treasury guidelines that mandate a light-handed and risk-tolerant approach to all regulation can be revoked.

“Treasury’s oversight team can be dismantled and officials, especially in core agencies, can be required to learn new regulatory practices as a condition of employment.

“In practice, we will require a revolution in the state sector equivalent to the restructuring of the 1980s and 1990s, with the reverse objectives.”

Revamping the Reserve Bank Act

Kelsey suggests the Reserve Bank’s Policy Targets Agreement should be broadened, so it isn’t solely focused on price stability.  

“If the objective is price stability, but price stability doesn’t include the real estate market, then you have some contradictions you need to deal with, and I think the Reserve Bank is struggling with that.”

She says the Reserve Bank’s structure is designed to insulate its inflation targeting objective from political intervention.

She’s calling for the Act to be revamped, as “many other countries are saying political interventions are increasingly needed”.

“We kind of have this fixation here that no one can touch the Reserve Bank Act, and we need to break through that.”

Bigger govt. with less reliance on the private sector

Kelsey is calling for the Government to stop entering into contractual agreements with the private sector, as this makes it harder to track where funds are going and sees the public purse made vulnerable to commercial interests.

She writes, “What was once an integrated public service is now a diffused web of public agencies constantly being reorganised and private actors performing public functions”.

She says the government should renegotiate existing contracts, restrict the scope of new contracts, and not enter into any new public private partnerships (PPPs).

Kelsey says PPPs are a “guaranteed income stream to what’s basically a consortium of financiers, the construction sector and the management industry”.

When there’s a problem, they end up in big contractual disputes that cost taxpayers.

“This particular government has gone hell for leather down the path of PPPs and PFIs (private finance initiatives), without there being much debate. And these are long-term arrangements… so they tie the hands of future governments and their income streams.”

Remaining flexible when entering international agreements  

Kelsey wants to bring both the state and a social conscious back into the market.

She wants us to “avoid digging ourselves deeper into the international connectedness through regimes that make it difficult for us to change tack”.

She claims she isn’t advocating New Zealand be cut off from the world, but says we need to remain flexible when entering into international relationships, as economies and world dynamics are ever-changing.

Concluding her book, Kelsey’s writes, “This book has exposed the paradox that financialisation and neoliberalism are fragile, unsustainable and yet resilient, as they reinforce each other within a regime that was designed to withstand the pressures for change.”

Despite it being difficult, Kelsey says we need to make some changes to our “unbalanced” economy, dependent on dairy exports and driven by speculation.

“It’s not enough to say we can’t do anything because we’re part of a globalised world. We actually can do things in this country to change our direction.”