Friday, 22 March 2019

Is there a credit squeeze?

This is from the latest ANZ business survey, and it worried me. If businesses are finding it hard to get finance in good times - and we're still in what is now a sustained eight year long expansion - what on earth are their prospects of getting credit in bad times?


It could of course be that they're just venting, in the way that surveyed 'business confidence' has a fair degree of politics in it, although it's not obvious what extraneous factor could drive such a large and prolonged fall in the expected ease of credit.

As it happens, there is another window into credit availability, though it's not the easiest to peer through. The Reserve Bank's credit conditions survey, in its current form, is run only six-monthly, and so far covers only March and September 2018, so it's not yet the full monty. There was a longer-running 'experimental' one which goes back to 2009, but it's not possible to align the old and new ones perfectly: the Bank says that "The mapping of historical indicators to the current set of indicators ... is imperfect". But I've done it anyway just to get some sort of longer-run feel.

Here's what the banks say about the recent availability of credit to SMEs and to the big end of town, the corporates and institutions. You can see the unfreezing of credit after the GFC, a rather mysterious temporary pullback in SME lending in 2013-14, and more recently a progressively tighter approach (barring that uptick in corporate credit on the latest reading, which may be a blip).


Strictly speaking the ANZ survey asks about expected rather than historical availability of credit, but fortunately the RBNZ survey also asks the same question. Here's what the credit suppliers answered when asked.


Assuming that zero on the index is neither happy nor unhappy, they're saying, essentially, that they're slightly on the relaxed side of lukewarm about extending business credit in coming months. They're not outright gung-ho, but they're not shuttering up the shop, either.

So there's not a great meeting of the minds at the moment between the businesses who respond to the ANZ survey and the banks who respond to the RBNZ's. Maybe the businesses are griping more loudly about extra documentation and hoops to jump through, but are actually getting the credit in the end, despite all the hassle along the way. Let's hope there isn't any genuine blockage in the flow of funds to businesses wanting to invest: the cyclical outlook is getting a bit more fragile, and it doesn't need any more headwinds.

Did Special Housing Areas help?

A while back I went and had a looksie at some local Special Housing Areas near me in Auckland.

I wasn't hugely impressed. At the first one I went to look at, I felt that designating it an SHA didn't seem to have made any material difference either way. On the left, by the way, is the very latest state of play on that first SHA site I visited. Still a long way from being finished - no dramas, it's the developers' prerogative to set whatever schedule best suits them - but not an obvious example of SHA status moving things along.

On a follow-up visit I had more doubts, noting that non-SHA apartment blocks were going up all over the place but the SHA sites were somnolent. "I'd like to believe", I said, that "Special Housing Areas greased the wheels of the housing planning process, and either accelerated or increased new construction, or both ... But how will anyone definitively know? ... I'm hoping that someone - an economic consultant with an interest in housing, maybe? - will be asked to turn their minds to a proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas, and checking to see if the SHA ones outperformed in speed or quantity".

Another visit left me asking the same questions. "it still leaves me with a nagging feeling that the interesting Special Housing Area initiative (faster planning approval in exchange for including some 'affordable' housing) didn't work out as everyone had imagined. We need to know whether this policy experiment worked, and if it did, repeat it or widen it, and if not, why. Otherwise we'll continue to blunder around with well-intentioned housing ideas that never get properly evaluated".

Lo and behold, someone's actually done exactly that "proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas". It's just been published in the online version of New Zealand Economic Papers as "Price effects of the special housing areas in Auckland": the abstract is here and if you've got access to NZEP online, here's the link to the full article. It's by Mario Fernandez of Auckland Council's Research and Monitoring Unit and two co-authors, Gonzalo Sánchez at ESPOL in Ecuador and Santiago Bucaram at the Inter-American Development Bank.

They used a difference-in-differences approach which looked at what happened to house prices in SHAs compared to those in nearby non-SHA areas. Before the SHA experiment, prices in both areas had been rising at about the same rates: assuming (I think reasonably) that those trends would have carried on absent the SHA cunning plan, you can attribute any subsequent differences between SHAs and non-SHAs to the effect of the SHA policy.

The SHA initiative did not scrub up well:
Our findings indicate that the SHA programme caused price increases (inside SHAs) amounting about 5% on dwelling prices and 4% on the price per square metre, and had no effect on the probability of affordable transactions to occur but actually increased the probability of costly transactions. These results cast doubts on the reliability of the SHAs as a housing policy aimed at improving affordability (p11) ... the findings of this paper suggest that the effectiveness of the SHAs on improving affordability was questionable or negligible (p13)
The findings were robust to the usual econometric tyre kicking (eg allowing for the possibility that developers and buyers saw the SHAs coming and might have changed their behaviour accordingly, and making the comparisons only on SHAs and non-SHA areas that are very close neighbours).

The authors say, "the policy questions that arise are: what weakened the SHA programme? or why
were the affordability requirements not binding to developers?".

On the first, one possibility (they say) is that "the fast-tracking of the consenting process [the SHA deal was faster consents, in exchange for agreeing to build an element of affordable housing] resulted with the developers being able to offer an additional attribute to their products: rapid delivery of new constructions ... Hence, the SHA programme simply allowed developers to offer new homes with an additional attribute (a shorter delivery time), which consequently implied higher prices" (p12).

On the second, there was an element of gaming the system. Developers had the option of waiting to see what planning options might become available under the Auckland Unitary Plan, rather than forging ahead with their SHA consents: "there were expectations of greater profits under the rules of the AUP rather than the SHA programme. Therefore, this could explain why prices did not decrease inside the SHAs as the timing of development may have relied on building first the more profitable (and expensive) houses and later (or never) the affordable" (p12). Scuttlebutt I picked up at the time fits with this explanation.

I'm not going to bag the designers of the SHA: I'm more in the 'let a thousand flowers bloom' camp when it comes to policy experiments, and anything that sounded plausible (the faster consent / affordability combo) was worth a go. I think we all knew that it wasn't going to make much of a difference compared to the impact, say, of a large expansion in the supply of housing-zoned land. But at the margin it might have been a small help.

It wasn't. People more familiar than me with the intricacies of the housing market can carry on the conversation about why not. My takeaway from the whole exercise is that any policy experiment ought to automatically come with follow-up provisions to see how it went. Not rocket science, you'd think, but it's routinely ignored all over the place: we're throwing money in the air, and not checking to see where it drifts or who picks it up. It's time to realise that 'evidence based policy' isn't just about designing a plausible initiative: it also means seeing if it lived up to expectations, and if not, why not.

Wednesday, 20 March 2019

Jumping the gun

A colleague in the competition business read my post about a recent Aussie 'gun jumping' case and let me know that one of the recent OECD 'Best Practice Roundtables on Competition Policy' had been all over the topic.

These roundtables focus on the hot competition issues of the day, and they're good stuff. 'Public interest considerations in merger control' (March '17), for example, was directly relevant to the issues at play in the NZME/Fairfax merger. Other recent ones on current frontier issues include 'Excessive pricing in pharmaceuticals' (November '18), plus two coming up this June, 'Vertical mergers in the technology, media and telecom sector' and 'Licensing of IP rights and competition law'. I found their market studies one very helpful when I was lobbying for legal change to allow market studies here (and they've since added a how-to-do them kit, 'Market study methodologies for competition authorities').

The gun jumping one, 'Gun jumping and suspensory effects of merger notifications', is also worth a read. The roundtable put two different things into the same 'gun jumping' box: not notifying mergers when you're required to or ought to, and premature coordination between merging competitors before the merger goes final. I'd personally have said only the second one is what most people would see as 'gun jumping' but it's semantics: it really doesn't matter whether you see them as two kinds of the same thing or two different things. The Commerce Act in any event puts them in different boxes (s47 for going ahead with an anti-competitive merger you should have had cleared or authorised, s27/s30 for premature collusion).

The roundtable was mostly geared to the vast majority of countries which operate compulsory merger notification schemes: as the OECD summary report says at para 21, "The UK, Australia and New Zealand are the only OECD jurisdictions with purely voluntary notification systems". But it also had some useful practical advice (at paras 65-77) for businesses under either regime, on how to avoid premature coordination. Sadly, there isn't any bright line certainty.
competition agencies fully recognise that these types of co-ordination are often necessary to achieve the legitimate objectives of a merger agreement ... Merging parties certainly have room to satisfy information and co-ordination needs which are justifiable in the context of a transaction. Such acts may need to be accompanied by appropriate safeguards in order to avoid gun jumping ... The remaining uncertainty on how to distinguish forms of information exchange, value preservation and post-merger planning that amount to gun jumping from those that are lawful seems inevitable ... While certain provisions in agreements and covenants and the safeguards applied may be considered ancillary, justifiable and sufficient in one case, this might not be true in another case [66, 76-77]
Interestingly both the ACCC and our own ComCom put in written submissions.

The ACCC talked about the Cryosite case but was also concerned about too-clever-by-'arf arrangements - my phrasing, not theirs -  that achieve all the benefits to the parties of an anti-competitive merger without looking like one. They cited one back in 1996, and they're currently alleging there was one in 2017: 'ACCC takes action against Pacific National and Aurizon'.

ComCom revisited NZ Bus and the Waikato pathology case and also mentioned a more recent instance in the horticultural sector where "the [acquirer's] receipt of the target’s customer lists and the target’s possible encouragement of its customers to switch to the acquirer raised concerns about pre-merger coordination" (para 45). In the end the Commission flagged away any enforcement action under s47 or s27/s30 but added that in general it sees "gun jumping as a potentially serious breach of competition law and is prepared to enforce against such breaches" (para 46).

Stepping back a bit from the minutiae, I think anti-competitive mergers and pre-merger-closing gun jumping are now one of the touchier hot buttons for competition authorities everywhere. There's a rising political head of steam building - here's just one example - behind the idea that too many mergers have been allowed through, with various damaging effects. In that environment, the enforcement level gets dialled up: horses and stable doors, maybe, but if you're on either side of a merger, it's time to be extra careful that the swinging door doesn't bang you on the bum.

Sunday, 10 March 2019

Too harsh?

So, this guy comes into your shop, wants his widget repaired.

"Like to help", you say, "thing is, we're not taking on repairs any more, we're selling out to WidgeCorp, here's their number, they'll see you right".

An innocuous scene from everyday commercial life? Not if the deal with WidgeCorp falls through.  In the meantime you may have been party to an agreement to divvy up the market with WidgeCorp. You've been anti-competitively "jumping the gun", as the competition authorities call it.

Which is where Cryosite, an Aussie company which banks umbilical cord blood and its potentially useful stem cells, found itself last month (ACCC announcement here, the case here). Its sale to Cell Care fell through, but as part of the deal it had agreed to stop competing and to refer all new business to Cell Care. It got pinged A$1 million plus A$50K costs. It can easily happen in New Zealand too: here is the Commerce Commission response to the Waikato pathology services case in 2010 and the case itself.

Yes, it wasn't the right thing for Cryosite to do. As ACCC Commissioner Sarah Court said in the ACCC release, "This outcome should be a strong reminder to competing companies that they must conduct themselves at arm’s length until a deal has been completed".

And yet I looked at the level of penalties, and wondered. Cryosite is ASX-listed, and you might think it's a decent sized corporate who will (properly) feel the hit, but can carry on. Cryosite, though, is among the micro-est of microcaps (A$2.1 million market capitalisation), is making an operating loss, and the judge was obliged to put the penalty on the never-never ($200K upfront, the rest in 10 equal  annual instalments out to 2029).

The penalty looked on the tough side to me. And maybe that's the ACCC's intention. As chair Rod Sims said in a speech last year, "we need higher penalties for CCA [their Commerce Act] breaches to raise the cost of them ... Over the next year you can expect the ACCC to take even more enforcement action, and to take a firmer stance on sanctions and penalties with a view to making an even greater impact on compliance".

It may be, too, that the pair of them had got offside with the ACCC with their proposed merger: as the chair of the ACCC said about the merger at the time, "While parties are not obliged to approach the ACCC for clearance, it is concerning that an acquisition in a highly concentrated market such as this would not prompt the parties to contact the ACCC". And it didn't help that Cryosite banked a A$500K non-refundable deposit as part of the proposed merger. That was a standard "no timewasters please" investment banking mechanism which Cryosite would have got irrespective of whether the merger materialised and irrespective of any "gun jumping". To my mind it should not have been characterised as a gain from the conduct, but you can see how people might have reckoned it should have gone into the penalty balancing exercise. There may be other wheels within wheels, too, as yet not vouchsafed unto us.

On what we've seen, though, this looks like a rather harsh rap on the knuckles. I'm all for throwing the book at brazen anti-competitive conduct - like the Japanese shipping lines' cartel on cars into Australia - and I was pleased to see an unapologetic cartelist get its penalty quintupled after an ill-advised appeal. But I'm not sure that context is getting enough of a hearing in less shameless breaches of competition law, a local example being the real estate agents backed into a collusive corner by a large threatened rise in TradeMe listing fees.

I suspect we'll be hearing a lot more about the appropriateness of penalties. It has already made for a lively session at last year's CLPINZ workshop and is on the agenda for the Commerce Commission's 'Competition Matters' conference in July. I'm looking forward to what I think will be a robust exchange of views.

Friday, 1 March 2019

Naïve? Casual? What?

When I was a cricket umpire, a colleague recalled how he had given one batsman out for handling the ball, and another for hitting the ball twice. These are rare kinds of dismissal: what was even odder still, they happened in the same over.

Which is a roundabout way of saying, sooner or later in any game you see everything. Last year, for example, I noted that the Commerce Commission was having an unusual run of (equally rare) s47 investigations - where the Commission looks at potentially anti-competitive mergers that should have come in for clearance or authorisation, but didn't.

There had been one in 2008, one in 2012, one in 2015. But since March 2018, there have been eight of them, with the latest announced last week. The full list is here.

We've also just learned what happened to one of them, First Gas's acquisition of GasNet's gas distribution pipeline network in Papamoa (suburban Tauranga). GasNet, ultimately owned by Whanganui District Council, had a local gas distribution network, and had started to eye up the gas distribution possibilities in new sub-divisions in Papamoa. Why a local authority thinks it's a good use of its ratepayers' resources to get into the gas pipeline game on the other side of the country is beyond me, but in any event they went for it. And got squashed like a bug.

First Gas, owner of the (ex Vector) North Island high-pressure gas transmission pipeline as well as of lots of local lower-pressure distribution pipeline networks, was not at all pleased. It tried to buy GasNet out with a succession of offers. And it threatened (and went some way to implement) laying its own pipes alongside GasNet's. It would have been uneconomic for both of them but signalled their willingness to play a game of mutually assured destruction. And First Gas used carrots and sticks on the sub-division developers: the judgment says at [22] that "First Gas also advised the developer that, if its offer was not accepted, it would lay the pipelines anyway and this retrofitting [digging up established development] would cause considerable disruption". GasNet caved, agreed to be bought out, and in addition signed a restraint of trade not to re-enter the Bay of Plenty for five years.

First Gas was bang to rights under s47. Whatever the market was - at [37] "the construction of distribution networks in new subdivisions in one or more of the following areas: the areas served by the Papamoa 2 delivery point; the areas served by all delivery points in Papamoa and Mt Maunganui; the Bay of Plenty" - First Gas was taking out its competition there. And the restraint of trade fell foul of s27: at [39] it "had the purpose, effect or likely effect of removing current competition in the market between First Gas and GasNet and of preventing future competition between First Gas and GasNet for at least the period of the restraint".

Bottom line, $3.4 million penalty. The judge said at [51], "The penalty together with the purchase price mean that the assets acquired will not be profitable over their life time. In the context of a business which is almost entirely regulated, this means First Gas will incur a material loss from the acquisition".

Fair enough, too. Yes, there was a remarkable naïveté  about First Gas's actions: at [30], First Gas "did not appreciate there were competition implications", at [47] "it was unintentional – First Gas did not appreciate there were Commerce Act implications despite the regulatory regime to which it is subject". And yes, you've got to give credit to First Gas for cooperating with the Commission: at [50], "Once alerted to the Commission’s concerns First Gas was entirely cooperative and this has led to an early and agreed resolution to the matter". But there's no doubt either about (at [47]) "a concerted effort on a reluctant seller to remove a competitor. First Gas was successful in its effort, and the effect on the market is on-going and is potentially permanent. The conduct has removed existing competition and is likely to have removed future competition in the market for the foreseeable
future". Plus there's whatever demonstration effect it might have in other distribution markets where competitors might have been thinking of giving it a go.

As I said last year, a voluntary notification scheme and self-policing of mergers is a good way to go. It's "one of those bits of social capital that lubricate the free flow of business and avoid the heavy-handed alternatives. Fingers crossed that this mini-outbreak of s47 investigations is just happenstance, and not a sign of a change in the times".

But now eight of the things have surfaced. It could still be happenstance, I suppose, though the odds are beginning to drift out.  It could reflect nothing worse than a more widespread First Gas style naïveté: in New Zealand we tend to informality in business and don't always cross the i's and dot the t's. And nothing may come of some of these s47 investigations: everything might be hunky dory, nothing to see, move along.

But at this stage I'd also guess that the Commission must be wondering if it should have put more effort into its market intelligence over the years. And the business community, if it's been chancing its arm, ought to put more effort into voluntary compliance. It's in businesses' own interest: the alternative, compulsory merger notification, would be clunkier, slower, and more expensive.

Thursday, 7 February 2019

Get ready to write in

Want to have a say on competition policy and fair business practices? Then you're going to be a busy chap or chapess over the next few weeks.

First, though it went largely unreported in the summer news doldrums, the Minister of Commerce Kris Faafoi has moved the s36 debate along, and now thinks that we should emulate the Aussies and adopt their legislative framework (here's his press release and here's MBIE's announcement about the consultation process, which runs to April 1).

I'm quietly impressed by the reforms the Minister is pushing along, which is maybe just a nice way of saying he's doing what I would like to see. But in any event he's got on with two improvements to our competition regime. Earlier he'd successfully pushed for the Commerce Commission having a power to initiate market studies (the previous government had wanted to make it only at Ministerial direction, as you can see at recommendation 'm' on p20 of the Cabinet paper) and now he's running with reform of s36, where the previous Minister had proposed kicking the can down the road apiece (recommendation 'k', ditto).

s36 has proved to be a rather divisive topic: the Cabinet paper had correctly said (p9), "This is a contentious area, with stakeholders presenting polarised views on the case for change". As readers will know I've been on the side of changing our current wording
"A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of" doing various bad anti-competitive stuff
to the Aussies' wording in their equivalent, s46 of their Act:
"A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition"
That junks the whole "take advantage" limb of our s36, which has led our jurisprudence down all sorts of rabbit-holes (none of them the right one). And it introduces "effects", which in principle ought to be a bit more productive to examine than "purpose", which is more nebulous. Plus it aligns both sides of the Tasman, an incidental but bankable benefit. Fire up your arguments if you want to be heard on s36 before the curtain drops on April 1.

If you've got an interest in competitive markets, you'll also likely want to get your tuppenceworth into the MBIE consultation process looking at unfair commercial practices (all the goop is here). Views due by February 28. Don't have strong views myself at the mo, though I rather like the way the Aussie version of our Commerce Act allows for industry codes of practice (part IVB of their Competition and Consumer Act). It seems to be helpful where, for example, their are imbalances of bargaining power between (say) the Aussie supermarket duopoly and their suppliers. You can explore the Aussie Food and Grocery Code here.

And finally if you're the complete competition submission wonk, the Commission is also consulting on its merger clearance process (details here, February 28 deadline again).

Speaking of competition policy tragics, my mate Ed Willis (University of Auckland Law School) and I shook off our summer stupor and in a miracle of last-minute productivity put in a submission on the draft market studies process guidelines the Commission issued last December. The submissions aren't on the Commission's website yet, but when they are (if anyone else actually defied the heatwave to submit on procedural issues), our pièce de wonkerie argued for more clarity round the criteria for launching a study, more emphasis on the need for efficiency in completion, and more safeguards around the use of information gathered, how it is shared, and how it is treated under the OIA. We also questioned whether market studies should be seen as another enforcement tool, as we felt the Commission was suggesting: that, in our view, was never Parliament's intention.

Friday, 14 December 2018

A big boost

Yesterday's Half Year Economic and Fiscal Update, the 'HYEFU', has got well picked over - except from one important perspective: what's the overall stance of fiscal policy? Is it boosting or braking GDP growth?

The answer to that question is given by the 'fiscal impulse'. If you're not a fiscal policy wonk, the fiscal impulse is the difference between one year's fiscal balance (surplus or deficit) and the next year's, when the balances have been adjusted for the impact of the business cycle. When you've taken out those cyclical effects (eg a strong economy boosting the tax take) what's left is the impact of changes to fiscal policy. If the (cyclically adjusted) deficit is getting larger, for example, fiscal policy is becoming more stimulatory. If a surplus gets bigger, policy is becoming more contractionary.

Here are the HYEFU estimates of the impulse. For the (June) 2019 year, there's a stonking great positive fiscal boost to GDP, of the order of 2% of GDP, followed by an extended period of mildly contractionary fiscal policy.


You might well wonder, given that the economy grew by a roughly-on-trend 2.7% in the year to June 2018, why there's a thumping great boost from fiscal policy underway. And the answer is, it's an accident. Here's what was intended back on Budget day in May, compared with what's actually happened.


The government meant to give the economy a decent kick along from fiscal policy in the year to June '18: it never happened. Planned expenditure didn't go to schedule: "lower-than-forecast expenditure in 2017/18 has resulted in expenditure now in 2018/19 that was previously expected in 2017/18 driving up the impulse in this year" (from p15 of the HYEFU 'Additional Information' document).

Why? Who knows. I'd guess a combo of institutional inertia, and capacity constraints in areas like infrastructure and housing. It might be useful if someone in Treasury had a decent look: at some point we may well want to turn on the fiscal taps in a hurry, and it'll be no good if too little is 'shovel ready', as the jargon goes.

As it happens, moving the fiscal boost from 2017-18 to 2018-19 may not be a bad thing. It's still an anomalously pro-cyclical fiscal stance in an economy that doesn't need it, but on the other hand it does provide a hefty dollop of cyclical insurance against the risks lurking in the global economy (well laid out in the 'Risks to the Economic Outlook' section of the HYEFU).

Hopefully this fiscal impulse analysis will still be possible in the future. The HYEFU said (p32) that "The Treasury is currently reviewing these indicators [the cyclically adjusted fiscal balances, and the fiscal impulse] to ensure they remain useful to users and fit for purpose. Any changes to these indicators will be signalled prior to their publication". I hope that's not code for "we always knew these things were down the by-guess-and-by-God end" - as they are - "and we're not going to run with them any more". Something half-way towards an answer still trumps no answers at all.

More positively, there was a big step up in the quality of information provided on the government's capital spending plans. In the past you could go cross-eyed trying to find how much of the spend was opex and how much capex, where the capex spend was going, and whether it was enough to add to the national stock of infrastructure (you need to spend quite a lot just to keep depreciation at bay). That's hugely improved: the 'Core Crown Capital Spending' bit starting on p33 is excellent, and I particularly liked the clear explanation of the 'Multi-year capital envelope'. And in the bowels of Treasury is someone who managed to explain (on p30) the 'top-down' adjustment in Plain English. Give that person a chocolate fish.

Thursday, 13 December 2018

Our financial cycles

Two economists at the University of Auckland, Caitlin Davies and Prasanna Gai, have come up with a really useful bit of practical macroeconomics. They've devised a Financial Cycle measure for New Zealand - an indicator of the overall tightness or looseness of financial conditions. Their paper, 'The New Zealand financial cycle 1968–2017', is available here in the online version of New Zealand Economic Papers.

Financial conditions indices (FCIs) are an established thing overseas. They were always relevant - changes in financial conditions have played a lead part in many business cycles, and even when not the lead have been important channels for propagating non-financial shocks - but have naturally become of greater interest since the GFC. As Davies and Gai say (p1), "Recent [academic] work ... suggests that strong credit growth and house price booms are good predictors of crisis and significantly shape macroeconomic outturns".

In the States, for example, there are a herd of them. The chart below shows five FCIs - three produced by various regional Federal Reserve Banks (Chicago, Kansas City, St Louis), two by the private sector (Bloomberg, Goldman Sachs) - plus a market-derived measure, the VIX, which is the volatility investors expect from holding the S&P500 index and which can be backed out of the prices for S&P500 options. They've all been normalised to be comparable, as described here by the St Louis Fed. Higher values for these indices mean tighter conditions.


You can see, for example, how financial conditions (ex the VIX) had been tightening ahead of the GFC, and then hit all-time highs for financial distress and unavailability of credit through the GFC itself. And if you subscribe to Austrian or Minsky style theories of business cycles, you'd argue that the pronounced period of unusually easy monetary conditions you can see in 2004-2006 sowed the seeds for the over-exuberant risk-taking that fuelled the eventual GFC bust.

Highly useful and informative things, these FCIs. And now we've got one of our own. To get it, Davies and Gai went the principal components route - take a bunch of finance and credit indicators, and see if there's a common influencing component in the background - and found that yes, there was. It combines six variables into an overall index: real credit, credit to GDP, credit to the M3 measure of money supply, real house prices, real share prices, and housebuilding to GDP.

Here's what the results look like, in raw form: for this New Zealand index, you read it the other way round to the US ones, in that higher values show easier financial conditions. The authors say that "Our measure of the New Zealand financial cycle appears to be broadly consistent with the main economic developments during the period", and I agree. You can see, for example, the surge in credit availability in the mid 1980s following banking deregulation, and the subsequent bust after the 1987 sharemarket crash. You can also see our experience of the GFC.


The authors usefully superimposed their financial index results on the business cycles identified by Viv Hall and John McDermott. The FCI for this comparison has been expressed in smoothed cyclical terms showing whether it is rising or falling (there's econometrics behind this we don't need to explore here), but same diff. Here's how they compare.


"Of the six contractionary episodes during the past fifty years, five occur less than three years after a peak in the financial cycle", the authors say (p8), and while I wouldn't immediately leap to cause and effect (and they don't either), it's a suggestive pattern.

The authors modestly say (p14) that their work "should be regarded as a tentative first-step in constructing a set of stylised facts on the financial cycle in New Zealand", but it's more than that. We had a rather large gap in documenting our recent macro history, and they've filled it. They've also created something that could easily be kept up to date, and serve as a real-time indicator of trouble brewing. As they mention, it's of obvious relevance to macroprudential policy: you might want to keep a weather eye out for where the FCI is before, for example, tightening or loosening LVRs. Indeed, you'd wonder why the RBNZ hadn't developed an FCI of their own by now.

And you can see extensions to it. This FCI is based on whatever quarterly series were available all the way back to 1968, and for a paper looking at the grand sweep of history, that's fine and unavoidable. But you can easily imagine an FCI using data that became available only more recently:I think it's highly likely, for example, that moves in corporate credit spreads, unavailable back to 1968 but available for more recent years, would feature strongly. And I think it's plausible that you could get to a monthly FCI: the Americans certainly have, and the Fed of Chicago has even gone as far as producing a weekly one (conditions are currently on the easy side of normal).

In any event this is a great start: I hope there's someone out there - the RB? a bank? the University itself? - who'll take up the baton and turn this into an ongoing up-to-date macro indicator.