Fiscal Policy for the Future seminar series: Economic Shocks and Fiscal Remedies: What I Learned from 9/11, GFC and Covid

Oscar Parkyn:

[speaking in te reo Māori 00:00:02] ... iwi, e ngā mana, e ngā hoa mahi. Tēnā koutou katoa. Ngā mihi nui ki a Dr Alan Bollard, te kaikōrero o te rā. Tēnā koe. Kō Oscar Parkyn tōku ingoa. Nau mai, haere mai ki Te Tai Ōhanga.

Welcome everyone. I'm Oscar Parkyn, I'm Principal Advisor at the Treasury, and recently returned from the International Monetary Fund where I was Alternate Executive Director. It's wonderful to see you all join us here at the Treasury and online for our next Treasury Guest Lecture Series under the theme Fiscal Policy for the Future. We extend a very warm welcome to our presenter, Dr Alan Bollard, who I'll introduce in a moment. Before we kick things off, let me run through some quick health and safety briefings for those of you who are in the room. In the event of a fire alarm, please follow Treasury staff to the nearest exit and progress down the stairwell to evacuate the building. No using the lifts. In the event of an earthquake, please drop, cover, and hold. Stay in the building until instructed by a warden. And bathrooms can be found to the left-hand side of the kitchenette. Walk straight ahead after exiting the rooms.

So, our current theme of the seminar explores the role of stabilising sustainable and effective fiscal policy. The Treasury chose this theme as resilient and sustainable fiscal policy is essential to maintain and raise living standards of all New Zealanders. The insights from our guest speakers on this topic are informing the three stewardship reports that the Treasury will be publishing next year, the Long-Term Insights Briefing, the Long-Term Fiscal Statement, and the Investment Statement. Each of these three reports will take a different angle on the long-term fiscal challenges facing New Zealand. So, it's my honour to introduce our guest speaker, who we are thrilled to have with us today. Dr Alan Bollard truly needs no introduction having held the highest economic roles across government, central banking, the private sector, and internationally.

And I think there's also a special resonance in these halls because as Treasury Secretary, it was Dr Bollard's vision to strengthen the Treasury's capacity to engage with ideas in academia through the Academic Linkages Programme, including this guest lecture series, which has been running for over 20 years. So, this highly successful initiative is a testament to your vision and enduring legacy at the Treasury, and we remain grateful for that. But having said that, I have my instructions to read out your biography. So, Dr Bollard has held positions as director of the New Zealand Institute for Economic Research, chair of the Commerce Commission, secretary to the Treasury, governor of the Reserve Bank, and executive director of APEC. Dr Bollard is currently a Professor of Practice at the School of Government at Victoria University. He's chair of the New Zealand Infrastructure Commission, the New Zealand Pacific Economic Cooperation Council, the New Zealand Portrait Gallery, and on the boards of China Construction Bank, the Tertiary Education Commission, and the ERI Think Tank in Jakarta.

And if that wasn't enough, he's also written a number of economic history books and several novels, and there are more underway, I'm told. So, about this topic. So today, Dr Bollard is going to share his perspective on the role that policy interventions have played in New Zealand in response to big global shocks, and clearly brings a wealth of experience in that regard. And this topic is particularly relevant to the Treasury's 2025 Long-Term Insights Briefing, which will explore how fiscal policy can respond sustainably to future economic shocks and cycles. So, we are very excited and looking forward to benefiting from our speaker's extensive experience and insights. So, I'll now invite Dr Bollard to deliver his presentation, which will be followed by the discussion. We'll take questions from the room and our online audience and just ask you to save your questions until the end of the presentation. And we'll use the Q&A function in Teams, so please post your questions there. And if you have any technical questions or queries, just put them in the standard chat function. So, now over to you Dr Bollard and welcome again.

Alan Bollard:

Kia ora and thank you for coming to talk and participate in this. I was a little bit worried about having to explain what words like GFC stand for, but, and I thought it might be quite a lonely experience, but I see most of you who are in there in the middle of it are all here in the room. So, I feel very comforted on that, although you've probably got quite different views about what the hell was going on through some of those times. I want to talk about global crises and their impact on economic and in particular fiscal issues. But for those of you who came expecting a sophisticated econometric analysis, I'm sorry you were going to go away very disappointed. I'm going to give you some personal reminiscences. It's sort of colour to put alongside those econometric studies.

The phone went off, I turned over on the bed. It was 3:00 AM. I said to my wife, "That'll be that bloody lawyer from London who keeps ringing at this time." She said, "No, it isn't." I tried to go back to sleep. The phone went again and again. I went downstairs and answered it. It was Don Brash, Governor of the Reserve Bank, and at the time I was Treasury Secretary, and he said, "Alan, America's being invaded." And, of course, I did, as you used to do in those days, went and turned on the television set. And for those of you who are doing the same thing, those images are seared on our brains forever. As I turned it on, that one of the World Trade Towers was smoking as I watched a plane flew into another one and it collapsed. Then they cut to the Pentagon, which appeared to be on fire. This was a very unusual and very concerning event.

We got together the next morning, and I was asked to come into emergency Cabinet meeting. Prime Minister Helen Clark was in India attending an Indian, sorry, a Commonwealth leaders meeting and having trouble getting back. Jim Anderton chaired a emergency meeting. I must say, he did a very good job. And as those of you who've been through real or simulated stress tests know you can find out who are the people you want to have around you at that sort of time and indeed who are the ones you don't want to have around you in those sort of times. We went through and reviewed what we knew, which was changing all the time, and where the economy was and any implications out of that, but of course we also knew that we didn't know much of what was happening and we didn't know what was to follow. And it's a recurring theme through these sort of events, that there's a huge amount of uncertainty. You're learning as it goes on. You're changing your mind about what's happening.

You don't know what the long-term implications are going to be. You have to run through it as you do all of this. But basically, the US looked to be in a real difficult state, they closed the stock market for four days, they closed airspace for four days, and it was 3000 New Yorkers killed, and airlines grounded. But the economy had been in reasonable shape globally and in New Zealand, and we thought we should be reasonably prepared for any economic downturn that happened out of that. But we had another problem going on, and that only showed itself the next day. And that was the airline industry, which had been deregulated in New Zealand, not in Australia. Air New Zealand, desperate to get some sort of trans-Tasman involvement, had tried to swallow up Ansett New Zealand and Australia, had bought Ansett, a much bigger organisation than it was itself. It had found it had a very high-cost operation, struggling to deal with Australian regulation and labour unrest and with having big problems.

The following day after 9/11, airline prices, stock market prices dropped around the world, Air New Zealand went through the floor. Air New Zealand offered Ansett Australia to Qantas for $1. Qantas laughed. That was suiting them fine not to have Ansett as an active competitor anymore. And the following day, Air New Zealand put Ansett into administration, and two days later all its planes were closed and stopped on the ground. At that time, Helen Clark was trying to get back from Colombo? Colombo? Somewhere in India, sorry, and had managed to make it to Melbourne Airport, where industrial workers on the ground sabotaged her plane and wouldn't allow it onto a take-off strip. And I'll always remember being in Department of Prime Minister and Cabinet and hearing people yelling, screaming as to what was happening with Australia stopping our Prime Minister for returning during a period of deep crisis. That was a pretty bad event that's never really been resolved in trans-Tasman relations.

We in Treasury were working on what was going to happen with Air New Zealand, which was in much danger of following Ansett into bankruptcy of some sort. We made some pretty harsh recommendations back to the government. They didn't accept all of them, but in the end they agreed that they'd put a capital injection of nearly a billion dollars into Air New Zealand. And this was going on all the time that 9/11 was going on. And it just says something about misfortunes don't come singly, they pull in other ones that have been out there somewhere. New Zealand economy, however, was in reasonable shape, growing reasonably well. We'd had a lot of inflationary pressure. Don Brash and the Reserve Bank had pushed the OCR up to just over 5%. The fiscal side was looking pretty reasonable. We were in good fiscal shape. There was a surplus and we had also, debt was down around 30%.

The December Economic and Fiscal Update, put together a month after that, put in place several possible scenarios. And the downside scenario was truly alarming. It was some very big risks. We were very worried about the oil price and where that might go, what might happen to world growth, what might happen to local consumption. Nobody was travelling after that. And it's also foresaw a significant deficit looming. But the medium scenario wasn't bad and indeed the government didn't reach for big fiscal injections other than that Air New Zealand injection. And that probably turned out to be the right thing to do. The US GDP was pretty weak following the dot-com bubble, and they did respond with stronger monetary policy moves. The Fed cut the interest rate from around 4% to around 2%. They didn't have an inflation problem particularly, they pumped liquidity into airline systems and the insurance industry, which we were very worried about whether it would survive or not. And foreign central banks, the big ones got together and did a coordinated buy-up of US to keep US liquidity in place.

So, there was a lot that went on right through that. But what we actually saw was a strong recovery the following year in the US market. And there's quite a number of studies that have looked at the effect of 9/11. And in that shorter term concluded that it didn't actually have that much economic impact. As I said, there was a little bit more spending in New Zealand, but not very big differences in policy settings. The BEFU mid-scenario turned out to be roughly right, monetary policy was reduced, but by half a percent, not a heck of a lot, and didn't seem to have too much impact on government spending or on the operating balance or on the debt, although the government broke up fairly soon after that, more driven by disagreements around the aviation involvements and some other things that were going on. So, that was the alliance government that then broke up into, I think we had a New Zealand progressive government or something at that time.

But what happened and where the real impact of Osama Bin Laden and Al-Qaeda were was not so much on the short-term events, but on a huge aggregation of costs around airlines and airports. Pretty much every international airport in the world over the next 10 years had to build another level to separate out incoming and outgoing internationals, or else the US would've prevented international flights into them. A huge cost there. And on the financial regulatory side, we had some things going on as well. The US had passed this US Patriot Act, and I think you can probably generalise to say that acts passed in a time of crisis at great speed are not always the best. And then they got on to propagate similar actions around the world. And I, as Secretary of Treasury, received a very angry and slightly incoherent phone call from somebody who I think was an Assistant Deputy Secretary of US Treasury, who ended up shouting at me about how we needed to freeze some bank accounts.

And I pointed out, as far as I knew, we did not have the power to freeze bank accounts, but I said, well, let's not go into all of that. I did work out it was 3:00 AM in Washington. And after a little while, I think that he thought he was talking to Norway, not New Zealand, but we'll never know for sure. But that again is the sort of thing that happened. And of course, depending on how you interpret all of this, one could say that the wars in Afghanistan and the war in Iraq followed from this as well. If we just forget all the human issues and just look at the costs, I've seen estimates of 6 trillion US dollars, so that is real big stuff. But overall, we had limited policy response. We were in pretty good shape, we had a quick recovery, but we did have these huge ongoing costs. Remember the times when you used to just stroll out to the airport and get on a plane? That's what it was like.

Let me fast forward nearly a decade and move from that security crisis to a financial crisis. This is the Global Financial Crisis. I was Governor of the Reserve Bank at that stage. And I do recall back in 2005, I think it was, at Jackson Hole when all the central bank governors would come together and there'd be some quite serious economic papers presented. And do remember Raghuram Rajan presented a paper called Have Financial Developments Made the World a Riskier Place? And his answer was, "Yes they have." And it was pretty interesting. I just heard previous to that from Alan Greenspan and somebody in the audience had said, "Mr. Greenspan, what is this thing called subprime mortgages? And are they a good thing?" He knew absolutely what they were. He knew something about the volumes of them, which is huge.

And he said, "Yes, they have very strong pro-efficiency effects. They're helping people into housing who would never otherwise be able to get into housing." And I think the risks are balanced or works to that effect. Now, at the same Jackson Hole conference, 2005, Alan Blinder and Ricardo Reis presented a paper where they did do some serious econometric analysis, and they concluded that, this is quotes, "When the score is tottered up, we think that there is a legitimate claim to seeing Alan Greenspan as the greatest central banker who ever lived." Now, that's pretty strong language for an economist and one that I assume they would've regretted at some stage. But I think it reflects the degree of hubris that was around the system at that time because this was a period when there had been very strong growth and where even people like Ben Bernanke had said, "Let's call this the great moderation, very strong growth without very strong inflation."

And the signs have generally been looking pretty good through a lot of this. So, we were talking about the second industrial revolution. From hindsight, a lot of it was China coming in with very strong growth, taking on a lot of production for the world. And we were getting the benefits of a lot of that without the sort of inflation that might go with normally very strong capacity utilisation. There were a couple of warning signs, current account deficits, big current account deficits, opening up between developed economies and developing economies, suggesting some real structural imbalance in all of that. And we've seen one of the outcomes of that, Donald Trump, but you can see it back in the numbers much earlier. In addition, this increase in financial engineering that was building up, and again, I do recall another central bank meeting where we had a financial guy in from Stanford Business School, and he said, and he's talking to Central Bank Governors here.

He said, "There's this new system that I've just been watching of financial instrument where we take all this mortgage debt and we put it through that and we put it through that and we bring it together, then we cut it like this. Then we take those away and move them together so that you're balancing out risks there with risks there. Then we push it together, and then we cut it this way." And he looked at us at that point and said, "Do any of you know what I'm talking about?" And we pretty much didn't. And he said, "No, of course, you don't. There's only 10 people in the world who understand this, and you can't afford to hire any of them into a central bank." And it's sort of moments like that when you say this is getting very complicated and it's pretty hard to know what the implications. The implications were, of course, contagion.

We had been facing strong growth in New Zealand, commodity boom. Generally, the economy looked pretty good, but house prices were very strong, and inflation was really pushing up out of bound. The government was running a fiscal surplus. The OCR had gone up to eight and a quarter percent. Some of you in this room will remember that and decisions around that. And that was pretty high. We were doing bank stress testing in quite a significant way at the Reserve Bank. And generally, when we put these obvious stress parameters in place, it looked like the banking system was in reasonable shape with one exception, which was finance companies, and they weren't, and we knew that, and there were some other issues around those, but much less contagious. But we had, and we were looking at Basel II regulatory requirements, but we had also devised a New Zealand style bank resolution.

So, what was going to happen with that? When we got bank issues, we were going to hear about them on Friday because you always do. The bank would be closed over the weekend, there'd be a limited form new organisation ready to open on Monday with a limited amount of recapitalization, and the bad bank would be worked through. That looked, to us, quite a neat solution. Of course, we had a system which was dominated by four Australian banks. We didn't have bank shareholders in New Zealand, or hardly any, and that changed the politics completely. We had bank customers of various sorts. The Australian banks objected very, very strongly to this. They had their own resolution scheme, which was basically, "Leave it to us. We'll look at how we're going to handle the claims, and we'll send you a bill down the track." And this sounded much less attractive to us because we actually had a simpler system with much fewer shareholders.

So, that was already building up quite difficult tensions there. In mid-2007, there's a company in the states called New Century Financial, quite a big company. It went into Chapter 11. And I didn't notice it at the time, but our attention was certainly drawn to it later. That was really the first of the significant subprime mortgage holder failures. And it would've been nice to have been sort of alerted to that early. But you learn about some of these things after the event. The rest of that year, we had some other stress. Bear Stearns, you might recall, had some big issues and got saved by the government in the way that the US government had always thought of its ability ever since, back in 1907 I think the US banking crisis then, to get some big banks together in the room, shut the door and say, "Sort it out."

But then 2008, things were getting worse. And Lehman's, the largest subprime holder in the world got into big problems and started to fail. Now, these subprimes plus other security derivatives I've seen valued, but I can't be sure the quality of this valuation, at 1000 trillion dollars. That's a quadrillion dollars. That's big. And so big that you don't know where it is, what the impacts are going to be, but of course, very particularly it was through North American, or US to be fair to Canada, US banks, some Western European banks, and British banks, and some of their offshoots of those. But we didn't really know that, and it was very difficult at the time to find that out. We could see that the weekend, well, actually it was the 10th of September that Lehman's formally failed because this was the first one where the US government or US big banks said, "We're not going to save it."

They also had this rather irritating tendency to say, "But we'll get some sort of resolution for Monday morning in time for the markets opening." Now, when they said, "In time for the markets opening," that meant Tokyo, that meant we were going to have four hours, and we were very aware we were the first market pretty much in the world and we had a very rocky time on the 11th of September. We got together, we'd probably been together half the weekend. Again, a number of you in this room were involved. We cut the OCR from eight and a quarter percent in the end down to 2% or something like that. That's the biggest cut ever happened in a couple of months. Very quickly. Probably was the right thing to do from hindsight, but we were dealing with real site at the time and there was other stuff going on as well.

And part of the other stuff was Australia again, because their banks were getting pretty rabid about what we were talking about in terms of bank resolution and thinking about. And, of course, they went immediately political, and they went to their ministers who came to our ministers. And then right in the middle of it, I got a call from Helen Clark saying that she'd had a call from Kevin Rudd, who wasn't in Australia. I think he was in New York at the time, but he might've been at the IMF meetings in Washington. And he was saying, they were planning to put in place a deposit guarantee scheme, and we better do the same. And, of course, once they did that, the big risk was, funds went out of the New Zealand system across the Tasman, immediately to take advantage of that, leaving our banks in a very difficult state.

I immediately got on the phone to the obvious key officials in Australia, who interestingly had heard nothing of this. And it was, again, quite a difficult time. It was even more difficult in New Zealand because we were having a general election. And the day after that, Helen Clark was about to announce the Labour Party's election campaign. Now, I must say I take my hat off to both her and to her Cabinet and incoming National government. They all behaved very appropriately for a potentially quite nasty political situation like that. She wanted to announce that we had put in place a deposit guarantee scheme as a temporary arrangement. We talked about what you could say and what you couldn't say. We had already been through another event, which was back with the Air New Zealand one with 9/11, where we ended up before the Australian Securities Commission and the New Zealand Securities Commission for giving assurances about the position of New Zealand shareholders in companies, i.e., Air New Zealand on the stock market.

We were pretty careful about these sort of things at this stage, but you see these other things coming along on sort of hitting you at the same time with all of this. It was a very difficult period. We set up an emergency call centre. Don Abel on Sunday night went around the staff and said, "Who'd like to do something a bit different tomorrow morning?" Half the staff volunteered. We set up an emergency call centre for banks saying, "What was this deposit guarantee scheme?" Then, and I think one of that two in this room might've been in those. And another one for the general public. And we got thousands of calls because people were very worried. We were having press conferences, where we were being asked, "Can you assure us that the New Zealand financial system is safe?" And you can't answer that question. So, there was a lot of verbal gymnastics going on at the same time as well, but you had to be credible through it.

We put in place temporary liquidity measures. We found that over the month of October, there was seven times the normal demand for cash, just old-fashioned cash. And Australian banks, when they heard about the guarantee scheme, they indicated they were unhappy about it. Primarily because initially decision from Michael Cullen, they would pay for it, the four big banks would pay for it. Now, I mean the payment was pretty minor, but boy did they take a point of principle on that. We had to go through some changes as a result of that, but we did get the thing going in that sense. The volatility continued. AIG in the States went under then it was rescued $85 billion. UK and European banks were in big trouble. Northern Rock, I mean, I thought it was a rock group in Newcastle, but it turned out to be a big fast-growing bank.

And we didn't think could see an old-fashioned bank run, but in the electronic days you still could have that, and it was worse, not better than the 1930s sort of ones. The German banks, the Swiss banks, it seemed that there was not very much in the way of safe places to run in all of this. I was on a number of central banker meetings where I saw some big tensions played out between some of the big regulators of the Northern Hemisphere, where their interest suddenly did not, well, they collided rather than being in one direction. And again, that sort of thing happens in a situation like that.

But again, monetary policy did its work in that we had a slow recovery. The 2009 Budget the next year, tax revenue was way down. There was a big focus on debt. Now, this is the National government had come in at this point. They were disinclined to put big expenditure in place, but there was quite a bit of automatic stabilisers going on in terms of increase in unemployment benefit going out there and also decrease in tax revenue coming in. And I feel it worked, but it was quite slow. We had a slow recovery from the next couple of years. Growth dropped over the next couple of years to one and a half percent. Unemployment went up to 7%, no inflation problems, and we persisted with very low OCR over that period. It was a slow global recovery. And G7 debt was heading up very high, and that's something I'd look on now with these very high American and British and European public debt numbers that are out there.

We had the Bank of International Settlements doing a bunch of very interesting work on how high does debt, public debt can go before you start getting responses from the financial markets. We were very cautious about Standard & Poor’s and Moody's and others coming to New Zealand. They were very cautious themselves. They were being pushed around by their head offices. Luckily, we had good relationships with the local ones, and I think they did a good job. But interestingly, they were pressured very hard from New York as to what those credit ratings would look like in a small country that no one was terribly worried about like New Zealand as well. What did we learn about this? Well, some of you'll recall the Rogoff and Reinhart ‘This Time is Different’, very interesting and readable account of financial crises through the Western world. And this time was different. It was this very virulent and highly contagious subprime mortgage system that we were just unaware of how fragile and connected it all was. But we were lucky. So, the New Zealand and Australian banks did not have much in the way of connection to that.

It took quite a while before the Australian banks could assure us about their balance sheets on that matter, but it turned out there was very little connected direct stress on them from that. In addition, Asia was very strong. Commodity prices still held up reasonably. The exchange rate worked, it went down. And house prices remained high, which I know was since to be an enduring New Zealand issue. But it did mean that households in New Zealand still retained a reasonable amount of confidence. And this was their wealth, and it didn't look like it was being eroded as we could have been worried about. We started work on macroprudential tools at that time, which have come into play much more in the COVID time. It wasn't a big fiscal event, automatic stabilisers, but what we did learn out of it is these big shocks like this can have a long tail.

And actually I think, looking back, I was a bit blinded on some of that. I wrote a book called ‘Crisis’ out of this. The librarian at Reserve Bank came and said, "This is really interesting. We should write something. We should record what's going on." And I remember looking at her and thinking, "Oh, that's the last thing I want to do. It was just tension, tension, work, never sleeping, migraines, the whole package." But she was right, and we did. And in the end, we put it together as a book and it gives you that feeling about all these things coming in at the same time on all of this and trying to work out and understand. To me, it was actually quite cathartic. But interestingly, I said, "This happened, and this happened and this happened." We went back and checked the numbers, and it didn't. I had a different view, even though it was a very strong view, about things that hadn't actually happened in that way.

So, again, neurologically there's an impact of these very big shocks and how you should interpret them and go through them. But in this case, we had room with very high OCR to get very big stimulus, and that did have some very useful effect. And of course, the other long-tail event was this actually was the time when I think you can start to see some of the current structural problems we have, US, China, and around the Asia-Pacific. The Asian system had held up pretty well. They'd been through the Asia financial crisis and sorted themselves out in some respect. China was quite worried quietly and put in what I think is the biggest fiscal stimulus ever in history up to that point, about a trillion dollars, and that kept a lot of us going as well. 2016, some years later, they had a big stock market problem, and that was partly this coming home to roost. And the lesson out of that is long tail, but you also have to pay back stuff that you put out there, and that's often very difficult.

Can I jump from a financial crisis to a health crisis? The last of the three big events I’d like to talk about. Now, I'm out of those main institutions at that stage, but I saw. And this one at least I don't have to explain to anybody, we've all been through it together. But my perspective was from being lecturing at the university, being a bank director, being chair of Portrait Gallery on the Wharf, which just closed and only survived because of jobs subsidy schemes and chair of the Infrastructure Commission. So, I mean, what happened now when we'd been back in Treasury and the Reserve Bank, we'd seen a lot of these epidemics coming through, SARS-I, SARS-II, Ebola, MERS, AIDS for that matter, avian bird flu, swine flu. And in each case, we've seen a lot of headlines, and it never really came to much. And you can't see any of those in the economic data today. So, I was inclined when we saw this other thing called COVID to say, "Yet another beat up." And then the WTO says, "No, it's a pandemic." And they're covering their backsides. Obviously wrong.

Because this thing was sudden, unexpected, scary, unclear, we didn't know the science, we didn't know how the political responses would be, we didn't know how the trade responses would be, it was global, it happened very fast, it was highly contagious. Those are all descriptors of real big problem shocks. And indeed, this is the mega shock, from an economic point of view. I'm only talking really here from an economic point of view in all of this. So, you'll recall, very early 2020, vax and PPE, problems getting access, the lockdowns, the returnees, the choke points and how scary it all seemed. Of course, the big effects on the retail sector, which you can still see out there on tourism, on travel, on education, on migration. It was a freeze. What we'd done effectively was to put the New Zealand economy into a managed coma, like sometimes surgeons will do after car accidents, to give it time to try and recover itself.

And we were doing it at a time when pretty much most of the world was doing something similar, sometimes something a little bit different from that. 4,000 people died prematurely. It was a big event, and it was a massive economic event as well. Now, this time the preconditions were a bit different. We'd had reasonable economic growth, but it had been slowing. Inflation was well within target, unemployment was low, debt was low. There was an operating balance surplus, but the OCR was way down on one and a half percent. And some people like me were sort of saying, "Is that really a new normal? Or is that a bit unusual and people need to keep remembering it's a bit unusual and that these things can change?" And it had been low since 2016.

What happened here, the government put in place a $50 billion COVID envelope, and of which basically two thirds was used. And that was job support. It was business continuity support, particularly for small business. I think they did a rough but really good job on that part of it. That was within a few months getting that money out there, getting some confidence, keeping the unemployment numbers looking, as far as we knew, okay, keeping things going, but it was very short term sort of stuff. And I know everybody in this room knows the importance of having an exit strategy as well as an entry strategy in a lot of these things. I'll come back to that.

This was a huge increase in government spending of something like 30% that year. I've seen estimates saying economic stimulus 8% of GDP, that is massive. And then I personally saw the "Don't waste a good crisis" stuff, which is pretty meaningless really, but anyway. And the Shovel-Ready Programme. I was the honour to be on the Shovel-Ready committee, and I managed at least to make sure it didn't end up in the bottom of the audit to general’s waste basket. It consisted of $5 billion over 200 projects. It was rough and dirty. Now, I don't blame anybody for rough and dirty in a situation like that. Very difficult operating and lockdown, fast. And let's remember, what happened in the United States was they took six months to get any stimulus out, and only then when they'd worked out how to write checks, sign them with Donald Trump's name on them and put them in the post.

I think we did extreme far better than that, but we did learn that there was really no point in investing or putting money into infrastructure as a short-term stimulus. Of course, there isn't to take so long to get going to such an set of upfront conditions and time involved in a lot of this. Now, monetary policy, of course, the Reserve Bank pushed down rates to near zero problem and said, "Whatever it takes," and, "Don't worry, can go negative." I think this is hindsight view, personal views, and my views are personal ones, not to do with any of these affiliated institutions I've had connections with. I think they were in a difficult position, and from hindsight, I don't think it was really a monetary policy thing. When you're starting from 1.5%, you don't have much room to reduce the OCR. If you drop it down to half a percent and say “This will really get the economy cushioned or stimulated," of course, most people are saying, "What does the Reserve Bank know that I don't know. This is really scary. I'm not going to borrow. I'm going to put up the shutters."

And that was pretty much what happened on a lot of that saying, "Don't worry, we can go negative." Well, that's a bit sort of nerdy, yes, it's possible. Denmark was going a bit negative on some things. I don't think you can expect a normal sort of stimulus effect out of that. And indeed, the term in the Reserve Bank was, "Get those rates down there." It's like pushing on a string. So, it wasn't really going to have that sort of impact. Now, more important, I think, was what they did with regard to increasing the money supply, some quantitative easing, although this looks like there's been some quite big losses out of that, bank lending support and some of the macroprudential tools that had come really from the Global Financial Crisis time, but are quite important to have and all of that, and to keep an eye on the banking sector and ensure that it was operating with confidence.

As it turned out, of course, demand for loans went right down, but the banking sector looked pretty good through that period and has been robust through it as well. But nevertheless, it was a massive economic hit. So, by Q2, we had had a huge drop in activity. In fact, GDP had gone down 12% in that quarter, and it stayed low the next quarter. But one of the problems we all had was we didn't know. We didn't know how it was going to be resolved, when it was going to be resolved. And in addition, we were seeing this data but we couldn't believe. It was, the Stats New Zealand did the best they could, but their data, when you plugged it into conventional models, was just out of zone. The scales didn't go that far in the graphs, and you would have to assume that behaviourally the model wouldn't behave in a useful way either in that sense. Of course, now we have the advantage of a lot more real-time data and some of that was very useful.

But I guess what we learned was it was the mobility data that was very interesting. But even then, I think we had particular problem around the labour market to know what was going on. You look at the US because, what do they call it when they effectively put employment contracts on a freeze? Furlough, yeah. And so, they looked like they had this huge unemployment. We don't look like we had it at all because we didn't do that. In fact, most OECD countries didn't do that, but I think it's very reasonable for the Reserve Bank and Treasury to have expected quite bad unemployment consequences out of that. But that didn't actually really happen, and we came out of this with a very, very, very tight labour market. It's quite interesting when you go back to what John Maynard Keynes did at the beginning of World War II and actually Paul Samuelson in the US, in the Washington Institute that he was in for a while did the same.

And they said, "You'd come out of a big shock like this, well, it's very important. Is it going to be capacity utilisation or empty capacity?" And they both looked at the possibilities, and they both got it wrong and said, "Probably there's going to be a large amount of capacity." And I think we got it wrong as well. But I think the conclusion we'd come to was a very reasonable one at the time, which was that there would be big employment problems. And there didn't seem to be, of course, that was more acute because the government had changed the Reserve Bank's targets to employment and inflation. So, we saw the world going through much of the same thing. We had a global contraction of almost 3% that year. I think that's the biggest the world's ever seen since it's had statistics and possibly the biggest since, I don't know, Black Death or something like that. And indeed, finding comparison points was a big problem for policymakers because you didn't know what you should compare this sort of stuff with.

The event itself looked like the 1918 flu, but of course policy is quite different from those days then. Then, of course, as you know, saw a very strong bounce back four and a half, nearly 5% growth in 2021 and of a feeling was here, well, okay, it's a strong economy. But, of course, what happened out of that was prices started going up and it was only late that year that the Reserve Banks sort rather reluctantly said, "Yes, we have an inflation problem. We'll need to start pushing up interest rates." I think from hindsight they got that too late, but again, you couldn't say that at the time. It seemed to be reasonable, what they were saying. And that was despite, OECD, to be fair to them, had been here and given us some big warnings about the impact of all of that. So, the next Budget 2022, we did close that $50 billion fund.

The operating balance by that stage had gone into major deficit, minus 23% at one stage, and debt had jumped up very significantly. What did we learn about all of that? It wasn't really a monetary event and didn't really respond to monetary policy. It was a fiscal event, and it did respond to fiscal policy. And I think we did fast, directed, targeted stimulus that certainly helped certainty, but it was hard even to exit that. And after that very strong recovery after two very flat years, we have since, of course, had some more flat years after that. And some of that, of course, is COVID. And I think what we actually had after those formal fiscal schemes was a general loosening of government expenditure over those couple of years. Now, I know I'm in the place that knows better and may have strong views one way or the other about that statement, but that was my broad conclusion.

So, what we learned out of all of this, we've had a security global shock, a financial global shock, a pandemic global shock. We've learned that preconditions matter, it makes a huge difference where the economy actually is and where settings are and what room you have to move those settings. And, of course, you want to be prepared and the most obvious way that that happens fiscally or economically is keeping public debt down. And I think New Zealand owes a debt of gratitude to earlier ministers of finance and earlier treasuries and others have been involved in getting us into that state where that is the default position, and it certainly had its dividend out of that. Markets that are flexible allow automatic stabilisers to work. I've mainly been talking about discretionary fiscal policies. This was a lot automatic. There was a lot of automatic stabilising going on, and particularly, of course, that means exchange rates and labour markets, and it also means commodity markets and land markets and other parts of the capital markets as well.

There's a very strong saying that was hammered into me when I came into Treasury, "Minister, don't start anything without knowing how you're going to get out of it." I do recall it being used in Defence policy pretty unsuccessfully but wisely. However, it absolutely applies in these things as well. And, of course, the politics of closing something is very different from the politics of starting these sort of things. And the other broad learning I think is beware and assume there will be legacy effects. After all of these, there were ongoing enduring costs that weren't initially obvious. We sort of thought, "Well, we got through that COVID, terrible. Big pickup, 2022, back to normal. No, it wasn't. Thank you very much."

Oscar Parkyn:

..took us into real-time decision-making into the rooms, the phone calls, and spared us the econometrics, so that was deeply insightful. We'll open up for questions in a second. We've got a number coming in online, so just ask folk to keep those coming in and we'll get through as many as we can. In a second, I'll turn to the room as well and get people to raise their hand and take a microphone and introduce themselves. I guess I was struck that you looked back, and you focused on three crises each had their own unique character, that you drew out some common themes. And there's something about a preparedness phase, managing under uncertainty and sound judgement being applied and then dealing with the long tail potentially of these crises. Perhaps, a little bit unfairly, we'll get you to cast your mind or your views to the future having looked back at the past.

I mean, I guess, when I was at the IMF, there was a common theme about the world becoming more shock-prone, particularly amidst geoeconomic fragmentation, and also the character of shocks potentially changing. The IMF got very used to dealing with shocks that emanated from internal excesses, fiscal profligacy, excess foreign borrowing, et cetera. But now, shocks seem to be more of a character, large, global, exogenous, supply-driven, things like wars, pandemics, climate shocks as well. So, I'd be interested in your sort of reflections on that observation and whether you draw implications for how we might prepare in the future. And I see there's a question online as well from Benjamin Stubbing who asks, "What is the most probable economic shock scenario that New Zealand's current institutional setup is least prepared for? And why hasn't this been fixed?"

Alan Bollard:

Yeah, thank you. Thank you, Oscar. The shock that we are least prepared for is probably foot and mouth disease, and that's a nasty one. And that was definitely on Treasury's mind and Reserve Bank's mind when I was there. I hope it still is. Looking in the future, well, Oscar, are you working at Treasury on the effects of a major trade war at the same time as income tax cuts in a over-debted major power lead to more demands on the financial markets, getting public debt up to 140% of GDP in the US? That's for you.

Oscar Parkyn:

I think Treasury is certainly looking at the world and thinking of various scenarios, but no, that is a very good point indeed. I guess that brings us into the debt. You've raised debt in your discussion, and I also see a question online about. Well, Ben Smith asserts that the IMF got it wrong by imposing austerity on Greece during the sovereign debt crisis. Do you see any role for austerity measures in developed nations during fiscal crises? Perhaps broaden it out as well as your thoughts about the sovereign debt situation in the world as well?

Alan Bollard:

Well, I mean I'm no expert on that, but I mean, of course, if you're going to have stimulus, you're going to have austerity depending a little bit how you define that. But you would hope that that would've been sort through by Treasury, or whoever the policymaker is, in advance and desirably timed so that it could happen in the least damaging sort of way. The Greece story, I mean, is different. There was so much egregious policy practises and institutional practises going on there that, did it have to blow up like that? Well, no, I mean it's very unfortunate, but it's hard to blame the IMF or other parts of the world for that sort of issue. We've got an interesting question right at the moment with fiscal in New Zealand. We've spent quite a lot over the last few years. The government is trying to get some of that down. Plenty of institutions were all involved with seeing attempts at contracting spending. Some of that can happen more easily and less painfully than others, but it should be there in the mindset, I think.

Oscar Parkyn:

Let's turn to the room, and we'll see if anyone can raise their hand, and then we'll pass you a microphone. Gentleman here.

Geoff King:

Thank you. Geoff King here from the Ministry of Foreign Affairs and Trade. It strikes me that you've talked about three massive global shocks that have occurred in 20 years, so we're about three years away from the next one on that sort of maths. And we've talked about debt. Do you get a sense that, and given that context, that we're seeing more and more volatility in terms of the geopolitical space, nevermind these other sort of issues that may come at us. Given that we've seen these fiscal and monetary responses, is your sense that we're becoming less and less prepared or have less and less fiscal room, less and less ability to manage the next shock? And I'm sort of thinking not just about New Zealand, but some of those huge international players that do act to stabilise the global economy?

Alan Bollard:

Yeah, thank you. I don't necessarily see more volatility in one sense. I think what we are seeing is more interconnectedness. So, this is globalisation at play in various ways, and globalisation has been of immense benefits, as over the last couple of decades, a billion people taken out of poverty into middle class as a result of globalisation. That's more than economics has ever achieved in the history of the world or ever will. So, that's massive. But we are becoming clearer about some of the nature of downside risks from security interconnectedness, financial interconnectedness, health interconnectedness, et cetera. So, absolutely those, we do have to think about those and think about them a bit differently. I think what I would say would be looking forward that it's not so much the economies and there's plenty of organisations like our own and other OECD countries and the developing world where they're very aware of that and the need for cushioning and the need for mitigation policies and how those might work in the preconditions to achieve those.

But we are seeing a weakening of the international institutions that deliver the rules of the game, that allow that to work better. And obviously, we're talking about some of the things that have been just foundation ever since World War II and have helped that 1 billion people come out of poverty like that. So, Bretton Woods, IMF, World Bank, particularly WTO, and that is much more of a worry. And some of that you'd say, "Well, why haven't we been better at maintaining those institutions?" I think partly because they didn't get maintenance. They were sort of set up and we relied on them. IMF and the other similar multilateral institutions probably needed much more governance rebuilt to get real about the developing world. WTO, I'm really worried about, and I think we're all a bit despondent about that and how that happened quite like that.

And, of course, right now, leaders from around the region are going to Lima for APEC leaders meeting starting tomorrow. And it's terribly important how APEC gets on. My view, having to run the place for a couple of years was with this big power rivalry stuff doesn't happen, but at least they're still talking together. And as an informal institution like that, it's in a harder place than ever before, but it's more important than ever before. So, those sort of things. And are we going to see more BRICS-type institutions? And if so, are they going to work? Or perhaps more interestingly, are we going to see plurilateral ones? My interest is watching ASEAN and how they get on having for a long time managed that tension between Chinese economic dominance and US strategic dominance. And I just think we have to keep watching that. And what we see isn't all that palatable, but that is a very difficult world. Sorry, I've drifted around a bit.

Oscar Parkyn:

[inaudible 00:57:33]. We'll take another question in the room. I see there's a few, so why don't we take a couple. So, gentleman in the front.

Phil Guerin:

Hello. Great talk. Thank you. Phil Guerin from Institute of Management Consultants. Look, I see that at the moment, New Zealand economy, 50 to 60% of our export earnings comes from selling commodities to China, Australia, and the US, and we are heading into a period where we may have significant trade wars and increased protectionism. And one obvious solution to that is to increase the proportion of our export earnings that come from digital or other more weightless services. Do you think New Zealand is positioned to take that shift structurally as an economy? And what might the obstacles be to that?

Alan Bollard:

Well, in the short term, the answer to your question will depend on what Fonterra has in mind by selling consumer goods, and I'm pretty unclear. I think you'll see that in the numbers actually. There's a really good report on this, it's got my name on it and the Institute of Economic Research, and it's 1980 something, and it didn't happen. I mean, it's a hard one because statistically there's complexities in all that as well. And from one point of view, our exports are still very predominantly commodity, no matter how you cut and paste them. But on the other hand, we've got a huge population now of tech companies, for example, and they're heterogeneous. They're hard to pin down. I'm not always sure when they're in New Zealand or not in New Zealand. I don't know how they're treated by Stats. I don't know how they're treated by Inland Revenue. But boy, there's a lot of stuff happening there, and some of it is really interesting as well.

So, harnessing that. Yeah, I mean, so there's some very interesting possibilities, but we are traders and a lot of the stuff that organisations, like APEC, have been working on over the years has been getting harmonised systems, standardised customs windows, getting the best out of blockchain, now trying to say how is AI going to help a lot of that. It's getting stuff across borders in sensible, fast, efficient, cheap ways and all of that. And I think that will continue. I think we're still pretty flexible, but personally I think the dairy sector is rather dominating and has got some other issues around acceptability into growing consumer markets given some of its footprint.

Oscar Parkyn:

Yes. And we had questions online on productivity and innovation. So, I think that addressed those very well. Another question online from Christie Smith at the Treasury who said, "You've mainly talked about large shocks and the result in policy responses, but do you have any comments on how or whether fiscal institutions writ large should evolve to strengthen fiscal sustainability?"

Alan Bollard:

I mean, I still think the New Zealand system is a very good system. It's not world leading anymore. I know you keep surveilling that and looking at other examples. I think that's very healthy that that continues. Though, we know those sort of arrangements need maintenance. Economies and trading conditions change around those, so you can't necessarily assume that what was best fit for purpose in 1990 necessarily still isn't quite the same way. I'm not an expert on that, and I know there's some people in this room who are.

Oscar Parkyn:

Very good. Let's go into the room, and I think it'd be good if we do take a few. So, there's a gentleman right here.

Matthew Palmer:

Matthew Palmer from the Court of Appeal. Mike, you've talked a little bit about international institutions. My question is about domestic social licence. To some extent, you may have seen a little bit of this in the second half of the COVID crisis, but I'm perhaps not so much the other two that you've talked about. What I'm wondering about is whether a diminution in public trust in government institutions reduces government degrees of freedom in terms of economic responses. And if so, what does that do to government responses or should do?

Alan Bollard:

Yeah, thanks, Matthew. Well, I mean-

Oscar Parkyn:

Let’s just take a couple of other questions.

Alan Bollard:

Oh, let me answer that one 'cause I’ll just forget otherwise. Yeah, I mean it does impact the scope of action from politicians, and officials need to understand that and work ways around that. And somehow that's connected to some of these things happening in the Northern Hemisphere at the minute. And you go through a lot of Western European countries at the moment where there's stuff happening, that relates to your question. And I don't really understand that. The area of political economy has changed, really complex, very important. I have found from teaching at Victoria with students has been pretty interesting. Arthur, you probably won't mind me saying this, but it's going to be too late if you do, did a survey of his students, "What do you think are New Zealand's compelling economic problems or issues?" I haven't got the wording quite right.

And the answer was social equity and climate change. He put a very interesting word cloud out. There were millions of words there. Growth wasn't there, efficiency wasn't there, productivity wasn't there, added value wasn't there. And I tried actually with my cast to probe that a bit and not interested. So, is that a matter of taking those things for granted? Yeah, I think so. What does it mean about these other things? It's generationally things are changing, conditions for operating are obviously changing, but we haven't really talked about the biggest potential international market failure of all, climate change and where we're going to see that. Well, COP29 happens next week in Azerbaijan, that's not going to be a happy story. So, I think an answer, yes, but I don't really understand a lot of that. And I'd love to hear and read more from people who do.

Oscar Parkyn:

Let's go over to the side of the room. Yes.

Natalija Petrovic:

Kia ora. I'm Natalija Petrovic at Treasury. I was just wondering if you had any reflections at a more organisational level on how the public service has changed in its ability to respond to crises over time. So, with COVID, we had quite a massive coordination effort across different agencies, stood up all these squads, and that sort of thing. I was wondering if you'd experienced change in how we organise ourselves over time?

Alan Bollard:

Yeah, well COVID was unusual like that because it was obviously cross-departmental responses needed, and it hadn't happened like that before, and it was new stuff, and it was really scary, and it was happening very, very fast, and so on. Actually, I heard a number of my ex-employees from the Reserve Bank and Treasury, I was quite proud to hear them organising in various ministries and departments now, organising their parts of that process. I thought we could really be very, very proud about how that had actually gone. And of course, those are departments not really set up to be that operational to work out how deliveries get into supermarkets, who's allowed within a hundred metres of them and all that sort of stuff. But I think we got a good answer on that.

Going back to Matthew's point, it was interesting how there was a lot of social acceptance of that. And we all watched whatever news, six o'clock news on television, which I've never really seen before for however many months. And then suddenly we didn't want to see it anymore, hear any of that stuff anymore. That was the end of social licence. But in terms of the broader organisation, I don't know. I mean, civil service numbers have gone up hugely. There are some real questions to answer in all of that, how that's happened at central and local government levels without obvious improvements in the delivery of outputs as a result of that. But you are in a better position than me to really reach conclusions on that.

Oscar Parkyn:

Should we take a question on this side of the room?

Denny Kudrna:

Denny Kudrna, School of Government. You made a very specific case for fiscal firepower as the best response to shocks. I wonder, do you see a role for these kind of ex-ante plans on how crises could be resolved? So, is there a point to develop a bank resolution regime and keep it updated for maybe decades before the next systemic banking crisis? Or is there a case for developing a pandemic preparedness plan that we would have to keep updated for decades before the next one? Or is it not the best use of resource?

Alan Bollard:

I think you have to work through on this, so everybody would agree you want to be prepared, but does that really mean that the government should have warehouses full of toilet paper or does it mean something quite different? The government should have very robust operating balance and a low level of public debt. And I guess the more you go right back to that, the safer your predictions are going to be. I always thought in terms of preparation for shocks, you don't want to get too specific about shocks. I mean, fine for a stress test, but in terms of working out exactly what's going to happen, because it won't happen like that, stuff happens you don't expect, people do things that you never expected, the Australian banks say something, there's some political something offshore. So, you're looking for generic preparedness, not specific preparedness. Where would that impact?

Yeah, definitely in the banking system. You want to see a generic set of preparedness, and that should be tested, and it should be updated all the time. And did we ever update it to big Northern Hemisphere subprime exposures? No, because we weren't really that aware of them, but now absolutely. But is the Bank updating for the next sort of big move, digital currencies? That'll move in different ways. I'm sure the Bank's thinking about that sort of thing. So, I'd say, yes, generic preparedness but not specific downstream covering all the bases like that. It won't be like that. This time is different.

Oscar Parkyn:

Question online, which somewhat picks up on this question of preparedness. But notes that we're focused a lot on monetary and fiscal interventions, but your talk also talked about issues around concentrated markets or particular sectoral issues, such as in the aviation sector, that contributed to how the response was calibrated. But do you see policy interventions outside of monetary or fiscal policy that could prepare us better for future shocks? And perhaps to build on that as well, if you could talk about coordination as well between different types of policies. I think that that could be helpful including monetary and fiscal, but perhaps structural policy as well.

Alan Bollard:

Well, I'd say, in general, macro financial policies and micro prudential policies should definitely be part of the mix. They're in the Reserve Bank. We have an advantage being a small country with small, actually, three times the size of the institution it was when we were there. So, I shouldn’t keep saying small. But anyway, it's a defined institution, and it's across the road from Treasury. That's great. So, those of you who have operated with international institutions and find that you are being an interpreter between Reserve Banks and Treasuries of other countries, 'cause they don't talk to one another, you'd say, "Well, that's not bad in New Zealand."

So, I do think those sort of things are connected. Now, we get an event, a health event. I mean, that's different. I don't know how you prepare for pandemics. Clearly there's a heightened risk, and I don't know what connections are required there. But again, I think New Zealand being very small, people knowing one another to some extent, trust around the place being still reasonably high, leaves us in a pretty good position like that. But there's stuff that's exogenous, and that's what you should always be looking at. There's exogenous shock, there's what the Australians are doing in the aviation industry or what the Australian banks are doing, or for that matter, what United States policy might look like in the future. That's very clearly outside our control. That needs to be factored in, but you have to think quite carefully about how far you can go on there.

Oscar Parkyn:

Gentleman at the back has his hand up.

Speaker 1:

Hi, thank you for your lecture. Firstly, I'm glad I've read your book. I first heard about it when I was at university, so glad I found it, having graduated after the Global Financial Crisis.

Alan Bollard:

There's some copies in the second hand book shop in Cuba Street.

Speaker 1:

Yes, that is where I found it. My question is, obviously, we talked about factors that give course for concern in terms of institutions, but I did wonder, when you look at the past 10 or 15 years, are there trends and developments that give you cause for hope and optimism rather than just concern and worry?

Alan Bollard:

Well, I mean, I'd go back to connectedness in a highly connected world. And there's some ways in which we completely understand how that can interact trade wars. I think we've got a clear framework in our minds how that might happen and what might happen. I was reading a piece of legislation from US Congress. It says, "US Tariff Act. The purpose of this act is to promote the welfare of the United States, to help American business, to protect American labour, and to do what other aims might be decided upon." It's the Smoot-Hawley Tariff 1930, and it led to an increase in tariffs on dutiable goods of 60%. Interestingly, that's what Trump's talking about again. And it ultimately led to or at least part of the causes of US trade over the next three years dropping to one third of what it had been. Now, we've got a lot of, I mean, let's hope we're not seeing that quite again, but we've got a lot of that sort of information, a trade framework, economists understand how it works and how you trace the implications going through. The financial one is more complex because it's fast, it's not always transparent. You get these contagions that you didn't quite expect. There's behavioural relations, institutional and personal ones in there as well. And so that is more complex. And then you've got health ones, where it's the epidemiologists who are modelling. And suddenly the economists are saying, "Who are these people? At least they've got numbers, but should they be running government? We run the government." So, those are different sorts of ways of thinking about those interconnections. And the other point that Matthew just brought up, which is society, politics, and economy, the interrelationship changing in ways, and I think it is, but I don't exactly know how. I think that is quite a challenge for our times to understand that, and we're all, I'm sure, reading about that.

Oscar Parkyn:

Very good. Probably got time for one more question in the room if we have someone on this side of the room. Ken's got his hand up so we'll let them have the mic, please.

Ken:

Thanks, Alan. A great talk. Taking your observation that we're a trading nation, and also your observation, the US debt is very, very high and perhaps adding accountants saw that bankruptcies happened very, very slowly and then very, very fast. And the current US expenses are 8 trillion and their revenues are 5 trillion. And internally they don't seem to be doing anything about that. How do we best prepare for the sudden event that US no longer becomes a world's reserve currency?

Alan Bollard:

Yeah, well, thanks, Ken, and good to have your question. I was getting worried that people in the room were with me through all of that were keeping very quiet. I think that is a hard one because we thought we knew quite a lot about financial markets, public sector implications for financial markets and feedback. And what normally happens is whatever the question is, the answer is the US dollar goes up and liquidity goes into US. Now, so I'm not exactly sure what does happen there other than the financial markets get a bit more skittish and presumably the US dollar could still go up even though US public debt and predictions went up. I think I'm right in reading that Donald Trump actually is saying that he would look to tax foreign funders of US federal debt, which says we're going to have a big debt problem and we're going to tax the people who are going to solve that problem for us. So, that really sounded quite unusual.

So, we don't have a background for saying what happens in that situation, but if there's a big US public sector financial problem as opposed to private sector, which was after all the GFC, I think initially we will still find the US dollar will go up, but I don't know how far and for how long. And I think you'll find the markets would start penalising poor debt prospects other than the US. But again, I don't know how long and quite how that works. And we've got to make sure we're not one of those. We're not one of those and we'd expect that to continue.

That's sort of shorter term. And how does that resolve over time? I mean, at the moment, we're seeing very strong stock markets, very strong US dollar, strong cryptocurrency, and all of that sort of stuff. That is a really short-term response. And those markets will chew that over and think about some of that, and some of that'll come off and some of it'll go into other areas. I don't think we're going to suddenly see a reduction a bit. You said something like sudden reduction in US dollars reserve currency. I think we'll see a long-term, slower trend. China's been pushing at that for a long time pretty unsuccessfully. They had another go at the last BRICS conference, and they're also talking about payment and settlement system. But liquidity seems to be the absolute thing that the markets look for, even if they're starting to distrust some of the institutions around that.

And we've yet to see would Trump really put a very political appointee and to replace Powell in the Federal Reserve, for example, and what will the Treasury secretary look like and that sort of stuff. But you'd say long term there will be a move like that. Now, actually, looking at the Russian sanctions was quite interesting because in the two years leading up to that, if I've got my numbers right, Russia reduced its holdings of US Treasuries by a half. I don't know if the spies were watching that, but they should have been. It's early warning. And I'm sure they're watching what China's doing at the moment on all of this as well. But there's big, long, long lead times doing that as well because it would cost some of those holders of US debt a heap to get out in a hurry. But it is a bit unusual, it's when the big power starts behaving like this, how do those markets respond.

Oscar Parkyn:

Well, thank you very much, Dr Bollard. I think we will have to leave it there. I know there were more questions coming in. That's been tremendously insightful. You've shared with us a huge range of thoughts on a whole range of different shocks and issues. And this is exactly the sort of food for thought for the Treasury as we prepare our Long-Term Insights Briefing, which is coming up, a Long-Term Fiscal Statement and our Investment Statement. And I think that is the opportunity for a lot of scenario analysis and long-term thinking.

And I know our chief economist in the room will have been listening very intently to some of your challenge for Treasury as well. I think we appreciate that we have some huge challenges to tackle. So, thanks everyone for joining us here in the room as well as online. Just to say that we have a range of excellent local and international speakers lined up for next year. So, please keep an eye out on the Treasury website for more announcements coming up. I'll just finish with our karakia

[speaking in te reo Māori] Piki te kaha. Piki te Ora. Piki te Wairua. Hui e, tāiki e!

Thank you everyone for attending.

[speaking in te reo Māori] Mā te wā.