Muldoon or crash?

Back to Muldoonist meddling or some judicious jawboning? Which does the inquiry into direct intervention into house mortgages amount to?

Intervention would be a big step away from the principles governing the financial markets for the past 20 years and would carry attendant risks of a less flexible economy and slower growth.

Michael Cullen’s record suggests he will stop short of that. He said on Tuesday none of the obvious options had “immediate appeal”. And, while he has reached for the big stick in the past — for example giving the Reserve Bank the capacity to smooth the peaks and troughs of the exchange rate — he has always stopped short of grasping and wielding it.

But at this delicate stage in the cycle, even if all he and his public service chiefs are doing this week is jawboning, he is risking a hard landing in the economy.

His — and Reserve Bank governor Alan Bollard’s — nightmare is that a savings glut in Asia has poured cheap money into the hands of a population tanked on retail therapy and supplied the means, through the rising “value” of their houses, to feed the habit.

Bollard has recently resorted to what for a central banker is very strong language. Yesterday’s statement by him and Treasury Secretary John Whitehead upped the ante further.

Of course, the statement doesn’t equate to action. They don’t report to Cullen until February. And then the options are: do nothing; set up some backstop measures to be implemented only in extremis; actually take some action.

But just announcing an inquiry risks making buyers jittery and pushing the market downhill at the very time when there are signs it is topping out of its own accord — fixed-rate mortgages have risen in the past month and there is anecdotal evidence of slowing sales. What happens if banks which have been lending on 100 per cent ratios or close to it suddenly switch to 70 per cent as a result of this statement and prospective buyers suddenly can’t afford today’s prices?

Cullen wants a soft landing. But if house prices start to slip, a nasty spiral could set in which undermines the currency, which in turn ramps up inflation and also frightens off the foreign retail investors who have been supplying the money for the cheap house loans, which drives up interest rates and pushes house prices down further.

And who then gets hurt most? The small people, those last into the investment market and those mortgaged to the eyeballs to get into a house on low incomes — Labour’s sorts of people. Small businesses, which are critical to jobs, would find more difficulty borrowing and maybe a finance company or two becomes wobbly.

The imbalances in the economy are serious. But if they unwind messily, that could be just as serious. Cullen, Bollard and Whitehead need to tread very warily.