In 2008, Jarrod Kerr was working at the Commonwealth Bank of Australia when the global financial crisis hit like a financial meteorite. Bankers around the world had loaned money to people with patchy incomes to buy houses they couldn’t afford. Then they’d packaged up those loans and on-sold them to unsuspecting pension funds and university endowments. Then they’d all placed side bets on how all these shiny new assets would perform. Then the whole thing blew up.
The only thing was, no one knew who was holding the worst mortgages, or had placed the riskiest bets. The entire financial system stopped working, and no one would trade with anyone else. In the midst of this fiscal carnage, very strange things started happening.
“We had a guy come into the bank, rip out $15m in cash and bury it in his backyard. He physically withdrew it from Brisbane,” says Kerr. “He had it in his head that there was no guarantee, certainly for the amount of money that he had. He put it into the trucks and for all we can assume he literally buried it somewhere.”
Kerr was a classically trained economist, and all around the world people like him were watching unbelievably strange events become routine. He had spent years learning about how a system responds to signals, an orderly and logical way of understanding markets that worked very well. Until it didn’t.
“I was throwing all my textbooks out the window,” he says. “Because what I saw in 2008 was not in any textbook. Markets that couldn’t freeze, froze. Participants that were supposed to act rationally were not acting rationally. I’m not saying these things happened for one or two days, these things happened for months, and we couldn’t explain it. We couldn’t buy a bond at a price, we couldn’t buy a currency at a price.
“The market broke.”
For the next ten years, everything he knew stopped making any sense, and he had to wrap his head around a new world order. Now he’s the chief economist for Kiwibank, the fifth-largest bank in New Zealand, one which both through its state control and scale you would expect to be a model of insipid, measured communication.
A CUSTODIAN CLEANS UP THE FLOOR OF THE NEW YORK STOCK EXCHANGE SEPTEMBER 15, 2008 IN NEW YORK CITY. (PHOTO: SPENCER PLATT/GETTY IMAGES)
"We knew we were witnessing history, but at the same time, we were haemorrhaging,” he wrote in a piece for The Spinoff marking the crash’s 10th anniversary. “I vividly remember traders screaming, ‘The market’s broken! I can’t get a price, any price!’… The fear of contagion crippled financial markets, and each bank was asking the same question of the other: ‘what dodgy exposure do you have?’”
JP Morgan acquired the carcass of Bear Stearns, but when the far larger Lehman Brothers fell too, all the investment banks suddenly looked imperiled. Kerr started casting around for other, safer opportunities, landing at the CBA (parent company to ASB) late in 2008. There, and at Credit Suisse in Singapore, where he worked from 2010-2013, he watched as the world went into a funk, one which defied all his textbooks and forced him to re-evaluate all the orthodoxies which had been carved into his cerebellum from years of watching the markets.
Interest rates crashed in an attempt to stimulate economic activity, heading to low single digits, then to zero, then, unfathomably, to negatives – wherein you give someone a million dollars, and years later they give you $990,000 back. Bankers all around the world were flummoxed as their time-tested tools stopped working.
Kerr still marvels at this today. “Normally when interest rates drop like this you see a huge response in investment,” he says. “Government investment firstly, but also private investment. You make use of those low rates to build the future. What we’ve done is the reverse, we’ve focused on those low interest rates to pay off debt faster.”
This is unimaginably strange territory for economists. Not just in our lifetime – but in any lifetime. On a chilly morning in early September, Kerr stood on a low stage in front of a crowd of business people at Team New Zealand’s waterfront headquarters. Clients of Kiwibank were the majority of the audience, and they were typically in charge of small-to-medium sized businesses – people who don’t often get invited to this kind of event when put on by the big Australian-owned banks, who tend to target larger corporates.
They were treated to a different kind of show. I’ve seen Kerr put on variants of this presentation more than once, and it’s a very unconventional performance. He has a disarmingly relaxed style, pacing the stage and allowing his speech to jag from a recent data point to an obscure historical episode, to an enormous longitudinal trend. He’s in command, supremely comfortable, but it’s quite a stretch for the audience. The presentation is made up of reams of data, with a particular fondness for centuries or millennia long datasets. It’s essentially Jarrod Kerr’s grand unified theory of society, a lo-fi series of charts from different sources which collectively explain where we are today, and how we got here.
ONE OF KERR’S FAMOUS CHARTS FROM HIS PRESENTATION (IMAGE: SUPPLIED).
That said, it’s absolutely not a ramble. Kerr has a point, a big one. Put simply, it’s that those in positions of influence need to be spending far, far more than they are. Not foolishly, but on making things, investing in the future.
“Countries like ourselves have too little debt to start with,” says Kerr, echoing a persistent critique from Keynesian types that Labour and the Greens’ budget responsibility rules (BRR) are an unnecessary stifling of a once-in-a-lifetime moment. “Why aren’t we making use of it? It is baffling. And it is disappointing. Because we all know we are sitting here in a country where we’ve got a massive infrastructure deficit. And the way to build a better housing market is not just building more homes, but building public transport and utilities and roading and everything that goes with new homes.
ANOTHER OF KERR’S CHARTS SHOWING THE RISE OF POPULISM (IMAGE: SUPPLIED).
Kerr is a deeply unconventional bank economist, both in style and in message. The story of his life, his work, and his experience helps explain how this key man became a banking iconoclast.
His was a normal New Zealand childhood. Born in Hamilton but moved to Auckland at an early age. He took his first economics class at Rosmini high school and something clicked within him. The numbers sang a sweet song, and at 14 he started behaving very strangely, sending letters to the Reserve Bank asking to receive its quarterly monetary policy statements.
“They were 60-70 pages,” says Kerr. “Similar to what we get today. I’d read them cover to cover and try and understand as much as I could.”
This was 1991, and these weren’t like other monetary policy statements. The young self-described nerd was phenomenally lucky. Famed economists all over the world had their eyes on New Zealand’s Reserve Bank at that precise moment. Years before he became famous for obtuse free speech arguments and racist election campaigns, then-reserve bank governor Don Brash was a celebrity central banker, one who spoke to a hallowed conference in Jackson Hole, Wyoming. There he told an enraptured crowd about his pioneering work deploying central bank interest rates to target a specific rate of inflation.
New Zealand was at the tail-end of the spasm of bleeding edge reform unleashed by David Lange’s Labour government, with the idea of controlling price rises with the government’s money supply one of the last radical ideas out of the gate, soon to become accepted orthodoxy worldwide.
The young Kerr was only dimly aware of his proximity to this revolution – “ I knew they were ahead of the curve” – but he devoured the policy statements, and became obsessed with economics, getting As while the rest of his school subjects drifted by in Bs and Cs. He didn’t know it yet, but he had found his life’s work.
“For me, that’s the lever,” he says of interest rates. “That’s the one thing that explains everything… a lot of what happens in financial markets pretty much pivots off these numbers.”
After school he went to Massey University to complete first a bachelors, then honours, then a masters, all in applied economics. “I still didn’t know what to do with myself,” he says. On the verge of sliding into a PhD, a professor set him up with a job at a think tank in Sydney.
Energised by the application of his learning, Kerr applied for a job with the most establishment investment bank of them all: JP Morgan. He was hired, and started work as an economist on the trading floor, in their expansive offices near Circular Quay in downtown Sydney’s financial district.
His job was to look for major economic trends and describe how those would play out throughout industries, commodities and businesses. After that, the traders took over. The big bets, with concomitant major wins and losses, was a bridge too far for Kerr.
“I never thought I’d have the stomach. It’s easy to say you think the price of gold is going to go from here to there, but then to actually put money on, hold it and decide when to sell – there is another level of stress and responsibility that I think goes beyond my capability."
Still, he enjoyed the high pressure environment, and stayed at JP Morgan for the frothiest years of the ‘00s, while one of the biggest bubbles in financial history was inflating quietly in the background. Kerr watched, jaw agape, as it popped.
A YOUNG KERR IN 2005 DURING HIS YEARS AS AN ECONOMIST FOR JP MORGAN. (PHOTO BY FAIRFAX MEDIA VIA GETTY IMAGES).
Ten years later he’s in shock again as a government with a $7.5bn surplus and record low interest rates continues to avoid big spending projects.
“This is not one government versus another, it’s 20 years of underinvestment.”
Countries tend to be judged by their debt as a percentage of GDP, essentially a way of seeing how much money a country’s government owes, measured against its ability to pay it back. For context the USA’s is 106%, Singapore’s is 112% and Japan’s is a headspinning 238%. New Zealand’s is 20%, one of the lowest in the world.
Kerr sees this as a result not of prudent financial management, as the likes of John Key and Michael Cullen would posit it, but of failing to build out and renew infrastructure to deal with our growing and ageing population.
“If you go to the rating agencies, the ones that look at us, most of them tell you we could go to 35% in a heartbeat. And we’ve still got low debt compared to most developed nations.
“I’d argue we could go to 40% in a heartbeat. We could double our net debt.”
That would unleash tens of billions in spending. Enough to relocate ports, fix leaky hospitals, upgrade dangerous roads, build enough homes to deal with a chronic shortage. Everything New Zealand anguishes over could be dealt with. The only thing standing in its way are the budget responsibility rules, a self-imposed straitjacket the government put on before it was even elected, essentially because it perceived economic management as the single area which represented its greatest vulnerability to National party attacks. And while they have announced a relaxation of the rules, to a band of between 20%-25%, even that is far too timid for the ambitions of Kerr.
Lest it appear that he’s solely a debt dove for the government, it’s important to note that Kerr is as disappointed in the private sector’s cautiousness. He’s an admirer of new Reserve Bank governor Adrian Orr’s interventionist stance. When Orr cut interest rates to 1% in August, it was a blaring signal that he would act ahead of signs of real trouble to keep the economy buoyant. A message that the ten years of low interest rates aren’t going anywhere. So business might as well take advantage.
“That has a big impact on businesses,” says Kerr. “So if you come out and say I’m going to cut to 50 basis points and I’m going to keep it there for five years… every business knows that interest rates are not a problem.”
The infrastructure debt exists in industry as much as government. New Zealand’s famously terrible productivity (Denmark works far fewer hours and earns nearly 40% more per capita, for example) is in part because we remain in part a technologically backward country. Fear of making bad decisions holds back government and the private sector alike, but recent years have provided more clarity about where investment could be effectively deployed. What we need is to shake off the collective PTSD that the ‘87 and ‘08 crashes imposed, and start acting decisively.
Until then, Kerr will continue to bang his drum. After spending the first half of his career absorbing all he could about a particular generation’s rational monetary policy, he has spent the last decade unlearning it. Now he spends his days soaking in the new reality, occasionally removing himself from his spreadsheets to preach this lesson to audiences around the country.
All he needs now is for those in the crowd, from central government to small businesses, to make like his former colleagues at JP Morgan and start making some big bets. Only then, according to Kerr, will this strange spell that has bewitched the world lose its power, and all the coiled energy of our economy really spring forth.
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