Investor finance restrictions: the Reserve Bank asserts a right to secrecy

The Reserve Bank has been consulting on a proposal to ban any lending with an LVR greater than 70 per cent to residential property rental businesses in Auckland.   I have been noting that the Governor acts as investigator, prosecutor, judge and jury in his own case in matters like this. I have also noted the contrast between the way the Bank handles submissions on its consultative documents, (releasing only a (self)-selected summary after the final decision has been made), with the process used in respect of submissions to parliamentary select committees, in which submissions are published (and the committee members are not themselves final decision makers on legislation).  This is a serious democratic deficit –  a unelected decision-maker keeping secret submissions on major economic policy initiatives, which will have pervasive effects on potential borrowers and on the efficiency of the financial system.

Under the Official Information Act, I asked for copies of the submissions the Reserve Bank has received on the Governor’s latest proposed controls.  This afternoon I received the letter below, refusing my request (it is, however, far the fastest they have responded to any of my OIA requests).

I have no idea whether their stance is legal, and will consider lodging a complaint with the Ombudsman, on the grounds that there is a strong public interest in having this information available.  Whether or not it is legal, it hardly seems wise for an unelected individual who exercises so much power, and who has already been challenged as having apparently misrepresented material in his consultative documents and responses to submissions.

There is a serious democratic deficit in the way the Reserve Bank is structured.  The Governor could choose to allay some of those concerns by the way he operates, but instead he adopts a secretive style while one individual makes these decisions, which appear to be at best weakly justified under the provisions of the Reserve Bank Act, which require its powers to be used to promote the soundness and efficiency of the financial system.  It is difficult for the public to have trust in a Governor who will not even make public the submissions he receives on his proposals, and is himself responsible for any summary of submissions that may later be published.

Dear Michael

On 14 July you made an Official Information request seeking: Copies of all submissions made to the Reserve Bank on the proposed changes and extensions to LVR restrictions.

The Reserve Bank recognises that there is a tension between the public interest in full disclosure and the statutory requirement to maintain the confidentiality of information we use to regulate banks. In order to balance transparency with confidentiality, our long-standing practice is to publish a summary of submissions rather than publish original documents submitted to us. We currently have work underway to publish a summary of submissions relating to our consultation on adjustments to restrictions on high-LVR mortgage lending.

Official Information Act section 16(2) says that we should provide requested information in the way that a requester prefers to receive it, unless doing so would:

(a)    impair efficient administration, or

(b)   be contrary to our legal duty in respect of the document.

Official Information Act section 16(1)(e) allows that information may be made available by giving an excerpt or summary of the contents.

Much of the information contained in the submissions that you have requested must be withheld in order to comply with the confidentiality provisions of section 105 of the Reserve Bank of New Zealand Act, and it would be administratively inefficient to publish our summary and repeat the work of summarising by redacting documents that are already being summarised for publication.

Accordingly, your request is refused on the following two grounds of the OIA:

  • s18(c)(i) – providing some of the information would be contrary to another Act; in this instance, section 105 of  the Reserve Bank of New Zealand Act, and
  • s18(d) – that the information is or will soon be publicly available; in this instance, as a summary.

The Reserve Bank expects to publish its summary of submissions near the end of August. The summary of submissions will include names of people and organisations that provided submissions, which gives you the option to directly approach submitters to ask if they will provide you with the information you’re seeking.

You have the right to seek a review of the Bank’s decision under section 28 of the Official Information Act.

Yours sincerely

Angus Barclay

External Communications Advisor | Reserve Bank of New Zealand

2 The Terrace, Wellington 6011 | P O Box 2498, Wellington 6140

From: Michael Reddell ] Sent: Tuesday, 14 July 2015 11:59 a.m. To: macroprudential Subject: RE: Submission on proposed investor finance restrictions

Thanks Daniel

This is to request, under the Official Information Act, copies of all submissions made to the Reserve Bank on the proposed changes and extensions to LVR restrictions.



How have we been doing in recent years relative to the US?

The US Bureau of Economic Analysis released overnight some revised GDP estimates, not just affecting the last couple of quarters (the bits that tend to attract more headlines than they are worth), but going back several years.  The overall effect was to revise lower estimates of US GDP growth over the last few years.  The previous estimates of growth had, of course, already been very low by historical standards.

I’ve been intrigued, and have posted previously, about how similar the paths of NZ and US GDP per capita have been since 2007, despite all the differences between the two countries’ experiences (financial crisis and not, terms of trade boom and not, earthquake reconstruction and not, and even quite different labour market experiences).  So I was curious to check what the chart  –  showing real GDP per capita –  looked like following the latest US revisions.

nz vs us gdp pc

Statistics New Zealand publishes separate production and expenditure GDP series, and not infrequently there are material divergences between recent years’ estimates of the two series.  SInce 2007, on current estimates, GDP(E) has grown more than 2 per cent more (in total) than GDP(P).   Analysts tend to pay more attention to the production measure (GDP(P), but that is partly for historical reasons (it used to be less volatile).  The differences will largely be revised away over time, but we have no obvious way on knowing now which will better be seen as representing history.  The final revisions, years hence, could be higher or lower than both series, or somewhere in the middle.  My hunch is that they will be a bit lower: I understand that SNZ uses PLT met migration to feed into its population estimates, but experience suggests that in periods of strong inward migration net PLT understates the actual net inflow.  The next census –  the check on the level of population  – is still a few years away.

If the GDP(E) line, as it currently stands, were to prove to be the final story, we might end up taking a little comfort that we had done a little better than the US over this period.  As it is, for now I’m sticking with emphasising the cumulative similarities in GDP per capita paths rather than the differences.  And if we had crept a little ahead in the last year or two, the chances of maintaining that lead don’t look overly good right now.

And don’t forget the employment (or productivity) picture.  We are estimated to have generated very slightly more income per capita growth since 2007, but employment here dropped from 65.9 per cent to 65.0 per cent of the population from 2007 to 2014.  In the US employment dropped from 63 to 59 per cent of the population over the same period.  For good or ill, it took them less of their population to generate much the same per capita output gains.  That represents much more productivity growth than we’ve seen here.


A few earlier posts touched on some issues around TPP.

I remain pretty uneasy about the likelihood of overall net benefits emerging from this deal for New Zealanders.

And since this is one of those polarising issues – at least in New Zealand – I should restate (in a perhaps over-simplified way) my priors:

  • The ability to trade freely in goods and services is generally good and beneficial
  • Unilateral removal of New Zealand’s own trade restrictions has generally benefited New Zealanders.
  • We should have gone further and removed our remaining tariffs and either abolished, or sharply constrained, our anti-dumping regime.
  • A liberal foreign investment regime is generally good and beneficial.
  • New Zealand’s foreign investment regime is less liberal than it could and should be.   (There may, however, be important exceptions to the general case for a liberal regime.  Had the Soviet Union sought to buy up a large contiguous chunk of Northland I’d have had no hesitation in supporting a ban.  And non-resident purchases of houses, especially houses that sit empty, on a large scale might also be an exception,  but only given the absurdities of our domestic planning and land use restrictions.)
  • Intellectual property protections appear to have generally gone beyond what is appropriate to foster a climate of innovation.  Copyright is the most obvious example.
  • Strong government institutions, and particularly those which protect and ensure the rule of law, are important to any successful and prosperous society.
  • A key element of the rule of law is equal treatment of the powerful and the weak.
  • The freedom for domestic Parliaments to adopt even daft and dangerous policies is an integral part of the sort of system of government that we inherited from Britain and have made our own.

So I’m pre-disposed to favour trade and investment liberalisation.  In general, the more the better.

But even the academic literature tells us that free-trade agreements among groups of countries are not the same, and don’t offer the same welfare gains, as more generalised free trade. The Australian Productivity Commission reminded us of that again just last month. Australia’s own FTA with the United States has generally been regarded as having secured few (perhaps even negative) benefits for Australians.

And it is already apparent that intellectual property protections are set to be extended in any TPP agreement.  That is a win for the owners of those properties – few of whom will be in New Zealand – but where is the evidence of a general welfare gains for New Zealand citizens, or indeed, those of other countries?   (And this is so, even acknowledging Eric Crampton’s in-principle point about free-riding and pharmaceuticals).

And why do we want to further entrench investor-state dispute settlement provisions (ISDS), that provide greater rights to foreign investors than domestic investors have? We should, primarily, be making New Zealand law in the interests of New Zealanders, and I have not seen a single serous argument for how that end is served by providing better remedies to foreign investors than to our own. Disputes about government policy should be fought out in domestic political arenas, and disputes on law should be fought in the domestic courts. For better or worse, we ended “foreign” jurisdictions (the Privy Council) in domestic law a decade or so ago.    I’m not suggesting that foreign investors are any better or worse than domestic businesses – but we shouldn’t treat them differently. As I noted in an earlier post, previous great eras of foreign investment flourished without the need for such additional protections.

And while perhaps it is true that key points in any negotiations go down to the wire, shouldn’t we be uneasy that at this very late stage, such indications as there are suggest that the prospects of trade liberalisation gains that matter to New Zealand don’t look good? Dairy gets a great deal of attention in our media, but I wonder just how important any progress on liberalising it is in any other capitals? There seem to be more countries who care about resisting liberalisation, or for whom it just doesn’t matter, than who really care much about securing more dairy liberalisation.   That doesn’t sound like a recipe that leaves our negotiators much leverage.

And no doubt there is considerable truth in the proposition that negotiations need to take place in private.  No doubt, equally, if there was a will there would have been a way to be more open than the TPP process has been. After all, we used to think domestic government deliberations should be protected from public scrutiny as well. Now we subject them to extensive consultative processes, and the scrutiny of, for example, freedom of information acts.

Negotiations in private are a delegation of responsibility, by New Zealanders to responsible ministers. And trust is an important dimension of any delegation. Perhaps trust might be a little higher if New Zealand had a Trade Minister who, however competent, comes out with statements like this

“This is a moving game, and we need adults to do this – not breathless children to run off at the mouth when the deal is not actually finished.”

I guess he is old enough to have been a public servant before the Official Information Act.  But after a decade in Parliament those sorts of attitudes really aren’t good enough –  perhaps the only saving grace is that he is indiscrete enough to say what perhaps others only think.

I’ve expressed concern previously about the momentum that takes hold in these sorts of processes.  These negotiations have been going on for years.  New Zealand ministers and officials have prided themselves on having a key administrative role in them.  So how willing is the government, really, to walk away, on a hard-headed (rather than wishful) assessment of whether any deal actually benefits New Zealanders.  And will other hard-headed governments think New Zealand will really be ready to walk?  On its own.

Our Trade Minister is rumoured to be about to head off to Washington as our next ambassador, and the Prime Minister appears to enjoy his good relationships with, and easy access to, people like the Barack Obama.  Basic agency theory suggests we shouldn’t just assume that their interests (or any other past or future ministers) are sufficiently aligned with those of the principals –  New Zealand citizens and voters.  To walk away might mean putting ourselves “outside the club”, whatever that specifically means.  At a time when the government appears to be revelling in its position on the UN Security Council (and I still struggle to take seriously the idea of New Zealand as a key player, whether in the cause of Middle East peace, or the Security Council veto), there might be more reasons than usual to question how willing the government will be to step away if only a bad economic deal is finally on the table.

Perhaps the issue won’t arise.  Perhaps Malcolm Bailey’s comments this morning that the current dairy offers (whatever they are) should be “unthinkable” for New Zealand are just part of some orchestrated positioning exercise, with a bit of MFAT choreography, to try to prod slightly better offers out of our trading partners. But, at the moment, what we read and hear in the media doesn’t sound promising.  It doesn’t sound enough for even those instinctively inclined to support liberalisation to think that we New Zealanders would be better off it we signed up.    Bad deals have been done in past –  the Australian-US FTA –  and we can’t just assume away the possibility.

Of course, if a deal is signed it will still have to be ratified by Parliament (and through domestic processes in other countries).   No doubt the government will have a rough ride through that process –  no matter what deal is signed –  but equally I’d have thought that the support of ACT and United Future shouldn’t be hard to secure, and that there is little serious threat to its ability to secure ratification.

But if an agreement is signed, it is going to be important that there is serious scrutiny of it before Parliament is asked to ratify it.  There will lots of vocal commentators, and no doubt some of them will make useful and reasoned points that contribute to the debate.  But we need more than that, on what will be quite a detailed agreement.  We need a serious independent assessment of economic implications of whatever ministers have signed.  Perhaps the Productivity Commission could be invited to oversee that analysis. As it happens, the Commissioners include a former Secretary to the Treasury, and a former Director-General of Agriculture.  I doubt that the Productivity Commission currently has the in-house expertise at present to do the detailed work itself, but with the ability to (for example) contract modelling expertise the PC should be able to make a useful assessment, better informing any pre-ratification debate.