The print issue of today’s NBR has a double-page feature on “Wheeler and his critics”. It includes – with a few transcription errors – the heart of an interview I did with Rob Hosking in early July.
There are few broad issues touched on in the article:
The first is monetary policy. Hosking correctly points out that market economists’ forecasts of inflation have been even less accurate than those of the Reserve Bank. That doesn’t reflect well on the market economists, who in 2013 and 2014 were also often even more “hawkish” on policy than Graeme Wheeler has been. The same results are reflected in the survey results of the NZIER’s Shadow Board.
Being less wrong than market economists is convenient defensive cover for the Reserve Bank. During the 2003-2007 boom, we used the argument on the other side. We (the Bank) let inflation drift too far up, and tightened too slowly. But, on average, the markets (pricing and economists) were more dovish – constant looking for the first easing.
And if the Governor has to make mistakes – and inevitably every central bank will from time to time – it is better to be in good company than out on his own. But only one agency – in New Zealand, one individual – is charged by law with keeping inflation near target. And the Governor has been given a lot of public resources to do the analysis and research to support his policy decisions. In this cycle, our Reserve Bank wasn’t doing that well in 2013 – core inflation was below the target midpoint (although 2013 outcomes were largely a result of Alan Bollard’s choices). But then they tightened policy – at a time when no other advanced country central bank was doing so – and kept on tightening. And core inflation just kept edging lower (and unemployment began to rise again). They were bad calls – increasingly clearly so with hindsight – and should be acknowledged as such, by the Governor – and by those paid to hold him to account, the Bank’s Board, and the Minister.
So I’m not one of those arguing that the Governor has put too much focus on inflation. Instead, he seems to have put far too little focus on actually keeping the medium-term trend in inflation on target. And that focus on the 2 per cent midpoint was one that Graeme Wheeler and Bill English added to the PTA less than three years ago. He seems to have been distracted by Auckland house prices – a serious issues, for political leaders – and by beliefs about what “normal” interest rates should be.
The second issue is around governance, and particularly the decision-making structures Parliament set up for the (rather different) Bank back in 1989. I get the sense that no one is really now defending the current system, which has no counterpart anywhere else in the advanced world. A single unelected individual is responsible for all the Bank’s analysis, and for all its decisions – not just on monetary policy, but on banking supervision, insurance supervision, note and coin designs, housing finance regulation, foreign exchange intervention, and so on. No other country does it that way. No other New Zealand public agency I’m aware of does it that way. The Greens have been raising concerns (and do so again in this NBR article), the Treasury has been suggesting changes, market economists have favoured change. In this article, now-independent economist Shamubeel Eaqub calls for change. And, of course, I’ve argued that it is past time for change. Actually, I suspect Graeme Wheeler favours change – although his preferences as to how are likely to be different from those of most others. This is not an ideological issue. It is common-sense one where reform is needed to bring the governance structures up to date. There are important discussions to be had about precisely what alternative model to adopt. I’ve made the case for something like the model the British government has recently adopted for the Bank of England, but there are reasonable arguments for other possible solutions. Unfortunately, the obstacle to reform now is the current government. I’m not quite sure why.
The third issue is around LVR controls. Shamubeel worries that active Reserve Bank involvement in housing finance restrictions invites, over time, a more direct political involvement in future Bank decisions, perhaps including around monetary policy. I think that is a risk. My points about LVR restrictions are twofold. These are really the sorts of decisions that should be made by politicians, if anyone is to make them. Direct controls of that sort, that impinge of so many people’s finances and businesses aren’t the sort of thing unelected officials should be deciding, But, in a sense, that is a decision Parliament needs to make, to take back (and then take) responsibility for such decisions.
But perhaps more importantly, the Bank – the Governor – has still not made a compelling case that the soundness of the New Zealand financial system requires such controls. They have not made a clear and convincing public case that investment housing lending is riskier than owner-occupier lending. More importantly, even if such lending is a bit riskier, there is no sign that lending is growing rapidly, or that even very major falls in house prices and rises in unemployment would threaten the health of New Zealand banks. The Reserve Bank did the stress tests, not me – and they seem to be very demanding tests. My response to their consultative document is here. In the meantime, they are now hiding behind provisions of the Official Information Act, and highly questionable provisions of the Reserve Bank Act, to keep from the public the submissions people have made on the proposals. Here are the submissions on some of the government’s housing initiatives. But where are the submissions on the Governor’s planned direct controls? The provisions the Bank rests on to keep them secret were never designed to shelter public submissions on major new macroeconomic policy initiatives. I’ll come back to this issue next week.
The interview reports a few areas where I have been critical of the Governor. In particular, I noted that he seemed very reluctant to engage in serious or robust debate on any of the policy or analytical issues. That was certainly the case internally, but I think it is true externally as well. Various people have made the point to me that the Governor seems uncomfortable with the media, or with the sort of scrutiny that inevitably should go with the sort of power he wields. I’m not sure that we’ve yet seen a serious and searching interview about his proposed new LVR restrictions, or about his conduct of monetary policy over the last 18 months or so. (Incidentally, I’m reported as calling the Governor “Action Man” – in fact, the credit for that description, emphasising action rather than analysis and reflection, belongs to one of the Governor’s own current direct reports.)
Finally, Rob Hosking highlights the issue of possible comparisons between the Governor and the late former Minister of Finance, Sir Robert Muldoon. As I noted, I did not make such a comparison, and I don’t think it would be helpful to do so. There is a sense in New Zealand debates that the first person to invoke Muldoon comparisons loses. And Sir Robert was Minister through some of the most difficult years New Zealand faced, and his record in response was a mix of the good and the rather less good.
But through the post-war decades, we had an extraordinary piece on legislation on the books, the Economic Stabilisation Act. It was introduced by a Labour government, and used and abused by both Labour and National governments over the decades. It gave ministers the power to impose wide-ranging economic controls (in Geoffrey Palmer’s words) “without resort to Parliament in ways that were unique in the western world”. It was finally repealed by the Labour government in 1987.
But it is worth noting that these decisions had to be made by a committee (the Governor General by Order in Council) and perhaps more importantly had to be made by people with an initial electoral mandate to hold office: Cabinet ministers are elected MPs, and can be tossed out again.
By contrast, Parliament just a few years later (in the original 1989 Reserve Bank Act and subsequent amendments) passed legislation allowing an unelected official to single-handedly (not even by Order in Council) impose far-reaching controls on almost any aspect relating to banking, which has potentially pervasive influences on whole classes of economic activity. The scope is, of course, nowhere near as wide as the powers under the Economic Stabilisation Act, but there are even fewer checks and balances, in an age that typically puts much greater weight on openness and transparency.
Graeme Wheeler is not responsible for having passed the Reserve Bank Act. That was Parliament’s choice. But the Governor has choices about whether, and how, he deploys those powers. Without a much stronger case, establishing the serious prospect of a threat to the soundness of the financial system, simply banning people from using banks to finance their residential rental businesses, when the initial exposure would exceed 70 per cent, seems unwise, and a step too far. Several serious people have argued to me that the Governor’s proposals are ultra vires. I’m not a lawyer, and issues of that sort can really only be resolved in the courts. But when banks are willing to lend, and customers are willing to borrow, and there is no evidence of any serious deterioration in credit standards, we should be wary about the prospect of a single public servant telling them they just can’t.