Back in August, I OIA’ed Treasury for copies of any material they had prepared on the Reserve Bank’s Auckland investor finance restrictions in the period following the release of the Bank’s consultative document on 3 June. I had written earlier about the pro-actively released Treasury papers, which captured some of the earlier round of discussions Treasury had had with the Bank on this issue. At that time, Treasury was unpersuaded by the Reserve Bank’s case, for a variety of reasons, and were rather grumpy about late notice, inadequate consultation with them etc.
But then I went away, and when I got back and worked through my inbox I didn’t notice that Treasury had (helpfully) replied to my request. In fact, I only realised it earlier this week, when stories started appearing (Politik, MacroBusiness, NBR and the Herald and the Dominion-Post) based on the papers Treasury had released, and which are now available on their website.
There is a curious, rather defensive, tone to the letter I received from Treasury. It looked as though senior management was now quite uncomfortable about the perceptions of a split between the Reserve Bank and Treasury, and so went out of their way to present a sense that everyone was on the same page…..really.
No doubt for this reason they included in the material they released a letter from Gabs Makhlouf to Graeme Wheeler. It looks to be a stock letter, sent by the Secretary to every government department/agency head at the start of the new fiscal year. There is nothing specific about the Treasury/Reserve Bank relationship in the letter – and it was notable mainly for the odd line “we want to create a New Zealand that is prosperous, sustainable and inclusive”. I could object to “create” – government departments have such power? – but it was the “we” that struck me. Surely we elect members of Parliament, from whom governments are formed, to determine policy, and set policy goals. Mere government departments – even The Treasury – have an advisory and implementation role.
However, Treasury seem to have included the letter in the release to me so that they could draw attention to the final paragraph.
The Treasury will continue to provide an independent perspective, and aim to add value to agencies’ business in doing so. Our goal is to be collaborative and challenging at the same time, engaging in a constructive spirit, with a shared sense of ambition and focus on getting better outcomes for all New Zealanders.
But the other thing Treasury was really keen to get across – it was explicitly included in the covering letter – was a sense that everyone was really more or less on the same page, at least on the need for some sort of intervention.
Please note that overall, the Treasury supports the Reserve Bank’s view that recent developments in the Auckland housing market could potentially pose a threat to financial stability over the medium term. Although there may not be signs that a systemic risk may crystallise imminently, there is cause for vigilance. Given the consequences of doing too little too late, we support the case for intervention at this stage on financial stability grounds on the basis of the available data.
I noted those lines when I first opened the documents. And then I was struck by how often they were repeated, word for word. It appears in the Treasury’s submission on the Reserve Bank consultation document. It appears in the Treasury Report to the Minister that accompanied a copy of the submission. And it appears even in an internal briefing note for the Secretary to the Treasury on the critical assessment of the Reserve Bank’s evidence base undertaken by Ian Harrison, and presented in the document A House of Cards.
The paragraph is not elegantly written at all, and it would have been easy to revise the words slightly over time to improve the expression. But it has the feel of words that were haggled over, to get just enough qualifiers included, and then perhaps finally imposed from the top. No one dared deviate, even stylistically, lest it reopen all the old debates and scepticism.
After all, it does not say that the Treasury supports the Auckland investor finance restrictions coming into force this weekend (or the relaxation of the LVR limit in the rest of the country). Indeed, it does not say much at all. It doesn’t say that recent developments in the Auckland housing market “do” pose a threat to financial stability, but simply that they “could potentially” do so, and even that is qualified by “over the medium term”. Then follows the awkward sentence “although there may not be signs that a systemic risk may crystallise imminently” – but not even Graeme Wheeler has suggested imminent crystallisation – “there is cause for vigilance”. Well, yes, but then that is what taxpayers pay bank supervisors for – we hope they are always “vigilant”.
But then they conclude rather oddly, “given the consequences of doing too little too late” they support “the case for intervention at this stage”, not unconditionally but “on the basis of the available data”. I’m not sure at all what that final qualifier is supposed to mean, or how its hedges the Treasury position, but my interest is the first phrase in the sentence. Surely that just makes the whole argument circular, and bases policy on a straw man? By definition, no one wants to have done “too little, too late”. If the financial system is, in fact, going to collapse in a heap if we do nothing then they support doing something. Most people – although not everyone – would.
But how do we know? How, for example, do we deal with the many countries that have had rapid credit growth (unlike New Zealand at present) and house price inflation, but no subsequent systemic problems. The Treasury lines just assumes an answer rather than demonstrating it, assumes that intervention can make a material sustained difference “over the medium term”, and does not even address the costs of intervention, or the consequences of being wrong. It is a poor quality conclusion, that seems to rest on rather poor quality analysis. It is, for example, exactly the sort of line that could have been run in 2005/06, on the back of the larger, and more pervasive (regions and asset classes), credit and asset boom. And yet the banking system came through the subsequent severe recession almost totally unscathed
There are some useful comments in the papers, if not always that clearly expressed. And Treasury seems to be torn. For example, buried in their comments is the telling observation “there is little evidence that lending standards are declining, a crucial component for assessing systemic risk”. If lending standards are not declining materially, history suggests there is almost no chance of the sorts of credit losses that would trigger a systemic financial crisis. Treasury and the Reserve Bank should be challenged to cite any exceptions they are aware of. Treasury might have highlighted the point in their advice to the Minister.
Many of the stories around these papers have highlighted an apparent Treasury preference that if there is going to be a direct regulatory intervention it should be done using debt to income limits rather than loan to value restrictions. In principle, I think they are probably correct – and that some of the comments in the Dominion-Post this morning are just wrong. But they lack the courage of their instincts – after all if there is no sign of systemic risk “crystallising imminently”, why didn’t they push back more strongly against the rushed use of LVR limits again? The Bank’s excuse in 2013 was that it didn’t have time, and something urgent had to be done. They were clearly wrong then, and it is now 2015. Good policy takes time, and rushed interventions rarely end that well.
Curiously, even though Treasury are the guardians of regulatory quality in New Zealand, there is no reference at all in the comments to the “efficiency” dimension of the Reserve Bank’s statutory responsibilities. Surely a challenge and review body should be more sharply posing questions around the balance between soundness and efficiency, and offering perspectives on how to think about policy proposals that might make some modest difference to soundness, but which certainly come at some cost to the efficiency of the financial system? Treasury do note that the regime is already becoming much more complex than was envisaged when the Reserve Bank first lurched into direct controls in 2013, but pay no attention to disintermediation risks or the distributive consequences of the policy, simply rather lamely concluding that ‘this is new territory for both the RBNZ and the Treasury and we will need to work together to ensure we continue to develop our understanding of these policy settings.
The one aspect of the new policy that Treasury is slightly stronger on is pushing back against the relaxation of the LVR restriction outside Auckland Here I’m not sure I really understand their argument – something about the risk of inconsistent signals. I think they are wrong on that – the logic of the Reserve Bank’s position seem clear, in trying to target specific areas of exuberance. There isn’t much sign of exuberance in Gisborne, or Invercargill, or Nelson, or Wellington or Christchurch. I don’t agree with the controls, at all, and I think regionalisation of prudential policy is another dangerous step towards politicising the Reserve Bank (akin to discretionary regional fiscal policy), but Treasury have already accepted the case for an Auckland restriction, so they’ve already abandoned that line.
These documents highlight the ongoing tussle between the Reserve Bank and the Treasury over prudential policy (as distinct from its application to individual institutions). In principle, I mostly side with Treasury. The Reserve Bank has far too much independent power to set policy without the direct involvement of the Minister of Finance – both the ability to vary banks’ conditions of registration, and the far-too-extensive scope the legislation seems to allow them to set conditions on. In my view, policy in these areas should be set by the Minister of Finance, with advice from the operating agency (the Reserve Bank) and the Treasury. The Reserve Bank’s operational independence in this area should be more narrowly restricted to matters relating to the implementation of policy and its application to individual institutions.
Institutional rivalry and tension is probably inevitable, and hardly unique to the relationship between our Treasury and our Reserve Bank. It isn’t helped by both institutions being led by people who had come in, not just from outside the public sector, but from outside New Zealand altogether, or by the rather weak senior leadership team at Treasury. But there is also something about the quality of what the Treasury brings to the table. The Reserve Bank tends to foster a rather closed environment, resistant to questioning, challenge, or even comment. That is true of monetary policy to some extent, but it is even more true of their regulatory roles. Some of that is about the individuals involved but it has fairly consistently been backed by more senior management. The Bank has tended to foster an attitude that it is better and smarter than those it deals with, than other government agencies, and than outside agencies more generally. If such an attitude was ever warranted (and humility is always a virtue), it has certainly not been so for a long time.
But Treasury does not help itself in this area. The people they have involved have often not been very impressive. Sometimes they are able individuals, but with no background in the subject matter – a common issue at Treasury, especially among managers. Sure the Reserve Bank can be difficult to deal with, but your case is a lot stronger when what you are bringing to the table is incisive and thoughtful. Even when the recipients are inclined to be dismissive anyway, it is easier to simple dismiss lightweight contributions than those with depth. On the evidence of these papers, Treasury unfortunately still has some way to go.
A new wave of financial interventions and controls come into force this Sunday, as the Reserve Bank continues to undermine the efficiency of our financial system. The case for the interventions has never convincingly been made by the Reserve Bank, and we have what feels like a knee-jerk policy intervention, that materially affect the lives and businesses of ordinary citizens, based on little more than the hunches of a Governor, who has already been shown to have got his monetary policy consistently wrong. In the earlier papers, Treasury showed some sign of challenging the weaknesses of the proposal, but as time went on instead of standing their ground, they have pulled their punches. And the remaining concerns are not argued in a clear and compelling manner.
If this is the best that our two premier macroeconomic and financial agencies can come up with we should be pretty worried about the quality of economic policymaking and advice in New Zealand. Responsibility for that rests, in particular, with the individuals in charge of those institutions, and those paid to appoint them and hold them to account.
(But, I continue to note that Treasury applies the Official Information in a much more helpful, and within the spirit of the Act, way than the Reserve Bank. I made this point in the Ombudsman’s survey – which I would encourage anyone else who has made OIA requests to complete.)