Month: October 2015

Fiscal policy – a response to some comments

Michael Reddell Fiscal policy

Following my post on Saturday about macroeconomic policy options, a reader posted the following substantive and interesting comment, which I thought warranted more of a response than a few lines buried in the comments.

The fiscal advice you propose is consistent with mainstream new-Keynesian models. This is the sort of outcome you get from the IMF modeling of the impact of a tighter fiscal stance in NZ in 2010 WP 10/128.

However, all these models assume that central bank acts rapidly and forcefully and is able to return inflation to target and output back to potential in short order (12-18 months or quicker because they assume that the monetary policy maker has a model of the economy that tell it in advance where output will be with certainty). This has not been the case. It is now 6 years since inflation has been at target and output at potential.

In these circumstance looser fiscal policy in the past (all else being equal) would have lead to high output, lower unemployment and inflation closer to target. All around welfare is higher. Perhaps we should leave aside the issue of what the fiscal policy maker should do if they share your beliefs about the RBNZ meeting its future target. Although just for the sake of playing devil’s advocate it would seem to me to be hard for the central bank to react to a fiscal loosening in this situation in the same way they might at close to full employment and their inflation objective.

Just looking at the near term it appears to me we face the risk of fiscal policy again being contractionary (perhaps only mildly) at a time when output is below potential – and fiscal policy will again be pro-cyclical.

Now there might be a good reason for all this if NZ was struggling with a large public debt burden and had no history of delivering fiscal consolidation. Yet this is not the case on either count. If you look at the IMF fiscal number and look at the change in primary balance (I used a 3 year average over the crisis period compared with calendar 2015) you will find that NZ adjustment (~ 7.5) looks like around the level of Portugal and Spain and Greece (Ireland is off the chart because of the size of the fiscal support provided to the banks through the accounts in these years). This is all in the context of macro models that suggest the appropriate pace of debt reduction from once in a generation shock is slow…..

And what about commodity prices?. I think the way to think about this is that you might tell you something about the right level of structural balance to aim for abstracting from the cycle. In my humble opinion it cannot tell you too much about the right fiscal stance from a cyclical point of view. To see this just imagine that this approach would have suggested a rapid tightening of the fiscal stance in 2010 as commodity prices returns to their peak despite the economy being in a deep slump. Another way to see this is to look at the cyclically adjusted balance scenario with the terms of trade at their 30 year average – this suggests that the structural balance is 2.5 percent worse than the forecast in every year.

Lastly, the decision needs to be made under the knowledge that the outcomes are asymmetric. If the central bank does its job as the macro models predict then we get a slightly different mix of output. But output reaches potential – no harm no foul. On the other hand if this is not the case then the outcome of looser policy will be much like I describe above for the past 5 years – higher output, employment, and welfare. All without reference to the risks of deflation or the zero lower bound.

There are a number of different points here.

I had noted that if a tighter fiscal policy had been adopted over the last few years that should have eased pressure on demand, the exchange rate and the OCR.  But as the commenter points out, it has been quite some years since core inflation was at target, and output also appears to have been consistently below potential (at least judging by the unemployment rate, if not by eg the Reserve Bank’s output gap estimate).

If so, mightn’t a looser fiscal policy –  as suggested by Brian Fallow –  have delivered some better economic outcomes?  I don’t think so.  The repeated mistakes the Reserve Bank has been making over the last few years have not had to do with fiscal policy.  The Bank’s approach is simply to take announced fiscal policy –  Treasury’s own numbers –  and build those assumptions into its own economic forecasts.  Internally, I was sometimes critical that we were too willing to base policy on government promises –  which is all forward operating allowance estimates are –  but in recent years doing so hasn’t provided a misleading steer.  The government got the Budget back to balance roughly when it said it would.

All that means that, as they said they were doing all along, the Reserve Bank set the OCR a bit lower than they otherwise would have because of the fiscal adjustment that was promised (and delivered).  Had the government planned a slower pace of fiscal consolidation, the Reserve Bank’s demand and inflation forecasts would have been a little stronger, and the case for tightening in 2013 and 2014 would have appeared even stronger to them than in fact it did.  The mistakes were about how the economy was working, not about the government’s own fiscal actions.

Only if fiscal policy had been surprisingly loose (unrecognised by the Reserve Bank) might there have been some windfall macro gains –  output a bit higher and inflation nearer target.  But no one wants to go back to a world of non-transparent fiscal policy –  perhaps especially not where one part of government (Treasury) keeps fiscal actions secret from another part of government (the Reserve Bank).

The commenter suggests that “we face the risk of fiscal policy again being contractionary (perhaps only mildly) at a time when output is below potential”.  The PDF with the supplementary Budget information on the Treasury website won’t open so I can’t check the fiscal impulse etc numbers, but two thoughts (a) surely any contractionary discretionary fiscal policy over the next few years must be pretty mild? and (b) whatever is flagged in the Treasury numbers is already included in the Reserve Bank’s forecasts and policy.  Since we are still nowhere near the zero lower bound, it seems unlikely that any additional fiscal contraction over the next couple of years will be holding back economic activity or inflation.    The Governor can fully offset the effects of well-signalled, relatively modest, fiscal actions.

I had made the point that the Budget had been flattered over the last few years by the high terms of trade.    If anything, I argued, a case could be made for having got back to balance a bit sooner than the government chose to.  After all, as Treasury’s numbers show, if one redid the fiscal numbers with the terms of trade set at their 30 year average, there would still have been a material (although not unduly alarming) deficit even in 2014/15.  My commenter seems to see this as an argument against faster tightening, but I don’t quite understand why.  A rising terms of trade does not of itself argue for faster discretionary fiscal consolidation, but rather for recognising that much of any improvement in the reported conventional cyclically-adjusted balance estimates is just arising from the boost to the terms of trade, and the underlying extent of adjustment still required remains as large as ever.  The improvement in New Zealand’s fiscal position has been flattered by the impact of the terms of trade.

Judging how much fiscal consolidation there has actually been is more of an art than a science.  My commenter presented one set of numbers, which suggests that there has been a very substantial fiscal consolidation in New Zealand in recent years, even by comparison with some of the benchmark austerity countries like Spain and Portugal.

I’ve got an alternative take, using the OECD’s underlying balance measure –  which is both cyclically-adjusted, and removes identifiable one-off items (eg bank recapitalisation s in a single year, or earthquakes).  Since the most recent OECD numbers are a few months old, the numbers aren’t quite as up to date as the IMF ones, but it is unlikely that the picture would change very much with a few months extra data.

OECD gen govt underlying balance

Here is the increase in underlying surplus (reduction in the underlying deficits) as a per cent of GDP,  from the low point reached over 2008 to 2010 to the latest 2015 estimate.  Over that period, the median OECD country reduced its underlying fiscal deficit by 3 percentage points of GDP, while New Zealand’s adjustment was 4.1 percentage points.  But New Zealand’s numbers were flattered by the fact that we had among the strongest terms of trade of any OECD country over that period.  If that were corrected for, the extent of our fiscal adjustment would be even more unremarkable, and much less than those in Ireland, Iceland, Portugal, Spain and the US.  And, of course, over that period our debt has increased.

It is quite reasonable to argue that New Zealand was under no particular market pressure to have adjusted that fast (neither was the US).  But on the other hand, unlike all these countries other than Iceland, we still had plenty of room for conventional monetary policy to offset the short-term demand effects of contractionary fiscal policy.  And although New Zealand did not use fiscal policy actively to counteract the 2008/09 recession (unlike the US, UK, or Australia, for example) it is worth reminding ourselves how large the deterioration in New Zealand’s underlying fiscal position was: on this underlying balance measure, only Spain and Iceland saw a larger fall in the underlying surplus from years just prior to the recession to the recessionary low.  Fortunately, we had started from large surpluses.

In making choices about fiscal policy now, the effects are not asymmetric.  The Reserve Bank will offset any  discretionary fiscal easing now –  the revised assumptions will feed straight into the forecasting models.  We won’t end up with higher output, higher employment, or higher inflation, we’ll just end up with slightly higher (than otherwise) interest rates, exchange rates, and public debt (and temporarily higher spending or lower taxes).  It is only when conventional monetary policy has reached its limits (say, an OCR at -0.5 per cent) that discretionary fiscal policy is likely to play a useful stabilisation role.  And we provide the best chance of that being a politically viable and economically credible option, for the several years of stimulus that might then be required, if the government keeps a tight rein on fiscal policy now.  I don’t favour running large structural surpluses in boom times –  it is a recipe for fiscal splurges of the sort the 2005-08 government took.  But adverse shocks are inevitable from time to time, and one of the best ways to cope with them is to keep public debt very low, and ensure that the budget runs modest structural surpluses in the more normal times.  Even then , a severe adverse economic shock may well undermine tax revenue sufficiently that there will often be surprisingly little discretionary fiscal leeway.

An official target for house prices to disposable incomes

Michael Reddell Housing

Getting back to thinking about housing issues, in preparation for a speech next week, I noticed that the Auckland Council’s Development Committee had adopted a target of reducing the Auckland ratio of median house prices to median disposable income to five (from around ten at present) by 2030.

The target appears to have been adopted following the recent report on housing affordability issues by the Council’s Chief Economist. That report,  if rather patchy, has some interesting material I’d not seen previously, such as the estimated range of costs of some of the view shaft restrictions on building that Auckland currently has in place.

I wasn’t that impressed by the new target.  The report notes that house price to income ratios probably “should” be around three, and then adopts a target which, even if taken seriously, would still leave price to income ratios 15 years hence well above the sorts of levels that should be able to be sustained over the longer-term.  Targets for asset prices leave me queasy at the best of times, but set that ‘theoretical” objection to one side for now.

But what chance is there of this target being taken seriously?  It is being adopted by the Development Committee of a Council that is a year out from an election.   Five sets of local authority elections will occur before 2030.    And unlike central government there is no strong party discipline in local government, which means there is even less meaningful basis for anyone to believe that a target adopted today by a committee of the current Council will translate meaningfully into action over the next 15 years.

There is an old cynic’s line that in making a prediction one can safely offer a number or a date, but would be most unwise to include both.  Probably the same goes for target-setting.  But an alternative formulation might be that if you must include a number and a date, set the date so far into the future that no one is likely to even remember it when the date comes round, and all those involved in setting the target will long since have moved on.     Concrete targets around things the Auckland Council can actually control for the 12 months between now and the next election  –  or at a pinch the one after that, which sitting councillors might campaign on next year  –  might have been more impressive.

Targets like this have more of a feel of “virtue-signalling” –  adopted and articulated to signal that the adoptees “feel the pain” rather than because they necessarily intend to do much about the problem in question.  To say that is not to doubt the goodwill of the Auckland councillors, simply to observe that in isolation this target gets some cheap feel-good headlines (the word “ambitious” gets associated with one’s name, and not necessarily in a Sir Humphrey sense) and commits them to precisely nothing.

In fact, I was reminded of some previous targets.    Numerous governments have talked about getting New Zealand back into, say, the top half of OECD per capita income rankings.  Not that long ago there was the goal of catching up with Australian per capita incomes by 2025.  No doubt all those involved would have welcomed achieving the targets, but weren’t willing to actually do anything much themselves to achieve them.  And having served their short-term purpose (fill out a speech, fend off a minor party or whatever) the targets themselves would soon be forgotten.

Getting rather long in the tooth now, I was also reminded of the 1989 Budget.  The then Labour Government was in increasingly desperate straits.  The economy was doing badly, the financial crisis was continuing to unfold, the tensions within the Cabinet grew more intense by the day, and Labour’s position in the polls looked bleak.  The Minister of Finance needed something a bit new for the Budget, and so a serious of macroeconomic targets were announced.  By December 1992, the government  –  which looked most unlikely to be re-elected anyway –  would aim to:

  • Reduce public debt to 50 per cent of GDP
  • Reduce inflation to 0 to 2 per cent
  • Reduce unemployment below 100000,
  • And get first mortgage interest rates in a 7-10 per cent range.

This was actually the first time the 0 to 2 per cent inflation target had been given a specific target date.

At the time, the new Reserve Bank legislation was being considered by Parliament.  That legislation would give someone –  the Reserve Bank Governor –  specific responsibility for getting inflation to the target by a particular date.    And it was (over)achieved, (nobody having mentioned the need for a severe recession when the targets were articulated).

But none of the other targets was ever heard of again. No one was made responsible, no one took them seriously, and there was no reporting and monitoring mechanism established.

I hope the Development Committee’s target is the next step in a serious process of freeing-up housing supply, and making housing and urban land in Auckland affordable once again.  But I’m not convinced.  I’m still not aware of any Anglo country major city in which planning restrictions have been materially and sustainably unwound to facilitate a responsive and affordable housing market (are there such examples?)  Perhaps Auckland can be the first, but there is little sign of the vision, passion, commitment, and political leadership –  whether at central or local government level –  to really address, and reverse, these issues.

(And, of course, we could get to the goal –  and beyond –  much more quickly if the target rates of inward non-citizen migration –  being reviewed by Cabinet now –  were materially reduced.  That could be done quickly and easily –  and it has worked previously.  It might buy time for a considered reassessment of the planning rules, in a rather less-fevered, less threatening, environment.)

On macroeconomic policy options

Michael Reddell Monetary policy

There have been a couple of odd comments this week about the use of macroeconomic policy tools in New Zealand.

In his weekly column yesterday, Brian Fallow suggested that it had been unwise to have put so much emphasis on getting the budget back to balance, and that it was time for more fiscal stimulus.  Of course, there is nothing sacrosanct about getting back to balance by any particular date, but if anything I thought our government had been rather too slow to get there.  With the benefit of record –  and probably unsustainable –  terms of trade – there wasn’t really much excuse for having run deficits in the last few years.       And a tighter stance of fiscal policy should, at the margin, have eased the upward pressure on demand, the OCR, and the exchange rate.

Fallow draws on the generalised advice of the IMF to advanced economies.  But most of those advanced countries can’t do anything much with conventional monetary policy even if they wanted to.  Quite a few advanced countries (including the euro area) already have negative policy interest rates, and many of the others –  US, UK, and Japan among them – are essentially at zero.  Perhaps new rounds of QE might make some difference –  I rather doubt they could do much – but to all intents and purposes monetary policy options are exhausted.    That is partly the fault of central banks and finance ministries that have done nothing material over eight years to remove the near-zero lower bound on nominal interest rates but, choice or not, it is the situation today.

If there is still excess capacity in many of those countries, and if many of them face widening output gaps if world activity growth continues to slow, the appeal of looking to fiscal policy for stimulus is understandable.  In general, I’m not sure it is a call that should be heeded to any great extent, as most of the larger countries already have rather sick fiscal positions –  made considerably worse when those countries resorted to fiscal stimulus, to loud cheering from the IMF, in 2008/09.

New Zealand –  and some other advanced countries such as Sweden, Finland, Estonia, Australia, and Switzerland –  is in the fortunate position of having a low level of public debt.  That means we do have some room  to use fiscal policy if such stimulus is required.  But even that potential isn’t limitless. Faced with another severe recession, even allowing the automatic stabilisers to work would add materially to the government’s debt over several years.  In such a downturn, it is probable that the government’s speculative investment vehicle – the New Zealand Superannuation Fund –  would lose a lot of money.  And for those who worry about the financial stability risks of the house prices more than I think warranted, bear in mind the potential need to bail out banks and their creditors.   If there is a severe downturn, we need the political room to allow those buffers to work, not to have to resort to pro-cylical fiscal policy

Fallow –  and many international commentators –  have favoured additional government spending because interest rates are low.  But remember that interest rates are low for a reason –  it isn’t just some number thrown up by a random number generator.  I’ve argued previously that the effective cost of capital the government should be using in deciding on even good quality projects is probably in excess of 10 per cent (the sort of standard private businesses use), not something close to the government bond rate.   And all this is before the questions that must be asked about the poor quality of too much government spending.

There are distinct political limits to how much fiscal stimulus any government can do, even in a crisis.  Why fritter away that potential now, when our OCR is still 2.75 per cent?  New Zealand has far more monetary policy headroom still open to it than most other countries do.  There are real macroeconomic issues in New Zealand –  as Fallow points out, the high and rising unemployment rate suggests that the economy continues to run below capacity  –  but as Eric Crampton noted in his response to Fallow yesterday, it is not as if monetary policy has been tried and failed.  Rather, because of the repeated mistaken calls by the Reserve Bank, monetary policy has barely been tried.

ANZ advocated fiscal stimulus back in July.  I set out here the reasons why I thought that was the wrong call. I don’t think I’d resile today from anything in that piece.

But the other odd comment on New Zealand macroeconomic policy came from someone who really should have known better.    In his speech on Wednesday, the Governor of the Reserve Bank

It is important also to consider whether borrowing costs are constraining investment, and the need to have sufficient capacity to cut interest rates if the global economy slows significantly.

I’ll largely ignore the first part of the sentence (although if inflation is low and unemployment still high, isn’t more private sector investment generally likely to be a good thing?).  It was the second half of the sentence that really reads oddly –  and arguably, worse than oddly.

This idea of keeping some powder dry in case there is a renewed sharp slowdown pops up from time to time in international commentary.  We’ve even seen the argument made that the Federal Reserve should raise interest rates now so that it has room to cut them if there is a future slowdown.  But it is a deeply flawed argument.  It may have some merit on the fiscal side –  higher public debt now leaves less room to run up more debt later on  – but in respect of monetary policy it is just wrong.

Monetary policy that is tighter than strictly necessary (in terms of the PTA) now, is likely to both weaken the economy (relative to the counterfactual) over the coming 12-18 months, and further low inflation and inflation expectations.  Lower inflation is undesirable (in terms of the PTA itself) and low inflation expectations are deeply problematic.  Lower inflation expectations, all else equal, raise real interest rates for any given nominal interest rate.  The experience of advanced world since 2007 says that one of the biggest macro management problems of a sharp slowdown in the presence of low inflation is getting real interest rates low enough.    It was easy to get real interest rates materially negative in the high inflation 1980s but it is almost impossible to do so now.  In other words, holding up nominal interest rates now increases, perhaps materially, how much one might need to cut rates if a severe downturn happens, while doing nothing to create that extra space.

The Governor has rather reluctantly come to acknowledge that global deflationary risks.  The last thing anyone in his position should be doing right now is making choices that would make it harder to handle the next sharp slowdown.  But that is what he appears to be set to do.

If anything, those countries that still have monetary policy room to move should be doing so now.  Real interest rates should be as low as possible, consistent with the PTA –  and perhaps especially in a country that starts with the highest real interest rates in the advanced world.  Rather than core inflation of 1.5 per cent or less, the Governor should be rather more comfortable with core inflation around 2.5 per cent.  The best way to get that sort of outcome would be to have cut the OCR over the last couple of years, not raised it.

As a commenter here the other day put it, this idea that we should hold the OCR up now so that it can be cut later “is like keeping your shoe laces tied so tightly that it cuts off your circulation, just so it feels good to loosen your laces later.”

Between the failure to do anything about the zero lower bound –  which the Governor now (belatedly)  implicitly acknowledges to be an issue –  or, absent that, to consider a higher inflation target, the Governor and the Minister have left New Zealand less well placed than it could have been if there is a new sharp global slowdown in the next few years. But the decisions that keep on delivering such unnecessarily low rates of core inflation (and high unemployment) are those of the Governor alone.

Plenty of market economists have commented on yesterday’s inflation numbers.  My only contribution is a simple chart of a new series Statistics New Zealand has just started publishing.

Non-tradables inflation has long been the focus for analysis of the underlying inflation position.  Tradables inflation is thrown around by short-term swings in international oil prices and level shifts in the exchange rate, and non-tradables inflation should provide a better guide to underlying inflationary pressures. But non-tradables inflation is made harder to read because of repeated tax increases (notably tobacco taxes) and changes in government charges –  which don’t reflect anything about the state of the domestic economy.   It is quite common internationally for statistical agencies to publish series excluding taxes and government charges.  And now SNZ has provided us with this series for New Zealand.  It has the advantage, over the Bank’s sectoral core factor model measure, that it is not prone to revisions.

PNT ex

Note that this measure of non-tradables inflation is running at only 1.6 per cent, barely above recessionary low.  Non-tradables inflation should be expected to run above tradables inflation on average over time (there is typically more scope for productivity gains in tradables than in many non-tradables).    Indeed, if CPI inflation was going to average around 2 per cent –  the Bank’s target  –  non-tradables inflation shoiuld probably average somewhere in the 2.5-3 per cent range (and perhaps tradables might be in the 1-1.5 per cent range).     Non-tradables inflation is extremely low in New Zealand –  it is too low and should, as a matter of active policy, be raised.

No doubt the Governor and his economists will say that that is what they have been trying to do.  But if so, they have repeatedly failed.  Becoming reluctant to cut the OCR further because of the housing market (one of the channels through which lower interest rates work –  a buoyant housing market is a desired feature not a bug) or for fear of hitting zero in a global downturn is a recipe for continuing the mistakes of the last few years.

To repeat Eric Crampton’s line: monetary policy has scarcely been tried.  It should be.

Justice Collins, the OIA and the Reserve Bank

Michael Reddell OIA, Reserve Bank

In the High Court earlier this week,  Justice Collins –  the former Solicitor General  – handed down a significant judgement in an Official Information Act case.  The judgement itself is a fairly easy read, and Otago University law professor Andrew Geddis has a nice summary of the issues and implications here.

Professor Jane Kelsey, of Auckland University, had sought from the Minister of Trade, Tim Groser,  material associated with the TPP negotiations.  The Minister declined Professor Kelsey’s application, prompting her (and several NGOs) to seek a judicial review of the Minister’s decision (which had been upheld by the Ombudsman).

Professor Kelsey’s challenge was largely successful.  It is a decision that does not reflect well on Tim Groser, and perhaps reflects even less well on the Chief Ombudsman.   As Andrew Geddis put it

The third audience for this judgment is the Ombudsman’s office, and the Chief Ombudsman Beverley Wakem in particular. Because it is fair to say that she does not come out of the judgment all that well. Not only does Justice Collins find that she apparently misunderstands how a quite key legal test under the OIA is meant to apply (at para. [139]), but her failure to pick up MFAT/Tim Groser’s ignoring of proper process is quite concerning.

After all, the Ombudsman is meant to be the primary check on those who hold official information failing to abide by their legal obligations. If that office is not noticing those failures – if it is basically waving through decisions that fail to comply with the OIA – then what is a citizen to do? The Courts are always there in theory … but in the real world this is a completely unrealistic avenue of redress because of the time and expense involved.

The judge reminded people of the important place the Official Information Act has in New Zealand’s system of government.  He draws on the 1980 report of the Danks Committee, which laid the foundations for the Official Information Act, highlighting the principles of open government that are reflected in the wording of the Act.  Indeed, the judge describes the Act as “an important component of New Zealand’s constitutional matrix”.  It imposes significant obligations on ministers and public servants (and other government agencies) –  and these are obligations that must be complied with, not simply aspirations to be met when it is convenient to do so..

What was the problem with the way Tim Groser handled the request?  The main issue was the blanket refusal to release any of the material Kelsey sought, without (a)  considering each piece of information individually, and (b) considering whether parts of any of these documents could be released.  Again in Andrew Geddis’s words:

the major flaw in MFAT’s/Tim Groser’s process was their adoption of a blanket approach to deciding whether or not to release any information. Reverse engineering the judgment a bit, it looks like MFAT/Tim Groser took this approach to the issue:

    • Jane Kelsey’s request was for lots and lots of material, which it would be a pain in the backside to have to go through;
    • MFAT/Tim Groser knew that they would have valid grounds under the OIA to refuse to release anything “interesting” contained in that material;
    • Anything left over after they redacted the “interesting” stuff would be useless for Jane Kelsey’s purposes;
    • Therefore, rather than waste time and effort going through all the material to weed out the “interesting” stuff, they instead decided not to release anything at all.

The problem with this approach is that it runs completely counter to the OIA’s basic purpose – to make any and all information available unless one of the specific reasons in the legislation applies. For the information holder to decide that it won’t provide information without actually looking at it and considering if there is a valid statutory reason for refusing its release inverts the way the OIA is supposed to work.

The judge did not rule that any specific bits of information have to be released.  It was a ruling about the need to apply proper process.  Going through lots of documents can be costly and inconvenient, but again (a) that was choice Parliament made in 1982, and represents an obligation on public agencies, and (b) the Act allows for agencies to specify a “reasonable” charge  especially if meeting the request would involve substantial collation or reaearch, and requires the agency concerned to  “consider whether consulting with the person who made the request would assist that person to make the request in a form that would remove the reason for the refusal”.     Tim Groser did none of these things.

Why I am writing about this case here?    First, because open government is an important cause, and the more people who are aware of these issues ,and abuses, the better.

But second, because I have been on the receiving end of several of these sorts of blanket refusals from the Reserve Bank of New Zealand.

I have written about one of them already.  I’d requested copies of the work the Reserve Bank had done on governance issues, and was flatly refused.

I got from holiday the other day to find two more examples in my inbox.

On 24 September, I received this response to one request:        

On 27 August you made an Official Information request seeking:

 Copies of the minutes of all meetings of the Reserve Bank’s Governing Committee held in the first six months of 2015

The Reserve Bank is withholding information under the following provisions of the Official Information Act:

  • Section 6(e)(iv) – to prevent damaging the economy of New Zealand by disclosing prematurely decisions to change or continue government economic or financial policies relating to the stability, control, and adjustment of prices of goods and services, rents, and other costs;
  • Section 9(2)(d) – to avoid prejudice to the substantial economic interests of New Zealand; and
  • Section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between officers and employees of any department or organisation in the course of their duty.

Section 6 of the Act provides conclusive reasons to withhold information. Section 9 of the Act requires the Bank to consider if the public interest in making the information available outweighs the public interest in withholding the information. The Reserve Bank recognises the tension between disclosure and confidentiality and has considered your request in light of that tension. Public disclosure, in summary form, is essentially what happens with monetary policy decisions in a carefully considered media release and the full text of the Monetary Policy statement. The process of deciding what to publish in these documents recognises and balances the tension between disclosure and confidentiality.

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

And on 25 September I received this response to another request  

On 10 September you made an Official Information request seeking:

 Copies of all papers being provided to the Reserve Bank’s Board in respect of the September 2015 Monetary Policy Statement released this morning.

The Reserve Bank is withholding the information under the following provisions of the Official Information Act (the Act):

  • Section 6(e)(iv) – to prevent damaging the economy of New Zealand by disclosing prematurely decisions to change or continue government economic or financial policies relating to the stability, control, and adjustment of prices of goods and services, rents, and other costs;
  • Section 9(2)(d) – to avoid prejudice to the substantial economic interests of New Zealand; and
  • Section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between officers and employees of any department or organisation in the course of their duty.

The Act explicitly recognises, in section 4(c), that there are times when releasing information is against the public interest and provides for such circumstances with different types of reasons to withhold information. Section 6 of the Act provides conclusive reasons to withhold information and section 9 provides reasons that must be balanced with the public interest in making the information available.

Public disclosure, in summary form, is essentially what happens with monetary policy decisions – in a carefully considered media release and the full text of the Monetary Policy statement. The process of deciding what to publish in these documents recognises and balances the tension between disclosure and confidentiality.

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

Taking them in turn, the first request was for copies of the minutes of meetings of the Reserve Bank’s Governing Committee for the first six months of 2015.   The Governing Committee, readers may recall, is the internal committee comprising the Governor, his two deputies and his assistant governor, set up by Graeme Wheeler and advertised as the forum in which the Governor would make major decisions (all legal decision-making authority, of course, rests with the Governor).

The response is puzzling in a number of areas.  First, the Bank appears to assume that my only interest in the minutes was the OCR decisions.  As the judge noted, it is not up to agencies to make assumptions about the interests of applicants, and in this occasion I had given no reason to suggest that OCR decisions were my primary interest.  In fact, my interest was is process and governance, and illustrating the lack of transparency and effective accountability around Reserve Bank decision-making, whether on monetary policy or other (policy or corporate) matters.  Indeed, I had heard, but was keen to verify, that minutes of this new forum consisted of little or no more than a single sentence record of the decision made.

There may well be material in the Governing Committee minutes that could be reasonably withheld under the Act, but the Bank has not made its case, or shown any sign that it has considered the contents of each of the individual sets of minutes.  It is almost inconceivable that there is nothing in any of those minutes  that could not safely be released (even if only the dates, attendees, and subject matter).  Justice Collins appears to have ruled that blanket refusals of this sort are not permissible.  I intend to pursue this matter with the Ombudsman, and may also request from the Bank copies any papers or emails that deal with their handling of my request.

The second request was for papers provided to the Reserve Bank Board in respect of the September Monetary Policy Statement.  Once the MPS has been released, the Board typically receives all the “forecast week” papers, and (anonymised) copies of the individual pieces of advice/recommendations provided to the Governor (Governing Committee) on what to do with the OCR.

Again, the Bank appears to have made no effort to look at each of the individual papers to determine whether all of each and every one of them should be withheld under the OIA.    Blanket refusals are simply not acceptable, according to Justice Collins’ judgement.

In (a rather slow and reluctant) response to a previous request of mine, the Reserve Bank has released all the forecast week papers for the March 2005 Monetary Policy Statement round. The character of the papers is no different now than it was then, and who can take seriously a claim that to release today’s equivalent of this paper (on business investment) would damage the New Zealand economy, prejudice the substantial economic interests of New Zealand, or impair the effective conduct of public affairs?    Clearly the main issue now is one of timing –  papers from 10 years ago don’t bother them, but papers from a few weeks ago do –  but they still need to make the case, paper by paper, and explain the reasons for their decisions.  I deliberately did not ask until the MPS itself had been released.  And I deliberately asked for the papers that went to the Board, not those that went to the Governor, because I knew that the OCR advice was anonymised before it went to the Board.   But senior staff should be able to provide advice to the Governor, in a professional manner, even if that advice is subsequently disclosed.  It is now not uncommon overseas for the views of individual Monetary Policy Committee members to be made public, with a relatively short lag.

In its reply, the Bank falls back on a common Bank line: background papers don’t need to be disclosed because

Public disclosure, in summary form, is essentially what happens with monetary policy decisions – in a carefully considered media release and the full text of the Monetary Policy statement. The process of deciding what to publish in these documents recognises and balances the tension between disclosure and confidentiality.

But this is simply unconvincing.  The point of the law is not to allow government agencies to release only what it suits them to convey to the public.    If that were so, for example, there would be no release of background Budget papers –  because the final Budget documents and “carefully considered” press releases would do the job.    Background papers are official information, and the presumption in the Act is in favour of release.

To be clear, I would expect that even if the Bank had taken an approach more consistent with the letter and spirit of the Act that there would have been a limited amount of material withheld from a few of the papers (eg those around judgements that might influence exchange rate intervention during the subsequent few weeks).   But each exclusion needs to be explicitly justified under a specific provision of the Act, not with a blanket refusal and a condescending stance of “we know what is the best balance between disclosure and confidentiality”.

Many of the specific issues in this request would be dealt with permanently if the Bank would pro-actively determine a suitable release policy for background MPS papers.  We now know that they are happy enough to release 10 year old papers, but not those a few weeks old.  I used to argue internally that, say, a six or twelve month lag would be a huge step forward, and involve no material risks for the Bank.

As I have been highlighting for months, despite its claims to the contrary, our Reserve Bank is not a very transparent organisation.  That is true of management and of the Board.  It is true of monetary policy, banking regulation policy, and corporate and budgetary matters.      Reasonable people might differ as to how open the Bank should be in each of these areas –  although it has never been clear what they have to hide, as distinct from an institutional cast of mind that says ‘we’ll tell you what we think you should know, when we think you should know it”.  But breaches of the law are a much more serious matter.  It increasingly looks as though the Reserve Bank –  like, no doubt, other government agencies – plays rather fast and loose with the provisions of the Official Information Act.  That should concern voters, and more immediately it should concern those charged with holding the Bank to account –  the Board, the Minister of Finance, the Treasury, and Parliament’s Finance and Expenditure Committee.

The Board reports…and says almost nothing

Michael Reddell Governance, Reserve Bank

In late August I wrote a piece looking forward to the Annual Report of the Reserve Bank of New Zealand’s Board.   On 27 September, that report was published quietly –  buried inside the Reserve Bank’s own Annual Report, and with no mention of it in the Governor’s press release.    As far as I can see, the Board’s Annual Report got no media coverage at all.

That is both understandable and disappointing.  Understandable, because it is much harder to report what isn’t there.  And disappointing  because Parliament set up the Reserve Bank Board as the principal body charged with holding to account the Governor of the Reserve Bank –  who is probably the single most powerful unelected individual in New Zealand.   The Board, with unparalleled access to inside information, was intended to be the agent for the Minister of Finance and for the general public in holding the Governor, and the Bank, to account.

When the Reserve Bank Act was introduced, the vision of accountability was a pretty simple one:  if (core) inflation was away from target, the Governor was culpable.  It was pretty quickly realised that things were more complex than that.  In addition, the Reserve Bank (Governor) has been given, and has assumed, a lot more discretionary power in a much wider range of areas.  Properly assessing the performance of the Governor in handling his statutory responsibilities/powers requires some pretty substantial analysis.  And substantive accountability isn’t just about a group of the great and good declaring their satisfaction, but about laying out the arguments and evidence, including addressing and responding to the strongest arguments of the critics.

Over 25 years, the Reserve Bank’s Board has pretty consistently failed in that role, even since the requirement for a published Annual Report was introduced in 2003, and the Governor was removed as chair.  From time to time they have asked awkward questions in private  –  no one has ever adequately been able to answer the questions Viv Hall used to pose around quite what clause 4(b) of the PTA really meant  –  and Boards have often had their own individual awkward and dissatisfied members.  But the public face of the Board has been a consistently bland and affirming one.  From the public’s perspective –  and I suspect from that of members of Parliament –  the Board adds next to no value.

That isn’t primarily a commentary on the individuals involved.  I’ve had good relations with many of the able members over the years.  The problem isn’t really with the individuals but with the institutional arrangements and incentives.

The Reserve Bank Board is set up to look like the Board of a corporate.  Many of the people appointed to the Reserve Bank Board have served on corporate Boards.  On a corporate Board the CEO runs the day-to-day business, but the Board is ultimately responsible for the strategy (and for the CEO).  It can command resources.  A very close relationship between CEO and Board is vital to the successful functioning of the organisation, and  –  at least in public – the Board needs to fully back the CEO, at least until the day they fire him or her.

By contrast, the Reserve Bank’s Board has no involvement in setting strategy, or deciding policy.  It has formal input to a handful of not-overly-important decisions (eg the size of the dividend to recommend), and only two big roles –  the responsibility to recommend the appointment of a person as Governor (and no person can be appointed who has not been recommended by the Board) and the ability to recommend dismissal (although it cannot actually dismiss the Governor,  and contrary to what is stated in this year’s Annual Report the Minister of Finance can act to dismiss without a recommendation of the Board).

The Act is quite clear that the primary role of the Board is ex post review and accountability.  And yet it goes through the routines that look like a normal corporate Board.  There are monthly Board meetings, a Board audit committee, Board papers, the CEO sits as a member of the Board.  A senior staff member serves as Secretary to the Board.  The Board meets on Bank premises, and has no independent budget or staff resources of its own.  But for an accountability board, the asymmetry is profound –  the Governor has 300 staff who all work fulltime on Reserve Bank issues, while Board members –  not typically experts in the field –  devote a few hours a month to the issues.

The Board can ask for papers from management, but it can’t compel the production of such papers.  It typically meets not just with the Governor (a fellow member of the Board), but with Deputy and Assistant Governors present throughout the meetings, and with other staff in attendance as required.  And unlike the situation in most Crown agencies, even though the Minister of Finance appoints the members of the Board[1], he does not get to appoint the chair.  Rather Board members get to select their own chair, increasing the likelihood that the role will be filled by someone who gets on easily with the Governor.

It would be recipe, perhaps, for effective collegial decision-making, if the Board were a decision-making Board.  But the Board doesn’t have that role; it is supposed to be an arms-length review and accountability agency.  And human nature is to avoid asking too many hard questions of those one works closely with, and to defer to expertise.    That happens between the Board and the Governor, and within the Board.   Thus, both of the independent chairs of the Board have been former senior executives of the Reserve Bank, and the current chair actually spent six months as acting Governor, aiming (unsuccessfully) to become Governor himself).   Both are able people, and either might be well-qualified to sit in a decision-making Reserve Bank Board.  But when the role of the Board is to ask hard questions and hold the Bank to account, being a former senior staffer isn’t necessarily the  best qualification for a Board chair.  Yes, former staff can ask awkward questions too, but in general  – even if they have some technical insights other Board members won’t have – they will be too ready to see things through the eyes of the Governor and staff, to “have his back” as it were.  But we  – citizens –  need a robust and independent eye.  Awkward questions, not sympathy.   Too often, the Reserve Bank’s Board seems to see a significant part of its role as being to help the Governor spread  his story and to explain the choices the Governor is making.

Don’t take my word for it:  this year’s Board report states explicitly

With most Board meetings…the Board hosts a larger evening function to engage with representatives of many local businesses and organisations, and to enhance our understanding of local economic developments and issues……. This outreach is a longstanding practice of the Board to ensure visibility of its role among the wider community, and to facilitate directors’ understanding of local economic developments, and the wider public’s understanding of the Bank’s policies.

Worthy activities for management, but that isn’t the role Parliament envisaged for the Board –  whose purpose is to hold management to account, not help management explain their choices to (select elements of) the public.

All that is by way of getting to this year’s Board Annual Report (from p3).  It was better than last year’s in one respect.  This year’s report stretched out to a little over three pages (last year’s was less than two pages).  But most of it is still descriptive (and even that contains an error).  I counted 41 paragraphs in the report.  Of them, at most 10 could be considered having anything other than purely descriptive material (“these are the activities we undertake/documents we receive/meetings we attended”).

In my earlier post, I identified some issues this year’s report might cover, if it were to do well the sort of scrutiny and accountability job Parliament appears to have intended.

This year’s Annual Report might perhaps cover, in some depth, issues such as:

• The way that core inflation has now been well below the middle of the target range for some years

• The significant policy mistake that was made last year in raising the OCR repeatedly and only very belatedly beginning to slowly cut it again.

• The poor quality of Bank’s research, analysis, and argumentation around the housing market, and around the new investor finance restrictions in particular.

• The obstructive and non-transparent approach the Bank has taken, including with respect to compliance with the Official Information Act.

What is about the Governor’s performance, and stewardship of resources, that has led to these outcomes? And what steps are being taken to avoid a repetition?  Many outsiders might have a view, but the Board has unique access to the inner workings of the Bank, and the ability to grill management.

In fact, probably to no one’s surprise, there is no substantive analysis in the report of any of these issues, or any others.  The report has a single sentence stating its comfort with the new LVR restrictions.  In discussing monetary policy, the substantial policy reversal (in which the OCR was raised aggressively last year and then cut this year) was not even mentioned.  The Board appears to have had no concerns about the conduct of monetary policy at any point in the year, and simply offers the anodyne observation that they consider that “the Governor made appropriate monetary policy decisions”, while providing no analysis to defend that conclusion (although  I don’t take from that text that they gave the Governor an enthusiastic A+).  In neither monetary policy nor financial stability is there any sense of the events and policy responses being part of a chain of events stretching back over several years.

I’m not suggesting that the Board should have concluded that the Governor made mistakes.  Reasonable people might differ on that, but we should expect to see signs that the Board has thought hard about the issues, engaged with alternative perspectives, rather than just looked to gloss over any potential areas of awkwardness.  There is no sign of that this year, or in previous years.

In essence what we seem to have is a model in which the Board majority has mostly been interested in being something of a cheer leader for the Governor, helping get the Governor’s message across and not making trouble. But they don’t seem to realise that they work  not for the Governor but for the public –  who need robust scrutiny of powerful public agencies.

The Board’s Annual Report contains a mildly interesting list of some of the papers management provided to the Board during the year (I might OIA a couple of them).  But it must surely be a list than contains a major omission.  Readers may recall that I lodged an OIA request for copies of any work the Bank had been doing on reforming the governance of the Bank.  The Bank refused to release anything, in the process confirming the scale of the work programme they had underway (which appears to have included professional legal advice and discussions with the Minister of Finance).  Given the sensitivities the Board has historically displayed around anything to do with governance –  including Bulletin articles on related issues –  it is simply inconceivable that there were no discussions at the Board, or papers to the Board, on the issue during the 2014/15 year.  The Board might reflect that there would be at least as great a public interest in knowing that the Board has received, and discussed, a paper on that issue as on, say, “differences in methodologies in calculating and assessing the output gap”.

The Reserve Bank’s Board simply does not do its job well. It may be useful in some other roles –  perhaps an occasional sounding board for the Governor –  but the Board that is supposed to be focused on arms-length accountability and review, as agent for the Minister and the public.  And yet it has never once published a critical comment about the Bank (in subject matter which is riddled with uncertainty and where mistakes and revisions to judgements are inevitable)  It does not publish its minutes, its papers, its agenda (even with a lag) and is just as obstructive of OIA requests as Bank management.  It is simply not worth the money we spend on it.

Readers might wonder why I harp on the issue.  After all, the Board doesn’t cost that much.  But recall just how much power the Governor, personally, exercises.  The Board was supposed to provide the check on gubernatorial mistakes or misjudgements –  counterweight to the unusual amount of power vested in a single unelected official.  It has not done so, does not do so, and probably –  as currently constituted –  cannot really be expected to do so.  We need serious structural reform of the Reserve Bank: decision-making by committees appointed by the Minister of Finance, and ex post review and analysis (of all limbs of macro policy) by a body that is better resourced and operates at much greater distance from the Governor and his senior staff.

[1] Although the Governor himself has an input.  On one occasion, a former Governor adamantly insisted to the Minister that a certain former respected market economist not be appointed (he and the Governor had recently disagreed on the OCR).  The Minister gave way (appointing instead someone who had recently been the political adviser in the office of one of his colleagues).

The Raft of the Medusa and New Zealand monetary policy

Michael Reddell Monetary policy

I learned something from Graeme Wheeler’s speech this morning. Having not gotten round to reading Andrew Graham-Dixon’s Caravaggio, which has now lingered on our bookshelves for five years, it hadn’t occurred to me that the Gericault painting The Raft of the Medusa was influenced by Caravaggio; in Graham-Dixon’s words, it is a “modern secularised version of an altarpiece by Caravaggio”.

It is a striking painting, but this was a strange speech – and nowhere more so than in the concluding reference to The Raft of the Medusa.

There was plenty of routine material I agreed with. It gets boring to say it, but central bankers have to go on making the point that monetary policy has no material impact on longer-term real interest rates, longer-term average real exchange rates, or the longer-term real growth performance of the economy. For 25 years, real interest rates and the real exchange rate have averaged too high here, and real per capita growth has been too low. There are things that could have been done to change that, but changing the monetary policy framework isn’t one of them.

But beyond that it all got rather strange. He started his speech with the references to Caravaggio to play up the dark and turbulent nature of the last few years (as he sees them). How difficult it all is for small country central banks. More so, he suggests, than previously.

I guess Graeme Wheeler is a latecomer to central banking. He’s been Governor for only three years and spent most of his career doing stuff other than macroeconomic policy. So perhaps recency errors should be pardoned. But it isn’t clear why he thinks, or wants us to think, that his job is harder than that of his predecessors (Don Brash, the challenges of disinflation, or Alan Bollard, and the massive credit boom). Self-pity is rarely an attractive quality, and perhaps especially so when it comes from highly-paid powerful public officials. The Governor has been given a relatively straightforward job to do by Parliament, and – unlike many of his offshore peers – he still has all the conventional tools at his disposal. He has made some mistakes along the way, as his predecessors did (and his successors no doubt will too), but it just is not that hard to get it roughly right.

There are some analytical puzzles to be sure, but we (taxpayers) don’t pay Wheeler to answer all those. We pay him to keep medium-term trend inflation near 2 per cent. And he hasn’t done that job very well. Inflation has surprised on the weak side for several years. It has surprised both the Bank and the markets, but the Bank has the job of delivering inflation near target. Having fairly consistently failed to do so, a reasonable rule of thumb might have been something along the lines of “core inflation has been below the midpoint of the target for so long, and we don’t fully understand why, so we’ll hold fire, and not raise interest rates until (say) core inflation is actually back to around 2 per cent”. It isn’t a perfect rules – in an imperfect world there are no such rules – but it would be better than what we’ve had.

Part of Graeme Wheeler’s defensive strategy – which shouldn’t really be needed, because there should be no great shame in recognising a mistake and owning up to it – is to cloth himself in the problems of other countries. Many other advanced economies have also struggled with at best modest (per capita) economic recoveries, and surprisingly weak inflation. But most of those countries had little or no conventional monetary policy ammunition left. Interest rates were at zero. I don’t think Wheeler’s speech even mentions the point.

By contrast, New Zealand’s OCR at 2.75 per cent means the Governor (and his predecessor) had plenty of room, if he (they) had chosen to use it, to secure a rather more conventional recovery in New Zealand. As I’ve pointed out previously, in conventional New Zealand recoveries we see a couple of years of 4-5 per cent GDP growth. We’ve seen nothing like that since 2009, despite the very rapid population growth in the last year or two. The number of people unemployed has stayed high, and has recently been rising again. That isn’t because of the travails of the rest of the world, but because of the Governor’s misjudgements. Inflation wasn’t rising. He didn’t need to raise interest rates.

As he winds up his general observations, Wheeler includes a couple of other curious paragraphs. He claims that “economic management has come a long way since Paish described it in the 1960s as like driving a car with a brake and an accelerator and only being able to look through the back window.” He backs this claim, that things have come a long way, by reference to sophisticated models used by central banks today [and when is that expensive model, developed at taxpayers’ expense, finally going to be published?]. But then he changes course midstream, concluding that really the models can’t tell one much and are more use for posing questions than delivering answers. I entirely agree with that final observation, but then it is a puzzle as to why the Governor thinks that economic management has improved a lot since the 1960s. As the Governor found with his ill-fated tightening campaign last year, forecasting remains hard, especially about the future. And even the rear-view mirror is prone to mislead at times.

And then Wheeler winds up the whole speech with his paragraph about The Raft of the Medusa, the “forlorn and exhausted sailors” and the “wild seas” which are apparently “symptomatic of the world central bankers are trying to navigate”. It is all bizarrely self-pitying, especially for a Governor with instruments at his disposal. The steering wheel isn’t broken.  The hull isn’t holed.

Here is the Wikipedia summary of the story of the painting.

it is an over-life-size painting that depicts a moment from the aftermath of the wreck of the French naval frigate Méduse, which ran aground off the coast of today’s Mauritania on July 2, 1816. On July 5, 1816 at least 147 people were set adrift on a hurriedly constructed raft; all but 15 died in the 13 days before their rescue, and those who survived endured starvation and dehydration and practiced cannibalism. The event became an international scandal, in part because its cause was widely attributed to the incompetence of the French captain

Great painting, but of a terrible event, for which the captain had to take blame.  The French public knew that.

The mismanagement of New Zealand’s monetary policy in recent years springs to mind. Fortunately, no one dies from those sorts of mistakes, but thousands of people are unemployed today who would not have been if the Reserve Bank of New Zealand – and specifically its Governor – had not made repeated choices – and it was pure choice, unlike the situation in ZB countries – to hold interest rates persistently higher than they needed to be. The apparent indifference of New Zealand’s elites – and of the Governor and his Board – to the awfulness of the involuntary unemployment (“forlorn and exhausted”?) is something I still struggle to understand.

Some thoughts on Bernanke’s book

Michael Reddell Monetary policy, USA

Ben Bernanke must have been busy.

Passing through Denver airport last Tuesday, the day after the book had been released,  I found a large pile of autographed copies of Bernanke’s new book The Courage to Act.    That was one bookshop in one city (not even one of the twenty largest in the US), and it had me wondering just how many days the former head of US central banking system had had to devote to autographs.  I guess even eminent  authors have to earn their –  no doubt rather large –  advances.

The stock of books on the post-2007 financial and economic crises continues to grow.  And it is still early days.  We can expect many more in coming decades –  akin perhaps to the continuing flow of works on the Great Depression, and the unresolved controversies that still  surround that episode.

Many of the key US participants have now published their accounts:  Hank Paulson, Secretary to the Treasury (to January 2009), Tim Geithner (New York Fed, and then Secretary to the Treasury), Sheila Bair (head of the FDIC).   And now Bernanke has joined them.  Each has a story to tell, and a case to make –  typically, a reputation to burnish or defend.

Bernanke’s book written for a mainstream intelligent lay audience. Plenty of copies are likely to be unwrapped on Christmas morning

For anyone who closely followed the crises, and their aftermath, there isn’t much new in Bernanke’s book.  It is a good refresher as the specific dates and events begin to blur in the memory.  And although no one will buy the book for story of his upbringing story, I found his account of a Jewish boy growing up in protestant South Carolina in the 1950s and 60s interesting.

It isn’t a great book by any means.  The writing often feels a bit pedestrian, and although he enlisted a former reporter to work with him on the book, that former reporter was on a year’s leave from the Public Affairs Division of the Federal Reserve.   Enhancing the sense of being written a little too close to the events and people he describes, Bernanke records that after leaving the Fed on Friday 31 January 2014 he started work in the book, from his new perch at Brookings, the following Monday.  I guess market demand (and the scale of publishers’ advances) was at its peak immediately after he left the Fed.  I hope he thinks about another substantive and more reflective contribution, perhaps aimed at a narrower audience, in 10 or 15 years’ time.

Bernanke does acknowledge the odd mistake, but they are “easy” ones, around the timing of particular interest rate adjustments.  Mostly this is a defence of his record, without actually engaging with any more-substantive critiques or alternative views.  In some ways, I found that a little surprising, especially in view of the dismal economic performance of most of the advanced world since the crises.  Arguments that seemed compelling in 2008 or 2009 – when a fairly fast snap-back in economic activity, employment  and inflation pressures were expected  – must surely look at least a little different now?

Here are some of the specific aspects of the book that struck me:

Bernanke doesn’t seem to have met a bailout he didn’t like.  Even in hindsight he does not think Bear Stearns should have been allowed to fail and close. He wanted to bail-out Lehmans (constrained only by lack of legal authority for either the Fed or the US Treasury) despite the enormous losses that Lehmans incurred.  He thought that holders of sovereign debt in Europe should not have been exposed to the possibility of loss, and appears not to consider that (eg) wholesale creditors of Irish banks should have been exposed to losses.  Somewhat to my surprise, he is not critical at all of the far-reaching guarantees offered to Irish bank creditors in October 2008, which triggered the range of guarantees around the world.  And he acknowledges that he favoured putting in place comprehensive guarantees for US banks (rather than the targeted, on new issues, wholesale guarantee approach that was eventually adoped [and which was also adopted for wholesale issues in New Zealand]).

In his defence, Bernanke might argue that the US did not in 2008 have good mechanisms for dealing with failing banks.  But in an interview with PBS the other night, I heard him acknowledge that “too big to fail” issues have still not been fully addressed in the US.    And in the book there is nothing sustained on the nature of the moral hazard to which such bailouts –  and the prospects of them being repeated in future –  is likely to give rise to.  Having come through the largest financial crisis in US history that is disappointing.

It is easy for people who spend their entire working lives in the public sector to assume too readily the benevolence and competence of government agencies and interventions.  Most of Bernanke’s career was spent in academe, but he has a fairly heroic view of public officials and their contributions.  There is no sense at all, anywhere in the book, of any concept of “government failure”, or of any sense that well-intentioned official interventions can sometimes (often?) have unintended adverse consequences.  Not unrelatedly, without directly addressing the issue, there is a strong sense that the crises were caused by the private sector, with courageous government officials intervening to save the private sector from itself.  It is a common view, but one might have hoped that someone with Bernanke’s academic stature might have been better able to make the case, including by dealing with stronger arguments of the sceptics.  His is a technocrat’s world. The one group he is consistently critical of is the US Congress and although one might sympathise to some extent, Bernanke shows little sign of appreciating the importance (or reality) of genuine differences of ideology or worldview.  Like many bureaucrats, he has lofty distaste for political theatre and the messy world of dealmaking –  but then, like them, he never had to face an election.

There is a paragraph towards the end of the book when Bernanke recounts a farewell dinner held in early 2013 when Tim Geithner ended his term as Secretary to the Treasury.    The attendees were former Treasury secretaries and former heads of the Fed.  Bernanke reflects:

Government policymaking at the highest levels involves long hours and near-constant stress, but it is exciting to feel part of history, to be doing things that matter.  At the same time, we all knew the frustrations of struggling with extraordinarily complex problems under unrelenting public and political scrutiny.  Rapidly changing communications technologies….seemed not only to have intensified the scrutiny but also to have favoured the strident and uninformed over the calm and reasonable, the personal attack over the thoughtful analysis.  In a world of spin and counterspin, we all knew what it was to become a symbol of a moment in economic history –  to serve as an unwilling avatar of Americans’ hopes and fears, to become a media-constructed caricature that no one who knew us would ever recognise.  But that’s the baggage that comes with consequential policy7 jobs, as we all knew too well.  The deepest frustration we shared, it soon became clear, was not with the baggage but with government dysfunction itself.

Technocrats as sacrificial heroes, saving the world from politicians and private markets…..

And yet, curiously, Bernanke seems untroubled by the continued growth in the size of government (whether spending/GDP, or the regulatory state). Ultimately those are choices made by the same Congresses that he views with such disdain.

I could go on at length, but there were several other areas of the book that left me disappointed:

  • There was no sustained engagement with the question of why, eg, real GDP per capita is still so far below the pre-crisis trend level (or, for all the contrasts he attempts to draw between himself and the Depression-era policymakers, why in many countries the record eight years on from 2007 is worse than that eight years on from 1929)
  • Bernanke is confident that (successive rounds of ) QE was the right policy, but actually offers little substantive basis for believing that QE made very much sustained difference at all.  Would US bond yields really have been much higher in the last few years absent QE?
  • Somewhat relatedly,  Bernanke does not discuss at all issues around removing or alleviating the zero lower bound on nominal interest rates.  In one sense that isn’t too surprising  – he started writing the book just a few days out of office, and ZLB issues can quickly get quite technical –   but for someone of the academic stature of Bernanke not even to have addressed the issue is a bit disappointing.    Perhaps he thinks nothing can be done, or should be done, but with year after year of policy interest rates near zero, it is not as if the ZLB proved to be a short-lived (or Japanese) curiosity that no one now needs to worry about.
  • Bernanke had a US-specific job, but I thought his treatment of the rest of the world was disappointingly weak.  Of course, US readers often aren’t that interested in the rest of the world, but I thought he was far too easy or glib about what could or should have been done in Europe (the poor old German taxpayer, facing not-low debt levels and a falling population, should apparently have spent a lot more).  And I spluttered when I got to the references suggesting that the IMF, under Strauss-Kahn and Lagarde, had shown no signs of favouring Europe.    And, as a hobbyhorse of mine, there wasn’t much sign that Bernanke has ever thought seriously about what marked out the countries that experienced crises from those that did not (there is, for example, only very brief reference to Canada), and whether the incidence of financial crisis can explain much about how respective economies have performed since 2007).
  • And there was nothing at all on the still extraordinarily large role the government plays in the housing finance market in the United States –  something that goes well beyond anything seen in most OECD countries, and which at least some observers suggest might have contributed to the severity of the US crisis..

I had been meaning for some time to write something about the contrasts between the legal constraints on central banks and government ministers in the United States on the one hand, and New Zealand on the other.  This was prompted by reading a fascinating book, To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis, by Philip Wallich, and contrasting it with our law, and my experiences in our Treasury during the 2008/09 crisis.  The powers of the Reserve Bank of New Zealand and New Zealand’s Minister of Finance in dealing with financial crises are extraordinary broad by comparison with those of the US authorities (either in 2008/09 or now).  No question could have arisen as to the Reserve Bank’s ability to lend to any institution it chose, or as to the ability of the Minister of Finance to guarantee any liability or institution he chose.  The US situation was very different, as Bernanke recounts.   There is a real tension here.  The New Zealand powers are frighteningly broad in the wrong hands –  as I read the Public Finance Act, the Minister of Finance could at a stroke bankrupt New Zealand, with no requirement for Cabinet or parliamentary approval –  but they are also very flexible.  I’m not at all sure what the right balance is, but would have been interested in Bernanke’s view on such issues in the light of his experience.  My guess is that he would favour more flexibility than the US had then or now, but how are citizens to be protected from official caprice and well-intentioned misjudgement?  Congress might be quite as bad as Bernanke suggests, but it is they who have an electoral mandate that the best central banker will never have.

Finally –  and perhaps mercifully –  there was nothing in the book of the numerous visitors who must have tramped through Bernanke’s offices over the years.  I wonder what he made of repeated meetings with visiting New Zealand delegations (that I used to read the file notes of) or those of the myriad visitors from other countries.  As a reserved academic, I suspect it wasn’t a highpoint of the job, but….at least they weren’t members of the US Congress.

I suspect Bernanke would have felt more at home in a system of government –  akin to ours, or that of Canada or the UK –  in which the legislature was kept more firmly in its place by the political executive, and there is perhaps less robust media scrutiny.    He ended the book

It is hard to avoid the conclusion that today we need more cooperation and less confrontation in Washington.  If government is to play its vital role in creating a successful economy, we must restore comity, compromise, and openness to evidence.  Without that the American economy will fall tragically short of its extraordinary potential.

For all its problems, of course, the US remains strikingly more successful economically than most of the countries  –  even the advanced democracies – where MPs make rather fewer problems for senior officials.