Year: 2016

Kiwibank: a retrograde step

Michael Reddell Banking, Privatisation

I wrote about Kiwibank last week, noting that there had never been a good economic reason for the Crown to have established it, and that there was not a good economic reason for the Crown to continue to own it.   Doing so undermines (modestly) the efficiency of the financial system, and poses unnecessary risks for taxpayers.

I take it that the Minister of Finance agrees.  Listening to him on Morning Report, unable to give any reason why the government should own a bank other than “it is government policy that we do so”, one almost felt a little sorry for him.  Then again, he is the Deputy Prime Minister.

What to make of yesterday’s announcement from New Zealand Post?  The plan is that NZ Post will sell 45 per cent of its stake in Kiwi Group Holdings (KGH) to ACC (20 per cent) and the New Zealand Superannuation Fund (25 per cent), at a price which values KGH at $1.1 billion.

In some ways, the price tells us what we need to know about Kiwibank.  The book value of shareholders’ equity in KGH as at 31 December 2015 was $1.304 billion, and yet the sale is going to go through at the equivalent of $1.1 billion (or perhaps lower if due diligence shows up some problems).   That is around 85 per cent of book value.

When I checked yesterday, the four Australian banks appeared to be trading on the stock exchange at anything from 1.2 to 2.1 times book value.  And the Reserve Bank of Australia ran this nice chart in their last Financial Stability Review

graph-1.17

Note where the Australian and Canadian banks have been trading.  By contrast, banks in much of the rest of the world, where there have been real doubts about asset quality or earnings potential have been trading at or below book value since the 2008/09 recession.

The deal also values KGH at eight times last year’s earnings ($137 million).  A quick check suggests that five listed Australian banks (the four operating here and the Bank of Queensland) are trading, on average, at prices around 11.5 times last year’s earnings.

Kiwibank just isn’t a very profitable bank.  Last week I showed this slightly-dated Treasury chart:

bank roa

But, of course, there are other reasons for a fairly low price:

  • Given the government’s determination not to privatize Kiwibank (even partially), there were no other possible takers.  ACC and NZSF no doubt knew that.
  • ACC and NZSF will, apparently, be locked in for the first five years (beyond the next two elections), unable to sell out, and yet without effective control (individually or jointly).  Some finance guru could no doubt value that (loss of) option, but I wouldn’t have thought it would be a trivial amount.

As Michael Cullen noted yesterday, if there had been a sale into private ownership it would have “almost certainly led to a higher price” for NZ Post.

At one level, the price of the transaction does not matter unduly, as all the buyers and sellers are ultimately owned by the New Zealand government.  In fact, the price should probably be the least of the worries.

The cleaner alternative approach to deal with Kiwibank (KGH) would have been for the government itself to have simply purchased KGH from NZ Post, and established KGH as a proper SOE, subject to proper SOE monitoring and accountability arrangements.  In the short-term, it would have made little or no difference to Kiwibank which option was chosen.  And it would have had the advantage of totally and immediately separating NZ Post and Kiwibank, enabling the directors and managers of NZ Post to focus solely on their troubled business.   But, of course, doing so would have involved immediate Crown cash outlays (to NZ Post, even if much of it came back shortly thereafter as a special dividend), while yesterday’s clever wheeze involves cash flowing into the Crown accounts (from those other government entities, ACC and NZSF) via the special dividend NZ Post will pay.  The cash flows don’t change the economic value to the overall Crown balance sheet.

Although the deal has been presented as making it easier for the owners to provide any future capital injections to Kiwibank that might be thought warranted (beyond what retained earnings –  the way most banks grow –  would allow), that isn’t an argument for the particular form of yesterday’s deal, as opposed to simply taking KGH directly into Crown ownership as an SOE.    After all, central government has considerably deeper pockets than either ACC or the NZSF.   At least on the basis of last year’s Annual Report, the proposed KGH investment (at $210m) will already be ACC’s largest single equity investment.

acc

It would also appear to be the largest equity holding for NZSF.  These don’t seem like organisations with sufficiently deep pockets that they would (or should anyway) be wanting much more exposure to a single entity, a minor (not overly financially successful) player in its own sector, than they will already have if this deal is completed.

I’m extremely wary of the state owning a bank, but if we are going to own it, I’d rather the question of any additional capital was being decided by the elected representatives of the owners, who we can kick out.

The deal has been presented by NZ Post as offering benefits to Kiwibank through the “long-term investment horizons” and “expertise” of ACC and NZSF investment managers.  For better or worse, the central government has actually tended to have a longer-term investment horizon than either institution (NZ Post in its current form was set up almost thirty years ago, the predecessor Post Office based bank ran under central government for well over 100 years).   And as for investment expertise, well, yes no doubt.  But Kiwibank is a retail bank, and neither ACC nor NZSF has any particular expertise in retail banking –  and nor would one expect, or want, them to (after all, as NZSF’s head of investment’s noted in last year’s Annual Report, NZSF is statutorily prohibited from having control of operational businesses).  Both ACC and NZSF are funds managers.  They seem to do that job moderately well (I’m much more skeptical of NZSF, but that is a topic for another day), through some mix of strategic asset allocation and tactical stock selection, but that isn’t the sort of expertise that helps generate a strong profitable retail bank.

Curiously, the sorts of expertise ACC or NZSF might have already seem rather well represented on the Kiwibank board, not one of whom has retail banking experience or apparent expertise.  Perhaps the Board will change under the new ownership, but why should we suppose that government funds such as ACC or NZSF will be better able to nominate suitable directors than NZ Post was (and in any case, for now NZ Post will retain the majority shareholding).

The paper-shuffling doesn’t have the feel of a long-term arrangement.  ACC, in particular, seems unlikely to be a natural holder of a 20 per cent stake in any company, and NZSF probably shouldn’t be.  A constant risk around NZSF has been that it would be used for political purposes: a large pool of money just waiting for people with “good ideas”  –  and a major ownership stake in a politically totemic, modestly performing,  bank is just an example of that sort of risk.

And so this deal has the feel of short-term opportunism.  Immediate cash inflows for the government rather than immediate cash outflows (with no difference in economic value between the two), and a way of making it perhaps just a little easier to privatize the bank if political conditions were to change.  No doubt for now, if ACC and NZSF wanted out, the Crown would repurchase the shares.  But if the political winds change a little, then, for example, the five year minimum holding periods could be waived if it suited the Crown to do so, and it might be rather easier for NZSF and ACC to dribble their shares out into private institutional hands gradually, at one remove from the decisions of politicians, than for politicians to choose a trade sale, or even a modest IPO.

I favour privatization, but also favour good government, and clear transparent lines of accountability.  This deal doesn’t look the way we should be running things.  We have a fairly good framework for Crown-owned operating businesses, the State-Owned Enterprises Act.  It should be used for Kiwibank (and KGH) and when the time comes the debate around privatization, partial or full, should be had directly and openly, between politicians, and citizens (as was done with the power companies, and all past privatisations), not by reshuffling holdings of major Crown assets into arms-lengths agencies that can offer little or nothing new to Kiwibank, and face neither market discipline, or effective public accountability themselves (indeed, in the case of NZSF, that lack of effective political accountability was the whole point of the governance structure).

Having said that the SOE Act has been a pretty good framework over 30 years for governing Crown-owned operating businesses, I was somewhat disconcerted to note yesterday how politicized the NZ Post press statement was.    The statement from Bill English and Todd McLay headed “Kiwibank to remain 100 per cent Govt owned” was fairly factual and descriptive in nature.   Michael Cullen’s statement, by contrast, was considerably more rhetorical: “Stronger circle of Crown owners proposed for Kiwibank”,  “these two Crown investors –  both essential parts of the New Zealand fabric”, “time to broaden the bank’s support base within the wider public sector”, “a rare opportunity”.      (Mind you, where the NZ Post statement really overstepped the mark for me was when they compared assets under management at ACC ($32bn) and NZSF ($28bn) with the sum of assets and liabilities of Kiwibank ($38 billion).  I’ve never heard anyone previously refer to the size of a bank by adding together than assets and liabilities.)

Overall, it seems like an unstable model (perhaps deliberately so).  We have a small underperforming bank that will be owned by three government owners, instead of one, none with any great expertise in the business the bank is actually undertaking.  One will still have effective control, but less so than previously.  And if things go wrong, no one of the direct shareholding parties will be able to call the shots to sort things out, and the risks are likely to fall back on central government anyway.

UPDATE: My unease has just been increased reading these comments from Bill English on the ending of the NZ Post guarantee.

“It wasn’t really an effective guarantee, but now that’s been replaced by an arrangement where the Government underwrites any capital requirements related to the bank coming under pressure,” he said.

“That’s yet to be finalised in detail, but there’ll be a capital facility there so that depositors know that if anything went wrong with Kiwibank then the Government is able to stand behind it,” he said.

“It’s a capital facility. It’s not like a deposit guarantee because in New Zealand we don’t have deposit guarantees, but it is a facility that Kiwibank can call on if in extreme circumstances it needed to repair its capitalisation,” he said.

Perhaps it just makes explicit the reality, and we will need to see the details (will this facility be priced?).  Better to have a properly priced deposit insurance scheme across the entire system, and get the state out of owning –  or underwriting the equity of – banks.

 

Productivity: where do we now stand?

Michael Reddell New Zealand economic history, New Zealand economic performance

This post is mostly a brief follow-up to yesterday’s, with its comparisons between the performances of Uruguay and New Zealand.  I concluded that post noting that it wasn’t obvious what would prevent our continued slow relative decline.

Comparisons of material living standards across time and across countries are fraught with measurement problems.  No one seriously questions that 100 years ago we had some of the very highest material living standards, and equally no one really questions that we are long way off that mark now (some want to focus instead on wellbeing indicators: that is a topic for another day, but a country that has as many of its own people leaving as New Zealand has had shouldn’t be seeking to rest on any sorts of laurels).

Historical estimates are fairly imprecise, and only available for a small number of variables (typically GDP per capita). For more recent periods, we have much more, and better-measured, data –  although always less than researchers and analysts might want – but even then we face problems in comparing outcomes from country to country.  All of which suggests one shouldn’t put much weight on small differences – they might just represent imprecise measurement and translation.

The most common comparative metric is still GDP per capita.  It has all sorts of problems, but one in particular is that there is huge variation across countries in how many hours the population works on average.  If people in one country on average work twice as many hours as those in another country then, all else equal, the people in the first country will have higher incomes.  That provides greater consumption opportunities, but isn’t much of a reflection of the productivity levels being achieved by firms in the countries concerned.  For that, the best indicator that is reasonably widely available is GDP per hour worked. It is also much less affected by business cycles than GDP per capita.  For international comparisons, one needs to convert the various estimates into a common currency, not at market exchange rates but at (estimated) purchasing power parity exchange rates.

For many countries there are no worthwhile estimates of GDP per hour worked.  But the OECD has data for all its member countries (and a few others) and the Conference Board produces estimates for a wider range of countries, going back a little further in history. For the most recent years, they now have estimates for 68 countries.   Here is a (long) chart of the 2014 estimates.

real gdp phw 2014 levels

I’ve highlighted New Zealand and the countries estimated to have had GDP per hour worked 10 per cent either side of us.  That range both recognizes the inevitable measurement imprecision, but also highlights the countries that have a broadly similar level of labour productivity to our own.   It is a mixed bag: Cyprus, Japan, Slovenia, Slovakia, Malta, Israel, Greece.  But none were ever –  well, perhaps not for a couple thousand years in Greece’s case –  world leaders.  (I haven’t shown the OECD version but the rankings are similar –  and Cyprus and Malta aren’t in the OECD).

If the New Zealand numbers are not perhaps quite “middle income” country levels yet, they seem uncomfortably close to them.  And they are a huge distance behind those (mostly Northern European) top-tier countries,  from Belgium to Switzerland.

If it had always been so, that might be one thing.  Many of the middling countries have always been middling countries.  But we weren’t.  GDP per capita isn’t GDP per hour worked, but it is fairly safe to assume that our productivity levels 100 years ago would have been among the highest in the world.  And much more recently than that, the Conference Board has estimates for a reasonable range of advanced and emerging countries going back decades.

real gdp phw 1960

By 1960, New Zealand experts were already writing serious reports on our disappointing productivity growth performance.   But then only United States and Venezuela (all that oil) were estimated to have had GDP per hour worked more than 10 per cent higher than New Zealand.  In the space of less than one lifetime –  and this is more or less my lifetime –  our productivity levels have gone from still among the best in world, to lost among the rest.  These sorts of declines aren’t normal phenomena.   They typically happen when countries mess themselves up badly –  think of Venezuela or Argentina, or even Zimbabwe.  And, critical as I am of economic policymaking in New Zealand over 50 years, we’ve been a moderately well-functioning country (stable democracy, rule of law etc).

It isn’t that nothing has been done in response to our decline.  We stopped doing a lot of what a commenter yesterday aptly called “dumb stuff” –  the protection and subsidies that shaped our economy from the late 1930s to the 1980s.  But we’ve done our share of other dumb stuff –  all well-intentioned.  The Think Big energy projects of the 1980s were an example.  I class throwing open the immigration doors again 25 years ago in that same category –  a new Think Big.  A catastrophic decline in relative productivity here was, surely, a signal for resources to go elsewhere –  and New Zealanders responded to that signal en masse (as, within New Zealand, people have moved away from places –  perfectly pleasant places – like Invercargill, Wanganui, or Taihape as the relative returns have changed).    So what possesses our bureaucratic and political elites to think that a path back to prosperity and higher productivity involved searching out and bringing lots and lots more people?  If it was perhaps a pardonable error 25 years ago, it is an inexcusable policy failure now.

And then there are the totally flaky ideas that never actually amount to much: turning New Zealand into a financial services hub, R&D subsidies, becoming rich on back of wealthy Europeans fleeing terrorism, and so on.  And if that looks like a criticism of the current Prime Minister, he isn’t obviously worse – more practically indifferent to the real issues –  than his predecessors, or his potential successors.  I watched Q&A interviews with James Shaw and Andrew Little at the weekend, and there was nothing there which gave me any hope that our political leaders even care much any more about our precipitous decline.  Bank-bashing seemed easier no doubt.

We can’t, and shouldn’t try, to turn back the clock to 1910, or even (worse) 1960.   But we shouldn’t lose sight of what we once had here, or give up believing that we can produce incomes for our people once again as good as those almost anywhere in the world.  Governments don’t make countries rich –  firms and individuals, ideas and opportunities do that –  but governments can stand in the way.    I’ve been asked a few times in the last few days what policy remedies I’d suggest.  There are lots of smaller issues, but here are my big three:

  • Stop bringing in anywhere near as many non-New Zealand migrants.  At a third of our current target for residence approvals, we’d still have about the same rate of legal migration as the United States.
  • Stop taxing business income anywhere near so heavily.  We need more business investment to have any hope of reversing our decline, and heavy taxes on returns to investment aren’t the way to get more of it.  The tax system should rely more on consumption taxes.
  • Stop stopping people using their own land to build (low rise) houses, pretty much as and where they like.

It is a mix that would produce lower real interest rates (relative to the rest of the world), a lower real exchange rate, a lower cost of capital, lower population growth, and lower house prices.  Plenty more innovative outward-oriented New Zealand firms –  I heard Steven Joyce talking about them on the radio this morning –  would find that a rewarding climate to invest and export, supporting better productivity and income prospects for all of us.  Will we match Belgium, the US, and Ireland (see first chart)?  Well, perhaps not, but who knows –  for all our locational disadvantages, we do plenty of things better than those countries.  But we certainly really  should be able to do much better than Cyprus, Malta, Slovenia and Greece, if we are willing to take the issue, and challenge, seriously.

 

 

Uruguay: one more angle on our dire long-term economic performance

Michael Reddell New Zealand economic history, New Zealand economic performance, Uncategorized

I’d never given much thought to Uruguay until some time around the turn of the century when Struan Little, then at Treasury and now Deputy Commissioner at IRD, came over to the Reserve Bank and gave us a presentation on his thoughts on comparisons between New Zealand’s economic performance and that of two other small and relatively remote countries, Uruguay and Iceland.  At the time, Iceland counted as a success story, and Uruguay not.     Since then, I’ve used Uruguay as a bit of a benchmark of what could happen to us if our continued relative decline wasn’t reversed. It was, after all, an agriculture-dependent colony of European settlement.

100 years ago, New Zealand had some of the very highest material living standards in the world.  Uruguay look reasonably good too, with GDP per capita estimated to have been above those in many countries in Western Europe.  The historical estimates move around a bit from year to year, but over the couple of decades from 1890 to World War One, the relationships between incomes in the United States, Uruguay, and New Zealand were reasonably stable.  Here are the averages, drawing on Angus Maddison’s collection of data:

uruguay nz 1

We were level-pegging with the United States, and Uruguay had incomes around 60 per cent of those of the United States and New Zealand.  Both Uruguay and New Zealand had around one million people back then.

Here is much the same chart for the last five year, this time using the estimates reported in the IMF WEO database.

uruguay nz 2

The Uruguay/New Zealand relationship hasn’t changed much, but both countries have fallen a long way relative to the US.  Relative to the United States, New Zealand is now about where Uruguay was prior to World War One.  Very few advanced or semi-advanced countries have done worse over that period: Argentina and Venezuela are the two I’m aware of.

Unfortunately, even this comparison still flatters us.   For every 100 hours the average Uruguayan worked over the last five years, the average New Zealander worked 116 hours (the US is in the middle).  Our relative productivity performance (GDP per hour worked) is rather worse than our GDP per capita performance.

We don’t have GDP per hour worked data going back to the decades prior to World War One.    In fact, in Uruguay’s case I could find that data only back to 1990.   Here are the Conference Board estimates.

uruguay nz 3

Despite all those reforms we did, we’ve continued to lose a little ground relative to the United States.  And Uruguay, wedged between two troubled countries (Brazil and Argentina) and having got into so much difficulty fifteen years ago that they needed an IMF support programme, has been improving significantly, against us most dramatically, but even relative to the United States.  They have a long way to go to get incomes or productivity anywhere near 60 per cent of those in the United States –  where they were 100 years ago – but GDP per hour worked is already up to almost 70 per cent of New Zealand.

uruguay nz 4

It isn’t just a labour productivity story either.   Here is total factor productivity growth since 1989, again from the Conference Board.   The improvement in Uruguay has been staggering, even allowing for the fact that the starting point had been a pretty badly distorted economy (and some decades of serious political turmoil).

From what one reads of Uruguay, there is still a long way to go –  consistent with the fact that it is still materially poorer than poorly-performing New Zealand.   But they’ve begun to catch-up, while we seem to just work longer hours (per capita) –  and add more people to the mix.  As late as 1970, New Zealand and Uruguay had much the same sized populations, but now their population is only around three quarters of ours.

Contrary to the wisdom of Treasury and MBIE –  accepted by the political elite –  all that infusion of new people doesn’t seem to have done us much good.

Of course, continuing the slow path of relative decline doesn’t prevent New Zealand being a pleasant place to live for many. The sun shines, the beaches and mountains call, and so on. But Montevideo’s beaches look attractive too.    What the continuing slow relative decline tends to mean is a continuing loss of our people –  our children, siblings, friends, grandchildren –  and for those who stay, the struggle to sustain good quality health systems, cancer drugs etc.

Perhaps our leaders might focus on these basic issues instead of pursuing seats on the Security Council, the Secretary-Generalship of the United Nations or whatever.  It isn’t just a National government failure after all.  Perhaps in the 1990s there was a reasonable “the cheque is in the mail” argument, but for the last 15 years –  under both National and Labour governments –  it has been increasingly apparent that economic policy just wasn’t working, and New Zealand was continuing its relative decline.  And nothing serious has been done to address that failure.   We are no better now –  relative to the leading countries – than Uruguay was 100 years ago.  What is stop us drifting further back, towards where Uruguay is today?

Big banking systems and house prices

Michael Reddell Banking, Housing

On Saturday afternoon I found myself in an email exchange with a couple of people about how the composition of bank lending had changed since 1984.  I wasn’t quite sure where the table I was responding to had come from, but when I eventually got to the business section of Saturday’s Herald I found the answer.  Brian Gaynor had devoted his column to a discussion of the changing significance of banks in recent decades, portentously headed  “Banks’ long shadow over New Zealand economy”.   I found myself agreeing with almost none of his interpretation.

My alternative story has two key strands:

  • the institutions we label “banks’ have become more important in the financial system as the incredible morass of restrictions built up since the days of Walter Nash were removed, first (too) slowly, and then in a great rush over 1984/85.  That has allowed the financial system to become much more efficient.  Financial intermediation is now undertaken mostly by those best placed to do it, rather than increasingly by those either subsidized by the government to do it, or just outside the network of controls and so still free to do it.
  • total credit to GDP (and especially the housing component) has risen mostly because of regulatory restrictions on building and, in particular, on urban land use. Higher housing credit is mostly an endogenous response to this policy-created scarcity.

There are all sorts of caveats to the story.  In some respects, banks are much more heavily and directly regulated now than they have ever been (and that burden is only getting heavier with LVR controls which threaten a new wave of disintermediation).  The “too big to fail” problem probably skews things a little too far towards banks (but adequately price deposit insurance and banks will still remain dominant), and at times banks get over-enthusiastic about increasing lending to particular sector and sub-sectors.  But, fundamentally, the rising importance of banks (relative to other intermediaries) has been a good thing not a bad one, and if one might reasonably be ambivalent or even concerned about the rise in household credit, that has been an almost inevitable consequence of artificial shortages created by central and local government.  Given the determination of our leaders to mess up urban land supply, in a country with a fast rising population, it would have happened in one form or another, and it is better that it has been done by efficient intermediaries.  Concerns should be addressed to central and local government politicians who keep the housing supply market dysfunctional, not to bankers.

At this remove, it is probably hard for many to appreciate quite what the New Zealand financial system was like in the heavily regulated decades.  Old New Zealand Official Yearbooks will give a good flavour, and the Reserve Bank published in 1983 a 2nd edition of its Monetary Policy and the New Zealand Financial System, which has lots of detail (the 3rd edition is a quite different book –  a weird confusion, which I take responsibility for).

In addition to the Reserve Bank  –  which lent, not just to its staff, but also to the major agricultural marketing bodies –  we had:

  • trading banks (each established by statute, with no new entrants for many decades)
  • private savings banks (savings banks subsidiaries of the trading banks, introduced in the early days of deregulation in the 1960s)
  • trustee savings banks (a different one in each region, some large and strong, some tiny)
  • the Post Office Savings Bank
  • the Housing Corporation (government mortgage finance)
  • the Rural Banking and Finance Corporation (govt rural finance)
  • the short-term official money market
  • finance companies
  • the PSIS
  • building societies (terminating and permanent)
  • life insurance and pension funds (large and fast-growing supported by a tax regime, and fairly large lenders)
  • the Development Finance Corporation
  • stock and station agents

And that was just the institutional entities –  almost all with different statutory and regulatory powers and restrictions.  And there was a very large non-institutional market in finance –  notably, the role of solicitors’ nominee companies in mortgage finance.

Trading banks had never been dominant providers of finance in New Zealand –  since they had not historically provided mortgage finance, whether to farmers or for households –  but even in their role as providers of, typically, short-term finance to business, they had been withering (under the burden of regulatory restrictions) for decades. As the Reserve Bank noted in its 1983 book, “trading bank loans and investments have fallen from being around 50 per cent of GNP in 1930 to around 25 per cent of GNP in 1981”.    As far as I can tell –  it was my impression back then, when writing an honours thesis on the disintermediation process, and it is my impression now –  that the only people who benefited from this state of affairs were the people running the entities subject to a lighter burden of regulation.  My schooling was mercifully free of so-called “financial literacy” education, but the one message I recall being drummed in repeatedly (reinforcing the one from my father) was that it was very difficult to get a mortgage, and one had to spend years building a track record that might allow one to go, on bended knee, to a lender, seeking as a special favour access to such credit.  But if you were on a lower income, the state would provide.  Alternatively, coming from a well-off family, or getting a job in an organization with concessional staff mortgages, was the way to go.  (Reserve Bank concessional loans were very good, although in the end I had one for only 2 months.)

Gaynor quotes statistics showing that trading bank housing lending was 14 per cent of total lending in 1984 and is 52 per cent now.  But look who did housing lending back then.  This chart is drawn from the 1984 New Zealand Official Yearbook, and shows the flow of new mortgages (on properties less than 2 hectares, so largely excluding farm mortgages) in the year to 31 March 1983.

mortgages 1983

Trading banks barely figure at all (and this includes their private savings bank loans, and loans to staff).  Most mortgages by then were being made through the Housing Corporation, within families, or through solicitors’ nominee companies.  Neither of the latter two offered much diversification, a key way of making available affordable finance.  Call me a relic of the 1980s if you like, but I count it as huge step forward that large and efficient private sector entities are now the main vehicle for residential mortgage finance.

I mostly want to focus on housing lending, but Gaynor also notes in support of his case

The first point to note is the huge fall in lending to the manufacturing sector, from 24.5 per cent of total bank lending 30 years ago to only 2.8 per cent at present. This reflects the deregulation and demise of manufacturing, which was also the result of policy initiatives by Sir Roger Douglas and the fourth Labour Government.

Yes, the relative importance of the manufacturing sector in the economy has shrunk –  perhaps more than it would have in a better-performing economy  –  but by my calculations drawn from Gaynor’s table, trading bank lending to manufacturing ($1.6 bn) was around 3.5 per cent of GDP in 1984 and at $11.4 bn is around 5 per cent of GDP now.  Across all the financial intermediaries that existed in 1984, the share would have been higher, but the overall picture is a quite different one from that Gaynor paints.

But what about housing lending?   Gaynor asserts that

The clear conclusion from this is that anyone who bought a house in the early 1980s has been extremely fortunate because aggressive bank lending has been a major contributor to the sustained rise in house prices over the past few decades.

Since 1980/81 was the trough of a very deep fall in real house prices, there is no doubt that it was an ideal time to have bought.  And there is also no doubt that there has been an aggressive (and almost entirely desirable) process of re-intermediation.  Some entities that weren’t trading banks became trading banks (or ‘registered banks’ as we now know them) – think of Heartland, SBS, ASB, PSIS –  or were directly purchased by banks (think of the United or Countrywide building societies, or Trustbank or Postbank), and in other cases banks just won market share away from other participants in the market (no need for a solicitor’s second or third flat (short-term interest only) mortgage when you could get a 80 per cent table first mortgage at the local bank branch).

But is there any evidence that “aggressive lending” by the financial sector (now mostly ‘banks’) has been a “major contributor” to the huge rise in real house prices in recent decades?    I think the evidence is against that claim.  Why?

First, “aggressive lending” usually ends badly.  It did for the banks when they lent on the massive commercial property and equity boom post-1984.   It did for the finance companies with aggressive property development lending in the years up to 2007.  It did for the banks with dairy lending (both in 2008/09 with a surge in NPLs and perhaps again now –  going even by the Reserve Bank’s own stress test).  Housing lending, by contrast, has not ended badly, even though the push by banks into housing lending has been going on now for more than 25 years, through several economic cycles and one very nasty recession.  It is easy to say “just wait”, but history is strongly against that proposition.  Inappropriately aggressive lending goes wrong much faster than that.

Second, while the lending terms of banks have become easier than they were 25 years ago –  when banks were just finding their way in this new market for them, and nominal interest rates were still extraordinarily high – they are not noticeably looser (at least in asset-based terms) than the terms applied by other housing lenders in earlier decades. 80 or 90 per cent 30 year mortgages from the Housing Corporation weren’t uncommon (or inappropriate for a young couple with decades of servicing capacity ahead).  Banks, including the Reserve Bank, had long lent those sort of proportions to their own staff.  And, on the other hand, we have not had any material amount of mortgage business written with LVRs above 100 per cent, or with terms of 100 years or beyond (things seen in various European markets at times).  Overall, credit conditions are probably easier than they were, but not in way that is self-evidently inappropriate or overly risky for either borrowers or lenders.  The Reserve Bank’s housing stress test backs that conclusion  – taking account of the joint risk of losses in asset values, and losses in servinig capacity (if unemployment were to rise sharply).

Third, there is a simpler explanation for high house and urban land prices.  Regulatory land use restrictions combined with population pressures (including policy-driven immigration ones) are a more persuasive story, including in explaining why house prices in Auckland have increased so much more than those elsewhere.  In New Zealand we have only one fairly large city, but think of the situation in the United States: there is a fairly unified financial system (albeit with some state level differentiation in restrictions) and yet we find huge increases in house prices in places like San Francisco (with tight land use and building restrictions) and very modest real increases in large and growing places such as Houston, Atlanta, Nashville and so on.  High house prices, and high house price to income ratios, are not an inevitable feature of a liberalized financial system.  They aren’t an inevitable feature of tight land use restrictions either, but the correlation across cities is pretty good.

demogrpahia 2016And if finance were primarily responsible, finance would also have brought forth lots of new supply.  That is way markets work –  it is part of the reason why credit-driven booms don’t last that long.  Instead, prices have been bid up largely as a result of regulatory constraints: there are not consistently excess profits lying around that developers can readily take advantage of.

Of course, higher house prices typically mean that buyers of houses need more credit than they otherwise did.  If house prices suddenly double because some regulatory change makes land scarcer, then with incomes unchanged either people can wait (much) longer to buy, saving a larger deposit, or they can borrow more to complete the purchase.  If the people who wanted to buy, but are reluctant to take on more debt, do hold back, someone else will buy the property.  And that person will need finance –  either debt or equity.  If banks are reluctant to lend on houses, then houses will tend to be owned by people who are least dependent on debt: those with large amounts of established wealth already.  All else equal, since few people get into the owner-occupied housing market without debt, that would be a recipe for even larger falls in owner-occupation rates than we have already seen.

Much of the overall increase in housing debt in New Zealand (and other similar countries) in recent decades has been the endogenous response to the higher house prices, rather than some independent factor driving up prices.  And these forces take a long time to play out.

In the chart below I’ve done a very simple exercise.  I’ve assumed that at the start of the exercise, housing debt is 50 per cent of income, house prices and incomes are flat, and people repay mortgages evenly over 25 years.  Only a minority of houses is traded each year, but each year the new purchasers take on new debt just enough to balance the repayments across the entire mortgage book.

And then a shock happens –  call it tighter land use regulation –  the impact of which is instantly recognized, and house prices double as a result.  Following that shock, house purchasers also double the amount of debt they take on with each purchase, while the (now rising) stock of debt continues to be repaid in equal installments over 25 years.

In this scenario remember, house prices rose only in year 1.  There is no subsequent increase in house prices or incomes.  But this is what happens to the debt to income ratio:

debt to income scenario

In this particular scenario, 100 years after the initial doubling in house prices, the debt to income ratio is still rising, solely as a result of the initial shock, converging (ever so slowly by then) to the new steady-state level of 1.  One could play around with the parameters, but a permanently higher level of real house prices will, in almost any of them, produce a permanently higher level of gross housing debt, and it will take many years to get to that new level.  The flipside, which I could also show, is the deposit balances of the other parts of the household sectors – the young who have to save for a higher deposit (even for a constant LVR) and the older cohorts who extract more money from the housing market when they downsize or exit the market.  Higher house prices do not, of themselves, require banks to raise more funding offshore.

This is deliberately highly-stylized, but it is designed to illustrate just two main points: higher debt ratios can be primarily a symptom of higher house prices (rather than any sort of cause) and the adjustment upwards in debt levels following an upward house price movement can take many years to work through.    And there is one more important point: this a process that mostly reallocates deposits and credit among participants in the housing market: it needn’t materially affect the availability of credit, or economic opportunities, in the rest of the economy.

None of which is to suggest that higher house prices, as a result of some combination of regulatory measures (eg land use restrictions and high non-citizen immigration), are matters of indifference.    They have appalling distributional consequences, and prevent the housing supply market working remotely efficiently.   But the banks aren’t the people to blame: that blame should be sheeted home, constantly, to the politicians responsible for the regulatory distortions.   We get bigger banks as a result –  more gross credit has to be distributed from one group in society to another –  but if we are going to mess up the housing and land supply markets, bigger banks are almost an inevitable, perhaps even second-best desirable, outcome. The alternative would be whole new waves of disintermediation, and a housing stock ending up (even more) increasingly owned by those not dependent on debt.

The preferable path would be one in which land use restrictions were substantially removed, and house and urban land prices once again reflected market economic factors rather than regulatory impositions.  That would be a path towards smaller banks –  but just as in my chart above, the adjustment would take many years.

An anniversary post

Michael Reddell New Zealand economic performance, Uncategorized

In his weekly column in the Herald yesterday, Brian Fallow pointed out how unimpressive New Zealand’s recent economic growth performance has been.  His article was headed “Froth disguises the facts” , and highlighted again how overall activity levels are mostly sustained by high levels of immigration, and that per capita GDP growth has been weak (and recent per capita income growth even worse).

That column prompted me to dig out the latest data to update a chart I ran (with caveats) a few months ago, showing trends in per capita tradables and non-tradables components of GDP.  Here, the tradables sector is the primary sector (agriculture, forestry, fishing and mining)  and the manufacturing sector from the GDP production measure, and exports of services from the GDP expenditure measure.  The non-tradables sector is the rest of GDP.

T and NT components of real GDP

It is a pretty depressing chart.  Per capita GDP in the tradables sector at the end of last year was still a touch lower than the level first reached in December 2000, 15 years previously.  Across the terms of two governments, both of which constantly talked of “international connections”, aiming for big increases in export shares of GDP etc etc, there has been simply no growth at all in the per capita volume of the stuff we produce in competition with the rest of the world.  As I’ve noted previously, the Christchurch repair process has inevitably skewed things a little, but it doesn’t do much to explain such a dire underperformance over 15 years.

Instead, with almost equal abandon the Clark-Cullen and Key-English governments have pulled ever more people into New Zealand, an economy that appears unable to compete sufficiently strongly internationally to see any growth at all in per capita tradables sector production.  All economies have, and need, both tradables and non-tradables production, and there is nothing inherently bad about non-tradables production, but if we were to have any hope of catching up again with the rest of the advanced world’s productivity and per capita incomes it almost inevitably has to come from firms finding New Zealand an attractive place to produce stuff (goods, services, or whatever) that takes on and beats producers in the rest of the world.  No matter how good our other regulatory settings are –  and if they aren’t typically great they mostly aren’t that bad – that simply isn’t likely with the sort of real exchange rate we’ve had over the last decade, itself the result of the persistently high real interest rates (relative to the rest of the world) and the pressure on resources that the policy-fuelled population growth creates.    Policy simply needs to change direction.

On a happier note, it is a year today since I left the Reserve Bank and was thus able to give this blog some publicity.  In effect, it is the anniversary of the blog.  I’ve really enjoyed almost everything about the intervening year –  best of all has been the more time with my kids, whether that has been baking, blackberrying, watching US political debates together, or just ensuring that the piano practice is done, and not inflicting on them nannies or after-school care.

The blog itself has found more readers than I had ever thought likely, which in turn probably prompted me to put more into it than I originally envisaged.  Somehow, I’ve read fewer books in the last year than I did in years when I was working fulltime.  I wanted to say thanks to all the readers, regular and occasional,  and to those who have commented. One of the best ways to refine one’s own thinking is to write, and be open to comment.  I’ve learned a lot in the last year, and (yes, it happens) have even altered my views on some issues.  Apart from anything else, one sees the world a bit differently once outside public sector bureaucracies.

Readership statistics aren’t always easy to interpret.  Many readers just get posts by email, and most other just drop by the home page, not explicitly clicking on any particular post.   But looking back over the last year, these are the 10 posts that have had the most people explicitly clicking on them, sometimes because they have been linked in other blogs.

  1.  A post on how New Zealand has done, relative to other advanced economies since 2007
  2. A post on the proposal to extend the Wellington airport runway, using large amount of ratepayer’s money.
  3. A post on the June 2015 CPI numbers, which I saw as a severe commentary on the Reserve Bank’s conduct of monetary policy in recent years.
  4. A post looking at the occupational breakdown of our permanent and long-term migrants.
  5. A post prompted by Malcolm Turnbull’s declaration, on deposing Tony Abbott, that he wanted to emulate “the very significant economic reforms in New Zealand”.  I noted that it was short list: I couldn’t think of any.
  6. A post on an unconvincing speech on housing by Reserve Bank Deputy Governor, Grant Spencer
  7. A post on financial crises around the advanced world since 2007.
  8. Another post on the occupational classification of our “skilled” immigrants.
  9. A post prompted by Wellington City Council meeting with local residents on plans to allow more medium-density housing
  10. A post on the continuing fall in dairy prices last year, with some longer-term perspectives.

Somewhat surprisingly, my post earlier this week about John Key’s apparent vision to turn New Zealand into a Switzerland of the South Pacific based on some mix of Saudi students, Chinese tourists, and wealthy people fleeing terrorism, is next on the list.

I’ve spent more time writing about the Reserve Bank itself than I ever intended.  Mostly that was because of the Bank’s unexpectedly obstructive attitude to OIA requests, and the unexpected slowness with which they have recognized just how weak inflation has been (and is) in New Zealand.   I hope to write less about the Bank in the coming year.  My main concern in matters economic is the continued long-term underperformance of the New Zealand economy, and (relatedly) the disappointingly poor quality of the policy analysis and advice of the leading official policy agencies in New Zealand.  The Reserve Bank is an important, (too) powerful, institution, but in the grand scheme of things central banks just don’t make that much difference, for good or ill.  That was a message I spent decades trying to spread while I was inside the institution, although I’m not sure we were ever very successful in persuading outsiders.  So I expect I’ll continue to make the point here.  People looking for the answers for New Zealand’s economic problems shouldn’t be focused on 2 The Terrace, but instead should be looking to the other corners (here and here)  of that Terrace/Bowen St intersection.

 

Governance of the Reserve Bank: an inadequate release

Michael Reddell Governance

Just before the Easter break last week, the Reserve Bank partially reversed its position and released a few papers on the work it had been doing on possible reforms to the governance of the Reserve Bank.  I made some initial comments on that change of stance here, including noting that citing an Associate Minister’s response to an Opposition MP’s supplementary question in the House six months ago as the basis for a change of heart now was singularly unconvincing.

I’ve now had a chance to read the papers the Bank has released.  Having done so, I’m more puzzled than I was before.  Perhaps they are hoping for some brownie points for a slightly greater degree of openness than previously?  But as the project has come to an end, something rightly lamented by The Treasury, and the government has made clear that it has no intention of reforming the governance of the Reserve Bank, there should be no basis for withholding almost anything from the work done, and the advice submitted, on possible reforms to the governance of the Bank. It is official information, and there is a statutory presumption in favour of release.  It should, among other things, be a useful contribution to outsiders’ thinking on these issues.

The Bank has released a grand total of six papers.  Four are released with no omissions, one has a handful of short omissions (on “free and frank” grounds) and one omits a paragraph on another matter altogether.     In other words, processing the request for these particular papers will have taken no time at all.  And yet it took two months to refuse the initial request, and six months after the Associate Minister’s comments to release this handful of papers.  Not exactly a sign of an organization with a commitment to openness, transparency, not to speak of compliance with the law.    Now the Reserve Bank may claim – as it did back in July – that their initial (no doubt very coarse) filter produced 9000 documents inside the scope of my request.  I’m sure there are nothing like that number, but most of what is in scope has still been withheld.

What have they released?

The first paper is a descriptive note, dated 11 May 2014, by one of the young analysts in the Economics Department on “Governance arrangements: decision making committees”. It is a mildly interesting piece, with some discussion of arrangements in other countries.  It has a couple of paragraphs on decision making in other sorts of bodies, but why the author chose local councils (which are wholly elected) and DHBs (generally regarded as having one of the less satisfactory governance models in the New Zealand public sector), rather than (say) central government Crown entities such as the FMA or NZQA or EQC is beyond me.

The second paper, dated 25 June 2014, is a brief note, also from one of the teams in the Economics Department, to the Governing Committee identifying “Sections of the RBNZ Act subject to revision with a change in decision-making framework”.   There is little of note there, although it is consistent with the Governor’s apparent preference for a minimalistic reform (legislating  the role of the Governing Committee in setting the OCR).  There is no sign of the authors having stood back and thought about the larger issues of institutional design and governance.

The third paper, dated 4 July 2014, also to the Governing Committee from Economics Department staff, is headed “Best practice structure and governance of central bank decision-making committees”.  They are obviously a bit uneasy about the “best practice” description, because in a note with three pages of text and one table, the released version of the document has repeated four times the following inscription “Please note that the “best practice” referred to in this paper is as per the literature (specifically Blinder), and not subjective opinion of the paper’s authors”.    Weirdly, in a paper on (Alan Blinder’s “subjective” view of) “best practice” central bank governance, there is no sign that the authors recognize that our central bank is responsible for rather more than just monetary policy.    It isn’t an example of best practice policy analysis or advice.

The fourth document is an email to Gabs Makhlouf and Graeme Wheeler, dated 17 September 2014,  from Simon Duncan, a Treasury secondee in Bill English’s office.  It is a follow-up to a meeting Wheeler and Makhlouf had held with English a couple of days earlier.  The relevant paragraph is as follows:

On the Governance paper, I read that as the Minister being generally comfortable with the proposal as long as his concerns around the Committee model not embedding a strong independence culture on the financial stability side were addressed.  Opening up the RBNZ Act would be contingent on the political landscape following the election.

Which is interesting on a number of counts.

First, by September 2014 there was a specific proposal that had been put to the Minister, not (apparently) just orally but in the form of “the Governance paper”.    The Minister was apparently generally happy with whatever this proposal was.     And yet none of the material has been released, even though it would all have been within the scope of my request.  I’m at something of a loss to understand what anyone has to hide at this late date, when the project has been terminated.  And if the Governor simply does not want his proposal (or the supporting analysis) to get wider public scrutiny, that isn’t a good reason, in law let alone good governance in an open democracy.

But the email is also interesting because it highlights the ongoing tensions between the Bank on the one hand, and the Minister and Treasury on the other hand, around just how much autonomy the Reserve Bank should have in setting financial regulatory policy.   Our Reserve Bank has an (internationally) unusual degree of autonomy on that front, with very little effective accountability, and any suggestion that the powers should move from the Governor (who at least the Minister has some say in appointing) to an internal committee, dominated by people appointed by the Governor, would further (and inappropriately in my view) weaken the Minister’s relative position.

The fifth document released is by Dean Ford, a manager in the Economics Department, dated 15 October 2014 and is “Terms of reference: Moving to committee decision making at the Reserve Bank”   It is the terms of reference for a “joint Treasury/Reserve Bank work program” on these issues.  It is a working level group of named Treasury and Reserve Bank officials, designed to lead to “a common understanding of the advantages and disadvantages of the various committee design features”.  The intention was to host various roundtable discussions (I went to several of these) as a prelude to advancing the work “aiming to produce material suitable for briefing the Minister of Finance and Cabinet, and subject to Cabinet agreement, moving the project through the parliamentary process.  This could include material for select committee or public release”.

But, reflecting those longstanding tensions over the governance of the financial regulatory functions, this working group (wholly composed of Economics Department people from the Bank side) was supposed to focus on monetary policy where “initial discussions  … revealed many areas of agreement”.  Not so much on “financial policy”.   But “to allow the insights from the work to be more easily applied to financial policy when we reach that point, it will be necessary for the project team to understand how the Bank’s policy roles fit together”.  Indeed, one might have supposed that reaching that understanding was a precondition to taking a view on the appropriate governance model for any of the Bank’s major functions.  There are important differences of view, in international practice and in the literature, on to what extent the sorts of functions our Reserve Bank undertakes should be governed jointly or separately (or with overlaps).

The final document they released is an internal memo, dated 4 December 2014, and just addressed to one of the teams in the Economics Department, on “Central bank decision making committee design” , is no more than a (slightly abbreviated) version of the 4 July 2014 paper discussed above.

My presumption is that not too long after this the Minister of Finance told the Governor that he was no longer interested in pursuing governance reforms, perhaps particularly not along the lines the Governor was proposing.  This is consistent with the fact that (a) there is no reference to governance reforms work in the Minister’s letter of expectation to the Governor dated 2 March 2015, and (b) that the Treasury’s advice to the Minister of Finance on the Reserve Bank’s draft 2015 Statement of Intent, dated 5 June 2015, noted that the governance workstream had been discontinued.

Significant amounts of public resources were used to undertake the Bank’s work on possible governance reforms.  If the quality of the analysis they’ve released is fairly disappointing, at least this material makes clear that plans were fairly well-advanced.  And yet the Reserve Bank refuses to release the paper that must have gone to the Minister on these issues in September 2014  or anything of the work that was done after the Treasury/Reserve Bank working party was set up.

When the Bank originally withheld everything I requested they invoked a laundry list of excuses, including these two provisions of the OIA

9(2)(d) to protect the substantial economic interests of New Zealand.

9(2)(f)(iv) – to maintain the constitutional conventions for the time being which protect the confidentiality of advice tendered by Ministers of the Crown and officials.

The first excuse was always laughable, and has now disappeared.  But I was also interested that they are no longer invoking 9(2)(f)(iv).  In which case, why can we not see the advice the Bank did tender to the Minister on governance issues, and file notes of any discussions with the Minister on these issues?

It just isn’t good enough, but sadly it is par for the course with the Reserve Bank –  an organization in which the culture of secrecy has unfortunately become ingrained, beyond what is helpful, appropriate, or lawful.

In this case, it is doubly unfortunate because almost everyone –  perhaps with the exception of the current Minister –  thinks that changes should be made to the governance of the Reserve Bank.  Market economists canvassed by Treasury thought so, the Treasury itself thinks so, the Governor thinks so (unlike his predecessor who was strongly committed to the current model), Opposition parties appear to think so (the Greens certainly).

We have a system that was set up 27 years ago which (a)  doesn’t adequately deal with the range of issues the Bank is now responsible for, and actively wielding power over, (b) is out of step with international practice for monetary policy and financial regulation, and (c) is out of step with how we run other central government autonomous agencies in New Zealand.    Reasonable people can differ, perhaps quite strongly, on what the best alternative model might be. Personally, I think the Governor’s own preference is not at all the right response, and I laid out my alternative model here, but these are issues where we need good quality analysis from a range of perspectives, and some considered debate and discussion drawing not just on bureaucrats (inevitably skewed towards insider models) but on external analysts and, indeed, politicians.     These debates shouldn’t be about individuals –  Don Brash, Alan Bollard, Graeme Wheeler and any successors will all no doubt have strengths and weaknesses, and none walk on water –  but about the best institutional design for the governance of these important functions in New Zealand for the next few decades.  Openness on the analysis and advice already tendered would (should?) be a useful step to advancing the necessary discussion and debate.

 

 

 

Universities,export education and immigration

Michael Reddell Immigration, Uncategorized

I’ve made a few passing comments in recent weeks about New Zealand universities, mostly in the context of discussions and debates around immigration.  Export education is one of the key emphases of the current government’s economic strategy; they and their MBIE advisers appear to believe that somehow we boost the incomes of New Zealanders by making it relative easy for people who come to study here to gain residence.

I’ve been a bit skeptical about this argument.  If there are economic benefits to New Zealanders from immigration to New Zealand, they probably arise mostly if we are able to attract particularly high-skilled, able and innovative people.  In a US context, people often talk of the benefits of having a top tier university system, which attracts top-flight students to do PhDs in the US and can help encourage some of those people to settle in the US, with possible spillover benefits to the wider economy.  It all sounds good in principle, and there is some evidence of those sorts of gains for the United States.

But what about New Zealand?  Well, I noticed that one set of international rankings of universities (the QS rankings) had been released earlier this month, and I started digging round in their data.  There are a number of different rankings systems, and they all produce slightly different results, emphasizing slightly different things.

On the QS rankings, here are the top 10 world universities

1 MIT
2 Harvard
3= Cambridge
3= Stanford
5 Caltech
6 Oxford
7 University College, London
8 Imperial College. London
9 Swiss Federal Institute of Technology
10 Chicago

New Zealand universities just aren’t in the same league as these sorts of places.  But how do our universities compare with those of other small advanced economies?

I painstakingly went through both the QS rankings and the Times Higher Education rankings for New Zealand and all the smaller OECD and EU countries, plus Singapore.  “Small” in this context meant fewer than 11 million people (Greece, Belgium and the Czech Republic are all just below that population).  There is quite a gap to the next smallest country, the Netherlands, with almost 17 million people.  New Zealand’s population is around that of the median country.

I took the average ranking for each of the universities in each of these countries, for both the QS and Times rankings.  Across the two sets of rankings, New Zealand’s universities turn out to be right on the median among these small advanced economies. The really lowly ranked systems are those of the former Eastern bloc Communist countries (notably Bulgaria, Croatia, Hungary, Latvia, Lithuania and Slovakia).

But New Zealand’s economic performance is also less impressive than most of these advanced economies.    There is a reasonable correlation between the two.  Here I’ve shown the average university ranking for each of these small advanced countries against real GDP per hour worked for 2014, taken from the Conference Board’s database.  New Zealand is highlighted in red.

universities.png

New Zealand doesn’t seem to do too badly, but we don’t stand out.  (The outliers on the right are Luxembourg and Norway).

If we don’t stand out, it is a little hard to see why top-tier foreign students would be keen to come and do PhD (and subsequent post-doc) study in New Zealand.   We will always attract some people –  and being an English language country helps us attract more foreign students than one might expect given our size and distance –  but not many of them will be from the top tier of potential students. It is those top tier students from whom the strongest contributions are later made –  and usually only from a relative handful of them.  And for almost all of those people, the top universities in the US or the UK (and a handful of others, in Switzerland, Singapore, or perhaps even Australia) will overwhelmingly be the destination of choice.

Perhaps for some these sorts of numbers suggest a strategy: “lets make our universities great, and then we’ll attract top tier students, who in turn might stay and help lift New Zealand’s economic performance”.  I suspect that if there are any causal relationships here, they are mostly the other way round.   Top universities are as much consumption goods as production ones, and luxury products tend to be found in the richest and most successful countries.  The United Kingdom and the United States have long been the richest and most successful countries and they have university systems that reflect that (the UK isn’t that large a country but has around 15 universities in the top 100).  Among the smaller countries, Switzerland and the Netherlands  have  also long been among the most prosperous countries, and also stand out with relatively high-performing universities.

No doubt, causation runs both ways –  top universities are a magnet for talent and in some cases that talent can be part of the process of innovation and economic advancement –  but it seems most unlikely that one can first  create the top tier university and then see the prosperity follow. That is perhaps especially so in somewhere as small and remote as New Zealand.   What would make top tier foreign academics, in large numbers, want to come and stay in New Zealand?  Perhaps money might do it for some, but even if governments were to make the money available, backing this as some new “growth strategy”, I rather doubt it could be a sustainable strategy.  Distance is simply too formidable an obstacle.

As I was playing around with this material, I was thinking of the New Zealanders who had worked at the Reserve Bank in my time there who had gained PhDs.  A few have pursued them at New Zealand universities –  several are at present – because it enables part-time study and fits with family commitments etc.  But I jotted down a list of 14 people I could recall who had done PhDs overseas, mostly after leaving the Bank.  Most went to the US or UK, and all of those went to top tier universities (LSE, Cambridge, Berkeley, Stanford, Chicago, Yale, Princeton, Harvard, NYU).  Even the two who did PhD study in Australia did so at universities rated materially higher (overall, and in economics) than any of New Zealand’s universities.  These were all very able people, and the revealed preference in their choices suggests that universities of the quality of those in New Zealand (middling by international standards) are most unlikely ever to attract any material number of the sort of exceptionally talented creative people from abroad around whom one might reasonable begin to build an immigration policy.

PhDs aren’t everything, and lots of highly creative people have no interest in that particular sort of field of endeavor, but it just helps illustrate the point about how difficult it is more generally for a small remote country, with mediocre incomes, to attract the world’s best.  In my view, we are much better focusing on building a prosperous and successful society around our own people, as capable and hardworking as any in the world.

But, by all means, put in place a facility akin to the US one for people of ” extraordinary ability”. Here are the requirements for one set of fields:

Proving extraordinary ability in science, education, business or athletics:

The applicant can submit evidence of receipt of a major international award such as the Nobel Prize, Olympic Gold Medal or at least 3 of the following:

  • Receipt of nationally or internationally recognized award
  • Membership in organization that requires outstanding achievement
  • Published materials about the applicant in professional or major trade publication
  • Judgment of the work of others
  • Original scientific or scholarly work of major significance in the applicant’s field
  • Evidence of authorship of scholarly work
  • Evidence that he or she has been employed in a critical or essential capacity at an organization with a distinguished reputation
  • Has commanded or will command a high salary in relation to others in the field
  • Other comparable evidence

If we can attract these sorts of people, New Zealanders might well benefit.  We probably wouldn’t get many, but who knows.  And large numbers aren’t really the path to prosperity; mass moderately-skilled immigration hasn’t been any sort of successful economic lever in New Zealand in the last 25 (or 70 ) years.

 

 

 

Kiwibank

Michael Reddell Banking, Privatisation

I’m still puzzling over the academic who told Radio New Zealand’s listeners yesterday that he didn’t agree with me that New Zealand was remote: “we are, after all, in the middle of this great ocean, the Pacific”.    I keep looking at the globe, conscious that perhaps I have a eurocentric view of the world, but….we still look about as remote as they come.  And it is a sort of remoteness which, historically, hasn’t been conducive to really high levels of economic performance for lots of people (see Tristan de Cunha, St Helena, Bouvet, and even Samoa, Kiribati, or Fiji).  Henry Kissinger is reported to have described Chile as “a dagger pointed at the heart of Antarctica”.  Much the same could be said of New Zealand, one of the Antarctic Rim countries.

But, on another topic, I noticed that Kiwibank and NZ Post were in the news this morning.

Late last week, Radio Live was reporting a story that Kiwibank was being prepared for sale, and they asked for my thoughts on that.  That interview is here.

There was never a good economic case for setting up Kiwibank.  Our banking market was, and is, pretty competitive, and there were few material regulatory barriers to new entrants.  And the historical track record, here and abroad, is that government-owned banks are more prone to getting into costly trouble than private-owned banks (and some of them cause quite enough trouble).  In a modern New Zealand context, think of the Bank of New Zealand, DFC, and the (different sort of case of the) Rural Bank.  Overseas, examples abound.

But, of course, the case for Kiwibank was never mostly about economics.  It was mostly about nationalism, and some mix of political product differentiation and the political circle turning. Jim Anderton has resigned from the Labour Party in 1989, having been suspended from Labour’s caucus when he refused to vote for the sale of the Bank of New Zealand (then still predominantly government-owned).   And now Jim Anderton was back, as Deputy Prime Minister in a Labour-Alliance government.  Not only could the government own businesses, but it could –  so it was claimed –  build good new ones.  This speech by Jim Anderton captures the flavour.  This centre-left government would be different from its predecessor, and the establishment of Kiwibank would be one important marker of that difference.

The Reserve Bank and (more importantly) Treasury opposed the establishment of Kiwibank.   There weren’t obvious gaps in the market that other new entrants couldn’t fill, and establishing any new business is risky.

The National Party opposed the establishment of Kiwibank, but has never been willing to commit to selling it (in full or in part), even when Don Brash was leader in the 2005 election.

The actual track record of Kiwibank has been less bad than many of the opponents feared.  NZ Post was able to recruit some capable people who have built a reasonably substantial bank, that now has around $19 billion of assets.  Kiwibank grew very rapidly in its early years, and when institutions –  especially new entrants –  grow rapidly, it is wise to worry about the credit standards: it is most easy to write loans to people whom other lenders are reluctant to lend to.  Kiwibank had a few ill-judged forays into particular market segments, but appears to have built a reasonably self-sustaining bank, which came through the recession of 2008/09 with little more damage than the larger banks sustained.   My own reaction to that record was that, as taxpayers, we should be thankful for small mercies, and take the opportunity to sell before something went wrong.

But it has never been quite clear how much money Kiwibank has really made, and in particular whether it has ever sustainably succeeded in covering the cost of the taxpayers’ capital invested (and reinvested) in the bank.  Banking is a highly leveraged business, and since the government’s finances are already heavily directly exposed to the overall health of the New Zealand economy, there were no obvious diversification gains for it in establishing a bank in New Zealand.  We needed a good rate of return to justify the risk.

One of the reasons it has never been clear just how profitable Kiwibank has been is that Kiwibank and its parent NZ Post were intertwined, operating (most obviously) from the same physical locations.  During the early years in particular, there was a lot of incentive for NZ Post (with its government appointed Board) to help ensure that Kiwibank was a success, and to err in favour of Kiwibank in any allocation of costs or charging for shared services.  I got involved with these issues briefly in my time at Treasury and even then it seemed impossible for outsiders to know whether costs were being allocated appropriately.  Several years on one might have hoped all these issues were adequately resolved, so I was a little surprised to see this comment from Bill English in the Herald this morning.

He said there had been discussions over whether NZ Post was subsidising Kiwibank.

“Certainly through the start-up phase it has been but NZ Post can’t afford to keep cross-subsidising the bank,” he said.

Which doesn’t give one a great deal of confidence that, even over the last few years, the Kiwibank accounts give a full representation of the returns from a standalone banking business.  I don’t read the literature as suggesting that the economies of scale in retail banking are huge (so a small bank could be profitable) –  and we have both big and small banks co-existing in the New Zealand market –  but I doubt it could be shown that Kiwibank had been a good investment for the taxpayer.  Fortunately, it hasn’t been a disastrous one.

So I’d be all in favour of Kiwibank being sold.  There is just no good reason for the government to be involved in the business of retail banking.  Even today, the barriers to new private sector entrants are quite low, and even if there is some independent concern  about New Zealand-owned banks, then we have SBS, TSB, Co-op, and Heartland.

One key strand in New Zealand’s approach to banking is the idea that no institution, and no depositor/creditor, is totally immune from failure and the risk of losing one’s money.  I don’t think that is a politically tenable stance, and am among those who favour New Zealand adopting some form of deposit insurance (as most other countries have done).  But it is a particularly difficult model to sustain in respect of a government-owned bank.

Yes, governments have been willing to allow creditors of SOEs to lose money –  the banks who had lent to Solid Energy most notably among them –  but a handful of banks, mostly foreign, is a rather different matter than hundreds of thousands  (800000 apparently) of retail depositors (and voters).   Governments can say all they like that no one is guaranteed, but it isn’t obvious why anyone would –  or should –  believe them.  After all, a standard element in the Reserve Bank’s approach is that if a bank gets into difficulties, the Reserve Bank will look to its shareholders to recapitalize the bank concerned.  The  New Zealand government owns all the shares in NZ Post, the immediate (struggling) parent of Kiwibank.   The credit rating agencies also take that view: S&P, for example, noted last year that

we consider that Kiwibank has a “high” likelihood of receiving extraordinary support from the New Zealand government, reflecting the bank’s “very strong” link and “important” role to the government.

The unpriced implicit support Kiwibank has from the government skews the domestic banking market and undermines the efficiency of the financial system, all while continuing to pose material financial risks for the New Zealand taxpayer.

And it is not as if the governance of Kiwibank looks particularly strong either.  I was quite surprised to find, looking through the list of directors, that not a single one of them has a background in retail banking.

At very least I think it would make sense to restructure the NZ Post group, removing Kiwibank and making it a standalone SOE in its own right.  Going by the comments from the Minister, if the story Radio Live ran had anything behind it, that was the mostly likely form.

A sale would also make sense, but I don’t see any chance of it happening under the current government.  One could conjure up all sorts of imaginative options that might mitigate the political uproar –  recall the size of the petition around the partial sales of the government stake in three power companies –  but I can’t see why this government would regard it as worth the political risk.  And no potential coalition partner really cares enough to want to make a sale a “bottom line” in any deal –  while NZ First might well care enough on the opposite side.

Kiwibank shares could, for example, be distributed to all adults –  on current book value that might be around $300 each –  so that it was truly the “people’s bank”.  But then there would no single dominant shareholder, and the rating agencies would get nervous, and so would the Reserve Bank.  It would have quite high direct costs, and the opposition parties would no doubt sell it (accurately) as prelude to those individual parcels being bought up by one or another of the other banks.

I’ve seen suggestions that perhaps the New Zealand Superannuation Fund should become a key shareholder in Kiwibank.  I reckon that would be even worse than direct state ownership, since the NZSF faces neither market nor political disciplines.

I don’t really like the idea of a partial privatization, with the government retaining the majority shareholding.  It still has most of the moral hazard/bailout risks associated with the current ownership model, with more risk that the private shareholders would seek to aggressively (and quite rationally) exploit such advantages.  It was, more or less exactly, the model used with the Bank of New Zealand in the late 1980s.

In truth, the best value for the taxpayer probably lies in what is the least politically attractive option: a straight trade sale, probably to one of the existing large participants in the market. That was how the previous Postbank was sold, back in 1988.  It is what happened to Trustbank in 1996, and to Countrywide a couple of years later.  And, of course, Lloyds concluded that the best value from the National Bank was through a trade sale to ANZ.  The government might get a price well above book value in such a sale, even recognizing that banks are less inclined to aggressive expansion than they were a decade ago, and that some of the Australian banks might be uneasy about overweighting their exposure to New Zealand.  But even to propose such a sale would surely be seen by the government’s political advisers as an unadulterated gift to the Opposition.

And so it seems likely that, for the foreseeable future, the government will not just be the largest owner in New Zealand of dairy farms, funds managers, trains and planes, power companies, and legal firms, but will remain the owner of a modest-sized, not outstandingly successful, retail bank.

UPDATE:  In casting around for any summary analysis that has been done/released on Kiwibank’s long-term performance, I found this chart of return on assets (not equity) in a Treasury report from a couple of years back.

bank roa.png

The results shouldn’t be very surprising, but they do reinforce the point that even if Kiwibank is currently earning reasonable rates of returns (eg in the most recent year), it has a long way to go to deliver the sorts of cumulative returns to taxpayers that private sector shareholders might have expected (especially as none of the private comparators were start-ups).

 

Switzerland of the South Pacific: cargo cult thinking?

Michael Reddell New Zealand economic performance

One of the odder articles to appear in the local media over the holiday weekend was Fran O’Sullivan’s piece in Saturday’s Herald, headed “Key’s vision: Switzerland south”.  I’ve been critical of the Prime Minister in a few posts recently, but when I first saw the O’Sullivan piece I wondered if she was really reporting the Prime Minister or building up a creation of her own.  But after several re-readings, I think she must really be reporting the views of our Prime Minister.

Of course, we have been this way before.  In the midst of the 1980s reforms, before the commercial property and equity bubble burst leaving us with a serious financial crisis, people like Michael Fay and David Richwhite used to give speeches talking of building a Switzerland of the South Pacific here in New Zealand.  Implausible as it may have been, my memory was of a positive vision – a liberalized economy would stimulate investment and entrepreneurship (and probably a large financial sector led by Fay, Richwhite?), enabling us to generate once again per capita incomes more akin to those in Switzerland(we’d matched or exceeded them as late as the 1920s).  In the climate of the times, in the early post-ANZUS days, Switzerland’s armed neutrality probably added to the appealing imagery.  Of course, it all came to pretty much nothing.  Switzerland remains one of the most prosperous advanced economies, while we languish as the slightly embarrassing poor relation.  Fay and Richwhite, as it happens, ended up relocating to Switzerland.

But John Key’s image is a much less positive one – New Zealand as a “beautiful and wealthy bolthole for high net-worthers seeking to escape from an unstable world”.

We are told that

Key believes that free-flowing terrorism is here to stay. To the Prime Minister, this simply makes New Zealand more attractive and will result in more high net-worth consumers wanting to come here

and

But Key contends it is the fear of terror – which has been happening over a long time – which is the driver for Europeans to up sticks and leave.

complete with talk of

If Donald Trump is elected President (assuming he first gets the Republican nomination) there may be a new outflow if his political bombast becomes reality.

Haven’t we heard all this before?  People allegedly about to flee the US if, say, George W Bush was re-elected.  Or people fleeing to New Zealand in the 1980s to escape the nuclear peril of the late Cold War tensions.  And where are we today?    Our per capita incomes and productivity relative to the rest of the world just keep on drifting slowly further behind.

And what about terrorism?  Tyler Cowen included a link the other day to this chart of annual terrorism-related deaths in Western Europe since 1970

chartoftheday_4093_people_killed_by_terrorist_attacks_in_western_europe_since_1970_n

Hardly a pattern suggesting that the rich and powerful  –  with much better protections than the masses – should flee to little old New Zealand.  If New Zealand didn’t prosper through a century in which Europe went through two savage wars and a prolonged Cold War, an exodus of the elites seems unlikely to be our path to renewed prosperity now.

The great age of European emigration was in the 60 or 70 years prior to World War One, not now.

Ah, but O’Sullivan points out, then there are the Chinese

New Zealand has also become an attractive destination for Asian high net-worthers who have invested in property here – particularly Auckland. Chinese investors are relatively open that they are seeking to de-risk their own exposure to the China market, get capital out and buy residential property in a pollution free environment.

Auckland, and Sydney, and Vancouver, and London and Houston and…..anywhere more or less safe without heavy tax and regulatory restrictions.  The Chinese capital outflow story is a real one, and a historically anomalous one –  about fear, corruption, and lack of secure property rights in China.  But there is little no basis for thinking that it will a basis for transforming New Zealand’s specific economic prospects.  We don’t have difficulty attracting foreign capital, but we haven’t (it appears) created a climate in which business investment here is sufficiently attractive to begin to lift our relative productivity and income performance.  And as China’s own GDP per capita is about a third of ours, it isn’t obvious that one would look to mainland Chinese as a source of sustained domestic prosperity. (Taiwan or Singapore might be different, but then those countries have rather more respect for domestic property rights and, not unrelatedly, more success in generating  domestic prosperity).

And if foreigners really were wanting to build a top-notch global business (as distinct –  and it is an important distinction – from protecting what one already had), you almost certainly wouldn’t start from here if you had any other choice.  No serious observer ever pretends that New Zealand is better than fifth choice even among the Anglo countries: try the US, the UK, Canada, or Australia, and if you can’t get in there, then there is always New Zealand.  For a similar population, higher incomes, and rather better location I’m never quite sure why Ireland doesn’t appear in those lists.

O’Sullivan also tells us tax plays a part.  We don’t, she tells, us compete with Switzerland’s (now somewhat attenuated) banking secrecy laws

But it is notable that one of the reasons why New Zealand has yet to follow Australia and bring in rigorous laws to clamp down on multinationals which are not paying significant tax here is because this country is competing for investment.

Perhaps, but this is the same Prime Minister who, interviewed by TV3 a week earlier, reckoned that the tax paid by multinationals in New Zealand was “not fair”, and whose government is part of the OECD-facilitated BEPS process.

If we were really serious about promoting business investment in New Zealand, and in turning lifting our incomes and productivity performance, one of the best things we could do is to remove taxes on capital incomes altogether.  Taxes on business incomes are, largely, taxes on wages, precisely because they discourage the business investment that, for example, New Zealand has been so short of.  This isn’t a popular line to run in New Zealand, or perhaps anywhere, but a government that was serious about creating the conditions under which its own people could prosper, and in which foreign investment would assist us in that process, would not still be presiding over a company tax rate of 28 per cent and talking of finding ways to raise more money from foreign companies operating here.

[This is not the post for a lengthy treatment of tax issues, but a standard response is that much lower company tax rates would be a windfall gain to existing foreign investors, with no benefit to New Zealand.  That might be so if most foreign investment here were in tradables sectors (since selling prices of tradables are largely determined in international markets), but in fact the largest components of foreign investment here are in the non-tradables sectors, where lower company taxes would be expected to result in lower domestic selling prices (eg for banking or telecoms services), benefiting New Zealand consumers and businesses.  I outlined some thoughts on tax a few years ago here.)

As the O’Sullivan moves towards her conclusion she notes

If the Key Government keeps its nerve, the wealth transition will continue. For instance, New Zealand is becoming a magnet for high net-worth Chinese tourists and for students from Saudi Arabia – markets which are growing rapidly. That interest will bring with it investment in hotels, airports, and housing.

Both –  Chinese tourists and Saudi Arabian students –  are surely welcome, but is there any reason to think they are a probable basis for a reversal of our decades of income decline?  Our universities aren’t exactly Harvard or Oxford –  or even on a path to getting there –  and although I’m loathe to criticize tourism (we want holidays, so do foreigners), there is no advanced country of any size that has managed to support or sustain top-tier incomes based on tourism.  France is perhaps the most-visited country in the world, but it isn’t tourism that keeps it rich.

Finally

Annual net migration reached an all-time high of 68,840 people. And net migration from Australia was positive for the 11th consecutive month. These positives underline that John Key’s vision of New Zealand as a Switzerland of the Asia-Pacific has indeed the potential to become reality.

Key won’t be doing anything to destroy that wealth effect.

It gets boring to keep pointing it out, but over the last year around a net 4000 New Zealanders left New Zealand.  If we can’t even persuade the New Zealanders to stay, let alone create conditions that make the huge diaspora population want to come back,  it is a pretty unpromising foundation for the creation of a Switzerland of the South Pacific.

As for that “wealth effect”, O’Sullivan repeats the claim that the Credit Suisse Global Wealth Report demonstrates that New Zealand households are the second wealthiest (behind only Switzerland).  If she got this from Key (with all his advisers) it is inexcusable: the claim was widely reported at the time, but Credit Suisse themselves acknowledged that they had made a mistake, using the wrong exchange rate to convert New Zealand data in to US dollars.  I suspect someone else has pointed this out, as the detailed reference in the hard copy edition of the Herald has disappeared from the online version of the article.

It was, in any case, an odd statistic to trumpet.  Even on the corrected basis, New Zealand household wealth looks quite high.  But it does so because (a) our exchange rate is very high (they use market exchange rates, not PPP ones) and (b) because house prices, especially in the third of the country that is Auckland, are ridiculously high.   The average middle-aged homeowner in major cities such as Houston or Atlanta probably has a better house than the average middle-aged Aucklander, but it does not have a $1m price tag attached to it.

Which brings me to my final comment on the article itself.  The Prime Minister is reported as

He is frankly unapologetic about the massive increase in Auckland residential property values, which has resulted in many established Aucklanders becoming relatively rich, but younger people being locked out of the market. It is a trend which is not going to stop anytime soon, given the immigration figures.

They aren’t presented as direct quotes but if these lines are representative (and they are consistent with what he said in his TV3 last week) it is surely a disgraceful indictment of a failed government.  The sheer indifference to the plight of ordinary New Zealanders is breathtaking.    While his government continues to preside over land-use restrictions that limit the ability of Auckland’s physical footprint to grow, then continued high immigration would continue to hold up Auckland house and land prices.  But those land-use restrictions could be changed, and should be, especially if we are going to continue with anything like recent population growth rates.

The breathtaking indifference might be slightly less inexcusable if there were any sign that the Prime Minister’s Switzerland “strategy” (or just “this week’s talking point”?) was working.  If, for example, incomes were growing rapidly and steadily closing the gap on the rest of the advanced world.  But they aren’t.  New Zealand continues to do badly, and recent data suggest that over the last 15 years Auckland has done worse than the country as a whole (per capita incomes growing less rapidly).

The Prime Minister is surely mostly right when he says

“They look at us and think it is a highly developed first world economy, unbroken democracy, stable government, independent judiciary

But in Switzerland they get all that, and more.  Beauty and stability, rule of law and wealth, and all that in the heart of one of the largest and most populous regions of  prosperity and innovation anywhere on earth.    Boltholes tend to be places of comfort and luxury but not of great economic dynamism and entrepreneurship.  And I’m pretty skeptical that it is “bolthole” tendencies that have enabled Switzerland to get, and stay, rich –  that is more down to the innovative products and services of its firms and peoples – but there seems no more basis for thinking that New Zealand is on any sort of path towards being a Switzerland of the South Pacific than there was when Fay and Richwhite were championing the idea 30 years ago.

Countries get and stay rich mostly on the skills and talents and energies of their own people.  Natural resources can help.  Really remote countries, even with able people and natural resources, face considerable challenges.   But to keep on looking for our salvation to come from abroad –  as the Prime Minister seems to in this article –  seems no more promising than the Melanesian cargo cults.

 

Inquiry into possible leak: for the record

Michael Reddell Reserve Bank, Uncategorized

It came to my attention that the weekly political newsletter Trans Tasman has commented on the Reserve Bank’s inquiry into the possible leak of the OCR decision.

They noted “the markets didn’t move until after the cut….so no harm was done and Reddell now says it may not have been a leak”.  The “now” in that sentence is what bothers me, with a suggestion that I have walked back from some earlier position.

So, to be clear:

At 8.04 am on 10 March I received an email from a person in a media organisation saying

We have just heard that the Reserve Bank is cutting by 25 basis points.

At 9.08 am I sent the following email to Reserve Bank Assistant Governor John McDermott and to Head of Communications, Mike Hannah

For what it is worth, I received an email an hour ago from someone telling me that they had just heard that the Bank was going to cut by 25bps this morning.  I have no idea whether it was a well-sourced “leak” or just speculation, but I have no reason to doubt the person who told me, who in turn (as far as I’m aware) has no reason to pass on simple speculation.

There were a couple of brief follow-up emails in which I told them the exact time of the email I’d received and made clear that it had not come from anyone inside the Bank.

Later that day, in my post about the Monetary Policy Statement, I included this brief concluding paragraph

And finally, as I have noted to them, the Reserve Bank might want look to the security of its systems.  I had an email out of the blue at around 8 this morning-  most definitely not from someone in the Bank –  telling me that the sender had just heard that the OCR was to be cut by 25 basis points.  I have no way of knowing if it was the fruit of a leak, or just inspired speculation, and was relieved to see the foreign exchange markets weren’t moving, but it wasn’t a good look.

A week or so later I wrote a post about possible improvements in the way the Reserve Bank handles and releases information about the OCR.

In that post I noted

I went into town this morning to talk to the Reserve Bank’s inquiry looking into the possible leak of last week’s OCR announcement (see last paragraph here).  I still have no idea whether there really was a leak, but it seems likely, and if so it seems likely to have come from one or other of the lock-ups the Bank runs, for analysts and for the media.

It “seems likely” to me mostly because if there was another explanation for the email I received, it would have been easy for the sender to have got in touch, either with me or with the Bank, to explain.  Perhaps someone had misunderstood something they’d been told.  Perhaps they were just testing me.  Or whatever.  Perhaps the sender has approached the Reserve Bank directly, but they certainly haven’t approached me.

The whole episode got a surprising amount of media coverage last week, on the back of this story by Hamish Rutherford.   That story quoted a Reserve Bank spokesman as saying

“We are aware of an allegation that information may have been leaked ahead of the OCR announcement on 10 March,” a spokesman of the bank said.

In a clarifying post, I noted that I had made no “allegations” (see paper trail above), but had simply passed on, unprompted and as a concerned citizen and former employee, the information (the email) I had received. I noted:

I have been consistently clear that the email in its own right is not confirmation that a leak occurred,  but it is troubling nonetheless, and raises the serious possibility of a leak.  When I drew the matter to the attention of the Reserve Bank, they also expressed immediate concern and appropriately moved to initiate an inquiry.

and

I still fervently hope that the investigation is able firmly to conclude that no leak occurred.

And that is the last thing I have said on the matter.  As readers will recognize, there has been no change in my account/arguments, and no allegations.  There is one piece of evidence from me, and the Bank is inquiring into what, if anything, they can conclude from that, and from anything else they can gather.  If there was in fact a leak of some sort, it may be a little like looking for a needle in a haystack  (and it is hard to prove a negative, even if no leak occurred) and so it may be difficult from them to conclude anything very confidently one way or another.

I presume that, in due course, the Reserve Bank will release the results of its inquiry.  Whatever it concludes about the specific event, the focus really should move quickly to reforming the procedures to materially reduce the risks of any leaks occurring.