I wasn’t planning to write anything today, but I was flicking through the NBR website when I found a story that both shocks and appals me. I suggest reading it first, before reading my take on it.
After my experiences with the Reserve Bank over the last couple of years, I thought I was beyond the possibility of being shocked by the Governor. Clearly, naive optimist that I must really be, I was wrong.
Somehow the media got hold of a story that Graeme Wheeler had lodged an official protest with BNZ over something their head of economics, Stephen Toplis, had written. So an Official Information Act request was lodged and the Bank has apparently responded by releasing both Wheeler’s letter to BNZ chief executive Anthony Healy and Healy’s response. The Bank hasn’t put those documents with the other OIA releases on their website, so I have asked for a copy.
I should add that Toplis is not some close friend of mine. I always find his commentaries stimulating, but we usually disagree on the substance of monetary policy. In fact, when I was in the gun from the Governor last year, Toplis was sending the Bank snarky comments about me (that he no doubt didn’t expect to be published). But no one should be treated, by a top public servant, the way he has now been treated by Graeme Wheeler.
What is Wheeler’s complaint? Apparently, he was upset with the preview of the latest Monetary Policy Statement that Toplis had written.
Mr Wheeler, who is to step down as governor on September 26, wrote to Mr Healy on May 11, the day the MPS was released, saying a preview written by BNZ head of research Stephen Toplis called into question the Reserve Bank’s integrity by saying it would be “negligent” not to admit it had a tightening bias, expressed “through an explicit expression of rate increase(s) in its published OCR track.”
For some context, here is what Toplis actually wrote
So why do we think the RBNZ will sit pat this week? Simply because it said it would. When it released its March OCR review, the Bank reaffirmed that not only did it expect interest rates to stay where they were for the foreseeable future but it went on to reiterate that it thought there was equal chance that the next move could be a cut as a hike. To hike this week would leave the Bank with egg splattered all over its face, a prospect it couldn’t abide.
But surely, at the very least, the Bank will be forced to admit that it now has a tightening bias? Equally, it would be negligent not to express this through an explicit expression of rate increase(s) in its published OCR track. The biggest questions should revolve around how early the Bank is prepared to poke in a first rate increase and how quickly (if at all) rates rise thereafter.
Toplis seemed to be trying to strike a middle path. Hawks, he argued, would be foolish to think Wheeler would raise the OCR in May, whatever they thought the data showed. And doves who might expect a flat (OCR) track forever were also likely to be mistaken. In Toplis’s view – given the data he had seen – it would be “negligent” of the Bank not to show some rate increases in the published OCR track.
And, as it happens, the Bank largely agreed. The actual OCR track released in the May MPS wasn’t anywhere near aggressive enough for BNZ’s liking (I agreed with the Bank this time), but it did show some increases in the OCR eventually. Presumably they thought it would be wrong – inconsistent with their obligations under the PTA – not to have done so.
So quite what was the Governor’s problem?
Monetary policy is one of those areas of considerable uncertainty. Reasonable people can and will differ quite materially on what the best approach is. But the power – very considerable power over the way the economy develops in the short to medium term – is vested only in the Reserve Bank. More specifically, it is vested in a single individual, the Governor. It is one of the unfortunate aspects of the single decisionmaker model that any criticism of the Bank’s decisions is inevitably a criticism of an individual’s actions/choices. For a thick-skinned and self-confident individual on the receiving end, that just shouldn’t be a problem. After all, the Governor took on the job voluntarily, knowing that he would be making key decisions in an area where (a) almost inevitably there would be mistakes (almost the nature of uncertainty) and (b) where he would subject to a lot of scrutiny from smart people, in political and economic spheres, here and abroad. He gets paid a great deal of money (by New Zealand public sector standards) to make the decisions and be accountable for them. A self-confident Governor might either (a) let disagreements wash over him, or (b) pick up the phone and invite the critic in for coffee and an open exchange of views. But Wheeler is notoriously thin-skinned – and unwilling to engage.
Here is how NBR continued the story
Mr Wheeler’s letter describes a back story, suggesting he reached out to Mr Healy after failing to bring Mr Toplis to heel. It says Mr Wheeler’s deputy governors had individually approached someone (the name is redacted) “to convey their concern at the personal nature of the criticism being expressed by the BNZ in its written publications.”
“When this failed to address the situation I met with you and passed on examples of the material,” Wheeler wrote. “I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of other banks.”
Clearly, Wheeler’s concern was more than just the particular pre-MPS commentary. And certainly, more than most other bank economists, Toplis is willing to quite openly disagree with the Governor and the Bank, sometimes with a vigorous style. But there is nothing “personal” in that preview, and even if there were, the Governor personally exercises the power.
Personally, I wish there were more like Toplis willing to openly question and challenge the Bank. The Bank – the Governor – after all wields huge power, not just in monetary policy but in regulatory matters, with rather little effective accountability. Banks in particular are very reluctant to openly call out the Reserve Bank – journalists have told me how difficult it is to get anyone to go on the record.
What bothers the Governor? Apparently, he thinks the Reserve Bank is damaged by criticism. It isn’t clear how or why, unless the Bank is operating in a way that leads people who read the criticism, and think about it, to conclude “yes, that’s right”. High-performing organisation shouldn’t need to worry about criticisms, And insular, low-performing organisations, need the criticism – and need to be willing to learn from it. Even more important, when it is a troubled public sector organisation, the public need the criticised body to learn from and respond constructively to criticism by lifting its game.
Perhaps even more oddly, the Governor thinks that Toplis’s commentary is “damaging the New Zealand financial market”. Who knows what he means by that? There is a competitive market in commentary. If Toplis’s criticism are wrong (on average over time) presumably that reflects badly on Toplis and the BNZ. If they right, perhaps it reflects badly on the Governor himself, but that doesn’t harm the New Zealand markets or economy. People having less faith in the Governor might, in principle, be a bad thing, but not if the criticisms are well-founded. And if they aren’t well-founded, the sort of observers who matter will go elsewhere for their commentary.
Wheeler clearly doesn’t see it that way
In his letter to Mr Healy, Mr Wheeler said it was “unacceptable” to question the Reserve Bank’s integrity while “fundamentally misrepresenting” how it sets monetary policy.
“I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by BNZ.”
Perhaps there is something in the Governor’s concern that I’m missing, but nothing in that quote above from the MPS preview questions the Bank’s integrity. It sets out some hypotheticals, and suggests the Reserve Bank would be not doing its job – “negligent” – if it didn’t do something Toplis favoured. But it did do it – there were rate hikes put into the OCR forward track. And even if the Bank has disagreed altogether – and run with a dead flat OCR track – the BNZ claim was “negligence”, it wasn’t a comment on integrity at all. When people suggest the Reserve Bank isn’t running monetary policy well, that is a judgement on their competence or their diligence (or just a disagreement about the data), but it isn’t a reflection on anyone’s integrity. It is disconcerting that the Governor doesn’t seem able to tell the difference. Nor, apparently, were the Bank’s Deputy and Assistant Governors.
The whole thing is extraordinary. I’ve never worked in a bank economics team, but I’ve never supposed that they had their daily or weekly economics commentaries signed off by in-house lawyers (or indeed by anyone much). It is chilling to have the Governor of the Reserve Bank writing to the chief executive of a major bank in effect urging such tight control. What is it, one can only wonder, that the Governor is afraid of? And isn’t this, after all, the Governor who regularly claims that the Bank is highly accountable, partly because of the scrutiny financial market participants and commentators provide?
All this would be quite bad enough if the Reserve Bank was simply a monetary policy body. Some central banks are. Such central banks influence the economy and the rate of inflation, but have little or no direct regulatory influence over private financial institutions. Access might still be valuable, but the central bank just doesn’t have that much leverage. Nor should it.
But that isn’t the model in New Zealand. Here, the Reserve Bank – the Governor personally – not only sets monetary policy, and sets prudential policy, but is also responsible for a wide range of detailed regulatory approvals that banks and financial institutions need to keep operating in this market. Mr Healy himself will have needed the Governor’s approval to take up his current position. So will all his direct reports. And approval of individuals is just the least of it. That is a huge amount of power, and all vested in one person. In this case, it appears, an extremely thin-skinned and reactive one.
Banks are typically pretty scared of the regulator – whether here or abroad – and unwilling to take them on over regulatory matters. That is bad enough. What is worse is when the Governor of the Reserve Bank openly – directly and through his deputies – attempts to coerce banks to just keep quiet, to say only stuff that the Reserve Bank likes to be said. We might expect that in Singapore, Russia, or other semi-authoritarian states. We shouldn’t tolerate it in a free and democratic society, governed by the rule of law not the whims of powerful men, like New Zealand. It would be bad enough from an elected politician – and I’m sure it goes on there to some extent (we saw recently the Alfred Ngaro comments) – but it is far far worse in an unelected, and exceptionally powerful, public servant.
As far as we can tell, the BNZ hasn’t been cowed by Wheeler’s approach. Perhaps they just think “there he goes again, and thank goodness he’ll be gone in another three months or so”. But even if they aren’t (this time), it is a chilling example that people in other organisations will take note of. Some of them will be more cautious, more risk averse, and the message will go down “be careful what you say; don’t upset the central bank”. We’ll be poorer for it. And actually, over time, the quality of our Reserve Bank would be poorer for it to, if the extent of robust scrutiny of this powerful institution was even less than it is now.
The fault here is clearly primarily with Graeme Wheeler, who reveals himself to be manifestly unfit to hold his current high office. But there are other people who need to take some responsibility:
- where, for example, in all this were Grant Spencer, Geoff Bascand, and John McDermott, the deputy and assistant governors. Wheeler has tried to tell us that that group makes all the Bank’s major decisions collectively, whatever the legal position. The NBR article implies that they too were making calls to the BNZ to get pressure put on Toplis to alter his commentary. Were any of them willing to stand up to Wheeler and tell him that he appeared to have lost all sense of perspective, and that if he went ahead with these actions it would only leave him and the Bank looking worse (even before this OIA, I gather the story was pretty widely known)? If not, why not? If not, why we would we suppose that any of them was fit to hold the office of Governor – Spencer will be acting for six months, and Bascand is widely expected to be a leading contender for the permanent role? Do any of them know what is, and isn’t fit behaviour for a regulator? You would hope so given that Spencer is now Head of Financial Stability, and Bascand will assume that role in September.
- where is the Bank’s Board in all this? They exist to monitor the performance of the Governor, and the chair has often seen his role as a bit of a confidential sounding board for the Governor. They were totally supine over the OCR leak last year, backing the Governor to the hilt? Will it be different this time – when the Annual Report comes out in a few months? If not, how could we possibly consider that these individuals are fit to take the lead responsibility for choosing a new Governor?
- What does the Minister of Finance make of this? He appoints, and can dismiss, the Governor. I hope some journalists are willing to ask hard questions of the Minister, and not allow themselves to be fobbed off, about whether this sort of conduct is acceptable from a New Zealand public servant?
- And what of the Finance and Expenditure Committee? Are they willing to call Wheeler before them to answer openly for his conduct in this matter? If not, what use are they to citizens?
I noticed that one commenter on the NBR article observed that if this is what Wheeler made of Toplis’s comments
“This is insane. Can you ask for Wheeler’s correspondence with Michael Reddell?”
There is no such correspondence. The difference is that Graeme Wheeler has no leverage over me. Stephen Toplis, by contrast, works for a bank over which the Reserve Bank has extensive regulatory clout. It shouldn’t make a difference – views are views and should stand or fall on their own merits – but in Graeme Wheeler’s Reserve Bank, sadly, it appears to. That is simply unacceptable.
He might only have three months left in office, but it is now three months too long. The words of Oliver Cromwell to the Rump Parliament – or Leo Amery to Neville Chamberlain in May 1940 – come to mind
You have sat too long for any good you have been doing lately … Depart, I say; and let us have done with you. In the name of God, go!