(I’ve had to spend much of the day at the Reserve Bank, in a meeting chaired by one of their Board members, attended by one Deputy Governor, and where the Governor himself just might turn up – he’s a member, but will no doubt find himself too busy on the day and send an alternate. In the interests of that meeting – which will be contentious enough anyway just on its own subject matter – this post is pre-scheduled to appear when I’ve got out of the building.)
On Monday, the Reserve Bank posted the full text of the Governor’s letter to BNZ CEO Anthony Healy, and of Healy’s initial reply to the Governor. Valuable as Paul McBeth’s initial article in NBR was, it is always worth reading the full text of such documents if one can. Some of this ground was already covered in my post on Saturday, but after a bit of comment on the letters themselves, I want to offer some other thoughts after a few days to reflect further on the issue, and the reaction to it.
First, the Governor’s letter. What is clearer with the benefit of seeing the full letter is the extent to which it wasn’t anything like a one-off fit of pique on a bad day, but rather a culmination of a sustained campaign from the Governor and his senior management to put pressure on the BNZ to “silence” (materially alter what he was saying and how he was saying it) Stephen Toplis. It is interesting that the letter was dated 11 May, the day of the release of the Monetary Policy Statement itself. One might have supposed that the Governor would have had higher priorities that day, between a press conference, an FEC appearance and so on.
The first couple of paragraphs of his letter focus just on the specific Monetary Policy Statement preview that Stephen Toplis had written and published a few days earlier.
I am writing to you to draw your attention to the language used in the BNZ Markets Outlook of 8 May 2017, which appeared to bring into question the integrity of the Reserve Bank. While I appreciate that you will not have reviewed the document in detail, I expect you would also be concerned at the nature of the language used.
As I noted in my earlier post, the Governor offers no evidence or examples to back his suggestion that the commentary concerned “questioned the integrity of the Reserve Bank”, There was, in fact, nothing in the commentary that any reasonable reader could have read as impugning the Bank’s integrity. Competence, diligence, or focus perhaps, but not integrity. So the Governor was off to a poor start. Perhaps he’d just got so worked up about Stephen Toplis over such a long period that he ending up seeing/reading stuff that just wasn’t there?
The document claims that the Bank would be negligent if it didn’t conform to the views of the BNZ economists. Negligence is a serious accusation and implies that the Reserve Bank would not exercise reasonable care in the discharge of its responsibilities. The document also makes other claims that the Reserve Bank would not implement monetary policy in the best interests of New Zealanders. For example, we would not adjust our policy stance even if our analysis indicated that appropriate, if it in some way embarrassed the Reserve Bank. To bring into question the Bank’s integrity while fundamentally misrepresenting how the Reserve Bank formulates policy is unacceptable.
To repeat, there is nothing in the document that any reasonable detached reader could take as impugning the integrity of the Bank. There is also nothing to support the suggestion that BNZ claimed that the Reserve Bank “would not implement monetary policy in the best interests of New Zealanders” (although in fact the Bank’s statutory mandate is rather narrower than that anyway). The commentary did suggest that the Bank would be reluctant to raise rates in May, whatever the data showed, because of how strongly they had previously adopted a fairly neutral bias. Well, take it from me, having sat around monetary policy decision tables for decades, those conversations do actually happen in central banks. Ask the Bank’s chief economist – there are whole literatures on interest rate smoothing, consistent signals etc. And, however much we sometimes like to pretend otherwise, no monetary policy decision is ever totally clear-cut, simply because no one knows the future. What’s more, as I noted the other day, the Reserve Bank more or less did what BNZ said they needed to do – they did show a track with (eventual) OCR increases in it. So having made a conditional statement, that the Bank would be negligent – or remiss, or not adequately doing its job – if an upward-sloping track wasn’t shown, they showed one. So quite what was the Governor’s specific problem?
Perhaps Toplis could have chosen another word than “negligent”, but “negligent” is a synonym for various words for not doing a job well, and with due attention to responsibilities. That is exactly what the Reserve Bank Act charges the Bank’s Board with assessing – it even makes brief reference to “neglect”. The whole statutory accountability framework is built around quite personalised assessments of that sort. If the Board can do such assessments why can’t the rest of us?
At this point, the Reserve Bank escalates the issue from a simple expression of concern to a not-very-veiled call for tighter control on Toplis, to suit the Governor’s preferences.
The Reserve Bank makes a considerable effort to explain its monetary policy processes, engage with market participants, and communicate clearly its monetary policy stance. Given these efforts, I would have expected the BNZ economists to be more accurate and careful in their choice of words [is this a suggestion Toplis had been “negligent”?] 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 the Reserve Bank.
Quite why the Reserve Bank’s “efforts” should affect the evaluations of the Reserve Bank that the BNZ economists (or anyone else) make is a bit of a mystery. Many people have criticised aspects of the Bank’s communications – or policy – over many years, rightly or wrongly. They are free to do so. They are also free to suggest that the Reserve Bank might not be doing its job adequately, if it did this, that or the other thing. Only the other day, for example, I suggested that some of their regulatory interventions looked as though they might be ultra vires.
And then what is it with the suggestion of vetting and legal sign-off on market commentaries? A preview for the Monetary Policy Statement, isn’t exactly a prospectus for a bond issue, or an official disclosure statement, with lawyers scrutinising every line to ensure statutory responsibilities are met. It is an opinion piece, in a field where reasonable people’s views at times differ widely, and where the Reserve Bank has no privileged knowledge about what choices will prove to be right.
The next paragraph is mostly inoffensive.
I should stress that we respect the forecasts made by market analysts and play [sic] close attention to their views in our monetary policy processes. We do not always expect to agree on outlook or policy responses, but instead seek that differences of view are reasoned and understood.
Well, fair enough I suppose, but anyone really is free to disagree with the Reserve Bank on any grounds they like. It simply isn’t up to the Reserve Bank – in a free society – to decide what sort of disagreement is acceptable and what is not. If the BNZ puts out consistently poor commentary – in the eyes of its management and clients – presumably there will, over time, be a diminution in the demand for that commentary. There is a competitive market in opinion and analysis, including that on the Reserve Bank.
And then we learn that actually the pre-MPS commentary was just the last straw for the Governor.
You will recall that my fellow Governors each met separately with [withheld – but presumably “Stephen Toplis”] to convey their concern at the personal nature of the criticism being expressed by the BNZ. When this failed to address the situation I met with you and passed on examples of the material. 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 the other banks.
So Grant Spencer – head of financial stability and responsible for regulation of BNZ – Geoff Bascand, and John McDermott each met with Toplis – not together, but in a succession of separate meetings. Not apparently to discuss or debate the substance of the BNZ commentaries or concerns – many of which have, over time, been quite well justified in my view – but to demand repentance and amendment of ways. That is what the Governor says – “when this failed to address the situation” , or “when the BNZ economists still refused to comment the way I wanted them to”. And the Governor complains about a personalised tone, even though he holds a very powerful position in a system which, as he knows, puts all the Bank’s power in his hands personally.
It is all rather extraordinary – perhaps redeemed only by the fact that the Governor actually put it in writing and thus (upsetting as it apparently is to him) eventually making it known to the public. The BNZ’s approach has certainly been more forceful than that of most other banks, but it simply isn’t for the Governor to tell a bank how it is allowed to review or criticise him. Lese-majeste is an offence in Thailand, but (a) this is New Zealand, and (b) Wheeler isn’t king. Probably no one would think it amiss if the Bank found Toplis’s tone so obnoxious that they refused to meet with him – no one has a right to meetings with the Governor or Chief Economist – but even then you need a thick skin in this game, and to recognise that over time scrutiny, even if not written in quite the tone you might like, has benefits (for society, and probably even for the institution).
I would like you to be aware of our serious concerns about the inappropriateness of the language used in the document and would ask that you bring it to the attention of those responsible for the editorial quality and any legal sign-off.
So twice in a single page letter, we have the heavy-handed call for censorship and references to lawyers. It is an extraordinary demand for a public servant to make of a private business in a free society. Extraordinary, having lost all sense of perspective, and quite – to use the Governor’s own words – “unacceptable” and “inappropriate”. And the Governor works for us – it is quite reasonable for us to hold him to account – while the BNZ does not work for the Governor.
I’ve had various discussions with people in the last few days about quite what was going on here. I’ve had people suggesting that maybe Wheeler wasn’t really responsible, but instead it was the Bank’s Communications Department, or one of the other Governors. Only they will know, but based on my knowledge of, and exposure to, each of those individuals that seems very unlikely. The Comms Dept can get prickly and precious at times, but they’ll have been only too well aware of how this would backfire if it ever got out. Graeme Wheeler is the one who has demonstrated a thin skin, a reluctance to expose himself to scrutiny, and a reluctance to engage with alternative perspectives. I’m pretty sure this was largely Wheeler-driven – perhaps he just got to the end of his tether as his troubled five year term finally draws to his end. Sadly, it seems that his colleagues were too weak to either convince him that he was over-reacting, or to refuse to be an active part in his censorship efforts. I don’t like to believe they’d have been encouraging him, but perhaps they were.
What of Healy’s response? It is mostly a holding response, but wasn’t written until several days after the Governor’s letter was sent, so presumably his lawyers, his regulatory affairs people, his Board, and perhaps his head office in Melbourne will all have been trying to work out how best to respond.
In an ideal world, perhaps, Healy would have written back along the lines of
“Dear Governor, Thank you for your letter of 11 May. The contents and style of our economic commentaries are matters for us to determine, not for you. We encourage and welcome robust debate, and we would hope you do too.”
But he was writing back to the chief executive – and single decisionmaker – of his regulatory agency. I should be clear that I do not read Wheeler’s letter as any sort of direct threat to BNZ itself – comply and censor Toplis or we will withhold this or that specific regulatory approval. Even the supine banks would probably have taken him on over anything that overt. But the banks need Reserve Bank say-so on numerous things large and small each year (people, models, instruments etc), and they are pretty cautious about getting offside with the boss of the regulatory agency, lest other disagrements risk colouring the attitudes of the Governor when he makes regulatory decisions.
And so Healy wrote
I refer to your letter of 11 May 2017 expressing concerns about commentary in the BNZ Markets Outlook of 8 May 2017.
I would like to acknowledge both the sentiment and concerns you have expressed in your letter and assure you that [withheld – but presumably either “Stephen Toplis is” or “the economics team are”] treating this matter with the utmost seriousness.
We will be reviewing the contents of the BNZ Markets Outlook and the concerns expressed in your letter in detail. Once that process is complete, I would appreciate the opportunity to have a call with you to discuss the outcomes of that review.
Please let me know if a call in the week of 29 May would be possible and I will ask my Regulatory Affairs team to arrange this.
Thank you for bringing your concerns to my attention and I look forward to hearing from you.
[UPDATE: A commenter points out that the RB doesn’t appear to have quite fully deleted the name, and what appears still be showing suggests it can’t be “Toplis”]
Pretty weak and deferential really – and the man knows this is the regulator he is dealing with, not just someone who disagrees with the team’s commentary. It isn’t his PA arranging the call, but his Regulatory Affairs team.
Healy, no doubt, finds himself in a difficult position. I guess the proof of his good intentions is that Toplis is still employed, and not obviously using a different tone or analysis in his reports. Then again, there hasn’t been another MPS since this episode. It would be interesting to know what was said in that phone call later in May, but I suspect it would be futile for anyone to try to OIA that information. Again, in an ideal world, BNZ would front up to the media on this attempt by the central bank to intimidate them and censor their commentary. I don’t suppose anyone will be holding their breath waiting for that. But failure to front up implicitly accepts and condones this sort of conduct by the Governor, whatever they might be saying in private.
Of course, one mystery in all this is how the story got to the media. Perhaps the BNZ themselves prompted Paul McBeth to lodge his OIA request. If so, well done. Presumably the Reserve Bank hierarchy didn’t want the news known, but I have heard stories that junior Reserve Bank staff were discussing the issue in Wellington bars.
In this episode, it is worth thinking briefly about the people involved. In some respects, Stephen Toplis isn’t a person who will naturally command lots of sympathy – highly paid economists of foreign banks, some might think, can simply fight their own battles. And his style can be, and has been, somewhat abrasive, not just with the Reserve Bank.
And, on the other hand, Graeme Wheeler is three months from leaving office. For all the failings in his term of office – and this is just another one – why bother when he’ll soon be gone from public life?
It seems to me that the response on both counts is about precedents. If powerful public officials attempt to shut down prominent economists, just think what they could do to other people. And if Graeme Wheeler gets away with this attempt – perhaps just having got the end of his tether – what message does it send to other regulators, officials and politicians in our system? Of course, others will try to keep their intimidation attempts quiet – as no doubt Wheeler did – but if there is little downside when things do come out, they might as well just keep on exerting that improper pressure. On this occasion it was about an almost unbelievably trivial thing – use of the word “negligent” – but on some occasions it will be more important things: the Muldoon attack on Len Bayliss was about serious and genuine differences of view about big picture economic policy. Such behaviour just shouldn’t be acceptable in a free society, and the powerful need to know it. And of course, the other reason to be concerned is that Geoff Bascand appears to have been fully involved in this, and he is widely expected to be a serious contender for Governor next year.
Very few people seem to have attempted to defend Wheeler’s behaviour – at most a few have minimised it (“not a good look”). But, given that fairly widespread apparent private disapproval, what is quite disconcerting is the deafening public silence over Wheeler’s attempt to “silence” Toplis and the BNZ. The BNZ itself hasn’t spoken out, and nor have any of the other banks or other bank economists. I can understand how difficult it might be for some prominent individuals to take an open stand. Then again, holding prominent positions carries with it responsibilities. And if, say, all the banks spoke out together – eg through the Bankers’ Association – what could the Reserve Bank possibly do in response?
It is to the credit of Paul McBeth that he got the original OIA material and ran the story, but it was reported as straight news. Where are other local media in deploring this attempt to limit open public debate and constrain critical review of a powerful institution? So far, there seems to have been more interest abroad. The story has been run on the Central Banking magazine’s website – premier publication for central bankers, and one which has honoured the Reserve Bank in the past (central bank of the year in 2015). I’ve spoken to one other foreign journalist who is quite stunned at the local silence (so far?) – not, it was put to me, what would have happened if an episode like this had happened in, say, the UK.
It isn’t a parliamentary sitting week, and Monday was Labour’s immigration policy day. But not a word of protest or unease has been heard from representatives of any political party. Of course, this isn’t a big vote-grabbing issue – defending institutions such as freedom of speech, and the need for self-restraint by the powerful, rarely is. Is this the worst offence in the world? Perhaps not, but we preserve our institutions and conventions by taking a stand on even modest breaches; when people step over the mark, perhaps even without quite fully realising what they were doing.
And then of course there is the question of the Reserve Bank Board. I know a few of the members, and they and the others look, on paper, to be people of decency who take their roles seriously. It is difficult to believe that many of them can really be comfortable with the Governor’s attempts to intimidate the BNZ. But if they aren’t, they have a responsibility to say so. They don’t work for the Governor. Their role isn’t to have the Governor’s back. It is to act as agent for the Minister and the public, in ensuring that the Governor is doing his job, and not overstepping those marks.
Similarly, where is the Minister of Finance in all this?. It would be a simple matter to let it be known that such behaviour is quite unacceptable in senior New Zealand public servants. If he won’t make that clear, he leaves us wondering whether in fact the government thinks such behaviour is acceptable, or just “the way of the world” (memories of Alfred Ngaro). That is the way the best elements of our free society are slowly but inexorably corroded.
As a final thought, I leave you with this quote
Financial markets, the business media, and other economic commentators all play a part in scrutinising and making sense of the Reserve Bank’s monetary policy choices. It is not difficult to make monetary policy choices that turn out to be wrong – indeed, in the nature of things, many will turn out to have been less than ideal. But the presence of the extensive market commentary, on every major piece of data and on OCR decisions themselves, means that if the Bank takes a position that even a significant minority of outsiders disagree with, the difference is likely to be highlighted. This not only allows for public debate and scrutiny, but also provides information that the Board themselves can (and does) use in questioning and evaluating the Governor.
It was the first thing that came up when I googled “monetary policy accountability and monitoring”. As it happens, I wrote those words 10 year or so ago, but they are still sitting on the Reserve Bank’s website, as an official document in the “About monetary policy” section. But after the Toplis affair, it is a little harder than it was to take it seriously as a representation of how the Reserve Bank thinks about the value of market commentary, alternative views, challenge and dissent. If so, that would be a shame.
The Reserve Bank Act isn’t built around a philosophy of deference, but around a difficult- to-maintain balance between the huge amount of power given to the Governor, and a countervailing place for searching scrutiny – by the Board, by the Minister, and by the public (including media and markets). Whoever the new Governor is next year really needs to devote a lot of effort to rebuilding an open and engaging culture that welcomes, and relishes, debate and challenge. At times, no doubt, it will be trying and frustrating, but that is how institutions in a democratic society are supposed to work. Life for the powerful isn’t meant to be comfortable.