A few days on and there has still been only scattered public comment on the systematic attempt by Graeme Wheeler and the senior management of the Reserve Bank to “silence” (materially alter the tone and content of what he writes) the BNZ’s Head of Research, Stephen Toplis, that came to light thanks to the Official Information Act and the efforts of BusinessDesk’s Paul McBeth.

(My previous post are here, here, and here.)

As I noted the other day, the letter in response to Wheeler written by the BNZ CEO Anthony Healy was quite strikingly deferential.  It wasn’t even as if Wheeler’s letter was the first Healy had heard of the issue.   In fact, Wheeler’s letter records that, having sent his Deputy and Assistant Governors out one by one to cajole Toplis, remonstrate with him, and induce repentance,

When this failed to address the situation I met with you and passed on examples of the material.

Presumably, the Governor hadn’t simply been told to go away, and get a thicker-skin, then either.

People are human, and sometimes over-react.  In the last few days I’ve remembered, and been reminded of, various past reactions by Reserve Bank Governors to criticism they didn’t like from bank economists.    In one case, a Governor took offence at criticism of his body language at a speech, and wrote to the economist’s boss to complain.  But in the decades since liberalisation I’ve never seen or heard of anything like the sort of sustained campaign to censor a leading economist that we get a glimpse of in these letters.

To what end?  Well, we don’t know what happened when the Governor and Mr Healy eventually talked again.   But in a story the other day Bloomberg reported that they did get an emailed response from Mr Healy.

In a separate emailed statement, Healy said “economists have an important role to play in providing opinions, and it’s important that they are independent and have a view which isn’t influenced by the wider organization.”

“However, we have acknowledged that from time to time, we may not get the right tone and will always take on board any feedback where our intent or message is not reflected in the language used,” he said.

So the CEO apparently has no concerns –  or at least none he is willing to be open about –  about the Reserve Bank Governor, and BNZ regulator, engaging in a sustained campaign aimed at changing what (and how) one of Mr Healy’s senior employee’s writes?

But, on the other hand, he does seem concerned to assure us that he has taken on board the Governor’s concerns, and will see to it that the product is different in future.  Perhaps they are just weasel words, but “take on board” seems rather more active than some bland observation that “we always welcome feedback”.    And I don’t think there is anyone –  whether or not they agree with what Stephen wrote –  who thinks that in the MPS preview that upset the Governor so much his “intent or message is not reflected in the language used”.   He said exactly what he thought, in a typically strident way.

So it begins to look as though Graeme Wheeler might have won (at least with the BNZ/Toplis) if not with a wider market.  In some ways, that would be even more disconcerting than the fact of the initial Wheeler-led campaign in the first place.   Time will tell, and I’m sure people will be watching Toplis’s future pieces with interest.

There was, for example, a new substantial piece out earlier this week, Capacity Constrained!  It is an interesting note, with some points to reflect on even if (like me) you aren’t that persuaded by his “hawkish” case.  But what I found striking, and a little disconcerting frankly, is that in five pages there is not a single mention of the Reserve Bank or monetary policy –  and yet, the research report is about aggregate capacity pressures and, hence, inflation risks.  The final sentence…..

But, that said, we strongly warn that businesses, householders, Government and investors alike need to better understand the capacity constraints that New Zealand currently faces and, in turn, recognise that whether or not expected inflationary pressures arise, growth is likely to moderate.

…..surely cries out to have “and the Reserve Bank” included in it?    Perhaps Toplis has just been told to lie low until the fuss passes, and then normal service can resume.  But even if that is “all” it is, it would be pretty disconcerting for Healy, his Board, and his parent, to have passed such a win to the Governor, him having exerted intense and illegitimate pressure to achieve it.

Then again, perhaps it was just an oversight, and Toplis really meant to include the Reserve Bank in his warning all along?   Perhaps.

There have been a few other comments in the last few days:

• one prominent business person, evidently a BNZ customer, commmented here, and while carefully avoiding direct comment on the Reserve Bank, observed that “any material change of approach by Stephen or Anthony would be unfortunate for BNZ’s customers and in due course BNZ.”
• on interest.co.nz, David Hargreaves has a very forceful and well-written piece, in which he calls for “a new Reserve Bank Governor who is thick-skinned and accepts that people will disagree with them” .    Mostly I strongly agree with Hargreaves – eg  “People in high office need to, in the colloquial vernacular, grow a pair, and accept that not everybody will agree with them. That’s what they are paid the big bucks for. ”     Having said that, he suggests that an “implied intellectual snobbery” at the Reserve Bank has got worse under Wheeler: for all his many faults, I don’t really agree with that comment (partly because I wince to remember some of the episodes I was involved in over the years in which at times we treated people who disagreed with us with absolute disdain….in public or in private….even if we didn’t try to censor them).

One line I really liked from Hargreaves was this

If you are going to take the drastic, actually, no…extraordinary… step of asking a bank that your organisation regulates to effectively censor the views of one of their (senior) employees you’ve got to be prepared for some consequences.

I’d certainly agree.  But it increasingly looks as though, in modern New Zealand, you don’t really need to be prepared for any consequences at all –  apart perhaps from a bit of criticism from the odd peripheral blogger.

Because the other person who has commented in the last couple of days is the Minister of Finance.  Again, interest.co.nz has the story.

Speaking to media Thursday, perhaps ironically at an event at the Reserve Bank museum, Joyce said he just was “not going to go into that,” He said doing so would be an “unproductive use of my time.”

“That’s a matter for the Reserve Bank Governor, as to how he conducts his communications with the banks and their economists,” Joyce said. He had not reached out to the Bank’s board on the matter.

Perhaps people were supposed to take it as something like “what are you asking me for, after all the Governor is his own man, and he has his own Board.  Really none of my business.”

Even if that were the legal position, it would be pretty disconcerting that the Minister of Finance would reveal himself, at least publicly, unbothered by such coercive conduct by a senior New Zealand public servant.   It would add to the sense that Alfred Ngaro was only slapped down because there was a political firestorm, not because the government was really uncomfortable with the sort of implied approach –  don’t criticise or else – Ngaro was enunciating.

But the legal position involves the Minister of Finance a lot more than he implied in answering those questions.  As I noted in my post the other day, the Reserve Bank Act is built on a difficult-to-maintain balance between, on the one hand, huge powers placed exclusively in the hands of the Governor, and on the other hand, a countervailing provisions that are supposed to provide a high level of accountability.  Some of that is in the form of serious scrutiny from outsiders (including banks and financial markets).  But the legal bits are about the relationship between the Board, the Minister and the Governor.

For a start, the Minister appoints the Governor (even though he can only appoint someone the Board nominates).  The Minister also appoints the Board –  gradually, as they serve staggered five year terms.    The Minister now writes annual letters of expectation to the Governor, and to the Board.  In writing directly to the Board he recognises that the main statutory role of the Board is as agent for the Minister –  and the public  –  in monitoring and evaluating the Governor’s performance.  The Board isn’t part of the Bank –  it is part of the review and assessment process, to strengthen accountability for the considerable power the Governor wields.

And not only does the Minister appoint the Governor but he can (via an Order in Council –  in other words with the consent of his Cabinet colleagues) dismiss the Governor on performance grounds.  In international central banking legislation, that is quite an unusual provision.  In most advanced countries, central bank governors can’t be dismissed for poor performance and certainly not just by the Minister of Finance. It will often take parliamentary action to remove a Governor, and even then only for defined really serious problems (imprisonment, mental or physical incapacity, corruption).  The whole point of our legislative model was that if the Governor alone was to have great power, there needed to be serious accountability.

And it is not even as if the Minister of Finance can simply hide behind the Board.  The Board certainly has clear responsibilities to monitor the Governor’s performance, and can if things get really bad recommend dismissal of the Governor.  Of course, they have a range of other possible sanctions, public and private, short of what is really a “nuclear option”.

But whereas the Minister can only appoint as Governor someone the Board recommends, he isn’t constrained that way when it comes to problems with, or concerns about, the Governor. He can recommend dismissal –  again the nuclear option, but there are other options –  without any recommendation from the Board.   Which pretty clearly suggests that he has statutory responsibilities himself for being satisfied that the Governor is doing his job, and doing it in an acceptable manner.    The Act is mostly concerned with the policy functions of the Bank, including the Policy Targets Agreement,  but the tests for the Minister include whether he is satisfied that “the Governor has not adequately discharged the responsibilities of office” or that “the Governor has been guilty of ….serious neglect of duty or misconduct”.

Using the power of your office to attempt to coerce a private institution, regulated by you, to censor one of its staff when writing critical evaluations of the Bank, and instructing your senior subordinates to actively involve themselves in such efforts, don’t look like the sort of standard –  the sort of discharge of the responsibilities of office –  that the Minister, or citizens, should reasonably expect, or tolerate.

I’m not suggesting that the Minister of Finance should fire the Governor.  But to simply pretend that the conduct of the Governor in this area is no concern of his, and not even to ask the Board for its views, looks like neglect of the Minister’s own responsibilities.  And it sends a dreadful message to citizens about the sorts of behaviour his government appears to be willing to, at very least, turn a blind eye to.

One of the obscure provisions of the Reserve Bank Act, that as far as I know no one has ever quite known what it means, is section 169.  It reads

169 Bank to exhibit sense of social responsibility

It shall be an objective of the Bank to exhibit a sense of social responsibility in exercising its powers under this Act.

That, too, is one of the Governor’s responsibilities in office (the Act makes him responsible for it all). It is hard to see how, in a free and democratic society, attempting to suppress a vocal critic, just because he happens to work for a body the Bank regulates, quite fits with that social responsibility.

As for the Bank’s Board, on the normal schedule they will have been meeting yesterday, upstairs just  a few floors above where Steven Joyce was washing his hands of the affair.  As I noted the other day, the Board members seem like decent and honourable people, and it should be a surprise if they were remotely comfortable with the Governor’s sustained attack on the BNZ and Toplis.    Then again, they have form, and mostly just seem to give cover to the Governor whatever he does (the OCR leak episode being a particularly clear example).  Perhaps some journalist should consider ringing the Board chair, Professor Neil Quigley, and asking him about the Board’s view of such behaviour.  Quite likely, he would simply refuse to comment, but that in itself would be telling.

UPDATE: There is new piece out from Oliver Hartwich, Executive Director of the New Zealand Initiative.  He notes

Central banks have a crucial role to fulfil in our economies. This role thus deserves public scrutiny and debate. Given the RBNZ’s independence, external commentary on its actions is the most effective check on its operations.

For these reasons, it is not acceptable for the governor of the RBNZ to attempt to stymie such scrutiny. With his complaints about a bank economist, the governor has overstepped his role.