On the Reserve Bank FSR

There are some interesting things in the Reserve Bank’s Financial Stability Report, some questionable ones (including, at the mostly-trival end of the scale, Grant Spencer’s assertion that he is “Governor” when by law he is, at best, “acting Governor”) and some things that are missing altogether.

The Reserve Bank observes that banks have tightened their own (residential mortgage) lending standards

Banks have tightened lending standards, reducing the borrowing capacity of households. Typically, banks are using higher interest rates when assessing the ability of borrowers to service a new mortgage and their existing debt, restricting the use of foreign income in serviceability assessments, placing stricter requirements on interest-only lending, and ensuring that living expenses assumed in a loan assessment are reasonable given the borrower’s income.

If so, you have to wonder why the Reserve Bank is still intervening in such a heavy-handed way in the decisions banks would otherwise make about their mortgage lending.

But they go on to back their claim with an interesting, but on the face of it somewhat dubious, chart

The overall impact of the tightening in banks’ lending standards is illustrated by the Reserve Bank’s recent hypothetical borrower exercise,  which asked banks to calculate the maximum amount that they would lend to a range of hypothetical borrowers. This repeated an exercise that was conducted in 2014. The 2017 results suggest that maximum borrowing amounts have declined by around 5-10 percent since 2014 (figure 2.3).

max lending amounts

But it is hardly surprising that, with the same nominal income, banks would lend a little less now than they would have been willing to do so in 2014.  After all, there has been three years’ of inflation since then.   Even if the borrowers had declared the same monthly living expenses to their bank, banks use their own estimates/provisions for living expenses in deciding how much to lend.  Supervisors, indeed, encourage them to do so, and to be sure to leave adequate buffers.   An income of $120000 would comfortably support more debt in 2014 than the same income does in 2017  (the reduction in the maximum amount lent to owner-occupiers was 3.5 per cent in the chart).  It would probably be better to do all these comparisons using inflation-adjusted inputs.

In this FSR, the Reserve Bank reports the results of their latest set of bank stress tests.    This year’s macro stress test didn’t seem particularly demanding in some ways.

stress test.png

Previous scenarios have featured falls in house prices of more like 50 per cent (in Auckland) and 40 per cent nationwide, which seemed like suitably tough tests.  Previous test also featured an increase in the unemployment rate to 13 per cent (which was so implausible that I pointed out then that no floating exchange rate advanced country had ever experienced such a large sustained increase in its unemployment rate).

But there are several unrealistic things about this scenario

  • it is highly improbable that even a severe recession in another country would lower New Zealand house prices by 35 per cent.  A massive over-supply of houses here might do so, or even the end of a massive credit-driven speculative boom, but neither an Australian nor Chinese recession is going to have that sort of effect.  In the 2008/09 recession –  as severe a global event as we’d seen for many decades – we saw about a 10 per cent fall in nominal house prices in New Zealand.
  • it is also highly unlikely that house and farm prices would fall by much the same amount in this sort of scenario.  Why?  Because in this scenario it is all but certain that the exchange rate would fall a long way (helped by the fact that the Reserve Bank has more scope to cut interest rates than their peers in other countries), in which case the dairy payout (and any fall in farm prices) will also be buffered relative to the fall in prices of domestic-focused assets.
  • But perhaps most implausible of all was the requirement that “banks’ lending grows on average by 6 per cent over the course of the scenario”.   Governments of the day might, at the time, be keen for banks to keep taking on more credit exposures, but those private businesses –  amid a pretty severe shakeout –  are unlikely to be willing to do so.  And there wouldn’t be many potential borrowers. If the asset base was stable –  or even shrank a bit, as it would tend to do naturally with sharply lower asset prices –  a fixed stock of capital goes quite a bit further.

As it is, once again the stress tests suggests that on the lending practices banks have operated under over recent years –  and they can change –  our big banks are impressively resilient.   Here is the key chart.

buffer macro

The chart is presented to make the deterioration in banks’ capital positions look large (by being presented as a margin over the minimum regulatory capital, rather than an absolute capital ratio –  creditors lose money when banks run out of capital, not when they get to the regulatory minimum).   But even then, look at the results.   The blue line is the result if the banks do nothing in response.  Which bank would do that in the middle of a period of multi-year stress?  But even then, at worst, the banks in aggregate end up with a buffer of capital of 2 percentage points above their required minimum.  With mitigants –  the red line –  they never even dip into the capital conservation buffer (the margin over the minimum; if banks dip into that zone there are limits of their ability ot pay dividends).

It is good that the Reserve Bank does these stress tests.  It would be better if they provided more information on the results (eg in this scenario they tell us that half the credit losses come from farm lending and residential mortgage lending, but don’t provide the breakdown –  from previous tests’ results, I suspect the residential contribution is relatively small  –  and don’t give any hint where the other half of the losses is coming from (given that housing and farm lending get most of the coverage in FSRs).

It must surely be hard to justify onerous and distortionary controls on access to credit for one large sector of borrowers when year after year the results come back showing that the banks look pretty robust to pretty severe shocks.  And when the Bank also tells us that the prudential regime isn’t designed to avoid all failures.  In combination, could one mount an argument that banks aren’t being allowed to take enough risk?

Operating in a market economy, banks in New Zealand –  and those in Australia and Canada –  appear to have done a remarkably good job of managing their own risks and credit allocation choices.  It is, after all, more than a 100 years since a major privately-owned bank has failed in any of those three countries.  Things can go wrong –  and often have in heavily distorted financial systems (eg that of the United States) – and bank regulators are paid to be vigilant, but it might be nice –  just occasionally –  to hear senior Reserve Bankers pay credit to the competent (never perfect) management of the risks our banks take with their shareholders’ money.

I mentioned things that were missing entirely from the FSR.  

The Reserve Bank Act requires FSRs to be published

A financial stability report must—

(a) report on the soundness and efficiency of the financial system and other matters associated with the Bank’s statutory prudential purposes; and
(b) contain the information necessary to allow an assessment to be made of the activities undertaken by the Bank to achieve its statutory prudential purposes under this Act and any other enactment.

That second item is no less important than the first.  And when the Reserve Bank has, during the period under review, imposed significant regulatory sanctions on a major bank you might have supposed that in the next FSR there would be a substantial treatment of the issue (there is, after all, more space than in a press release).  It is, after all, an accountability document, designed to allow the public (and MPs) to evaluate the Reserve Bank’s handling of its responsibilities.

But in the case of the recent Westpac breach (operating unapproved capital models), which resulted in big temporary increases in Westpac’s minimum capital ratios and –  it appears –  a requirement that Westpac issue more capital over and above those minima you would be quite wrong.  I read the entire document yesterday and didn’t spot a single reference.  A proper search of the text revealed a single footnote, which simply noted that Westpac’s minimum capital ratios had been increased, with a link to last week’s Reserve Bank press release.

This really should be regarded –  by the Board, by MPs, by citizens and other stakeholders –  as unacceptable: an organisation, that despite its constant claims, seems to regard itself as above any sort of serious public accountability, despite the clear requirements imposed by Parliament.    You will recall that last week I noted that there was a range of unanswered questions about this whole episode (here and here).  The FSR answered none of them.  For example:

  • who discovered the error, and how?
  • how did it happen (both at the Westpac end, and at the Reserve Bank end)?,
  • what confidence can we have that there are not similar problems at other banks?,
  • what changes has the Reserve Bank made to its own procedures to reduce the risk of a repeat?
  • why was there no reference in the Reserve Bank statement to the failures of Westpac directors (even though director attestation is supposed to be central to the regulatory regime)?
  • did the Reserve Bank compel Westpac to raise new capital?
  • how much difference did the use of unauthorised models make to Westpac’s capital ratios?

Jenny Ruth of NBR (who covered the story in a column last week, noting that the Bank’s failure then to provide more information was “appalling”) asked some questions about the issue at press conference yesterday.     The answers weren’t particularly clear or helpful.

She asked why no directors were prosecuted (these were, after all, strict liability offences, and director attestations are a key part of the regime).  Grant Spencer basically refused to answer, just claiming that the steps they had taken were a “strong regulatory response”.

She asked about the other internal-ratings banks and whether there were such problems with them.  The first answer seemed to suggest that the Bank was confident, having checked, that there were not.  But as Spencer and Bascand went on, even that seemed to become less clear.  By the end it seemed to be a case of “we aren’t aware of any other problems and we are encouraged that some are having a look to check”.  It didn’t exactly seem like an aggressive pro-active response by the Reserve Bank, to a potential problem it has known about for more than a year (since the Westpac issues first came to light).  It turns out that ASB has had other problems around its capital calculations (apparently without penalty).

We learned one thing.  Asked who first uncovered the issue –  Ruth suggested she had heard that Westpac had uncovered the problem itself –  the Bank representatives responded that they had had their own suspicisions and had raised the matter with Westpac, who had then confirmed that there was a problem.   That was good to know, but it was only one small part of the questions that should be answered.

It is, perhaps, getting a bit repetitive to say so, but if the new government is at all serious about more open government –  and serious media outlets have raised questions about that in recent days –  then the Reserve Bank would be a good place to start.   The culture needs changing, and culture change is only likely to come from the (words and actions at the) top.    How the government can expect to find a Governor who would lead the Bank into a new era of openness and transparency when they are relying on the Board –  always emollient, always keen to have the Governor’s back, never revealing anything, never even documenting their meetings in accordance with the law,  – is a bit beyond me.  Sadly,a more probable conclusion is that the government doesn’t really care much, and that the repeated promises  by Labour, the Greens, and New Zealand First around the Reserve Bank were more about being seen to make legislative changes, rather than actually bringing about substantive change in the way this extraordinarily powerful, not very accountable, agency operates.  If so –  and I hope it isn’t –  that would be a shame.


Very slowly lifting LVR controls

It is a strange form of democracy in which an unlawfully appointed (and certainly unelected) bureaucrat, who faces little or no effective accountability, can descend from the mountain-top and decree new limits for how much different types of (potential) house buyers can borrow from banks.  But that is what Grant Spencer of the Reserve Bank did this morning with the release of the latest –  his one and only –  Financial Stability Report.  Our politicians seem to see nothing strange about this –  rabbiting on about “respecting Reserve Bank independence” in an area where there is no obvious reason for Reserve Bank independence at all.  If we have to live under the burden of regulation –  especially of the sort that directly affects ordinary citizens –  those controls should be imposed, or lifted, by politicians.  We can toss them out.  In this particular case, it is not as if there is even a clear statutory framework: the Reserve Bank is required to exercise its powers to promote “the soundness and efficiency of the financial system”, but neither they –  nor anyone else –  can really tell us what that means, or hence what limits, if any, it places on a Governor’s (or “acting Governor’s”) freedom of action. Arbitrary whims aren’t a good basis for government.

Don’t get me wrong.  I’m pleased to see the Reserve Bank making another start on easing the LVR controls (there was a partial easing a couple of years ago, but that didn’t last long).     The controls should never have been put on in the first place.   They started as a knee-jerk reaction from the previous Governor, without any good supporting analysis, and –  as so often happens with controls –  one control, originally sold as temporary, soon led to others, ever more onerous, with ill-founded exceptions.   As I summed up LVR restrictions a few months ago

They are discrimatory –  across classes of borrowers, classes of borrowing, and classes of lending institutions –  they aren’t based on any robust analysis, as a tool to protect the financial system they are inferior to higher capital requirements, they penalise the marginal in favour of the established (or lucky), and generally undermine an efficient and well-functioning housing finance market, for little evident end.  Oh, and among types of housing lending, they deliberately carve-out an unrestricted space for the most risky class of housing lending –  that on new builds.

That discrimination?

We have direct controls on lending secured on housing, but none on lending secured on farms or property development –  even though the FSR notes that the dairy debt position still looks stretched, and recognises that internationally many of the losses in financial crises are on commercial property (especially development) loans.

We have much more onerous direct controls on potential owner-occupiers than on investors, even when the nature of the underlying collateral is identical.  Even if the investor borrower might, objectively, be a much better credit  (think of someone with a really secure job like a teacher or police officer buying a first investment property, and contrast then with a person (with the same income) with a job in a highly cyclical sector (thus at considerable risk of unemployment in the next recession) buying an owner-occupied dwelling).

And we have direct controls on housing lending by banks, but not by other lending institutions.

And, again as I noted earlier

You’d never know, from listening to the Governor or reading the Bank’s material, that New Zealand banks – like those in most other floating exchange rate countries –  appear to have done quite a good job over the decades in providing housing finance and managing the associated credit risks.   We had a huge credit boom last decade, followed by a nasty recession, and our banks’ housing loan books –  and those in other similar countries –  came through just fine.

The Reserve Bank has never seriously engaged with this sort of perspective, and never told us why we should be confident that they are better-placed to make credit allocation judgements than experienced bankers whose own shareholders’ money in on the line.

Some months ago the former Prime Minister called on the Bank to lay out clear and explicit markers that would see the LVR limits wound back and eventually removed.   Unfortunately we got nothing of the sort today (indeed, the idea that the restrictions will eventually go altogether –  and we can back to having banks making credit allocation decisions, at an individual and portfolio level –  got barely a mention in the FSR itself or in the subsequent press conference).    No doubt, the bureaucrats like having toys to play with.  They stress how hard it is  for them to lay down clear markers, but appear to put no weight at all on how hard it might be for citizens who have to make their own decisions against a backdrop of such regulatory uncertainty.  Sadly, there are few effective incentives to ensure that bureaucrats and politicians internalise those costs at all.   Politicians have to face re-election (and scrutiny in the House each day), but the Reserve Bank bosses face no such pressure.

Now, to be fair, this mess was primarily of Graeme Wheeler’s making, and Spencer and Bascand are left to tidy up the mess.  Since the LVRs were never grounded in good analysis in the first place, it is hard to set out analytically robust markers for lifting them.  But if analysis couldn’t offer much, perhaps there should have been a premium on predictability: the Bank could have laid out an expected numerical path under which over the next two years the LVR limits would be removed completely, with modest easing scheduled for each quarter.  Sure, they couldn’t have made binding commitments –  apart from anything else, some as-yet-unknown person will be calling the shots as Governor after March –  but indicative plans help provide certainty to banks, their competitors, to borrowers, and to other participants in the housing market.  And they create some hurdles that the Reserve Bank would need to get over before deviating from the announced path.    As it is, we have no idea –  no clues at all –  as to what pace the controls might be lifted at.

As a reminder, if the Reserve Bank is really concerned about the soundness of the financial system –  let alone the “efficiency” of the system, a key part of the mandate –  capital requirements (risk weights and required capital ratios) clearly dominate direct (and discriminatory) intervention in the credit allocation process.     That sort of insight was behind getting rid of direct controls back in the 1980s.

The Bank did attempt to lay out the criteria it would be using  in assessing whether and when to relax LVR limits further.  There were three.

  • Evidence that house price and credit growth have fallen to around the rate of household income growth.
  • A low risk of housing market resurgence once LVR restrictions are eased.
  • Confidence that an easing in policy will not undermine the resilience of the financial system.

The second and third aren’t specific at all, and provide little basis for citizens to hold the Bank to account.   But the second is also problematic, because the Bank has always claimed that its goal isn’t to eliminate, or even to materially dampen, house price cycles (the “acting Governor” this morning reiterated that there will always be housing cycles).  That second criterion only makes sense if there is evidence that house price cycles/increases are mostly caused by changes in bank lending standards, and the Bank has never produced any evidence for that in a New Zealand context.

The first criterion looks slightly more useful –  at least we can see the data for that.  But I’m not sure it is very robust.  First, why “household income”, when many of the houses are now bought by the small business sector –  nominal GDP growth might be as useful.  But, more importantly, the Bank’s criterion seems to cement in the current ratios of price and debt to income as some sort of equilibrium.   And they have absolutely no evidence at all for such a claim.  As they surely know, if land use is heavily-regulated then fresh shocks to demand –  from any source, including unexpected population growth –  will tend to raise debt and price to income ratios, with no particular reason to think that such movements raise financial stability concerns.  Lending standards are really what matter, not macroeconomic indicators.  And, of course, in floating exchange rate countries with a market-led allocation of housing credit, I’m not aware of a single case where housing loan losses have been central to systemic financial crises.

There was the customary self-congratulation this morning about the contribution the LVR controls have made.  The Bank keeps telling us LVR restrictions have “substantially improved” the resilience of the financial system.  It is another claim for which they advance no serious evidence.  They correctly note that the volume of high LVR loans is lower than otherwise (although a little footnote on page 6 suggests even that effect might have been quite modest), but they never ever explicitly recognise that if banks have fewer high-LVR loans they will be required to hold less capital than otherwise.  Or that since the incentive was now to lend lots of, say, 79.99 per cent LVRs –  not economically different from a loan of 80.01 per cent –  and yet capital requirements are typically materially lower on lower LVR loans, it is quite possible that the effective resilience of the banks has actually worsened a little.  As it is, their stress tests have told throughout that the banks are robust.

Two final points:

The first is that in some respects today’s moves further increase the regulatory wedge imposed between access to credit for investors, and that for owner-occupiers.  In essence, no one (or almost no one) can borrow from a bank to buy a residential rental property using a mortgage of more than 65 per cent of the value of the property.  (There is provision for up to 5 per cent of such loans to be above 65 per cent, but given the larger buffers banks operate to ensure that they don’t breach conditions of registration, it is effectively a near-zero limit).  That isn’t a decision of a professional credit-manager.  It is regulatory fiat, from people with little or no experience in credit allocation.  By contrast, 15 per cent of owner-occupied housing loans can now be to borrowers with LVRs in excess of 80 per cent.  If banks judge it prudent –  and it might well be, depending on the borrower and the overall portfolio –  some owner-occupiers will be able to borrow perhaps well above 90 per cent.    The Reserve Bank has not produced a shred of evidence –  in the past or today –  for such a huge gap, on identical collateral.   Recall my example earlier: lending an 82 per cent LVR loan to the police officer buying an investment property is likely to be materially safer than lending to, say, a person on the same salary buying a first home, but working in a highly-cyclical sector (eg construction or tourism).  Banks can make those sorts of distinctions – they get to know and evaluate their customers –  but the Reserve Bank can’t. Instead, we get crude controls slapped on and maintained for years.  It looks and feels a lot more like politicised credit preferences – owner-occupiers favoured over investors.  When politicians do it it might be odious and undesirable but….they are politicians, and they have to face the voters.  When bureaucrats do it, it is highly inappropriate.

As I noted in my housing post yesterday, in some ways it is a bit odd for the Reserve Bank to be starting to declare victory now.  For the last few years there has been little or no prospect of any material oversupply of physical dwellings (or urban land).  There was little effective liberalisation and huge population pressures, and much of the new building has been on a pretty small scale, done by the private sector.   But now net immigration looks as if it may have turned a corner, easing some of the demand pressures.  A series of tax and regulatory changes will also dampen demand, at least temporarily, a little.     And the government is talking up “build, build, build”, in a government-led process designed to generate a huge number of new houses in the next decade  You might be sceptical, as I am.  But it is explicit government policy.  And government-led investment projects face considerably weaker market disciplines –  and often operate on a considerably larger scale –  than private sector ones.    Government interventions in the housing finance market were a big part of what went wrong in the United States. Physical oversupply was a big issue in Spain, Ireland and (parts of) the United States.   How confident can the Reserve Bank be that if Kiwibuild really gets going at the scale envisaged that the risks can be effectively managed?   It is, after all, almost certain there will be at least one recession  –  wich won’t be foreseen – in the 10-year horizon of Kiwibuild.     I’m not using this as an argument for keeping LVR restrictions on –  they aren’t fit for purpose, and in any case the Bank bowed to political pressure to exclude loans for building new houses (the riskiest sort of housing loans) from the LVR controls altogether.  But I think they are wrong if they believe, as they stated this morning, that risks are now easing.  And capital standards are a better, less intrusive, way to manage any risks.

The sooner the LVR controls are behind us the better,  Sadly, unless the right Governor is chosen, that day doesn’t seem likely to be soon.

I’ll have some comments tomorrow on some other aspects of the FSR.

Why do our politicians ignore PRC influence?

Our leading politicians appear quite unbothered about the rise of China and the way it is happening.   We don’t see emerging an open, free, peaceful, and democratic state  –  as with Taiwan, Korea or Japan.    We don’t even see something that looks like a large Singapore.    Instead we see a very large totalitarian party-state, suppressing most meaningful freedoms for its own people –  in ways reminiscent of the Soviet Union or Nazi Germany –  and increasingly willing to use the combination of size and wealth (not high per capita, but there are a lot of people) to throw its weight around internationally, at times (as in the South China Sea) in flagrant and ongoing violation of international law.  It is increasingly well-documented that that strategy includes attempting to exert control over ethnic Chinese cultural and religious groupings and media outlets in other countries, to suborn (with all sorts of blandishments, whether financial, access, or whatever) key figures in other countries, and to exert influence on the domestic politics of other countries, including encouraging ethnic Chinese in other countries who have suitably close ties to the Communist Party to run for elective office in those countries.

It is easy for the world-weary, and those who want to avoid confronting the issue, to respond “but everyone does it; every country seeks to exert influence”.   And, no doubt to some extent or other, that is true.   And so we need to look to the character of the country, and political regime, in question.  The People’s Republic of China today still looks much like the Soviet Union and Nazi Germany, two of the more odious regimes (at least among large countries) in the 20th century.  We –  citizens and governments –  should be treating it as such.

Instead, all our political parties, and their leaders, seem determined to look the other way, to try to pretend –  even though surely they know otherwise –  that China is some sort of normal state.   Why, the party presidents of National and Labour were recently sending warm fraternal greetings on the occasion of the five-yearly Communist Party Congress.     Would they have turned up to the Nuremberg rallies as well?   I guess political fundraising is a difficult business, but you might have hoped that former Foreign Minister Phil Goff would walk away from a $150000 donation to his mayoral campaign from an offshore donor.  Perhaps such donations should be illegal?

And then there are the elected politicians.  We have two elected members of Parliament who left China as adults and settled in New Zealand.    One appears to have misrepresented his past in his residency/citizenship application, and certainly hid it from the public when he first ran for Parliament.  That past: membership of the Communist Party, and being a member of the Chinese military intelligence system, clearly sufficiently in the good graces of the Party to have been allowed to move abroad.  The same MP remains very close to the Chinese Embassy, and has never been heard to utter a word of criticism of Chinese government policy.   And ever since the story broke, just before the election, he has gone very quiet: refusing to account to the voters (at least as represented by the English language media).

The other member of Parliament is a less egregious, but still troubling, case.  Raymond Huo is a Labour MP, also apparently widely known to be very close to the Chinese Embassy.  Of him, Professor Anne-Marie Brady wrote

Raymond Huo霍建强 works very publicly with China’s united front organizations in New Zealand and promotes their policies in English and Chinese. Huo was a Member of Parliament from 2008 to 2014, then returned to Parliament again in 2017 when a list position became vacant. In 2009, at a meeting organized by the Peaceful Reunification of China Association of New Zealand to celebrate Tibetan Serf Liberation Day, Huo said that as a “person from China” (中国人) he would promote China’s Tibet policies to the New Zealand Parliament.

It was Huo who made the decision to translate Labour’s 2017 election campaign slogan “Let’s do it” into a quote from Xi Jinping (撸起袖子加油干, which literally means “roll up your sleeves and work hard”). Huo told journalists at the Labour campaign launch that the Chinese translation “auspiciously equates to a New Year’s message from President Xi Jinping encouraging China to ‘roll its sleeves up’.”  ……    Xi’s catchphrase has been widely satirized in Chinese social media.   Nonetheless, the phrase is now the politically correct slogan for promoting OBOR, both in China and abroad. ……. In 2014, when asked about the issue of Chinese political influence in New Zealand, Huo told RNZ National, “Generally the Chinese community is excited about the prospect of China having more influence in New Zealand” and added, “many Chinese community members told him a powerful China meant a backer, either psychologically or in the real sense.”

So whose interests does Huo represent in our Parliament?  They are quotes from his own speeches/interviews, which I’m not aware that he has contested.  He has also been remarkably quiet since the Brady paper was published in September.

Recall that on TVNZ a few weeks ago, veteran diplomat (and now lobbyist) Charles Finny, who has been keen to stick up for both men and celebrate their membership in our Parliament, explicitly stated that he was always very careful what he said in front of either man, as he knew –  and given his diplomatic/trade background he would know – that they were both close to the Chinese Embassy.   If Finny always takes care what he –  just a private citizen lobbyist now –  says in front of Yang or Huo, how should ministers or senior opposition MPs react?

In fact, their reaction tends to be to pretend there is no issue.  Bill English has simply refused to answer any serious questions, referring journalists to Jian Yang as if he can answer questions about his own suitability for office, even if he were willing to make himself available for journalists.  The previous Attorney-General, and Minister for the GCSB and SIS, tried to pretend that any concerns were just racist or anti-foreigner –  as if no one could tell the difference between, say, Joseph Goebbels and Dietrich Bonhoeffer or between Xi Jinping and Liu Xiaobo.   It was pretty despicable.

Not that there was ever much hope that the Labour Party (or their partners) would be any different.  As Opposition leader, Jacinda Ardern sought to simply avoid the issue –  as, I suppose, you would when you had Huo on your list.  People who live in glasshouses and all that, I suppose.

And so it proves in government.   Last week, Raymond Huo was confirmed as chair of the Justice select committee of Parliament.    They do the triennial inquiry into the conduct of each election.  They handle legislation around such matters as political donations, the electoral system, the rule of law, and so on.    And the government is quite happy to have as chair of that committee, someone known to be close to the embassy of the dreadful People’s Republic of China, a government with little or no regard for the rule of law –  whether domestically or internationally.  Someone who channels quotes from Xi Jinping to win votes for Labour.  Who seems to think that China having more influence in New Zealand is a good thing.

I’d be uncomfortable with an American or a Briton who had become a New Zealand citizen championing greater influence of their country in New Zealand.  But there isn’t a moral equivalence between the UK, the USA, and the People’s Republic China.  The latter is a force for evil.   And you will, it seems, never hear that from Raymond Huo.

But, of course, the National Party seems unbothered.  People in glasshouses, I suppose.

And then as if to bring the last few months full circle, there was an interview on Newsroom last week with the new minister responsible for the GCSB and the SIS (and various other portfolios, including those around electoral law), Andrew Little.  Buried down at the end of a lengthy interview, Little was asked about the issue of Chinese influence

One thing that Little is not concerned about is any perceived growing influence of China in New Zealand.


When questioned about the issue and Yang, Little will not reveal if he had received any related briefings but says he has no concerns.

“There’s nothing here that’s alerted me to any Chinese nefarious influence in institutions like universities…I know there’s often the line about political influence but our donations regime is pretty transparent.

“That’s a legitimate public debate right now because it’s [Yang’s background] been revealed, he said he didn’t know he was teaching spies? I can’t recall what his defence is, he’s made it into Parliament because the National party wanted him to be there, people are going to have to form an opinion themselves.”

Asked if Yang should have been allowed to stand for Parliament or if he should have been granted citizenship, Little says he does not have enough background to comment on the latter but was more comfortable with the National MP being an elected official.

“He’s a New Zealand citizen, that entitles him to stand for Parliament. There’s a variety of backgrounds. Sue Bradford, who was a regular radical protestor, took on the police, took on the establishment, she became an MP.

“I’d be very worried about saying there were criteria beyond citizenship that we should add to about whether you can stand for Parliament.”

It doesn’t look to have been the most searching interview ever, with no questions at all about Huo, but at least the journalist asked about some things.  And as he asks, Andrew Little is scampering for cover, and in the process insulting Sue Bradford (of whom I’ve probably never knowingly previously defended). Our minister for the intelligence services compares a former spy, member of the Chinese Communist Party, and someone with close ongoing ties to a heinous regime and its representatives in Wellington (the validity of whose citizenship he doesn’t feel comfortable commenting on), with a domestic activist and protestor exercising –  and perhaps occasionally stepping over –  her rights as a New Zealand citizen.  I’m not aware anyone has ever questioned Sue Bradford’s loyalty.

And even if Jian Yang’s citizenship is securely grounded, is this senior minister really serious about that final sentence?  I don’t suppose anyone is proposing amending the Electoral Act to provide specifically that (unrepentant) members of the Chinese Communist Party, past or present, and past Chinese spies, should be disqualified from Parliament.  I wouldn’t want to amend the Act to legally disqualify a whole bunch of other people either.   If some former apartheid South African BOSS agent had somehow got New Zealand citizenship, s/he might be legally entitled to run for Parliament but –  without some serious exercise in penitence and contrition –  I hope no serious political party would consider nominating him/her.  Graham Capill is probably eligible to run again for Parliament –  and I’m a Christian, and believe in forgiveness and restoration – but no party that nominated him would ever get my vote.  And so on.  The law can’t and shouldn’t try to cover all circumstances.  But decent political parties should be able to draw lines themselves.  Ours don’t seem to anymore  (our version of Roy Moore and John Conyers perhaps?)   There is no way Jian Yang should be in our Parliament at all, and if Raymond Huo won’t distance himself from the PRC –  and call out its evil and abuses, domestic and foreign, neither should he.   Decent parties simply shouldn’t select them (being list MPs, the public have little or no direct effective recourse).

These issues of Chinese influence in other countries aren’t unique to New Zealand  (there is a good recent podcast from an Australian academic on these issues in an Australian context) although from what I’ve read of countries such as Australia, Canada, and the United States, New Zealand is the only country yet with two MPs with these close PRC ties in our national Parliament.

Quite why our politicians aren’t bothered is a bit of a mystery.  There is clearly an element of not upsetting Beijing, and with it a desire not to rock the boat in ways that could have short-term economic cost through the trade ties of some large New Zealand entities with close traditional ties to our governments.   Perhaps the political donations are part of the story as well.   That’s the shameful side of the story.  Is this what it must have been like in the 1930s, when plenty of politicians wanted to smooth things over with Germany, and more egregious abuses just made the cause of appeaement seem more urgent?

But the other side must be that the voters just don’t care very much, if at all (as European populations didn’t for a long time in the 1930s).    Perhaps that is understandable.  There isn’t a lot of foreign news in our papers and other media, and certainly not on stories that deal much with China.  We don’t have good foreign affairs think-tanks, and on the one hand taxpayer money is devoted to keeping the good news stories flowing, and journalists value the opportunity of funded trips to China.  How, then, will the average voter know what our political parties make themselves –  and by extension us –  party to?

It doesn’t make it less shameful though, and it isn’t even clear what our politicians think they achieving in selling out our values, the principles our society is built on, in keeping quiet about China.  There is the mythology that somehow China makes us (or Australia) wealthy.  It’s nonsense of course.  China is a middle-income country with a badly distorted economy.  More to the point, countries almost always make (or break) their own fortunes.  I’ve pointed out before how small a share of GDP is represented by the exports of New Zealand firms to China.  Of course, that trade matters a lot for some firms, but it doesn’t matter that much at all for the nation’s overall prosperity.  Politicians seem to sell out our soul for the financial interests of a small group of exporters, whose interests are not necessarily our own.

No doubt, MFAT advisers periodically remind any minister tempted to acquire some backbone of the potential for China to disrupt the trade of New Zealand firms.   You can read the stories about Mongolia, Norway, the Philippines, and –  most recently – South Korea.  There is some potential for disruption –  the Chinese seem to have been particularly willing to cut off the tourist flow when a country steps “out of line”, and presumably the international student market is also vulnerable.  In both cases, blocking trade hurts the seller (NZ) but doesn’t make much difference to the buyers (Chinese tourists just go to, say, France that year).    But is this the sort of country we want to become, where we quail before the butchers of Bejing, rather than standing for our own values and institutions, and telling anyone who wants to export to China –  to deal with a regime on a par with Soviet Union or Nazi Germany – that they are on their own?   South Korean firms are learning now, having experienced the nature of the Chinese state, that diversification is prudent.

There seems little doubt that Chinese global influence will only increase, and that that of the United States will continue to diminish. Perhaps one day, the Communist Party will be toppled and that influence will be more benign, but that isn’t the prospect for now.  Particularly for a country as far from China as we are, that still leaves us with choices.  I’d rather our politicians (and public) decided to take a stand.  Dealing with the PRC –  dealing with Chinese entities on PRC terms –  on other that proper and limited diplomatic terms, should be no more socially or politically acceptable than pandering to the Germans was in 1939.

Not, of course, that there is any likelihood of our government taking a stand.  Flicking through the Herald over lunch I noticed an advert from a Chinese-government affiliated entity celebrating the “New Zealand China Young Leaders’ Forum” held on Sunday which, we were told, was “setting NZ up for a bright future”.  Just like China you mean?  No political freedom, no religious freedom, no freedom of expression, just the dominance of the Party (and a mediocre economy)?   The Chinese premier, Li Keqiang had, we were told, sent his greetings and the Chinese delegation was led by a Vice-Minister.   And guess who opened this forum?   Well, that was Michael Wood, Parliamentary Under-Secretary to the Minister for Ethnic Communities.  I guess he was about as far down the official food chain as it was possible to get, but one likes to think that the British government wouldn’t have been sending a representative in 1939 to open some joint forum with, say, the Hitler Youth.

Our political leaders, apparently without exceptions (certainly none with the courage to speak out even timidly) disgrace us.

Housing policy and prospects

I’ve been wary for some time of Labour’s approach to the disgrace that is the New Zealand housing and urban land market –  a mess created, and/or presided over, by successive National and Labour-led governments.

Eric Crampton and Oliver Hartwich at the New Zealand Initiative (bastion of quasi-libertarian public policy analysis) had been consistently pretty upbeat about Labour’s proposals, and particularly about the stated desire of (then housing spokesman, now Minister of Housing, Phil Twyford) to free up the urban land market and fix problems around infrastructure financing.  There was the famous joint op-ed in the Herald a couple of years ago.    I have never been sure how much the NZI people really believed Labour was committed to letting the market work, how much they simply wanted to reinforce that strand of Labour’s thinking with support from a business-funded body, and how much it was just about building relationships with a party that would, one day, no doubt be back in government.   Perhaps there was an element of all three?

As for me

I’ve liked the talk, but have been a bit sceptical that it will come to much.  In part, I’m sceptical because no other country (or even large area) I’m aware of that once got into the morass of planning and land use laws has successfully cut through the mess and re-established a well-functioning housing and urban land market.  In such a hypothetical country, we wouldn’t need multiple ministers for different dimensions of housing policy.  I’m also sceptical because there is a great deal local government could do to free up urban land markets, but even though our big cities all have Labour-affiliated mayors, there has been no sign of such liberalisation.    The Deputy Mayor of Wellington for example leads the Wellington City Council ‘housing taskforce”.  Paul Eagle is about to step into a safe Labour seat.   His taskforce seems keen on the council building more houses, and tossing more out subsidies, but nothing is heard of simply freeing up the market in land.  Or even of looking for innovative ways to allow local communities to both protect existing interests and respond, over time, to changing opportunities.

There was also the fact that any Labour government was likely to depend on Green votes in Parliament, and there was no sign the Greens were keen on land-use liberalisation.

And then there was little sign of leadership commitment.

Labour’s leader, Andrew Little, devoted the bulk of his election year conference speech to housing, complete with the sorts of personal touches audiences like.  Media reports say the speech went down well with the faithful…….

But in the entire speech –  and recall that most of it was devoted to housing –  there was not a single mention of freeing up the market in urban land, reforming the planning system etc.  Not even a hint.    I understand that giving landowners choice etc probably isn’t the sort of stuff that gets the Labour faithful to their feet with applause.   But to include not a single mention of the key distortion that has given us some of the most expensive (relative to income) house prices in the advanced world, doesn’t inspire much confidence.

It has been no different since Jacinda Ardern took over as leader.

Sure, as defenders point out, reform of the planning system does appear in Labour’s manifesto, and there was a brief mention in the Speech from the Throne.  But mostly what we hear about are the same, consistently emphasised, lines they’ve been running for at least the last year:

  • the ban on non-resident non-citizens buying existing residential property,
  • the extension of the brightline test (from two years to five years),
  • ringfencing, so that rental property losses can’t be offset by other income, and
  • Kiwibuild.

As well as measures to impose new higher standard on rental properties.  In practice, the new Tax Working Group also seems likely to be focused on housing-related tax issues (capital gains tax in particular).

Two things in the last few days reinforced my unease.

The first was the new “independent stocktake of the housing crisis” the Minister has commissioned.  Given that it was announced on 25 November, and is to report “before Christmas”, it is hard to believe that the group will come up with much new and different.  Probably, that isn’t even the point.

Here is how the Minister framed the work

“Shamubeel Eaqub, Philippa Howden-Chapman, and Alan Johnson are among New Zealand’s foremost experts on housing. Their insight will be invaluable.

“This report will provide an authoritative picture of the state of housing in New Zealand today, drawing on the best data available. It will put firm figures on homelessness, the state of the rental market, the decline of homeownership, and other factors in the housing crisis.

“The Labour-led Government is already pushing ahead quickly with initiatives to make housing more affordable and healthy, including banning overseas speculators, passing the Healthy Homes Guarantee Bill, cancelling the state house selloff, and setting up KiwiBuild. This report will help the Government refine and focus that work where it is most needed.

Each of the members has some expertise in aspects of housing, but none has any expertise  in –  or known sympathy with arguments for – freeing up land-use restrictions, and allowing the physical footprint of cities to grow readily as the population does.  And then there is the third paragraph –  the same old list of direct interventions, with nothing at all about liberalisation of the land market, even though it is vital if the long-term structural problems are to be effectively addressed.

Now perhaps the Minister will argue that planning reform is proceeding on a separate track, or even point to the responsibility of his colleague, the Minister for the Environment, David Parker.  But the fact remains that in all the talk about fixing the badly-distorted housing market there is little open emphasis on land-use law, nothing on reducing the price of urban land, and nothing on (finally) letting the market work effectively.

And then there was a substantial interview  the other day with Phil Twyford on interest.co.nz.   And it was much the same again.  There was plenty of talk of the coming tax changes and the proposed foreign ownership ban.  And there was great deal of talk about Kiwibuild.  There was reference to using Crown and Council-owned land in Auckland to build on.  But there was nothing at all, in the entire 23 minute interview, on reforming or freeing up the market in urban land.  There were defensive references –  it would be hard to produce ‘affordable” houses in the $500-600K range because land was ‘absurdly expensive” –  but nothing,  not a word,  about reforms that might effectively, and enduringly, lower land prices.

There was. of course, lots of talk of how “we have to build more houses”, but no attempt to seriously address the argument that, given land-use restrictions, there may not be any material unmet demand for houses at the prevailing price.   Talk about a shortage of 71000 houses –  or whatever the latest guess is –  is mostly nonsense unless the land market is fixed, and the price of land falls considerably.  At much lower land prices, I think there is little doubt that there would be more effective demand for housing –  and no obvious reason why the private sector would not meet that additional effective demand.  That would be a highly desirable outcome, but in his interview the Minister studiously avoided any suggestion of land prices falling.   And at current (very high, but currently stable) prices, there isn’t obviously any unmet effective demand in Auckland at present.

All the Minister’s talk seems to be of state-led projects to build more houses, including more ‘affordable’ houses, and more state houses.   In some cases, it seems, it will just involve the state participating in developments that were already planned.    But unless land prices are going to fall materially, it is really hard to see how any big increase in state-associated housebuilding isn’t going to largely displace private sector building that might otherwise have taken place.    For all the talk about building at different price points, and actually building more so-called “affordable houses”, houses are substitutable, to a greater or lesser extent.  A new small place on a tiny amount of land at, say, $600,000 (a price point which even the minister conceded would be a stretch) is going to be competing with existing houses in that price range in, say, Manurewa.  Perhaps additional state-led building can alter relative prices a bit but (a) if so, it seems likely too be only by use of government subsidies (the Minister indicated that the government will not be charging for the development risk, in a way that any private developer would need to), and (b) nothing about the underlying scarcity (regulation-induced) of land will change.

In their recent Monetary Policy Statement, the Reserve Bank indicated that it was assuming that half of the Kiwibuild activity displaced other construction.    They didn’t elaborate on that point, but I have an Official Information Act request in with them asking for the analysis they did in support of that assumption.

(Incidentally, while I am keen to see LVR restrictions come off –  since they never should have been put on –  it would be quite curious to see them beginning to be removed at just the sort of time when –  on government policy –  the risks around housing lending might increase quite considerably.   If the government is to be taken at its word, and we really are to see a massive increase in housebuilding, led by government initiatives rather than market forces – and at a time when many forecasters expect net immigration to be dropping away –  the risks of an oversupply of physical housing (as in Spain, Ireland and parts of the United States) would have to be considerably greater than they’ve been in recent decades.  Of course, weirdly, LVR restrictions have never applied to the most risky type of housing lending, that for houses being built.)

Two final points:

The Minister indicated, again, that one of the government’s motivations in its housing reforms is to “shift investment”, so that people don’t so much buy houses, as buy shares etc.  On this point, they seem as confused as ever.  If there really is a physical shortage of, say, 71000 houses and that is to be met over the next few years, there will have to be much more physical investment in building houses.  And someone will need to own those houses –  whether owner-occupiers, the state, or private rental businesses.  Real resources devoted to one use can’t be devoted to another use.  And, for any given stock of houses, it isn’t that evident that it is likely to make much difference to economic performance who (among New Zealand residents) owns those houses.  I’m all for home ownership, but if owner-occupiers buy houses (with large mortgages) it isn’t obvious why capital markets etc, or investment choices by businesses elsewhere in the economy, will be much different than if rental property owners buy houses (with large mortgages).

In his interview, the Minister was also lamenting large boom-bust cycles in residential construction, and suggesting that was part of the problem in New Zealand. I was a bit puzzled by that suggestion, and wondered if there was any evidence that the fluctuations in residential building activity were larger here than in other advanced economies.  It was possible they were –  after all, our population growth rates are quite variable, mostly because of swings in the flow of New Zealanders going to Australia.  So I dug out the data, for residential investment as a share of GDP, going back to 1995 (when complete data is available for most OECD countries).  This chart shows the coefficient of variation (ie the standard deviaton divided by the mean).

construction coeff of var

At least over this period, residential building activity (as a share of GDP) in New Zealand has been less variable than in the median OECD country, and far less variable than in the countries to the far right of the chart.  Over a longer period, back to 1970, there is no sign that New Zealand’s residential investment cycles have been larger or more variable than those in Australia or the United States.  Investment is variable –  typically the most variable component of GDP.  It is how market economies work.

Where does all this leave me?  With the new government’s apparent determination to continue to pursue a “big New Zealand” approach, without any material change to immigration policy, the need for additional housing will continue to grow largely unabated (tax changes and foreign ownership bans won’t make much more sustained difference here than they have abroad).   Perhaps the government has plans, currently kept quiet, for far-reaching land use reforms that will enable the market to meet changing demands, at genuinely affordable prices –  as happens in much of the US.  But at present it looks disconcertingly as though the centrepiece is going to be a government-led house building programme that (a) never gets to grips with the land issues, (b) will substantially displace private sector building, and (c) runs all the sorts of risks that government-led investment projects are often prone to.

Perhaps it will work. But it is hard to be optimistic at present.


UPDATE: An interesting piece from today’s Herald on the way land prices render even moderate intensification not really consistent with more “affordable” house prices in Auckland.

UPDATE (Friday):  Twyford speech on the government’s housing policy does nothing to allay any of the concerns in this post.   Land use reforms appear, a little cryptically, very briefly and near the end of the speech.



An underwhelming top 200

In last Friday’s Herald there was a weighty supplement headed “Dyanamic Business”, reporting/celebrating the results of the annual Deloitte Top 200 (companies that is) business awards.  It seemed to be an opportunity for mutual self-congratulation, bonhomie, and a bit of virtue-signalling thrown in as well (eg the MBIE-sponsored award for “diversity and inclusion”).  And a few oddities as well: the award for “excellence in governance” went to a company that is majority state-owned and subject to quite real moral hazard risks (see 2001), and I don’t suppose the Reserve Bank will have been best-pleased to see the chair of Westpac New Zealand Limited –  the subsidiary just last week subject to Reserve Bank sanctions for failures of governance –  as a runner-up the “Chairperson of the Year” stakes.

But what caught my eye flicking through the supplement was this table for the top 200 (non-financial) companies in New Zealand.

Annual % growth 2016/17
Revenue 4.3
Pre-tax profits -6.4
Tax paid 22.7
Assets -5.7
Equity 2.9

(Tax aside) those numbers didn’t look very impressive.  Total revenue was up 4.3 per cent (and the accompanying article says that in the previous year revenue actually fell).  Profits and total assets actually fell, and both EBITDA and total equity were up by 2.9 per cent.

And what happened to the whole economy?  The Top 200 numbers use the latest audited accounts of each company, so there is a mix of balance dates.   But in the year to June 2017 (the latest quarterly data we have), nominal GDP rose by 5.9 per cent.  The last annual national accounts came out late last week: on those numbers, nominal GDP has risen 6.2 per cent in the year to March 2017, and 5.1 per cent in the year to March 2016.   Against that backdrop, the performance of the top 200 companies was, if anything, surprisingly weak.

Big companies, in aggregate, doing less well than the economy as a whole needn’t be a concern.  It could, after all, be a sign of thrusting new companies surging ahead and displacing the tired old giants.  But there isn’t really much sign of that sort of process in at work in New Zealand –  see, for example, the tech sector.   And, of course, our overall per capita growth in real GDP (let alone productivity growth) has been pretty deeply underwhelming.

In a way, a simple list of the top 10 most profitable companies (dollar value of profits) is quite revealing:

Air NZ
Ryman Health
Kaingaroa Forest
Auckland Airport
Z Energy
Meridian Energy

Of those 10, we have four majority state-owned companies (one a natural monopoly), a chain of petrol stations, a property-boom play, and a co-op whose profits are largely driven by swings in global commodity prices.   There wasn’t much new or very dynamic about it.  In a way, the list of top 10 money-losing companies looks more interesting – in addition to Tasman Steel (No 1) and Kiwirail (No 2), it does feature Xero and Orion Health.

It is a very different list than, say, one of the top most profitable non-financials in the US, which does feature (relative) newcomers like Apple and Alphabet (Google) and where almost all the companies have a strong international focus.

I mentioned those new annual national accounts numbers.  No doubt I’ll be using the numbers in various posts in the next couple of months, but for now just a couple of charts.

I’ve noted in various recent posts the fall in the export share of GDP over recent years.  There was always the hope that some of that might have been revised away when the annual numbers were published.  But no.

X and M share of GDP

As a share of GDP, imports haven’t been lower since the depths of the recession in the year to March 1992.  Exports haven’t been lower, as a share of GDP, since the year to March 1976 –  more than 40 years ago.     There was, so it was claimed, a policy focus on increasing the outward orientation of the New Zealand economy.  If so, it failed.

And what of business investment as a share of GDP  (as previously, this is total gross fixed capital formation less government and residential investment)?

bus investment

It picked up a couple of years ago from recession-era lows, but has gone sideways since, and is nowhere the rates reached in the previous expansion.

When profit growth in our top 200 companies has been relatively subdued perhaps it shouldn’t be surprising that not very much business investment is occurring.   And those export/import numbers shown earlier strongly suggest that what business investment is occurring will have been disproportionately concentrated in the non-tradables bits of the economy, those that don’t (be definition) face much international competition.

Deloittes and the Herald might think this is a “dynamic economy” –  and I’m sure there are plenty of small exciting firms in it –  but once we stand back and look at the aggregate numbers the picture isn’t very encouraging at all.  If change is constant, the change here seems –  in aggregate –  to more akin to drifting slowly backwards.

That was the legacy of the now-departed National-led government.  That government’s policies were not, in relevant areas, materially different than those of the previous Labour-led government.    The worry now is whether there is any realistic basis for expecting something different, and better, from the new centre-left government.  At present, it isn’t obvious why the future should be any better than the performance over the last 20 years or so.



National single-handedly lifting parliamentary productivity

The Productivity Commission has been working on a report on state sector productivity, commissioned by the previous National-led government.    I’m not sure that everyone simply working harder was quite what they had in mind.

But judging by the number of written parliamentary questions lodged in the less than three weeks since the opening of Parliament, National Party MPs (and their research assistants) seem to be generating outputs at a record rate.   Outcomes –  the real focus surely –  might be another matter.

Parliament publishes an accessible record of all written parliamentary questions asked since 2003.   Here are the annual totals.

wirtten PQs annual

The Opposition (largest component being the Phil Goff-led Labour Party) was particularly active in 2010, lodging almost 40000 questions that year (almost all written questions are lodged by Opposition MPs), but in the average year around 17000 questions were asked.

It is an interesting contrast to the Australian Parliament, where a fact sheet records that on average in the last Parliament only 11.6 questions per sitting day were lodged.   Perhaps incentives matter:  in New Zealand, all written questions have to be answered, and within six working days.  In Australia, by contrast, there is no time limit.

In that earlier chart there is nothing unusual about the 2017 numbers.  At the moment the total is a little below average, but there are still four more working weeks of the year.  And here is a chart of the monthly totals back to just prior to the 2014 election.

PQs monthly

There are some zero months: around elections when Parliament itself is dissolved, and the Opposition parties seem to have given themselves (and those who have to answer the questions), a complete break each January.

But look at that total for November 2017: 6254 questions asked already.  The first question wasn’t asked until 8 November and it is only 25 November now.   With four more working days to go, they could yet hit 10000 questions for the (partial) month.   At anything like this pace, the 2010 record will be blown out of the water next year.

But one does have to wonder to what end?  The line from Macbeth “sound and fury, signifying nothing” was springing to mind, perhaps (one would hope) unfairly.

Every one of these questions –  even the really mundane ones –  have to be processed, by the Clerk’s office, by the relevant Minister’s office, and possibly by a government department.  Each one needs an answer prepared, and then submitted back through the system for approval and then lodging for reply.

And it isn’t as if this is a normal phenomenon immediately after an election or change of government.  In December 2008, for example, the first month of the new Parliament, only 619 written questions were asked.   In the two months after the 2014 election, a total of 2339 written questions were asked.

And what bits of vital government information are the Opposition MPs trying to ferret out of ministers?   Dr Jian Yang, a middle to lower ranking National Party MP, spokesman on Statistics, has been more active than the average Opposition MP: he has asked 147 questions so far (the average Opposition MP has asked “only” 110).    These are the five questions he asked on Thursday (he took the day off apparently yesterday)

What reports, briefings, memos or aide memoires did the Minister receive on 23 November 2017?

What meetings did the Minister attend on 23 November 2017?

What meetings did the Minister decline on 23 November 2017?

What events did the Minister attend on 23 November 2017?

What events did the Minister decline on 23 November 2017?

And the previous day he asked the same five questions about the 22 November. And the Minister of Statistics doesn’t actually do very much at all.  From what I could see, not a single one of the 147 questions was substantive.

Now I’m all in favour of open government.  I reckon Parliament itself should be subject to something like the Official Information Act, and there is a good case for making the diaries of ministers open (sunlight being a good disinfectant against undue influence etc).

But quite what is being gained by interminable questions of this sort (when there is presumably no suggestion of any particular inappropriate conduct)?   They aren’t all diary questions of course.  Shane Reti, another National MP, has 587 questions to his name.  A sample includes from yesterday.

Will the Minister commit to visiting NorthTec Rawene Campus in the first 100 days of office?

When was the last time the Minister visited the NorthTec Rawene Campus?

It all has the feel of a rather expensive fishing expedition in the expectations that if they ask enough questions something will turn up somewhere about something.  Another phrase for it might be “sheer waste of taxpayers’ money” (something perhaps the Taxpayers’ Union could get interested in.)  When people set out in pursuit of a political career, with the typical high-minded aspirations such people have, did they really think this is the sort of activity they’d be reduced to?

Meanwhile, I’m sure the public service (and ministerial staff) are fervently hoping for a breather in January.  But I’m not sure I like their chances.

UPDATE:  This post by Graeme Edgeler changes my impression somewhat.

A trans-Tasman banking union isn’t likely

What will happens if –  perhaps “when” if we take a long enough horizon – a major Australian bank fails isn’t at all clear.

We went through a phase of failures and near-failures a generation ago, after the post-liberalisation boom and (spectacular) bust.  On the Australian side, there were the failures (in effect, bailed out by governments) of the state banks of Victoria and South Australia –  the latter bank had operations in New Zealand.  Westpac –  operating as a single entity on both sides of the Tasman –  came under some pretty severe pressures.  And on this side of the Tasman, we had the failure of the DFC and the two episodes in the failure (again bailed out by the government, the primary owner) of the BNZ.  (In both countries, some new entrant foreign banks also lost a lot of money, but they weren’t really the problem of governments and regulatory authorities in Australasia).

In that episode (or succession of episodes), handling the failures (or threat of failure) was almost entirely a matter for the home authorities –  those where the bank concerned was based.  That was so even when there were substantial losses on the other side of the Tasman (eg many of BNZ’s losses were on the loan book it had built up trying to buy its way into the Australian market).

Things were easier and clearer in that episode.  In particular, the banks that actually failed were all government-owned (wholly or primarily) to start with.  And in Australia, the failures were of second-tier institutions:  we (fortunately) never got to see how a Westpac failure would have been handled.   And at the time, the New Zealand and Australian banking systems were also much less intertwined.   Westpac and ANZ had substantial New Zealand operations, but NAB and Commonwealth Bank were hardly here at all, and we had fairly large banks that weren’t active in Australia (the Lloyds-owned National Bank, Trustbank, Countrywide).  BNZ was the largest bank in New Zealand, but although the BNZ’s operations in Australia were important to them, they were not very important to Australia.   BNZ was clearly our problem.

These days, by contrast, our banking system consists of the operations of the four big Australian banks, state-owned Kiwibank, and the rest don’t matter much at all (whether retail or wholesale).  And for the Australian banks, New Zealand exposures are typically the largest chunk of the non-Australian assets of the respective banks.  In ANZ’s case, almost 20 per cent of the group’s assets are in New Zealand.  Our problems are their problems, and their problems are our problems.

But the interdependence isn’t symmetric: not only is Australia much bigger than New Zealand, but all the banks are (ultimately) Australian-owned and based.     Things would look rather different if, say, one of the four big Australasian banks was owned and based here.   And our legislative approaches are different too: Australian had explicit statutory preference for the claims of Australian depositors (and, more recently, deposit insurance, but that is a different issue), while under our legislation all creditors are treated equally.   That longstanding depositor preference rule was one of the main reasons why some years ago (it must be getting on for 20 years now) we insisted that the local operations of Australian banks taking material amounts of retail deposits had to be locally incorporated (ie operate through a New Zealand subsidiary).  The proceeds of the New Zealand subsidiary’s assets were to be available to meet its own explicit liabilities, not just be part of a wider trans-Tasman pool.

On paper, the New Zealand subsidiary is pretty fully separable from the parent.  Should the whole banking group fail, New Zealand authorities can decide how to handle the New Zealand subsidiary independent of what the Australian authorities decide (although in both countries, legislation commits each country to take account of the financial stability interests on the other).   If the subsidiary also failed we could choose to bail it out, or not.  And if the subsidiary was strong, even though the parent was in trouble (say there had been a particularly severe shock specific to Australia), the subsidiary would be capable of keeping on operating here.   That separability comes at a cost, but it might well be technically workable.  In principle, we could apply the OBR mechanism to the (failed) New Zealand sub of an Australian bank (the stated preference of the Reserve Bank and the previous government) even if the Australian government bailed out the parent (the generally expected approach under successive Australian governments).

In practice, it isn’t very likely.   And everyone in the relevant government agencies on both sides of the Tasman knows it.    Should the whole of a banking group be in trouble, it is much more likely that the Australian government will push (very strongly) for a bail-out of the entire group, and will put a great deal of pressure on the New Zealand government to contribute to such a bailout.     What is their leverage?  Well, on the one hand, there are always large numbers of issues on the boil between the two countries at any one time –  don’t play ball on something that really matters to Australia, and we’d find ourselves exposed to bad outcomes in some other areas, and damaged relationships over time.  And on the other hand, there would be straightforward domestic political pressure here: how likely is a New Zealand government to let the depositors of ANZ New Zealand lose money, while the news headlines tell of the Australian government bailing out in full those of ANZ Australia?    And from the Australian perspective they won’t want a major subsidiary, carrying the same name, failing, even if the Australian operations themselves are ringfenced –  the headlines won’t look good with the investor base in New York, London, or Tokyo.

In sum, it is much more likely that if one of the major Australian banks fails, (a) it will be bailed out at a group level, and (b) there will be a great deal of pressure for New Zealand to participate in a bail-out in some form or other.  The details will be haggled over at the time, under intense pressure, and with active high-level political engagement.   Australia, for example, would probably prefer we put in money to help recapitalise at a group level (while the parent then recapitalises the NZ sub).  Our authorities might prefer a clean break in which we took, and recapitalised the sub, and had control over what happened down the track.  What actually happens would depend on, inter alia, the key individuals at the time, the wider state of political relations between NZ and Australia,  perhaps where the source of the failure primarily lay (NZ-centred losses or not), on the global environment, and on whether this particular failure was perceived to be idiosyncratic, or potentially the first of a sequence.

One of the issues the Europeans (in particular) have been grappling with since the 2008/09 crisis has been the ability –  fiscal capacity –  of single countries to stand behind (“bail out”) large international banks that are based in their countries.   It isn’t really an issue in the United States (for example) where the banks are not that large (as a share of GDP) and the country itself is big.  It is potentially a different issue in, say, Switzerland or the Netherlands –  and since the crisis, the Swiss authorities have been taking steps to lower the relative size of the international banks based in their country.

One of the academics who has done a great deal of work in this field is Dirk Schoenmaker, of the Rotterdam School of Management, who has been in New Zealand for the last couple of weeks as the Reserve Bank/Victoria University professorial fellow.  When the Reserve Bank has these visiting fellows, Treasury tends to “free ride” and use the opportunity to host a public guest lecture by the visitor (which used to annoy me a little when I was at the Bank –  it was our money funding the visit –  but for which I’m now grateful).

Last Friday, Schoenmaker gave just such a lecture at The Treasury on exactly this issue: can small countries cope with international banks based in their country, and the risk of them failing.  His published paper on the issue is available here.   This is from his abstract.

While large countries can still afford to resolve large global banks on their own, small and medium-sized countries face a policy choice. This paper investigates the impact of resolution on banking structure. The financial trilemma model suggests that smaller countries can either conduct joint supervision and resolution of their global banks(based on single point of entry resolution) or reduce the size of their global banks and move to separate resolution of these banks’ national subsidiaries (based on multiple point of entry resolution). Euro-area countries are heading for joint resolution based on burden sharing, while the United Kingdom and Switzerland have implemented policies to downsize their banks.

This is his trilemma


You can, he argues, have any two of these dimensions but not all three if you are a small/medium country.   That reasoning seems sound.  I’m less sure about what follows from it.

First, what can individual countries afford to do (as bailouts) if they want to?  Schoenmaker does quite a bit of analysis of the last series of crisis (2008 and after) and concludes that the most any country can really spend on a bailout is 8 per cent of GDP.    This is his chart

schoenmaker.pngAs he notes, the first four countries on the left of the chart couldn’t cope themselves and needed either IMF or EU support, and Spain also needed external assistance.  But all these countries were in the euro-area, and thus not only lost the capacity to adjust domestic interest rates for themselves, but also couldn’t do anything to adjust the nominal exchange rate.  By contrast, the UK’s bailout costs –  not that much lower than Spain’s –  never ever raised any serious questions about the UK’s fiscal capacity.  And that was with a far higher starting level of public debt (as a share of GDP) than, say, Ireland had.

So his analysis looks to be quite useful in an intra euro-area context.   Belonging to the euro –  whatever advantages it may bring –  involves a substantial sacrifice of national flexibility in a crisis.  And so the logic of the direction Schoenmaker is calling for –  and which the Europeans are moving gradually towards –  involving (at least for big international banks) unified supervision and loss-sharing  (across national boundaries) in the event of failure and bailout, seems to make quite a lot of sense.  If I were Dutch, I’d probably be rather keen on the idea.

But Schoenmaker also argues that the model is directly relevant to this part of the world.  In particular, he shows a table in which the cost of recapitalising (ie replacing existing capital) of the three largest Australian banks (he uses the top-3 banks in each area he looks at) would be around 7.6 per cent of GDP.  That is close to his 8 per cent “fiscal space” threshold, and thus he argues that Australia may be only barely able to cope with a systemic financial crisis in this part of the world.  Part of that recapitalisation burden would, on these numbers, include the overseas operations, the largest of which are typically in New Zealand.

Schoenmaker has written a new paper specifically on the idea of a possible trans-Tasman banking union.  It is still in draft, and isn’t yet available on his website, but he has given me permission to make it available here.  Schoenmaker on Trans-Tasman Banking Union

It is worth reading, both for the coverage of the ideas, and because the current draft already incorporates comments from Wayne Byres, the head of the Australian Prudential Regulatory Authority (APRA).

I don’t really buy the potential fiscal incapacity argument in either Australia or New Zealand.  Both countries have very low levels of public debt (Australia’s even lower than our 9 per cent net government debt, properly defined), and plenty of capacity for the exchange rate to adjust in a crisis (not just against each other if necessary, but against the wider world).  Neither country is hemmed in as (say) the Irish were –  “prohibited” by various EU agencies from allowing any private sector bail-in, even of wholesale creditors, in the midst of the crisis.

But set that to one side for the moment, how might his proposed trans-Tasman banking union work?  And why is not likely at all to be established?

Schoenmaker doesn’t set out precise details in his paper, but from his various papers and presentations it is clear that he draws an important (and correct) distinction between non-binding memoranda of understanding and the sorts of binding pre-committed burden-sharing arrangements he is talking about.  As he notes, there is a lot of contact between New Zealand and Australian officials in this area, culminating in the Trans-Tasman Banking Council (TTBC).  There is probably a fair amount of goodwill, statutory provisions to encourage looking out for each other, and the various agencies even “war-game” crises from time to time.  But none of this commits anyone (or their political masters, who change) to anything in a crisis.  In crises –  as in 2008/09 –  it is largely every country for itself.

And so what he seems to envisages is a binding treaty entered into by the New Zealand and Australian governments, under which a common set of supervisory standards would be applied (at least to the big banks operating in both countries), and the two countries would agree in advance on a (binding) formula for the allocation of losses in the event of failure (and bailout).  As he notes, roughly 87 per cent of the big-4 assets are in Australia and other places, and 13 per cent are in New Zealand.  In this model, New Zealand would commit to 13 per cent of any bailout costs, enabling resolution issues to be handled jointly (by a single agency accountable to both governments/Parliaments).  On the European model (ESM), this single agency could even be given the ability to borrow to meet recapitalisation costs.  Under this sort of model, Australia would (presumably) get rid of depositor preference, and we would get rid of local incorporation requirements for Australian banks.

One can, sort of, see why something along these lines might, on the right terms, appeal in Australia.   There was long been a strand of thinking in Australia that we are (a) free-riders, and (b) more than a little crazy.  In other words, so the argument goes, the soundness of our banks mostly depends on robust APRA supervision at the group level (“after all, the RBNZ doesn’t do any ‘real’ supervision at all”).  And, as for OBR, well “you can’t really be serious, can you……..?  We hope not…………”  So from an Australian perspective, arrangements that tied us into a pre-commitment to share the cost of bailouts would be a win –  a (pretty modest) fiscal saving, but removing the uncertainty that perhaps the crazy New Zealanders might actually use OBR and thus (in some thinking) further damage the wider banking group.

But on what terms would it be attractive to Australia?  Presumably terms on which the Australian authorities got to determine, finally, what banking regulatory standards were applied, and what action would be taken at the point of (actual or impending) failure.  New Zealand might be represented on a regulatory agency board, but with 13 per cent of the financial contribution, it might perhaps get 13 per cent of the vote.  13 per cent of the vote on a two-country entity is no power at all.

When I asked him, Schoenmaker suggested that perhaps the arrangement would have to be one in which New Zealand had a veto.  If so, it would rather dramatically change the nature of the arrangement –  more attractive to New Zealand, but (almost surely) totally unacceptable to Australia.  Is it even possible to conceive of an arrangement under which an Australian government would commit, by treaty, to giving New Zealand a veto on (a) bank supervisory policies, and (b) crisis resolution?  I wouldn’t if I was them.

And even if, somehow, such an arrangement were put in place in a mutual fit of bonhomie and trans-Tasman togetherness, there is no certainty that it would be honoured in a crisis (perhaps by then under different –  more mutually distrustful politicians).     This was the big point on which Schoenmaker and I differed at his seminar.  I argued that if, say, New Zealand wanted to let the bank fail and Australian wanted to bail them out then whatever the treaty said, Australia could –  and probably would –  just do so anyway.  Sure, there might be a binding treaty with dispute resolution provisions, but they would take years to get to a determination (think of the WTO disputes) and the crisis needs dealing with tonight.   Schoenmaker argues that it just doesn’t happen, but (a) we don’t have examples in banking crisis resolution, and (b) his mental model is one of the EU where there are (i) lots more countries, not just one big one and one small one, and (ii) a shared elite commitment to working towards political union.  There is nothing similar here.

Perhaps the Australians wouldn’t renege, but we’d have to take account of the possibility.  And with all the banks based there, not here, the issues and risks aren’t remotely symmetrical.  If, one day, New Zealand and Australia are working towards a political union, something along the lines of what Schoenmaker suggests might well be one part of that progress.  For now, it isn’t an idea that is likely to go anywhere, and nor should it go much beyond the seminar room (and any associated public debate).

If it doesn’t happen, Schoenmaker warns that we may well find ourselves on a path that will eventually make the Australian parents reconsider the benefits of operating in New Zealand at all.  As he notes, in eastern Europe many countries are putting up higher and higher barriers (eg very high capital requirements) to assure themselves of an ability to manage foreign-owned subsidiaries of western banks in a crisis.   If it were to come to that point in New Zealand, I personally think it would be unfortunate (we gain from having at least modestly-diversified banks), but it isn’t clear that New Zealand voters would necessarily see it the same way.  And if the two countries really wanted to deal with the potential costs of high New Zealand local capital requirements, they (Australia) could at last do something about mutual recognition of trans-Tasman imputation credits.  The inability/unwillingness to resolve that issue after 30 years is a salutary reminder of why we should not count on being able to easily pre-specify rules for handling a major economic and financial crisis hitting the two countries.  Crises, and loss allocations in particular,  are almost inherently nationa, and –  for now anyway –  these two nations aren’t merging.

(And, of course, the politics of banking in the two countries remains quite different.  We weren’t the country that almost nationalised the banks in the 1940s, and –  whatever the unease in some quarters now about Australian domination of the banking system –  we aren’t the country where the possibility of a Royal Commision into banking –  to what possible substantive end –  is in the headlines day after day.)

(There was an attempt by the Australians to take over all supervision back when Michael Cullen was Minister of Finance.  Alan Bollard –  rightly in my view –  fought back strongly and eventually persuaded the government not to accede to the Australian government bid.  Much of the reason for resistance comes down to the ability to manage crises in the interests of New Zealanders.)