The new government is setting up a process to review the Reserve Bank Act, including – but not limited to – giving effect to Labour’s campaign promises to introduce some sort of employment objective to the Reserve Bank Act and to create a statutory committtee, including external appointees, to take OCR decisions.
It is a once-in-a-generation opportunity to reshape the central bank, a key policymaking (and implementing) institution in our economy and financial system. As the Minister has pointed out, the current Act was written almost 30 years ago. Lots of things about monetary policy, and the wider role of the Bank, turned out differently that was expected, or perhaps hoped for, thirty years ago. Little about the New Zealand system has been followed by other countries who’ve reformed their central banks in the years since.
Of course, the bureaucrats at the Reserve Bank (“the old guard” as Bernard Hickey described them last week) aren’t keen on change at all. Bureaucrats rarely are. For years they have been successful in keeping secret their preferences – Graeme Wheeler refused to release any of the work they’d done on reform issues and options a few years ago – but last week they went public. Unlawfully appointed “acting Governor” Grant Spencer, and his deputy – and declared candidate to be the next Governor – Geoff Bascand, used the platform of the Monetary Policy Statement press conference to outline their opposition to change – or at least to any change that might diminish the power of Reserve Bank management (ie them, or people like them).
Spencer loftily declared that, of course, they weren’t opposed to a committee. In fact, they supported one. But, in his words, they already had a committee, they thought it worked well (perhaps unsurprisingly since they are members of that – purely advisory – committee), and would be happy to see it established in law. But, asked about outsiders on the committee – something the government had promised, both in the Labour Party campaign, and in the Speech from the Throne the previous day- Spencer was very wary. How, he wondered, could we sure of finding enough suitable people without insuperable conflicts of interest? (How, I wonder, do we manage with almost every other agency of the state?) Worse still was the idea that the members of any new Monetary Policy Committee might individually be held to account, and their views on the OCR be known to the public. Why, Spencer declared, it could turn into a “circus”, with much too much focus on monetary policy – as, he asserted, it had in some other countries. Bascand worried that people might focus on the views of members of the committee, not on the issues “the Bank” wanted to focus on.
It was like some sort of blast from the past. Many bureaucrats, for example, hated the idea of the Official Information Act too. Open government is an anathema to most. But of considerable benefit to citizens. Not one of the three “old guard” sitting at the top table at that Reserve Bank press conference has ever shown any serious or sustained interest in open government, especially as it applies to the Reserve Bank. They are, in practice, devotees, to the “cult of the expert”, in which the public is told only what the “wise experts” determine they should know. Thus, our Reserve Bank will happily tell you what they think the OCR will be in 2020 – by when the decisionmaker will have changed, and the PTA and Act too – but they fight tooth and nail, too often with the support of the Ombudsman, to keep secret their current deliberations, current analysis, or the advice the “acting Governor” receives on current monetary policy. It is tidy, to be sure. Open government isn’t – in fact, it is often a bit messy. But it benefits citizens, and over time actually makes for better government institutions and policies as well.
As I noted the other day, despite claims that an open central bank could turn into a “circus”, neither Spencer nor Bascand has offered any evidence in support of their claim. There are aspects of how central banks work in other countries that, at times, career central bankers don’t like. But the interests of career central bankers and bureaucrats and those of the public don’t necessarily overlap much, if at all.
Each country has its own system, with its own idiosyncracies. Many of those provisions aren’t – and probably shouldn’t be – written into law. Institutional cultures need to evolve.
But in Canada, they manage to run an open programme of research and dialogue as part of each five-yearly review of the inflation target. In Sweden, members of the monetary policy decisionmaking board can, and do, articulate their views, not just in speeches around the decisions, but in substantive records in the minutes. At the Bank of England, the Governor has been willing to be out-voted (and for that to be in the published minutes), even to vote differently than his own senior executives (some of whom are members of the Monetary Policy Committee). The Bank of England runs a staff blog that, at least at its foundation, was sold as an opportunity for staff to challenge established orthodoxies (it is a good blog, although it never quite delivered on that – unrealistic promise). In the United States, senior researchers have been free to publish papers and books that disagree quite strongly with the way the Fed has run monetary policy. The Atlanta and New York Feds have competing, and published, nowcasting models of current GDP growth. John Williams – head of the San Francisco Fed – was not long ago out in public suggesting that the Fed shift away from inflation targeting, towards something more levels-focused. As I noted then
I’m not persuaded by Williams’ case, but what struck me is how open the system is when such a senior figure can openly make such a case. The markets didn’t melt down. The political system didn’t grind to a halt. Rather an able senior official made his case, and people individually assessed the argument on its merits.
The FOMC doesn’t publish minutes as detailed as those of the Riksbank, but voting members can record their dissent from a majority decision, and they (and other regional Fed heads) can and do use speeches to articulate their own thinking about the economy and monetary policy. It is rarely, if ever, as explicit as “I’ll be voting for a 25 point increase at the next meeting”, but outlining how that particular person thinks about the economy, the risks, and perhaps the challenges/opportunities the Fed faces.
My impression – and I’ve kept an eye on these things for a long time – is that the Swedish, British and US system all work well. I’ve heard current and former Governors of some of these places moan about the systems, and individuals – Stefan Ingves of the Riksbank, who was famously wrong in his disagreement with Lars Svensson, was here only about three years ago. But since the whole point of dispersed, and open systems, is to limit the power of a single Governor, that unease should more likely be seen as a feature than as a bug. Same goes for the claims of Spencer and Bascand here.
There have been concerns – again from internal career people – that externals on Monetary Policy Committees may use the visibility of a public platform to pursue their next career opportunity. This was strongly asserted of one particular member of the Bank of England MPC in its early days – a member who made life difficult for the Bank of England management.
It is, probably, a bit of an issue. But it is no less so for management people. I”m old-fashioned enough to think that Governors of the Reserve Bank (like Prime Ministers)should retire, and settle for gardening, charity work or whatever. But it isn’t the way public life now runs. Don Brash was on the board of our largest bank just a few years after ceasing being Governor, Ben Bernanke makes large amounts of money from his new roles in the financial sector, Glenn Stevens has just signed-up as adviser to a macro hedge fund, and if I recall rightly when Graeme Wheeler announced he wasn’t seeking a second term as Governor he indicated that he had always planned to do only five years and then to step back into Board roles. There is empirical evidence that the prospect of the “next job” has, at the margin, influenced monetary policy decisions that central bankers have made, and real concern that it can affect regulatory policy decisions. These aren’t just issues for central banks – and they certainly aren’t just issues for part-time external members of policy boards.
And the other issue that often gets raised is the potential for “confusion” or heightened market volatility. The public, and markets, just won’t (it is suggested) be able to cope with differences of view in plain sight. Strangely enough, they seem to in other countries. There is no evidence I’m aware of suggesting that market conditions are less volatile here because we have a secretive monolithic central bank, but if such evidence exists perhaps the Bank could publish it, or point us to it. If anything, there is a possible counter-argument (which I wouldn’t want to make much of) that if it is known that a variety of voters on a monetary policy committee have different views, and different (explicit or implicit) models, and if those views are being updated in public periodicially, market adjustment might be easier and less disupted than being restricted to a six-weekly decree from the mountain-top. As I say, I wouldn’t want to make much of that argument – open government is good in its own right, and seems to work (in central banks) in various other democratic countries – but it is just to note that the argument doesn’t run all one way, even on this narrow point.
The “acting Governor” attempted to back his opposition to any sort of open acknowledgement of differences of view – on a subject where, the Bank rightly and regularly reminds us, there is huge uncertainty – by comparison with the Cabinet.
Cabinet collective responsibility has, historically, been an important part of our system of government. In ye olden days – ie before MMP – all our government ministers were, without exception, from a single political party. They were elected on a common platform and, even if there were intense rivalries among them, they expected to seek re-election on a common platform. These days, of course, we have often have ministers outside Cabinet who are representing parties not considered part of the government, and those ministers – not having a common programme – are not bound by the conventions (which is all they are) of Cabinet collective responsibility.
But even if Cabinet collective responsibility is one legitimate model, it is hardly the only one. In Parliament, for example, laws are debated and passed, and who voted for the law and who voted against it is no secret. MPs lobby, and are lobbied, give speeches, go on disagreeing after the final vote, but the law is the law. The authority and robustness of the law is not diminished by robust open debate. If anything, it is the alternative that would worry us – the Chinese People’s Congress anyone? Our local authorities mostly debate things openly – majorities win, minorities lose, and life goes on. And talking of the law, no one seems to think it a problem, that a bench of judges on the Supreme Court will often divide 3:2, and the Chief Justice might well be on the losing side. Dissenting views can be, and typically are, properly documented and made available.
And it is worth reminding ourselves the nature of the OCR decisions. They aren’t once-for-all decisions, but ones that are revisted every couple of months, precisely because new data come available, and what to make of that data remains very uncertain. There are, often enough, no self-evidently “correct” answers. It is the sort of climate in which good decisionmaking is likely to be advanced by as open an approach as possible, and public confidence in the quality of the decisionmaking is likely to be advanced by the ability of citizens to assess the arguments (and the quality of the argumentation) of those given statutory power to make these decisions. Truth doesn’t simply flow from the Reserve Bank to the public.
And the open approach seems to work in a variety of other countries. It isn’t the only approach that can work. But it does work, without obvious problems, in Sweden, in the UK, in the United States, three otherwise quite different countries. There is no reason why it shouldn’t work here.
How might a reformed Reserve Bank work in respect of monetary policy?
- The (monetary) policy targets should be set by the Minister of Finance in each year’s Budget (essentially the UK system),
- all members of the statutory Monetary Policy Committee should be appointed directly by the Minister of Finance (the Australian system),
- all members should be subject to confirmation hearings at Parliament’s Finance and Expenditure Committee. Members would not be subject to parliamentary ratification, but the committee could publish any serious concerns it hard (essentially the UK system),
- probably a five member committee (Governor, a Deputy Governor, and three non-executive members), with all members having overlapping five year terms (the Swedish system has a majority of external members),
- a statutory requirement to publish the minutes of MPC meetings, including the numerical vote on any OCR decision, within two weeks of the meeting date (publication of minutes, on a timely basis, is now pretty standard),
- publication of all the background documents for each monetary policy decision within two months of the relevant policy annoucement,
- no statutory prohibitions on the ability of individual members to make speeches or give interviews on monetary policy matters (pretty standard these days).
On that final bullet point, I don’t think this is a matter for statute, and it is something the new Monetary Policy Committee should work out for themselves over time. Institutional cultures need to be able to be able to evolve. Having said that, I would strongly favour a more open approach – of the sort that works well in several countries abroad – and would encourage the government to appoint people (as Governor and as committee members) who are committed to building an open institution, and yet who can engage effectively, and with mutual respect, with each other.
I’d also establish a statutory provision allowing the Minister of Finance to appoint an external reviewer perhaps every five years, to encourage periodic independent external review of how the system is working, and of how the Bank has been conducting monetary policy.
Many of the issues are about culture rather than statute, but I would hope that the new Governor will look carefully at encouraging staff to engage more openly on policy and analytical issues. Blogs have been adopted by several overseas central banks, but the precise vehicle is less the issue than the cultural change that should be encouraged.
None of this sketch outline should be considered as the details of what I might recommend to the government’s review when it gets underway. There are lots of fine-grained details to consider in reshaping the statutory provisions around monetary policy, and quite a few interdependencies among them (let alone interdependencies with other functions, and issues around what – precisely – an MPC would and wouldn’t be responsible for). If they invite proper submissions, I will make one – and publish it – but my point today has really just been twofold:
- open systems work well in various other countries – including countries with central banks that are at least as well-regarded (generally better in my view) than our Reserve Bank, and
- to sketch out a set of arrangements that look as though they could be workable for New Zealand and which could, with goodwill and the right people appointed, deliver us a more open, more effective, and better-regarded central bank for New Zealand.
And to suggest that, no matter how genuinely Spencer and Bascand might believe their points in opposition to serious reform, the views of the Reserve Bank “old guard” are best seen as (predictably) serving the interests of Bank management, rather than those of the public, and shouldn’t be taken very seriously unless they can advance much more evidence (than the zero so far) of the sort of potential problems the sorts of open systems that work well in other countries might credibly pose.
It isn’t clear how committed the government is to serious reform. But they have an open opportunity to put in place something much better and different, more suited for this generation. Doing so will require good laws and good people. I hope they don’t let the opportunities – on either front – slip by.