We’ve had talkative new central bank Governors previously. Shortly after Don Brash took office people took note of the way he was commenting pretty freely on a lot of issues. Tom Scott captured it this way.
If the latest new Governor is really keen on transparency and openness on things he has responsibility for, I could readily offer a list of suggestions (well short of webcasting MPC deliberations). He could, for example, publish (with a short lag)
- the minutes of the Governing Committee meetings in which he makes his OCR decisions,
- a summary of the written advice (recommendations and risks) he gets from his internal Monetary Policy Committee, and
- the background papers generated internally in the process of deciding on his forecasts and OCR decisions.
On the latter point, I’m still engaged in an appeal to the Ombudsman to get hold of the analysis the Bank used last November in making written (but not substantiated) Monetary Policy Statement comments about the macroeconomic impacts of various of the new government’s policy initiatives. To be clear, there was no problem with them making comments – things like Kiwibuild should affect demand pressures and thus the near-term inflation outlook – the issue was the lack of detail, and the refusal then to release the background papers.
Perhaps the new Governor will take steps along these lines. We have not yet seen an OCR decision on his watch, and journalists must already be relishing the first scheduled Orr press conference next month, given his readiness to comment at length on all matter of things that are no part of the responsibility of the Reserve Bank. It is great that he is fronting up to the media – in a way quite unknown during Graeme Wheeler’s term – but is there anything about which he will say, if asked, “well, that isn’t really something that would be appropriate for me, as central bank Governor, to comment on”? There has been no sign of such restraint so far.
I wrote on Friday about the Governor’s interview on Radio New Zealand. In a comment to that post, one of my former colleagues described it as
I thought it was rather a good one – compared with many of the media beat-ups about this and that with which we seem to be currently afflicted. And refreshing to hear interesting perspectives about the need for coherent approaches to our strategic directions, and the risks associated with longer term structural adjustments in several dimensions.
As I noted in response, if you didn’t know who the interview was with, there was no particular problem with the content (reasonable people can have quite different views on the substantive issues and we benefit from debate). Had it been an interview with think-tank person, an academic, a journalistic commentator, or even a retired Governor or Secretary to the Treasury, it might have been a welcome addition to the ongoing dialogue on important economic and social issues.
But it was the independent Governor of the central bank, banging the drum for a whole lots of causes where his words will have been music to the ears of the current government, on issues where (even if he may have some personal expertise/experience on some of them) the Reserve Bank has no responsibility, and no institutional expertise. It would have been almost as bad if he had been taking the opposite position on those issues, or advocating a bunch of right-wing causes. And I only say “almost as bad”, not to take a view of the merits of those issues, but simply because at least if Orr was overstepping the mark on the right-wing side, there would have been no suggestion that he was trying to butter-up the current government – championing many of their causes – in a year when he has a lot of turf battles to fight and win. There are all the legislative details of the Stage 1 changes to the Reserve Bank Act, and the subsequent provisions of the Charter, let alone Stage 2 where if things go badly for the Governor he could find his powers very greatly reduced – or indeed find the regulatory/supervisory functions split out of the Reserve Bank altogether. The decisions the government finally makes are more likely to go the Governor’s way if the government finds him useful, supportive, and generally agreeable.
I don’t suppose that there is anything dishonest in what the Governor is saying. I presume he is quite as left-liberal (“a passion for issues such as social equality, diversity and the environment”) as his comments and journalists’ accounts of interviews suggest. But the personal politics – views on all manner of other issues – of the Governor shouldn’t be relevant to his conduct in office, and shouldn’t be on display at all. It isn’t just the Governor: the same goes for the Commissioner of Police, the Chief Justice, the Chief Electoral Officer, the Ombudsman, the Parliamentary Commissioner for the Environment, the Auditor-General, the Inspector-General of Intelligence, or whoever (let alone heads of government departments). When the personal politics of any of these people is on display – on issues for which they have no official responsibility – it degrades the office, and diminishes the likely general respect for the office-holder (even as the groupies of one side or the other mostly welcome the support). It also complicates the ability of the office holder to serve a government of a different stripe: Orr, for example, has a five year term, only half of which is before the next election. It isn’t a role where the holder simply serves at the pleasure of the government of the day.
The Governor’s garrulity was on display again yesterday in a fairly short pre-recorded interview on TVNZ’s Q&A programme. This time the topics weren’t climate change, sustainable farming, or infrastructure finance. Instead, this interview covered capital gains taxes and the Australian banking royal commission. Whether or not a capital gains tax is a good idea isn’t really a matter for the Reserve Bank. It is a (highly) political choice, with various technical tax policy perspectives offering reasons why one might favour such a tax or oppose it. As the Bank itself has previously noted, there is no evidence that whether or not one has a CGT makes much difference to the housing market or house prices. Now, to be fair, the Governor didn’t specifically say he favoured a CGT, but at the end, having attempted to suggest that there were relevant financial stability dimensions, he observed “we need a more efficient level playing field around tax”, to which Corin Dann responded – with no objection from the Governor – “I’ll take that as a yes”. Perhaps he should have gone on to ask the Governor whether the “level playing field” he favoured – with no actual responsibility for tax policy or the housing market – included the family home in his CGT. (Incidentally, in both the Q&A and Radio NZ interviews I heard the Governor suggest that 90 per cent of household net worth is in housing. He is quite wrong about that. The numbers are on his own institution’s website.)
Then there was the matter of the Australian Royal Commission into banking, and the question of whether such an inquiry was required here. To be clear, the Australian Royal Commission was ordered by the Australian government, under intense political pressure. It had – and has – almost nothing to with the financial soundness of the banking system, or any of the sorts of issues the Reserve Bank of New Zealand has responsibility for in New Zealand. It seems to be mostly about consumer protection (and abuse) issues. So what possessed the Governor to declare that we don’t such an inquiry in New Zealand? It isn’t his responsibility – either formally (it is for the government to set up Royal Commission) or even covering the Bank’s policy ground (the “soundness and efficiency of the financial system’). He went on to declare that the banking culture in New Zealand is “infinitely better than in Australia” – one might hope so, but given that they are mostly the same banks, and several are or were until recently headed by New Zealanders, you have to wonder what evidence he has for that belief. The substance of the issue – abuses in the Australian banking system etc – isn’t one I focus on, and so I don’t have a view on whether we need an inquiry or not (although the final Australian report could shed light on that). But quite how, three weeks into the job, the Governor can express so much confidence in the Reserve Bank, the FMA, and MBIE in dealing with such issues – “all over them, every day” was the flavour – is a bit beyond me. Perhaps he could look into the approach to such things of his own Deputy.
There are, of course, plenty of cases where central bank Governors overstep the bounds in their comments – it is common enough to prompt Willem Buiter to write the paper I linked to on Friday – but few with quite the degree of abandon of our new Governor. For his own good, and that of the institution and New Zealand public life (avoiding the politicisation of key institutions), he needs to be reined in. In one of the Stuff profiles on the new Governor he observed
The problem was finding something which suited his temperament.
“I am certainly attracted to wanting to make a difference.”
He is also attracted situations involving drama and excitement.
“Being a ginger, I tend to run towards the fire, rather than away from the fire.
Sounds like the sort of character that would suit many roles. It doesn’t naturally sound like a Governor of a central bank. Central banking – monetary policy and financial stability – done well should be boring (and not very politically divisive). The image I often used to use was of the fire brigades at airports. In an ideal world, if you ever give it a thought you take comfort from knowing they are there, but you don’t expect to hear from them, and hope they are never needed to do much. The parallel isn’t exact, but I’d argue it is closer to the ideal than a garruous Governor sounding off on every policy question some journalist happens to ask. If he continues as he is starting, the value of his words will be greatly devalued. And that would be a shame.
The Governor and the Minister of Finance should also give some thought to how the communications style the Governor is adopting fits with the approach to communications that the Minister announced a few weeks ago. In that announcement, the Minister indicated that he would be legislating to establish a statutory Monetary Policy Committee, in which the Governor would have a majority of insiders, a role in appointing the outsiders, and in which
The Governor will chair the MPC and will be the sole spokesperson on its decisions.
Other MPC members are not be allowed to give speeches or interviews offering their own perspectives.
The Reserve Bank’s stance has been that if individual members were free to speak (as they are, say, in the US, UK, and Sweden) and are individually accountable for their advice and votes), it would be a “circus” (though as Bernard Hickey points out, this example is hardly evidence of something wrong with the system). At present, legally, the Governor is speaking only for himself – as the sole lawful decisionmaker – but soon, at least on monetary policy matters, he will become no more than first among equals. Even at present, there is a real risk that the Bank’s messages on monetary policy and financial stability – including the crucial ones about the limits of what Bank policy can do – will be drowned in a cacaphony of comment on all manner of things, that commentators will come to assume it is normal for the Governor to comment on. I’d welcome the open contest of ideas, and evidence of a range of views, on the appropriate path of interest rates, or how best to build monetary policy space for the next recession. I’m not sure it would wise to have one – let alone six – members of the MPC all offering their thoughts on climate change, the merits of a CGT, or whatever. It is time for the Governor to stop and reset – and for the Board and Minister to have a quiet chat, and encourage the Governor to think again.