Very unwise and quite inappropriate

That was my immediate reaction yesterday when someone asked my view of Reserve Bank Governor Adrian Orr’s latest public comments, on the Christchurch rebuild, PPPs, government infrastructure spending, and so on.

Here was just a sample of what the Reserve Bank Governor said, as reported by Stuff’s Hamish Rutherford

Orr, who is now the governor of the Reserve Bank, made an enthusiastic plea for New Zealand to embrace “third party capital” – a reference to public private partnerships – as a means of boosting investment in infrastructure.

“This country, we’ve gone through the lowest ever global interest rates, we’re in good fiscal health. Why aren’t we investing?” Orr said in an interview.

“Personally, as a citizen of New Zealand I’m very pleased to see public investment being planned and trying to get underway, and I’m even more pleased as a citizen of the world that third party capital is increasingly being allowed to be part of the public infrastructure investment.”

Orr acknowledged he was giving a plug for his former employer, the NZ Super Fund

He goes on to complain about the rebuild process, and the lack of investment opportunities for NZSF, about public procurement processes, even weighing on the woes of Fletcher Building.

As I’ve said before, if having left the NZSF job he was now retired –  or even just joining the ranks of company directors and consultants –  there would be no problem with him expressing his views.

But he is a public servant.  And as Governor of the Reserve Bank he personally exercises an extraordinary degree of power, singlehandedly making the monetary policy decisions, as well as exercising a huge range of regulatory powers over banks, insurance companies and other non-bank deposit-takers.  He is the most powerful unelected individual in New Zealand.    In the areas Parliament has empowered him.

But the stuff he was talking about in his interview yesterday was –  again –  none of his official business.  He is welcome to his personal views, but when he speaks publically he should be speaking only on the things he has official responsibility for.   Either that, or change jobs and make a run for Parliament.  As someone observed to me recently, too often Orr sounds as if he would really prefer to be Minister of Finance.  But he isn’t.  He has no popular mandate, and responsibilities only as specifically laid down in various bits of legislation (primarily the Reserve Bank Act).

Why does it matter?  Because if the public is to be confident in delegating huge amounts of power to unelected officials, they also need to be confident that those unelected officials aren’t misusing that power, or the pulpit it can provide, to pursue personal or political agendas.

I’ve written several posts recently about the new book, Unelected Power, by former Bank of England Deputy Governor Paul Tucker.  Touching on some of these sorts of issues, Tucker notes that in his time at the top of the Bank of England he never knew the personal politics of his senior colleagues, and he was glad of that.   Perhaps that is just the famed English reserve, but it is something to reflect on here.  I’ve written previously about Don Brash overstepping that mark –  in a way that really soured relations between the Bank and the then government.   Arguably Orr’s case is worse, both because he is weighing in on immediately relevant political issues, including more or less directly attacking the stewardship of the previous government, and because he is overtly on the same side as the current government.  When (as central bank Governor) you openly disagree with the current government on general policy issues it might still be unwise and very wrong , but at least no one thinks you are in league with the government.   The whole case for an independent central bank, is so that they can act independently, in those specific areas Parliament has asked them to handle.  The Christchurch rebuild, PPPs, infrastructure finance more generally, are not among those responsibilities.  Nor, for that matter, is “giving a plug” for the Governor’s former employer.

When the initial Stuff story appeared, I was a bit surprised the journalist didn’t seem to have sought a comment from the Opposition Finance spokesperson, who as it happens is also a Christchurch MP.   You just do not see anything like this degree of overt political comment from central bank Governors in other advanced economies, and one of Paul Tucker’s other points is that delegating power to independent agencies really only works well if the legislature is effective in scrutinising and holding it to account the independent agency, including ensuring that it is (a) doing its job, and (b) only doing its job (in other words, sticking to the mandate democratically elected people have given them).   Parliamentary scrutiny of the Reserve Bank was very weak under the previous government, and appears to be no better now.  There is still no word from Amy Adams about the Governor flagrantly overstepping the bounds.

But a few hours later, her colleague Gerry Brownlee came out swinging at the Governor.  I don’t often agree with Mr Brownlee, but on this occasion his remarks seemed both forthright and to the point.  He was “incensed”

Brownlee said he was “incensed” by the comments which he believes mischaracterised the situation. As Canterbury Earthquake Recovery Minister he visited the fund about investment options but were told were not on the scale the fund needed.

“It certainly looks like the Reserve Bank governor has bought into the current Government’s mantra that everything the previous government did was wrong and everyone should join in in saying so.

“And I think that’s a very dangerous position for him to be in.”

When a senior MP describes himself as “incensed” by comments made by the central bank Governor –  especially when they aren’t about things in the Governor’s remit –  it is time for the grown-ups in the room to wake up and do something about the situation.   When the Governor so undermines confidence in himself, he weakens his own position, he weakens the Bank, and that is potentially damaging for the country.

I’m still a bit puzzled by what game the Governor is playing.

It could be that he just hasn’t yet adjusted to his new role.    In various earlier incarnations he was chief economist for the National Bank and for Westpac.  In roles like that part of his job was to say to provocative stuff in an interesting way, to get coverage for him and his bank. Back in the spotlight now, with every serious media outlet only too happy to report his every word, perhaps he just hasn’t adjusted yet.   I find that a little hard to credit, for various reasons, including that he is 55 not 35, has already spent  eleven years as a public sector CEO, and that yesterday’s remarks weren’t the first time he’s overstepped.

Perhaps, too, he just sees no connection between the comments he makes on climate change, infrastructure finance, the Christchurch rebuild, PPPs etc and his day job.  But he’d have to be extraordinarily naive to believe that, and he isn’t.  His views are reported because he is the Governor, not as “Adrian Orr, citizen of Devenport [or wherever he now lives]”.  Another really senior unelected role is that of the Chief Justice: just think of the outrage if she were out giving speeches and interviews on all manner of political issues, unrelated to the administration of justice.   That is a measure of how wrong Orr’s current stance is –  and he wields more power personally than the Chief Justice.

And that leaves the even more unwelcome possibility that, in some sense, Orr is playing politics.   A former colleague put it to me the other day that “Orr is a political animal, par excellence”.   I’m sure he is only ever uttering his own genuinely-held views, and I’m not sure he is even that good a political player (on the evidence of the last few weeks) but look at his incentives.  The Governor has a huge number of turf battles to fight and win this year, around the various stages of the review of the Reserve Bank Act.    Will the Bank keep prudential responsibilities in house?  Even if so, will the policymaking powers stay with the Governor, move to a committee, or be removed back to the Minister?  What sort of people will be appointed to the new Monetary Policy Committee, and what sorts of constraints will the Minister put on their freedom to challenge the Governor?  Might tighter budgetary constraints be put on the Bank, or regular (properly-resourced)_ provisions for external reviews be established?   And so on.

And how to win those battles?  Good quality analysis and advice goes only so far.  Orr might reasonably conclude that things are more likely to go his way, if the Minister and his Cabinet colleagues (and parties outside Cabinet) smile benevolently on the Governor and think of him as “one of us”.

I’m not fully persuaded this is the bulk of the story either.  Orr has, after all, been a public servant for the last 15 years, and if his approach is all about political game-playing and seeking leverage with ministers, you’d have to think he’d have the art down pat better than the overtly political stuff on display in recent weeks.   There has to be a risk that, whatever his intentions, he has overstepped the mark so far and so often, so early, that at least some in government might be having a case of buyer’s remorse, wondering quite what they have got themselves into with this new Governor –  who might be “sound” ideologically, but seems to lack that deeper sort of soundness the nation should be able to count on.

Whatever the explanation, it needs to stop.

When there was speculation last year as to who might be the next Governor, one reason on my list of factors counting against Adrian Orr was precisely that he was a strong character, given to speaking his mind, and one whom the Board (and specifically the Board chair) might find hard to keep on a leash.  The same thought might, I speculated, worry a new Minister of Finance.    Of course, in the Board’s case it has become increasingly clear that they see themselves as facilitators for, and defenders of, the Governor, not needing to do anything to hold him to account.  But if they really care at all about the institution, and about good governance in New Zealand, they need to call the Governor to order now.

I noted earlier my surprise that the Opposition finance spokesperson had not commented on the way the Governor is operating.  Neither, it appears, has the Minister of Finance.   Perhaps it would be worth some journalist asking the Minister for his comments, even if only to record him refusing to comment, washing his hands of any responsibility (for the conduct of someone he appointed, in an agency he is responsible for).

The Governor is damaging himself, and he is damaging the institution.  It is early days and there is still time for a course correction, but it needs to happen now, and to be decisive.  It isn’t, after all, as if the Governor is without messes to clear up in his own areas of responsibility (eg here and here).  And leave politics –  including public finance, infrastructure, climate change or whatever  – to those we’ve elected.

(I have deliberately avoided engaging with the content of the Governor’s comments.  Even if I fully agreed with him, they would still be unwise and quite inappropriate, and it is the process point –  good governance – that matters most.)

UPDATE: I notice that issues about Orr’s remarks are beginning to be highlighted elsewhere.

UPDATE 2: Rereading the post I wrote when Orr’s appointment was first announced, there is nothing (positive or otherwise) in it I’d resile from now, and some of the potential areas of concern touched on then already seem to be being realised.

UPDATE 3: For those who don’t normally read the comments here, I suggest at least looking at the one by former Reserve Bank official, Geof Mortlock.

UPDATE 4:  The Minister of Finance has indeed refused to comment.

17 thoughts on “Very unwise and quite inappropriate

  1. Adrian Orr is definitely compromising the independence of the Reserve Bank. We might as well call the RBNZ, “The Reserve Bank of the Labour Party of New Zealand”. or RBLNZ.

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    • Sorry ggs but that is a rather pithy comment.

      On the other hand he could better have advocated a bit of QE as a better approach than PPPs
      All IMVHO of course.

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      • Definition of Pithy

        “brief, forceful, and meaningful in expression; full of vigor, substance, or meaning; terse; forcible” Dictionary.com

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  2. There are a couple of issues here. Apologies for the comment length but I have tried to cross-reference facts/sources.
    As MR rightly points out, communications in-role need to fit with the role and not stray into outside issues, particularly given the pulpit that the RBNZ Guvnor podium occupies.
    But secondly there is the issue of the accuracy of any communication content given the confidence we need to have in our senior public servants. And, unless Stuff misquoted him, there looks to me to have been substantial factual inaccuracies in what the Guvnor said.
    I actually believe Gerry Brownlee’s account in Stuff about him directly engaging but NZ Super saying the opportunities were too small. Why? Because NZ Super explicitly say this on their own website! When referring to “NZ Direct” investments they are very clear: “we target transactions between NZ$100m-NZ$300m+ for a 20%-50% stake”.
    https://www.nzsuperfund.co.nz/investing-nz/opportunities
    So they want investments of a transaction size where total equity would be minimum of say $200M and at this size there would be leverage so maybe $500M minimum size individual deals. How many of these were there in the Christchurch rebuild? The convention centre blew out to close to this but was expected to be much smaller cost when proposed.
    Stuff also claims he said NZ Super was never able to invest in NZ infrastructure: “Orr said he was unable to ever secure an infrastructure investment in New Zealand.”
    https://www.stuff.co.nz/business/103902717/adrian-orr-says-super-fund-gave-up-trying-to-invest-in-christchurch-rebuild
    Again just false. NZ Super has itself stated it is invested ($100M) in the Morrison PIP fund which builds infrastructure in NZ: https://www.nzsuperfund.co.nz/investing-nz/opportunities
    Their published equity listings also show they actively invest in the NZ listed infra companies including Auckland Airport (the fund’s 3rd largest NZ equity holding), Infratil, Port of Tauranga, Vector, Chorus and the electricity generation companies – all of which are involved in both operating and also building incremental infrastructure.
    https://www.nzsuperfund.co.nz/publications/annual-equity-listings

    We don’t live in Venezuela or Trump-topia; we deserve veracity from our senior public servants when they make public statements, not a “don’t let the facts get in the way of a good story/headline” approach.

    At it’s heart I believe the behaviour to be a result of weak oversight of his predecessor NZ Super at board/shareholder and also a poorly informed/educated business press and general public, leading to the Guvnor believing he can say what he likes with impunity.

    In the Guvnor’s previous role he got a very easy ride from all stakeholders and the glow of warm (misinformed?) PR from which he could launch all sorts of statements that were never challenged – the NZ public lapped them up because of “headline returns” of the fund. The market participants would never speak out and challenge because of fear that the institutional funding gorilla would cut off access to capital.

    But does the reality of the fund hold up to proper scrutiny? MR has previously blogged about how the performance of the fund on a risk adjusted basis is not that great – recent high headline annual returns look to be just a result of highly volatile (ie risky) performance on the back of bull equity markets (driven by central bank monetary policy). Nothing to do with being smart, just about appetite for risk (in the context of a mandate requirement of “maximising returns without undue risk to the Fund as a whole”: https://www.nzsuperfund.co.nz/how-we-invest/balancing-risk-and-return).

    But if you dig, it appears to be actually even worse than that. The way the shareholders and board have allowed the Fund to operate looks in my view to be actually pretty poor investment governance in a couple of areas:
    – The manager gets to set and tweak its own benchmark for performance (MR highlighted the recent case on reducing carbon exposure; ie should really be viewed as an active decision of the manager, but somehow they persuaded the board to change the benchmark instead). And remember, the manager team gets rewarded on beating this benchmark!
    – They also not only adopt an aggressively risky portfolio but they then lever it up via derivatives, whilst still measuring themselves against an unlevered benchmark. This from their own website (Annual Report 2016) makes interesting reading: https://ar2016.nzsuperfund.co.nz/investment-performance/case-studies/Active-Collateral-and-Direct-Arbitrage
    Now I’m not a derivatives expert but essentially how I read this is that they take their $Billions AUM (or at least part of it), put derivative trades on that only require a margin investment (say 10% of the notional exposure) and then rather than have the balance of funds sitting on cash call deposit (to meet the derivative margin movements and end settlement) they then go and invest this ‘collateral’ cash in other stuff. But that’s just leverage right?
    If I take $100, invest $10 of it in a notional $100 derivative exposure and then go invest the spare $90 in other assets, I have magically generated $190 of economic asset exposure on my $100 principal – the beauty of leverage! Now this works great in a bull market where asset values keep rising but in a down market…LTCM anyone? Is this how we want our public finance assets being invested?
    But the main point (other than whether this meets the “undue risk” requirement) is the governance one – the board has allowed them to lever up a portfolio and then measure performance against an unlevered benchmark, and get rewarded (bonuses) if they beat that unlevered benchmark.
    It also raises the question of whether their claimed “1% outperformance” of their benchmark over time is really that great. It would be interesting to see the apples-apples comparison but you could easily assume it is actually pretty horrific underperformance. If you bought a house with a 90% mortgage and your equity only grew by say 7% vs the overall Auckland house price market of 6%, is that good? Implies your house price grew by <1% right and was actually a bad investment?

    Unfortunately the weak scrutiny and governance of what is really going on has allowed a PR-Teflon shield to be generated that the Guvnor looks to now be trying on in a far more sensitive market role.

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    • It is rather worrying that we have a RB governor that is very off the cuff and there is no preparation in any of his comments. More a Labour Party publicist and mouthpiece than a RB governor. His performance so far has been extremely poor.

      Liked by 1 person

  3. Michael, I share your views on the inappropriateness of Adrian Orr’s now all too frequent tendency to speak out on all sorts of issues that bear no relationship to his responsibilities as Governor. Of equal concern is his eagerness to speak on matters within his sphere of responsibility without having first done any serious thinking on the issue at hand.

    In doing so, Orr puts at risk the credibility of the RBNZ and the position of Governor, and calls into question his political neutrality. He risks politicising the role of Governor and weakens his capacity to speak with authority and non-political objectivity on matters that actually do relate to the role of Governor. He also risks having to later correct or qualify things he has said, or to backtrack on his comments, as we saw with the erratic, ‘verbal random walk’ series of comments on market conduct in the financial sector.

    I think this reflects two tendencies that I find worrying. The first is his lack of self discipline. He has long had a tendency to shoot from the hip with little thought of the consequences of doing so. That is never a desirable attribute. It is a deeply concerning one for someone who occupies the role of Governor. It is rather like putting someone with tourette syndrome in the role of a diplomat charged with the task of handling delicate negotiations. Or asking a person prone to erratic hand movements to perform neuro surgery. In a Governor, one wants someone who is focused, thinks carefully before they speak, and with sound judgement.

    The second is that he comes across as a political player – both publicly and perhaps behind the scenes. That would be perfectly fine if he were in Parliament or in a private sector lobby role. It is not ok for the Governor of the RBNZ or for any public servant. It fundamentally undermines the independence and political neutrality of his office and of the RBNZ itself.

    Let’s hope he learns from these cock ups and acquires more self discipline as he settles into the job.

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  4. Hold your horses : Cool your jets

    quote:
    “My single biggest frustration when I was at the Super Fund was the inability to be able to invest in New Zealand infrastructure,” Orr said.

    That’s a dense and compact and ambiguous statement that can be interpreted two different ways

    The negative case casts aspersions on CERA
    The positive case simply implies CERA did (could) not meet the size criteria and Orr felt frustrated that he could not help out in a catastrophic situation

    Guess we will soon find out
    Interesting everyone, including the media have leapt on the negative

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    • Except these guys have form, using the media to lobby for everything from contributions to tax breaks to sweet heart infra deals. Others like ACC and Morrison just get on and invest in the PPPs.
      It’s like the spoilt kid at the party crying in the corner because no one will give them the biggest slice of cake. Now there is a Tom Scott cartoon…

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  5. I’m probably the only one who finds Orr’s freewheeling commentary to be entertaining. Probably he is enjoying his newfound status and can’t help remarking on every matter he feels he can illuminate. In the long run though I can see that the role requires a bit more restraint.

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      • Don Brash had the superstar status. I recall everyone always waited with bated breath and with fear at his every word as he was always hawkish in his monetary policy. Allan Bollard also had a star status but not in the same league as Don Brash a bit more relaxed working with a widening interest rate band but then went nuts and crushed the NZ economy. Wheeler was boring but very action orientated throwing up all manner of LVR macroprudential tools and dropping interest rates to 1.75%.

        So far with Adrian Orr it is not entertainment value. It is more like watching a Labour party slogan campaign and trying to palm that off as factual research and treating the NZ public as fools. Rather annoying and irritating.

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    • Hopefully unlike Wheeler, Orr has the capability to learn from the mistakes he will inevitably make.
      That includes both restraint and somewill not be a political hack exploring of new territory.
      He will not be a political hack whereas Wheeler had an inertia somewhat similar to the inertia of Bill English.
      More exciting times?

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      • I still nominate Wheeler as our very best RB Governor. It is completely wrong to say he had inertia. There is no inertia with Wheeler, he is certainly very action orientated. Under Wheeler we had some massive changes to monetary policy.

        1. Macroprudential tools were initiated by Wheeler and we have had 3 versions as he adjusted to industry concerns and conditions on the ground.
        Version 1 – 20% LVR in general
        Version 2 – 20% LVR in general and 30% LVR for property investors in Auckland
        Version 3 – 20% LVR in general and 40% LVR for all property investors in NZ

        Within the versions 2 & 3 you could have 10% of a banks lending book could have 10% LVR for first home buyers. Also the 40% LVR for property investors excluded new build.

        2. Where Wheeler got it wrong but I put that more to the Don Brash and Allan Bollard legacy, is the rash and trigger happy increases in interest rates during the Christchurch rebuild. 4 increases in 12 months to stymie the rebuild progress because NZ economists wrongly touted NZ as the Rockstar economy. No one in their sane minds would ever consider a disaster recovery as a basis to label the NZ economy as rockstar economy but NZ economists in general did so and that put Wheeler under pressure to raise interest rates. And he did so in 2 separate occassions before realising his error and dropped interest rates twice after increases.

        3. Forced the National government in the public media to rush through a form of Capital Gains Tax. That was how the Bright Line Test came about.

        4. A RB governor that presided over a 3.5% growing economy with inflation at 1% must be doing something right.

        5. He ensured that the RBNZ was independent of the political parties. He also made sure that the RBNZ was independent also of the banks having several run in with bank executives as he wielded his big stick to get them to toe the line. I have been very concerned in the past with how closely Don Brash and Allan Bollard appeared too bank friendly as if they they bank buddies rather than a tough regulator.

        My concerns with Wheeler is the lack of research before action is initiated and also there is no follow up research in the after action.

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