Orr defends himself

There seems to have been almost no media coverage of an extraordinary statement put out late on Wednesday by the going-rogue Governor of the Reserve Bank, Adrian Orr.  Perhaps he was fortunate that all eyes were already on Thursday’s Budget.

I’ve been drawing attention to the way in which Orr has been speaking out on all and sundry issues – often contentious political issues – for which neither he nor the Bank has been assigned responsibility by Parliament.   We’ve had climate change issues, infrastructure spending, both sides of the bank conduct issue (where he was defending the banks only to flip sides and start poking a stick at them), sustainable agriculture, and capital gains taxes. (Various posts touching on the Governor’s comments are here.)

Last week he was at it again, giving an interview to Stuff’s Hamish Rutherford in which he took the opportunity to attack the way the Christchurch rebuild had been done, including in particular the lack of opportunities for his former employer, the New Zealand Superannuation Fund.  And a couple of days out from the Budget, he took another opportunity to call for more government infrastructure spending, more government borrowing, and to offer his thoughts on public procurement processes.  Anyone would think he was a party leader at election time.

There were two separate classes of issues arising out of the interview with Hamish Rutherford.  The first was around the details of what Orr was saying about the Christchurch rebuild and the substance of NZSF’s involvement or lack of it.    The former minister, Gerry Brownlee, understandably took umbrage at the substance of Orr’s remarks, but the details of that particular spat weren’t my concern (although a commenter in detail here suggests Brownlee was on the stronger ground).

The second class of issues –  and the focus of my concern – is around the appropriateness of the Governor speaking out at all on these (and the other) issues.   As I summed it up the other day, the Governor’s comments are very unwise and quite inappropriate –  and would be so regardless of any substantive merits in his views.   The Governor holds an important public office, in which he wields (singlehandedly at present) enormous power in a limited range of areas.  It really matters –  if we care at all about avoiding the politicisation of all our institutions –  that officials like the Governor (or the Police Commissioner, the Chief Justice, the Ombudsman or whoever) are regarded as trustworthy, and not believed to be using the specific platform they’ve been afforded to advance personal agendas in areas miles outside the mandate Parliament has given them.   We don’t want a climate in which only partisan hacks have any confidence in officeholders, and only then when their side got to appoint the particular officeholder.  And that is the path Adrian Orr seems –  no doubt unintentionally – to be taking us down.  As I’ve noted previously, as his time in office lengthened, Don Brash made something of the same mistake.    That was unfortunate and inappropriate, but in 14 years in office I’d be surprised if Don managed as many overtly political comments as Adrian Orr has delivered in less than two months.

I’ve had conversations with people, including journalists, who can’t really see a problem.  I guess Orr is still in his honeymoon phase, and the journalists are still just grateful they no longer face a Governor who wouldn’t even communicate properly on issues that were his clear and specific responsibility.  Perhaps it helps to see the problem by supposing that a new Governor had come to office and was giving interviews calling for, say,:

  • doing nothing about climate change,
  • cutting capital taxes,
  • lamenting that the government had not just stayed out of central Christchurch and had just landowners get on with it,
  • suggesting that the state stay out of housebuilding,
  • promoting irrigation schemes, and (for the sake of argument)
  • attacking light rail

That new Governor might be perfectly technically capable of doing monetary policy and financial regulatory tasks.  But nonetheless, there would almost certainly be an outcry –  people from the left attacking the Governor for his attacks on policies of the government of the day, and people on the right using the Governor’s comments to buttress their anti-government rhetoric.  It  would be unwise, and should be quite unacceptable for a Governor to be making such comments.  And it is no more wise, or acceptable/appropriate, for him to be making comments on the other side of such issues.

I’m not suggesting that the Governor is an active Labour/Greens partisan, making the comments he does to try to advance the interests of the governing parties.  Probably he believes he is better than them anyway.  But clearly his personal views on all manner of issues seem to align with those of Labour (in particular), and since he has lots of turf battles to win (around the reform of the Reserve Bank) he probably judges that it doesn’t hurt his personal cause to be speaking as he has.  But even if that works out for him in the short-term it isn’t desirable.  His interests aren’t the national interest.  It is conceivable that the second half of his term could see him working with a National government, and he’ll have made that more difficult with these overtly political comments, ranging well beyond his brief.  And he will have increased the risk that future Reserve Bank Governor appointments will be made on an overtly partisan basis –   “if the Governor feels free to speak on absolutely anything, we want someone who’ll be championing our particular causes”.  That would be highly undesirable.

After Orr’s comments last week, there was an outraged response from Gerry Brownlee (on the specifics) but there was also a response from the Opposition leader, Simon Bridges.  That upped the ante quite a bit, even though Bridges’ statement was pretty moderate.

Bridges did not directly answer questions about whether he believed Orr comments were a sign he had sided with the new Government, or on the tone of Brownlee’s comments, but said Orr would have taken a lesson from the episode.

“I am sure he [Orr] will have seen what Mr Brownlee has said, and you know, there’ll just be a lesson there in terms of sticking to the knitting in terms of what his remit is.

“I’m sure he’ll want to be very careful about not wanting to step into legitimate political debates, rather than his mandate as Reserve Bank governor.”

Bridges said National had supported Orr being appointed governor.

“He’s a good guy, he’s a clever economist, he’s a great communicator, so he’s got the skills to be governor.”

That “stick to his knitting” line was particular welcome, but it was still a pretty emollient statement. Opposition leaders don’t wade in every day criticising the Governor –  in fact, memory suggests (perhaps incorrectly) it is really quite unusual –  but it was clearly a statement that was seeking a de-escalation.  There was no criticism of Orr’s appointment or his basic skills and qualities, and really just a quite moderate call for a minor course correction.   When I saw the Bridges comments, I assumed that would be the end of the matter: the Opposition would take it no further, Orr would retire to lick his wounds and reflect, and perhaps in time emissaries might be dispatched to make clear that the Bank recognised where its core responsibilities did and didn’t lie.  Others at the Reserve Bank, meanwhile, (better schooled in the responsibilities and limits of a central bank) would breath a sigh of relief

But no.  Instead late on Wednesday the Governor put out a full page statement under the Reserve Bank name defending himself, and if anything taking the offensive, claiming the freedom (nay, responsibility) to speak out on almost anything.   “Doubling down” was my quick summary.

The Governor began

I greatly respect and appreciate the operational independence of the Reserve Bank.

Maybe, but talking so freely on all manner of contentious political issues does nothing to foster long-term public support for that operational independence.

My comments about infrastructure investment reported in the recent Stuff article of 15 May related not only to my previous role as CEO of the NZ Super Fund, but also to my current role as Governor of the Reserve Bank.

There are two points here.  First, as Governor he shouldn’t be giving interviews about his previous job –  we didn’t hear Don Brash giving interviews about Trustbank or Alan Bollard about Treasury once they were Governor. It is all the more important to maintain that clear separation given that in this case the Governor had previously had another government job.    But, second, this is where he begins to double-down, claiming that it is right and appropriate, as Governor, to be talking openly about these contentious political issues, for which he has no direct policy responsibility.

He disagrees

I spoke openly and frankly because that is a desired feature of the role of Reserve Bank Governor.

Yes, we would welcome a Governor who spoke clearly, and accessibly, on the issues Parliament has assigned to him.  His immediate predecessor didn’t do that bit of the job well at all. But that is very different from a Governor sounding off, without nuance, on all manner of highly contentious issues.   The Governor himself may “desire” to do so –  and no doubt it makes good copy so journalists won’t say no –  but perhaps the Governor could point to any other indication that the public interest is being served by the approach he is taking?

There follow a couple of paragraphs about the specifics of NZSF and Christchurch rebuild issues, including

Any lack of investment by the NZ Super Fund was not caused by lack of commitment from either Mr Brownlee or the NZ Super Fund. Rather it was due to no access for third-party capital into the core infrastructure space, for example, ports (air and sea), transport, electricity distribution and so on. These were decisions made by the appropriate authorities at the time.

It still isn’t clear why NZSF involvement (or any third-party capital) would have been appropriate in any of the major public aspects of the rebuild process,  most of which were (as my commenter points out) well below the size threshold NZSF itself says it is looking for (and bigger ones, notably the convention centre and the stadium remain of questionable economic value).    But, even setting that to one side, there is something extraordinary about this issue being fought on the website of the operationally-independent Reserve Bank.  It is, quite simply, none of the Bank’s responsibility.

But here the Governor pivots to try to claim that this is all very much part of his new responsibilities.

That challenge is not unique to Christchurch or New Zealand. It is a global financial challenge and one that leads to financial instability at times, especially stressed balance sheets.

This is a stretch, to say the very least.    Even if we were to allow that it was a “global financial challenge”, it wasn’t one in Christchurch, and certainly posed (and poses) no threat to financial stability in New Zealand.     One might, as well, worry about pots of government money, and the way they can be used to subvert good decisionmaking, robust allocation of capital, and so on –  perhaps especially if the Governor of a central bank starts championing the causes of such government funds.

The Governor attempts to generalise

The Reserve Bank Act requires us to promote a sound and efficient financial system. The Policy Targets Agreement that I have signed with the Minister of Finance also requires that, along with maintaining low and stable inflation, the Reserve Bank must contribute to maximising sustainable employment.

But even here he, no doubt deliberately, skates over some important language in the Act and the Policy Targets Agreement.  For example, the Act does not require the Reserve Bank to “promote a sound and efficient financial system” .  Here is the key provision of the Reserve Bank Act

68 Exercise of powers under this Part

The powers conferred on the Governor-General, the Minister, and the Bank by this Part shall be exercised for the purposes of—

(a)  promoting the maintenance of a sound and efficient financial system; or

(b)  avoiding significant damage to the financial system that could result from the failure of a registered bank.

In other words, it isn’t a general obligation, but a constraint on how the Bank’s statutory powers are used.  The specific statutory powers to regulate banks must be used in a way that promotes the maintenance of a sound and efficient financial system.  There is quite a difference from weighing in championing PPPs, more government debt, or specific solutions to particular Christchurch rebuild issues.

Similarly, in the Policy Targets Agreement –  a provision governing the conduct of monetary policy – there is just this descriptive statement

The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.

and a requirement to explain in each MPS

The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.

No one thinks that offering interviews on PPPs, sustainable agriculture, or the Christchurch rebuild is what is meant by “the conduct of monetary policy”.

Well, no one other than the Governor that is. Because he goes on

I have spoken about specific issues recently because increased infrastructure investment opportunities provide sound investment choices, risk diversification for financing goods and services, and improves maximum sustainable employment by relieving capacity constraints.   These are all core components of the Reserve Bank’s role and something we often speak about in our Financial Stability Reports.

I almost fell off my chair laughing when I read that line.  When I was young at the Bank we used to occasionally argue that we were free to talk about absolutely anything because almost anything could be argued to affect price stability, in some form or another (resource usage and all that).  There was even a statutory provision.

10 Formulation and implementation of monetary policy

In formulating and implementing monetary policy the Bank shall—

(a)  have regard to the efficiency and soundness of the financial system:
(b) consult with, and give advice to, the Government and such persons or organisations as the Bank considers can assist it to achieve and maintain the economic objective of monetary policy.

But no one took that sort of ambitious –  rather silly – argument very seriously.  At least, it appears, until the Governor came along.    Now, it seems, the Governor wants to openly argue that absolutely anything if within his purview.

Even then he seems confused. For example, he claims that

…..increased infrastructure investment opportunities………improves maximum sustainable employment by relieving capacity constraints.

Well, maybe eventually if the infrastructure investment itself is robust and cost-effective (a test much infrastructure spending in New Zealand fails).  But, as no doubt his economists could point out to him, in the short to medium increased infrastructure spending puts more pressure on resources, and exacerbates capacity constraints and inflationary pressure (all that additional spending before the capacity comes on line).  And then he goes on to assert that these are “core components” of what the Reserve Bank does. and are “something we often speak about in the our Financial Stability Reports”.   Which is an odd claim, since issues about relieving capacity constraints would appear more naturally to belong in Monetary Policy Statements.  And doubly odd in that when I checked the most recent Financial Stability Report, there was a but one reference to “infrastructure” in the entire document, and that a reference to something they call the “retirement saving infrastructure”.   But there is a new FSR out next week, so I guess the Governor will be ensuring it does touch on infrastructure issues?

It all smacks of a statement pulled together in a rush, under pressure.  He clearly hasn’t stopped to think of the total non-viability of a Governor addressing such issues in ways the government of the day doesn’t like (and thus the inappropriateness of only addressing it in ways they do like) or of the implications of his position –  at future press conferences or FEC hearings he’d have no grounds to refuse comments on almost any aspect of policy some mischevious questioner wanted to ask about.  Immigration policy Governor?  Welfare policy Governor?  And so on.  It is a reckless path.

It isn’t unlawful, of course, for the Governor to speak on these issues.  Perhaps, over time, a Governor could develop a sufficient reputation in office for his stewardship of his core responsibilities that people look to him or her to comment occasionally on a slightly wider range of issues. But to wade in, on so many contentious issues, in an utterly non-nuanced way, so early in his term seems extremely unwise and quite inappropriate.  The Minister of Finance and the chair of the Bank’s Board should be making that point forcefully to the Governor, as often as is necessary until his behaviour changes.

Back when the Reserve Bank Board advertised the job last year, two of the qualities they claimed to be looking for were:

  • Personal style will be consistent with the national importance and gravitas of the role.

  • The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

Orr’s approach at present isn’t consistent with either of those.

And he appears to be carrying on as he started. In the Sunday Star-Times yesterday, Orr was again being quoted on things that are little or none of his responsibility.

Last year, New Zealand banks reported a combined $5.19b in profits, up just over $355 million year-on-year.

New Reserve Bank governor Adrian Orr said he was perplexed by the ongoing strength in bank profits.

Perhaps he might be “perplexed” but it really isn’t anything to do with a prudential regulator.  If there are competition issues, we have a Commerce Act and government ministers.  He went on

Checks on whether bank profits were sustainable would form a significant part of the “culture check” being undertaken by the Reserve Bank and Financial Markets Authority, Orr said.

A Royal Commission of Inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia revealed serious misconduct by New Zealand banks’ parent companies.

That prompted New Zealand regulators to demand more information from New Zealand banks, which they had until May 18 to deliver.

“I think you’ve always got to be sure that they are competing properly and they are behaving responsibly,” Orr said.

“If they’re making profits, good on them, but let’s make sure they’re long-term sustainable profits and there’s true competition in the markets.”

To repeat, almost none of this is anything to do with the Reserve Bank’s statutory areas of responsibility.  Perhaps it plays to a populist mood, but it fails to respect boundaries, including the reasons why we assign different functions to different agencies.  And the public mood is a fickle mistress.

Perhaps comments on bank profits are slightly less egregious, in some circumstances, than those on climate change, sustainable agriculture, capital gains taxes, PPPs or whatever, but none of its suggests a Governor with the sort of self-discipline and recognition of limits that the role demands.  Much of it seems more attuned to grabbing headlines, than to offering the sort of nuanced reflection that might occasionally provide a useful contribution to a thoughtful debate on some important issues.

It is still early days in the Governor’s term, but a change of approach is already well overdue.  It is not as if there aren’t plenty of issues that the Governor is most definitely responsible for –  and accountable for –  that he could be getting quietly on with.


27 thoughts on “Orr defends himself

  1. The Honourable Sir John Key, Prime Minister of the nation, established the practice of carrying a hat-rack of different hats, depending on the particular need at the time

    Prime Minister is a higher station than Governor of the Reserve Bank

    Personally I don’t get too exercised about Orr going off the reservation. The information he imparts is of value. He has made utterances that do not get dealt with anywhere else. I’d rather hear it than not hear it. Of course it would be better if we has a stable of academics and others of your ilk publishing, but they don’t. It is noted that the current Secretary to the Treasury who was most “garrulous” when he first took office is now largely silent. Has he been muzzled? Who knows but he is certainly very much under the radar these days. What is not being said that we need to know.


    • Unfortunately what Adrian Orr says is of little value when it is off the cuff comments with no research. Even the NZ super comments does not sound right. He is starting to look like he did not even know his job at NZ super.


    • The prime ministers job is to push the National Party agenda. He does not have to be independent of that party. He is representative of those policies. The job of the RB governor is intended to be independent of the government as Michael rightly points out and to be focused on his key mandate ie bank stability and inflation. The Christchurch earthquake should have involved the Reserve Bank in ensuring that we do not get decades of rebuilding out of the governments coffers to the extant that it has affected the operational and capex budgets of all the government departments. This is where he should have got involved. Nothing to do really with NZ super. Rebuilds do not have enough yield to justify the NZ super investing.


      • A mini QE to fund the Christchurch earthquake would likely have been within the RB governors mandate.


      • Legally, the Governor is allowed to lend as much as he likes, on whatever terms he likes, to the government (so long as, overall, he has monetary policy set consistent with the inflation target.)

        As we’ve debated previously, I think QE in 2011 NZ would also have been unwise and inappropriate (even if by other means inflation was kept at target.)


      • Not sure we actually have debated the merits. The risk is very high that another disaster event will occur on the scale of Christchurch and we are ill prepared with EQC funds depleted and now around 10,000 houses got rather shoddy repairs due to EQC caps on repairs. The arguments between who is responsible is just a never ending legal battle. The government had to also bail out AMI. All this pain could have been avoided if the RB governor got involved and ensured that the government was adequately funded to handle such a disaster of that magnitude.


  2. Adrian Orr should look closely at the LVR rules and the tight credit liquidity that the RBNZ is enforcing onto banks. Also the uncertainty that the government brings to policy foreign buyer bans and tax has taken a toll on house buying activity. House price values are falling. His attention should be on this as I am starting to see house prices offered in prime areas falling more than 40% of Council valuations. This will start to affect the sales prices of new apartments as landed properties in many suburbs are now cheaper than the cost to build apartments. Bank stability risks are rising in this scenario.


  3. I don’t have a problem with what Orr said. He seems to be telling the truth. The NZ Super Fund was unable to invest in the Christchurch rebuild. Yet they have been able to invest in Auckland housing, partnering no less than with Ngai Tahu -Christchurch’s and the South Island’s main iwi -to build 2 hectares of housing in Hobsonville.

    I am glad NZ has a Reserve Bank governor with expertise in actually building housing and infrastructure, rather than one who set up an entire policy apparatus to ration housing….. Wheeler and his MacroPrudential tools.


      • Michael I don’t see what Adrian was saying as being particularly political -in the sense it favours one side over the other. There will be plenty of people on the left who will not like the Reserve Bank Governor discussing how the private sector can provide infrastructure, for example.

        Infrastructure deficits is incredibly topical. It is widely discussed that if NZ doesn’t find solutions to this problem then the housing crisis cannot be solved (or at least not unless there is a massive cut in immigration, which like it or not there is not the democratic mandate for).

        For as long as I can remember Reserve Bank governors have made media announcements about the housing market. If Adrian wants to add infrastructure into his media engagements then I don’t have a problem with it.


      • My point isn’t that his comments are always party political (altho the overall tenor of his off-mandate comments will please ‘the left” more than “the right”), as that they are well outside his mandate. Even the “housing crisis” – reprehensible as it is – isn’t the Reserve Bank’s responsibility.

        I grant that the boundaries aren’t always easy to draw sharply. If, for example, there is a widespread claim that, say, high bank profits are because of something the RB has done, it might be quite reasonable for the Bank to offer some careful analysis of why it thinks that is unlikely, perhaps even offering other explanations. But that sort of context applies currently to none of the issues the Governor is weighing in on.

        BTW, you didn’t answer my question……in other words, are you defending the Governor because you more or less agree with him on this specific issue, or because you would be genuinely fine with a Governor openly taking those alternative positions I listed?


      • So Michael your list being;
        -doing nothing about climate change,
        -cutting capital taxes,
        -lamenting that the government had not just stayed out of central Christchurch and had just landowners get on with it,
        -suggesting that the state stay out of house building,
        -promoting irrigation schemes, and (for the sake of argument) attacking light rail

        Yes I would have a problem if Adrian randomly spouted off willy nilly on the above or similar topics. But that is not my understanding of what Adrian was saying.

        I think he was talking about resource constraints -which we may have differing opinion on whether this constitutes as coming under Reserve Bank’s remit or not. Then he proposed a solution that was not tried in the Christchurch rebuild -that a system is created whereby the private sector and the SuperFund can provide capital to address infrastructure bottlenecks.

        My view is that I saw a fellow traveller, in the sense that Adrian was taking a thoughtful, constructive approach by engaging with the public conversation on how NZ can address its current economic challenges.

        You could argue that a constructive Reserve Bank Governor is biased towards the current government administration -but does the country really want an unconstructive Governor?

        BTW Michael you may be interested in my latest housing paper -which coincidentally mentions the Superfund twice -both near the beginning as an investor in medium/high density housing in Hobsonville and at the end of paper in relation to the private sector investing in public transport infrastructure.
        View at Medium.com


    • A private investment Maori consortium did try to run a $200 million monorail into the Milford sounds but was stopped by Green conservation groupies and unfortunately with the backing of Nick Smith as Conservation Minister under the previous National Government under pressure to look good after approving the Sky City $450 million convention centre.


  4. It was probably a mistake for Adrian to publically comment on a range of issues tangential to monetary policy and banking soundness. But he’s compounded it by posting a defence on the RBNZ website. After this, it’s going to be hard to mend fences with National’s front bench, whom he may need to work with in the future.

    Sometimes it’s best just to cut your losses and keep your mouth shut.


  5. BH, fair call that we want to see development but this is already happening, e.g.
    https://nx2group.com/Partnership (Puhoi to Warkworth)
    http://www.cpbcon.com.au/projects/transmission-gully-ppp/ (Transmission Gully)
    Nice partnerships including both private sector players and a Crown fund, ACC.
    The Treasury also has a unit dedicated to facilitating PPP structures for infrastructure so there is a framework to work with: https://treasury.govt.nz/information-and-services/nz-economy/infrastructure
    There will always be local council biases towards either involving or excluding private capital from local asset ownership (the beauty of living in a mixture of national and local democracies). If you want to change these positions, then surely more appropriate to run for council/parliament?
    If you really just want to invest in infrastructure for the returns, then why not participate in the available projects the way others appear to do? ACC’s last annual report shows they appear to be nice little earners too…in the order of 15% p.a.
    Amazing what a little google research over lunch unearths…


    • Sure, good points The Bear.

      PPP schemes are not new to NZ or this government. Again another argument that the underlying content of Adrian’s comments were not particularly party political.

      Also I would like to say as a citizen of NZ I have the right to freely express myself publically. Maybe that leads to policy changes, maybe it doesn’t. That is how democracy works…… there is a marketplace of ideas…..

      I don’t have to become a politician to be part of a public conversation. In fact, I probably have more freedom to speak out as a citizen rather that being bound by formal party political positions.


      • By “you”, I was meaning Mr Orr (in terms of “if you want to change these positions…run for council/parliament” – sorry if that wasn’t clear). i.e. MR’s key point in the articles is that it’s not the Governor’s role to talk about or advocate for this sort of policy.
        My point was simply that the current market context shows that there are infrastructure projects happening and private and public sector funders are participating in them. It’s completely baffling to me what the Governor has an issue with.


      • Fair enough Mr Bear, I thought as you addressed the comment to me -BH that the later ‘you’s also meant me.

        The point Adrian seemed to me to be making, was that frequently this infrastructure is not provided -that there is a lack of access for third-party capital and this lack of access can contribute to financial instability and/or prevents resources from being utilised at full capacity. Both issues according to Adrian coming under the remit of the Reserve Bank. So he doesn’t need to be a politician to speak about them.

        Read for yourself. This is from Adrian Orr’s 16th of May Reserve Bank Statement

        “Any lack of investment by the NZ Super Fund was not caused by lack of commitment from either Mr Brownlee or the NZ Super Fund. Rather it was due to no access for third-party capital into the core infrastructure space, for example, ports (air and sea), transport, electricity distribution and so on. These were decisions made by the appropriate authorities at the time.

        That challenge is not unique to Christchurch or New Zealand. It is a global financial challenge and one that leads to financial instability at times, especially stressed balance sheets.

        The Reserve Bank Act requires us to promote a sound and efficient financial system. The Policy Targets Agreement that I have signed with the Minister of Finance also requires that, along with maintaining low and stable inflation, the Reserve Bank must contribute to maximising sustainable employment.

        I have spoken about specific issues recently because increased infrastructure investment opportunities provide sound investment choices, risk diversification for financing goods and services, and improves maximum sustainable employment by relieving capacity constraints.

        These are all core components of the Reserve Bank’s role and something we often speak about in our Financial Stability Reports.”


      • To which my response would be that the Governor can’t just decide for himself what is and isn’t within his remit. That is largely a matter for the legislature, but also for our conventions of government (as to how senior unelected officeholders behave, especially as regards public comment – typically with very considerable restraint.)


      • Michael you don’t see the Reserve Bank governor as having an educative role in using his knowledge and expertise to contribute to the public debate around how the market can better address infrastructure constraints, which if not addressed could lead to financial instability and/or under utilised resources?


      • Generally, I think it is unwise. As I noted in the post, if after a period of time as Governor a person builds up a reputation for his excellence in his own field, society may sometimes turn to that person for thoughtful, well-researched, insights on other matters. Even then it is dangerous – eg Alan Greenspan, who became both “indispensable” and a source of political support by association. For a new Governor I think it is particularly inappropriate – apart from anything else, clean breaks from previous roles are important – and also when, as on many of the topics Adrian touches on, there is considerable legitimate political debate on the issues. On the specifics I don’t buy the argument that infrastructure constraints – of the sort he was talking about – can be (let alone are) a source of financial instability, but perhaps he will make the case in his FSR next week and I’ll be more persuaded?

        As at any organisation, it needn’t be all or nothing. If the Bank were to do some thoughtful research on these issues, illustrating how and when the financial stability issues have (and haven’t) arisen, that could be useful background – something for senior managers to refer to occasionally.


      • Good debate. One thing we haven’t touched on is the appropriate mode of Crown funding for infrastructure. Getting the Super Fund or ACC to invest in NZ infrastructure is really just the Crown balance sheet being deployed via another sleeve of the same jacket. But what ensures the most efficient development and operation of the infrastructure (best design, avoid cost and time over-runs, manage the operations well)?

        As I understood it, the PPP framework objective was to get private expertise and risk sharing to generate optimal value from the projects for the Crown and taxpayers. The Crown can always borrow funds cheaper than any partner in the market (and the Crown balance sheet is pretty healthy today) so cost of capital and financing capacity isn’t an issue.

        Do the Super Fund and ACC add anything to this equation other than ringfencing off assets from other agencies where commercial motivations are less clear? And if that is the argument then surely it’s a bigger game and we should transfer all SOEs and other commercial assets the Crown owns to their ownership. We should probably merge the Super Fund and ACC to save costs too (do any other countries in the world have multiple sovereign funds?).

        Here’s another deeper one to ponder – should domestic Crown funds like the Super Fund and ACC even be allowed to invest in NZ at all? Is there an argument that if you want to have a buffer investment fund for domestic economic risks (pensions and accidents) you should diversify away from NZ as at the point that the risks hit the extreme the value of local assets is also at a low point (lots of retirees cash in their properties, shares etc for annuity incomes, NZD comes under pressure as offshore investors sell out)? That would also remove the political debate around the funds’ market development function locally.


      • Some good questions, perhaps one for a separate post at some stage.

        Of course, my opening bid would be to close NZSF altogether, and I’d lean towards shifting ACC to a pay as you go funding model which might also see its pool of assets removed.

        But given that the funds exist, I’d look at ACC and NZSF a little differently. ACC has contractural commitments (which could, of course, be changed by statute) while NZSF really is just arms-length pot of govt money wearing a “superannuation” badge. That leaves me a bit more relaxed about domestic ACC investment, provided they can consistently observe the discipline not to pursue political sweetheart deals (thus the Kiwibank deal bothered me). For NZSF, I think there is a lot to be said for keeping the NZ exposures to a minimum, and in that category – albeit for different reasons – I think they are wrong to hedge the offshore assets back into NZD. The big asset market corrections we worry about are also ones when the NZD will typically fall sharply, and they are the ones we should care about most. If NZSF loses 40% of its value in the next downturn, there will be a lot of flak – as other pressures on the Crown accounts will also be more intense then – which would not be there had the offshore assets not been hedged back to NZD.

        I’m presuming that neither ACC nor NZSF has any real infrastructure expertise, beyond what say NZTA might have. And I remain sceptical of PPPs generally – even with the best private sector players – because even though they might bring some specific expertise, it is very hard to write contracts that capture what really matters, and all the appropriate contigencies. Difficulty in contracting makes a strong case for doing things in-house.


  6. Here’s an idea. Why don’t we get the Super Fund to invest in building some plastic recycling plants here? They like the environment and they recently invested in a trash business in the USA. We are in desperate need of domestic recycling facilities now that China has shut the door to rubbish imports (incidentally highlighting a dirty little secret for NZ – only clean and green because we cart our refuse offshore…). You don’t need to persuade a council of this one, just get on and do it!


    • I think Auckland does have quite a large recycling plant at the old Mere Mere Power station. There has been a number of proposals to convert to a $200 million rubbish burning to energy conversion by private interests but the community does not want it in their backyard.


  7. Interesting debate. As the most left person, I suggest that this problem emerged because of an ideological approach to both monetary policy and the role of the State in currency management (i.e. there shouldn’t be one, apart from an unelected technocrat deciding the discount rate). If anyone is managing the economy – why do the media still use this terminology – then it is the Governor.
    I have actually met Adrian Orr, many years ago when I was an economics student. He seems one of the few economists who doesn’t take an especially ideological or technocratic approach, in the sense that theoretical postulates have to be rigidly adhered to, or are useful as smokescreens when only addressing the key people in the markets. If he can widen the debate about urgent policy issues good luck to him. Having said, the Reserve Bank Act does need to change, and parliamentary scrutiny re-created in a substantive sense.


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