Another Orr interview

The Governor of the Reserve Bank was interviewed over the weekend on Newshub Nation. Perhaps even fewer people than usual watched the programme, since it was  on over a holiday weekend, but I saw a few comments –  public and private –  suggesting it was a rather odd performance so I finally had a look myself.  I had to agree with the commenters.

There were three broad topics covered in the interview:

  • infrastructure finance,
  • bank conduct issues, and
  • mortgage lending.

Of those three topics, only the third is really within the ambit of the Governor’s responsibilities.

On infrastructure finance, you’ll recall that a few weeks ago the Governor weighed in on this issue, claiming to be speaking both in his former capacity of head of the New Zealand Superannuation Fund (NZSF) and in his current role as Governor.  He was venting about his frustration that NZSF had not been able to invest in infrastructure projects in Christchurch after the earthquakes.

“My single biggest frustration when I was at the Super Fund was the inability to be able to invest in New Zealand infrastructure.

“We never got to spend a single penny in Christchurch. I stopped going down. It became too hard,” Orr said.

“I went down, even once CERA [the Canterbury Earthquake Recovery Authority] was formed, and the person said ‘it’s great to see you here, Minister [Gerry] Brownlee is very pleased you’re here. Now, tell me again which KiwiSaver fund you’re from’.”

Understandably, that upset Gerry Brownlee and prompted a rare criticism of a central bank Governor from the Leader of the Opposition and a suggestion that the Governor should stick to his knitting –  the core stuff he now has legal responsibility for.

Orr now claims he wasn’t being specifically critical of the Christchurch situation –  although see the quote – and that he was just making a general point, one he is not defensive about at all.  There isn’t, in his view, enough “outside capital” being brought into infrastructure development, here and abroad.

His mandate, so he claimed in this latest interview, was his obligation to contribute to “maximum sustainable employment” –  the words recently added to the Policy Targets Agreement governing the conduct of monetary policy.   As I’ve pointed out recently, this argument just doesn’t stack up: the words in the PTA are about the conduct of monetary policy (interest rates and all that) not a licence for the Governor to get on his bully pulpit and start lecturing us –  politicians and citizens –  about all manner of other policies he happens to think might be a good idea.   It is a doubly flawed argument because even the new monetary policy mandate is about employment –  not productivity or GDP per capita –  and the Governor will know very well that you can have a poor fully-employed economy or a prosperous fully-employed economy.   Infrastructure finance –  even well done –  has almost nothing to do with sustainable levels of employment.

In the latest interview, he was asked (very first question) about the recent bid by NZSF to invest in light rail in Auckland.  Instead of gently reminding the interviewer that such things aren’t his responsibility any longer, the Governor weighed in.  Any opportunity for outside capital should be welcomed, we were told.  The Governor went on to lament the “hang-ups” people have –  “people”, we were told, were the problem here, “getting in the way” of sensible solutions.  The Governor complained that all this leads to infrastructure being financed by debt or taxes, when it really should –  in his view –  be financed by equity (perhaps he didn’t notice that the NZSF itself was, and is, funded by debt and taxes, or that he has previously called for governments to take on more debt).  The Governor complained about politicians being scared of tolls, and argued that they “need to get over it”.     Challenged as to whether these were not political debates, the Governor argued that he was trying to get these out of the political debate –  as if mere citizens, the dread “people”, might not reasonably have a view not only on what projects should be done, but how they should be owned/financed.   Wrapping up that particular segment of the interview, the Governor opined that the wider economic benefits of light rail were “incredibly important” to maximising sustainable employment”.

It all remains, as I put it some weeks ago, very unwise and quite inappropriate.  Even if his views had merit (which, I would argue, they mostly don’t), these are issues which have nothing to do with the Reserve Bank (where the Governor wields a great deal of barely trammelled power).  As I put it in an earlier post

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. 

The arrogance of it all is pretty breathtaking too –  we “the people” are the problem.  Officials and politicians sometimes say things like that in private (feeling that they really deserve a better class of “people”), but generally not in public.  And the Governor seems to have no conception of the way in which genuine outside capital in a private project in a competitive industry, where all the gains and losses accrue to the private providers, differs from the public-private partnerships he waxes lyrical about (even while championing what would, at best, have been only public-public partnerships, since NZSF is just another pot of government money).    Contracting, in ways that both preserves the public interest and ensures continuity of high quality service, has proved hellishly difficult.   Providers of outside capital in PPPs –  whether state entities of the sort Orr has championed or private ones –  don’t care at all about the fundamental merits of a particular project, so long as they can write a contract that more or less guarantees returns to them.  In such a world, easy access to money can be a recipe for a smoother road to more really bad projects being done –  anyone recall the synthetic petrol plant, as an example of outside capital and guaranteed rates of return?

I’m not suggesting the Governor is totally wrong –  I’m pretty sympathetic to congestion pricing on city roads for example –  but in his official capacity, it is none of his business.    There is a vacancy coming up for Secretary to the Treasury; perhaps could apply for that position?  Or he could run for Parliament –  though probably not with that dismissive attitude to “the people” –  or retire and get a newspaper column.  But it is nothing to do with the Reserve Bank, and he jeopardises the Bank’s position –  both the ability to do its day job with general support, and increasing the chances of future partisan hack appointments –  if he goes on this way.

And what about his claim that infrastructure finance is really core to what the Reserve Bank does?  There was this from his public statement a couple of weeks ago

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.

In the last month, we’ve had a Monetary Policy Statement and a Financial Stability Report.  There were no mentions at all of infrastructure in the Monetary Policy Statement and, once again, a single mention in the Financial Stability Report –  a brief reference to “market infrastructure”.  The Governor just seems to be making it up on the fly, when these issues are no more part of his official brief than most other areas of government policy are.  

The second strand of the weekend interview had to do the ongoing banking conduct investigation  –  in which the Reserve Bank and the FMA demand banks and insurers prove their innocence, on points which (at least in the Reserve Bank’s case) are really not the government agency’s business.  There wasn’t much new in this part of the interview, apart from the somewhat surprising claim that the Reserve Bank has a very good insight into banks and insurers (which makes you wonder how CBL failed, or Westpac ended up using unapproved capital models for years, or how a few weeks ago the Governor could have been convinced there were no problems here, but now leaves open the possibility that he could recommend a Royal Commission).

As the Governor ran through his checklist of issues, it was more and more clear how little any of this had to do with the Reserve Bank’s statutory responsibilities.  He was concerned, for example, as to whether banks were “customer-focused”.  Personally, I rather hope that, as private businesses, they are shareholder-focused, working first in the interests of the owners.   Now, working in the interests of the owners does not preclude caring a great deal about good customer service (whether in banking or any other sector) but it shouldn’t be the prime goal.  And whether or not banks offer good customer service has very little to do with the Reserve Bank’s statutory focus on the soundness and efficiency of the financial system.    Perhaps we all wish it did, but some friendly customer-focused banks fail, and most flinty hardnosed one don’t, and vice versa.  There is no particular connection.

Similarly, the Governor was concerned about remediation when customers have problems with their banks.  Perhaps there is a role for some agency of government to take an interest (perhaps…..) but there is no obvious connection to the Reserve Bank’s prudential regulatory functions.  Over the years I’ve had plenty more complaints about my supermarket than about my bank, but (fortunately) no one seems to think governments should regulate customer service in supermarkets.

The Governor has found a partial defender in Gareth Vaughan at  But as Vaughan notes, it hasn’t typically been the Reserve Bank way

In 2015 when Australian authorities were probing high credit card interest rates, my colleague Jenée Tibshraeny tried to find someone, anyone, in a position of power in New Zealand to take an interest in credit card interest rates here that were at similar levels to Australia. This is what a Reserve Bank spokesman told Jenée;

“The Reserve Bank of New Zealand regulates banks, insurers, and non-bank deposit takers (NBDTs) at a systemic level – i.e. to make sure the financial system remains sound.”

“We don’t regulate from an individual customer protection perspective and don’t have comment to offer about pricing of products and services offered by banks, insurers and NBDTs,” a Reserve Bank spokesman said in 2015.

That stance is entirely consistent with the legislation the Reserve Bank operates under.  Vaughan concludes

Personally I welcome the Reserve Bank thinking of consumers, be they borrowers, savers or insurance policyholders. By taking an interest in consumer outcomes Orr is humanising the Reserve Bank, and making it more relevant to the general public.

However, if this is the path the Reserve Bank wants to go down, and has government support to do so, then perhaps phase 2 of the Government’s Reserve Bank Act review is a good opportunity to enshrine this more consumer outcomes focused role into the Reserve Bank Act. The terms of reference for Phase 2 are due to be published during June.

In a sense, that is the point.   Responsibilities of government agencies are something for Parliament –  the pesky “people” and their representatives again –  to assign, not for individual officials to grab.  I happen to disagree with Vaughan here –  between the FMA and generic consumer protection law, there is no obvious gap for the Reserve Bank –  but it should be a matter for Parliament.

It remains hard not to conclude that Orr is driving this populist bandwagon for two reasons:

  • to avoid letting the FMA take the limelight (the Reserve Bank has never been keen to play second fiddle to the FMA, especially on anything affecting banks) and
  • to distract attention from the Reserve Bank’s own poor performance as a prudential regulator, encapsulated in the recent scathing feedback in the New Zealand Initiative report.

He seems to have been remarkably successful so far – journalists seem to have been so pleasantly surprised by on-the-record media access to the Governor that they don’t bother asking the hard questions, and the Governor gets to portray himself as some sort of tribune of the abused masses (with or without evidence).

Personally, I find the sort of concerns outlined in today’s Australian about the Royal Commission itself , or concerns about the potential for these show trials to reduce access to credit, including (in particular) for small businesses, ones our officials or politicians might take rather more seriously.  But, probably, feel-good rhetoric is more satisfying in the short-term.

The final part of the Governor’s interview was about mortgage lending.  It wasn’t impressive.  The Governor declared that “we’re scared” about the high debt to income ratios evident among households with mortgages, but then in the next breath stressed that banks were very well capitalised and highly liquid etc.     Those two observations are simply inconsistent: if the Reserve Bank really has grounds to be scared (a) bad outcomes should be showing up in their stress tests (which they don’t) and (b) the Bank should be articulating a concern that banks are insufficiently capitalised and raising capital requirements further.  And it isn’t clear how the Governor thinks that, in a regulatory climate in which land prices are driven artificially high, ordinary people would be able to buy a house without a very high initial debt to income ratio.  But this seems to have become an evidence and argument-free zone, in favour of emoting about the “high debt” (not, as I noted last week, much higher relative to income than it was a decade ago).

The final question in the entire interview was about whether loans for Kiwibuild houses should be exempt from the LVR restrictions.  The Governor’s initial response was that he didn’t know, and couldn’t answer.  But then, pushed a little further, he expressed a view that such loans should be exempt……..they were, after all, about adding supply, and doing it quickly, and helping low income people into homes who might not otherwise be able to manage it.

Quite what was going on there wasn’t very clear.  There is already an exemption for people purchasing new houses (and any debt developers take on in the construction phase isn’t covered by LVR restrictions anyway).

The new dwelling construction exemption applies to most residential mortgage lending to finance the construction of a new residential property.

The construction loan should either be
(1) for a property where the borrower has made a financial and legal commitment to buy in the form of a purchase contract with the builder, prior to the property being built or at an early stage in construction. This could be traditional ‘construction lending’ where the loan is disbursed in staged payments, or it could be a loan to finance the purchase of a property, which will be settled (in one payment) once the build is complete.

(2) For a newly-built entire dwelling completed less than six months before the mortgage application. The dwelling must be purchased from the original developer (the contract to buy at completion can be agreed while the building is still being constructed).

This exemption didn’t exist when LVR were first rushed in by the previous Governor, but pretty quickly industry and political pressure built up and the Reserve Bank amended the policy.  In doing so, they revealed the fundamental incoherence of the LVR framework:  the Reserve Bank has always claimed that it is about protecting financial stability and reducing (their view) of excess risk in bank mortgage books.  And yet, lending on new properties –  all else equal – is riskier than lending on existing houses.  Existing houses are, for one thing, finished.  They are also in areas that have been occupied for some time.  By contrast, new houses –  especially in new subdivisions –  can be left high and dry when and if the property turns, or the economy turns down.  Think of the pictures of abandoned subdivisions on the outskirts of Dublin, or of some US cities in the last downturn.

And the Governor’s, apparently off the cuff, suggestion that credit restrictions should be easier for low income people who might not otherwise be able to get into a house, was distressingly reminiscent of the US policies –  political and bureaucratic – in the decade before the US crisis, which ended badly (for banks, and for many borrowers).   It is a recipe for encouraging banks –  supposed to be “customer-focused” in the Governor’s view –  to be more ready to lend to people relatively less able to support debt.  It is, frankly, irresponsible.   (And all this is before one even gets to questions about the extent to which Kiwibuild will simply crowd out other construction –  the Bank’s analysis on which they simply refuse to release, despite having opined on the issue in past MPSs.)

The quality of policymaking – official and political – in New Zealand has fallen away quite sharply in the last 15 or 20 years.  Sadly, Adrian Orr as Governor increasingly seems at risk of averaging it down further.  All while showing no sign of addressing the problems in his own backyard –  whether as regulator, analyst, or as sponsor.