Towards an MPC

A week or so ago, advertisements appeared in the major newspapers inviting applications from people wishing to be considered for appointment as external (non-executive) members of the Monetary Policy Committee.   Should you wish to apply, the advert is here, with applications closing on Friday.

All of which is quite remarkable.  The Monetary Policy Committee is to be created by legislation currently before Parliament,  and not expected to be passed until the end of the year (the select committee isn’t due to report back until early December). The appointments are not expected to take effect until April next year.  In fact, submissions on the Reserve Bank of New Zealand (Monetary Policy) Amendment Bill themselves also close on Friday.   The select committee process is supposed to involve members looking carefully at the details of the legislation, considering public submissions, and recommending any refinements or amendments the committee considers appropriate.  But you would have to wonder what the point of submitting is, at least on the MPC structure, powers etc, when the appointment process for members is already well underway.

As I’ve previously highlighted, one of the bizarre aspects of the proposed model is that the Reserve Bank Board (no doubt heavily influenced by the Governor, who is a member of the Board) get to control the appointments.  Appointees will, finally, be signed off on by Cabinet and appointed by the Minister of Finance, but the Minister will only be able to appoint people nominated by the Board.  Most of the Board members have no, repeat no, expertise in monetary policy (including its governance), and all but one of them were appointed by the previous government.  It is a weird abdication of responsibility, for a key aspect of short-term economic policy, not seen (as far as I’m aware) in any other major government appointments.  It is extraordinary that the Minister of Finance cannot directly appoint people he has judged appropriate to the role –  people who can, by their choices, have a big influence on the short-medium course of the economy.   The Minister of Finance (and his colleagues) are, after all, the only people we citizens can actually hold to account –  kick out – if things go wrong.

We’ve seen this sort of rather premature process from the Board previously.  Last year, they were advertising for candidates for a new Governor, with applications closing well before the election, even though the Board –  like everyone else –  knew that the then Opposition parties were promising reform of the Reserve Bank, including legislative change.

This time one must presume they have the approval of the Minister of Finance for kicking off the recruitment process.  After all, the advert is quite specific that there will be three external appointees, and that is a decision only the Minister can make (the legislation specifies only a range (2 or 3 externals)).  That, incidentally, guarantees that there will be four internal members –  the maximum allowed in the legislative provisions, and the bill requires an majority of internals.

That said, the process seems to have been rather rushed.  Applications are open for only two weeks, and when I contacted the recruitment firm the Bank’s Board is using to ask for the information pack and related detail, the initial response was that they didn’t yet have all the material from the client.  It took six days before the material finally arrived.

There was some interesting material in the advertisement

External MPC members need not have expertise in monetary policy or macroeconomic theory.

This is the more moderate version of what I was told the Governor had said the other day at the INFINZ function, that he didn’t want “you economists” (last I looked that was the Governor’s own background) because “we need different thinking”.

The bill itself says

The Minister may only appoint as an internal or external member a person who, in the Minister’s opinion, has the appropriate knowledge, skills, and experience to assist the MPC to perform its functions (for example, in economics, banking, or public policy).

Which is fair enough I guess, but I would hope that when the Minister finally comes to make appointments he insists that at least one of the externals in fact has a fairly strong background in monetary policy and macroeconomics.   Even the Bank’s Board –  which has no power over monetary policy at all –  has usually had such a person.  If there is no such person on the MPC, it will simply confirm from the start even more strongly what I have been arguing, that the new structure is likely to be ineffective, governor-dominated, and resembling in many ways the sort of system the Bank has had in place for the last 15 years or so (when a couple of externals  –  almost always with no economics background –  have participated in monetary policy deliberations, and provided an OCR recommendation, but have had little real influence most of time, and no accountability: any value was mostly in passing on a specific class of business anecdote).

What sort of people is the Board looking for?

External MPC members will require:

  • Exceptional intellectual acumen and communication skills
  • Experience exercising sound judgement to make effective decisions, in environments reflecting high levels of complexity and uncertainty
  • Capacity to engage with complex economic issues and make contributions which draw upon a range of relevant professional, educational and life experiences
  • Absolute integrity, reflecting genuine independence, rather than solely acting as a ‘voice’ for specific sectors or interest groups
  • The ability to operate in a manner consistent with the highly confidential nature of MPC decisions.

On the second to last of those, even the bill is a bit stronger

A person must not be appointed on the basis that the person represents a particular industry sector.

It would be quite concerning if anyone appointed to the MPC saw themselves as a representative or voice of a sector (even if not “solely”).  All members must surely be expected to operate solely from a national perspective.

But what of the first set of criteria?  I’m always a bit sceptical of adverts seeking “exceptional” anything, as there are very few people with such “exceptional” qualities anywhere.  Of the Reserve Bank’s existing senior management and Board, of those I’ve had anything to do with there are plenty of moderately capable people, but none whom I’d describe as having “exceptional intellectual acumen”.  Why does the Board think they are likely to attract such people to a part-time role, in which they will have little ability to influence policy, no independent resources, and (from what we’ve been told previously) no ability to articulate their views openly?  Oh, and not to mention people willing/able to devote 50 days a years in a part-time capacity at public sector board remuneration rates?

I’m also puzzled at the suggestion that MPC members should need “exceptional communications skills”.     Again, of management or the Board, only the Governor could possibly be considered to have such skills, and even he is often rather a loose cannon.  But more importantly, the Reserve Bank fought hard –  and the Minister sadly endorsed – a model in which MPC members will not be free to articulate anything other than an agreed MPC position on policy.  They won’t even be able to have their personal perspectives clearly recorded in the minutes of the meetings, let alone make speeches or give interviews that might seek to advance thinking or articulate a minority position, That is quite different from the situation in more open systems, notably those in the UK, the US, and Sweden: systems which function well, without any of the problems the Reserve Bank management (protecting their personal position) have tried to worry people with.

It will be interesting to see what sort of people the Board and the Minister come up with, assuming that Parliament eventually passes legislation along the lines of the current bill (and bear in mind that we have a minority government again).  It is hard to see why the roles –  probably little more than silent adjuncts to the Governor – would be attractive to really good people, or who will really be free to take them up (even an academic –  apparently not wanted by the Governor –  might struggle to commit 50 days a years, spread over the year, not just in the long summer vacation).

Potential conflicts of interest have always been a bit of an issue, and the main reason I asked for the information pack was to see how they proposed to handle that issue.  Frankly, the material I received –  which included a draft Code of Conduct –  suggested they haven’t really thought sufficiently hard about it yet.   The conflict of interest provisions look a lot like those I used to be subject to as a staff member participating in the OCR Advisory Group, but don’t really grapple adequately with the situation of part-time externals, presumably earning their living (or occupying their time) mostly doing other, non Reserve Bank, stuff.  For example, there is (reasonably enough) a prohibition on

Members must not be personally or professionally involved, directly or indirectly, in regular trading in financial markets in which the Bank has, or might have, a significant influence. This includes domestic wholesale money, bond and foreign exchange markets, interest and exchange rate futures, options and swaps markets, instruments linked to such markets, equities listed on New Zealand exchanges and prediction markets related to those issues in which the Bank might have a significant influence.

(If only the predictions market had not, in fact, been killed off by the previous government).

And under the legislation public servants and directors/employees of entities regulated by the Bank will be probibited.

But there is no sign that, say, someone in my position would be disqualified or conflicted (in terms of this specific policy), despite being a trustee of two superannuation schemes and devoting a fair chunk of my time to, at times quite vocal, commentary on aspects of economic policy.  I’d certainly regard both of those sorts of involvements as disqualifying –  even scrupulously observing confidentiality –  and I would expect most Monetary Policy Committees in other countries would do so too.

(And in case anyone is in any doubt, I have no interest in the MPC positions myself. They are set to be ineffectual figleaf positions.)

And so it will be interesting to see what people they finally manage to attract, both in the first round, and a few years later when the novelty has worn off.  A smart (but deferential) semi-retired person would probably fit the bill quite well, but since the government and the Bank have been clear they don’t want people who might rock the boat, and they apparently aren’t keen on economists, and since even the externals together will be a perpetual minority, you wonder why someone good would be interested.   Pocket money probably shouldn’t be the motivation, at least if the government were serious about putting in place a strong, well-functioning, MPC.  Of course, as it is, there is no evidence of such intent.

6 thoughts on “Towards an MPC

  1. Really bad look considering submissions on the Bill haven’t even closed yet – and the extremely short time frame for recruitment, suggests shoulder tapping has already taken place. Very bad look – I’d be really surprised if the Minister approved this timing of the process – and I’d be equally surprised if he agrees that no appropriate experience is necessary, as per the wording of the ad. Again, that suggests shoulder-tapping. Some enterprising Parliamentary reporter ought to put the question directly to the Minister.

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  2. Not too sure why they need to pay a whole bunch of people in a Board that clearly do not have a clue when the obvious Monetary Policy track is down, down and down. They should just give it to Shane Jones NZ First’s Tree planting provincial fund. I was at Bunnings yesterday checking out tree sapling stakes and they are $5 each. Holy moly, that’s $5 billion just in the tree planting stakes without the tree saplings for his 1 billion tree program.

    “Falling business confidence is spreading. in July, bank lending to business fell sharply, down -$1.731 billion or -1.6% month-on-month. But bank deposit accounts pick up. They are up +0.9% month-on-month and +7.3% year-on-year. That is faster growth than overall lending growth of +5.2%.and +10.3% year-on-year, heady growth in anyone’s terms.

    That means bank deposits grew by a massive +$2.6 bln more than bank lending in July from June.” Interest.co.nz

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  3. Do you know anything about the new trade deal between Australia and Indonesia Michael? It seems to have the same elements that gave us Auckland

    ““Because we know from first-hand experience that free trade works. It has underpinned Australia’s economic success for more than half a century and fuelled Asia’s rapid growth.”

    The trade deal will be the crowd pleaser back home — giving higher education institutions and health services greater access to Indonesian markets and beef cattle and wheat exporters more certainty. Indonesia too, with its 132 million-strong workforce — roughly half of them with only a primary level education, is pleased with the outcome.

    “We want to open up for education, and also focus on training. We need it very badly,” Indonesian Chamber of Commerce and Industry chair Rosan Roeslani said this morning. “This is I think the key element for our agreement.”
    Indonesian Business leader Shinta Kamdani agreed opening up the two countries to services exchange was a “big part of this agreement.”

    “It’s not just trading goods,” Ms Kamdani said. “The fact we can skill exchange, vocational training, I think that’s a big thing for Indonesia.”

    But it is the elevation of the bilateral relationship to a Comprehensive Strategic Partnership, also announced Friday, that could be the most significant game changer for the region, depending on what meat the two nations can put on the bones of that agreement. ”
    https://www.theaustralian.com.au/national-affairs/australiaindonesia-free-trade-deal-a-jobs-bonanza-says-scott-morrison/news-story/3ca84a7aea1ef89d504dd52fae8f9daf

    “Thousands more Indonesians will be allowed into Australia on working holiday visas under the conditions of a landmark free trade agreement.”
    https://www.sbs.com.au/news/indonesian-working-holiday-visas-to-rise

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