The Governor of the Reserve Bank is currently consulting on his own proposal that would markedly increase the share of their balance sheets New Zealand registered and incorporated banks have to fund from equity. Whatever the possible merits of this proposal – saving some possible, but highly uncertain, costs in several decades’ time – it is an expensive proposition. From the economy’s perspective, if his deputy is to be believed, we’ll all be poorer (level of annual GDP permanently lower) by about 0.25 per cent. In present value terms, that is a cost in the range of $15 to $20 billion. As for the owners of the banks themselves, they will have to stump up billions in new capital just to keep doing the business they are doing now. Among other options, the Deputy Governor cavalierly observes, they could simply sell off part or all of their business (which seems to be one of the possible outcomes the Governor would quite like – with no statutory authoritiy – to see).
All on a whim, supported by flimsy analysis at best. And with few or no protections for citizens or for the owners of the directly affected private businesses. Government in a free society shouldn’t be done this way. And mostly it isn’t. Mostly there are a lot more checks and balances. But not when it comes to the Governor of the Reserve Bank exercising his extensive regulatory powers over banks.
Typically, if a bureaucrat has a bright idea about a new rule or law, he or she first has to persuade the bosses of their own agency. Even if they are persuaded, the boss then has to persuade the relevant minister. The minister might have to persuade his or her Cabinet colleagues (at which point other relevant government agencies will have input to the Cabinet paper). And Cabinet may even need to persuade Parliament, a process which involves select committee submissions (which are public), deliberations and reports back, sometimes through a committee chaired by an opposition party MP. Even if it is the minister who has the bright idea – and ministers are actually elected, and can be tossed out again (either by the PM instantly or at the next election) – it will still typically have to go through much the same sort of process – referred to the relevant agency/department for advice, and so on as above. Heads of agencies/departments don’t set out to gratuitously upset ministers, but they do have an degree of independent status and authority and can, and sometimes do, offer free and frank advice on a minister’s bright ideas.
Contrast that with what happens when the Reserve Bank has a bright idea around the regulation of banks (“hey, how about we double the amount of capital banks have to have?”). If there are any formal checks and balances, they are about process only. I’m sure staff still come up with ideas – good ones and daft ones – and not all of them are accepted by management.
But if an idea comes from the Governor, or is once accepted by the Governor, things quickly become all-but-unstoppable. After all, all the power (around the regulation of banks) rests with the Governor personally. Someone who wasn’t elected, and wasn’t even directly appointed by someone who was elected – rather he was chosen by half a dozen faceless company director types who themselves have no accountability and little or no subject expertise. All the executive power with in the Bank also rests with the Governor personally (not necessarily a problem in itself, except in conjunction with that extensive policymaking power). If we blessed with a highly competent saint as Governor – of equable temper, open mind, encouraging dissent etc etc – none of this might matter much. But such people will be (exceedingly) rare: we need to build institutional arrangements around the crooked timber of humanity; people with all their flaws, biases etc. Few of us are as ready to acknowledge the weaknesses in cases we are advancing, championing, as might objectively be warranted. That is human nature, not something to specific to central bank governors. It becomes harder to change our minds the more we’ve nailed our personal colours to the mast. Everyone recognises that, which is why most serious decisions involve multi-stage processes, appeal or review rights etc. In the criminal system, you can’t be prosecutor, judge, jury, and appellate court in the same case – even in places like the PRC, in the deference vice pays to virtue, they observe the form of distinctions like this, although not the substance.
And yet that is exactly how the bank capital proposals are handled. It is not even as if there was any socialisation of the ideas, testing of the argumentation, with interested and/or expert parties in advance of the Governor’s proposal being announced. Instead, with little or no preparation of the ground, the person who will be the final decisionmaker launched his radical proposal. Understandably, he and staff now champion that proposal in public fora (interviews, speeches etc). But how then do we suppose that the Governor will be able to bring the requisite degree of objectivity and detachment to the submissions that come in. No doubt, he will do enough to get through the legal hoop of “having regard to” the material in the submissions, but that is much much too weak a standard when he is prosecuting a case in which he will also be judge. Imagine a criminal case in which the prosecutor was also judge (and there were no substantive appeal rights): the prosecutor/judge might swear black and blue that they would take seriously defence evidence/arguments, but no one – no one – would regard that as a credible or appropriate model. It isn’t either when it comes to multi-billion dollar regulatory decisions.
The problems are compounded when the people most directly affected by the Governor’s regulatory whims have to keep on his good side because the Governor wields a great deal of discretion around other things that matter to individual banks (approval of models, approval of instrument, approval of individuals). That has typically left banks very reluctant to say anything much in public about what the Governor might be proposing, no matter how potentially costly or troublesome those proposals might be. From their own perspective, that might be the best course open to them. It isn’t a pathway to good policymaking, or robust decisionmaking around bank regulatory matters.
There is no need for things to be done this way. A more-normal process would involve major policy decisions being made by the Minister of Finance, or preferably Cabinet. The Minister would want to take expert advice from the Reserve Bank and from the Treasury, and it might even open to those agencies to champion their preferences in a consultative document. But when unelected people are championing change, they shouldn’t also be the ones making final decisions, with no appeal or review rights. (All the more so in a structure like the current Reserve Bank one in which all power rests with a single individual – a highly unconventional, inappropriate, governance structure for major regulatory powers.)
The specific issues are totally unrelated, but I had much the same thoughts – too much power resting with unelected unaccountable bureaucrats – when I listened to the Police Commissioner on Morning Report yesterday asserting his absolute right to decide whether or not Police routinely carry guns. (This is the same Police Commissioner who thought it appropriate to give the eulogy, praising the man’s integrity, at the funeral of a former policeman found to have planted evidence.) The mantra of “operational independence” was chanted, in ways reminiscent of the Reserve Bank.
I’m not clear whether the Polce Commissioner really has the power he claims (although successive ministers seem to have been willing to defer to that view), but when I looked up the Policing Act it contained a high-level distinction between matters for the minister and matters for the Commissioner that seemed appropriate.
The items under 16(2) seem like exactly the sort of areas we don’t ministers involved in: the Minister of Police should never be able to tell Police to arrest, or not arrest, a friend or enemy (any more than the Minister of Finance should be able to tell the Governor to go easy on bank x and hard on bank y, where cronies might be involved) or interfere in individual personnel decisions
But applying the law to all people without fear, favour or political interference is very different than a general policy question as to whether, say, Police should routinely carry guns. That is the sort of choice (including about what sort of society we want to be, what risks we will accept, or not) that only elected politicians – directly accountable to us – should be making. The incentives are all wrong otherwise. I’m strongly opposed to routinely arming Police, but I’m even more opposed to letting the Police Commissioner get away with assertions that it is a decision for him alone to make. If that really is the law, it should be changed. No matter how much Police Commissioners like to tell you they serve the public, historically they (and probably any bureaucracy) will tend to serve its own interests more. Thus, I noticed an article in which the southern police commander, asked what kept him awake at night, replied that it was safety of his officers. That is natural, and not even necessarily inappropriate (and health and safety laws apply to Police management too) but against that has to be weighed other interests – for example, the rights of law-abiding citizens not to live in fear of Police, the rights of innocent people not to be deprived of life by a Police officer acting rashly (it happens) and so on. It is simply unreasonable and inappropriate to allow Police themselves to make such policy decisions.
Democracy isn’t perfect by any means, just less bad than the alternatives. And one of those alternatives involves delegating a great deal of power to unelected unaccountable bureaucrats. When big policy decisions – whether about capital structures of banks, or routinely arming the Police force – are involved, only those who are elected – and thus able to be unelected – should be making the decisions. And when officials are championing any particular cause, they shouldn’t be the ones making the final decisions, the more so when there are no appeal rights. Too often, of course, it suits politicians to opt out – not just here, it has been a huge problem in the US Congress for decades – but if they aren’t willing to make and defend hard decisions themselves perhaps they should consider another occupation. We want and need experts for (a) advice, and (b) implementation. But the big choices should be made only be those whom we elect, and can toss out again. Neither Adrian Orr nor Mike Bush has got themselves elected.