Unelected officials wielding too much power

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.

police

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.

 

 

15 thoughts on “Unelected officials wielding too much power

  1. I am continually impressed with the opinions you have and share about the Reserve Bank and the influence the Bank has with leadership that seems to have little accountability to any Minister or to the people they supposedly work for namely we the people. As for the threat of a reduction in our standard of living with some of the decisions being made in the Bank and in Govt, one can feel very uneasy about where NZ is heading. Is the name of the game to reduce us all to the lowest common denominator. Heaven help NZ.

    Regards,

    Margaret

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    • I support the introduction of retail deposit insurance. That – or use of OBR, together with or instead of deposit insurance – will be a decision for the Minister of Finance, not the Bank (the Bank is keen on OBR, but in law it can only recommend, the Minister decides).

      Having said that, I’m wary of too readily concluding that depositors are willing to pay for such insurance. Think of term deposits. We already have a rock solid option – govt issued Kiwi Bonds. At present, there are only $177m on issue
      https://www.rbnz.govt.nz/statistics/d30

      (Of course, the pricing is quite “aggressive” (exploiting the very risk averse) – 1.75% for 6 mths, whereas banks are offering just over 3% (with credit risk) – and insurance could be priced more sharply than implied by that spread. )

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      • if housing collapses money has no value those deposits backed by insurance will have no value. money is backed byou house prices. Actually it’s called currency.

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  2. “” 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) “”.

    So why does the minister for Immigration seem to have the authority to override his civil servants? There have been several cases over the last 17 years that seem dubious. My own opinion is the minister is responsible and should have the right however it ought to require a televised vote by parliament with the opportunity for objections to be made. As it is the public only hears about Kim Dotcom and Peter Thiel after the event. (if I am confusing issues of permanent residency and citizenship my objection applies to both).

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    • I don’t have too much problem with something like prerogative powers of mercy (eg in the old days, a court might pass a death sentence, but the Home Secretary could decide to commute). The Governor-General on advice can pardon prisoners. The Minister of Immigration deciding not to deport someone perhaps falls in the same category.

      But I agree there should be a lot more transparency. When the Thiel case was around, I suggested that any use of the exceptional powers to grant citizenship should be done fully transparently, and perhaps with a month’s advance notice of the Minister’s intent to exercise that power.

      (I wasn’t aware there was a ministerial issue about Kim Dotcom getting in to NZ. Am I wrong?) Actually, re Kim Dotcom, I also don’t have a problem with the Minister of Justice exercising the final decision if the courts order deportation – it is one thing to remit or set aside a penalty (esp once open process has reached a normal view) and another to be able to impose an impost (loss of liberty, big economic cost) discretionarily. Bills of attainder are rightly abhorent to our system/tradition.

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      • I may have to apologise to Mr Dotcom – I remember reading the original recommendation was to refuse because of his police record. There have been a few other cases of decidedly odd cases where ‘developers’ were approved – I remember a large site in Ponsonby that remained empty for years subsequent to promises to develop. If it was PNG the public assumption would be blatant cash in brown envelop style corruption; in NZ I’d assume no money trail but certainly knowing somebody who knows somebody type of influence.

        Having been critical of the govt of China on this website it is embarassing that we have headlines such as “”Four of China’s ‘most wanted’ for alleged corruption are reported to be hiding out in Auckland””. If they were wanted for being Christian or Tibetans or Falun Gong we might be proud. Clearly INZ have made too many mistakes in the past.

        Back to your subject – the actions of the Reserve Bank – last night I came apon a Youtube speech by Milton Friedman where he claims the RB of America’s annual report always praises its own actions; even in 1932. If the economy is booming it claims credit and if things are bad it explains how much worse it would have been except for their efforts.

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      • Not understanding ‘bills of attainder’; if you say Mr Dotcom should not be deported to America to face trial for a non-violent crime that was not committed in NZ more than a decade ago then I agree.

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      • The Peter Thiel episode is currently doing the rounds of the News Media dance floor again (and again and again) wonder why

        Gets dragged out and dusted off at least once a year – in the NZ Herald right now

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  3. Agree with the sentiment of the article.

    a) the law covering the RBNZ needs to clearly set out the scope of regulations the RBNZ can change/implement without resort to government approval, & those it cant. One could argue in this case it is the law that is wrong if it is within the RBNZ gambit to change the capital requirements as it sees fit

    b) Ideally the Capital Requirements proposal should go through a full business case assessment and consider a long list of options, e.g.
    i) OCR
    ii) deposit insurance & no change in capital requirements
    ii) change capital requirements only
    iii) change capital requirements + deposit insurance
    iv) change capital requirements + no deposit insurance & market government treasuries/bonds to the public as safe assets
    v) etc, etc, etc
    which gets analysed down to a short list & then final recommended option.

    c) meaningful consultation

    d) If the government doesnt need to approve the regulations (or law not amended so it does), one would hope that at least the RBNZ board is required to, or the legislation changed so that it does.

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    • As it stands, the RB Board has no role, other than ex post in their performance review to ensure that the Governor has acted within the law (which, no doubt, he will have). The role of the Board etc is being reviewed in a government-initiated process at present, but that is with a view to legislation perhaps next year or the year after (and no certainty of change in these areas at all).

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  4. No, my point was just that laws shouldn’t be targeted at specific individuals, and by extension politicians should not be able to use existing laws to target specific people (while ignoring others etc).

    Re Dotcom, personally I wish we could send him back to Germany and let the Germans and the US sort it out (I think there is no extradition practice of deporting German nationals to the US).

    Could you send me the link to that Friedman speech. I guess all bureaus – not just central banks – tend to favourably spin their own performance, and typically even believe it. One reason to be wary of resting too much power in their hands.

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    • Given the years of legal wrangling and costs incurred by the NZ government it is clear that Kim Dot Com has not broken any New Zealand laws. We just stupidly invaded his private life and private property due to some vague US FBI request for extradition with a gungho use of force.

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