An embattled Orr

Still catching up, but noticing some concerning newspaper stories about how the Governor was handling things, yesterday I finally got round to reading the Reserve Bank’s Financial Stability Report and watching the Governor’s press conference.

Of the former, probably the less said the better.  It is a disappointingly lightweight effort, clearly designed to sound a bit more worried about New Zealand financial system risks – to support (belatedly) the Governor’s capital proposals – even while offering no evidence to suggest that such risks were (a) significant, or (b) worsening.       There were statements of the blindingly obvious –  “some” households and farms are overindebted, as if that has not always been the case –  and alarmist conclusions (about the threat banks could face if lots of borrowers default) made without any reference to the Bank’s own repeated stress tests.

And then there was the press conference.   I’ve seen some pretty poor performances from Governors over the years –  early ones by Alan Bollard were often awkward, and as Graeme Wheeler became more embattled the defensive introvert, never comfortable with the media, took over.     But this one was the worst I’ve seen, and from someone who has many talents in communications.  But just not, so it is confirmed again, in coping with challenge, disagreement, or finding himself on the back foot.  I doubt a senior politician would have got away with it, and it isn’t obvious why an unelected bureaucrat, uncomfortable at facing serious scrutiny, should do so.

The Governor and Deputy Governor faced several questions about the possible impact of the Bank’s capital proposals on farm lending –  various commentators have suggested such borrowers will be among the hardest hit.  The Bank attempted to push back claiming that any sectoral impacts were nothing to do with them, and all about banks’ own choices.  But they seemed blind to the fact that banks will have more ability to pass on the additional costs of the higher capital requirements to some sectors, some borrowers, than others.  And that is because of a point the Bank never addresses: their capital requirements don’t apply to all lenders.

They don’t apply to banks operating here that aren’t locally incorporated, they don’t apply to banks operating abroad in respect of loans to New Zealand entities, they don’t apply to local non-bank institutional lenders (deposit-takers, who have their own capital regime, or others), and they don’t apply to bond markets.   So some borrowers (think large corporates in particular) have a variety of alternative options and others don’t.  Almost inevitably the costs of the Bank’s capital proposals would bear most heavily on those with the fewest options, and farm borrowers are foremost among that group (there isn’t a big appetite from new entrants to build farm loan books, and farm lending is information-intensive and quite property-specific).   The Reserve Bank’s failure to openly and honestly address these sorts of issues –  none of them have been touched on in any of the consultative documents –  reflects poorly on them.   Whether it is because they simply never recognised the issue, or are trying to play blame games and shift responsibility etc, isn’t clear, but since the issues have been raised here (and elsewhere) for months, there is an increasingly likelihood that they know exactly what they are doing, not playing straight with the New Zealand public.

The Governor came across as embattled from start to finish –  embattled at best, at times prickly, rude, and behaving in a manner quite inappropriate for a senior unelected public official exercising a great deal of discretionary power, with few formal checks and balances.   BusinessDesk’s Jenny Ruth – who often asks particularly pointed questions about the exercise of the Bank’s regulatory powers, and the lack of transparency around its use of those powers – was the particular target of his ire, and at one point he tried to refuse to take further questions from her.

It isn’t always clear that the Governor hears the way he sounds: he goes out of his way to state that it is a genuine and open consultation, only to then conclude “but we are going to have more and better capital” –  in other words, no true consultation at all, as he has already made up his mind on the big picture.  Asked by another journalist what had changed in recent years that made further big increases in capital requirements warranted now, he fell back on spin –  no substantive answer, but “not enough has changed since 2008”, which isn’t a serious answer at all, especially in view of (a) the resilience of Australasian bank loan books in 2008/09, (b) repeated stress tests since, and (c) that aggregagate debt to income ratios are little different now than they were 10 years ago.   At one point, he actively misrepresented a prominent submitter’s submission.

Not all the awkward questioning was about the new capital proposals.  Some was about the recently-discovered failure of ANZ to use approved models in calculating capital requirements for operational risk, in the course of which it was revealed –  belatedly –  that the  Reserve Bank had told banks  (but not the public) that it is no longer approving any changes they would like to make to their internal models.    Under pressure –  this is after all the Reserve Bank’s day job –  the Governor moaned that the Bank hadn’t been adequately funded and that they had to prioritise. It was a shame no one asked about why the $1 million on the Governor’s Maori strategy, his tree god spin, and the endless talk about climate change –  at best peripheral to the Bank’s responsibilities – is being prioritised over proper adminstration of the bank capital regime.  Someone still should (after all, recently they had the money to send two staff to Paris for a climate change shindig).

The press conference deterioriated further as it got towards the end.  Without specific further prompting, the Governor noted a certain frostiness in the room, and then launched off again in his own defence.  The Bank was very transparent –  he asserted, even though it took months to get the full capital proposal documentation out, and we still have no cost-benefit analysis –  and it was very open-minded (except that, as he told us, he was closed minded on the needed for more and better capital).  He went on to note that he needed to rely on facts, and he would welcome decent questionings but (and I paraphrase) “I will be short with people when I see continuous mis-statements from journalists and others with vested interests”, all while – he told us –  he was trying to serve the interests of the people of New Zealand.

It should become a case-study for official agencies in how not to do things.

But it appears that Orr wasn’t finished, and didn’t go back to his office, reflect that that hadn’t gone well, listen to some sage counsel from his senior managers or Board, and re-engage in that sunny upbeat way the Governor at his best can manage much better than most.

A couple of articles in the Herald in recent days tells us some more of the story.   The first was from Liam Dann, who has in the past provided a trusty outlet for the views of successive Governors, and the second was a column from Pattrick Smellie, under the heading “Bunker mentality returns to the RBNZ?”, evoking unwelcome memories of the Wheeler governorship.

Dann’s article draws from a media lunch at which Orr had apparently been speaking.  There was, it appears, no hint of emollience, no suggestion of welcoming all the thoughtful work and analysis that had gone into the many submissions the Bank had received.  That is what a normal person would do and say (whatever they felt privately).  But not Orr.  He’s all in.  People either don’t understand, or they choose not to understand because –  on the Governor’s telling – they are all self-interested, part of the financial sector, while he –  and he alone it appears –  is looking out for the future of New Zealand.   If you think I’m caricaturing, read the article for yourself (I’m reluctant to excerpt extensively something behind a paywall).   But here are two extracts.

Orr said he had expected the strong critical response from the banks because he was aware of “the capability and resource” within the industry to lobby for the status quo.

“It is a very, very powerful industry.”

But he said he had been surprised by the personal attacks and “the underlying venom” that had come from the broader financial sector – including bloggers, think tanks and some sections of the media.

The noble Governor –  alone equipped to assess the public interest –  as the Three Hundred at Thermopylae facing down the amassed hordes of bankers (and “bloggers, think tanks and some sections of the media”).

Not only is there nothing about the substance of the arguments and evidence submitters and commenters have made (at length over many months) but note the attempt to imply that anyone criticising his proposals (and the very weak process around them) was part of the “financial sector”.   No doubt my views don’t count for much, but I’ve articulated numerous questions and criticisms here (and in my submission), and have never once taken a cent from the “financial sector”.  My former colleague Ian Harrison has extensively critiqued the Bank’s proposals and supporting documents, and I know for a fact it was entirely a labour of love (well, voluntary and unremunerated anyway).  And even if affected industries have made submissions –  shouldn’t we want them to? –  the onus should still be on the Governor and his staff to address issues and criticisms in a constructive way, not to engage in some sort of Trumpy politics of slur (no need to engage, because you are  – great evil –  banks).  It actually got worse at FEC (at least according to the Smellie column): questioned about why his “independent experts” (appointed belatedly) were all from abroad, he couldn’t stick to a moderate line that (say) most New Zealand residents who knew much about the issue had already weighed in in one form or another, but had to resort to the (frankly slanderous) suggestions that any New Zealand experts “had already been ‘bought’ by the trading banks”.

In the Dann article there was further illustration of how the Governor plays politics and spin, rather than engaging on substance.    We get this

Orr described the notion that the major banks “sailed through the GFC” as a popular myth that had taken hold with the general public.

In fact sailing through had involved a $133 billion overnight guarantee, an $8b direct asset purchase by the Reserve Bank to provide liquidity, a $10b wholesale underwrite and a drop of the OCR by 5.75 per cent.

I know Orr was not in the core public sector at the time (he was trading the markets at NZSF), but this is a highly misleading attempt to play distraction.   First, as the Governor very well knows, the big banks did not want to participate in the retail deposit guarantee scheme (the Minister of Finance compelled them to, as a condition of the limited wholesale guarantees).  Second, as the Governor equally well knows, every wholesale funding market in the world dried up for a time (and for reasons –  as all the contemporary documentation makes clear –  that had nothing to do with the specifics of Australasian banks).  Third, it is a core role of the Reserve Bank to provide liquidity support when demand for liquidity rises.  Fourth, as regards banks, all those operations were profitable for the Crown.    Fifth, the scale of the OCR adjustment is totally irrelevant to questions of bank soundness or otherwise –  there was a severe recession, partly domestic, partly foreign –  and adjusting the OCR as it did was just the Reserve Bank doing its day job (a little slowly as it happens).  And finally –  and really the only point of relevance to the capital debate  – bank losses (and NPLs) remained impressively moderate through that nasty recession and slow recovery.  Capital was never impaired.

On my reading, even Pattrick Smellie’s column is too willing to defend Orr’s conduct –  last week, and more generally.    He sticks up for his use of the Bank to pursue climate change agendas that have no grounding in statute (translations of the Bank’s self-chosen Maori name signify precisely nothing), of the tree god nonsense and the costly Maori strategy (even defending Orr’s claim that criticism of him on this is somehow “racist”).  And he buys into the Orr propaganda line that the Bank is “now more open and transparent” (it just isn’t so –  the capital review is only the latest example, but nothing material has changed about monetary policy, we’ve had no serious speeeches from the Governor on his core responsibilities, and they play OIA games just as much as ever), but this really should worry the Board (albeit they are usually in the Governor’s pocket), The Treasury (other distractions I suppose), and the Minister of Finance.

Ebullient, rambunctious, prone to Shane Jones-ian turns of phrase, Orr is the antithesis of his prickly predecessor, Graeme Wheeler. The RBNZ is now more open and transparent.

However, Orr and members of his senior team are starting to exhibit some of the same bunker mentality as beset Wheeler,

Orr very much needs to be pulled into line, for his own sake and that of the country (as single decisionmaker he still wields huge untrammelled power).  At present, he is displaying none of the qualities that we should expect to find in powerful unelected official –  nothing calm, nothing judicious, nothing open and engaging, just embattled, defensive, aggressive, playing the man rather than the ball, all around troubles of his own making (poor process around radical proposals made without any robust shared analysis, all while he is prosecutor, judge, and jury in his own case).

It is a sad week for New Zealand when the heads of our two main economic agencies –  The Treasury and the Reserve Bank –  are so much, and so deservedly, under intense scrutiny, and when we have no idea who will even be Secretary to the Treasury –  lead economic adviser to the government –  three weeks from now.



7 thoughts on “An embattled Orr

  1. Thank you Michael for your faithful expose on this facet of NZ life. I read every post you make and am deeply appreciative of the wealth of experience you so eloquently bring to bear on issues that affect us all, but few of us have the insight or connections to do so. Big thanks for your past work and what you will contribute in future.


  2. On the FSR the system ‘soundness ‘ assessment that has been in every FSR has been dropped.

    Apparently the focus is now on whether the system is resilient- what ever that means.

    Having declared in the capital consultation that soundness required a 16 percent capital ratio the Bank would have had to declare the system to be unsound if it had stuck to its guns. So it ducked the issue.

    Liked by 1 person

  3. His response is too reductive for even a Marxist undergraduate student. He makes the classic “follow the money” argument, rather than argue the merits of his case. Even if someone has an economic incentive to pursue a certain argument, they may still be correct despite this – economic interest is only relevant when assessing testimony, but not logical argument. And in the banking context it is even more pathetic – the banks are being asked to chop into their profit margins, and yet he just argues that you don’t like it because you don’t want to chop into your profit margins. Yes, of course – profits are a good thing for a company. Why would you expect the banks to just surrender them without a properly debated conclusion being reached?

    Indicates to me that besides his various personality weaknesses, he is at heart a strong leftist with limited sympathy for a free market banking system. He is entitled to that view, but shouldn’t be in this role.


    • Damoyo, I note your comment that Adrian Orr “is at heart a strong leftist with limited sympathy for a free market banking system.”

      It’s worse than that — much worse!

      On 1 November 2018, the New Zealand Treasury and the RBNZ jointly issued a public consultation paper entitled: “Safeguarding the future of our financial system – The role of the Reserve Bank and how it should be governed – Phase 2 of the Reserve Bank Act Review”.

      This document makes it perfectly clear that — as they both signed it off — both Gabriel Mahklouf and Adrian Orr erroneously believe that banks are financial intermediaries that take in money from savers, aggregate it, and on-lend it to borrowers, and that they make an honest living from the margins between the interest rates that they pay savers and the interest rates that they charge borrowers,

      On the lower part of page 17 of that document is one of at least four sections of text that prove what I have stated in the preceding paragraph. I quote: “A bank is a financial intermediary that takes customer deposits (and other sources of funding such as equity and wholesale market debt), and lends them out as loans and mortgages.”

      Absolutely nowhere in the Treasury/RBNZ document referred to above is there any mention of the fact that banks are money creators. Throughout, the NZ Treasury and the RBNZ present banks as being mere financial intermediaries.

      The section of text reproduced above shows without a shadow of doubt that certain employees of the NZ Treasury and of the RBNZ – who should know better – either have a false understanding as to how the banking and monetary system actually works, or are deliberately lying. They therefore have no business advising a kindergarten – let alone our government – on anything to do with finance and banking!

      The employees responsible for this outrageously misleading document should hang their heads in shame! The buck must stop with Gabriel Makhlouf, the Secretary for the Treasury, and Adrian Orr, the Governor of the RBNZ. They both deserve to be dismissed forthwith.

      That the Treasury and RBNZ are advising government on the regulation of the banking industry is, IMHO, farcical. The vice chancellors of every one of our universities should hang their heads in shame, for by and large it was their supposedly learned lecturers in our universities’ departments of economics who taught the fake knowledge of neoliberal, mainstream macroeconomics to those misguided Treasury and RBNZ employees who produced that public consultation document!

      Rather than acting to “promote the prosperity and wellbeing of New Zealanders and contribute to a sustainable and productive economy” as it is supposed to do, the RBNZ enables and aids banks to make insanely obscene profits – far higher than would be possible if banks were merely financial intermediaries as both the Treasury and the RBNZ, by the above incontrovertible evidence, erroneously believe them to be.

      In fact, banks are not financial intermediaries. Banks are money creators, as shown by the unanimous Report of the 1956 NZ Royal Commission into Monetary, Banking and Credit Systems. That fact was again revealed in the two Bank of England papers “Money creation in the modern economy” (2014), and “Banks are not financial intermediaries, and why this matters” (2015) In these papers, staff of the Bank of England describe how money is created out of nothing as debt to banks when they grant loans and when they purchase assets, and destroyed (i.e. sent back into the nothing from whence it came) whenever any bank loan principal is repaid.

      IMHO, the RBNZ should be conduction some serious research to establish which of two banking and monetary systems — the present one or a Sovereign Money one — would better “promote the prosperity and wellbeing of New Zealanders and contribute to a sustainable and productive economy”, as the RBNZ’s mandate requires it to do.

      In a Sovereign Money banking and monetary system, we would for the first time experience true “people’s capitalism” as expounded by Adam Smith.

      Capitalism as defined by Adam Smith in 1776 in his classic treatise ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, was a system by which the capital markets would take the deposits that people and businesses put in the bank, and with their permission invest them in real businesses that create real jobs and real economic growth. The world would be a much more wonderful place if that was how capitalism and banking actually work – and in my humble opinion, if that had always been the case, Karl Marx would never have proposed communism!


      • Frankly our banking system works quite well. What is my main concern is how commercial loan interest rates around 7%, Farm loan and residential Overdraft interest rates are around 5% can get closer to the OCR rate of 1.5%. That gap is still massive.


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