A post this morning doing something rare: praising National, or more particularly their finance spokesman Paul Goldsmith.
There was an article on Stuff yesterday, and in the Dominion-Post this morning, in which Goldsmith is quoted as suggesting that politicians should set policy. In this particular case, National is proposing that the Governor of the Reserve Bank – unelected, and in effect appointed by other unelected people – should not get to set regulatory policy around banks all by himself, but that politicians – in this case the Minister of Finance – should do so.
The article begins in a rather overwrought style
National Party Finance Spokesperson Paul Goldsmith wants to shake-up banking, by ripping a scab that hasn’t been touched for 30 years.
Goldsmith has called into question the independence of the Reserve Bank, responsible for setting interest rates and regulating banking.
But read on a bit and, of course, you find that National isn’t proposing any changes to the operational autonomy the Bank’s Monetary Policy Committee enjoys in adjusting the OCR to meet the target set for them by the Minister of Finance.
What they are talking about is regulatory policy around banks, where – for the time being – the Governor enjoys a huge degree of freedom of action, with hardly any checks and balances, to set policy as he personally chooses. Yes, the legislative foundations for that model are 30 years old but (a) when the legislation was passed, no one really envisaged much active banking regulatory policy at all (the Bank was a reluctant player and governments weren’t keen) and (b) the legislation has seen grown like topsy, with little real scrutiny, in effect allowing one bureaucrat – almost totally unaccountable – to undertake huge regulatory interventions on little more than his/her own whim. Successive waves of LVR restrictions were done like that, and now the Governor’s proposals to hugely increase capital requirements for locally-incorporated banks are just done on the same whim.
Who elected him? one might reasonably ask. The answer, of course, is no one.
And thus Goldsmith
Goldsmith thinks the Government should have a say as well.
“It defies belief that the Crown, represented by the Government of the day, shouldn’t have a significant say in determining that risk tolerance,” said.
This is because ultimately, the Government is going to be on the hook if there’s a banking crisis that leads to a bail out.
Which is right, but doesn’t really go far enough. Even if there were no risk of bank bailouts – say we could count on the Bank’s OBR model being used by governments in a crisis – these still aren’t choices that should be left to unelected officials. Very few areas of policy are, and rightly so. We live in a democracy, and one of the key features of a democratic system is, or should be, that big and controversial choices should be made by people whom we’ve elected and can hold to account, can eject if necessary.
We might want independent people to apply the law – whether as judges ruling on disputes, or officials applying laws impartially as between people (or firms) – but people we’ve elected should make the rules, in Parliament itself as far as possible.
We also want capable, judicious, and (one hopes) expert advisers to ministers. We don’t expect our ministers or MPs to be technical subject experts – sometimes it can help if they are, but generally temperament and the willingness to ask awkward, even seemingly silly, questions is rather more important. That and a set of values and predispositions that have been subjected to an electoral test.
Our tax system is an excellent example of the paradigm. Taxes are, almost with exception, set by Parliament, and Ministers introduce legislation to establish or vary provisions of the tax system. There are all manner of expert advisers – not just in Treasury and the IRD but also working groups, professional firms, and independent academics and commentators – who may have influence, but do not set policy. And then IRD administers the system, without fear or favour, without political involvement or interference. It isn’t that different in a host of other policy areas: welfare policy is set by ministers and Parliament, advised and lobbied by experts and others, and applied without fear or favour (Minister’s relatives aren’t supposed to be treated more favourably) by MSD. It is a pretty standard operating model.
But not when it comes to some key areas of the Reserve Bank’s powers. That really should be changed, and if Paul Goldsmith’s comments are a indication the National Party to do so when next they are in office, I can only commend them. We want banking regulatory rules applied to individual banks without fear, favour or political interference (no favours for a minister’s pet bank, or one owned by his/her cronies) but the high level rules should be set by those we elect/eject. It is already the way things are for non-bank deposit takers, where – in newer legislation – most of the policy-setting powers are reserved to ministers, just not for the institutions that really matter – banks. Thus, LVR restrictions were applied to banks, on the then-Governor’s whim (no serious supporting analysis) but not to other deposit-taking institutions because the Governor did not have to power to impose such controls himself.
No doubt the Governor would hate the idea of taking away some of his power. International agencies like the IMF probably wouldn’t be too keen either, but the IMF has little interest in democracy, accountability, or good government (only narrow specialised interests in, eg, banks) whereas New Zealand citizens and political parties do, or should.
And none of what I’m saying here is really radical. I’ve written previously about Unelected Power, the excellent book published last year by former Bank of England Deputy Governor, Paul Tucker, which deals with many of these questions – what powers should be delegated, on what conditions, in what circumstances, to unelected decisionmakers. He reaches wider than just central banks and financial regulatory agencies, but what he has to say is of great relevance there.
There may, for example, still be a good case for delegating operational decisions around monetary policy to an independent committee – it is, for example, relatively easier than in many areas to pre-specify a goal and later to hold the decisionmakers to account. But neither of those criteria apply when thinking about big financial regulatory policy choices, including those New Zealand is facing at present around the orders of magnitude for bank capital.
We cannot meaningfully articulate an objective for independent policymakers to work to, in a way that is usefully constraining, and we cannot tell afterwards whether they have done a decent job (the Bank claims to be limited crises to no more than 1 in 200 years – in other words, no meaningful policy evaluation, even if our political system – eg parliamentary committees – had the resources to do serious evaluation). There is no professional consensus on the best approach to tackling, or even thinking about, the issues. And there is also no very obvious problem with the Minister of Finance setting policy in this area – you’ll hear all manner of lines about time-inconsistency etc, but any such concerns are really no different than those in huge numbers of other policy areas where we rightly reserve major policy powers to those we elect. And it isn’t as if these are just minor details at the far periphery of policy, impinging on almost no one. They are naturally the stuff of politics.
On the specifics of the bank capital issue, from the article again
He [Goldsmith] said the Government should “have a view on the proposals” and Finance Minister Grant Robertson “should be assuring himself that they stack up”.
The Government has remained fiercely neutral throughout the saga
The utter silence from the Minister of Finance looks a lot like a simple abdication of any responsibility. Sure, under current law, the final decision is solely a matter for the Governor. That could have been changed, relatively simply (the government was amending the Reserve Bank Act only last year). But even within the current law, the Minister has leverage if he wants to use it. He appoints the Bank’s Board – and specifically the Board chair. He writes letters of expectation to the Govenor and the Board. He has the opportunity to commment on the Bank’s draft Statement of Intent and the Bank must have regard to his input. There are lots of outcomes the Governor might prefer in the current RB Act review that the Minister could agree to, or not. And, in a legislative provision that has never really been tested, the Minister may direct the Bank to have regard (a phrase which has legal meaning) to a government policy relating to one of the Bank’s functions. The Minister can’t issue a directive to prevent the Bank setting capital ratios at a specific number it doesn’t like, but it could (for example) make clear its view that the banking system is sound and stable, that additional barriers to access to credit would be unwelcome, with plenty of contextual material around that. And the Minister has the power of legitimacy – he is elected, he has a political mandate, he has accountability, none of which the Governor has. Oh, and he has his own expert advisers in The Treasury.
“Fiercely neutral” looks a lot like copping out, hiding behind the parapets rather than taking any leadership, any responsibility.
I don’t know what specifics National has in mind for the legislation (and perhaps they don’t yet either). There are some difficult boundary issues, as to what matters count as big policy questions, or irreversible interventions (like a decision to put a bank in statutory management) that should be reserved to ministers, and which powers should be assigned to independent officials. Those boundaries can and should be contested. But a call as big as the one the Governor proposes to make, deciding on his own prosecution case, is one that simply shouldn’t be his to make.
(None of this, of course, should be read as suggesting that we do not need expert advisers in many policy areas. It might indeed be normal and appropriate for an expert Reserve Bank – or an expert Treasury – to take the lead in advising on the key technical dimensions of big picture banking regulatory policy. But policymaking – here as elsewhere – will be better, and more legitimate, when the expert advisers, champions of change (or even opponents of it), aren’t the same people making the final decision. In our system of government, prosecutors don’t make the determinative judgements. That’s more in the PRC style.)
On which note, my regard for Paul Goldsmith would be a little less tinged with ambivalence if he were to show some moral leadership and stop sharing an Auckland office with Jian Yang, the former PLA intelligence official, former CCP member, active cheerleader (just this week) for all the evil of the PRC, a country abused under the thumb of his former party. Unless, of course, Goldsmith too wants to champions tens of millions dead, relative economic failure, and a pretty all-pervasive theft of freedom. He seems a decent bloke and it is hard to believe he would really champion such evil. But he does by the people/person he chooses to stand, and sit, with,