Our central bank that is.
Except that I had to believe it. The Governor himself was being quoted again in a Stuff article and the video footage of a full interview with his deputy (on the economics and markets side) Christian Hawkesby was on interest.co.nz.
On Tuesday, as I wrote about in my post yesterday, we had the Governor telling us that monetary policy would have no more than a supporting role – despite being the main cyclical stabilisation tool – that there would be no “knee-jerk reactions”, that we were in “a good space” and – perhaps most incredibly of all – that “confidence and cashflow will win the day”. Confidence that had tanked, cashflow that was rapidly becoming a problem for many. It was – or one really wished it was – unreal.
But Orr and Hawkesby – both statutory officeholders charged with the stabilisation role of monetary policy – were back at it yesterday. Clearly, the Governor’s voice is most important – especially with no deep or authoritative figures elsewhere on the MPC – so we’ll take his new comments first.
Not all of it was silly. There was the standard advice to firms to talk to their banks early (I imagine that, where they still can, firms might be well advised to draw down any credit lines early too). But then we get lines like this
Reserve Bank governor Adrian Orr has advised businesses to focus on things they can influence and banks to consider their “social licence” and play a long game to bridge the gap in activity created by the coronavirus pandemic.
“That is it all it is, just a gap,” he said.
Talk about minimisation. If a firm takes a deep hit to its revenue for six or nine months, and has fixed commitments it can’t get out of at all, and other semi-fixed commitments, what was a viable business can quickly run through any remaining collateral and not be viable at all (the underlying business might be, but not the existing owners). So sure it is a “gap”, but it could be a mighty big one, with quite uncertain horizons for anything like normality returning.
Most especially because the Governor – like the Minister of Finance – gives no hint of recognising that the worst (probably a lot worse) is yet to come.
(And what about that strange suggestion that firms should focus on what they can influence? What they can’t, really at all, influence is what is likely to be worrying most, more so by the day.)
But the interview goes on
He said he did not believe there was a perception that the bank had been slow to respond to date.
Instead, there were benefits in the central bank getting more information about how consumer and investor behaviour was unfolding and the response of global governments, he said.
“While some talk about ‘what is your interest rate response?’, at times like this central banks have a much broader and important role which is around financial-market functioning and financial institution stability,” he said.
“There, we certainly aren’t sitting on our hands, watching, worrying and waiting.
“We are on high alert around how the financial markets are operating and our role in the provision of liquidity.”
I guess he isn’t reading much of anything – unless he now has his media clippings selected only for their favourability to him – if he really believes that first sentence. Perhaps the case for an OCR cut at the MPS was borderline, but there were plenty of sceptics even then as to whether their talk was taking things seriously enough. And I haven’t seen many people who thought has remarks on Tuesday were appropriate, responsible, timely, or whatever. In the meantime, central banks in Australia, the US, Canada and now the UK have acted.
But it was the rest of that quote that really staggered me – the claim that the Bank had a “much broader and more important role” in this situation around market functioning and financial institution soundness. Again, what planet is he on? No one, but no one, believes the coronavirus shock’s economic effects are primarily a financial stability issue. Really severe recessions could in time generate significant credit losses, but that is well down the track (for banks of our sort). In things to do with the Bank this is primarily a severe adverse shock to demand (almost wholly a demand shock for New Zealand so far, something neither Orr nor Hawkesby seem to grasp). These are the guys who go on and on about their new employment-supporting mandate. Lots of jobs are being lost right now, and will be over the coming weeks and months. There may be other things governments can/should do, there may be other stuff other wings of the central bank need to focus on, but monetary policy is their macroeconomic business, the tool that can be deployed quickly and flexibly, and which has been in every past crisis. But Orr and Hawkesby seem to prefer to sit on their hands and gather more information (of the gathering of information in fast-moving, exponential, crises there is no end).
Before coming back to Orr’s final comments, I add some remarks on Hawkesby’s interview.
Assistant Reserve Bank Governor Christian Hawkesby says the RBNZ’s main focus at this point of the coronavirus crisis is making sure the banking system remains strong.
Echoing comments Governor Adrian Orr made on Tuesday around confidence and cashflow being key, Hawkesby said the RBNZ is looking at how funding markets and banks’ relationships with their coronavirus-affected clients are holding up.
“That’s really our first point of call and our main focus – at least in these initial stages,” he told interest.co.nz.
Much the same themes, but how utterly irresponsible. No sense of his responsibility as a (statutory) monetary policymaker, explicitly charged with a macrostabilisation role. Doubly so because, as he goes on to acknowledge (and unlike, say, Italy)
“We have a well-capitalised banking system and a well-funded banking system.”
So try looking under the right lamp-post for issues that need to be addressed.
Hawkesby, like Orr on Tuesday, hosed down expectations of large, if not emergency, Official Cash Rate (OCR) cuts in the immediate future.
He said the government could move with more haste than the RBNZ, targeting those most affected by coronavirus.
He also claimed it was “early days”: early days was a month or six weeks ago, when the Bank was doing its MPS forecasts. This is now a full-throated downturn – where even the local banks are now talking, belatedly, of recession.
And what of that nonsense about the government being able to move faster. Not only is it generally not true – OCR decisions can be taken and implemented almost instantly – but on this occasion neither party has actually done anything yet. In fairness to Hawkesby when I listened to the interview he seemed to be trying to make a point that sectoral issues are better targeted with sectoral policies, but that doesn’t really help him this time, as he went on to say
Hawkesby said: “What we need to think through is, to what extent is it [coronavirus] a supply-side issue around supply chains; around specific sectors being affected – in which case monetary policy can’t provide direct help.”
He said monetary policy would be useful if there is a spill-over effect and a lack of demand and confidence across the economy.
Perhaps he missed the data release on Tuesday showing that business confidence had fallen to levels last seen in 2009. And when you are talking about the temporary collapse of one of our largest economic sectors – overseas tourism – you are dealing with pervasive effects that really only macro policy can do much to lean against.
It is almost as if these guys think they are running some sort of academic seminar, rather than being alert to real world developments – here and abroad, including monetary policy responses abroad. Whatever the explanation – and no one seems to have a good one, they are just failing to do the basics of their job. In none of any of that was there any mention of the idea that (at least temporarily) neutral interest rates will have plummeted – the fall in very long-term bond yields is probably a bare-minimum estimate of how much – and that much of the job of monetary policy is keeping actual short-term rates in line with shifts in neutral. These guys would appear to prefer to do nothing, even as real retail interest rates are rising. (I’m sure they will move, perhaps quite a lot, as spiralling global crisis will produce a lot of reality to mug them with in the next couple of weeks.)
Oh, and as in the Governor’s remarks on Tuesday, there was nothing in either interview about the threat to inflation expectations. They are falling around the world, and in New Zealand – seen in the bond market and in the ANZ business survey. As I noted towards the end of yesterday’s post, it is a strange omission, because only a few months ago both Orr and Hawkesby were dead-keen on emphasising downside risks to inflation expectations and making the case for pro-active least-regrets monetary policy adjustments. Good and sensible quotes from both of them are included in this post from late last year. Not sure what happened to those central bankers. The threats/risks must be much greater now. But it all fuels a sense that these guys are just out of their depth, with no consistent mental models or sense of the world (or this event) found especially wanting by a crisis.
By contrast there was good workmanlike speech on coronavirus economic issues yesterday by Guy Debelle, Deputy Governor of the Reserve Bank of Australia, Hawkesby’s direct counterpart. It was what serious normal central banking looks like.
But I wanted to come back to Orr’s final comment in his Stuff interview.
The coronavirus was a reminder of why policies such as the Reserve Bank’s decision to increase the capital requirements of the major banks and to ensure they could operate on a standalone basis had been pursued, Orr said.
“We try to implement them in peace time, because it is hard to implement them in war time – not that I am saying we are in war time.”
He probably should get his lines sorted out with his deputy: you’ll recall that Hawkesby quote that, at current levels before any of the increased capital requirements take effect, we have a “well-capitalised” banking system. Which is what the Bank’s demanding stress tests have always shown, and what numerous serious critics pointed out in the consultation process last year.
But even if we take Orr’s comment in isolation, he seems not to recognise at all that whether his announced higher capital requirements made sense in some long-run steady-state, they will have some adverse effects on the availability of credit, rates of investment etc through the transition period. Orr confirmed that capital requirements in December and they are to be phased in over seven years. Unfortunately, the beginning of that transition period – when bank behaviour is already being affected (and we saw this in the last credit conditions survye months ago – the next one, presumably taken this month, will be fascinating) – happens to coincide with the nastiest economic shock we’ve had in a long time. But, at present, no bank’s capital ratios will be any higher now than they would have been if Orr had seen sense and not proceeded (so there is none of the additional buffer he is implying). As it happens, reported capital ratios – though not of course actual dollar capital – would drop before long, because the change to the rules around aligning minimum risks weights for iRB banks with the standardised rules is being frontloaded.
And while no one could foresee that we’d have a severe pandemic shock this year, Orr was warned of exactly this sort of issue: in a climate with little conventional monetary policy capacity, sharply increasing capital requirements over a period when a new recession was fairly probable at some point would simply compound the real economic and economic policymaking challenges. This was from my submission
Finally, in this section, there was no discussion at all of the macroeconomic context in which these proposals would take effect. The proposals involved a transition over five years. Nine years into an economic recovery, with slowing domestic growth and growing global risks there has to be a fairly significant chance that the next significant recession will occur in the next five years (i.e. during the proposed transition period). That means a significant risk that regulatory policy would be exacerbating any downturn (through tighter credit constraints, reduced credit appetite, and potential higher pricing), in a downturn in which monetary policy is likely to be hard up against conventional limits (the Bank’s own analysis has suggested the OCR might be able to be cut only to around -0.75 per cent). Of course, if bank balance sheets were looking shaky it would be prudent to move ahead anyway – better ten years ago, but if not then now – but nothing in the Bank’s published analysis (past FSRs, stress tests, consultation document) nor in the credit ratings of the relevant institutions suggests anything like that sort of vulnerability. Without it, you will – with a reasonable probability – make economic management over the next few years more difficult (additional upfront potential economic costs), in exchange for the modest probability of making any real difference to (already very low) financial system risks over that period. It isn’t a tradeoff that appears to be worth making – at least not without much more supporting analysis than we have had to date.
I’ve seen no sign Orr or his colleagues ever engaged with this point.
And before passing on, don’t overlook this bit from Orr
“not that I am saying we are in war time”
Relentlessly determined to minimise just what is going on and the extremely challenging period – of indeterminate length – we are now entering.
But whatever should have been, the new capital requirements are what they are.
There is some discussion as to whether it might make sense to suspend implementation of the new requirements. In the UK, the Bank of England last night released their Countercyclical Capital Buffer (an element of their capital requirements). More generally, people are looking at the merits of some regulatory accommodation.
For now at least, I have to say I’m quite sceptical, at least in New Zealand (and I noticed Hawkesby suggested these were conversations for well down the track). Sure, capital is there to be used as loan losses mount (which, of course, they haven’t yet). But it is always worth remembering how important expectations are to behaviour – for bank/bankers as much as anyone else. So, sure, Adrian Orr could suspend the implementation of the higher requirements, but why would that materially alter the attitude of banks to taking on additional risk? After all, the Governor tells us this is just “a gap”, but even when reality finally mugs him, the banks – and their parents in Australia – will know that the Governor is still sitting there waiting to resume the steady escalation in capital requirements as soon as some modicum of normality returns. I’m not going to oppose suggestions of a temporary suspensionm but I doubt there would be much bang for the buck in doing so, at least while Orr is still Governor.
It really has been a reprehensibly bad performance so far in this crisis from the Governor, his monetary policy deputy, and the Monetary Policy Committee as a whole (all of whom must, for now, be presumed to be on board – although will the next OCR decision be the first time someone on MPC is willing to record a dissent?). Looking to the statutue books, you might have been hoping that the chair of the Bank’s board and/or the Minister of Finance – both responsible for the Governor and the MPC – would be demanding something better, but I’m not holding my breath about either of them.
There are, of course, more ultimate statutory provisions. They won’t be used. But the case is mounting that the Governor, the Bank, Hawkesby, and (as far we can tell) the external ciphers on the MPC simply are not doing their monetary policy job. It is an utter failure of leadership, something we are now seeing far too much of at the top levels of government as this crisis deepens. We are paying for unserious appointments, weakening public institutions, in the quiet times.