The apparent complacency of our key economic agencies is almost beyond belief at this point.
Thus, the Prime Minister told us yesterday that The Treasury’s advice “at the weekend” was that the economic impact “could” be larger than the recession of 2008/09 (as she loosely termed it “worse than the GFC”). As various articles have pointed out, real GDP fell by just over 3 per cent over five successive quarters in 2008 and 2009. The unemployment rate rose from a one quarter trough of 3.3 per cent to a one-quarter peak of 6.7 per cent (looking at the quarter-to-quarter volatility it is probably fair to talk of a three percentage point increase).
If that is – or even on Saturday was – still Treasury’s view, it is quite seriously worrying. Whatever the outcome for the March quarter – which still has two weeks to run, weeks that are likely to be pretty bad – it isn’t at all hard to envisage a fall in the June quarter alone that will swamp the entire fall in real GDP in 2008/09. Just remember the international tourism sector. We used to have one.
Recall that the Secretary to the Treasury is an observer on the Reserve Bank Monetary Policy Committee, and attended the meeting on Sunday where they agreed to cut the OCR 75 basis points and to commit not to cut in further for a year. This was the same meeting the Governor emerged from to tell the press conference yesterday that only on “some scenarios” would there be a recession in New Zealand. Surely, if the Secretary to the Treasury – who unfortunately has no national policymaking experience or background – thought differently she’d have conveyed that view pretty forcefully in the meeting. Or are the Governor and the Secretary on the same pages.
But that was yesterday. This morning three interviews with senior RBers, each members of the MPC, have become available. I missed most of Orr’s on Radio NZ so may come back to that when it is available on the website. So for now, lets just stick to comments made by Chief Economist, Yuong Ha on RNZ this morning and an interview Deputy Governor Geoff Bascand gave yesterday to interest.co.nz. Complacency, combined with lack of any evident framework for thinking about and responding to the challenges, seemed to me to sum things up.
Yuong Ha was quoted saying that the Bank has given a considerable stimulus yesterday, with the 75 basis point interest rate cut. But surely one could only judge “considerable” relative to the scale of the shock. And in typical downturns, the OCR has been cut (or bill rates fallen pre-OCR) by 500 basis points or more – in that 2008/09 downturn that the Treasury says this “could” be worse than – we cut the OCR by 575 basis points. This MPC has cut by 75 basis points, and has committed not to cut any further for a year. Ha claimed to be quite unbothered at the inability to take rates negative – because bank systems can’t cope – despite the Bank having given us no previous hint of such a problem, including in the Governor’s speech last week. After all, he said, “we have lots of other ways to add stimulus”.
His favourite, and that of the Committee, appears to be large-scale purchases of government bonds. That, all else equal, will greatly boost settlement cash balances at the RB, but so what? That doesn’t lower servicing costs or returns to depositors, and there is no identified transmission mechanism where it makes much difference to anything. I’m not opposed to such purchases – as I said yesterday, the Bank should probably now stand in the market to buy any government bonds at 0% yields – but on their own they won’t do much (recall that normal 500 points of easing).
Ha was then asked about the exchange rate, partly about where it is at now and partly about options to lower it by direct fx intervention. Remarkably – or sadly, perhaps what we have come to expect from this MPC – he expressed himself quite pleased with the exchange rate and the buffering it was providing. But again, he seems to forget – or more likely chooose to skate over – the fact that in serious downturns exchange rate buffering often involves, for New Zealand, 20 per cent plus falls in the exchange rate. In TWI terms, that was almost exactly the extent of the fall over 2008/09. And this time? The TWI averaged 70.1 in the second half of last year (71.1 for the month of December) and, according to the RB website, was 68.7 yesterday. It has barely fallen at all.
So the Bank can’t or won’t cut interest rates, (perhaps not entirely unrelatedly) the exchange rate hasn’t fallen much, and yet even The Treasury accepts this “could” be bigger than the GFC-associated recession. But Ha isn’t bothered. Government bond purchases will do the job apparently. Almost unbelievable. (The same Ha whose comments from last week I quoted yesterday, suggesting that asset purchases could really only do a little, at the margin.)
But that performance was almost trumped by someone who, with much more media (and policy) experience, the Deputy Governor Geoff Bascand. He wasinterviewed on interest.co.nz, video footage and all.
And he just seemed extraordinarily complacent. Bank funding was just fine and would be for months he thought. There was no sense, for example, of suggesting that banks might want to tap markets while they still can just to be on the safe side (as one courageous NZ bank treasurer actually did in early 2008).
But this is the bit that really got my goat
But for a number of them, their IT systems “aren’t ready and can’t cope with negative rates”.
“New Zealand hasn’t really contemplated negative rates in the historical period that we can think about. It’s a bit like a Y2K thing in a sense that they’re all set up to be positive, zero, or positive numbers,” Bascand said.
“It doesn’t mean that you couldn’t create some work-arounds eventually, or adjust this, but right now [this] doesn’t seem to be the key thing to do.
“We’ve got other ways of putting stimulus into the economy if we need to. Taking on additional risk of doing something that may or may not transmit, or work properly, doesn’t seem like the smartest thing to do.”
Take first that “other ways of putting stimulus into the economy if we need to”. It reveals both a complacency about the economic shock, a misunderstanding of quite what easier monetary conditions do right now (would mostly ease servicing burdens and redistribute burdens), and that belief in other mechanisms which is simply belied by the evidence – and by the comments of the Chief Economist only last week.
But it was the unreadiness of systems bit that really takes the cake. He blithely tells us is “like a Y2K thing”, but never seems to recognise a profound difference. Under some mix of commercial imperatives and central bank and other official pressure, there was a huge expensive effort undertakem to ensure that the financial system was ready for Y2K (I was heavily involved at the time, including the policy precautions). The issue was recognised several years in advance and appropriately prioritised. As it happens, Adrian Orr was the Bank’s chief economist at the time (although I guess it wasn’t an issue that much involved that bit of the Bank).
And then he claims
“New Zealand hasn’t really contemplated negative rates in the historical period that we can think about.
which is simply false. As I mentioned yesterday, at the height of the euro crisis, in the dying days of his governorship, Alan Bollard set up an internal working group (which I chaired) to look at monetary policy issues and options should short-term interest rates get near-zero. That report, to the (then-internal) Monetary Policy Committee, explicitly canvassed the possibilities of negative rates, including the wider (physical currency conversion) risks and limits, including in the light of international experience to date. That report explicitly identified -0.5 per cent as appearing likely to be a true floor, and identified system constraints as a potential issue.
As a result, among the recommendation were three specific ones on that score: that we ensure that the Bank’s own internal systems (banking system, NZClear etc) could cope with negative rates, that we liaise with the Treasury to ensure that the DMO could handle negative interest rates, and that the Bank’s prudential supervisors should liaise with banks as to whether their systems could adequately cope with negative interest rates.
That report was dated 31 August 2012. I do not recall anyone disagreeing, or refusing to accept, those recommendations.
Now, to be sure, that particular eased and passed. But negative rates did not become less of an issue for advanced country central banks, with notable examples of countries with extensive experience in recent years being Switzerland, Sweden, Denmark, and the euro-area.
And yet today the Reserve Bank of New Zealand can blithely tell us that banks’ systems aren’t ready. This despite the Bank’s proud repeated boast of the advantages of having monetary policy and bank supervision in the same organisation. I’m simply staggered at this failure, this utter lack of preparedness – all the more so because past Bank publications had openly talked of negative rates as a policy option for New Zealand.
And who bears responsibility. Well, in a few days time, Adrian Orr will have been Governor for two years. Plenty of time to ensure the Bank was ready for a crisis even if his predecessor had been a bit slack (crisis preparedness is really core central banking – the crash fire brigade that needs to be excellent, even as you hope they are never needed at all). And, even more so, Geoff Bascand has been Head of Financial Stability (responsible for the whole supervisory and regulatory side of the Bank, as well as sitting on MPC) for almost three years. (Oh, and then there is the small matter of the Board, who are supposed to have held the Bank to account, including ensuring things like crisis preparedness: Quigley has chaired the Board for more than three years now).
And yet, with not a hint of apology he blithely tells us banks aren’t ready and – perhaps as egregious – it isn’t really worth making it priority to fix that now.
It is simply breathtakingly inadequate. They become more incredible – literally hard to believe, impossible to have any confidence in, by the day.
UPDATE: For anyone here looking for views on the government’s economic package today, I suggest having a look at my Twitter feed (here). A more considered post on the package will be forthcoming tomorrow.