When I finished yesterday’s post I realised there was plenty else that could have been said.
First, of course, is the way that the Reserve Bank’s housing graphic feeds a narrative that a fall in house prices would itself be a bad thing, at an economywide level. After all, presumably their mental model is symmetrical.
As I noted yesterday, their framing totally ignores the context in which house prices change. Were a government ever to summon up the intestinal fortitude to free up land use, we would expect to see house/land prices fall, and fall a long way. This would, of course, be tough for some individuals, but their losses would be largely offset by gains to others (the young, the poor, the renters), and for many people – owner-occupiers with modest or no mortgages – it would really make no difference at all. Speaking personally, I would cheer the day nationwide policy reforms meant real house/land prices dropped back, say, to where they were when I first entered the market in 1988. It would make no difference to my consumption, but would make the prospects of my children a great deal better.
It is just possible that such a reform might even spark a whole new wave of housebuilding, and perhaps even help lift economywide productivity (since land is better able to be used for things people – not governments – value most). But, of course, none of this appears in the Reserve Bank’s spin.
Wealth effects (at an economywide level) are generally thought of as much more powerful re non-housing assets. There was a nice piece yesterday by Michael Pettis, who writes mainly about China, headed Why the Bezzle Matters for the Economy. The “bezzle” is a phrase dreamed up by J K Galbraith to capture the notion that if someone has defrauded you and you don’t yet know it, both you and he think you have the wealth, and collectively society thinks it is wealthier than it really is. Until the fraud is discovered. Pettis generalises the point to apply to grossly-overvalued equity markets, or to physical investments that might have been put in place – by firms or governments – that in the course of time will just never pay off. One could think too of housing booms in which far too many physical houses end up getting built. The waste has already happened but it can take a considerable time, sometimes a specific shock, for societies to wake up, and adjust. Anyway, it is a good read – although quite unrelated to things RB.
But what I was really planning to write about today was the round of media interviews granted to various media outlets by the Reserve Bank senior management following last week’s MPS. The round of interviews seems to have become something of a ritual. FIrst there was the Governor (in Stuff). He seemed typically loose, not very rigorous, but also not very controversial.
Then the Deputy Governor popped up in an interview at Business Desk. You’ll recall that in a post late last week I took the Governor to task for having suggested to FEC that somehow the Bank was contractually bound to keep offering the Funding for Lending scheme for the next year plus, even as the MPC was saying it wanted to tighten monetary conditions quite a bit. It looked as though Bascand had been sent out in part to tidy up after the Governor (a job that, as a safer pair of hands who’d have made a less bad Governor, he seems to do a bit of). In that interview we learned that – at least in Bascand’s view – actually it wasn’t a matter of contract at all, but of “keeping our word”. He went on to add that
“I do place quite a lot of weight on RBNZ’s words being listened to and us being true to what we say. That’s where our credibility comes from,”
The same daft argument they adopted for sticking to their odd pledge in March 2020 not to change the OCR, either way and come what may, for a year. And on the other hand, the one they obviously discounted when (sensibly if belatedly) choosing to stop LSAP purchases. If you want to be credible, stick to making few (and sensible) pledges, and only ones that respect the extreme uncertainty every monetary policy maker faces when contemplating future policy moves.
Bascand went on to try to articulate a substantive case for keeping offering the Funding for Lending scheme (although never actually engaged with the distortions that accompany it), arguing about the FfL scheme that “one doesn’t really know” what impact changes in the scheme would have. But that is hardly a satisfactory answer both because (a) it is an implied admission that they are running a crisis-intervention instrument that they don’t really understand the effects of (but is having those effects now), and (b) because on their own telling the scheme will end next year, policy now is set on forecasts, so those forecasts must already be building in some view on what impact the end of the FfL scheme will have. But even if there was anything much to the Bank’s concern about precision – and there isn’t, since exchange rate reactions to OCR changes are never that predictable – nothing would stop them phasing the scheme out over a few months, enabling any observed effects to be taken account of as the OCR itself was being set.
So, to recap. To this point, we’d had the Governor suggest a contract and the Deputy Governor disavow that notion (and word). But then the Bank’s Chief Economist – who has not been let loose to do a single speech on-the-record in the 3+ years he has been a statutory officeholder – was interviewed by interest.co.nz. And up popped the idea of a contractual obligation again
Furthermore, Yuong confirmed the RBNZ would keep its Funding for Lending Programme (FLP) in place until the end of 2022 to uphold the “contractual arrangement” it made with retail banks last year.
His words, no paraphrasing.
Ha’s interview seemed to focus on the future of the LSAP, and here he seemed back on-message with all this talk about unpredictability and lack of precision.
Hesitation over going down an untrodden path
As for the LSAP, Ha said the RBNZ’s initial thinking is that it isn’t keen to actively sell the $54 billion of New Zealand Government Bonds it has bought from banks, fund managers, etc since March 2020.
By buying these bonds it put downward pressure on interest rates. Actively selling them before they mature would tighten monetary conditions.
Ha said, “We know a lot more about how to calibrate tightening policy through an OCR. We know less about how you would do that through selling down government bonds.”
He was also wary of the RBNZ not flooding the market with bonds at a time Treasury’s bond issuance remains elevated ($30 billion of issuance is planned for the 2021/22 year).
“The key thing to remember is, on the way down, you sort of made a big splash about the LSAP. Markets are dysfunctional, you want to keep interest rates low,” Ha said.
“On the way out, you want to be quite methodical and want to be operational in the background. We’re not intending to send massive policy signals through the withdrawal of the LSAP programme.
“We largely see it now as just managing… the holdings of those assets on our balance sheet.”
So last year they were all gung-ho on how much they were achieving by buying bonds, but now it is all too hard, and they propose to simply sit on their hands (and risk more large losses to the taxpayer). And if the bond market was a bit dysfunctional briefly last March, it wasn’t through most of the period the Bank was buying heavily and it isn’t now. It simply defies belief that they can seriously believe that a pre-announced sales programme of, say, $2billion a month would create any difficulties for the market at all. What is more likely is that, in their heart of hearts, they know that LSAP bond sales wouldn’t make any material macro difference it all. They wouldn’t tighten conditions any more than the purchases – heavily focused at long maturities of little relevance to anyone much in the New Zealand market – themselves did. But it would a bit awkward to concede that, after all the spin last year.
The fourth policymaker interview (at least of those I noticed) was by the Assistant Governor (the deputy CE responsible for monetary policy) Christian Hawkesby with Bloomberg. Bloomberg seemed more interested in getting comment on the likely stance of policy, rather than details of which instrument. I was encouraged that Hawkesby told his interviewers that the MPC that a 50 point OCR increases was “definitely on the table” last week and “actively considered”, even as I wondered why we learned this from an interview with a specific paywalled proprietary outlet and not from, say, the minutes of the MPC meeting (or even, at a pinch, the Governor’s press conference). In an update to their story, Bloomberg reports that their story – and a sense that Hawkesby was still hawkish – moved both the exchange rate and the market pricing on an October OCR increase.
I’m left with a number of concerns:
- on the specific of communications around the FfL scheme, three top managers over three days couldn’t even keep their lines consistent (“contract” or not),
- the poor quality of what argumentation these highly-paid supposedly expert monetary policymakers are putting up about getting out of the crisis programmes, and
- none of this (whether crisis programme arguments or the possibility of a 50bps OCR increase) was in the MPS or the minutes of the MPC meeting, which are supposed to be at the heart of the transparency and accountability around monetary policy, including because everyone has equal access to those public documents and knows when they will be released.
It really isn’t good enough.
One could go on to note that we’ve (again) heard nothing from the three “independent” non-executive members of the MPC. Of course, in a way that isn’t surprising: one has no relevant expertise at all (and never been heard from once) and all three were clearly carefully selected to not make waves and to provide reputational cover for the Governor’s continued control, despite the formal Committee structure, and formal commitments to greater transparency.
And, to be clear, if I am criticising the different lines Orr, Bascand, and Ha are running it is simply because they are supposed to be representing a decision already made, presumably with justifications agreed at the time. I’m all in favour of much more openness and diversity of view – both what should be captured in serious minutes, and that which serious speeches and lectures can provide. There is (always) real uncertainty about how the economy is working, and we should be able to see evidence of a serious contest of ideas and evidence. That sort of openness actually helps stimulate debate (internal and external) and scrutiny ex ante, as well as ex post accountability. Thus, you can see why the MPC members, perhaps the Governor most of all, just prefer to keep things the half-baked way they are.