A few weeks ago in a post about what a new government might do about the Reserve Bank, I noted with some concern that the National Party had been very quiet on the issue.
I noted then that the process for reappointing (or not) Orr was likely to be getting underway very soon, and that if the Opposition thought it was inappropriate for him to be reappointed they needed to be raising concerns now (helping create a climate in which it would be more difficult for the government to push ahead) and not wait until (as required by law) the Minister has to consult other parties on the person he proposes to appoint as Governor (by when there would be considerable momentum behind any particular name).
So it was interesting and encouraging to see a press release yesterday from Luxon which appeared to raise serious concerns about Orr’s stewardship of monetary policy., apparently prompted at least in part by the Wheeler-Wilkinson (WW) note out yesterday morning, which has had considerably coverage. The centrepiece was a call for an independent public inquiry
tied to the issue of whether or not Orr is reappointed thus
Count me sceptical.
There have been a couple of earlier strands to calls for inquiries. The Green Party has for some time been calling for the Finance and Expenditure Committee to inquire into the conduct of both fiscal and monetary policy over the pandemic period. They have had support in that call from both ACT and National but the Labour majority (no doubt on instructions from above) simply refuses. It seems to me a natural topic for a serious select committee to look into, and even allowing for the partisan priors of all participants, it isn’t impossible such a review could shed some light.
The second, and more recent, strand is that inquiry into the RBA that the incoming Labor government in Australia has established (terms of reference here). But this inquiry isn’t really relevant to the issue here, and while pandemic responses aren’t out of scope the focus of the inquiry seems likely to be on policy frameworks more broadly and the governance model. On the latter, the current New Zealand government has only recently legislated for new models, for monetary policy specifically and the Bank more generally. As I’ve highlighted in various posts on this blog, there are a lot of problems with the new arrangements, but this government is hardly likely to revisit its own creations so quickly. That (I hope) will be a matter for a new government one day.
Note also that the RBA review, with reviewers already appointed, has to report by March next year. The question of the (re)appointment of a Governor here has to proceed on a much faster track than that, since Orr’s term expires in late March. As I noted in my earlier post, I expect that the question of the (re)appointment will be on the Board’s agenda very shortly, with a goal (Minister, Board, Bank – and probably markets) of having everything more or less settled by Christmas. Consistent with that, I saw this in Bernard Hickey’s newsletter this morning
Finance Minister Grant Robertson immediately refused yesterday to agree to a review and said he was in discussions with the Reserve Bank’s board about the re-appointment process.
Robertson has ruled out a review, but even if he hadn’t I don’t think it would be a particularly good use of public money to have one. Apart from anything else, it is hard to think of anyone in New Zealand who knows the territory who is not conflicted or who has not already declared their hand (often in quite strong terms).
In other comments, the Minister has pointed out that the Bank’s Board is responsible for reporting and reviewing the Bank’s performance. Of course, there he is just playing distraction since he appointed both the old and new boards (and their chairs) and knows that the Board is on record (minutes released under the OIA) as having done no serious scrutiny or evaluation of the Bank’s monetary policy performance. Nor is there any sign that the Minister has ever asked for more. And, most recently, he has appointed a new Board that is manifestly underqualified for the statutory roles of holding the Governor and MPC to account, or recommending the appointment of a future Governor. Other OIAs show that the Minister just reappointed two of the MPC members – in the midst of a really troubling period for monetary policy – with no serious attempt to evaluate their performance at all.
In addition, The Treasury is now formally charged with a role monitoring the Bank’s performance. It is hard to be optimistic that will deliver much (the institutions are typically too close) but there is no sign Robertson has any serious interest in enhanced scrutiny or analysis. (In addition, of course, Treasury is more than a little compromised by their closeness to the Bank – including the Secretary as non-voting MPC member – and the advice they provided at the time, including recommending the Minister enable the LSAP programme.)
Finally, it is true that the Reserve Bank is working on its own evaluation of its handling of policy over recent years. We can expect this to largely be a self-serving self-congratulatory piece being done by staff (not even by the MPC) but even so when they eventually publish it it will still provide a basis for discussion and critique. The Bank tells us it has taken some independent overseas advice, but if that sounds reassuring it probably shouldn’t: they haven’t told us who they have sought advice from, and it is hardly a novel insight to suggest that the choice of overseas person is quite likely to be influenced by what the Governor already knows of that person’s views. One can always find a sympathetic commenter.
The real reason I don’t think an independent inquiry is warranted is that we already know pretty much all there is usefully to know. Defenders of the Bank/Governor will interpret the set of data one way, and others will contest a range of alternative interpretations. It is, and should be, a process of contest and debate. And the issues relevant to the question of whether Orr should be reappointed by not even close to limited to those around the pandemic response (in fact, I would argue that these later points should not be given too much weight at all). We know about things like:
- Orr’s bullying style,
- his lack of receptiveness to scrutiny, challenge, and criticism (most evident in the bank capital review process),
- the high rate of turnover of staff, particularly senior staff,
- the top-heavy management structure he has put in place, in which very few have much evident subject expertise (eg the deputy chief executive responsible for macroeconomics, monetary policy and markets, who has no background in economics at all),
- the really big increase in the size of the Bank (with no material change in responsibilities), in many cases in non-core areas (notably the very large communications staff),
- the distracted focus and politicisation of the Bank as Orr has pursued his climate change, indigenous network, tree god, and similar interests, for which he has no statutory responsibilities,
- the absence of serious speeches from the Governor shedding light on his thinking or analytical frameworks around areas of his core responsibility,
- the degrading of the Bank’s research and analysis capabilities (despite the massive increase in total staff) that has seen very few serious research papers published in recent years,
- the insular monolith the Governor has helped create in the MPC, where outsiders with relevant ongoing expertise are banned from being appointed to the Committee, and challenge and dissent (let alone public accountability) appears to be actively discouraged.
All these speak of someone not fit for the job, someone who isn’t even that interested in developing a world-class small central bank or doing the core functions of the Bank excellently. We don’t need an inquiry for any of that.
What of the pandemic response? Perhaps there is case that could be made that any time core inflation gets so far outside the target range, the Governor and most of the MPC should lose their jobs almost automatically. Such a regime might be better than one in which leading central bankers (globally) rarely pay much (if any) personal price for their mistakes, no matter what cost they impose on the public in the process. $8 billion plus in losses on the LSAP speculative punt (with not even any evidence of a robust risk analysis before launching the scheme) isn’t nothing, and neither is the recession likely to be required for getting core inflation back down again. They are serious failures. Honourable people responsible might well choose to resign, or not seek reappointment. They took the job, and the pay and prestige, and accept that there is a price to be paid when things go badly, if only to encourage others.
But what makes me hesitant is that these choices were not made in a vacuum. Others, with incentives to get things right, had views at much the same time as the Orr-led Reserve Bank was making its call, and the middle-ground of expert opinion at the time was not, I assert, wildly different to the policy choices Orr and the MPC (and their peers abroad) were making. I take seriously the idea that when central banks are targeting inflation, their forecasts matter hugely (given the lags, perhaps almost as importantly as outcomes). At the times the Reserve Bank was making key choices, their forecasts – which I will treat as their honest best effort – either showed (core) inflation undershooting the target range (the case for most of 2020), or staying in the range based on policies similar to those they adopted.
I would accept that there was a good case for not reappointing Orr (and the MPC) if:
- New Zealand’s Reserve Bank was the only one to have made the same mistake (thus, they ignored relevant perspectives from peers), and/or
- the Reserve Bank’s forecasts and policy actions at the time they were made were seriously out of step (in what proved to be the wrong direction) with those of most serious observers, forecasters, commentators, and/or market prices
But as far as I can see that was not the case, on either count. Sure, there were always people critical of some or other aspect of what the Bank was doing (I was an early critic/sceptic of the LSAP policy, although did not anticipate how large the losses they would run might be), and (of yesterday’s authors) Bryce Wilkinson was among them. But often, at least I would argue, those who disagreed with some or other aspect of what the Bank was doing may have been right for the wrong reasons, and right analysis counts in making judgements about key policymakers.
People will, reasonably enough, point out that there are several advanced countries that have not seen the extent of the rise in core inflation New Zealand (and most others) have. Thus, they suggest, there was wisdom our Reserve Bank could have followed and did not. I’m not convinced. The countries that have not seen much of a rise in inflation seem mostly to have been those that were already at the effective lower bound in early 2020. They did not materially ease monetary policy because they could not. It is unknowable at this point what they would have done if they’d had the capacity (and New Zealand and Australia and the US did have that capacity – starting with policy rates still materially above zero).
It isn’t a common position for me to be defending the Bank, and in many respects I don’t (to me, there is a strong case for not reappointing Orr on things it is quite appropriate to directly hold him to account for – his choices, his information). But there is an element of the last 2.5 years that may have been simply unknowable with any great conviction or certainty. Sadly, no one I’m aware of was (18 months ago) forecasting that New Zealand would soon see record low unemployment (similar outcomes in many other countries). With hindsight, perhaps they should have, but it was an idiosyncratic shock – pandemics, lockdowns, virus and policy uncertainty – for which we (and central banks) had no real precedents. I’m still happy to argue that the LSAP should have been stopped in the second half of 2020 when it was clear the world wasn’t ending, but….at the time the Bank still had very low inflation forecasts (and if others differed, no one I’m aware of differed to a huge extent). I’m quite content to argue that the Bank – and peers abroad – should have started raising the OCR earlier and more aggressively last year but……given the lags it isn’t likely that any credible tightening started mid last year, even done at some pace, would have made a lot of difference to the inflation we have seen in the latest June quarter numbers (but would have brought it down sooner and faster). But again, who was openly calling for tightenings last May or June (for myself, the May MPC was the first time in almost a decade I’d been more “hawkish” than the Bank, but I wasn’t then calling for immediate OCR increases).
Perhaps societies need scapegoats, but it isn’t self-evidently obvious that a reasonable human set of central bankers at the RBNZ would have been likely to have done better than Orr did in that particular set of circumstances. The Bank is wrong to allow the suggestion to continue that they moved earlier by international standards (they were nearer the median of OECD central banks), but they were a bit earlier than the Anglo central banks we often default to comparing against.
Perhaps I’m just playing devil’s advocate here, but I don’t think so. There is a real point about the limitations of human knowledge, and of what we might realistically expect from a typical (not exceptional – you’ll rarely find them) central banker. And a quickfire inquiry wouldn’t really help resolve that one.
It is encouraging that National is beginning to get down off the fence again (after Luxon initially shut down Bridges saying National had no confidence in Orr late last year). But they probably need more confidence in their convictions (assuming they have found some) and be willing to back a case that the Governor should not be reappointed, and the external MPC members should be replaced as their terms expire. Much of what Orr has done, and failed to do, has been done with the apparent approval, or even endorsement of the Minister of Finance (who thus shares some responsibility). But in the end, Robertson has the choice to jettison Orr if he becomes a liability for the government. An honourable Governor would probably walk away, expressing his regrets for the outcomes he has presided over. So far, (per past select committee appearances and yesterday’s statement) Orr appears to regret nothing about policy, even with hindsight, and if he has regrets at all it is the empty and meaningless regret that Covid itself has intruded.
I regret that the Committee – and society at large – has been confronted with the COVID-19 pandemic, and other recent events that have caused food and energy price spikes.
We should regret that Robertson appointed a Governor who has done so poorly, who has cost New Zealanders so much, and regret that Robertson has gone along with the Governor in barring the appointment of an open and excellent MPC, following that up with the appointment of a weak and inadequate board.