The $9 billion dollar man

The Listener magazine this week reported the results of a caption contest they’d run for a photo of Reserve Bank Governor Adrian Orr.

I’d suggested what seemed to me a rather more apt caption.

One good thing about the Reserve Bank is that they do report their balance sheet in some detail every month, and yesterday they released the numbers for the end of August. August was not a good month for the government bond market: yields rose further and the market value of anyone’s bond holdings fell. And thus the Reserve Bank’s claim on the government, under the indemnity the Minister of Finance provided them in respect of the LSAP programme, mounted.

This is the line item from the balance sheet

A new record high at just over $9bn.

And that doesn’t seem to be quite the full extent of the losses the Governor and the MPC have caused. A while ago the Herald reported on an OIAed document from The Treasury.

I wasn’t sure quite what to make of that, but we know that from July the Bank has begun selling its bonds back to The Treasury. Over July and August they had sold back $830m of the longest-dated bonds (ie the ones on which the losses will have been largest) and presumably collected on the indemnity when the Bank realised the losses on those bonds at point of sale.

Presumably all the numbers will eventually turn up in the Crown accounts, but for now it seems safe to assume that Orr and his colleagues (facilitated by the Minister of Finance) have cost taxpayers around $9.5 billion dollars – getting on for 2.5% of New Zealand’s annual GDP (or about 7 per cent of this year’s government spending).

These are really huge losses, and to now the Governor’s defence seems to amount to little more than “trust us, we knew what we were doing”, accompanied by vague claims that he is confident that the economic benefits were “multiples” of the costs. But there is no contemporary documentation in support of the former claim (eg a proper risk analysis rigorously examined and reviewed before they launched into this huge punt with our money), and nothing at all yet in support of the latter claim.

Central banks should be (modest) profit centres for the Crown. Between their positions as monopoly issuers of zero-interest notes and coins and as residual liquidity supplier to the financial system there is never a good excuse for a central bank to lose money, and certainly not on the scale we’ve seen here (and in other countries) in the last couple of years – punting massively on an implicit view that bond yields would never go up much or for long (as they hadn’t much in the previous decade when other central banks were engaging in QE).

There are plenty of things governments waste money on, and plenty of big programmes that (rightly) command widespread support (through Covid you could think of the wage subsidy scheme). But this was just little more than a coin toss – low expected value, but with at least as high a chance of big losses as of any substantial gains. And seemingly with no accountability whatever. Orr has not apologised for the losses, nor have the other MPC members. No one has lost their job – but then this is the New Zealand public sector where hardly anyone ever does – and not a word has been heard from those charged with holding the Bank to account (the Board or the Minister of Finance).

Back when I was young the Bank ran up big (indemnified) foreign exchange losses in the 1984 devaluation episode. Searching through old papers I can’t find the precise number the Crown had to pay out, but between what I could find and my memory it may well have been of a similar order (share of GDP) as the LSAP losses. But the responsibility then rested directly with the Minister of Finance – the Bank was not operationally independent, and defending the fixed exchange rate under pressure was government policy. It was a rash policy – the Bank advised the government not to do it – and the large losses added to the obloquy heaped on Muldoon for his stewardship in his last couple of years on office. But the public got to vote Muldoon out, while there still appears to be a serious possibility that Orr – having cost New Zealanders perhaps $1800 each – will be reappointed (with just six months of his term to go if he is not going to be reappointed it will need to be announced soon to enable a proper search process for a replacement to occur). The LSAP losses may not even be the Governor’s worst failing, but no one directly responsible for that scale of taxpayer losses – on risks he simply did not have to take – should even be considered for reappointment, at least if accountability is to mean anything ever.

Of course, there have been bigger losses in New Zealand government history. I’ve just been reading John Boshier’s Power Surge on the Think Big debacle of the 1980s. As a share of GDP, total economic losses to the taxpayer from that series of projects were far greater than the LSAP losses, but I’m not sure that losing less in one punt than the worst series of discretionary public sector projects ever in New Zealand history should be any consolation or mitigation. And, for what it is worth, Boshier’s book suggests there was typically more advance risk analysis undertaken for the Think Big projects than we have yet seen evidence of for the LSAP.

I’m sure gambling appeals to some people, and I wouldn’t want to stop those minded punting on the bond market, the fx market, Bitcoin, equities or whatever. But if that is the sort of thing that takes Orr’s fancy – and it probably isn’t judging by his past financial disclosures – he could at least do it with his own money, not ours. And having rashly done it with our money, and lost heavily, have the decency to apologise.

16 thoughts on “The $9 billion dollar man

  1. RBNZ failed to realise that NZ bond yields would have dropped dramatically in line with global markets without them doing any buying at all. Did they think that, given historical correlations, NZ yields would stay at 4%+ while US, UK . Europe. Canada, Australia all fell to 0.50% or under? We had the opportunity of a free ride and didn’t take it….


  2. The biggest gamble the Government is doing right now is to borrow at around 4% to purchase over valued global equities via the NZ Super Fund. The Fund needs to be wound up.

    It did well out of global QE but there’s no free lunch and borrowing to buy stock is never a good idea.


      • The govt bought back Kiwibank from NZ Super and ACC simply because the government needs to be able to create lending to Maori community based land ownership. Without proper land titles, Maori has not been able to develop its community based land that it owns. This would have been driven by the Maori caucus with the Labour government with significant risks of loan defaults with non existent titles. NZ Super and ACC operate quite independently of government interference which is good commercial practice.


  3. Just expressing the real despair caused by the profligate Government spending, which has resulted in a positive GDP.
    Like the LSAP etc the spending will inevitably add to inflation.
    Seems Robertson and Orr are joined at the hip!


    • Whether intentional or not, the RBNZ did lower NZ QE quite dramatically in a very short space of time. NZ QE started with an intent of $100 billion but stopped at $59 billion, Dr LSAP $59 billion and Cr. Individual Banks Cash Settlement liability Account $59 billion. Then the RBNZ repaid Banks Settlement Cash liability Account by $32 billion as soon as it borrowed $59 billion by debiting individual Banks, Cash Settlement liability Account and crediting the Crown’s Cash Settlement liability Account ie Dr Individual Banks Cash Settlement Account $32 billion Cr. Crown Cash Settlement Liability Account $32 billion.

      In simple terms NZ QE was only $27 billion stilled owed to the individual banks. The amount of bonds bought was $54 billion and the amount paid by the RBNZ was $59 billion. NZ QE was effectively only $27 billion at an upfront cost $5 billion ie very expensive borrowings. This $5 billion was booked by the individual banks in 2020 as profit and correspondingly this $5 billion loss would be part of the RBNZ $9 billion loss as the Bonds revalue as interest rates rise.


  4. As for the “9 billion loss”, what effectively happed was the Treasury sold circa 50 billion of bonds to the RBNZ (via the banks) at a low yield/high price and is now buying them back at high yield/ low price, in the process Treasury is booking a profit that matches the RBNZ loss. Via an inter-government book entry, Treasury’s profit will be transferred to the RBNZ. So no “loss” will show up in government books….QED


    • No line item “loss” will show up in the government’s book, but the huge loss to taxpayers is real nonetheless (in the form of much higher interest payments by the RB to the private sector on the vastly increased settlement cash liability relative to the yields on the bonds). Simple as that.


      • Not just the negative carry on the bond holdings….

        Although it will only be an opportunity cost – and therefore not show up in the books – the real loss of the LSAP is the Treasury having to issue bonds at current yields to replace the funds raised at vastly lower yields post COVID which are now being squandered buying back the RBNZ holdings. At current rates that opportunity cost will be circa 9 billion.


      • The choice to buy back the bonds gradually is relevant only if bond yields and the expected OCR.were to fall back a lot later. On market yields as they stand today the MPC’s choices have cost us around $9bn, with little sign of any offsetting benefits that could not have been achieved otherwise more cheaply.


      • Yes, the loss is real, whichever way you look at it. And it was all so unnecessary. With the big boys all going hard out on QE we could have just gone for the ride. In a global market desperate for yield, market forces would have pulled our rates almost as low as the got without the RBNZ incurring a 9 billion loss. Why didn’t they realise that would have happened?


    • I’m hoping to write a post on the book, but I guess my short summary is that it would have been a much better book had he had a proper editor. There is quite a lot of interesting material there, and altho he hasn’t done any archival research he did interview a lot of senior people who were involved at the time, but (a) it often gets bogged down in detail that at best might have been in footnotes, and (b) it doesn’t really represent any sort of definitive evaluative history of the era. He has the odd strange macroeconomic hobbyhorse….and macroeconomics definitely isn’t his strength.

      There is still a crying need for an in-depth economic and political history of NZ covering say 1973-1993.


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