Month: September 2024

Human nature doesn’t change

Michael Reddell Uncategorized

It was a tweet from Olivier Blanchard, emeritus professor of economics at MIT and former chief economist of the IMF, that first drew my attention to the book

Blanchard’s full blurb reads

“A brilliant and fascinating description of crypto. It makes painfully clear that, on the buying side, there is no limit to human credulity, and the faith in magic returns. And, on the selling side, no limit to hubris, deception and scamming. Read the book, and cry.”

As I sat reading the book yesterday I kept wondering quite how it had got through the publishers’ lawyers. But it seems to have been written under a pseudonym and various significant names have been changed, including that of the UK-based crypto firm (that briefly became one of the biggest crypto marketing companies around) in which the author was a senior figure, and more than a few of their client firms. Presumably that was seen as enough to reduce the legal risks sufficiently to publish.

Readers should be grateful: it is an easy and absorbing read, and if you are anything like me you’ll read it with some mix of astonishment, despair (human nature and all that), and moral outrage. I’m pretty sure the author intends to prompt readers to think more regulation is an obvious and necessary response, but I’m less easily persuaded on that count. Fools and their money…. If there are decent people and firms in the sector, operating consistently ethically, there is pretty strong incentive on them to differentiate themselves from the (apparently) very many rogues and rank opportunists.

“Donoghue” (from here on I’ll drop the quote marks) – who seems to be still quite young (says he was still a student in 2016) – had a background in PR, apparently in both finance and politics in the UK, before he jumped aboard a crypto startup being put together by an old university friend and the friend’s cousin. In the early days – Donoghue still holding down a fulltime PR job elsewhere – it seems not to have been much more than three or four of them, chasing the dream of “generational wealth”. The plan was to launch a gambling platform – on the future price of Bitcoin – with an associated crypto token. As Donoghue writes it now – while claiming, perhaps plausibly as he was the PR guy, not to have realised it at the time – it was a “totally implausible business model”. Which, in the crypto sector, didn’t stop lots of weird projects getting off the ground, and a lot of wealth being redistributed (and some apparently made – with an emphasis on the “apparently”; it was close to the sort of stuff J K Galbraith was writing about when he coined the phrase “the bezzle”). The shortlived boom Donoghue was in the midst of collapsed in late 2022, most prominently including the fall of Sam Bankman-Fried’s FTX.

It is a lively story. Donoghue’s firm started with its own platform/token, but very quickly found that there was more money to be made parleying their experiences and expertise (such as it was) into selling marketing and promotional services around the launch of new crypto firms/products/token to the myriad of other ambitious opportunists wanting to get on the boom quickly. In some cases, firms were almost throwing money at Moonshot (the pseudonym of the advisory firm). There are weird tales of the launch of improbable NFTs (non-fungible tokens) – who, they wondered, was going to want to buy NFTs of pictures of the football players of some US team, whose CFO had got keen on the idea, especially when there was no easy way – for those not already engrossed in the crypto world – to buy the product. But it sold. Or an NFT of a stamp, when one could simply own the stamp itself (as I recall it, that one didn’t get off the ground).

There are plenty of accounts of “influencers” being paid in heavily discounted crypto tokens they were to hawk, never disclosing to the influenced their own direct stake in the success of the token/platform. Or of venture capital firms issued with deeply discounted tokens, typically undertaking next to no due diligence, and wanted less for the immediate money they provided, than for the apparent (but highly misleading signal) that if the VCs were on board, it must be okay for the public to buy. And the parties, so many parties, so lavish.

In Donoghue’s words:

It’s an insider’s view, into the lives and livelihoods of some of the inner circle to which I used to belong. It’s a record of the sheer extravagance, excess and absurdity, which seemed to take place on a daily basis.   And what it illustrates is how the people behind one of the most captivating, disruptive and incomprehensible industries the world has ever seen act when the cameras are off, and their guards are down.

I strongly recommend the book. And if the recommendation of someone like Blanchard (and blurbs from two Nobel memorial prize in economics winners) isn’t the thing for you, it also comes blurbed by people like Frank Abagnale (subject of Catch Me if You Can), Izabella Kaminska, Frank Partnoy, William Cohan and Dan Davies, authors many of you will recognise. Oh, and by Andy Verity, whose excellent book – published by the same firm – on the scandalous prosecutions that followed the LIBOR issues in 2008/09 I wrote about here last year.

As it happened I had a couple of emails from Donoghue himself a couple of weeks ago offering me a review copy (not sure why, this being a fairly obscure blog, but I guess PR was his expertise. And I’d already ordered a copy). This is how he describes his own book.

The book is a narrative non-fiction account of my time spent working in the cryptocurrency industry. It’s a cautionary tale of the scams and fraud endemic to the space, and the often-devastating consequences inflicted on ordinary investors who get caught up in these.

For several years, I ran one of the most prominent marketing agencies in the industry, working with some of the largest companies and projects in the space. I was also on the founding team of a number of projects myself, one of which obtained an all-time-high fully diluted market capitalisation of $300 million.

My book now seeks to shed light on the corruption and malpractice which I saw unfold on a daily basis.

What could usefully be added is the line from the end of the book’s Prologue: “In order to tell that story, I first need to tell my own. It’s the story of a player on the inside who became so blinded by greed that he didn’t even realise he’d lost his way until it was almost too late”. It was a wild ride, and perhaps one he is now ashamed of. His penultimate paragraph is a good place to end.

I can only hope that, after the actions of SBF, Do Kwon, and the countless other characters in the rogues’ gallery of crypto we haven’t heard of –  who will all hopefully get their day in court sooner rather than later – people will be dissuaded from having a punt in the murky and malevolent markets of crypto.

Should NZ establish a Fiscal Council?

Michael Reddell Fiscal policy

The Treasury this morning hosted a guest lecture on the merits (or otherwise) of a Fiscal Council, hosted by the acting Secretary to the Treasury, Struan Little.

A Fiscal Council in this context is something quite different from the sort of state-funded policy costings office that many of the New Zealand political parties seem to be gravitating towards thinking would be good idea (more state funding, under the guise of something in the public interest, so why should we be surprised). Over the years I’ve written consistently sceptically about the policy costings unit idea, and was only reinforced in that view by my involvement last year in the contretemps over the costings of National’s proposed foreign buyers tax.

The general idea of a Fiscal Council is to have an independent expert-led small agency that provides independent and non-partisan analysis, research and advice on aggregate fiscal policy, aiming to improve the overall quality of debate on fiscal policy issues and, so it is hoped, improve fiscal policy itself. Such bodies have become flavour of the decade over the last 15 years or so. Fiscal councils are particularly common in Europe, where the macroeconomic issues are generally rather different: countries in the euro-area not only give up the option of monetary policy for national cyclical stabilisation (leaving any such national countercyclical activity to fiscal policy), but are also subject, loosely as it may be, to European Union rules.

The idea of establishing a New Zealand fiscal council has been championed by the OECD (but there have been other advocates, including a report from a former top IMF fiscal official done for The Treasury a decade or so ago, and the New Zealand Initiative). I also tended to be somewhat sympathetic (but see below).

The speaker at this morning’s lecture was Sebastian Barnes, a (British) mid-level manager in the OECD’s Economics Department, and (while working for the OECD) a former long-serving member (and then chair) of the Irish Fiscal Advisory Council (IFAC), that had been set up in 2011 in the wake of the Irish financial and fiscal crises of the previous few years.

My impression, from a distance, of the IFAC had been fairly positive over the years, and nothing Barnes said this morning shifted that sense. IFAC is a pretty lean body (apparently costing about EUR1 million per annum), with five part-time council members (a mix of academics and people with more of a policy background), and a secretariat of five fulltime economists and one administrator (they apparently share premises, and admin support with the main national economic research institute). If you look at the current council, three of the five members seemed to be non-Irish (two UK-based and one Italian – a retired IMF official who used to be the desk economist for Ireland).

Barnes spoke very positively about the Irish IFAC. That wasn’t exactly surprising – he’d spent 10 years on the Council, was present at its creation, and works for the OECD, which has called for New Zealand to set up a Fiscal Council – but his comments and experiences were interesting. For a small entity, they are pretty active and publish quite a few regular reports each year, as well as more occasional (but not infrequent) research. Barnes noted that the role of IFAC was threefold: monitoring compliance with the fiscal framework, improving fiscal and economic analysis in Ireland, and promoting informed debate on fiscal issues (and not just among technocrats and politicians).

He claimed (and I have no reason to doubt him) that IFAC had become a fairly respected and well-regarded entity on the Irish scene, and that (for example) it had established a strong reputation with the media as a credible analytical agency and a clear communicator. Barnes reckoned IFAC’s presence had helped strengthen parliamentary oversight on fiscal policy issues. One thing that he was at pains to stresses is that IFAC focuses on analysis and avoids getting into normative debates. Here he seemed to be primarily referring to choices around raising taxes or reducing spending (as ways to maintain overall fiscal balance and moderate debt), let alone to specific tax policy or (say) pensions spending. There is, it seems, quite enough to do in deepening understanding of the fiscal arrangements and highlighting risks around fiscal policy becoming pro-cyclical, a big issue for Ireland leading up to 2007. It is worth noting that Ireland now has some very distinctive issues, notably an abundance of tax revenue from foreign multi-nationals (and a big budget surplus), of the sort that may (or may not) prove particularly sustainable, and where the associated tax bases are not always hugely well understood.

It is difficult to see that the IFAC has done any particular harm. Perhaps it has even done some good for overall economic policy in Ireland. It doesn’t appear to have become politicised, it has maintained a clear sense of an expert-led analytical and advisory body. And it hasn’t cost the Irish taxpayer very much at all.

But it is still rather hard to pin down quite what useful difference fiscal councils, there or elsewhere, have made, and thus whether New Zealand really should regard the establishment of one as a medium-term priority. Barnes did note that a very visible effect of establishing fiscal councils had been that more people were now working on fiscal policy issues (he reckoned at least 100 more across Europe) and argued that fiscal policy issues had tended to be under-researched, especially relative to monetary policy. He several times referred to their inspiration as being expert-led research-oriented central banks. More research isn’t necessarily a bad thing, but…

I posed a question, noting that across the OECD there had been a proliferation of fiscal councils and yet it wasn’t obvious that overall fiscal management was getting better (he’d opened his talk with a multi-country chart of gross debt as a share of GDP, and if not every country had gotten worse over the decades, the upward trend (dominated by large countries) was pretty clear). Perhaps things were improving relative to a counterfactual (not directly observable) or perhaps fiscal councils might be more in the nature of a nice-to-have, a luxury consumption item – and good for the employment of macroeconomists and public finance people – rather than an effective contributor to better fiscal policies?

His (honest) answer was that we “can’t really tell”, but that he thought some had had “some incremental impact”, while going on to note that some of the better-regarded ones were in places (like Netherlands, Denmark, and Sweden) which had long managed themselves fairly well anyway. Perhaps a decent Fiscal Council was then a common output of a wider disciplined approach to good government and effective fiscal management? As for Ireland, I was struck the other day by a feature article in the FT about Ireland’s fiscal challenges (those big surpluses from the corporate tax revenue), in which numerous Irish commentators were quoted/mentioned, but there was no reference to IFAC or its analysis at all.

It was an interesting presentation, but if it was the best case for a Fiscal Council here (and it should have been given his OECD and IFAC background) I didn’t find it very persuasive. It wasn’t helped by the New Zealand experience of the last decade, where (a) the central bank has become anything but expert-led and produces little serious research or analysis of its own (for all its limitations, Treasury is now producing more), and (b) a Productivity Commission was set up, with a vision of being expert-led, and has now disappeared again, amid a sense (well-justified in my view) that the previous government had substantially degraded it (and to be clear this isn’t a partisan critique – active partisan seem to have been appointed by this government to several boards which should be known for being highly non-partisan). How optimistic could one be that a Fiscal Council could avoid being quickly degraded and politicised, in the New Zealand as we now find it? And do we really think that our fiscal challenges – as we drift towards being a normal OECD country in that regard – have to do with lack of sufficient analysis (official or public)?

A decade ago I had a somewhat different view. About the time I was leaving the Reserve Bank I wrote a discussion note for my then colleagues, prompted by a recent visit from US academic economist Ross Levine who was championing an arms-length monitoring body for banking regulation, suggesting that perhaps there was a case for a Macro Council, providing arms-length and independent analysis, research and review around fiscal policy, monetary policy, and financial regulation. I put the discusssion note on this blog back in its early days.

These days I’m pretty deeply ambivalent. While such a body might, perhaps, play a useful role (mostly as luxury consumption item, but if one is wealthy and successful there is nothing wrong with luxury consumption) in enriching debate/analysis in a successful and well-governed New Zealand, if I was a Minister of Finance seriously interested in much better institutions for economic policy etc in New Zealand, it isn’t where I would start. Whatever really able people are available, whatever financial resources can be spared, which be much better used in seeking to overhaul and get to (or in some case back to) real and sustained analytical and policy expertise. If I had in mind particularly the Reserve Bank, it is far from being the only economic institution with diminished capabilities (and perhaps limited demand for something better from successive ministers). And it is difficult to see how an effective Fiscal Council, let alone a Macro one, would be appointed (and able composition maintained). We have very few academics working in the area, no non-partisan research institutes, and while there are partisan people with real expertise attempting to tap them is just a recipe for repeated games of partisanship in appointments. And while I quite like the Irish use of foreign expertise, the realistic pool is limited to Australia (travel distance still matters a lot) and that pool itself doesn’t seem deep). And Ireland doesn’t need to stock a quality MPC.

It was an interesting presentation, it was good of Treasury to host it, but count me unconvinced.

An excellent working relationship with the Governor

Michael Reddell Uncategorized

Back in June the Minister of Finance (and the coalition government more generally) surprised many/most observers by reappointing, for another two-year term, the chair of the Reserve Bank Board, Neil Quigley. Quigley, you may recall, has been on the Bank’s Board since 2010, has been chair since 2016, and in 2022 (when the new Act and Board structure came into effect) had been appointed for what then seemed like a two-year transitional (ie final) term by then Minister of Finance Grant Robertson.

I wrote about this astonishing (to put it politely) reappointment at the time, and then lodged an Official Information Act request with the Minister of Finance for any and all material relating to Board appointments or non-appointments (there are still vacancies on the Board and to date the Minister appeared to have done nothing about filling them either). Nothing about either the conduct or the policy performance of the Reserve Bank over recent years suggested that simply reappointing the Board chair would make a lot of sense, at least for a government that cared two straws about institutional quality, massive losses to the taxpayer, let alone debacles like the worst outbreak of core inflation in decades (recall the “cost of living crisis” that helped see off the previous government).

It took the Minister a long time to reply, running over her own extended deadline, but the results finally turned up last week. The response didn’t shed much light on the reappointment, but I’ll come back later to what little we did learn. There was, however, some interesting snippets on other aspects of the Minister and the Reserve Bank.

The first was about appointments to the Monetary Policy Committee (there were two new external appointments earlier in the year). I hadn’t asked about MPC appointments, but I guess they must have got caught up in the response because the Board recommends these appointments.

The new appointees – Carl Hansen and Prasanna Gai – represented a step forward (including final confirmation that the absurd Quigley blackball on expertise on the MPC had well and truly gone). They were announced on 28 March, four months into the government’s term. But what the OIA response showed was that the nominations had been delivered to the Minister in a paper dated 15 December 2023, just a couple of weeks after the government took office. It confirmed, what had seemed likely, that the MPC appointees had been selected by the Labour-appointed Board to selection criteria that had been developed much earlier last year, under Labour. My OIA response doesn’t specifically show that Gai and Hansen were those nominated in December, but there is no hint in any of the papers that the Minister of Finance pushed back at all on those nominations, or did anything about seeking to reconfigure the way the MPC works to encourage more openness and accountability. Instead, the pre-election nominations simply worked their way slowly through the system, and were finally announced just before the first appointee needed to take office. Neither appointee was, on the face of it, bad (although we have yet to see any evidence that either has made a positive difference), but the process revealed a Minister who wasn’t very interested and just went along.

The other unrelated aspect that the OIA revealed something about was the government’s approach to Reserve Bank spending. I’ve previously noted my surprise that there had been nothing in the 2024 Letter of Expectation from the Minister to the Board calling for expenditure savings or strongly stating that the next five-yearly funding agreement (from 1 July 2025) would do something about the bloat that had grown up under Orr/Quigley/Robertson.

But it turns out that there were actually two letters of expectation, only one of which has been disclosed pro-actively.

The mention of a “savings target” for next year and beyond of 7.5 per cent is, I guess, a start, and better than nothing from the Minister, although seems rather light given the huge increase in spending and staff numbers the Bank has undertaken over the last few years, including (for example) the 27 comms staff.

But then there is no sign at all of anything pro-active in the Reserve Bank’s response, or even in the Minister’s follow-up. The contrast with ACC is stark. It also isn’t directly Budget funded so also wasn’t included in this year’s fiscal savings targets but this was the CEO in February

Seemed like the approach of a responsible CEO and Board.

But very different from the Orr/Quigley approach. As they are required to by law, the Reserve Bank at the end of June released its Statement of Intent and Statement of Performance Expectations. The draft Statement of Intent has to have been provided to the Minister early, the Minister can provide comments, and the Bank must consider those comments. But there is little or no substantive mention in either the Statement of Intent or the Statement of Performance Expectations of the forthcoming new funding agreement, nothing at all about cuts, savings targets or anything of the sort. And, you may remember that for 24/25 the Board had approved budgets with a further 21 per cent increase in staff expenses.

Doesn’t quite seem to compute, against the reported talk of a 7.5 per cent savings target from next year.

(One person I discussed this with suggested – flippantly I think – that perhaps the 21 per cent increase included big redundancy costs, but I think we can discount that rather charitable interpretation.)

Where was the Minister of Finance in all this? Why, she was finalising the further reappointment of the Board chair. It seems to speak to an extraordinary degree of indifference.

What do we learn from the OIA about that reappointment. To be honest, not a great deal. We do learn that the Opposition political parties (who she was required by law to consult) raised no objection (but then Robertson had appointed Quigley in the first place and run defence for the Bank over recent years, backing the Board’s recommendation to reappoint Orr).

But there was also this line in the talking points provided by The Treasury to the Minister of Finance to accompany the reappointment paper she was taking to Cabinet’s Appointments and Honours Committee in early May (this sentence was the only content on reasons for the proposed reappointment).

It was pretty staggering stuff really. A Governor whose personal conduct leaves a great deal to be desired, who repeatedly misleads (or worse) FEC, treats MPs (including Willis when she was in Opposition) with disdain, and who had presided over the worst monetary policy failures in decades, with not a word of contrition or straightforward reflection and ex post analysis……and what is supposed to commend the Board chair (himself with a fairly shady record, misleading Treasury) is that he works well with the Governor. Just astonishing. Now, to be sure, one would not want a Board chair who was perpetually unnecessarily at odds with the Governor, but one of the prime jobs of the Board and its chair is to hold the Governor and MPC to account, and – in the wake of failures of recent years – you might hope that things between the Board and Governor were actually a bit tense, with pressure on the Governor to markedly lift his game. (Cabinet in early May wasn’t to know that they were just about to be treated to another example of MPC/Governor very poor performance, with the baffling MPS in May, the quick U-turn, and then the attempt by the Governor to suggest that anyone suggesting there’d been a U-turn shouldn’t be taken seriously.)

It is always easier to reflect on what is in documents (and OIA releases) than what isn’t there. But reflecting on this bundle of documents, what is striking is that there is no written advice at all from The Treasury to the Minister on the performance of the Board or the Board chair (and my request specifically encompassed such advice). Part of the overhaul of the Reserve Bank Act was to give Treasury a clearer and more explicit (and better-funded) role in monitoring the Bank and its Board. And yet……there was just nothing when it came to the decision whether or not to reappoint the incumbent, who’d presided through the years of woe (and whose Board Annual Reports, supposedly providing accountability, never expressed any concerns whatever). Whether this was Treasury falling down on the job (quite badly) or just keeping quiet because the new Minister had been clear from the start that she was reappointing Quigley anyway is impossible to tell from this set of documents. Even if it was the latter, you might have hoped that a fearless Treasury, serious about its new monitoring role, would have recorded some advice anyway. But apparently not.

When Willis announced the reappointment of Quigley, her statement included this line

You were left wondering why a new Minister of Finance wouldn’t have just got on and made appointments when she could (she’d already been Minister of six months then, and pretty everyone outside thought the current Reserve Bank Board was seriously underqualified).

On 29 May, Treasury provided some advice to the Minister about future Board appointments, notably a “late 2024 appointment round” that they were proposing. Much of it is fairly sensible stuff, and they clearly had in mind the eventual replacement of Quigley proposing to find a new member “with specialist domain knowledge and the potential to succeed Professor Quigley as chair”, and noting later again the need for a succession plan for Quigley’s position as chair.

The paper has a timetable, that envisaged getting onto things pretty promptly, with nominations/applications to fill the various vacancies to close on 24 June, appointments to be formally made late last month, with the appointees taking up their new positions on 9 September. Which would have been all well and good, but…..there is no sign (either in the release, or in anything seen in public since) that the Minister accepted this advice or that anything has anything has yet happened.

And so we are just left with not much further insight, but perhaps a confirmation that the Minister of Finance really didn’t care much. Which really shouldn’t be good enough, in an institution (management, Board, and MPC) that has done so poorly in recent years on so many dimensions.

I don’t usually find cynical explanations that convincing, so I’ve been reluctant to take very seriously the line that Quigley was reappointed because he was in league with National Party figures (be it Steven Joyce, the very expensive lobbyist Quigley had hired, or Shane Reti and the promise of “a present” for a second term in government that a new medical school would be). If I had a cynical explanation of my own it might be along the lines that National really had no reason to be concerned about all those Reserve Bank failures because, after all, the dreadful inflation outcomes helped them win the election. What wasn’t to like? But I don’t really believe that is the answer either.

And so I fall back on the idea that Willis just doesn’t care very much. There might be no political price to pay for making a start on sorting out the Reserve Bank, but there probably is no price to pay among the general public for doing nothing about it all. So, if you really are mostly just a political operative, why bother? Who cares? That should be a fairly damning indictment of the individuals involved, and of the system, but it is hard to think of a better story. (Lines about needs for succession planning ring pretty hollow: plenty of Crown entity chairs have been replaced in short order, and it is hardly as if anyone outside the Bank seems to think the Orr/Quigley Bank had been doing a good or professional job.)

I’m not going to repeat all the text I wrote when the Quigley reappointment was first announced, but I’ll end with just a few sentences from that post

Even among those with low expectations of the current Minister of Finance, it was pretty astonishing news. It isn’t really possible to get rid of the Governor – unless he had been inclined to do the honourable thing, including accepting responsibility for the macro mess, and resign – but the Board chair’s term expired just six months after the new government took office. Of the three parties in the government, the two who had been in Parliament last term – ACT and National – had both objected to Orr’s reappointment when, as his new law required, Grant Robertson had consulted them. And it was the Board, led by Quigley, that was responsible for choosing to recommend Orr.

Just astonishing. But remember that “excellent working relationship” he has with Orr…..

PS Not that is a particular concern of mine, but I noticed in the documents that Quigley is getting paid $2300 a day for his Reserve Bank role. Last year’s Annual Report showed that he received $170127, or about 74 days at that approved daily rate. That seems like a large chunk of time for someone with a fulltime chief executive role, as a university Vice-Chancellor, to be able to devote to an outside Board position