Month: October 2024

Pretty (il)legal

Michael Reddell Governance, RBNZ Superannuation Fund

The title of this post was, of course, a reference to the efforts of former Minister of Finance and National campaign manager Steven Joyce to defend the use by National of music inspired by or copied from some overseas band’s work. It was, he claimed, “pretty legal”. The courts disagreed.

Joyce himself developed form in this area, and as Minister of Finance in 2017 appointed an acting Governor of the Reserve Bank for six months, with no legal authority whatever. It was, in many respects, a pragmatic solution (a new permanent Governor could not, under our conventions, be appointed to take office very close to election day), but instead of passing a brief technical amendment to the Reserve Bank Act, to deal with what was perhaps an unforeseen oversight in the initial drafting, he simply went ahead and made the questionably legal appointment. At the time, this blog devoted a lot of time and space to the issue (having flagged the looming issue a couple of years in advance, while officials and ministers did nothing). Eventually, through the good offices of the Ombudsman, Crown Law – CEO, one Una Jagose, who has since developed something of a reputation – released a summary of their legal advice to Treasury on the issue (discussed, with other relevant links, here). Crown Law’s case seemed to boil down to no more than “well, Parliament must have intended to enable the appointment an acting Governor of this specific sort”. Had they intended it, it would have been a simple matter for a suitable clause to have been in the act. None was. (That particular gap has been fixed in the amendments to the Reserve Bank Act in recent years).

It mattered for a number of reasons.

First, because we are supposed to be governed under the rule of law, not ministerial whim, or the fancy of officials who happen to think a particular outcome would be convenient, but can’t be bothered asking Parliament to legislate. “Pretty legal” is no sort of acceptable standard, the more so when on a plain reading (detail and legislative context), something is actually pretty clearly illegal.

There are also real risks when officials and ministers play fast and loose with the law, for their own convenience, betting perhaps that no one will be bothered with the expense and delays in access to civil justice to attempt to challenge it formally. Fortunately, Grant Spencer – who compromised a worthy career by accepting this temporary but dubiously legal appointment – doesn’t seem to have been faced with particularly contentious choices in his few months occupying the office, but the lawyers might have been gathering if there had been a very costly or contentious decision going against one or other groups of interests. In those days, all power at the Reserve Bank rested with the Governor personally.

And, frankly, this was our central bank, supposed guardian of financial stability, and prudential regulator, including around ensuring that good standards of governance exist and are upheld in banks and financial institutions. Would this sort of – pretty legal/ evidently illegal but convenient – standard have been even close to acceptable to the Reserve Bank if a supervised institution had offered it up in the context of its own appointments? And while the appointment was made by Steven Joyce, there is not the slightest sign in the documents of any unease from the Bank. Its Board was, then as now, chaired by Neil Quigley. (You may recall that Quigley – in his day job – and Steven Joyce have an economic relationship recently called out and criticised by the Auditor-General no less. They probably thought that arrangement was pretty much okay. It wasn’t.)

All that said, and bad as that episode was, it was all over in six months. A permanent Governor, lawfully appointed, took office and things moved on. Not all such “pretty (il)legal” stuff done by governments is so time-limited.

All that in the post so far was really by way of scene-setting for another example of “pretty legal” sort of thinking. It doesn’t affect many people, but does involve the Reserve Bank (Quigley again, Orr, and their very senior appointees), The Treasury, the Minister of Finance and most of her ministerial colleagues on the one hand, and a fairly small group of mostly very elderly pensioners on the other. Officials and ministers are acting as if the law simply doesn’t matter, to achieve what might otherwise in many ways be a sensible outcome, and by refusing to make simple legislative amendments are doing so in a way that leaves those pensioners and their spouses highly exposed to what could, in the wrong circumstances decades hence, be catastrophic financial risk.

I will try to keep the explanation short and clear.

The Reserve Bank established a pension fund for employees back in 1935. The defined benefit (pension) bit of the scheme was closed to new members in 1991 (and the later defined contribution bit has also been closed for a long time) and all the members of that scheme are now retired. There aren’t many left (50 or so), and as schemes shrink cost burdens tend to increase, investment options diminish, and it gets harder to find member trustees.

The scheme’s rules allow for it to be wound up. But in that event, trustees have to be able to purchase replacement pensions. There are no private annuity providers now in the New Zealand market, but decades ago a provision was included allowing for the possibility of transferring pension liabilities to the Government Superannuation Fund (not coincidentally, the provisions of the two schemes are pretty similar).

I’m a trustee of the scheme – never quite imagining in 2008 when I filled in as someone’s alternate that I’d still be there 16 years later. A couple of years ago I championed exploring whether a transfer to the GSF was really a feasible option. If it could be done in ways that replicated members’ benefits, it would lead to measurable cost savings for the Bank, and get all the compliance etc rigmarole out of our lives. I suspect that no one who has served as a trustee of this scheme in the last decade has counted it a pleasant or satisfying experience.

Anyway, my colleagues agreed and we got the Reserve Bank Board (which has the final decision on a wind-up) to agree to us exploring the issue.

There were a couple of immediate questions. If the GSF Authority wasn’t interested, we couldn’t compel them. But even if they were interested did they have the legal powers, under their own legislation, to assume our liabilities (in exchange for payment)?

People, with various degrees of creativity, looked through the GSF Act and found two possible straws to cling to. One dropped away very quickly, as everyone accepted it didn’t help.

But then there was section 98 of the Government Superannuation Fund Act.

When it was first suggested as an avenue, I scoffed. And the more I reflected on those provisions, and their legislative context/history, the more implausible it became.

The legislation dates back many decades and what evidence there is suggests it was written mainly with university lecturers in mind – many of whom in those days came from the UK. It made sense to enable agreements that recognised service in (say) UK universities for NZ university pension purposes and vice versa. What was envisaged was a reciprocal relationship.

You’ll note that the provision isn’t restricted to overseas entities. Reciprocal arrangements can be enabled, by Order in Council, with other New Zealand entities. It would, for example, have been fully in order decades ago for (an Order in Council enabling) the Reserve Bank and the GSF to have entered a reciprocal agreement to mutually recognise service in the other (eg for Treasury staff moving to the Reserve Bank, Reserve Bank staff moving to Treasury). There was never an agreement of that sort (in fact such were the restrictive practices at the Reserve Bank even when I joined in the 1980s that it was all but impossible to join the Bank if you were aged over 26).

But the critical words in that statutory provision – which has apparently not been tested by the courts – is “reciprocity” (“providing reciprocity in matters relating to superannuation”).

A few months ago a Cabinet committee, attended by 19 ministers (including the PM) and an under-secretary, decided that it was fine and dandy. A bit later Treasury pro-actively released the relevant Cabinet minute. They also released, with significant redactions, the associated Cabinet paper, presumably prepared for the Minister of Finance by Treasury but with input from various other government agencies.

It is a shoddy paper from start to finish (starting with the repeated claim that the Reserve Bank scheme is a “government” scheme – it is a fully separate legal entity, on the same footing and regulatory basis as any other legacy superannuation scheme under the Financial Markets Conduct Act, with the Reserve Bank having no powers over it, and the government itself having no powers or liabilities different from those applying to any private scheme). It is perhaps no wonder that both the Minister and Treasury refused my OIA requests for advice received on this GSF option.

It is, however, usefully clear and explicit that the main reason for such a transfer, if it can be legally done, is to save money for the Reserve Bank. That is an entirely legitimate objective, provided members’ interests and rights are robustly protected. But there is no sign that the Minister provided any such assessment to her colleagues, who presumably nodded this through. A transfer to GSF could, in appropriate circumstances, be a mutually beneficial and tidy outcome. But it simply isn’t legal on the law as it stands, and precisely because it is proposed to be done using an Order in Council, which can simply be revoked by any future minister/government, or disallowed by Parliament itself under standard secondary legislation provisions, with no recourse for pensioners, it leaves those pensioners in an extremely vulnerable position. The risk of such revocation or disallowance might seem low today, but as even the Cabinet paper notes the liabilities probably have at least 40 years to run, and no sensible person concerned about their own finances is going to approach decades-long contracts saying “oh, never mind, explicit written statutory powers will probably never be used”. You look for protections, and what the Minister of Finance is proposing to do – pretty illegal in the first place – offers none at all.

“Reciprocity” simply does not mean what it has to mean for a simple sale and purchase agreement in which the trustees pay cash to GSF to take the liabilities off their hands to count. It doesn’t mean something like that in plain English usage, and it does not do so anywhere else in New Zealand statutes (and yes, I have worked my way through every single reference). When I buy my groceries from the supermarket it is a mutually beneficial exchange, but no one thinks of it as an agreement involving “reciprocity” (which in general and statutory usage, and things like Social Security Agreements involves something much more of a “like for like” nature.) Moreover, as even the Cabinet paper notes this (pretty illegal) wheeze involves trying to use an Order in Council to get round an explicit statutory prohibition of new entrants to the GSF scheme itself.

A couple of months ago, having become aware of the Cabinet minute (although not then of the redacted Cabinet paper itself) I wrote to the Minister of Finance outlining in some detail my concerns, and proposing instead a simple and uncontroversial legislative amendment to the GSF Act, which would provide trustees and members legal certainty, and markedly reduce future risks for members (since revocation of an authorising Order in Council or disallowance by Parliament would no longer be options). I have not had a reply from the Minister. When I approached her again, a private secretary suggested that I could expect a response shortly. Nothing has since been heard, suggesting that a conscious decision has been taken to simply ignore my concerns, as someone with legal duties to scheme members.

The full text of my letter to the Minister of Finance is here.

Letter to Minister of Finance re section 98 of the GSF Act

The Cabinet paper very briefly touches on the legislative option (having provided ministers with no information on the risks and legal doubts about the approach her officials would have them take).

I guess if there is no formal legal challenge, pretty illegal stuff can be done quickly. But this is a bizarre argument more generally. Nothing in the Cabinet paper suggests any urgency about an arrangement. The scheme functions, bills are paid, pensions are paid, and although pressures will build they have not done so yet. It would be good to tidy things up, but only if it can be done robustly, and not with ministers brushed off with lines about there being nothing to worry about and only minor implications for members). As it happens, it is now late October 2024 and if a transfer happens it certainly won’t be until 2025. Doing things properly, by the book, not indulging in quick “pretty illegal” fixes, unbothered about the future vulnerabilities created, should be the way our ministers and responsible officials operate.

But I guess this is New Zealand.

You might be wondering about the other trustees of the scheme. Well, three of them are appointed by Orr/Quigley – two are among Orr’s many DCEs – and openly take the view that it is no concern of theirs whether the current law actually allows a transfer of this sort. Of course, in many commercial deals it isn’t possible for one party to look fully behind the scenes and be sure of the other party’s processes and internal authorisations. One often has to rely on warranties etc. But…..the GSF Act is a public statute, has been on the books for decades, and simply does not contemplate or allow for a deal of this sort. Judging by the time spent, some might conclude that trustees have seemed much more concerned about their own future indemnity arrangements than about robustly protecting the best interests of members.

There are simple and much more robust fixes. It is beyond comprehension why the Minister and officials are not willing to take such a route. It speaks of indifference to law, and indifference to people. But it looked quick, and perhaps “pretty legal”

Fiction and spin

Michael Reddell Adrian Orr, Monetary policy

I had in mind another post for today, but this morning we had something rare: a speech about monetary policy from the Governor of the Reserve Bank, delivered in Washington at a think-tank which appears to have been hosting many speakers this week (in town for the IMF World Bank Annual Meetings). On their schedule, the Deputy Governor of the Banque de France was speaking earlier in the afternoon (some very interesting material in her presentation) and the Prime Minister of Liechtenstein a bit later.

The Governor’s wife writes fiction (several books published) and teaches creative writing. Entirely laudable and there are often powerful insights in great works of fiction. But when – as her husband does – fiction and sheer spin are dressed up as serious accounts of policy stewardship etc, the only possible insight is into the character of the chancer who tries it on. And perhaps those who enable him (one could think of Neil Quigley and Grant Robertson, but also now (sadly) of Nicola Willis).

But first a point to his credit. Climate change, for example, didn’t get mentioned even once in the speech. Or the treaty of Waitangi. It had the appearance of a straight up and down speech about monetary policy stewardship, as advertised (“Navigating monetary policy through the unknown”). And, if you recall how he used to tell people (well, Parliament actually) that the Russian invasion of Ukraine was to blame for the worst New Zealand inflation in decades that line has now been quietly minimised too.

Consistent with his revealed preference for fictional embellishments, Orr builds his speech around the navigational challenges faced by ancient mariners, in his case primarily Kupe. Orr claims to know that Kupe had a clear goal in mind, and whether he did or not, (I guess he could have used Captain Cook too) but – technology having moved on – he wasn’t reliant on the sea birds etc. It still seemed a rather strange analogy to use, in 2024, in an age of GPS. Then again, I guess it is only a couple of weeks since the HMNZS Manawanui ran onto the reef, so perhaps it isn’t such a bad analogy for New Zealand monetary policy after all. Perhaps the salvage will be done well, at considerable costs (perhaps lingering costs for the people of Samoa) but the ship never should have ended up on the reef in the first place. Those responsible for the loss of a ship face courts of inquiry, perhaps even a Court Martial.

But in Orr’s fictional world central bankers – New Zealand central bankers, since his speech does actually concentrate on New Zealand – are heroes, having delivered us to the least-bad possible outcomes through the storms, vicissitudes and other uncertainties of the last few years, where anything bad was no one’s responsibility, and anything good was to the credit of the wise and respected navigators, led by Orr himself. It was pretty breathtaking stuff really – although questionably persuasive even as fiction – as there is no longer even a hint that anything could have been done better, by our courageous central bank navigator, than it was. When the Bank reviewed its own performance a couple of years ago, they then thought it prudent to acknowledge the odd small error, even while claiming that none of it mattered much. But no longer apparently.

In his celebratory self-congratulatory mood – he claims to have saved us from two deep recessions – his overseas listeners would have had absolutely no idea that on the IMF forecasts that came out yesterday, New Zealand’s real per capita GDP growth in both 2024 and 2025 is estimated to be among the worst in the world, down there with places like Yemen and Haiti. Or that on those same IMF estimates, New Zealand will have been one of the very worst performers over the entire 2019 to 2025 period.

Now, to be fair to the Governor, one can’t blame underlying long-term productivity problems on the Reserve Bank, but equally no one really doubts that those 2024 and 2025 outcomes are mostly on monetary policy: the consequences of the Bank belatedly waking up to its past mistakes, and doing what it took to get inflation back down again. And, frankly (although the Governor won’t tell you this) anyone can get inflation back down: the trick (the reason we delegated the job to supposed experts) was never letting it get away on you (well, on us, the public) in the first place.

The spin, and utter avoidance of any responsibility, begins earlier, in fact with the Bank’s covering press release, which presumably captures the key lines Orr would like to see reported here.

First, there is this framing

Followed up in the speech with this extraordinary admission from someone charged with keeping inflation near 2 per cent.

Now, I don’t doubt that briefly in early 2020 perhaps the MPC really believed that the alternative to them acting as they did was economic disaster, but it was very quickly evident that that simply wasn’t the case. Economic indicators here rebounded quickly and early. And the MPC did nothing to start to pull back on the excessively loose monetary policy until late 2021 (it wasn’t until into 2022 that the nominal OCR was even lifted back to the immediate pre-Covid level by when inflation and inflation pressures were already running away on them): they now estimate the positive output gap was in excess of 3 per cent by late 2021. If we want to play with nautical analogies, Ulysses steered his way between Scylla and Charybdis. Orr and his team ran us onto the rocks (full blown inflation, fixed only at great cost). And he claims to have been now quite relaxed about those hugely and disruptive inflationary consequences, with all the attendant arbitrary redistributions.

And then, still with the press release, there is this

Inflation simply was not “caused by COVID-19”. With all their comms staff, this is very unlikely to be a slip of the pen, rather it is yet another in the endless series of attempts to avoid actual responsibility for doing the highly-paid job they took on so badly. No one doubts that Covid provided a context where many policymakers had to make difficult calls in conditions of great uncertainty. But it was the Reserve Bank MPC’s calls, faced with all that uncertainty and the decisions of others (since monetary policy moves last, by construction), that delivered the worst inflation in decades and the attendant cost and disruption to getting it down again. But Orr can’t or won’t admit that.

As the work fiction continues, there is no mention of the LSAP – just a couple of passing lines about how quantitative easing tools hadn’t been used in New Zealand before – or the $11 billion of losses the MPC’s choices imposed on the New Zealand taxpayer (as someone pointed out a couple of weeks ago, one could build three Dunedin hospitals for that price), and of course none of the way in which the Bank went on provided concessional lending to banks to the very end of 2022. No doubt, if challenged, Orr would bluster and repeat his utterly unsubstantiated claims that the LSAP made a big positive difference to New Zealanders, but on this occasion his fictional treatment just airbrushes it away.

I spluttered when I came to this paragraph

He chooses not to mention to his overseas audience (or to remind local readers) that his own reappointment was formally opposed by the two Opposition parties in Parliament at the time or that – as in many other countries – public discontent and inflation and the cost of living registered extremely high in opinion polls throughout, arguably playing a role in defeating the government here last year. It is hard to find anyone with any subject expertise who has any confidence in Orr (I’d mention Orr’s board, who seem to, but hardly any of them have any subject expertise).

(In case you are wondering quite what he meant, Orr’s idea of “mutiny” appears only to involve troublesome inflation expectations).

The creative writing continues as we move towards the end of the speech.

Has anyone ever associated Orr and his public communications with the word “humility”? Perhaps we might all take this as less like make-believe if it weren’t so well-documented just how many times Orr has actively misled Parliament’s Finance and Expenditure Committee (charged in part with holding him to account), or if he didn’t send out his chief economist to say “oh no, we didn’t really mean what the numbers say, and anyway it isn’t our fault but that of the tools”. Nothing, you see, is ever the fault of Orr and the MPC…..at least in this fairy tale.

It goes on.

I’m wondering how Martien Lubberink, Roger Partridge, Jenny Ruth or Nicola Willis (in her Opposition days) feel about their experiences of Orr as empathetic communicator? Disdainful bullying is probably a fairer characterisation of his style. And as for the rest of the MPC, all these supposedly-expert external members sat on the MPC right through this extreme period, and none of them ever said a word….no speeches, no serious interviews, no scrutiny by Parliament. Nothing.

Orr has the gall to then claim that it is really all in the minutes (the “Record of Meeting”) and that is only a shame that so few people, even “economic experts refer to or query” it. Which is, of course, nonsense on stilts, and just more active make believe. People read the Record of Meeting but they just don’t find much there. Despite all the uncertainties that Orr makes much of, there is never a serious sense of that in the Record of Meeting. Oh, they talk a good game, but when there is real uncertainty about important things, really able smart and engaged people will – with all goodwill – reach quite differing conclusions about where to next, and what the latest data probably mean. There is just none of that. The grapevine reports claim that there is in fact vigorous debate in the MPC, but there is not the slightest evidence of it shown to those us press-ganged into enduring the consequences of their bad calls. If the MPC really was unanimous on all but one call in the last five years, that is a very poor reflection indeed on the MPC members (some of whom are simply unfit for office, but from a couple one might have hoped for a bit more) and their chair. If not, the Record of Meeting is just comms spin.

I could go on, but will draw this to a close here. Somewhat remarkably – well, perhaps not in the fictional world Orr would prefer to draw for us – there is no mention of accountability. It was always supposed to be the price, the quid pro quo, for delegating a great deal of constrained power to central banks. Accountability was supposed to involve real consequences. And yet, through the biggest and most costly monetary policy misjudgements in decades, Orr would just prefer no one mentioned anything about accountability (or in fact about mistakes at all). I guess it is the New Zealand public sector way (as we seeing again now in the wake of revelations of obstruction and cover-ups in the context of decades of abuse of people in state care).

When captains of naval vessels made mistakes and ran their ship onto the rocks it was often considered fitting, and not inappropriate, for the captain to go down with his ship. But barefaced creative fiction, with not even a hint of contrition or regret to add nuance to the manuscript, seems to be Orr way.

Central bank policy communications

Michael Reddell MPC

For a long time I’ve been a strong supporter of central bank transparency about stuff a central bank actually knows something about, but a sceptic of the faux transparency of publishing stuff a central bank really knows very little about. In the former category, one might think of the background papers going to the MPC (by aiming deliberately low I once got them out of the Bank for a forecast round 10 years previously, but good luck if you asked now for the papers around the 2020 and 2021 decisionmaking, let alone those from six months ago). In the latter category I primarily had in mind medium-term macroeconomic forecasts, including endogenous forecasts for the OCR. Sure, the numbers are mostly put together fairly honestly, but in truth (and this isn’t a criticism, more a description of the limitations of human knowledge) central banks just don’t know very much about the future, especially a couple of years ahead. In principle, an OCR forecast now for the end of 2026 would be drawing on forecasts for inflation pressures well out into 2028. Forecasting 2024 or 2025 remains a considerable challenge.

But my criticisms there have typically been about the hubris or delusion involved in thinking one could add meaningful value re where things might be a couple of years hence. In fact, I was rereading this morning an old piece I used at a BIS conference years ago on such issues. But I tended to be relatively more relaxed about near-term forecasts, for (say) the next quarter or two, included the associated guidance on likely policy. If one might still be sceptical about just how good central banks might be at nowcasting or near-term forecasting (a) they do have more resource to throw at the issue than any other forecaster, and b) they should at very least know a little more than we otherwise do about their own reaction functions (ie how they might react to any given set of economic/inflation data). That might be so whether one had in mind explicit near-term OCR forecasts (to the second decimal place) as the Reserve Bank does, or just “bias statements” of the sort pretty much all central banks tend to engage in.

Here in New Zealand, even with some new and (apparently) improved external membership of the MPC, the last six months don’t score very well even on that count.

It was less than five months ago (22 May in fact) when the MPC released a Monetary Policy Statement indicating, in their forecast track, that there was a bit better than even chance that the next warranted move in the OCR would be an increase this year (to be consistent with this track, probably in August).

Their associated communications (which I’ve written about previously) was so at-sea that they tried to deny the implications of their own chosen track (the chief economist even tried to blame it on the tools, rather than the MPC of which he was a part).

Within six weeks, (without a new full set of forecasts, and in the absence on holiday of the chief economist), the MPC had flipped to a dovish stance. This was how I illustrated it at the time

And on this occasion they more or less did follow through. There wasn’t any huge inconsistency between their July and August statements (and the associated 25 basis point cut in the OCR).

But this was the forecast track in the August MPS, published only six weeks ago

That forecast track was exactly consistent (weight by days) with 25 basis point cuts in October and November, such that it was clearly intended by the MPC as specific forward guidance. It looks as if they envisaged another 25 basis point cut in February such that by then the OCR would have been lowered to 4.5 per cent.

And yet yesterday we saw a 50 basis point cut, and a fairly high degree of confidence among market economists that another 50 points will follow next month. One can argue that there wasn’t a clear direct signal of that from the MPC, although when you put a big headline in the “minutes”, and explicit statements that a) inflation is expected to “remain” around the target midpoint, and b) that an OCR of 4.75 per cent is still “restrictive”, it doesn’t take much guessing to see what they had in mind yesterday (especially with the three month MPC summer holiday coming up).

Now, as it happens, I think yesterday’s OCR cut was most likely to right call in substantive macroeconomic terms (and still think we are probably heading towards 2.5 per cent by the second half of next year). But that isn’t the issue for this post. Rather the point was nicely summed up by a journalist’s tweet yesterday

Which is a pretty damning indictment, of a committee whose claims to exercise such great discretionary power is that they are technically expert and have some reliable/predictable idea of what they are doing. And that simply isn’t obvious at present.

No one particularly minds when central banks change their mind when there is some significant exogenous shock, the size or timing of which they could not reasonably have anticipated. But it is far from clear that anything very much has changed about the economic backdrop since May (no really big data surprises on GDP or unemployment, and confidence measures seem to have bounced around a bit without leaving us in a lot different place than in early May, let alone August). Instead, the expert committee, drawing on its staff, seem simply to have gotten things very wrong, and to have seriously misread the extent of the disinflation that was already well in train (or at least so they assume, having anticipated yesterday the CPI numbers out next week). It doesn’t seem so different (though probably less severe) than the mistake they made in 2020/21 and even early 2022.

If the MPC really can’t do better than that there are two options. Either they aren’t the men and women for the job (in several cases that seems quite likely) or they should stop just injecting random noise purporting to be expert judgement by publishing forward tracks and indications of what might happen next. And, of course, there is no indication in any of the published sets of minutes from May to now of any robust debate or disagreement among MPC members, which is simply additionally damning: they all went along with each of the flip flops and inconsistencies through time, with no indication that any of them were applying the intellectual energy and analytical grunt to contest and challenge whatever view was coming from staff or management. I’ve long argued for much more personal accountability for MPC members – the risk has always just been that individuals (whether inexpert internals or the externals) would just free-ride, go along for the status, the fee, the addition to the CV, while adding little, and not bearing any consequences when the overall MPC does poorly. Management hates the idea of an open contest of ideas – has ever since reform models started being explored a decade ago – and one of their worries was of a “cacophony” of voices, in which truth would be obscured. It was never a compelling argument – other central banks manage, and it was a clearly an argument that reflected mostly management self-interest – but the experience of the last six months highlights again just how little “truth” or knowledge there is in anything much the MPC says beyond the specific OCR adjustment on a specific day. An open (but respectful) contest of ideas, exploration of alternative models, could hardly be worse than what’s been on offer again this year.

Divisiveness and democracy

Michael Reddell NZ politics

Not the usual stuff of this blog, but at lunchtime yesterday I went along to this well-attended event (St Andrew’s was full).

I had a few reactions and didn’t think I could do them justice in a few quick tweets.

Why did I go along? Well, several reasons really. Being semi-retired one has time, in principle the topic sounded interesting and important, I’d never heard Salmond speak before, and I have some time for Boston. I can’t say I necessarily expected to agree with the thrust of the promised “conversation”, but it is always good to hear people you disagree with make their best cases. Boston noted that it was a rare event at which he lowered the average age (and he is a few years older than me).

As it happened, Salmond did most of the talking, while Boston acted more as guide and host to the conversation (although he threw in some more comments in the Q&A session, including stating his preference to raise the NZS eligibility age to 70 – I clapped at that point). He sought to structure the discussion under 4 headings: treaty issues, environmental issues, the future of democracy, and “what on earth should we do now”.

Of course, I should have anticipated that the “conversation” wasn’t really going to be anything at all disinterested. If you were concerned about the way in which politics and society were going, and were interested in exploring common ground, rebuilding trust, engaging in efforts towards mutual understanding etc, you certainly wouldn’t have taken Salmond’s approach. From Salmond’s side in particular, it was mostly a series of sneers and laments about this government (David Seymour in particular, and Christopher Luxon who seemed to have fallen into the hands of bad people).

(As regular readers will know I am not myself a particular fan of this government, have little time for either Seymour or Luxon, and do not support Seymour’s Treaty Principles Bill.)

If inflammatory language is one of the problems of our day, Salmond contributed more than her fair share in just one session. Had anyone who strongly disagreed with her own politics been present they’d not have felt as if Salmond had any interest in them, except to sort them out and put them on the straight and narrow, or any recognition that there might be legitimately competing interests, world views, models for how policy should be done or New Zealand governed. Instead – particularly on treaty issues – we got sneers at how David Seymour couldn’t read Maori (which seemed particularly strange from someone of wholly European ancestry re someone of part Maori ancestry), claims that his approach was “impertinent”, that it was all “heartbreaking”, and that “it takes a lot of work to remain as ignorant as many of us have been”. It was, apparently, okay to have a discussion about the Treaty of Waitangi, “but not like this” – more, it seemed, a case of it was okay for the unwashed to ask questions of the experts and be put back on the right path, as if historical research (fascinating as it often is) was the answer, rather than one contribution to dialogue and debate as to how a modern New Zealand should best be governed, and what (if any) ongoing role an 1840 treaty might play in that.

The government was then accused – in the calm moderate language that fosters dialogue – of an “ambush of our democracy”, a claim which appeared to apply not just to treaty things but to the environment. This government, we were told, “is going in the opposite direction to our survival as a species”. Strangely – or perhaps not – the fact that the ETS continues in place, which caps emissions across the economy as a whole, was never mentioned. The fast track list seemed very unpopular……and yet of course there was no mention of projects fast-tracked under the previous government. Perhaps one line I might welcome was that there wasn’t much evidence of the coalition agreement commitment to evidence-based policymaking, if only it weren’t that successive governments – of both political stripes – have been so poor on that score.

And if the rhetoric hadn’t been amped up enough, we were then told that the government was “tossing whole categories of people on the rubbish heap”, while being invited to evaluate the government on how many New Zealanders were leaving, the suggestion being that it was because of this “ambush of democracy” – as if this hadn’t been a stark and sad feature of New Zealand, across governments except when the borders were closed, for too many decades.

I’m sure it was quite entertaining and emotionally satisfying for the much of the audience – and there were audible gasps of approval when she quoted Nobel economics winner Paul Romer to the effect that “we must stop apologising for regulation. It is the only thing that protects us from the abyss” – as if no one had noticed that David Seymour’s own new ministry is actually called the Ministry FOR Regulation.

I suspect that Boston was pretty sympathetic to a fair amount of Salmond’s commentary but he did inject a moment of realism, noting that the government (and its component parties) are about as popular now as they were in the election last year. If good Christopher Luxon (Salmond had been keen on him at Air NZ) really had fallen among the disreputable, “many of our fellow New Zealanders” seemed to quite like what he was doing.

(Now again to be fair, Boston seemed distinctly unimpressed with the Labour Party, and Salmond with the Green Party, so perhaps they might think it was all just the failures of the Opposition).

Salmond seemed dead keen on allowing New Zealand policy to be shaped by international “great and good” people: we got repeated references to various reports of Nobel Prize summits. It wasn’t quite clear how this was going to help her treaty concerns, but I guess she had in mind the environment. Quite why we’d want New Zealand policy to be guided by a bunch of people who are very expert in usually quite narrow technical areas, when most political hard choices are about values and distributional tradeoff, wasn’t ever made clear. Salmond seemed very keen on “citizens’ assemblies” and exercises in so-called “deliberative democracies” but presumably only so long as people like her got to guide the material these selected citizens were presented with. More money for journalism, and public broadcasting in particular, seemed to be a policy line both Boston and Salmond were championing, seemingly utterly oblivious to the declining public trust in journalism.

Perhaps weirdest of all was the way Salmond ended. Apparently oblivious to Boston’s reminder that the current government isn’t exactly unpopular (at least outside central Wellington) there was an impassioned plea that we should “let leaders lead”. Since I doubt she in mind Seymour, Shane Jones, or even the diminished Luxon, one can only assume it was only the right sort of approved leaders who should be allowed to lead. In a final flourish of no nuance whatever, we were told that we needed leaders who would look to the interests of their children and grandchildren, not to the interests of donors. A particular unconstructive approach to enhancing mutual respect etc to simply assert that everyone who disagrees with you is either ignorant or in the thrall of donors, and has no concern for next generations (even their own) at all. It really was quite breathtaking.

Perhaps if one went along to an ACT rally, or even a New Zealand Initiative members’ retreat, it might all be about as bad on the other side: the dismissive sneering and the automatic assumption of a single right pathway, if only the peasants could be cowed or brought to understand. Maybe (I genuinely don’t know). For myself, I’m sceptical of constant calls for “social cohesion” etc, since there are really big and important differences and values and world views and priorities, and there isn’t much point in assuming that one side or the other only needs to be enlightening (or perhaps silenced). But it really was astonishing that someone as able in her own field as Salmond evidently is, had no apparent interest in anyone else’s models or values or frameworks, or even a conception that there could be such things: the people of goodwill and intelligence might genuinely, deeply, and perhaps intractably disagree.

But it probably all played well to the elderly base present at the meeting. Just like so many gatherings – so much social media for that matter – do.

Public policy just keeps on worsening

Michael Reddell Housing

On Friday morning I picked up my copy of The Post to find on the front page a story clearly handed to Stuff’s political editor Luke Malpass, about a shiny new intervention that ministers were to announce later that morning to help out residential property developers. It was, we were told, going to offer free downside price/liquidity insurance to large and established property developers. It would be sold as strictly “time-limited” except that there would, in fact, be no time limit specified.

My reaction on Twittter was “What…….” and it brought to mind that old jeer about business-friendly (as opposed to pro-market) governments and an enthusiasm among some of their supporters to “capitalise the gains and socialise the losses”. Little did we imagine that this would in fact become declared and intended policy of this National/ACT/NZ First government (not in the midst of a crisis, where sometimes these things happen, but as a whole new policy tool). I’m not generally an ACT fan, but……you have to wonder what the point of an allegedly pro-market anti-intervention libertarian party is if they wave things like this scheme through Cabinet (and not even their backbenchers have issued statements of disapproval, they being rather freer than ministers).

Malpass’s report was quickly proved accurate, with the announcement later that morning by Chris Bishop and Chris Penk (ministers of housing and of building and construction respectively) of the Residential Development Underwrite scheme.

The fact that it appeared to replace but considerably extend schemes in place under Labour was not a point in its favour

Funding for the RDU will be redirected from unused funding from the Kiwibuild and BuildReady Development Pathway programmes. Both of these programmes are now closed to new applications.

This government (rightly) having made much of inheriting a large structural fiscal deficit, and wanting to get government out of business, instead jump in boots and all. And all apparently on the basis that a couple of Cabinet ministers and their MHUD officials know better than the market what should be built when, where, and by whom, and thus who will win the benevolence of the free government underwrite.

There was more information on the MHUD website, but it was no more reassuring. There was no sign of any analytical framework behind any of it (no analysis at all, let alone anything serious or rigorous. of market failures or any sort of cost-benefit analysis or risk assessment). In fact, there was a distinct sense of something that had been rushed out. Some property developers had presumably been bending the ears of ministers. As the Herald put it “the government is riding to the rescue of stressed property developers”, in a distinctly picking-winners approach to the recession. Plenty of people and firms will have undergone huge stress in the last couple of years, as inflation was squeezed back out of the system. It was and is a necessary adjustment. But most apparently didn’t enjoy the favour of ministers.

And will no doubt do so again. In one article on Friday, Bishop was quoted thus

Bishop said the scheme wouldn’t be in place forever and Cabinet would make decisions about when to “turn it on and off” depending on demand and construction activity.

So that would no predictable and rigorous framework, but rather a great deal of trust in ministers’ ability to forecast construction cycles and housing demand, or to respond to pressures of the electoral cycle or developers bending their ears. Good regulation – like a good tax system – is stable and predictable, not turned on or off at the whim of ministers. This is poor policy, done poorly. And isn’t it simply dishonest for a government department to repeat ministerial spin about the intervention being “time-limited” (and MHUD does exactly that upfront) when there is no time limit at all? After all, in the grand scheme of things every policy intervention will eventually be altered/amended.

In essence what the scheme involves:

  • the government will guarantee to purchase at an agreed (in advance) price houses that don’t sell at an (approved) market price within an approved period of time,
  • only large-scale developers will be eligible for this assistance, preferably those building in Auckland, Wellington, Christchurch, Hamilton, and Tauranga [a little surprised Queenstown wasn’t on the favoured list),
  • no fee will be charged for this put option that is being granted to the developers

The rationale appears to be that banks and other potential lenders aren’t sufficiently willing to take risks on this projects, even at high fees/interest margins, but……government knows better/best. Quite why we are supposed to believe this self-delusion (ministers and officials falling for it is perhaps more understandable – if no more excusable – given the nature of their incentives) is never made clear. Minister are, it appears, blessed with some special insight into the state of the economy and the timing/speed of the recovery, and instead of just (say) publishing that analysis, they prefer to give handouts (and that is what free price/liquidity insurance is) to developers.

In the MHUD document there is this statement upfront

The secondary objective never seems to get another mention, but the ‘primary objective” is almost worse, for being functionally meaningless. You minimise the cost and risk to the Crown by simply not offering free insurance, and if you must offer such insurance you should do so with a disciplined and transparent model (to, for example, estimate the economic price of the option). But there is nothing of that sort in any of the MHUD material, just a lot of mention of the (extensive) discretion afforded to officials, of whom we may be left wondering both what their expertise is and what their incentives are. Why would we back them to make better choices than financial market participants? And as for “maximising housing supply”, there seems to be no analytical framework there either, including around incentives on developers (who will, of course, prefer free insurance and can be expected to try to game the rules). Will there be any material impact on supply, will any impact be any more than timing, and how will MHUD rigorously evaluate claims put to them by developers? Oh, and isn’t developers finding themselves with overhangs of houses and land part of the way that much lower house prices actually come about?

It is possible the scheme won’t end up being hugely costly. After all, house prices might take off again as interest rates fall. Or officials might err on the very cautious side and very few underwrite grants might be made (or at such deep discounts that the real insurance cost is cheap). But there is just no good or compelling analytical foundation for any sort of intervention of this sort (none provided, none readily conceivable). Even the business cycle argument seems rather flakey. Ministers seem to lament the cyclicality of residential construction (globally, it tends to be one of the most cyclically variable components of GDP), but when they lament the state of the industry, they don’t mention that new residential dwelling consents are still running around twice the level at the trough of the 2008/09 recesssion.

There is also talk about helping to get the cyclical economic recovery underway. Pretty much all the arguments against using fiscal policy for that purpose – I’ve outlined them here repeatedly – apply at least as much to discretionary sector-specific interventions like the Residential Development Underwrite. And, of course, were the Reserve Bank to regard this scheme as being likely to make a material difference it should, all else equal, make them more reluctant to, with less scope to, cut the OCR a lot further.

It is a rather sad reflection of how the quality of New Zealand policymaking has fallen. Perhaps we should be grateful that exchange rate cycles aren’t what they were – and that past governments were less prone to scheme like this – or who knows what sort of free insurance the government would be dreaming up for exporters.

Who knows what the relevant government agencies thought of this scheme. I’ve lodged OIA requests and am particularly interested in any analysis and advice from The Treasury and the Ministry for Regulation.

Inquiring into banking

Michael Reddell bank capital requirements, Banking, Prudential regulation

Hard on the heels of the Commerce Commission’s inquiry into some aspects of banking competition, Parliament’s Finance and Expenditure Committee is also holding an inquiry. Submissions weren’t open for very long and have now closed, but the full terms of reference are here. It is a select committee inquiry, so it is hard to be optimistic anything very useful will come from it. Select committees are poorly resourced, even if they wanted to make a serious contribution, and the incentives seem to be almost entirely partisan political in nature.

A few submissions have so far seen the light of day. Those I’ve seen are:

None is particularly long, although Body’s piece has several appendices of past contributions in this general area.

The Reserve Bank’s contribution is mostly defensive in nature: if there are any issues, responsibility doesn’t rest with us or with our regulatory model. Which is, of course, pretty much what you would expect them to say, as an entrenched and powerful independent existing regulator, who no doubt believe that all the policy judgements they’ve made have been wise, in the best interests of New Zealanders etc. But just because it is them saying it doesn’t automatically mean they are wrong.

And in some areas no doubt they are right. As they note, having four big banks isn’t at all unusual. And some scepticism of state-enabled “maverick disruptors”, especially in the form of an unimpressive modest retail bank, is likely to be well-warranted. They also fairly note that patterns of finance have changed over time, something particularly evident in rural lending (where Rabobank is now the second biggest lender) and in corporate lending (where even on the data they have access to – and big corporates can tap international markets directly – overseas banks other than the big 4 apparently now have 30 per cent of the market).

And I (have always tended to) share their view that (approved regulatory) relative risk weights, used in calculating capital requirements matter a lot less than is often made out. In principle they should make no systematic difference at all since the aim of relative risk weights is more or less to reflect true differences in the underlying riskiness of different types of credit (eg a residential mortgage, with a 40 per cent LVR, is likely to be much much less risky, individually and as part of a portfolio, than an unsecured loan to a B-rated corporate). In practice, things aren’t that simple, including because the dividing lines between different types of lending and associated risk aren’t always clear or straightforward, and which side of a rather arbitrary line something falls can matter. And since no one – regulator or regulated – knows with any great certainty how (relatively) risky different types of loans are (mercifully, very bad crises don’t come along very often, and so data are scarce and open to contextual interpretation – regulators can get things wrong, and impose risk weights on particular types of lending that are quite at odds with the views of the lenders themselves. And any mapping for particular Reserve Bank imposed risk weights to either the pricing or availability of individual loan products is likely to be fuzzy and indirect at best.

Most importantly, relative risk weights simply do not explain why bank balance sheets are chock-full of residential mortgages. Rather, the artificial scarcity of houses and land, imposed over decades by central and local government, has led to hugely expensive houses, which each incoming generation needs to finance. Bank balance sheets would be much smaller if regulatory reform successfully delivered enduring low prices of houses and urban land.

All that said, one shouldn’t be too keen to come to the defence of the Reserve Bank as regulator. This is an agency with very limited specialist expertise at the top (see, notably, the Bank’s Board which now wields the policymaking power), has a culture of being aggressively dismissive, produces no serious research or analysis on financial regulation or stability (even though these functions now comprise the largest chunk of the Bank’s staff) and so on. What speeches there are lack any real depth or insight.

As I noted at the start, the New Zealand Initiative’s submission is brief. There are, broadly speaking, two aspects to it. The first is about efficiency considerations – a dimension unfortunately now lost from the legislation

Of course, any bureaucracy can produce a cost-benefit analysis of sorts of justify its own choices. I didn’t find the case for the 2019 decisions compelling, but a review now – especially if the reviewers were appointed by the RB or those sympathetic to it – isn’t really the answer (and under current legislation the Minister of Finance can’t direct the Bank in this area). My own view remains that (a) key people matter, and b) key policymaking decisions (as distinct from implementation on individual instruments and institutions) should be moved back to the Minister of Finance, who has both some real accountability (governments get tossed out, and question in Parliament routinely) and better incentives to balance the competing imperatives around any regulatory structure. It is very unusual to delegate major regulatory choices to an unelected agency (the more so, one with little demonstrated depth, expertise, and commanding little respect).

The New Zealand Initiative doesn’t go that far. They propose instead

I’ve written previously in favour of splitting around a NZPRA, which would have advantages for both those functions and for the Reserve Bank’s monetary policy and related functions. As they note, a suitably-qualified FPC might be a halfway house, although I’m not sure that the MPC – as staffed, and (not) scrutinised and held to account for the mistakes of recent years – is a great advert.

(I’m less convinced of the merits of taking the Governor off the Board. The FMA is primarily an implementation agency without much of a public face. The Reserve Bank, or major policymaking committees, are a different matter…….and for what it is worth it would be quite anomalous internationally not to have the Governor on the central bank board.)

The main prompt for doing this post was Andrew Body’s submission, which he was kind enough to send me. I don’t agree with everything in his submission – we’d disagree I think mainly on the risk weights issue (see above) – but the bulk of the submission captures a number of areas where the current Reserve Bank is ill-equipped for its job, and not doing that job well. His submission is an easy read. Here are a few extracts.

It is often forgotten just how much of an impost was imposed on banks the local incorporation and outsourcing requirements.

What I’m less sure of is how much of this is idiosyncratic to New Zealand, and how much is a general tendency of regulators and the regulated. The stylised wisdom when I was at the Reserve Bank was that banks were typically under orders from Australia to be very reluctant to upset or call out the regulator (there or here). Of course, when your regulator – as Graeme Wheeler did here – takes offence at anodyne critical comments from a bank economist, and calls in the heavy artillery to get the economist silenced, it sends a message. Banks have a lot at stake, and the Reserve Bank has a lot of power, which can be wielded for good or ill.

Before turning to governance

Much of that makes a lot of sense. But, of course, there is no sign that the Minister of Finance has any interest whatever in a better Reserve Bank, whether in its monetary policy or regulatory functions. She just reappointed the chair, has left Board vacancies unfilled, and included nothing about a reorientation in her Letter of Expectation. Instead, she seems to have been toying with arbitrary new taxes on banks.

Standing back from all three submissions, a few things struck me. The first (and most important) is that neither the Reserve Bank in its defence or the critical submitters mentioned the APRA regulatory requirements and how they affect things in New Zealand (neither did the FEC’s terms of reference). That should be really quite surprising as most of the grumbling is about the four big Australian banks, all of which are part of Australian-based consolidated banking groups, regulated as such by APRA (eg capital requirements that apply to group exposures as a whole). There is no doubt that more onerous regulatory requirements can materially affect the New Zealand subsidiaries, but in any area in which the RBNZ’s requirements were less burdensome than APRA’s it might make or little or no difference here, as the group would still be constrained by group-wide regulation. I’ve never been quite sure how it all works out in practice – how banks do their pricing and risk allocation etc having regard to these distinct regulatory regimes – but it is surprising not to see it mentioned once. At an aggregate level, I’m inclined to the view that the Reserve Bank never made a compelling case for the extent of the 2019 increases in New Zealand capital requirements (and that the heavy focus on high capital is somewhat misplaced, relative to the much-harder-to-measure/observe changes in credit standards), but markedly lower requirements might well become non-binding.

I’ve long been a bit puzzled as to why more non deposit-taking entities don’t lend directly into the New Zealand market (at least if, as we are often invited to believe, there are excess profits on offer here). I recall being heavily involved in some work almost 20 years ago now on possible alternative approaches to monetary policy implementation, and one thing we focused on a lot then was the possibility of entities lending mortgages (say) directly into New Zealand from abroad. Disintermediation was also in focus when the first LVR restrictions were put in place. But none of it ever seem to have come to much. I was exchanging notes with a banking lawyer recently and asking why, say, Macquarie – an aggressive new entrant to the Australian mortgage market – couldn’t just lending into New Zealand as “Cheap Mortgage Loans Limited” (so wouldn’t need to be a New Zealand bank), but the person I was engaging with noted that people who had considered such options were scared that the Reserve Bank would act to stop them (and apparently there are designation powers in the new deposit-takers legislation). You have to wonder why it would: no New Zealand depositors’ funds would be at risk, and new competition would be injected to the system. I note it mainly because it isn’t entirely compelling that everything sensible has been done by the Reserve Bank to reduce unnecessary barriers to entry. Better “Cheap Mortgage Loans Limited” than a juiced-up Kiwibank, in which taxpayers’ money is directly at stake.

I have no expectation that the FEC inquiry will produce anything useful. It isn’t set up to. The submission time was short – who could commission serious or fresh analysis in that time? – and the committee has few resources, no specialist support, and its members don’t appear overly strongly qualified, except to pursue narrow political agendas (some of which might be sensible, but most won’t). And thus how equipped are they going to be to evaluate competing claims in the submissions they receive? It isn’t like a court case in which expert witnesses are grilled by counsel for both sides, and arguments, evidence, and implications tested. A proper workshop, with major submissions presented as papers with discussants and audience questions might have offered the prospect of shedding some serious light. But the political process is all too often interested more in heat than light.

UPDATE: Martien Lubberink (VUW) draws my attention to his submission here. A one sentence summary might be that we should be at least somewhat grateful for what we have – a stable, predominantly foreign-owned, system – and wary of the siren calls to any sort of quick fixes to apparent problems. Thus far, it is hard to disagree (although I have a few specific areas in which I might reach different views than he does).