My post this morning was based on Adrian Orr’s Q&A interview as found on TVNZ+. However, it turns out that that wasn’t the full interview which (thanks to the kind people at Q&A for pointing me to it) is now available on Q&A’s Youtube account here. The full interview is almost half an hour, and is probably worth watching if you haven’t already watched the selections on TVNZ+ – it is a more rounded presentation and chance for Orr to tell his story.
As in the previous post, there was something in this bit of the interview where I welcomed the Governor’s comments. He lamented the underinvestment in official economic statistics, that has gone on for decades now, and suggested governments really should do better. And while he noted (fairly) that there is a lot more other data than there used to be, it remains something of an open question (would be interesting to see RB analysis of it) as to whether the Bank and other forecasters have gotten any better at recognising early quite what is going on in the economy and inflation. Perhaps 2020/21 was an unfair test, but we’ve seen a lot of lurches even this year from the MPC. But if the Governor is championing full monthly CPI and HLFS data and more timely GDP data, I can only agree with him.
But if that was the positive, there were plenty of things to lament in the Governor’s comments in the extended interview.
There were, for example, outright falsehoods. Thus, he talked of his European peers having struggled with inflation in excess of 20 per cent per annum. As far I can see, the only OECD European central bank that faced an inflation rate that high was Hungary (briefly) although a couple of others were in the high teens for a while. Gas prices severely affected headline – but not core – inflation, and New Zealand (and Australia) weren’t exposed to that post-Ukraine shock. In the euro-area (most of Europe) headline inflation peaked – gas shock – at 10.6 per cent. The Governor then claimed that the UK had had 15 per cent inflation. That didn’t sound right either.
11.1 per cent isn’t even close to 15 per cent. Why does he just make these things up?
(And a reminder of the graph in this morning’s post: on core inflation (the bit central banks do much about) we were simply middle of the pack in the OECD.
I noted this morning that the LSAP hadn’t come up in that bit of the interview. It did in the fuller interview, and sure enough we get the repeated Orr make-believe blustery arguments. Not only had the Bank’s interventions saved the economy from a “deep recession” (quite how when as the Governor correctly notes the lags in monetary policy are long, and GDP here quickly rebounded after the first lockdown), but the costs (the $11bn or so of losses to the taxpayer) were “more than overwhelmed” by the “net benefits”. The net benefits have never been successfully identified, and the absurd claim needs to be read against the fact that overall Reserve Bank monetary policy calls led to the economy massively overheating, a severe outbreak of core inflation, big redistributions, and then a protracted – if not overly deep – recession to get things back to balance. Whatever the good intentions, there simply were no “net benefits” (probably few gross ones either) and large losses to the taxpayer. But Orr never engages straightforwardly on such issues. (For anyone who listens he cited some IMF work – I picked apart an earlier piece from the IMF on this issue here : the IMF had simply imagined a world (and economy) quite different from what New Zealand actually experienced.)
There were two other interesting lines from Orr.
The first was a bold statement that banks had been making “excessive profits”. Not high, but “excessive”. Quite what basis he as prudential regulator had for that claim isn’t clear, but he has long had it in for the Australian banks. He seems to consider it somehow unfair that the Australian banks are efficient low-cost operators.
And the second was the claim that we are seeing unusual (greater than previously) changes in relative prices globally. Since oil prices were one of those he mentioned, here is a long-term chart
The alleged greater volatility isn’t apparent there. Perhaps there is something to the claim more generally (would be interesting to see the analysis and data), but it seems unlikely, and perhaps particularly in the New Zealand context, where one of our most important relative prices is the exchange rate, which has displayed remarkably greater stability in the last decade or more than in the first 25 years after it was floated.
Orr also claimed that inflation itself was going to be more variable, but again it isn’t obvious. There has been a bad outbreak of inflation a few years ago, now brought back under control, but is there really any evidence (beyond the Governor’s desperate desire to talk about climate change) for the proposition, or that it would matter if it were true (headline vs core considerations again)?
Towards the end, Orr was talking up the strength of the Bank, notably the Board (signally underskilled in fact, with a chair reappointed who did/said nothing about the mistakes of recent years) and the MPC (most of whom we never or very rarely hear from, at least one of whom has no relevant qualifications at all). As for the rest of the senior management, those I have anything to do with (several) simply aren’t very impressive (in two cases “not very impressive” is to flatter). Perhaps when standards are that low Orr gets away with the sort of loose language, bluster, and Trumpian-style false claims internally (as well as the intolerance of dissent etc that he is known for). But it shouldn’t be acceptable in such a powerful figure, and if central bank Governors are never going to be some sort of single source of truth, at very least they should (a) prompt one to think, and b) not prompt one to worry that yet another claim just bore little or no relation to reality.
But this is latter day New Zealand.
croaking cassandra 
Michael, you refer to the Governor’s “Trumpian-style false claims”. I hold no view on the Governor, not having studied him as you have. However, Trump has boldly gone where no other US president has, with a rather remarkable chicken strategy. First, lie. When fact-checked, do not admit fault or even lie low. Instead, insult the fact-checker and lie again so as to distract attention from the first lie. When fact-checked a new, insult the new fact-checker and lie yet again to distract attention from the second lie. After numerous iterations, a remarkable proportion of the populace judges you to be rather resolute and the fact-checkers to be the problem. Having so ‘succeeded’, unsurprisingly many have followed suit, but the option to act in this way is available to only a select group: you have to be impervious to shame.
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Very nicely put
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I’m sure President Trump has good reason to question the credibility of the so called fact checkers; they’re more curators of narrative than seekers of the truth.
Anyway, here’s a laugh from the debates. They’re eating the dogs!
https://youtu.be/jlbavUL4ldE
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Given that the ABC has just forked over $15 million to settle misreporting about Trump, the press is learning that abuse by its reporters in misrepresenting facts is going to be costly. Trump is lining up his lawyers to get some truth back into the press. Maybe social media pundits like yourself should also be considering not supporting such blatant nonsense comments by firebravely as clearly a unfactual comment.
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Me having implied that Trump is a congenital liar, and you claiming this view to be “blatant nonsense”, you might have argued that he is not a congenital liar. Instead, you point to a reporting error about Trump by ABC. ABC’s errors are not mine, so your reasoning is illogical. However, in the world of the Trump acolyte, it is sufficient to erect a straw man and then assail it. In fact, it is necessary. The straw man must substitute for the real one because the real one cannot be defended. However, if you seek a straw man to assail, it is rather remarkable that you should choose ABC’s claim that he is rapist because even the jury thought that Trump had sexually assaulted her in a lesser way (digitally to be precise) and even the trial judge thought the word rapist to be “substantially true”. On the other hand, perhaps real defenses of Trump are so hard to find that one must settle for technicalities over which part of Trump’s body was used to conduct a sexual assault.
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Hi Michael,
Excellent analysis by yourself (again). One wonders what our govt think of Orr’s performance, or more to the pint, whether they think at all. Or perhaps they are just overwhelmed by the enormity of the situation, or too busy fighting other crusades (Willis – gender equality).
We are constantly reminded by them (although I haven’t heard it for a while), that unless we can fix the economy we can kiss all of the other first-world services goodbye.
For NZ to be at the bottom of the IMF survey of GDP growth, points to things going the wrong way for a long time. Tinkering here and there as proposed by Willis and Luxon (we are gong to cut red tape!) won’t fix a thing. We need real incentives if we’re going to attract any sort of investment and foreign capital.
Having a governor of the RBNZ who really knows his stuff and who is determined to make a difference and can lead from the front, would be another good start.
Regards, Jan
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If Jerome Powell, Erik Thedéen, or even Michelle Bullock were to overstate historical inflation in European countries during an interview, you can be rest assured a press release would be issued to correct the record. That’s the professional thing to do. Crickets from Orr?
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Then again, if something of this sort happened in those countries one would expect some media scrutiny/challenge in response as well. Here, nothing….again.
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Ouch. This feels like very harsh criticism indeed. It feels a bit too much from my perspective. I watched the interview and I’ve read both of your critiques. Firstly I’m interested in what you and other critics of Orr would have done differently in terms of monetary policy that would have led to a different outcome to the one we have now?
Also, under the previous government Orr had two mandates – controlling inflation and maintaining low unemployment. In monetary policy this is a contradiction but nevertheless it may have influenced the decisions made at the time and constrained the actions of the RBNZ. Not that it stopped Orr announcing at one point that he wanted unemployment to rise by 117,000 to bring inflation down. (Or a number close to that).
NZ, on many economic indicators did a lot better than our economic peers – as Orr stated – at some point we had 3% growth, 3% unemployment and 7% inflation – overheated labor market, maybe, but does that have to be a bad thing? 7% inflation was bad but by no means the worst globally.
Those numbers do stack up well against our peers – most of whom had higher levels of inflation and much lower growth. But I am interested in what critics would consider a better path and what unemployment and growth numbers would look like under that path.
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The criticism about the lies or exaggerations that were made by Orr are fair and he could have done better with his facts and figures to make his arguments more convincing.
I didn’t understand what was meant by the LSAP program losing $11 billion so asked my greatest educator ChatGPT this question – “there is a comment by some NZ economists that the RBNZ lost $11 billion during it’s QE program. What does that mean?”
Chat GPT Answer:
The $11 billion loss reported by the Reserve Bank of New Zealand (RBNZ) refers to an accounting or valuation loss incurred as a result of its Large-Scale Asset Purchase (LSAP) program, also known as quantitative easing (QE). Under the LSAP program, the RBNZ purchased government bonds in large quantities to inject liquidity into the economy during the COVID-19 pandemic. Here’s what this means:
In short, the loss reflects the broader economic strategy during the pandemic rather than mismanagement. The long-term implications depend on how the economy adjusts post-pandemic and whether the benefits of the LSAP program outweigh these fiscal costs.
Thanks Chat.
Is that a fair summary of what you are saying – basically the $11 billion has been added to the government deficit without any long term benefits in economic performance.
As with the other critiques I would ask what alternative action would have been better at the time? If the RBNZ had done no LSAP what would have been the economic consequences? Can that be known or modelled?
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It is a broadly fair summary of the issues at hand. Re the LSAP there was never a good case for taking that scale of financial risk (there was never a decent cost benefit done, nor any compelling evidence of how there were likely to be compensating real economic benefits). That is an observation independent of whether the Rb (or any of the rest is us) got our macro views right back in March 2020 – we didn’t but whereas cutting the ocr was defensible given those incorrect macro views, the scale of the risk around the LSAP never was (more especially in NZ, more especially when bond yields were all extraordinarily low – thus some contrast to say the US (different sorts of markets) in 2008.
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Thanks Michael. Yes I (now) understand that deciding to buy bonds when interest rates were so low was always going to be a loss making venture – but I think that was the point. If I’m getting what Chat is saying – the RBNZ took the losses to in order to provide liquidity to the private sector in a time of crisis. The agreement with the government to shoulder the loss indicates it was a fiscal policy more than a monetary one and the risk or loss was known up front.
The economy is not well at the moment and predicted to get worse so your sentiment that the $11 billion may have been wasted is not wrong.
My hunch remains that fiscal policy is the big bogey man here but no-one in NZ (apart from Bernard Hickey) will mention it. As data emerges over the next year I think it will become clearer.
Yes – technically Willis budgets are fiscally neutral but the scale and speed with which so much work across so many different sectors was halted – from major infrastructure and construction to health, education and NGO funding – must have had an immediate contractionary impact. And the withdrawal of so many potential large scale projects – which take years to plan, finance and resource – what was the impact of that on future planned investments from the private sector?
This has to be known and deliberate – is this an attempt to lift productivity in the public sector? Or is it the view that a good long recession restores efficiency to the economy by weeding out the weak and unnecessary. That is the only explanation I can come up with to understand what Willis thinks she is doing.
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Still a distinction to make. the LSAP interventions in the first few weeks were mostly about restoring bond market liquidity (and considered over that period were profitble), By April 2020 the RB’s logic was about driving interest and exchange rates lower (they didn’t rest on liquidity stories then) and those interventions were unnecessary (apparent fairly early), ineffective, risky, and highly costly. Ie, all those losses, with almost nothing to show for it.
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