Year: 2025

What was the story re Orr’s resignation?

Michael Reddell Adrian Orr, Reserve Bank Board

It is almost six weeks since the shock announcement early on the afternoon of Wednesday 5 March that the Governor of the Reserve Bank, Adrian Orr, was resigning effective 31 March, and that in fact he had already left and an acting Governor was already in place. Orr had been (controversially) reappointed in late 2022 to a second five-year term that still had a little over three years to run. In his seven years in office he’d been a near-constant figure of controversy, not least for his role as chair of the Monetary Policy Committee which had not only let inflation run out of control then needing to bring about a (mild) recession to get back in check, but for the $11 billion of losses the Bank had sustained punting in the government bond market. His relationships with anyone but sycophants and yes-men seemed strained – whether the rapid turnover of senior managers, his treatment of external critics, or the very evident rather dismissive and at best frosty relationship with the current Minister of Finance when she was in Opposition. On many occasions – including at numerous select committee hearings – his relationship with the truth also seemed tenuous.

It is good to see the back of him, but it really isn’t adequate that we’ve had no explanation at all for the sudden departure, sufficiently precipitate that he simply walked off the day before he was due to host a research conference, with speakers of the eminence of Ben Bernanke, to mark 35 years of inflation targeting. Orr’s own comments – the only ones being in the official statement (linked to above) – shed no light at all on the reasons for his resignation or for the precipitate departure. Neither the Bank’s Board nor the Minister of Finance has shed any light at all, including on why they allowed their employee to simply walk off with no (effective) notice whatsoever. What were the relevant provisions in his contract, and were they enforced? One can think of circumstances in which an employer might want an employee- senior or junior – out instantly (eg if there were serious behavioural issues or if someone was resigning to take up a position that involved a direct conflict of interest – eg when Don Brash left the Reserve Bank to go into politics, or if Orr had resigned to go and work for a bank or funds managers), but generally people expect to (and are expected/required to) give a decent amount of notice and to work out that notice. As just one example, when the Deputy Governor resigned a few years ago he gave four months notice. Why wasn’t Orr working out a decent length of notice?

I’ve been looking back through articles etc from 5 March, and what limited material has emerged since. The line that caught my eye was from Infometrics’ Brad Olsen on the day of the resignation:
“Let’s be very blunt. The Board of the Reserve Bank needs to front, they need to front urgently, and they need to be open and transparent. Anything less is just not acceptable”

And yet “anything less” is just what we have got. No straight answers from either the Board or the Minister of Finance. The Bank likes to boast of its commitment to transparency, but as I’ve had cause to observe numerous times over the years while they are very open about things they want us to know, they are consistently obstructive about much of the rest. Serious transparency involves openness even when it is uncomfortable or embarrassing. Anything else is really just PR/spin.

Early candidates for the explanation for Orr’s departure were disputes with the Minister of Finance over either (or both) the Bank’s budgets and (forthcoming new) Funding Agreement or bank capital etc regulation. It had been only a week previously that the Minister had finally confirmed publicly that she would be looking for savings from the Bank.

Neither of those factors ever seemed adequate to account for what we knew. After all, despite suggestions that the Bank had actually been bidding for more funding, pretty much every government agency had had to live with budget cuts in the last year, and no other chief executive is known to have tossed his/her toys and stormed off in protest. The Bank and Governor must have known that fiscal restraint was going to come for them too. And the Board chair told us that while discussions were ongoing nothing had been finalised by 5 March. And even if the Governor had concluded that in his best professional opinion the Bank couldn’t do its job on the level of funding the Minister and/or Treasury were proposing, why storm off with no notice (around a not-yet-finalised agreement) when the new Funding Agreement was not even due to come into effect until 1 July this year? Giving notice that he’d be going on 30 June would have seemed to (relatively) mature and responsible approach had fiscal concerns been the key to Orr wanting to leave.

Much the same goes for issues around bank capital regulation. The Minister has been quite open that she had been taking advice on possible changes to the legislation to allow her to determine key prudential policy parameters. Reasonable people can and do differ on that. A central bank Governor might have regarded such changes, had they been confirmed, as simply unacceptable and not a regime he/she would be willing to work under. But there do not seem to have been any confirmed decisions, legislation takes time to put in place, and again…..3-4 months notice would have been quite reasonable if the Governor had concluded that someone else should pick up the baton for the years ahead. There is nothing of such apparent urgency to account for simply walking off with no effective notice at all.

Same goes if the Governor had simply come back from his summer holiday and decided he no longer has enough “gas in the tank”, was tired, and thought it was time to go. Plenty of people do come back from holidays thinking it is time for a change (plenty of them then settle back into the routine of the year), and look around for another job and/or give notice and move on. People might even sympathise with a senior official who got to that point. But it doesn’t make sense of Orr’s departure….with no effective notice at all.

If anything, the mystery – and a sense that the Board and Minister are keeping important stuff from us – was highlighted by the OIA response obtained from the Minister of Finance by the Herald’s assiduous Jenee Tibshraeny, as reported here. (I’m guessing she probably has a similar request in with the Bank itself, but is probably being obstructed and delayed there.)

Those documents suggest that Orr had last met with Willis on 24 February. By 27 February, Board chair Neil Quigley had been in touch with Treasury Secretary Iain Rennie about Orr, and Rennie advised the Minister of this conversation (substance of which was withheld). Most strikingly, the documents show that on the morning of 5 March “Reserve Bank staff sent Willis’s staff a draft press release for the resignation announcement, dated 10 March” (the following Monday, and after the inflation targeting conference was out of the way). And yet by 1:30pm on the 5th the resignation announcement went out – Orr himself was already out – with staff (on both sides of Bowen St/The Terrace) having scrambled to finalise press releases.

Something must have happened that morning. It simply cannot have been developments around either the funding agreement or bank regulatory policy (and although I can’t verify these claims I have heard a couple of times from people I trust that (other) people very close to the situation have confirmed that neither was the explanation for either the departure or the suddenly expedited announcement and no-notice nature of the exit).

Then there is the other document reported in the Herald article: some proposed Q&As for the Minister prepared by her press secretary. This particular press secretary must have been particularly averse to openness, suggesting that in response to a question “Did you ever have disagreements with Adrian Orr” she answer (in essence) “no comment”, when surely almost any minister and agency CE worth their salt would have disagreements, including on policy issues, from time to time.

Then there was this one

Which has to be the ultimate answer designed to deflect, and yet in the process suggested there really was something there. David Farrar picked up on this issue thus

It would be pretty extraordinary for a senior official to raise his/her voice with a minister (sadly, vice versa is not unknown), and although Orr was not formally a public servant, it would still be pretty grossly unacceptable behaviour from such an official and something the Board should have been alerted to. Unfortunately, Orr’s impulsive and undisciplined nature means that raising his voice at the Minister sounds all too plausible.

But, even if so, still not an adequate explanation for why the resignation was brought forward at the very last minute.

The Herald article also reports that (a) the Minister told her press secretary not to give out the purpose of the 24 February meeting (not exactly committed to transparency is she?), b) wasn’t briefed by her press secretary on answering questions re bank capital (presumably the press secretary didn’t think that was the story), and c) Willis was advised to say “not that I’m aware of” if asked if the resignation had anything to do with either the funding agreement or her opposition to his 2022 reappointment.

So where does it leave us? We – the public – are clearly being stonewalled by both Willis and the Bank’s Board (while Orr, now no longer a public official is saying nothing at all). The usually supine Finance and Expenditure Committee – currently launching an inquiry into improving performance reporting and public accountability – is living down to form.

Faced with the set of facts (the unquestioned known ones), and applying something like Occam’s Razor, most reasonable people would deduce that something pretty serious and potentially scandalous must have gone on. The facts?

  • resignation with no-effective notice (out of the door by the time the announcement hit the screens (Quigley told questioners that the acting Governor had been in place from “lunchtime today”)
  • resignation on the eve of a significant and fairly prestigious conference, where CEO level hospitality would normally have been expected,
  • resignation accelerated at the last minute (10th brought forward to the 5th),
  • person resigning not indicating anything about (a) a new job, and b) even general new career directions,
  • other proffered stories (funding, bank capital) making no sense of the stylised facts, even from an undisciplined and volatile character like Orr.  (Health hypotheses also don’t work, as even a short non-specific mention of health as the explanation would have quickly allayed questioning and resulted in widespread sympathy.)

There are, of course, problems with a conduct/scandal hypothesis.

Specifically, Neil Quigley appears to have denied it at his hastily-called short press conference later on the afternoon of 5 March.   Someone who was there kindly sent me a transcript, which this draws from.

Quigley’s first answer on this point might appear to have wriggle room.  Asked if there were “any conduct issues outstanding”, Quigley replies with a simple “No”.  But, of course, it isn’t exactly unknown for questionable conduct to be dealt with by way of quid pro quo: someone resigns and an issue is taken no further.  Once the resignation is lodged and accepted (as it clearly was by late on 5 March) there wouldn’t be any conduct issues “outstanding”.

But a later question seemed to allow less wriggle room: asked whether there were any “policy, conduct and performance issues which are at the centre of this resignation”, Quigley responded “we have issues that we’ve been working through, but there are no issues of that type that are behind this”, and in a follow-up clarified that the issues they’d been working on had been the policy/funding issues.   But was he then primarily answering about “policy” rather than the other limbs of the question?

There is also a final question, where the transcript isn’t fully clear.  Quigley appears to have been asked if there are “current issue with Adrian” and if there had been “any complaints”.   He is recorded as responding “I’m not going to go into that because that’s history”, and something about “some things that have made as a public record’ [perhaps past concerns about Orr’s treatment of people like Roger Partridge and Martien Lubberink] “but I don’t intend to go into those now” before he walked off and terminated the press conference.

Quigley also stated that Orr had still had his (Quigley’s) confidence, while avoiding answering a question that was about the Board’s continuing confidence.

The problem is that Quigley (a) doesn’t seem to be giving straight answers, and b) has form.   Thus, if the only thing you read was the transcript of his press conference you’d get the sense that the story was somehow about Orr feeling the job had been done and it was time to move on.   But that makes no sense of what we now know (the rush to bring forward the announcement to that afternoon), and he provided no compelling explanation when asked why Orr hadn’t just stuck round long enough even just to be hospitable at the conference.   And even what he did say doesn’t make much sense of a “time for a change” story, noting that he and Orr had been in discussion on “this and exactly how it would play out over a few days”. 

And, as to Quigley’s “form”, regular readers will recall his denial –  and putting Treasury in a place where it went public with a denial –  that there had ever been any sort of blackball on expertise when the first MPC members were appointed five years ago.  Not only did personal testimony contradict him (people who were told by Quigley himself they would not be considered because they were active experts), but so did the documentary record (OIAs), and comments from one of his own fellow Board members who’d been actively involved in the selection process back then.

One final straw in the wind is that just a few days after Orr left, a release quietly appeared on the Reserve Bank’s website advising that one of Orr’s several deputies, an Assistant Governor responsible for Information, Data, and Analytics, had resigned.  There was no indication of any other job to go to, and the departure date was less than three weeks from the date of the announcement (by contrast, another Assistant Governor resigned last year, offering more than two months notice).    Perhaps there is no connection to Orr’s departure.   But the coincidence in timing, with no specific job to go to, should at least prompt some questions.

We (the public) still have no idea what actually happened.  And that really isn’t good enough from either the Board or the Minister about the holder of such a consequential office.    But what we do know is enough to lead a reasonable interpreter to fear that it really may have been something around Orr’s conduct.   If not (and one genuinely hopes not) a straightforward explanation could set the record straight very quickly.  And if so, people shouldn’t be able to hide behind private commitments to secrecy that might serve the interests of some of the powerful, but are hardly likely to serve the public interest.

Tariff madness and monetary policy

Michael Reddell Monetary policy, Trade

We’ve seen this morning the latest step up in the Trump-initiated trade war, with the additional 50 per cent tariffs imposed on imports from China. If the tariff madness persists – but in fact even if were wound back in some places (eg some of the particularly absurd tariffs on supposed US allies in east Asia, or 48 per cent tariffs on Madagascar’s vanilla) – it is going to be extremely damaging to global economic activity in the (probably protracted) transition. A global recession would then be the best forecast (through a whole variety of channels including, but not limited to, extreme uncertainty – fatal for investment, which can usually be postponed – and wealth losses). Faced with severe adverse shocks, and extreme uncertainty, layoffs happen and firms close faster than replacements emerge.

(The longer run effects will also be adverse, lowering potential GDP in all the countries that participate in the “war”, which consciously and deliberately put sand in the wheels of their own economic performance, but economies adjust – you can have full employment in a highly protected economy with impaired productivity growth (see NZ in the 50s and 60s) or in a high-performing open and competitive economy.)

The direct effects of the tariff war on New Zealand are still probably pretty limited. Our goods exporters to the US face the lowest tariff band, lower than those facing many competitors (eg European wine exporters) and the amounts involved are just a small fraction of GDP anyway. But as pretty much every commentator is now pointing out, the indirect effects will swamp any direct effects. It is perhaps a bit like early 2020 when government agencies were initially focused on the damage to a few New Zealand exporters (lobster, universities etc) from China’s disruptions, only for those modest effects to be totally swamped by the wider global effects and our own experience with Covid (pre-emptive adjustments and lockdowns). In a global recession there is pretty much no place to hide.

But what does, and should, it mean for monetary policy, here and abroad (if the madness persists)?

In the US, it is near-certain that there will be a material increase in consumer prices. Headline inflation will, all else equal, increase over the coming few months. To the extent there is any logic in the madness, that is part of the point. Higher prices in the US increases returns to domestic producers and make foreign produced products relatively less attractive (of course, in many cases, US producers will also face higher costs on imported inputs). From a revenue perspective, it is also akin to a big increase (inefficient and all as it may be) in consumption taxes – reportedly the largest US tax increase in some decades. So prices will rise and real household disposable incomes will fall.

A sensible central bank will always have to play things by ear to some extent. No idiosyncratic event is ever quite like another. It isn’t impossible that the higher tariffs will translate into behaviours consistent with households expecting inflation to be permanently higher. If that happened, the Fed would need to lean against that risk – hold policy tighter than otherwise.

But an alternative scenario might be one akin to an increase in GST. Increasing consumption taxes raises consumer prices and headline inflation. We’ve had three experiments of this sort in New Zealand in our post-liberalisation years: when GST was first imposed in 1986 (a 6%+ lift to the price level) and when it was increased in 1989 and 2010 (each increasing consumer prices by a bit over 2%). On none of those occasions did the Reserve Bank seek to tighten monetary policy in response, and with hindsight that was the right call on each occasion. The lift in prices was (at least implicitly) recognised by the public as a one-off lift in inflation, that dropped out of the headline rate again a year later.

How likely is something like that in the US at present? Given the chaotic policy and political processes, and the fact that – unlike with GST changes – prices won’t all change on one day, perhaps there is less reason for optimism there. And perhaps all bets are off if the public and markets come to think there is a credible threat to sack and replace existing Fed decisionmakers.

But, even if household expectations (beyond 12 months ahead) and behaviour do rise – and surveys and behaviour are two different things – there is still the big hit to real household disposable income to consider. Such hits happen with some GST adjustments (the NZ 1989 one was intended as a fiscal consolidation) but not others (the NZ 2010 GST change was intended as a tax switch). And in addition to the direct effects of the tariffs, there are wealth losses (see stockmarket) and the impact of business disruption and business uncertainty delaying investment spending. Real activity, and pressure on resources and capacity, seem almost certain to ease. All else equal, a reasonable conclusion should be – and market pricing is consistent with this – that the Fed is more likely to need to ease than it would otherwise have thought, consistent with keeping core inflation near to target.

There is rhetoric around that somehow the lesson of the last few years is not to ease in the face of adverse supply shocks. But a lot depends on the nature of your supply shock. This isn’t (for example) a case of literally shutting down the economy and people going home (voluntarily or otherwise) to avoid a virus. The labour is still there, the capital equipment is still there. It can all be used – capacity is real – but the demand for resources is likely to diminish quite considerably. Monetary policy cannot (of course) do anything about the longer-term adverse effects of a shift to a more protectionist economy and policy regime. If the regime persists, Americans will be poorer than otherwise. But monetary policy often has a role to play in smoothing the dislocations, in trying to replicate what a market interest rate would be doing – reconciling desired saving and investment plans – absent a central bank. One parallel, for example, is the recession and financial crisis in the US in 2008/09. Monetary policy couldn’t fix the misallocation of resources and bad choices that led to the financial crisis in the first place. To the extent financial crises impair productivity, monetary policy also couldn’t do much about that. But not many people think that simply holding the Fed funds rate at mid 2007 levels in the face of the dislocation and associated severe recession would have made much sense.

What about New Zealand (and countries like us). If we see higher prices directly as a result of the tariff war, they should be fairly scattered and limited. It isn’t at all impossible that we might see import prices, in foreign currency terms, falling as (for example) Chinese manufacturing exporters look for alternative markets where they won’t face 100 per cent plus tariffs. With a fairly limited manufacturing sector ourselves, that terms of trade gain might be fairly unambiguously welcomed. We might get (temporarily) lower headline inflation and slightly higher real disposable incomes.

But, and on the other hand, a global recession would almost certainly more than cancel out that effect. We’d see materially lower export prices for commodities, and lower volumes for many other exports (eg tourism, students). It doesn’t matter that the initial crisis/shock wasn’t generated here, any more than it mattered in 2008/09.

I put this on Twitter this morning

and, of course, once the recession really took hold we got a big decline in (imported) oil prices but it wasn’t enough to stop the terms of trade overall falling by 10 per cent.

Assuming the tariff madness persists (see mercurial and unpredictable occupant of White House) it is very difficult to see how we – and other countries – avoid something similar this time round. I’m glad I’m not an economic forecaster paid to put specific numbers to it – this is just another case of extreme uncertainty making all but the most highly conditional numerical forecasts barely worth the paper they are written on – but the direction is clear, the severity of the shock is clear, our (non-unique) exposure is clear. All else equal, the OCR is likely to need to be a lot lower than otherwise, and since it is starting out still above neutral and with core inflation not far from target, that suggests a lot lower in absolute terms. To be clear, this is not a forecast, but in past serious downturns – demand led – short-term interest rates have often fallen something like 5 percentage points (in New Zealand, but also actually in the US).

The Reserve Bank’s MPC has its latest OCR review announcement out this afternoon. They are in a difficult position: they have only an acting Governor (who was responsible for the Bank’s macro and monetary policy functions when the really bad calls in 2020 and 2021 were made), a deputy chief executive responsible for macro who has no expertise or background in the subject, and so on. Being an interim review, they won’t have a full sort of forecasts and scenarios of the sort done for the quarterly MPS. They’ve also continued the madness of scheduling OCR reviews a week before the CPI comes out so they won’t even have a good read on the baseline – pre tariff madness – state of core inflation. And policy out of Washington (and Beijing and Brussels) can shift by the day.

Most people seem to expect the MPC to stick to the 25 basis point cut foreshadowed at the last MPS. On the domestic macro data they’ll have to hand – all from before the latest tariff madness (which even Jerome Powell has noted is worse than had been expected) – that would be perfectly defensible.

But so would a somewhat larger adjustment. After all, the external environment has changed, the effect is not likely to be small (or to be fully reversed even if we woke up tomorrow to find the last week had just been a bad dream), and even the government, channelling Treasury, is now warning of the adverse economic effects and risks. It isn’t time for dramatic emergency moves – that time may come, although one hopes we never need to see a 150 basis point cut ever again, as in late 2008 – but a rate that seemed fitting, to the New Zealand inflation outlook, 10 days ago, shouldn’t seem right today. And for all that they have only an acting Governor they may feel less locked into Orr’s February commitments than he might have were he still there. The risks are pretty moderate, especially as on the Bank’s own estimates the OCR is still above neutral and the output gap is estimated to be materially negative.

What are some counter-arguments? There is always the “six weeks doesn’t make any macro difference” so why not wait until the (full forecasts) and the May MPS. Perhaps there will be fuller information. I don’t think it is particularly compelling as it seems quite unlikely that the fog of war will have disappeared by next month (the macro implications will just be starting to become apparent), and if a large adjustment is eventually needed it may be best to get started. If it isn’t eventually needed a larger move today doesn’t take the Bank beyond where it thought things would level out at.

I heard one market economist on the radio this morning suggests that a larger cut today might rattle people. Quite probably, but most likely they should be rattled. This is a really serious economic policy shock Trump has launched on the world.

And then there is the exchange rate. People – reasonably – note that in severe downturns the New Zealand exchange rate usually falls a lot. That will tend to raise the prices of tradables, all else equal. It hasn’t really happened yet – if anything the TWI is a bit stronger – but it seems a pretty plausible story. It is just that in serious downturns previously – most notably 2008/09 – the direct price effects of a lower exchange rate ended up being outweighed by the disinflationary effects of the downturn on non-tradables inflation. An exchange rate adjustment is likely to be part of the overall response to the tariff madness shock, but not a substitute for action by the MPC.

We’ll see this afternoon what the MPC has come up with, but we shouldn’t be surprised if they do cut by more than 25 basis points, and doing so would probably be the right call. If they don’t, then I guess even more attention than usual will be paid to the wording of their statement, recognising that with the loss of a Governor some changes in wording may just be idiosyncratic – linked to one person’s stylistic or other preferences.

Reserve Bank, bank capital etc

Michael Reddell bank capital requirements, Reserve Bank

Things seem to be at a pretty low ebb in and around the Reserve Bank. There was, in particular, the mysterious, sudden, and as-yet unexplained resignation of the Governor (we’ve had four Governors since the Bank was given its operational autonomy 35 years ago, and only two have completed their terms and left in a normal way, which must be some sort of unwanted advanced country record). Having slimmed down the bloated number of Orr’s deputies by one last year, another of them quietly resigned and left last month on (apparently) short notice and no specific job to go to. Of those who remain, two are (at best) ethically challenged and one is simply unqualified for the job she holds.

And then there is the mystery as to why a temporary Governor (specifically provided for in the Act) has not yet been appointed, even though it is now four weeks since Orr tossed his toys and walked out (formally finishing on 31 March, but no longer present). I wrote about this briefly on Monday morning when it emerged (in The Post) that despite what the Minister and Bank had led us to believe on the day Orr resigned (effective 31 March), there would not be a temporary Governor in place from 1 April. The Bank’s spokesperson, quoted in the Post article on Monday so badly misread the relevant provisions of the Act that the Bank seemed to feel it necessary to issue a release yesterday, which added nothing but at least didn’t muddy the water further. The Bank’s Board has to (finally) make a recommendation of a person to serve as temporary Governor by 28 April, but even once she gets such a nomination the Minister of Finance can take as long (or short) as she likes to make an appointment (or, presumably, knock back a recommendation and send the Board away to make another).

Reasonable people would have assumed that within a few days of Orr announcing his resignation (and storming off), the Board would have met and made a recommendation. With more than three weeks notice (at least on paper) having been given there was really no excuse for not even having a recommendation on the Minister’s desk by the end of March. We are left to wonder why. Perhaps Hawkesby didn’t want the job? Perhaps the Board doesn’t have confidence in him to do even the fill-in role? Perhaps the Minister had indicated that she didn’t want him? We don’t know, and neither do international markets who (like the rest of us) were taken off-guard by Orr’s resignation. It really isn’t a good look. And if for some reason Hawkesby isn’t an option (and there are very slim pickings among the other 2nd tier managers), perhaps they could twist the arm of former Deputy Governor Grant Spencer and bring him back for a second stint filling in between Governors (only it would be legal this time)?

The unsatisfactory picture was compounded just a little later on Monday morning when Hawkesby and the Board chair Neil Quigley fronted up to the Finance and Expenditure Committee to announce that they were after all going to have a review of bank capital requirements (their opening statements are here). This had all been arranged with the Minister of Finance, who put out a simultaneous statement welcoming the review, and confirmed by the Bank’s Board at a meeting last week (which the outgoing – but still in office, and thus still a Board member – Governor did not attend).

[UPDATE: Meant to mention that Hawkesby did himself no favours – if he aspires to be seen as anything other than Orr’s man – when he opened his FEC statement this way (emphasis added)

“I’d like to begin by acknowledging our Governor, Adrian Orr, who over 7 years would have attended FEC hearings more than 50 times and always been engaging.  We are looking forward to continuing that relationship.”

Orr actively misled FEC repeatedly, and the frostiness of his encounters with any questioning FEC members has been repeatedly commented on. ]

Recall that, rightly or wrongly (I think wrongly), Parliament has given policymaking powers on such matters to the Bank (and specifically to the underqualified Board). Recall too that just a few weeks ago the Minister of Finance had indicated that she was seeking advice on ways to compel the Bank to change policy. Presumably the Board – and perhaps management – reading which way the political winds were blowing simply caved and arranged Monday’s FEC appearance and announcement, rather than risk losing their powers. They were, after all, in a weak position: as far as we know the Bank’s Funding Agreement for the next five years has not yet been approved (the Minister has talked of coming cuts), there wasn’t a permanent Governor in place, and even the appointment of a temporary Governor seemed to be hanging in some sort of limbo.

It is always possible that the Bank itself (especially now minus Orr – who last year was vociferously defending current policy and, as so often, attacking any critics) thought that a review was (substantively) timely and appropriate, but it looks a lot like bowing to political pressure, at a point of particular weakness. In an independent agency. And, frankly, since I believe that big policy calls should be made by elected politicians, I’d rather the government had actually legislated to shift big-picture prudential policymaking powers back to the Minister of Finance, while retaining a vital role for a better-performing Reserve Bank to advise and to implement (essentially the model in most other areas of government policymaking).

There are also lots of questions about where to from here with the review. The suggestion from Quigley is that the review will be completed by the end of the year, but while decisions are finally a matter for the Bank’s Board, it does invite the question of what role (if any) the new permanent Governor is to have (at least if it is anyone other than Hawkesby). By law, the temporary Governor can (eventually) be appointed for six months, extendable for another three. Even if the Board gets on and advertises for a permanent Governor this month, at best it will be several months before a new Governor is on board (eg there was roughly six months between Don Brash resigning and Alan Bollard starting work). With a non-expert Board wouldn’t one normally expect the Governor to be taking the lead in formulating the advice on which the Board would finally make decisions? Or is the new person to be presented with a fait accompli?

And then of course, there are questions about the nature of the review itself. Is it purely appearance theatre (“we need to look like we are doing something”) or is it genuinely a case of an open-minded reassessment? There is talk of consulting banks before any changes are made, but what about the wider group of interested experts and commentators (many of whom submitted on the 2019 policy proposals/decisions)? And for all the talk of commissioning “international experts”, surely only the most naive would take that at face value. You choose your expert according to your interests (eg a different group if one wanted people likely mostly to reaffirm your priors than if you were genuinely opening things up). I reread yesterday my post about the “international experts” Orr had commissioned in 2019, and the rather limited (and conveniently-supportive, having been chosen for a purpose) contribution they made. Those earlier experts were barred from talking to anyone in New Zealand other than the handful the Bank approved. Will it be any different this time?

And although back in 2019 the law was such that the decisions were still those of Orr alone (the Board then had a different role), Quigley was also the Board chair then and has had Orr’s back right throughout his time in office – apparently serving the Governor’s interests more than the public’s interest. His own questionable relationship with the facts on a number of occasions has also been documented here on various occasions. Apparently Quigley presented quite well at FEC on Monday, but so what? When he isn’t under pressure – and FEC was more attuned to welcome the review than ask very searching questions – he is a smooth operator (when he is under pressure, well…..see his press conference on the afternoon Orr resigned).

My own view, back in 2019, was that even the final Orr position – which pulled back from the initial proposals – went further than was really warranted. But one of the things I’d be looking for as part of the Bank’s review this year – and as a test of seriousness and openmindedness – is a rigorous and transparent comparison of the New Zealand capital requirements (for large and for small banks) with those of other countries. The Reserve Bank made no atttempt whatever to provide those sorts of comparisons in 2018/19.

One might think of countries like Norway, Sweden, Denmark, Australia and Canada, but perhaps also advanced countries where the bulk of the banking system is made up of subsidiaries of much-larger foreign banks (for example, the Baltics). To do this properly isn’t a superficial exercise of comparing headline capital ratios. One needs to look at things like the composition of balance sheets (in a quite granular way), risk weights on individual types of exposures (standardised and IRB) and so on. One might, in principle, take the business structure of one or more New Zealand banks and actually apply the rules in other countries to see how much capital they would be required to have on those rules, relative to the rules here.

If the current Reserve Bank policy, and scheduled further increases in minimum required capital, ended up pretty much in the pack, relative to the situation in other advanced countries, it might be considered the end of the matter. There might not be anything very optimal about what those other countries have chosen to do, but the case for any revision to the New Zealand rules would be that much harder to sustain than if (for example) the full New Zealand requirements imposed much higher capital requirements on much the same sort of portfolios. There is no compelling reason to believe that the exposure to really serious adverse shocks is any greater in New Zealand than in other advanced economies, so absent a compelling argument that the rest of the world is just “too lax”, being somewhere around the median of other countries might be a reasonable benchmark for New Zealand authorities (in a world of inevitable great uncertainty). (Incidentally, there would be no point in having requirements lower than those applied by APRA, since their requirements would set a floor for the Australian banking groups as a whole – there has been too little mention of the APRA group requirements in the recent New Zealand debate).

Reviewing some old posts yesterday I also stumbled on this chart, taken from a 2019 working paper of the Basle Committee on Banking Supervision (which I wrote about here)

I don’t want to fixate on the individual numbers, but simply to reiterate the point that any wider economic gains from higher required minimum capital ratios abate quite quickly as those requirements are increased. Actual numbers that might emerge will depend heavily on things like assumed discount rates (the ones used in these studies are far below the standard discount rates for us in New Zealand public policy evaluation), and the ability (or otherwise) of high capital ratios to save us from financial crises with severe economic consequences (a point quite in contention in 2019, when I observed that the numbers used by the Bank and their supporters were grossly implausibly large).

(Finally, on this topic, it is worth remembering that capital buffers are very useful to absorb losses, but that what matters even more – including as regards real economic losses and dislocations – is the quality of bank assets, and thus bank lending standards. A bank can have pretty large capital buffers and yet can still go off the rails quite badly in a surprisingly short space of time if lending standards degrade and/or management/Boards start chasing lending opportunities which look fine and good in the heat of a boom only to prove anything but as the tide recedes. Probably the largest real economic losses don’t arise from a bank itself coming under stress, but from the gross misallocation of real economic resources that can occur all too easily when undisciplined or excessively risky lending occurs, and those costs are already baked in when the lending and associated real investment choices are made, even if they only become apparent when the shakeout happens.)

Anyway, we will see what comes of the Bank’s review. And if, as Hawkesby/Orr [previously]/Quigley claim, the Bank’s policies are basically right, whether they can make a compelling case to persuade the public, external commentators….and of course the Minister of Finance who, I guess, still has the threat of legislating up her sleeve.

Changing tack completely, today marks 10 years since I left the Reserve Bank. As I noted at the time, that move was something of a double coincidence of wants: Graeme Wheeler really wanted me out, and I really wanted out, to be around as a house husband for our kids. It was a great move and I’ve not had the slightest regret (indeed, one shudders at the thought that I might otherwise have been there when the Orr years started). Being available for the kids, and helping to enable my wife to hold down busy jobs, will always count as one of the blessings of my life (and a few weeks ago the youngest left for university).

Every so often I think about where to next. The blog has been less frequent in the last few years (including due to 2-3 years of fairly indifferent health including post-Covid, but now passed). Circumstances change and I’ve got busier. I have occasionally thought about shutting it down and doing other stuff – I had an outline on my desk when the BPNG appointment came through of a time-consuming project I’d still like to pursue. For now, various circumstances and considerations mean I’m going to try to discipline my public comment more narrowly. There has been an increasing range of things I’d like to have written about but it wasn’t possible/appropriate. For this blog that will mean primarily Reserve Bank things, fiscal policy, productivity and not much else, which was the original intended focus. (And if a capable, even excellent, Governor is appointed, consistently lifting the performance of the Bank, and its efficiency, openness and transparency, perhaps even Reserve Bank commentary will die away. There are much bigger economic policy challenges.)

Not much parliamentary scrutiny

Michael Reddell Adrian Orr, FEC, Reserve Bank

This was the post I was planning to write this morning to mark Orr’s final day. That said, if the underlying events – deliberate attempts to mislead Parliament – were Orr’s doing, the post is more about the apparent uselessness of Parliament (specifically the Finance and Expenditure Committee) in holding him and the rest of the Bank (other MPC members, Board) to account. This is just one small example.

I was brought up – 7th form and university history – on the courage of the likes of Hampden and Pym in the House of Commons, resisting over-mighty acts of the executive, but I guess these days too often too many MPs seem more focused on becoming part of the executive themselves.

A few weeks ago one Saturday afternoon I wrote a short post about a letter I’d sent to the chair of the Finance and Expenditure Committee (in that capacity), cc’ed to the senior opposition member, about what seemed a (and yet another) pretty blatant and deliberate effort by the Governor at his most recent FEC appearance to mislead (or worse) the Committee. Orr had done so with two of his senior managers, and fellow MPC members, sitting either side of him. They’d done nothing to clarify and correct what Orr had told the Committee. I suggested that perhaps the Committee could consider inviting the Bank to verify the Governor’s claim that the RBNZ had been one of the first central banks to tighten and one of the first to ease.

The letter had been sent on Friday 28 February (so while Orr was still at work, before any of us had any hint of a forthcoming resignation) and more than a week later I’d heard nothing (the chair’s auto-reply had indicated he’d respond within 3-5 working days).

(I could add here that I’m not in the habit of writing to parliamentary committees or ministers. OIA requests aside, I think I’ve written one letter to a minister in 10 years, and the odd submission on legislation had been my only contact with FEC itself. I’ve occasionally exchanged notes with, and even met, some members of FEC, but only at their initiative.)

Anyway, the post seemed to have been brought to the attention of the two MPs.

On the following Monday morning (10 March) I heard from Barbara Edmonds’ email account

And that was that.

From the committee chair, Cameron Brewer, there was a little more. He sent me an email on the Tuesday afternoon (11th). In that email he claimed that he hadn’t wanted to respond while research was underway, and implying that his office really should have sent me a holding reply.

What research? Well, it seemed that he had asked the parliamentary library staff to look into the matter. He even sent me a copy. This was first bit of it (highlighting added)

It was pretty clear that the research hadn’t been requested the previous week, but at – what seems like – very short notice indeed. So short that the poor parliamentary staff hadn’t even had time to check all the OECD central banks, even though it takes about 30 seconds to do each one. And, by their reckoning (having left out 10 of the relevant central banks), the Reserve Bank had indeed been third (of their sub-sample) to tighten (and something like sixth to ease).

Brewer passed this along, apparently content that it seemed to vindicate the Governor (and if so I guess there was no need to do anything so awkward as bother the Bank). But he did add “If this information falls short of your expectations, I’m happy to put your email formally to the committee for them to acknowledge receipt or action further.”

I went back to Brewer the following day, pointing out that parliamentary staff had simply not checked a large group of OECD central banks, drawing the distinction between euro-area and other central banks (thus there were only about 20 independent sets of monetary policy), and repeating the listing I’d referred him to in my first letter, showing that the Reserve Bank of New Zealand had been roughly middle of the pack (by date) in both tightening and easing. I noted that the parliamentary research had not identified any mistakes or errors in my listing, and so it wasn’t clear how – incomplete and all – it shed any useful light.

(Note that the issue has never about macroeconomic significance – there is none in the rank ordering, when every country faces its own unique set of macro circumstances and inflation risks/threats – but about a senior public official appearing to deliberately mislead Parliament, aided and abetted (by their silence) by senior colleagues, all with no apparent consequences.)

As to where to next, I was a little torn. It was pretty clear that Brewer wanted the issue to go away, and of course Orr had announced his resignation (while still being in office until today) between me writing the letter and him responding. So, assuming it would be the last I heard, I ended my email back to him pretty emolliently.

“Quite how you choose to pursue (or not) this matter is of course over to you.  Given that parliamentary committees routinely ask follow up question of government agencies that appear before them, my suggestion had been that at least you ask the Bank for the evidence and/or argumentation to back the claims made by the Governor.”

But, there was more to come. I got this reply.

“Thanks Michael. Good points. Let me put it back to them. Appreciate your comprehensive work in this area. I honestly did not know our international rankings on monetary tightening and loosening during that period, hence expressed no opinion and appreciate your response (as I sought unvarnished from you in my last email) to the Parliamentary Library’s paper.”

It was a bit odd, since my concern wasn’t with the Parliamentary Library staff, but with the Reserve Bank (the senior public officials who had actually misled FEC).

I went back to Brewer thus

“In some respects the specifics of my original email to you (28 Feb) has been overtaken by events (Orr’s unexpected early resignation), and obviously it is up to you and the committee whether you want to pursue it any further (given that other RB managers sat silently by).  That said, in some respects the thing I’d urge you to think about more is how under the (soon to be appointed) temporary Governor and then a new permanent Governor you will hold the Bank to account and ensure you are consistently being given straight answers.    Ideally, of course, the character of the new appointees will be such that no further serious issues of this sort arise.”

Anyway, they must have given the Parliamentary Library staff a bit more time this time as I heard nothing more until last week.

In the meantime, as I’ve previously highlighted on Twitter, a reader had drawn my attention to a new OECD report which (p 32) actually addressed the timing matter directly (at least as far as easings) in a summary table

Contrary to what the Governor had told Parliament, the RBNZ was (of course) not among the first to ease.

Last week, I heard back from Brewer’s EA. 

….we have compiled a more extensive report, noting your concerns. Again, I strongly emphasize that this comes from Cameron in his personal, and induvial [sic] capacity as an MP. Formal matters would need to be raised with the committee itself.

We will leave the findings to your expertise, and hope you find it helpful. We will leave this with you.

Many thanks for taking the time to write.

I was rolling my eyes at this point. Did writing to the committee chair, explicitly in that capacity, cc’ed to the senior Labour member of the committee, somehow not count as “raising it with the Committee itself”? And “we will leave the findings to my expertise”, when the issue was never the data – which anyone could track down with an hour’s quick internet searches – but whether MPs were bothered about being lied to. They apparently weren’t.

But Brewer’s EA did send me the Parliamentary Library’s new piece…..which told me exactly what I already knew, and had raised with FEC, that the Reserve Bank was not among the first to tighten or the first to ease. In fact, here is their table.

The Parliamentary Library (now) know that Orr was simply making stuff up. So does the OECD. So, in fact, does anyone who even bothered to check. So, it seems, now does the chair of FEC. But he and his members simply don’t seem at all bothered. And that, it seems, is Parliament for you.

I was overseas last week and was recounting this experience to a colleague over dinner. He was, understandably, a bit flabbergasted. After all, he noted, surely Orr’s initial claims were just factual and easily verified (or otherwise)? Well, indeed. And why would a parliamentary committee not be bothered about having been lied to? Well, there I couldn’t really help him. I explained that the timing of the resignation perhaps eased any pressure they might otherwise have felt, but it didn’t seem even close to a decent explanation, since (as I had noted to the – new – FEC chair) this was only the last in a long series of Orrian efforts to mislead the committee, his senior colleagues had sat by silently (again) while he did it, and if we are looking (as the law says we must) to the Bank’s Board to lead the selection of a new Governor, surely asking them questions about their past Governor’s egregious behaviour might have shed some useful light.

But instead we live in the age of Donald Trump, Pete Hegseth, and Karoline Leavitt where truth and straightforwardness in public officials seems at best an optional extra…..even, it seems, in New Zealand.

(And, to be clear, had Brewer come back to me the day Orr announced his resignation and said something like “thanks for raising those concerns, which do seem a little troubling, but since the Governor has now resigned there probably isn’t much mileage in us pursuing this specific any further”, I’d probably have gone “fair enough, that’s life” and moved on.)

UPDATE: Cameron Brewer, the chair of FEC, has commented below in response to this post. Readers are encouraged to read his comments. On specifics, I will have to take his word on when the first lot of information was requested from the Parliamentary Library, but assuming that is so it leaves a number of questions, including why Brewer or his EA didn’t go back to the Library staff straight away and ask them to check the rest of the central banks (might have taken them another 20 minutes). Or, indeed, ask the Reserve Bank to verify the Governor’s claim (given that this initial request for information was before Orr’s unexpected resignation).

Farewell to Orr

Michael Reddell Adrian Orr, Reserve Bank Board

Today is the last day in office for the Governor of the Reserve Bank, Adrian Orr. Of course, he hasn’t been in the office since 5 March when, on the eve of his major international conference, his resignation was announced and he stormed off with no (effective) notice and no explanation.

I’m not going to waste my time or bore readers with a retrospective assessment of Orr’s overall tenure. I recently reread the couple of substantive posts I wrote on prospects at the time he was appointed, and although I was probably more openly sceptical than most, I wasn’t nearly pessimistic enough. But if the initial appointment was (perhaps) pardonable, he should never have been reappointed, and his departure now is both welcome and long overdue.

When Orr’s resignation was announced, we were told that his deputy would be acting Governor for the rest of the month and were led to believe that from 1 April a formal “temporary Governor” (explicitly provided for in the Act) would be in place. Here is the extract from the Bank’s statement

and this is from the Minister’s statement

But then this appeared in The Post this morning

It may be legal (although the RB spokesperson appears to have the details wrong as the Act does not seem to impose a deadline on the Minister, only on the Board, and – if Orr’s resignation really is effective only from today – they’d appear to have another 28 days even to make a recommendation)

but it certainly isn’t what we were led to expect on 5 March in either announcement (see above). There doesn’t seem to be any good reason for the Bank’s Board not yet to have made a recommendation to the Minister. They’d had more than three weeks already.

As per earlier posts, I think it is quite inappropriate that board chair Quigley is still in office. The government should have prevailed him to do the decent thing and step aside so that someone new can lead the search for a new permanent Governor. But even if the government were so minded, it isn’t a good reason for not getting a proper temporary Governor in place, and for not having a recommendation on the Minister’s desk already. Probably most people expect Hawkesby to be appointed as temporary Governor, and if that was the Board’s inclination it should have been quick and easy to decide on that recommendation. Of course, it is always possible that the Minister has in mind something different and is in back-channels and unofficial conversation with the Board about just who they might nominate (“back-channels and unofficial” since the Act is clear that the onus is on the Board to nominate and on the Minister only to accept or reject).

It all seems rather sloppy and lackadaisical (dating right back to those 5 March press releases, which perhaps had to be churned out in a hurry). And one reason countries typically give long (and fixed) terms to central bank Governors is precisely so that Ministers of Finance cannot do what the Stuff journalist suggests and make decisions about short terms based on whether someone makes monetary policy decisions to the Minister’s satisfaction (not that I am suggesting Willis will). And if this process is sloppy and lackadaisical it only compounds the bad impression made about a country and its central bank when the incumbent Governor resigned with no notice and not a word of explanation.

On the way ahead

Michael Reddell Governance, Reserve Bank, Reserve Bank Board

In my post last Thursday I offered some thoughts on changes that should be initiated by the government in the wake of the Governor’s surprise resignation. (Days on we still have no real explanation as to why he just resigned with no notice, disappearing out the door and (eg) leaving his international conference in the lurch, but this post is entirely forward looking.) Here I want to elaborate on three points, having benefited from a few days to reflect and a few useful conversations/exchanges:

  • the position of the Board chair, Neil Quigley,
  • policymaking on bank (and related) regulatory matters,
  • the Funding Agreement.

Board members, including the chair, of the Reserve Bank cannot be removed at will by the government. That puts them in a different position than the boards of many other government agencies. Whatever the pros and cons of that model (and there are both) it is the law as it stands.

Last year the government – for reasons never made clear – extended the term of the chair of the Board, Neil Quigley, for another and apparently final two year term. Quigley has been on the board for a very long time now, and has been chair since 2016. By usual standards of corporate governance that would really be too long anyway, even allowing for the fact that the role has changed over time. But it was pretty clear when the reappointment was done last year that with Quigley getting another two years but Orr having (then) almost four years to run, the government expected – and appropriately so – that a new chair would be in place to lead the search for, and transition to, a new Governor (Governors are now limited to two terms).

It should be untenable for Quigley lead the search (and transition) process now. He drove the selection and appointment (and reappointment) process for Orr in the first place. And frankly, however Orr appeared to the interviewers in 2017, that did not turn out well, and did not end well. The Board – and especially the long-serving Board chair – has to take some responsibility for that (including the chaos of last week, including Quigley’s own unconvincing belated press conference, which one person put it to me was bad enough to warrant dismissal for cause – sadly, not really a statutory option). In addition, Quigley – whose responsibilities have been to the public and the minister – has had the back of the Governor throughout his term, and there has never been the slightest hint in any Board Annual Report of any concerns at all. Worse, it appears that Quigley championed that blackball back in 2018 which – unlike any serious central bank in the world – saw anyone with current or future research interests in or around monetary policy banned from consideration for appointment to the Monetary Policy Committee (and yes, there is chapter and verse on this). Much more recently, whether deliberately or through careless forgetfulness (and failing to check records) he actively misled Treasury and, in turn, the public on this matter, claiming there’d never been such a ban (see, eg, here and here).

It is time for Quigley to go, and for cleaning house to begin in earnest. Quigley can’t be dismissed, but it shouldn’t be beyond the wit of the Minister of Finance to have it made clear to him that it isn’t tenable or appropriate for him to lead the next stage. Quigley himself is a wily political operator and could no doubt read tea leaves were they presented to him. And he seems still to want that medical school. Willis also has an existing board vacancy to fill now, and 2 more positions become vacant on 30 June.

(Assuming she isn’t willing to amend the Act to make the appointment of the Governor wholly a choice for her and the Cabinet), Willis should be looking to move in short order to put in place a new Board chair, someone not compromised by the Orr years, someone of stature (appointments need to be consulted with other parties in Parliament), but also someone trusted to be sympathetic to the general direction the government wants to go with the Bank. (If that seems threatening or politicised, it isn’t intended that way, but we are a democracy and governments, in Parliament, get to make the big picture policy and organisational directional calls). In any case, the Minister should look to issue a new letter of expectations to the Board making clear what she is looking for as regard budget discipline, policy priorities, and the qualities to be sought in a new Governor.

What about prudential regulatory policy? In most areas of government, policy is set by ministers, and implementation is done by agencies, including Crown entities, operating (implementing/applying) at arms-length from ministers. That is both efficient (ministers have limited time etc) and consistent with good governance generally – we really do not want ministers playing favourites for their donors or mates in the application of the standard rules, and we really do want accountability to Parliament and public for policy choices.

In prudential policy in New Zealand things are different. For the most part, the Reserve Bank itself gets to set the rules (big picture social risk tolerances and all) and apply them. Prudential regulators of course tend to like such a model, and there is plenty of literature from sympathetic former regulators, and from academics, in support of it. On the other hand, it looks pretty dubious through a democratic accountability lens. I’ve written here previously about former Bank of England Deputy Governor Paul Tucker’s book on delegating power, including but not exclusively so, to central banks. Bank regulatory policy simply does not pass the test – the various sensible principles Tucker lists – for being delegated to technical experts. And, as it happens, in New Zealand the power doesn’t even rest with technical experts, but with the Reserve Bank Board, which has been very light indeed on expertise or experience in these areas.

It has become clear that the government is unhappy with elements of Reserve Bank policy choices in these areas. Some of the apparent discontent – eg last year and the secretive advice re remuneration of settlement account balances – doesn’t make sense. Some other counts seem weak, and others rather more persuasive. But here’s the thing: the government is the government and, hand in hand with Parliament, is supposed to make our laws, and be accountable for them. The government, for example, sets the inflation target (while delegating OCR calls needed to deliver inflation near target).

It seems highly likely that prudential policy issues are going to be front of mind in choosing a new Governor (all that ongoing select committee inquiry and all). Which is fine, but a much more direct way to do things would be to seek a simple amendment to the Deposit Takers Act to make clear that in setting prudential standards the Reserve Bank first needs the consent of the Minister of Finance (at present, the Bank needs to inform her – not consult – and even failure to inform doesn’t invalidate the new rule). Then the government could be confident that whoever became Governor would be (a) providing advice, and b) ensuring the implementation of the rules, but that policy itself would be being set by the government. People we can toss out. We shouldn’t want a yes-man (or woman) as Governor – it shouldn’t be in the Minister’s interests either – and it is critically important that the Minister gets robust, technically expert, advice from the Bank (informed by research and critically-reviewed analysis) before making prudential policy decisions. But big picture policy calls should be for the Minister.

I’m not a parliamentary process expert so perhaps it might take a few months to make such an amendment. It is likely to take a few months to appoint a new Governor anyway, but any appointment could then be made with the new Governor knowing that those would be the terms on which they were taking the job.

The final of my three points is about the Funding Agreement, widely believed to be one of the factors that led Orr to storm off. As a reminder, the Reserve Bank isn’t (but probably should be) funded by annual parliamentary appropriation (yes, we want operating autonomy but we still fund the Police that way), but through an agreement that determines how much of its profit the Bank gets to keep and spend. This is a deeply flawed model – a legacy of late eighties disputes. Not only does Parliament not get a say at all (with hundreds of millions of operating spending involved) but the Bank does (government departments simply get told by ministers what their appropriation will be). But worse it is not compulsory for there even to be a Funding Agreement, and the law states that if there isn’t one the board simply has to use its best endeavours to keep spending no more than in the last year of the previous agreement. Which, I suppose, caps further growth in bloat and budget, but could be used to simply to refuse to accept a cut in budgets (when almost every other government agency has had or faces cuts). I’m not suggesting the Bank would negotiate in bad faith, but….the law is the law, and it gives them much more power and formal leverage than most agencies have. It should be changed, and in short order, to ensure that if the five year funding model remains, a) the Minister sets the amount, and the allocation among Bank’s statutory functions, and b) that all is subject to parliamentary debate and ratification as other government spending is.

Changing tack, who might eventually be chosen as the new Governor? There isn’t any obvious standout candidate – which may be a poor reflection on how our system has worked, including the way successive Reserve Bank Boards have operated over the last couple of decades. Various articles have listed a reasonably predictable list of possible names, including Arthur Grimes, John McDermott, Christian Hawkesby, and Prasanna Gai [UPDATE: and Dominick Stephens was also on those lists]. I tossed into the mix on Twitter the other day the name of former Government Statistician and (more recently) Deputy Governor, Geoff Bascand. One name I have been a bit surprised not to have seen mentioned – casting the net necessarily wide – is Carl Hansen, who was appointed to the MPC last year, but who has both Reserve Bank and Treasury experience, and chief executive experience.

All those people are economists by background. Neither the current head of the Fed nor the current head of the ECB is an economist. That is pretty uncommon these days, but both the Fed and ECB have deep benches of economics expertise in very senior roles. But might, for example, there be a case for a strong non technically expert change manager becoming Governor, perhaps with the intention of doing only 2-3 years (on the pattern of Brian Roche at PSC)? I’d be wary – perhaps a good Board chair could best do some of that – but….there is no standout candidate.

An obvious question is what about New Zealanders abroad or indeed foreigners (eg the Australian government has appointed a Brit, with no past ties to or experience of Australia, to the Deputy Governor role at the RBA). I used to be pretty staunchly opposed to a foreign appointment when the Governor was the all-powerful single decisionmaker, but legislative reforms have – at least on paper – spread the power. Someone with no past ties to, or experience of, New Zealand would still face a big adjustment hurdle, and it would be quite risky (and there are adverse selection issues: the most able globally might reasonably think their best opportunities were not in New Zealand). New Zealanders abroad might be more of an option, although one I used to champion as warranting serious consideration (including in 2017) – David Archer, former Assistant Governor, former senior official at the BIS – might have almost aged out by now (although is probably only about the same age as Grimes) and has been away for a long time. There will be others.

I’m not going offer my thoughts on the pros and cons of any of these individuals. Suffice to repeat that, and especially given the broad role as it is currently specified, there doesn’t seem to be a compelling candidate in any of the lists. Perhaps even more than usually, in coming up with their final pick, the Board and the Minister might want to be thinking in terms of a team at the top, the sort of people a possible new Governor would choose to fill the couple of most senior posts (policy and operational/administrative) around him/her.

A letter

Michael Reddell Adrian Orr, MPC

After the Reserve Bank’s appearance on 20 February at the Finance and Expenditure Committee (the Governor, his macro deputy Karen Silk, and his chief economist Paul Conway) on the previous day’s Monetary Policy Statement, I wrote a post here about it, focused on a number of areas in which Orr, either actively abetted or silently accompanied by his senior colleagues, had been stringing along or actively misleading (or worse) the Commitee. The post was headed Orr at it again, a reminder that there had been all too many such cases from the Governor over recent years – mostly misleading FEC (a rather serious matter) but also not infrequently any media outlets that ever posed slightly awkward questions. It is a long list and I won’t bore you with details (you can search: Google and “croaking cassandra, Orr, misleading” appears to work well).

There have been many specific points over the years. Some are quite complex to explain, and many get lost in longer posts. But on 20 February there had been a very specific, easy to explain, readily verifiable, factual claim.

“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing” said the Governor.

He’d made versions of the first bit of it previously (many times) but the second claim seemed new.

So I thought it might be useful to devote a single post just to rebutting those two specific claims. It would be easy to refer people to in future (and to find myself). It was headed, plaintively, Why is such rank dishonesty tolerated?

I didn’t give it much more thought. But someone else who is equally frustrated by Orr’s record of playing fast and loose with the facts got in touch suggesting that it might be worth raising the matter with the Finance and Expenditure Committee. I don’t have much confidence in any of our institutions these days, but the person who contacted me tends to be a bit more optimistic about things. Reflecting on the suggestion a bit more I decided it couldn’t really do any harm. There was, after all, a new chair of FEC, and it was possible he was neither aware of the extent to which his committee hearing had been misled, or of past form.

And so I wrote to Cameron Brewer, the National MP newly appointed to chair the committee, copied to Labour’s finance spokesperson Barbara Edmonds.

I heard nothing at all from Edmonds (perhaps Oppositions don’t bother with scrutiny of government agencies these days?). There was an automated reply from Brewer which assured correspondents that

More than five business days have now passed, and not even the courtesy of a reply.

Now, in a sense some of the specific concern has been overtaken by events. The Governor has resigned, effective from 31 March, and disappeared on leave for the rest of month with no explanations. But a) Orr is still a public official, and b) his two colleagues who sat alongside him while he made these claims are still in office (both statutory officeholders on the MPC). The chief economist at least must have known his boss was simply making stuff up, but did nothing to clarify things for the committee members.

Is Parliament, is FEC specifically, really so unbothered about being misled by such senior officials? Revealed behaviour over the years suggests so, but there is always (idle?) hope when a new person takes over. Perhaps some might take Parliament and its committees seriously as more than just a chance for performative display and bonhomie, and with an expectation that senior public officials, exercising a huge amount of power, might account for themselves in an honest, transparent, and positively helpful manner. It is what we should expect from members of Parliament – our representatives – and from the public officials. Too often it isn’t what we get.

Perhaps if someone in power had called Orr out previously we might never have got to Wednesday’s very messy departure, that seems to diminish both him, the Bank, and those (Board, minister, MPs) paid to hold him to account.

Appendix:

In case people have trouble reading the photo of the letter above, here is the body of the text:

Dear Mr Brewer,

I am writing to you in your capacity as chair of Parliament’s Finance and Expenditure Committee (cc’ed to the senior Labour Party member of the committee).

At your hearing on Thursday 20 February on the Reserve Bank’s latest Monetary Policy Statement, the Governor, Adrian Orr, in response to a question from Dan Bidois stated of the Bank and MPC 

“We were one of the first central banks in the world to be tightening; we were one of the first central banks in the world to be easing”

This was simply not so, on either count (tightening or loosening).   Moreover, it is not the first time that he has made similar claims to FEC, particularly in respect of the tightenings that began in late 2021. 

I am a former senior Reserve Bank official, served formerly on the board of the International Monetary Fund  (and serve now as a director of the central bank of Papua New Guinea).  Among other topics, my economics blog devotes considerable space to monetary policy and central bank governance issues.  In a post yesterday, I documented again how indefensible the Governor’s claims around 2021 were, and that the claim about being “one of the first to ease” (a new claim from him) was even less defensible.  In fact, in both episodes the Bank acted around the middle of the pack of OECD central banks (having allowed the economy first to become materially more overheated than most of their peers had).

Why is such rank dishonesty tolerated? | croaking cassandra

There are strong grounds to believe that the Governor makes these claims to your committee either knowing them to be false, or holding a position (and with resources at his disposal) in which he should be reasonably be expected to know that they are false,  Within the limited time each member inevitably gets in these FEC hearings, and with none of the MPs involved being specialists, he appears to count on getting away with it because none of you will have precise facts at your fingertips.

You are new to the FEC role.  Unfortunately, over the last few years there has been a succession of claims to the Committee by the Governor that are demonstrably false or misleading.  Many of these have been documented on my blog, and I would be happy to provide further detail.

Conduct like this tends to diminish both the Reserve Bank (once highly regarded internationally, now more often regarded with eye-rolling despair) and, more importantly, Parliament itself.   FEC scrutiny has been a key element of the autonomous Reserve Bank model since it was first set up in 1989, and effective parliamentary scrutiny of any public agency relies on the honesty and integrity of senior public officials.  You will know better than me the very serious view that Parliament has historically taken of either MPs or witnesses at select committees misleading Parliament or its committees.

At very least, I would urge you to follow up this matter with the Governor, inviting him to provide solid substantiation for his very specific claims.

Yours faithfully

 

Bernanke on inflation targeting

Michael Reddell Monetary policy

Former chairman of the Federal Reserve Board of Governors (and FOMC) Ben Bernanke was yesterday the first of two keynote speakers at the Reserve Bank’s conference to mark 35 years of inflation targeting, which first became a formalised thing here in New Zealand.  He indicated that he’d be speaking about inflation targeting in general and then about “some lessons from the recent global inflation”.  (I’ve linked to his text above, but you can also find the full session including the Q&As on the Reserve Bank’s Youtube channel).  

Bernanke was the first speaker of the morning and he began his remarks, perhaps somewhat bemusedly, noting that it was “the first conference I’ve ever attended that was preceded by a concert” (half an hour or so of it apparently, including singalongs, and reportedly described by senior Reserve Bank staff as “beautiful”).    That, I guess, was the Orr-led central bank to the last. 

I’ve seen suggestions from a couple of people that Bernanke may have been paid some staggering amount of money to speak.  He certainly still seems to command a high price on the US lecture circuit.  But I’d be surprised if Bernanke cost taxpayers more than return business class airfares and associated accommodation etc.   This conference was a non-commercial event inside the central banking world.  And a year or two back Bernanke did a major review of forecasting for the Bank of England, and seems to have been very generous with his time and own resources.   Call it a loss leader, or just something he was interested in.  Either way, the British taxpayer didn’t pay much at all.  [UPDATE: An OIA response from some months ago appears to confirm the fares & accommodation only basis for Bernanke.]

Unfortunately, if Bernanke didn’t cost much, he didn’t offer much beyond his name.    It was a fairly short speech (7.5 pages of text), the first two-thirds of which was about inflation targeting in general.  It would be really surprising if anyone at the conference either learned anything new from that section or was prompted to think differently about any aspect of monetary policy or inflation targeting.  It was almost entirely descriptive, with no attempts to suggest refinements or even to knock down what he might think were dead-end suggested variants.  There wasn’t even a mention – amid the observation that the Fed’s target is “well understood by financial markets, legislators, and other observers” – of the questionable experiment with “flexible average inflation targeting”.

Close readers might note that he apparently takes for granted that “clarity about the strategy – and internal debates about the strategy [emphasis added] – also helps the public understand and predict how policy is likely to change when…the world evolves in unexpected ways”.  If anyone had noticed, no one questioned him about this observation, which is of course quite at odds with how the New Zealand Monetary Policy Committee has operated since its inception.  There is little sign that debates even exist, let alone the nature of them.

He also noted that inflation targeting “does not prevent policy mistakes”, but then he didn’t identify any of those, whether from his own experience or from his subsequent observation as a scholar, let alone discuss the nature of mistakes, or how we learn from them or how policymakers might be held to account. 

All in all, it was very much a complacent end-of-history and inside-the-club sort of treatment.   I suppose everyone wants to feel good about what they do, and Bernanke is certainly an eminent person to bestow his blessing (Nobel Memorial Prize and all).  But it was advertised as a research conference –  something about learning, improving, evaluating etc.   And there was none of that from Bernanke.  Unfortunately it reminded me of his 2022 book, 21st Century Monetary Policy, which also erred sufficiently on the complacent side as to make it of little interest beyond perhaps an undergraduate (or similar) audience.

There was perhaps more interest in the final 2.5 pages devoted to the inflation of the last few years.  Unfortunately his story –  which, admittedly, might have warmed the heart of the Governor if he’d been there and hadn’t resigned and stormed off the day before – wasn’t very convincing either.

In fact, it was really quite astonishing that there was no analysis and almost no discussion of monetary policy at all.  There was not even any mention of central bank responses during the early stages of the pandemic itself.    What there was was the claim – supported by no analysis at all – that “my overall conclusion is that, in terms of actual policy choices, most central banks did about as well as they could in the post-pandemic period, given what they knew at the time”.

Which is pretty remarkable when you realise that, to take just the US as an example, annual core PCE inflation – core PCE is the one the Fed tends to focus on, and which removes food and energy – peaked in February 2022.  The Fed’s first increase in its policy target rate came in March 2022.

Bernanke devotes considerable space to the question of whether (pandemic and post-pandemic) fiscal policy caused the outbreak of inflation. Of course it didn’t, because monetary policymakers (a) know about fiscal policy news, and b) move last. Except at the extremes of fiscal dominance – not even close to being reached in advanced economies in recent decades – fiscal policy is never the primary culprit. If it was, we wouldn’t have made central banks independent. You can have bad or good fiscal policy, necessary, wise, or otherwise, and monetary policy is supposed to counter the (core) inflation effects. And no one really doubts that monetary policy settings once the pandemic really took hold – and for a couple of years thereafter – were expansionary not contractionary.

With hindsight – and only really with hindsight – it might at least be reasonable to note that the initial monetary easing was unnecessary and inappropriate (central banks – and markets – simply didn’t understand pandemic macro well enough). And it is pretty universally acknowledged now that (almost all) central banks were slow to begin to tighten again (even Orr has reluctantly acknowledged that the RBNZ should have started sooner). But apparently that wasn’t something Bernanke wanted to touch on even in passing, perhaps taking politeness to your central banking hosts rather to an extreme.

The essence of Bernanke’s arguments is here

This paper got a fair amount of attention when it was published in 2023. The Reserve Bank even did a version here which, as Bernanke notes, found a larger role for demand – and thus monetary policy – factors. The paper looked at quite a range of variables, but the centrepiece was around headline CPI inflation. Headline inflation, of course, gets affected by the sorts of supply shocks to prices (energy and food) that we saw, in particular, around the time of the invasion of Ukraine. As he notes, headline inflation in Europe was particularly badly affected by the extreme gas price shock (something not affecting NZ at all, detached as we are from the global LNG market).

Central banks though (rightly) tend not to focus on headline inflation – worrying only about whether headline effects spill into inflation expectations and then into price and wage-setting behaviour over longer horizons. Now, simply excluding food and energy inflation isn’t the only sort of core measure central banks and other analysts like to look add in difficult times, but it is what we have reasonably consistent international data for.

Bernanke claims as evidence for his story that “most economies faced similar levels of inflation, independently of their fiscal choices”. But even on headline inflation that isn’t really so.

which is a much greater degree of cross-country variation than we were seeing pre-Covid, even if one discounts the (geographically specific) gas price shock countries at the far right of the chart.

As for core CPI inflation (ex food and energy), the OECD databases have become painful to use, but I dug this chart out of an old post (ideally I’d show all the euro-area countries just as a single observation, although you can see the overall euro area number towards the left of the chart)

Quite some cross-country variation (even excluding the monetarily wayward Turkey). Is it, for example, pure coincidence that the two OECD central banks that didn’t ease monetary policy going into Covid – Japan and Switzerland – managed the lowest inflation? And to the extent that there was similarity- recall, this is in core inflation – across some countries (eg US, NZ and Australia) mightn’t it possibly reflect something about common mindsets and approaches to policy (and even, across those three countries, a fairly common pace of rebound in GDP following the initial 2020 lockdowns etc)?

And if the primary driver for (core measures) of inflation was really supply shocks (that should be largely looked through) rather than central bank choices, there must surely be at least two outstanding questions:

  • Why is it that all (or certainly almost all –  someone can to point me to an exception if they know of one) advanced country central banks would still today describe their monetary policy stance as being on the restrictive side of neutral?  The ECB eased today, to 2.5 per cent, and repeated that interpretation of their policy rate, and it is certainly the RBA and RBNZ stance.    (For the US things might be different. Policy is still described as restrictive, but while Bernanke noted that the CBO estimate of the output gap for the US in 2021 and 2022 never got very large (IMF estimates show the same thing), the most CBO recent estimates for the end of last year now point to a large and growing positive output gap.)
  • If the story of the surge in inflation really was mostly about supply shocks why, given that those shocks have now fully reversed hasn’t the price level dropped back?    Even in nominal USD terms, world oil prices are back to around where they were in 2018 and 2019, the same goes for wheat, and even European gas prices don’t seem dramatically higher in real terms than they were before the pandemic and war.  In all cases, real prices have fallen a lot (shipping and componentry disruptions also largely sorted themselves out), and there simply has not been any period in which headline inflation has substantially undershot the core measures, while the price level  –  headline or core –  remains well above the trajectory implied by central bank targets projected forward from 2019.   Central banks don’t pursue price level targets, but successful flexible inflation targeting, that simply looked through the ups and downs of supply shocks to prices (when shocks fairly quickly reverse), would look a lot like medium-term price level targeting.   Here is what a chart for New Zealand looks like

In broad outline, this sort of chart for many other advanced countries would look quite similar.

I don’t think anyone accuses central banks of malevolence during the last few years (Covid and inflation). No doubt they were all trying to do their best. But the evidence just isn’t there to support Bernanke’s claim that they did as well as they could have with the information they had (unless that last phrase is somehow shorthand for “on the mental models they happened to be using”, which unfortunately too often turned out to be wrong).

You can’t cover everything in a fairly short speech, but it was also worth noting that there was no mention of the (really large) losses incurred by taxpayers from the QE-type operations (bond purchases) undertaken by central banks during the Covid period, when bond yields were already at extraordinarily low levels. In his book, finished about three years ago, he affected a fairly blithe indifference, noting that any losses this time could be considered against the gains central banks had made on earlier QE. That seemed a pretty rash approach to public sector risk-taking, and would be small comfort to taxpayers in places like Australia and New Zealand where the central banks had not previously done QE. (In fairness, one can make a slightly stronger argument for the QE – beyond the immediate crisis of March 2020 – in the US, where long rates really matter, than here.)

And of course, because pretty much all the chaps (of either sex) had really done their best, there was of course nothing in Bernanke’s discussion about practical accountability. It might at least have been interesting to hear him on that in principle – what would or should it take for powerful independent decisionmakers to warrant losing their jobs? Again, the US system is different than ours (and in fact each country has different specific provisions for removal) but the price of operational autonomy was supposed to be serious accountability – something more, at least when inflation targeting was conceived and idealism was afoot, than just marking your own performance after the event, with barely a hint of contrition.

It was a shame. Surely Bernanke could have offered something deeper and more stimulating (it didn’t even stimulate searching questions from the floor). Then again, I guess Orr and his team had chosen him deliberately. And they’ll have been rather pleased with that “did as well as they could” summary assessment. Wouldn’t want any awkwardness now would we? (Other perhaps than the unplanned unexpected absence of the Governor from his own “celebration” – the word Acting Governor Hawkesby had used in introducing Bernanke.)

Doing monetary policy well in tough times isn’t easy. Glib lines about “it is only about 25bps up and down every so often” are just that – glib. Humans make mistakes, but they – and their institutions – learn when they are willing to confront and explore them.

$11 billion and out

Michael Reddell Adrian Orr, Reserve Bank

I’d been thinking last week of writing a post looking ahead to the end of Adrian Orr’s term (due to have run until March 2028) and offering some thoughts on structural changes the government should be looking to make, to complete and refine the Reserve Bank reform programme kicked off by the previous government in 2018. Some of that is now overwhelmed by events, but the importance of the issues – and the medium-term opportunities to deliver a better central bank – hasn’t. So although I will offer a few thoughts at the end of this post on yesterday’s shock news, and the unsatisfactory handling of it, and perhaps even fewer on Orr’s overall tenure, first I’m going to focus on the future.

The Reserve Bank of New Zealand is one of the relatively few central banks in the world where the government is not free, when a vacancy arises, to appoint a person they have confidence in as Governor. One can mount a reasonable – although not entirely compelling – case that it should be very hard to dismiss a Governor (or perhaps even an MPC member), and it typically is. But the governorship of the central bank is a very major and influential role – affecting, when mistakes are made, all of us adversely, including perhaps the government’s own electoral fortunes. Against that backdrop our system is extraordinary: the government can only appoint as Governor someone nominated by the board of the Reserve Bank, a board which (a) has no electoral mandate or accountability, b) at least in the New Zealand experience will often have little or no subject expertise, and c) may well have been (this time is, but it was also so when Orr was first appointed) largely appointed by the government’s predecessors, reflecting their particular whims and patronage priorities. Nicola Willis – or Grant Robertson – might not be any sort of macroeconomist, but they are (were) accountable to the voters. Neil Quigley, Rodger Findlay, Jeremy Banks [oops, meant Byron Pepper] (all of whom have had questions raised about them) and the rest have neither expertise nor accountability.

Now, it is true that the Minister of Finance can reject a board nomination, but she cannot impose her own candidate. In reality the government can send messages to the board about what they don’t want (Helen Clark was apparently pretty clear she didn’t want to be served up with the name of a Brash clone – anyone who’d been part of the Brash RB), but those views carry no formal legal weight, and a Board could simply assert itself and insist on serving up only names it preferred. The government doesn’t get any say in what sort of person is nominated – no say, for example, in the job description or personal qualities sort. It is a stark contrast to the position re heads of government departments – who usually have no significant policy decision-making power – where the government can specify what they are looking for and can in the end simply appoint their own person. The same goes for members of the MPC – supposedly really powerful positions and yet the Minister can only appoint people the underqualified board (which has no routine responsibility for monetary policy, and thus no expertise) serves up. And here it is important to remember that the Reserve Bank isn’t just the monetary policy maker, but has key policymaking roles in a wide range of banking and financial regulation, stuff for which ministers are usually responsible. These legislative provisions should be changed, so that the Minister/Cabinet can appoint their own person – stick in some boilerplate expertise criteria, and perhaps offer the Board the chance to make suggestions, allow the FEC a scrutiny hearing before the person took up the job – and be accountable for that appointment. It would be an entirely normal model internationally.

The issue at present is compounded by the fact that the names to be recommended as the new Governor will come forward from the same Board (largely) that recommended Orr’s reappointment in 2022 (and with the same Board chair as was responsible for the initial appointment in 2017). No one outside government knows what possessed Nicola Willis to reappoint Quigley – who has a terrible record of his own, in blocking expertise when the MPC was first set up, openly misrepresenting the history later, and in covering for Orr almost throughout – but he is about the last person who should be playing a decisive role in choosing a successor. A minister who really cared about the future of the institution and its policies etc would insist that Quigley left now too, appointing a new chair to lead the search to replace Orr.

My next suggestion is that policymaking powers around banking (and insurance etc) prudential regulation should be removed from the Reserve Bank itself and handed back to the Minister of Finance. There is a decent case for having OCR setting being done by an independent body, and a fairly compelling one for having the application of prudential policy and oversight to particular institutions be done by an independent body. But even in respect of monetary policy, the inflation target is now set unambiguously by the Minister of Finance alone (previously used to be an agreement with the Governor), and pretty all other important policymaking regulatory power in our system of government rests with ministers – the people we can throw out. There is a lot of controversy around at present about aspects of the Bank’s prudential policy choices. I agree strongly with some of them, disagree with others, and generally am not convinced that the specifics matter quite as much as some of the critics claim (and I think on that I may be closer to Orr). But the people who should be making these policy calls are ministers. We elect them. We toss them out. Of course, they need expert advisers – so this isn’t a call to diminish Reserve Bank capability (in fact it probably needs strengthening – check how few research papers (0) they’ve published in the last decade on regulatory policy and financial stability matters), but to have a clearer stronger separation between policymaking and implementation (and, given the inflation target, what the MPC does is – influential – implementation).

I’ve also noted here before that there is a decent case for a structural separation of the Reserve Bank. When the Bank was first made independent it was basically a monetary policy agency with a few vestigial regulatory/supervisory staff. These days (even amid the general bloat) far more of the staff are on the regulatory side, and there are two significantly different (expertise and culture) prime roles. Even the sort of expertise one might need/want in a chief executive should be materially different: monetary policy is primarily a macroeconomic role, with some operational responsibility (markets, currency etc), while the supervisory side is a regulatory function pure and simple. Splitting out the regulatory functions into a New Zealand Prudential Regulatory Agency would parallel the Australian model; a system which has substantive matters, but also where alignment makes some sense when the biggest systemic risks etc here relate to Australian-owned banks. (If multiplication of government agencies was a concern, the FMA could be wound into a single financial regulatory body.)

Those changes can’t generally be made overnight (they all require legislation), but as a direction they have a lot to commend them, and I’d urge the Minister of Finance to take time in the next few weeks to reflect on the sort of direction she wants, before the momentum of the existing model takes hold. It is a busy time for her – the Budget will be more pressing – but medium-term choices matter too and this is her opportunity to stamp her mark on a better set of central banking arrangements.

One thing that doesn’t take legislation would be an overhaul of the Monetary Policy Committee’s charter, and particularly the culture around it. Setting up a Monetary Policy Committee was a good call by Grant Robertson – by the time it was done everyone agreed we needed to move away from the single decisionmaker model – but the specific path chosen was a fairly unproductive dead end. We had externals (three at a time) appointed – in one case solely (as OIA papers reveal) for her sex rather than expertise in the field – and then we never heard from them or saw any evidence that they made even a modicum of difference, even as they collected their not-inconsiderable fee and rounded out their CVs. This government has taken some steps to improve the quality of the externals – although they also extended again the term of an 80 year old member who was there through the worst of the costly policy mistakes on 2020 to 2022 – but there is still no sign of them making any difference in style or substance, and not the slightest accountability for their views. Much better to have a much more open system – as in the UK, US, or Sweden for example – where MPC members are open about, and accountable for, their views. Historically the Bank’s management – even before Orr- hated the idea, but in the real world everyone knows there is huge uncertainty and that processes are likely to benefit from open exploration of ideas, contest of views, and actual accountability. The Supreme Court manages to have dissenting opinions published. There is no reason why our MPC should not. And require members to front up to FEC from time to time, including in (non-binding) hearings before these powerful individuals take up their appointments. Good monetary policy is not an infallible text handed from heaven but, inevitably and appropriately, a process of discovery and challenge, in which everyone – or at least MPC members who are up to the job – would benefit from greater openness.

What of yesterday?

It is all highly unsatisfactory. We had brief press releases from the Bank and from the Minister but no real answers. We are told there were no active conduct concerns – although there probably should have been, when deliberately misleading Parliament has happened time and again, and just recently – and yet the Governor just disappeared with no notice on the eve of the big research conference, to mark 35 years of inflation targeting that he was talking up only a week or two ago, (I also know that one major media outlet had an in-depth interview with Orr scheduled for Friday – they’d asked for some suggestions for questions). And with not a word of explanation. If you simply think your job is done and it is time to move on, the typical – and responsible – way is to give several months of notice, enabling a smooth search for a replacement. He could easily have announced something next week, after the conference, and left after the next Monetary Policy Statement in May.

Instead, it is pretty clear that there has been some sort of “throw your toys out of the cot and storm off” sort of event, which (further) diminishes his standing and that of the Bank (but particularly the Board and its chair). It all must have happened so quickly that we now have this fiction that Orr is on leave for the rest of the month (the provisions in the Act require a temporary Governor to be appointed by the Minister only on the recommendation of the Board, and probably Orr just didn’t leave them time). After several hours of uncertainty, the Board chair finally decided to hold a press conference, which he didn’t seem to handle particularly well and (I’m told – I only have a transcript – in the end he too stormed off) we still aren’t much the wiser. It will, I suppose, provide much topic for conversation among the research geeks at the conference today and tomorrow (quite what visitors Ben Bernanke and Catherine Mann – BoE MPC member – will make of it all is anyone’s guess).

I guess it is probably true that Orr can’t be forced to explain himself, although since he is still a public employee until 31 March I’m not sure why considerable pressure could not be applied. But even if he won’t talk the answers so far from either Willis or Quigley really aren’t adequate. You don’t just storm off from an $800000 a year job you’ve held for seven years, having made many evident policy mistakes and misjudgments, as well as operating with a style that lacked gravitas or decorum etc, with not a word. Or decent and honourable people, fit to hold high public office don’t.

The suggestion seems to be that budgetary pressures – the Minister wanting to cut the Bank’s next five-year funding agreement are at the heart of it (and a careful read of the Reserve Bank statement hints at that). I had heard a story – apparently well-sourced – that the Bank had actually been bidding for a material increase in its funding, on top of the extraordinary increases of the last five years, but whether that is true or not the Minister does seem to have signalled coming cuts, and Orr has long been known more for his empire-building capabilities than for his focus on lean and efficient use of public money, But every public sector chief executive in Wellington has had to deal with budgetary restraint and, so far as we can tell, not one of them has tossed his/her toys and stormed off. It isn’t as if the Bank had been relentlessly and exclusively focused on its core business, with not a penny to be spared the poor taxpayer. In any case, from what comments have been let out it seems that final future budget decisions had not even been made yet, so surely it can’t be the whole story.

Comments by Quigley suggests that perhaps Orr was getting to the end of his tether, and some one or more recent things made him snap, reacting perhaps more than a normal person would do faced with the ups and downs of public sector life. It seems highly likely the budget stuff, and the desire to keep pursuing whims, was part of it, but it can hardly have been all. I don’t suppose he felt any great compunction about misleading Parliament so egregiously again…..but he should. And all this time – having stormed off with no adequate explanation – Quigley declares that he still had confidence in Orr. Surely yesterday confirms again that both of them, in their different ways, were unfit for office.

Oh, and for those puzzled by it, the title of this post refers to the latest estimate of the losses to the taxpayer from the Bank’s rash punting in the government bond market in 2020 and 2021. $11 billion dollar in losses. Three and a bit Dunedin hospitals or several frigates or…..all options lost to us from this recklessness, undertaken to no useful end, and a loss which Orr endlessly tried to play down (suggesting it was all to our benefit after all), and which not one of his MPC members – one now temporarily acting as Governor – even either dissented on or gave straight and honest contrite answers about. It has been 43 years since a Reserve Bank Governor was appointed from within. That is an indictment on the way the place has been run. Successful organisations tend to promote from within. Orr (and Quigley) do not leave a successful organisation, but one of yes-men and women. The place needs a fresh broom to sweep clean. One hopes the government cares enough to ensure it happens,

Australia’s Pandemic Exceptionalism

Michael Reddell Australia, pandemic

That’s the title of a 2024 book by a couple of Australian academic economists, Steven Hamilton (based in US) and Richard Holden (a professor at the University of New South Wales). The subtitle of the book is “How we crushed the curve but lost the race”.

It is easy to get off on the wrong foot with at least one of the authors. Each of them has a Foreword, and Hamilton’s rubs me up the wrong way every time I come back to it (as I did just now). There are 26 “I’s” in 2.5 pages (he notes “I am the first to admit I can be prone to self-congratulation”) and then this moan

I do love Australia but boy do we love credentialism.  Australia is a country where time served is taken far more seriously than the merits of an argument. Where, unless you have some postnominals, a regular column writing in a national broadsheet, or went to the right private school, the typical journalist won’t give you the time of day.  The policy discussion is fundamentally undemocratic, and the country is poorer for it.

Which seemed a little odd for someone who is an assistant professor in another country and has just had a book, on policy in Australia, published by an Australian university press. In fact, I looked up Hamilton’s bio. It has 7 pages of listings under “Opinion Writing” (130 or so pieces), and the bulk of those articles/columns were published in top Australian newspapers (AFR, Australian, SMH). Not bad for a junior academic living in another country.

The title of the book is a bit of a puzzle. In places, the story is that Australia did some things exceptionally well (thus, low death toll) and other things exceptionally badly (that subtitle about losing the race is about the delays in securing vaccines – and the economic nationalism of trying to promote Australian-produced options – and in moving away from exclusive reliance on lab-processed PCR tests and authorising/enabling extensive use of RAT tests). But then their claim in the concluding chapter is “overall, Australia’s handling of the pandemic was exceptionally good”, notwithstanding their claim earlier in the book that the vaccine delay – similar to New Zealand’s – was “almost surely the single most costly economic event in Australian history”, a claim which itself makes no sense unless they are using some exceptionally narrow definition of “economic event” that isn’t hinted at in the text. And they give very little attention to the Reserve Bank of Australia’s role in pandemic economic management – none at all to the massive losses to taxpayers from ill-judged risky interventions in the bond market, and very little to the worst outbreak of (core) inflation in decades.

My own final take on that “overall exceptionally good” claim was as follows:

In some respects (including the important mortality one) Australia did materially better than most.  Arguably the Australian government (like New Zealand’s) got one really big call right (the initial closing of the borders in March 2020 just in time, albeit –  and as [the authors] note – later than they should have). Beyond that, the record is really rather mixed.  Some of that might perhaps have been inevitable in such exceptional times.  But plenty of things could have been done better, as even [the authors] (sometimes grudgingly) acknowledge.

For those tempted to buy the book, if you followed events closely over 2020 to 2022 you aren’t likely to find anything new, and some of the argumentation is moderately detailed, and thus it isn’t entirely clear who the target audience was. But time moves on, people forget too quickly, and before long there will cohorts of policy advisers and even politicians for whom the pandemic period was little more than a hazy teenage memory. For them, perhaps in particular, it is likely to be a useful point of reference.

The editor of the New Zealand economics journal, New Zealand Economic Papers, invited me to write a review of the Hamilton and Holden book, which was published on their website a few weeks ago.

There were a few changes before the final published version but what follows has all the substance.

Review of Steven Hamilton and Richard Holden, Australia’s pandemic exceptionalism:how we crushed the curve but lost the race, UNSW Press, Sydney, 2024, 240pp

Introduction

No one can doubt that 2020 and 2021 were exceptional.  COVID-19 was the worst pandemic in a century, and the nature and scale of the policy responses were pretty much without precedent.  Those of us who’d assiduously read accounts of the 1918/19 flu pandemic got little real help in what to expect.  The discontinuities in the economic data will probably be puzzling students a century hence.

But in their new book two Australian academic economists, Steven Hamilton (George Washington University) and Richard Holden (University of New South Wales), seek to highlight what they believe to have been exceptional about the specific Australian experiences and policy responses –  exceptionally good (the economics), and exceptionally bad (sluggish acquisition of vaccines, very slow adoption of RAT tests).  Since the overall experience of the pandemic in Australia –  policy and outcomes –  was very similar to that of New Zealand many of the arguments made are likely to be valid, or not, for New Zealand too.

Both Hamilton and Holden (hereafter HH) had many things to say during the pandemic, and a fair number of the points they were making then were fundamentally correct. And so if the book often has a self-congratulatory tone (and Hamilton acknowledges his tendencies in his Foreword) it isn’t entirely unwarranted. 

Judged by deaths from Covid, Australia was one of the group of the best performing advanced countries. As HH recognise, these outcomes were a mix of luck and policy –  Italy, for example, felt the full force of the outbreak early, but it could have been any other country, particularly those with lots of travel to and from China.  

Using Our World in Data, here are the advanced countries with cumulative death rates less than 1000 per million people (a longer list than you might get the impression of from reading the book).

COVID-19 death rates per million (to 21 January 2025)
Australia963
Iceland489
Japan597
Korea693
New Zealand879
Singapore358
Taiwan739

In contrast there are the United Kingdom (3404), the United States (3548), and Italy (3344), with a number of central and eastern European EU countries materially higher again. 

But how should we assess the wider policy response, in particular the economic side of things?

Assessing policy responses

The authors were among the organisers of an open letter in April 2020, signed by 265 Australian economists, arguing in support of government policy, including lockdowns, and they continue to champion the view that there was no trade-off between public health and economic outcomes in the peak pandemic period.   It is a set of arguments that, taken together, never seemed fully persuasive.  

HH remind readers of the Goolsbee and Syverson (2021) paper that suggested quite early on, using mobile phone data, that almost 90 per cent of the reduction in movement in the United States was voluntary (was happening anyway independent of legal restrictions being imposed).  If so, and given that the legitimate public health goal was to get and keep the replication rate below 1 (ie each case passing Covid on to, on average, less than one other person), was there really a compelling case –  that would pass a robust cost-benefit test –  for fairly extreme lockdowns?  How much difference did the marginal movement restrictions produce (on the health side) and at what economic and social cost?  Presumably, on average, the least costly and disruptive reductions in movement occurred first and voluntarily?   

Unfortunately, we do not know with any confidence the answers to questions like these.  There was little or no evidence of serious cost-benefit analysis being deployed, even in principle, in the New Zealand official advice (and the Productivity Commission ran into significant blowback when it attempted something illustrative) and nothing in HH’s book suggests things were any different in Australia.  Unfortunately, there is also no sign of any marginal analysis in this book (or in other post-event evaluations).

Peak lockdowns in New Zealand were more onerous than those (on average across states) in Australia and, for what it is worth, the best estimates of June quarter 2020 GDP in both countries show a materially larger fall in New Zealand than in Australia[1].   Lockdowns were not the biggest part of the economic story, but it is also very unlikely they made only a small difference[2].  Output not generated in one quarter isn’t typically replaced with additional output later, even when there is a very quick recovery in activity to the pre-crisis level.   And beyond GDP effects, HH seem largely unbothered by the human costs of the more extreme provisions – funerals couldn’t be held, the dying or bereaved couldn’t be comforted, and so on.  Decisionmakers, of course, had to operate under considerable time pressure in early 2020 –  although as HH note, they were often slow to grasp the seriousness of what was emerging and so lost valuable time for reflection and analysis. 

Hamilton was among those making the case fairly early that in a shock of this sort (not having its roots in initial economic imbalances) fiscal support measures should focus not just on income support but on keeping firms and employment relationships (and the embedded firm specific capital) intact.  It wasn’t a new idea (and New Zealand governments had used that model on a small scale in the wake of the Christchurch and Kaikoura earthquakes) but as the magnitude of the Covid crisis belatedly became apparent the scale of any such support (not just dollars but the administrative capacity required) was daunting.  

The United States serves as a foil throughout the book to help make the authors’ case for Australian exceptionalism (especially on the economic side of things).  The authors correctly note that the American political system (in which the head of government doesn’t control the legislature, and where a large proportion of powers –  including around unemployment insurance – operate at the state level anyway) could not realistically have been expected to generate quick and comprehensive whole of government responses, of the sort we saw in Australia and New Zealand.  They contrast particularly the Australian JobKeeper programme programme (somewhat similar to the New Zealand wage subsidy scheme, both emphasising retention of existing employment relationships) with the US support programmes (lump sum household grants and the Paycheck Protection Programme).

The way government support programmes were designed is generally recognised as having had substantial implications for the extent to which the reported unemployment rate rose in different countries.

Increase in unemployment rate: end-2019 to peak COVID level (percentage points)

Australia                                          +2.5

New Zealand                                  +1.1

Canada                                            +8.1

United States                                  +11.3

United Kingdom                             +1.4

Those are stark differences[3], and HH attempt to connect the difference between the  US and  Australian unemployment numbers to subsequent economic performance.  Somewhat surprisingly they do this wholly by reference to the employment to population ratio, which is higher now in Australia (and New Zealand) than pre-COVID, but is lower in the United States, with the suggestion that the JobKeeper type of programme, if not perfect, was better suited to a full and quick rebound in the economy.

As it happens, the United Kingdom (with a very small increase in the unemployment rate) also now has a lower than pre-COVID employment to population ratio, but more importantly there is no mention at all of the respective GDP experiences.

In fact, despite the very different pandemic experiences of Australia and the United States the tracks for real GDP per capita were remarkably similar.  Both countries regained the December 2019 level in the same quarter (March 2021) and by the end of the immediate pandemic period the cumulative growth rates had been almost identical. 

Since then, of course, US productivity and real GDP per capita growth have diverged (favourably) from those of almost all other advanced economies. The reasons aren’t yet well understood, but there isn’t much evidence that pandemic-related labour market scarring has mattered much at least at an economywide level. 

As the authors highlight, Australia could reasonably be considered to have done exceptionally badly around vaccine procurement, and the approval and widespread use of RAT rest. They both devoted many column inches at the time to the breathtaking failure of politicians and officials in Australia to act early and decisively to secure access to vaccines by placing orders or buying options at scale on all the emerging potential vaccines (a New Zealand book would have to grapple with the same failure).  No one knew which would emerge as best or be available earliest, and the cost of over-ordering would have been small compared to the costs of additional economic and social disruption if the population remained largely with access to an effective vaccine.   The complacency –  in the then Prime Minister’s words “this is not a race” – reflects very poorly on ministers and officials, and came at a considerable economic cost.  Like New Zealand, Australia eventually achieved very high vaccination rates, but the operative word is “eventually”.

Unfortunately, and inexcusable as those delays were, this is one of a number of places where HH lapse into overstatement.   They estimate that the vaccine delays cost Australia (directly and indirectly) A$50 billion and go on to claim that this meant that “Australia’s great vaccine debacle [was] almost surely the single most costly economic event in Australian history”.   $A50 billion is a lot of lost output but it was about 2.5 per cent of one year’s GDP.  By contrast, during the Great Depression Australia’s per capita GDP averaged almost 15 per cent below pre-Depression levels for five years (so in total something like 75 per cent of one year’s GDP), and the 1890s financial crisis (when it took 15 years for real GDP per capita to regain pre-crisis levels) was even worse.    If one wants more recent, and directly policy-related, costly economic choices, one might think of the post-war tariff walls or letting inflation get away in the 1970s. 

Macroeconomic policy

HH are firm champions of fiscal policy as a countercyclical stabilisation tool, and spend quite a bit of space in the book revisiting arguments for why there should have been (but wasn’t) countercyclical fiscal stimulus in Australia’s 1991 recession and why they believe such stimulus was both desirable and successful in 2008/09.  They are sympathetic to Claudia Sahm’s proposal for additional semi-automatic fiscal stabilisers.  I’m sceptical on all three counts (including the associated claim that Australia avoided a recession in 2008/09, when the unemployment rose by 1.7 percentage points and real per capita national disposable income measures fell materially), but the connection to an event like the pandemic is not clear.  

In a typical unexpected downturn countercyclical policy aims to stimulate business and household demand and spending.     The relative merits of monetary and fiscal policy tools can be debated but the goal is pretty clear.   The goal in March 2020 was quite different.  The aim wasn’t to stimulate demand or activity, but to tide people and firms over while the economy was more or less shutdown (more or less as a policy goal, through some mix of official edicts and private risk-averse behaviour).    That required direct transfers in one form or another, something monetary policy simply cannot do.  The fact that programmes like JobKeeper (and the New Zealand wage subsidy) worked – at vast, probably unnecessarily large, fiscal cost[4] – in a unique crisis like COVID tells us almost nothing about how best to handle future conventional (aggregate demand shock) downturns. And nor do the experiences of past conventional recessions shed useful light on how best to handle shutting down much of the economy temporarily for non-economic reasons.

One of the striking omissions in the book is any serious or sustained discussion of monetary policy and the performance of the Reserve Bank of Australia (RBA).  Monetary policy wasn’t the instrument that could or should have dealt with the income support and firm-retention goals governments rightly had through COVID.  But monetary policy moves last, and is supposed to take into account all the other pressures on the aggregate demand/supply balances, with the aim of keeping inflation near target.    Faced with the unique pressures of COVID too many central banks, including the RBA, failed badly.  Core inflation reached levels it was never supposed to reach again under inflation targeting.  And those same central banks ran up massive losses (tens of billions of dollars in the RBA case) on ill-judged and largely ineffective bond buying programmes.  These massive losses to taxpayers are not mentioned at all in the book.

There is a brief discussion of inflation, but HH seem to treat those outcomes as just a price that had to be paid, even describing the inflation (somewhat curiously) as an “insurance premium” (such premia are usually fixed upfront against uncertain losses and are not the unexpected outcome).   They, like many central bankers  (at least judging by their public remarks), seem utterly indifferent to the huge redistributions of wealth such a severe outbreak of unexpected inflation caused.

Various commentators, including HH, contrast the really gloomy macro forecasts that were widespread in mid-2020 with the actual outcomes.  The suggestion is that this is a testimony to policy effectiveness, but surely it is mostly a testimony to forecasting failure?  Central banks and finance ministries in the second and third quarters of 2020 knew all about the nature and magnitude of the policy support, but they simply misread the overall macroeconomic implications.   Take the RBA Statement of Monetary Policy from as late as November 2020: they forecast trimmed mean inflation at 1 per cent for 2021 and 1.5 per cent for 2022, both well below target.  Projections of that sort at that time were not uncommon (those of the Reserve Bank of New Zealand were similarly weak).  Those serious misjudgements, not the COVID support interventions themselves, gave us the serious inflation problem that central banks are still now dealing with the after-effects of.     Getting the balance between demand and supply effects right, knowing what weight (little, as it turned out) to put on adverse uncertainty effects etc, wasn’t easy, but it was the job central bank experts are paid to do.

Conclusion

Much is made by HH of  Australian “state capacity”[5] and at one point they suggest that “if this book is about anything, it’s state capacity”.   On recent metrics (eg O’Reilly and Murphy (2022)) state capacity in Australia going into the pandemic was good but didn’t stand out relative to other advanced economies.  The authors are clearly right to praise the ability of the Australian Tax Office (ATO) to put in place quickly the JobKeeper programme, itself in part a reflection of efforts to modernise the agency over previous years. But since state capacity is more than just the technical abililty to implement a programme quickly and efficiently under pressure, we can’t –  and HH don’t – ignore things like the vaccine procurement and RAT approval issues, both of which were costly failures.  And what we saw, in Australia no more or less than most other advanced countries, was monetary policy authorities failing to do their core job adequately when it really counted.

We need many more books and formal studies about all aspects of the pandemic period, national and cross-country.  That said, it isn’t entirely clear who the target market for this particular book is.  The Australian Treasury (past and present), the ATO, and the then Treasurer Josh Frydenberg will welcome it (they count as the authors’ heroes), and those already inclined to agree with the authors will nod along as they read, but without necessarily learning anything new.  In a fairly short account covering a substantial amount of sometimes-complex historical ground perhaps there isn’t room for, and they don’t attempt, fresh in-depth analysis. But memories fade all too quickly, and before long a new generation of junior policy analysts will be staffing agencies with only a hazy child’s memory of the pandemic. The book should be a useful introduction to much[6] about the Australian government response. 

Which brings us to the final issue: was Australia’s overall handling of the pandemic “exceptionally good”, as the authors claim?  In some respects (including the important mortality one) Australia did materially better than most.  Arguably the Australian government (like New Zealand’s) got one really big call right (the initial closing of the borders in March 2020 just in time, albeit –  and as HH note – later than they should have).  Beyond that, the record was really rather mixed.  Some of that might perhaps have been inevitable in such exceptional times. But plenty of things could have been better, as even HH (sometimes grudgingly) acknowledge.

References

Gibson, J. (2022), Government mandated lockdowns do not reduce Covid-19 deaths: implications for evaluating the stringent New Zealand response, New Zealand Economic Papers Vol 56 2022 Issue 1

Goolsbee, A. and Syverson, S. (2021), Fear, lockdown, and diversion: Comparing drivers of pandemic economic decline 2020, Journal of Public Economics 193

O’Reilly, C. and Murphy, R. H., (2022), An Index Measuring State Capacity, 1789–2018, Economica, Vol 89, Issue 355 pp 713-745

Reddell, M., “A radical macro framework for the next year or two”, Croaking Cassandra blog, 16 March 2020 (https://croakingcassandra.com/2020/03/16/a-radical-macro-framework-for-the-next-year-or-two/)

[1] Note, however, that measurement of a locked-down economy was much more difficult than usual, particularly in non-market sectors, and outsiders can’t be sure how comparable the (inevitable) assumptions used were.

[2] John Gibson (2022), written in 2020, is also relevant here, drawing on the diverse restrictions in the different parts of the United States..

[3] The United Kingdom had by far the largest peak to trough fall in GDP of any of these countries.

[4] HH tend to play down the validity of ex post observations of this sort (while accepting that there may be cheaper options that could be considered in future), but as it happened I had laid out before the New Zealand lockdown the genesis of an alternative approach that, had it been adopted, would have proved considerably cheaper (Reddell (2020)),

[5] For example (p39), “the sharp contrast with the United States revealed deep reserves of state capacity that we simply had not realised were there”.

[6] But not all.  One notable omission from the book was much discussion about the range of different state approaches.