Portrait of a strongman

It didn’t seem like the best weekend for Reserve Bank Governor Adrian Orr.

First, there was Radio New Zealand’s Insight documentary on the Governor’s bank capital plans, and other possible new regulatory burdens.  I was impressed with the huge amount of time and energy that was put into the programme, although inevitably there are limitations in what a programme designed for a mainstream Sunday morning audience can deal with.     In some ways, the best public service now would be if Radio New Zealand and/or the Reserve Bank agreed to release the full interview Guyon Espiner did with the Governor –  we were told it was an hour long, but no more than five minutes would have been used in the programme (I presume this was par for the course on Espiner’s background work, as I did an interview with him that went for perhaps 40+ minutes).

In commenting on the substance of the programme one then has to be a bit careful.  The selection of quotes and the framing is Espiner’s (and I did notice a couple of small errors) and although he is a responsible senior journalist, the way he presented material isn’t necessarily the way the Governor himself might have chosen to.  Then again, the Governor has plenty of communications media open to him and after 18 months in the job still hasn’t given a speech about financial regulation topics, for which he personally has huge personal policy freedom.

But as RNZ presented the Governor’s arguments, they were less than impressive.  They seemed to be playing distraction more than engaging with what should be the core issues.  Not once, at least according to my notes, did he engage on the possible costs and distortions his proposals would introduce (whatever the possible benefits). Not once, for example, did he engage with how comparable his proposals are to the regime that will apply in Australia to the respective banking groups (hint, Orr’s are much more onerous).

Instead, we got irrelevancies.  The Governor decreed that banks were earning too much money in New Zealand.  Not only that, in his tree god and garden imagery, the (Australian) banks were “darkening the garden”, such that the market was not as competitive as it should be.  Perhaps there is something to those arguments, but they are simply not the Governor’s job and should be irrelevant considerations in proposing to exercise regulatory powers under the Reserve Bank Act (directed to promoting the soundness and efficiency of the financial system).  We have a Commerce Act, there are powers now for the Minister of Commerce or the Commerce Commission to initiate a market study.  But that has nothing at all to do with the Reserve Bank, the prudential regulator, not the competition authority.

Orr came a little closer to his own ground, and to respectable arguments, when he suggested that existing capital (and leverage) ratios were just too low, and thus that banks were “too risky”.  That might have been a touch more persuasive if, for example, he’d engaged with the standalone credit ratings of the banks operating here, or talked about the differences between a strongly-diversified big bank and an individual borrower (instead he tried to imply that the risks, and hence appropriate capital, were much the same).  There was the rather weak claim that “at times” housing crises have led to banking crises, but no attempt to unpack that claim, or to engage with the repeated stress tests his own institutions has done this decade.  Let alone, to consider the experiences of banking system like our own (or Australia’s or Canada’s or Norway’s) that with floating exchange rates and governments out of the housing finance market have proved resilient over many decades.

Instead we got another attempt at distraction, suggesting that the New Zealand experience in 2008/09 was really rather a close-run thing.  He knows it wasn’t so. He knows that the issues the New Zealand banks (and their parents) faced in 2008/09 were about liquidity, not about credit quality or loan losses.  There had been a degree of complacency among the banks about liquidity in the 00s –  I recall one discussion with the head of risk at a major bank in about 2006 who simply could not conceive of a world in which funding liquidity markets would dry up almost completely.   But liquidity is a different issue than loan losses –  which were modest in a fairly deep recession after a period of very rapid credit growth – and even the liquidity/funding issues New Zealand banks faced never threatened to bring any of them down.  And the Bank addressed the funding/liquidity issues almost a decade ago, with much more stringent policy requirements.    And risk-weighted capital ratios are already higher than they were going into the last recession  –  partly under regulatory pressure, partly market pressure  –  a recession when (to repeat) the loan losses were pretty modest and not at all threatening.

Then we had more rhetoric about how the Bank was not going to “keep falsely subsidising bank businesses”, although the nature of any such “subsidy” was never clear given (a) the resilience of banks to the Reserve Bank’s own stress tests, and (b) the central place the Bank has long argued OBR should have in handling any bank failures in New Zealand.   But it probably sounded good.  And then he fell back on attempts to exaggerate the costs of financial crises, with talk of “generations of lost employment opportunities”, mental health failures, and vague allusions to various “challenges” of the world right now –  the Brexit, Trump duo again I suppose – being down to insufficient bank capital.    Evidence and sustained argumentation would help –  if not on a short radio programme then, for example, in speeches and robust consultative documents and –  perish the thought –  upfront cost/benefit analyses (as distinct from the ex post one they might eventually show us).

There was some discussion of dairy lending.  As the Governor fairly noted there had been some fairly aggressive and unwise lending to that sector over the last 15 years (in the early part of that period the impression was that the offshore parents had little real idea of what the subsidiaries were doing in that sector).  Dairy farm economics doesn’t look as it once did, for various market and (actual/proposed) regulatory reasons, so no doubt there isn’t the same bank risk appetite there once was.  But it is quite unconvincing for the Governor to try to pretend his capital proposals won’t exacerbate pressures in that sector, or in other sectors where specific hard-to-extract and manage  knowledge/experience is key to good lending.  Big corporates, for example, who can simply turn to banks not affected by the Governor’s proposal (overseas-based banks, and even the parents of the NZ locally-incorporated banks).  I doubt credit supply will be too adversely affected for residential mortgage finance either.  But for other sectors, including dairy, who does the Governor expect to step into the gap?  Wasn’t he talking (see above) about insufficient competition?  Won’t these proposals weaken that competition, especially as all the locally-owned banks are themselves capital constrained?

The Governor also tried to claim that the Bank’s existing capital rules had somehow “caused” the banks to run into problems on dairy lending, citing differences in risk weights used by various banks for apparently similar lending.   Even to the extent there is an issue there, it is worth remembering that (a) by far the biggest increases in dairy lending occurred (last decade) before the advanced models approach came into effect, and (b) good banks get things wrong from time to time, and none of the actual or stress-tested dairy losses pose any threat to systemic stability.  The Governor’s numbers tell him so.   We want banks to lose money from time to time –  were they not doing so the Governor (on another day, another trope) would probably be complaining about them taking insufficient risk, holding back opportunities etc.

And then, of course, there was the cavalier line I wrote about on Friday: the Governor in essence telling the banks that if they don’t like his rules (and him as prosecutor, judge and jury in his own case) they can just take their money and go.  I wrote about this  irresponsible line on Friday.

Perhaps we should see his talk –  all it appears to be at present – about banning people from serving on both the boards of parent and New Zealand subsidiary at the same time, as all part of that same mentality of suspicion of Australian banks.  The Governor shows little or no sign of appreciating the value New Zealand, and New Zealanders, get from having banks that are part of much larger banking groups, from a country with a track record of a stable and well-managed banking system.  He talks a lot about the standalone capacity of New Zealand subsidiaries in a crisis, but very little about the benefits of integrated banking operations in more normal circumstances (ie at least 99 per cent of the time).  He seems to be hankering for the Australian banks to sell down their shareholding in the New Zealand subsidiaries –  acting as, in effect, an agent for NZX and the New Zealand funds management industry – while showing no sign of recognising that a more arms-length New Zealand operation might also be one less well-placed to receive parental support if something ever does go wrong.

All in all, I just wasn’t persuaded that Orr was even trying to make a serious sustained analytical case for the specific policy he is pursuing.  Playing distraction seemed to be more the style.  (Perhaps I’m wrong and the tape of the full interview would no doubt tell us more.)  That, after all, is the problem with the regime: at least formally, under the law, having dreamed up this proposal all by himself, the only person he actually has to convince of its merits is….himself (final decisionmaker).

Oh, and I almost forgot to mention Auckland University economics professor Robert MacCulloch’s comments.  He highlighted the “sheer lack of raw intellectual firepower” at the Bank, and claimed that neither the Board nor the senior management were really up to the job.  I probably wouldn’t have put it quite that strongly –  there are still able people but in the Board’s case they seem to have no interest in doing anything other than covering for the Governor, and in the staff’s case, personal self-protection –  with a Governor who does not welcome challenge –  is a deterrent to people speaking up even if they have (a) stayed on, and (b) disagreed.      The Bank has lost a lot of good people this year, for various reasons, but few would have had much involvement in the bank capital issues.  MacCulloch’s other comments resonated more strongly with me: there is no history of extreme fragility in the New Zealand banking system (“rather the opposite in 2008”) and that the Governor’s style is undermining confidende in the Reserve Bank, at home and abroad.

Of course, only a few geeks would try to unpick the Insight programme.

But the Sunday Star Times did us a public service with a big double-page article on the Governor that was distinctly less than flattering.  The online version ran under the title “Portrait of the Governor as a strongman”.  I’d encourage you to read the article. Several critics were actually willing to go on the record –  not, of course, ones from among the banks (the “strongman” has a lot of power over them).

Here is an extract, starting with reference to the heavyhanded stance Orr took with veteran and highly capable journalist Jenny Ruth at a recent press conference

The video of the conference remains on the Reserve Bank’s website. Some reporters said they were stunned Orr would air his anger so publicly and called it bullying.

But other observers were not surprised. Details of Lubberink’s experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank’s plan.

“There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,” said one source who’s been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn’t agree with.

“I’m worried about what he’s doing.”

The source said some companies have “withheld submissions,” for fear of being targeted by Orr.

“They’re absolutely scared of repercussions. It’s genuinely disturbing,” he said.

(Orr told someone recently he didn’t read what I write –  his perfect liberty of course –  so I guess I’m safe from the “angry weekend phone calls”.)

Sadly, one can’t really say it is shocking.  It is, more or less, what one might have come to expect.  But it is appalling, and a far cry from the sort of standard the public has a right to expect from such a powerful public servant.  Wielding so much power singlehandedly, with few checks and balances, we need someone with a judicious and calm temperament, happy to engage openly and non-defensively, and so on. Instead we have Adrian Orr.

The article reports that Orr refused to be interviewed.  But perhaps the bigger question is why the journalist responsible –  for a very useful and courageous article –  showed no sign of having sought comment from Neil Quigley, the chair of the Bank’s Board who is paid to hold the Governor to account.  And there was no sign either of having sought comment from Grant Robertson, the person who actually has the power to dismiss the Governor and whom –  as voters –  we might expect to be visible when concerns like these are raised.  (And if the Minister of Finance isn’t visible, why isn’t the Prime Minister insisting that her Minister do his job?)  The behaviour as reported should be unacceptable in a democratic society governed by the rule of law and conventions of acceptable conduct.

Another quote from the article

In the cut and thrust of the debate, Orr’s jokey style and everyman charisma fell away. In recent months he’s dogmatically insisted the cost of his plan would be minimal and has picked personally at critics in the media, academia, and the financial services industry.

He’s been variously described as defensive, bullying, and perilously close to abusing his power.

“He’s in danger of bringing scorn on his office,” said long-time industry watcher David Tripe, professor of banking at Massey University. “I used to know him well. I no longer feel so confident.”

I was exchanging notes last week with someone about comparisons between Graeme Wheeler and Adrian Orr.   The SST article reports insiders claiming that Wheeler had not been keen on the idea of big increases in capital requirements for locally-incorporated banks.  If so, that is to his credit.

Not much else was. I’m not going to repeat his failings, but recall just how unpopular he had become with key stakeholders by late in his term (the survey the New Zealand Initiative undertook). By the end, his departure was almost universally welcomed, and must almost have been a relief to him too, as someone never at all comfortable in the public spotlight.

Orr is more a polarising figure, in that he does still have some supporters, but they must be getting quite uncomfortable with his style, even if they are sympathetic on substance.  But a rerun of that NZI survey would be unlikely to show up the Bank in a good light.  The more time goes on the more unsuited Orr appears to be for the office to which the Bank’s Board and the Minister of Finance appointed him.     He degrades the standing of the Bank here and abroad, as well as eroding its internal analytical capability and whatever spirit of robust internal debate was left after Wheeler, and undermines confidence in the institution’s ability to manage real threats.  It is rather sad to watch, but perhaps only a slightly more extreme example of the sustained degradation of policy capability and leadership in New Zealand public life and public sector this century.

 I hear on RNZ this morning the Governor was quoted as pushing back – I think mainly against MacCulloch – suggesting that criticisms were “narrow nitpicking”.  But there is a long list of sceptics, and of reasoned critical submissions on what is proposing, and how he is doing it. For anyone interested, here was my formal submission

Revisiting some RB history

One of Stuff’s political correspondents, Henry Cooke, had a column in this morning’s  Dominion-Post about Adrian Orr and the power he wields, single-handedly, around banking regulation.

The column starts with some comparisons with some other senior public servants

Think Police Commissioner Mike Bush, former Treasury boss Gabriel Makhlouf​, or State Services Commissioner Peter Hughes. These three have had more influence over the way this country is run than all but the most powerful MPs.

Yet that trio can technically be called to heel by their ministers, even if doing so will probably result in a serious headache for the minister in question. Not so for Reserve Bank governor Adrian Orr, whose independence is enshrined in law.

Not probably company most would want to be numbered with.  A Police Commissioner who gave a eulogy at the funeral of a former policeman widely accepted as having planted evidence in a murder case, who seems to be counted on not to make trouble for whichever party is in power, and who is only too happy for the NZ Police to cosy up to, and assist, the PRC security forces.  A now-departed Treasury Secretary who presided over the decline of his own institution, and then flitted the country refusing to accept any serious responsbility for his own conduct over the “budget hack” affair.  And so on.     Whatever influence these people might have – not much I’d have thought in the case of the Police Commissioner – they have no policymaking powers themselves.

By contrast, when it comes to banking regulation, the Reserve Bank Governor enjoys a great deal of formal power, with little accountability and no rights of appeal against his policy decisions.   They are powers which should be reined in, by MPs and ministers, and which while they exist need to be used with the utmost judiciousness and care.  Under Orr, it is more like a bull in a china shop, pursuing personal whims, perhaps political agendas, all supported by not very much robust analysis at all.   I’ve written about all that previously and am not going to repeat it today.

Cooke notes the suggestion by Paul Goldsmith that the Governor should have fewer policymaking powers, with big policy calls in banking regulation being made by ministers and MPs, as big policy calls in most other areas of public life are.  But then follows a strange end to his article, which is the point of this post.

Goldsmith knows all about how the Reserve Bank can set off real political fires. He wrote the book about the last Reserve Bank governor to step so seriously into the fray: Don Brash. Way way back in 1990 the then-Labour government’s election-year Budget was utterly blunted when Brash decided to immediately hike interest rates in response. Brash was drawn into the bitter debate between David Lange and his own finance minister, and the whole thing was extremely public.

We are nowhere near that level of chaos yet. But things sure are starting to get interesting.

I guess it is what comes of middle age, but the events of 1990 still seem to me not much further back than yesterday (not “way way back”), but I suppose the typical journalist is young.  Even so, it isn’t hard to have checked that the Prime Minister in question was Geoffrey Palmer  (and, unless I’ve missed something, the Goldsmith book doesn’t seem to deal with the episode in question at all).

And there are a few things to bear in mind as institutional context to that episode:

  • the Reserve Bank had received statutory operational independence only a few months earlier, under legislation initiated by the government in question (4th Labour government,
  • under that legislation, the Bank was responsible for pursuing an inflation target, primarily set by the government but formalised in a Policy Targets Agreement between the Governor and the Minister.  That agreement had been signed as recently as March 1990 and required as to get to price stability (0 to 2 per cent annual inflation) by the end of 1992,
  • at the time, the Labour government was miles behind in the polls, in an FPP electorial system, and generally expected to be thrashed in the polls later that year (I see in my diary that in the week in question I observed that “the only question seems to be whether Labour will hold St Albans and Christchurch Central”, two of Labour’s safer seats, held by Minister and PM respectively,
  • while National had supported the Reserve Bank Act (a) it was promising to push the target date further out (to 1993) and (b) that was with the Richardson camp dominant, but there was a fear that a less “hardline” strand within the caucus might prove dominant (eg, as it was thought at the time, the popular Winston Peters and Bill Birch),
  • the reform programme had already ripped apart Labour, the economy was in the midst of a difficult adjustment, and privately even someone as mainstream as the Minister of Finance was saying privately (in a meeting with officials), “we all know that if we don’t get to 0 to 2 per cent, we’ll just change the target”.

All of which could be summed up in the idea that there was not yet a great deal of credibility attached to the notion that inflation was actually going to be securely lowered into a 0 to 2 per cent range.  People, including markets, were searching for signals and signs that might buttress or undermine confidence.  And yet it was the Bank’s job –  mandated by Parliament and the Minister – to deliver that price stability outcome, and to do so at least transitional economic cost.

So what happened?   On 24 July 1990 the government brought down a Budget that was treated by financial markets as something of an election giveaway.  Under the rules at the time, they posted a surplus, but only by including what was in effect a large expected asset sale proceeds as revenue, and significant deficits were again forecast in the out-years.  It was widely viewed as a reversal of direction after five years of sustained fiscal consolidation.  There were a number of measures in the Budget (reductions in government price/fees/excises) which would have the effect of lowering the headline inflation rate for one year, but those weren’t really the focus of either the Reserve Bank or the financial markets.

Bond yields rose in response, and as market participants reflected a bit further the exchange rate fell.    It was that move, rather than the Budget itself, that prompted a reaction from the Reserve Bank.  Until the exchange rate fell, we had planned only a mild passing comment –  about the importance of ongoing fiscal discipline –  in the next Monetary Policy Statement.

At that time, we did not set an official interest rate (the OCR wasn’t a thing until 1999).  And the conventional view, not just at the Bank, was that exchange rate changes had a big short-term effect on domestic prices (whereas these days the short-term effects are roughly a 1 per cent change in the CPI for a 10 per cent change in the exchange rate, in those days empiricial estimates suggested anything up to a 4.6 per cent change in the CPI for a 10 per cent change in the exchange rate).  And so, roughly speaking, we ran policy with (unpublished) ranges in which the TWI could fluctuate, which were reset each quarter in light of the inflation outlook and changes in economic data.  If the exchange rate looked to move through the bottom of the range, we made a statement (‘open mouth operations’) and usually the statement itself was sufficient for interest rates and the exchange rate to adjust (the latter back into the range).

On Tuesday 31 July – thus a week after the Budget –  the exchange rate had fallen throught the bottom of our indicative range, and the Governor agreed to tighten monetary policy (it was a decision made a bit more easily than usual because all three of the more dovish senior officials were all away that week, but it was entirely in line with our standard operating framework).  We knew it wasn’t going to be popular – I noted in my diary that evening the question of whether it would spark a confrontation with the government – but the point of an operationally independent central bank was to be willing to be unpopular, especially in the run-up to elections.  There was a bit of a sense that it would not look good for the case for operational autonomy if we did nothing when first market doubts arose.  (Some years later David Caygill confirmed to me that the government had not expected any adverse reaction.)

We made an initial statement the following morning, which pushed interest rates up but didn’t do much to the exchange rate.  The statement was well-received by market economists (“who seemed surprised that we had the backbone – an NBR article this morning openly suggested that we want to back away”) and the Opposition finance people “who are impressed with the explicitness and clarity of the statement” (they had been criticising us for oblique communications), and even the media coverage wasn’t bad.  The Minister of Finance was not terribly supportive, but the Prime Minister was overseas.

On the following day, we were pondering whether we needed to make another statement –  to get the exchange rate back within the range.    Those with a particularly good memory may recall that this was also the day (2 August) Iraq invaded Kuwait, which pushed oil prices sharply upwards.  At the time –  although we weren’t knee-jerk reacting to oil prices –  our stance would have been that first round oil price effects were to be looked through, but that much higher oil prices would create risks of higher inflation expectations and a spillover into holding underlying or core inflation above target.

And so we made another statement the following morning.  For a time that day we thought we’d completely botched things because there were wire service reports that Iraq had gone on to invade Saudi Arabia too, but of course that was soon proved false.  Interest rates rose quite a bit, and the exchange rate also edged higher.  Banks began raising mortgage rates prompting the Minister of Finance to come out with rather silly comments (“presumably under Palmer’s orders”) about the banks being mean and out to get the government.  With the Prime Minister’s return both he and the Minister were out with further critical comments –  recall that they were less than three months out from an election thrashing .  The comments were aimed especially at the banks, while noting that there was nothing the government could do (monetary policy operational decisions having been handed to the Bank).

It wasn’t as if the Bank itself was totally blinkered and doctrinaire during this period.  In the days following this episode we discussed ourselves at senior levels whether we should consider recommending pushing back the target date (to, say, 1993) but on balance decided not to do so just yet.

That specific controversy died down pretty quickly, and to my mind remains an example of the system working as it was supposed to.  We were doing our job, and the government was doing its (setting fiscal policy, having initially set the inflation target itself).   I haven’t checked with Don Brash but I’ve never heard a suggestion that the framework, the target, or Don’s position was then in jeopardy.  In fact, a month or so later, Don was upsetting the Opposition by making himself somewhat party to the “Growth Agreement” the government and the unions reached –  in our terms, what that amount to was simply restating that if inflation pressures (this time wages) were lower then all else equal monetary policy would be able to be easier and interest rates (and the exchange rate) lower.

With the benefit of hindsight one can argue about whether the Bank’s monetary policy tightening was really necessary. In some respects, the market reaction post-Budget was a confidence shock and demand might have been expected to weaken anyway.  Moreover, actual exchange rate passthroughs were to prove weaker in future than had been the case in the past.   With better analysis might we have realised that sooner? Perhaps.  But as I noted, the Bank’s reaction was wholly consistent with the Policy Targets Agreement, signed only a few months earlier, and with our best understanding then of how the economy worked, in the midst of a highly contentious and uncertain disinflation, and was supported by the bulk of private market economists.

I’m not sure where Henry Cooke got his story, but it just wasn’t “chaos” then, and to the extent there was any, it wasn’t Bank-initiated.

In fact, that episode wasn’t even close to the toughest political challenges for the Bank.   Only a few months later, National was in power and Jim Bolger in particular was very unhappy with some of the choices the Bank was making.  Goldsmith records Ruth Richardson warning Brash, as she was about to leave for an overseas trip, not to “make waves” as his “best friend at court” wouldn’t be around to provide cover.  That angst went on for months, and even culminated in pressure on the Bank from senior Treasury officials to ease monetary policy specifically to assist Richardson’s own political position.  (I am less confident that we handled 1991 that well, even on the sort of information we should have used at the time).

And then, of course, a decade later there was Don Brash’s infamous Knowledge Wave conference speech –  given rather against the advice of various of his closer advisers – which, whatever its substantive merits, did involve stepping well outside his statutory role, and greatly irritated the then Prime Minister, in turn poisoning the prospects for any internal candidate succeeding Brash when he left for politics in 2002.

The point of this post is really twofold.  I quite like delving into the monetary policy history, much of which isn’t that well or readily accessibly documented.  But I was also keen to differentiate that episode from the current controversy around Orr.  In 1990 the government set the mandate –  and was free to change it at any time –  and we were simply doing our best to implement that mandate, in a climate of huge political and economic uncertainty.

By contrast, when Adrian Orr is proposing banning people from serving on the boards of bank parents and subs or –  much more radically –  proposes that he should more or less double how much capital locally-incorporated banks would need, he isn’t following some clear and specific mandate set by Parliament or the Minister, against which he can readily be held to account.  He is pursuing a personal whim.  His stated goal –  reducing the risks to the soundness of the financial system –  is certainly an authorised statutory goal, but there is no professional consensus on what level of risk is appropriate, or what policy steps might deliver that level of risks, or what costs might be imposed in the transition or the steady-state.  And there are no effective rights of appeal, no override powers, to his one-man exercise of his personal preferences.     That simply isn’t appropriate.  With superlative supporting analysis, and a long and open period of real consultation –  before the Governor nailed his colours to the mast, as prosecutor in the case he himself will judge –  it might be one thing (still not ideal).  What we’ve actually had in the past year falls far short of that sort of standard.  It is a much more serious situation –  including because there are no self-correcting mechanisms (eg inflation falling below target, telling the Bank it has things a bit tight –  than a one-week flurry around a modest monetary policy adjustment implemented in pursuit of a goal the government itself had explicitly set.

The Minister of Finance and the Board do not have formal override powers.  But they could, and should, be using the leverage they have to insist on a much more compelling case being made for any actual policy adjustment (and not for that case to be published only after the decision itself has been made).  Cooke’s article quoted a submission suggesting annual GDP costs of up to $1.8 billion a year, but the Governor’s own deputy has quite openly suggested that the policy will cost the economy $750 million a year.  For gains –  in a sound and well-managed banking system – that are far from evident, in an economy where tightening credit conditions, even just in a transition, are about the last thing that is needed.


Orr on bank capital

I’ll no doubt have more to say about Radio New Zealand’s Insight documentary on the Reserve Bank Governor’s proposed bank capital reforms after the full programme has run, but Morning Report this morning ran a fairly lengthy piece on the issue, including meaty quotes from the Governor (and some from me and from the former Secretary to the Treasury, Graham Scott, who was involved in the Bankers’ Association submissions on the Governor’s “proposal”).  Even what I heard of that RNZ story was pretty extraordinary in several areas.

First, as if to confirm that the “proposal” wasn’t a serious consultation, the Governor confirmed that capital requirements will be rising, no question about that.  Perhaps he is genuine that he hasn’t quite decided whether he thinks his own proposal is perfect in all its details –  I was pleased RNZ got in my line that he is prosecutor, judge and jury in his own case, with no effective right of appeal – but there was little sign he is interested in alternative perspectives, arguments, or evidence.  And thus remains true to form.

Perhaps more extraordinary –  given his specific statutory role, not a constraint that ever seems to bother him –  was the assertion that Australian banks make “too much money” in New Zealand.  I suppose as a citizen he is entitled to his prejudice, but as Governor of the Reserve Bank how much private businesses make is really none of his business. His job is prudential regulator –  ie safety and soundness of the system –  not about competition, rates of return or the like.  We have, or could have, competition law and associated institutions to deal with those issues.  For all the Governor’s talk about super-profits, if it were really true you’d have to wonder why bank assets in New Zealand weren’t growing very rapidly, and new entrants flocking in, credit abundant to anyone who asks, to take advantage of this extraordinarily profitable corner of the world.  And in feeding the angst in some circles about Australian bank profits, perhaps he might point out that if his proposals are adopted it is likely that total profits earned by Australian banks in New Zealand will rise, not fall (rates of return are likely to fall a bit, but there will be a lot more capital in the banks –  unless the Governor’s proposal really backfires).

On which note, it was extraordinary to hear the Governor suggest that if the Australian banks didn’t like his new regime, well they could just take their money and go elsewhere.  He wasn’t going to be bothered.   This about banks that in some cases have been here, steadily, almost as long as modern New Zealand has.   This from as Governor whose own consultation document never seriously discussed transitions or adjustment paths (in aggregate or specific sectors) to his proposed much higher capital ratios.  The Bank has all year tended to be pretty dismissive of any suggestions that the availability of credit might be adversely affected, and they’ve still provided no supporting analysis.  Nine months ago when they launched the Governor’s radical scheme, they thought the economy didn’t look too bad.  Since then they’ve had to cut the OCR by 75 points, with more cuts to come (on almost everyone’s reckoning) even before allowing for any effects of these capital proposals.  Perhaps then a rash Governor could afford to be cavalier about bank capital, but it borders on the outright irresponsible for him to take that stance now –  with so little conventional monetary policy leeway left, in a world looking more difficult almost by the day.   Reduced credit availability, to the extent it happens, will only exacerbate any downturn, and the effects are likely to be concentrated in those sectors least readily able to tap alternative credit (hint: not big corporates, not household mortgages, but eg farms and small businesses). But, of course, thanks to the government’s indifference there are no effective checks and balances on the Governor following his whim, in some sort of Orr-tarchy.

And finally on this topic for today, there was the line the Governor ran about how he had to do this to end the practice of the public subsidising banks.  He went on to suggest that we forget too easily all the banking failures and near-misses.  But with no a shred of evidence –  in any of his documents –  to support any of this.  The New Zealand banking system has gone for 125 years without any serious crisis, except for the one 30 years when the ensnaring complex of extensive regulation was pulled away quickly and neither banks, borrowers, nor central bankers really knew what they were doing. The Australian banking system is the same.  The Canadian banking system even more so.   The Governor’s own stress tests have repeatedly supported the view – taken by the Bank over many years, supported by the IMF –  that the New Zealand banking system is strong and well-capitalised.  The Governor likes to play on 2008, muddying the water with talk of near-crises here: he should know very well that there were no major credit losses here, and the (real) liquidity issues were global in nature, and would not have been one jot different if banks had had twice the (then untroubling) level of capital they had.

It is a worry that so much power is held by one individual.   It should be concerning even if we had the most thoughtful, considered, consultative, and judicious person in the role.  In fact, we have Adrian Orr, to whom none of those descriptions can reasonably be applied.   And there seems to be a vacuum where there should be a government taking leadership responsibility (in fact, one can imagine Shane Jones –  “consulting the Cabinet Manual” on his holiday –  cheering Orr on).


Big policy choices should be for politicians: that is their job

A post this morning doing something rare: praising National, or more particularly their finance spokesman Paul Goldsmith.

There was an article on Stuff yesterday, and in the Dominion-Post this morning, in which Goldsmith is quoted as suggesting that politicians should set policy.    In this particular case, National is proposing that the Governor of the Reserve Bank – unelected, and in effect appointed by other unelected people –  should not get to set regulatory policy around banks all by himself, but that politicians –  in this case the Minister of Finance –  should do so.

The article begins in a rather overwrought style

National Party Finance Spokesperson Paul Goldsmith wants to  shake-up banking, by ripping a scab that hasn’t been touched for 30 years.

Goldsmith has called into question the independence of the Reserve Bank, responsible for setting interest rates and regulating banking.

But read on a bit and, of course, you find that National isn’t proposing any changes to the operational autonomy the Bank’s Monetary Policy Committee enjoys in adjusting the OCR to meet the target set for them by the Minister of Finance.

What they are talking about is regulatory policy around banks, where –  for the time being –  the Governor enjoys a huge degree of freedom of action, with hardly any checks and balances, to set policy as he personally chooses.   Yes, the legislative foundations for that model are 30 years old but (a) when the legislation was passed, no one really envisaged much active banking regulatory policy at all (the Bank was a reluctant player and governments weren’t keen) and (b) the legislation has seen grown like topsy, with little real scrutiny, in effect allowing one bureaucrat – almost totally unaccountable –  to undertake huge regulatory interventions on little more than his/her own whim. Successive waves of LVR restrictions were done like that, and now the Governor’s proposals to hugely increase capital requirements for locally-incorporated banks are just done on the same whim.

Who elected him? one might reasonably ask.  The answer, of course, is no one.

And thus Goldsmith

Goldsmith thinks the Government should have a say as well.

“It defies belief that the Crown, represented by the Government of the day, shouldn’t have a significant say in determining that risk tolerance,” said.

This is because ultimately, the Government is going to be on the hook if there’s a banking crisis that leads to a bail out.

Which is right, but doesn’t really go far enough.  Even if there were no risk of bank bailouts –  say we could count on the Bank’s OBR model being used by governments in a crisis – these still aren’t choices that should be left to unelected officials.  Very few areas of policy are, and rightly so.   We live in a democracy, and one of the key features of a democratic system is, or should be, that big and controversial choices should be made by people whom we’ve elected and can hold to account, can eject if necessary.

We might want independent people to apply the law –  whether as judges ruling on disputes, or officials applying laws impartially as between people (or firms) –  but people we’ve elected should make the rules, in Parliament itself as far as possible.

We also want capable, judicious, and (one hopes) expert advisers to ministers.  We don’t expect our ministers or MPs to be technical subject experts –  sometimes it can help if they are, but generally temperament and the willingness to ask awkward, even seemingly silly, questions is rather more important.  That and a set of values and predispositions that have been subjected to an electoral test.

Our tax system is an excellent example of the paradigm.  Taxes are, almost with exception, set by Parliament, and Ministers introduce legislation to establish or vary provisions of the tax system.  There are all manner of expert advisers – not just in Treasury and the IRD but also working groups, professional firms, and independent academics and commentators –  who may have influence, but do not set policy.  And then IRD administers the system, without fear or favour, without political involvement or interference.    It isn’t that different in a host of other policy areas:  welfare policy is set by ministers and Parliament, advised and lobbied by experts and others, and applied without fear or favour (Minister’s relatives aren’t supposed to be treated more favourably) by MSD.    It is a pretty standard operating model.

But not when it comes to some key areas of the Reserve Bank’s powers.  That really should be changed, and if Paul Goldsmith’s comments are a indication the National Party to do so when next they are in office, I can only commend them.  We want banking regulatory rules applied to individual banks without fear, favour or political interference (no favours for a minister’s pet bank, or one owned by his/her cronies) but the high level rules should be set by those we elect/eject.    It is already the way things are for non-bank deposit takers, where –  in newer legislation – most of the policy-setting powers are reserved to ministers, just not for the institutions that really matter –  banks.  Thus, LVR restrictions were applied to banks, on the then-Governor’s whim (no serious supporting analysis) but not to other deposit-taking institutions because the Governor did not have to power to impose such controls himself.

No doubt the Governor would hate the idea of taking away some of his power. International agencies like the IMF probably wouldn’t be too keen either, but the IMF has little interest in democracy, accountability, or good government (only narrow specialised interests in, eg, banks) whereas New Zealand citizens and political parties do, or should.

And none of what I’m saying here is really radical. I’ve written previously about Unelected Power, the excellent book published last year by former Bank of England Deputy Governor, Paul Tucker, which deals with many of these questions –  what powers should be delegated, on what conditions, in what circumstances, to unelected decisionmakers.  He reaches wider than just central banks and financial regulatory agencies, but what he has to say is of great relevance there.

There may, for example, still be a good case for delegating operational decisions around monetary policy to an independent committee –  it is, for example, relatively easier than in many areas to pre-specify a goal and later to hold the decisionmakers to account.   But neither of those criteria apply when thinking about big financial regulatory policy choices, including those New Zealand is facing at present around the orders of magnitude for bank capital.

We cannot meaningfully articulate an objective for independent policymakers to work to, in a way that is usefully constraining, and we cannot tell afterwards whether they have done a decent job (the Bank claims to be limited crises to no more than 1 in 200 years –  in other words, no meaningful policy evaluation, even if our political system –  eg parliamentary committees –  had the resources to do serious evaluation).  There is no professional consensus on the best approach to tackling, or even thinking about, the issues. And there is also no very obvious problem with the Minister of Finance setting policy in this area –  you’ll hear all manner of lines about time-inconsistency etc, but any such concerns are really no different than those in huge numbers of other policy areas where we rightly reserve major policy powers to those we elect.    And it isn’t as if these are just minor details at the far periphery of policy, impinging on almost no one.    They are naturally the stuff of politics.

On the specifics of the bank capital issue, from the article again

He [Goldsmith] said the Government should “have a view on the proposals” and Finance Minister Grant Robertson “should be assuring himself that they stack up”.

The Government has remained fiercely neutral throughout the saga

The utter silence from the Minister of Finance looks a lot like a simple abdication of any responsibility.  Sure, under current law, the final decision is solely a matter for the Governor.  That could have been changed, relatively simply  (the government was amending the Reserve Bank Act only last year).  But even within the current law, the Minister has leverage if he wants to use it.  He appoints the Bank’s Board –  and specifically the Board chair. He writes letters of expectation to the Govenor and the Board.  He has the opportunity to commment on the Bank’s draft Statement of Intent and the Bank must have regard to his input.  There are lots of outcomes the Governor might prefer in the current RB Act review that the Minister could agree to, or not.   And, in a legislative provision that has never really been tested, the Minister may direct the Bank to have regard (a phrase which has legal meaning) to a government policy relating to one of the Bank’s functions.  The Minister can’t issue a directive to prevent the Bank setting capital ratios at a specific number it doesn’t like, but it could (for example) make clear its view that the banking system is sound and stable, that additional barriers to access to credit would be unwelcome, with plenty of contextual material around that.   And the Minister has the power of legitimacy –  he is elected, he has a political mandate, he has accountability, none of which the Governor has.  Oh, and he has his own expert advisers in The Treasury.

“Fiercely neutral” looks a lot like copping out, hiding behind the parapets rather than taking any leadership, any responsibility.

I don’t know what specifics National has in mind for the legislation (and perhaps they don’t yet either).  There are some difficult boundary issues, as to what matters count as big policy questions, or irreversible interventions (like a decision to put a bank in statutory management) that should be reserved to ministers, and which powers should be assigned to independent officials.  Those boundaries can and should be contested. But a call as big as the one the Governor proposes to make, deciding on his own prosecution case, is one that simply shouldn’t be his to make.

(None of this, of course, should be read as suggesting that we do not need expert advisers in many policy areas.  It might indeed be normal and appropriate for an expert Reserve Bank  –  or an expert Treasury – to take the lead in advising on the key technical dimensions of big picture banking regulatory policy. But policymaking –  here as elsewhere – will be better, and more legitimate, when the expert advisers, champions of change (or even opponents of it), aren’t the same people making the final decision.  In our system of government, prosecutors don’t make the determinative judgements.  That’s more in the PRC style.)

On which note, my regard for Paul Goldsmith would be a little less tinged with ambivalence if he were to show some moral leadership and stop sharing an Auckland office with Jian Yang, the former PLA intelligence official, former CCP member, active cheerleader (just this week) for all the evil of the PRC, a country abused under the thumb of his former party.  Unless, of course, Goldsmith too wants to champions tens of millions dead, relative economic failure, and a pretty all-pervasive theft of freedom.  He seems a decent bloke and it is hard to believe he would really champion such evil.   But he does by the people/person he chooses to stand, and sit, with,

Reserve Bank annual reports

A post on the Annual Report of the Reserve Bank’s Board has become something of an annual event here (here was last year’s). The Bank’s Board is charged by statute with holding to account the Governor (and now the MPC) on behalf of the public and the Minister of Finance.  Almost throughout their history, they’ve almost entirely abdicated that responsibility, acting as if their prime responsibility is to support and provide cover for the Governor.  Of course, they are compromised because they play a key role (unelected and unaccountable as they themselves are) in appointing this key policymaker, and so –  with no other real role – it is perhaps little wonder that they been duchessed.  It doesn’t help that the Governor himself sits on the Board, a Bank staffer acts as secretary, and the Board has no independent resources or (for example) analytical support.   They aren’t paid very much and all seem to have pretty much settled for the easy life and whatever mild prestige seems to attach to the Reserve Bank Board.  It wasn’t always the approach of the current chair –  when he wasn’t chair –  but since getting to the top of the greasy pole a few years ago, he is now much the same as his predecessors.

It is a deeply flawed model, and by now pretty much everyone seems to recognise it.  The Minister of Finance has made an “in-principle” decision, as part of the Reserve Bank Act review, to turn the Board into a conventional decisionmaking body, but there is quite a way to run until any such decision becomes law, and in the meantime in this year’s Annual Report the Board has chosen to do us a public service by reminding us just how willingly useless they are in the monitoring and accountability role.

But before getting into the substance of the Board’s report, there are a couple of snippets worth noting from Bank management (ie the Governor’s) own report and supporting press release.

I’ve already drawn attention on Twitter to this startling claim from Monday’s press release (so he can’t even blame publication lags).

The New Zealand economy has proved resilient through a period of weakening global growth and heightened global uncertainty according to the Reserve Bank’s Annual Report 2018-19 released today.

Not much better than pure spin, but no doubt welcome in the Beehive.

Then there was this table

turnover RB

Another year of really high staff turnover, if a little lower than the previous year.   Rarely a particular positive commentary on the way an organisation of this sort is being run, and all of the 2019 year was on Adrian Orr’s watch (and the people I happen to know who’ve left over the past year were typically very able).

And this quote

We’re committed to promoting a diverse, inclusive and forward-thinking economic and financial system for all New Zealand.

As one reader notes, a backward-thinking economic and financial system might be one that learns from history and experience, rather than pursuing ideological agendas.  Most financial institutions that have failed badly thought they were being innovative, forward-thinking etc.

But my real objection here is that it simply not the role of the Reserve Bank  to promote, shape, champion, any particular type of economy or financial system, whether for “all New Zealand” or otherwise.  The Reserve Bank is a statutory body, given access to scarce taxpayer resources to pursue specific statutory responsibilities.  Those are largely about monetary policy and financial system soundness. The trendy mantra of the left (“diversity and inclusion”) is simply none of the Reserve Bank’s business when it comes to any organisation than its own.  Nor is the shape of the “ecnomic and financial system”. No doubt the Governor has personal ideological and political agendas,  perhaps suppported by many of his political and big business mates. But it is not his job.  He has no authority to spend our money to promote his agendas.  It really should be Public Management 101.  But no doubt it suits the Minister of Finance to have an ideological ally championing Labour/Greens type causes at public expense.

What of the Board’s Annual Report?  The usual process criticisms can be logged.  The report is buried in the middle of Bank management’s report, and there is no press release from the Board chair, or even mention of the independent Board Annual Report in the Governor’s press release.  Which really rather gives the game away.

When I first started writing these posts, the Board’s report was very short.  It has grown again this year, and is now eight pages of text (pages 6-13 here).  Last year I gave the Board’s report a moderately favourable rating (“bare pass”) but no matter how many more words they churn out, this year in substance they seem to have reverted to form.  I guess last year it was easy: the old Governor (and the unlawful acting Governor) had just gone, and the new man had been in office for only three months.  The mildly useful comments related to what had gone before Orr, and those responsible had already left.

Just a few specific points that caught my eye in this year’s report.

As I noted, the Minister of Finance has made an in-principle decision to change the role of the Board

Together with the Governors, we supported the proposal to adopt a governance model for the Bank that will provide more standard powers and clearer responsibilities for the Board. Directors have begun to consider the corporate governance processes, including Board meeting agendas, risk appetite statements, agreed cycles for strategic planning and formal management delegations that will be required as these in-principle decisions are implemented.

That seems a little surprising given that (a) it is only an in-principle decision, (b) an election is only a year away and it would be surprising if any serious changes were legislated in this government’s term (given the various consultation documents still to come) and (c) the second terms of both the chair and deputy chair expire  in four months from now, and (d) one might reasonably imagine a government might want different types of people on a decision-making Board than on the sort of Board we notionally have at present.  Surely there would be plenty of time to do all this process stuff when, say, a bill is before Parliament?  Most probably though, this is the sort of stuff the Board members might be good at (corporate board processes), unlike the role they are actually currently charged with.

Then there was monetary policy, until March the primary statutory function of the Bank.  You’d get no idea from the Board’s report that core inflation has been running below the target midpoint (focal point in successive agreements) for eight years, or that the Bank had again been misjudging policy and inflation pressures.  The other worrying note about monetary policy was this

With the external members of the MPC now having the primary responsibility to undertake external scrutiny of the research and formulation of monetary policy,

But they simply don’t have that role.  The external members of the MPC aren’t supposed to be external reviewers, but full participants in the process of formulating and communicating monetary policy.  And isn’t it extraordinary that the Board would claim to look to external MPC members when the Board itself, in agreement with the Minister, disqualified for consideration of membership of the MPC anyone who actually had any research interests –  past, present, or future – in monetary policy or macroeconomics.

That was a truly weird decision in the first place, for which they and Grant Robertson should be held accountable, but then to try to suggest that having excluded research-qualifed people from the MPC, the actual appointees were responsible for providing external scrutiny of research……well, it is like some topsy-turvy Alice-in-Wonderland world.

What of some of the other things they write about?

Last year, the Board was so bold as to note that bank conduct issues were really more a matter for the FMA. But the Governor has them properly corralled again this year

We believe it is appropriate for the Bank to be concerned about inappropriate cultures and behaviours in regulated institutions. Poor conduct affecting customers can be symptomatic of governance problems and can adversely affect confidence in the New Zealand financial system.

Do note those “can”s:  the way is opened to a great deal of regulatory over-reach there. If the chief executive is having marital problems it probably won’t be great for the bank either, but we don’t want the Reserve Bank undertaking fishing expeditions in those areas either.

Of CBL, last year they defended the Bank’s handling of the affair. This year they were back, still only slightly abashed, and still claiming it was nothing to do with the Bank that shareholders weren’t informed (in fact, the Bank barred directors from telling shareholders).  They are there with management all the way –  which might even be appropriate in a decisionmaking Board, but this Board is supposed to stand at arms-length.

There were the almost comical bits

We have supported the development of the Bank’s Te Ao Mäori strategy, including through the integration of tikanga Mäori into our own meetings.

Never mind any serious scrutiny –  including of the questionable and expensive Maori strategy (tree gods anyone?) itself –  but we’ll do something Maori in our meetings.

And the one area they could be seen as somewhat critical relates to a IT project that appears to have gone wrong, but which had already been scrapped by management

The trade valuation system has been unsuccessful and has been terminated. We were kept fully informed about the problems with the development of this system and supported the move to avoid compounding the problems by further investment. The lessons learned from the ex post project review, including the need for deeper due diligence at the outset, stronger stage-gating of the project, and appropriate resourcing of the procurement and contract management function, have already been reflected in Bank procurement and project management processes.

Which is fine, no doubt, but there is no sign of the Board having added any value.

What of the highly-controversial bank capital proposals that the Governor rushed out late last year, and then spent months having to backfill material in support, still not having provided any sort of serious cost-benefit assessment for what he is proposing?  Here is what the Board had to say.

The Bank’s proposal to increase capital requirements for registered banks has attracted considerable public comment and created greater awareness of the importance of the quality of capital and capital ratios for financial stability. We have closely followed public commentary on the proposals and directors have been open to hearing the views of senior executives, chairs and board members of the banks operating in New Zealand.

Seems quite telling that to the extent the Board is interested in any other perspectives than the Governor’s it is only that of banks.  Public interest anyone?

They go on

 In our oversight of the transition from consultative process to final decisions and the completion of the Bank’s cost/benefit evaluation, we are mindful of the Minister’s expectation that we test the Bank’s thinking on regulatory proposals and be satisfied that the Bank has reasonably considered and addressed alternative perspectives.

Isn’t that nice.  No sense that they might themselves have a statutory obligation to hold the Governor to account, no sense that a cost-benefit analysis is useful at the start of consultation, not after the single prosecutor-judge-jury has already made his final decision.

If you were being charitable one might read a subtext of some unease, but it is as if they are embarrassed to be uneasy, when in fact it is supposed to be their job.

What of the Governor’s great enthusiam for all things green and climate changey?

The Bank’s work programme on climate change is also of national importance. The programme follows increasing global interest in the implications of climate change for financial stability and the risks associated with asset stranding, uninsurable assets and economic shocks resulting from catastrophic loss from climate events and the sectoral impacts of emission-reduction strategies. It is important that the Bank provides leadership in understanding the implications of climate change for different sectors of the economy as well as the financial system.

Give me strength.   Not once do they attempt to ground of this in the statutes the Bank operates under.  They don’t even try to pretend that it is related to the specific statutory responsibilities the Bank has. No, they declaim that this “work programme” –  of which we’ve seen very little –  is somehow (but how?) of “national importance”.   Not just that, it is –  they tell us – “important for the Bank to provide leadership in understanding the implications of climate change for different sectors of the economy”.   You’d think we didn’t have a Treasury or a Ministry for the Environment, and that heroically the Governor was swooping in to save the day. Instead, he is again using public resources for personal ideological/political agendas –  they might even be popular, at least in his left-wing circles, but they simply aren’t his job.  The Act(s) tell him what is.  The Board clearly doesn’t care, either in his thrall or intimidated by the Governor.

The Board – no doubt guided by management –  make much about external communications but don’t even pause to note that now, 18 months in to the Governor’s term we’ve not had a single speech from the Governor on financial stability issues (where he remains sole legal decisionmaker) and  –  finally last week –  a single short, really rather bad and lightweight, speech on monetary policy.   In his own statement, the Governor talks of how

 all initiatives this year have been propelling us forward to be a Great Team, Best Central Bank.

And yet strangely, this goal isn’t even mentioned by the Board –  supposedly holding him to account –  let alone how such a dreadful track record of speeches (where the Governor could readily be benchmarked against overseas peers) measures up to it.

One of the themes of the Annual Report – Bank and Board –  is that the Bank just doesn’t have enough money.  I used to, perhaps still am, mildly sympathetic to that view but they really don’t make the case when

  • so much of what they do isn’t done well (see bank capital as just one example, or CBL, or that recent speech, or….),
  • and when there is no sign that new and costly whims are rigorously  evaluated, no sign that whims and interests are sacrificed in favour of doing core business better.

If you think the word “interests” is some jaundiced invention of mine, you’d be wrong. Here is the Board (emphasis added)

The interests of the Bank, and its public engagement, have broadened in appropriate ways. But it is clear that in order for the Bank to meet public expectations, to continue to meet the highest standards of monetary policy formulation, to increase its regulatory/supervisory capability and to be more externally engaged in both traditional and new policy interests, additional resources will be required in the future.

Government agencies aren’t supposed to be funded for the whims of senior managers, the “new policy interests” of Governors, but for the statutory duties Parliament has set ouf for the institution.  As regards the Reserve Bank, those are really pretty clear.   They don’t include playing the tree god (from memory that Maori strategy was costing about $1m), let alone some self-interested role of national importance as champion of centre-left climate change rhetoric.

The Governor ended his own statement in the Annual Report this way

I would like to thank our Minister, Hon Grant Robertson, and our Board for their unwavering support during the year.

And there, in a sentence, is surely the problem.  The Governor works for, and is accountable to, the Minister and the Board (and the public).  Their job is to pose hard questions, demand excellent performance, and generally be just a little annoying –  that is what serious scrutiny feels like.  Both seem to have been AWOL on the Governor’s biggest rash initiative of the year –  the bank capital proposals.  Both seem to see deference to the Bank, rather than accountability from it, as their role.  In that sense, neither adds any value.



On the anniversary of the CCP seizing power

It is 70 years today since one of the dark days of the 20th century, when the Communist Party seized power in China, and renamed the country the People’s Republic of China –  rather better surely would have been Party’s Republic of China?

Of course, there were a fair number of dark 20th century days, mostly associated with one or another of the totalitarian regimes.  But when thinks of the CCP one can combine (a) the number of people in China, (b) the length of time the regime has persisted, and (c) the very great evils the regime has visited on its own people (and others).  I’m not going to argue it was necessarily worse than when the Nazis came to power in Germany: tens of millions then lost their lives, but the regime was gone again in little more than 12 years.  Or than the Communist Party coming to power in Russia, which opened the way to all manner of Communist regimes, including in China, as well as the brutality and depraved indifference (mass starvation) and loss of freedom visited on its own people and others.   On a smaller (but still large) scale the Rape of Nanking and the Japanese invasion of China would be up there.  But as a marker of evil in our world, 20th century (and now 21st) style it is a low that is hard to beat.    Absolutely dreadful as Rwanda in the 90s, Cambodia in the 70s, various other ethnic cleansings, and even the dropping of the atomic bomb. were, those were all shortlived (mercifully) and affected a handful of people by comparison with the PRC and the Party that controls it.  After all, almost 20 per cent of the world’s population lives under this particular longrunning tyranny.

And yet among too many of the “elites” in our society – whether elected or not –  that doesn’t seem to be the take on the PRC at all.     The PRC model might not be the one they’d want for their own children, but the fact that hundreds of millions of others live under such a regime (tens of millions more either starved by the depraved indifference of the regime, or murdered by the forced abortion policies of the regime) bothers them not in the least.    It isn’t just New Zealand, of course, although all indications are that our “elites” have lost of any sort of moral or values-based perspective on the PRC regime to at least as great an extent, probably more so, than so-called leaders in many other Western countries.  After all –  and not the worst of it – they tolerate a Communist Party member and (former?) member of the PRC military intelligence system in our Parliament, not as some rogue independent, but as a (recently-promoted) member of our largest political party.  And worse, so we are told by a well-connected person, they are so lacking in any decency or moral seriousness, they make light of the fact.


Meanwhile, other parties in Parliament make nothing of this, and so become complicit.

Around the world, all manner of well-known, powerful or influential people in recent weeks will have been invited to functions, hosted by PRC embassies, to mark the beginning of the CCP tyranny.  Others –  people in embassies in Beijing –  will no doubt have been invited to this afternoon’s lavish military parade.   You’d suppose that decent, honourable, people would simply say no.  I’m not suggesting our authorities should have no relations with the PRC but an invitation to such an event in New Zealand might have been met by sending along, for as short a period as decently possible, a mid-ranked MFAT official.

Somewhat to their credit, the PRC Embassy in New Zealand maintains quite a useful website, with speeches and articles that typically tell one more than would ever be secured from the New Zealand side of such exchanges.    Last week there was a big reception, hosted by the Ambassador, at Te Papa to mark the Communist takeover.   The “great and the good” (well, I’ll use the label, even if there is no substance to it) seem to have flocked to it.

On September 24th, the Chinese Embassy in New Zealand held a reception to celebrate the 70th anniversary of the founding of the People’s Republic of China at the Museum of New Zealand Te Papa Tongarewa. Over 500 people attended the reception, including the Acting Prime Minister and Foreign Minister Rt. Hon Winston Peters, the Minister for Ethnic Communities Hon Jenny Salesa, the Acting Secretary and Deputy Chief Executive of MFAT Bede Corry, the Deputy Secretary of the Americas and Asia Group of MFAT Ben King, heads of major government departments and members of parliament, well-known members of the wider community in New Zealand, members of Diplomatic Corps, overseas Chinese, representatives from Chinese institutions and international students.

I’m not holding it against resident PRC citizens that they would attend such an event –  it might not have gone well for them or their families had they declined.  But what of all those prominent New Zealanders, from the acting Prime Minister on down?  Not one of them had to attend.  Every one of them made a choice to do so, a choice that said that what the regime stands for – and has stood for over the decades – didn’t matter to them one bit.    Perhaps the PM herself would have gone if she hadn’t been extolling –  emptily, as this occasion demonstrates –  the idea of a values-driven approach to policy and international affairs?  The acting Prime Minister is photographed standing with the Ambassador, unbothered (apparently) that she represents the latter day manifestation of something like the Nazi Party ca 1938.

(There was another such function in Auckland, with only a slightly less ‘distinguished’ attendance list, including such people as the National Party president, the Mayor of Auckland, and Don McKinnon, all known for their deference to the regime in Beijing.)

We are told that a Deputy Secretary of MFAT gave a speech on behalf of the New Zealand government (less bad than the Minister I suppose).    According to the embassy

MFAT’s Deputy Secretary of the Americas and Asia Group Ben King delivered a speech on behalf of the New Zealand Government, extending warm congratulations on the 70th anniversary of the founding of the People’s Republic of China.

How many tens of millions of dead would it have taken for Mr King to have found a conscience and either refused to speak or spoken out (career-limiting of course) to regret the founding of any tyrannical regime and this one in particular?  King’s speech doesn’t appear on the MFAT website, but I have requested a copy. I’m sure it will have been cleverly drafted, but not in the way that will avoid the clear immoral choice successive New Zealand governments have made around the PRC in recent times.  Values are things that have a cost, and when it comes to the PRC it isn’t clear that our politicians or officials have any values at all.  There is no sign any price is worth paying ever.  Some, of course, are particular craven in their pandering, their praise, and their lack of interest in the character of the regime (Simon Bridges as just the most recent egregious example).

Communist Party regimes around the world have proved fairly economically disappointing.   In whatever precise form the regime takes, Communism hasn’t proved incompatible with improving material living standards.   The USSR in 1991 had substantially higher material living standards than Russia had had in 1917.   The same goes for the eastern-bloc countries the Soviet Union controlled for several decades –  wealthier at the end than at the start.   Data on Laos is scarce, but no doubt material living standards are higher than they were several decades ago.  Even Cuba, for all it failures, has GDP per capita higher than when Castro took power.      Quite possible, material living standards even in North Korea (which now eschews the Communist label) are better than in 1950.  But what of it?  Almost every country in the world is richer than it was, and yet useful idiots all round the West rush to use the CCP line about how somehow the regime has “lifted out of poverty” many hundreds of millions.

The best simple test of the economic value-add of Communist regime might be to compare the economic performance of Communist countries with non-Communist one with similar cultural backgrounds, similar geographies etc.   The simplest examples, of course, being East and West Germany, and North and South Korea (the north have once been the more advanced part of the peninsula).    But we could, say, compare Austria with Czechoslovakia (until 1918 they were all part of one polity): in 1937 GDP per capita in two countries was roughly similar  but after 40 years of Communism Czechoslovakia (richer than it was 1937) had about half the per capita GDP of Austria.   Or Cuba and Costa Rica –  with pretty similar levels of GDP per capita in the 1950s, Cuba at about 75 per cent of Spain’s GDP per capita, Cuba now lags badly behind.  Or contrast Laos with neighbouring Thailand.  Vietnam with Malaysia.

And, of course, the PRC with Taiwan, Japan, Singapore, South Korea…..well, even with today’s Russia.    Sure over 70 years the material lot of PRC citizens is generally better than it was, but the level of income now lags far behind those other countries.    China once led the world economically, but now –  even after decades of catch-up growth (and some doubts about their data), their average GDP per capita (in PPP terms) is still only just reaching the world average.  Almost certainly, the Communist Party has materially held back the economic development of China and thus the income prospects of the the citizens of the PRC.

Perhaps it would be a little different if Communist rule –  anywhere, let alone China –  had been some staggering economic success.  Then an honest representative of the CCP (is there such a thing?) might reasonably ask whether materially higher living standards than were on offer in comparable, but freer, societies was not a trade-off worth making.  That is, implicitly at least, the situation in Singapore –  not free (although not PRC unfree either) but really rather prosperous, almost up at the global productivity frontiers.  But this is the PRC we are talking about.  It might buy a lot of stuff, including from New Zealand, but it has crippled the economic prospects of its own people, and taken their freedoms in the process.

Yet this is the actual regime ministers, head of departments, and other “leading” citizens have been celebrating:

  •  one where citizens don’t have the vote,
  •  one where citizens have little or no effective freedom of expression,
  •  one where the surveillance state becomes more intrusive by the year,
  •  one that holds Canadian citizens hostage, not for any real crimes, but as leverage against the Canadian government,
  •  one that engages in forced organ transplants,
  •  one that has unilaterally seized and militarised much of the South China Sea, in defiance of international agreements to which the PRC was a party,
  •  one that holds a million or more Uighur people in concentration camps,
  •  one that remains openly determined to absorb free and democratic Taiwan into the PRC, if necessary by invading it,
  •  one that increasingly deprives citizens of any freedom of religion, which might be seen as a threat to the pre-eminence of the Party

and so we would go on, barely mentioning Tibet, state-sponsored intellectual property theft, the absence of the rule of law, or the activities abroad of the likes of Jian Yang, Yikun Zhang, and their counterparts in numerous countries around the world. And it is not as if the regime is getting less tyrannical, more willing to limit the Party’s pre-eminence.

But never mind, there are drinks and canapes to consume, deals to do, donations to secure…….against which the sort of traditional values of New Zealand citizens (including many ethnic Chinese who came here to escape the regime) are set at naught and dishonoured every day, but this day perhaps more than most.

How will history judge these people – our politicians, our prominent business leaders, our journalists who take trips to China and then write PRC-favourable stories, the government-funded propagandists at the China Council, and so on?  Not well, one hopes.  No doubt, they all manage to tell themselves that somehow they have the ‘best interests of New Zealand” at heart and perhaps they even believe it, but they are deluding themselves, and dishonouring all those who value freedom, whether here, in China, or anywhere else around the world.

They shame us:

Jacinda Ardern

Simon Bridges

Winston Peters

James Shaw

Todd McClay

Gerry Brownlee

David Parker

Don McKinnon

Stephen Jacobi

Peter Goodfellow

and so on, including the galaxy of MFAT officials, other senior officials, university vice-chancellors, private business people, much of the mainstream media.

But if it is 70 years today since the CCP tyranny was established, it is also 30 years next month since the Berlin Wall fell and way was opened decisively for the end of Communism in Europe.      Evil regimes don’t last forever.  For the sake of the world, and for the 1.4 billion people in China, we should hope this one ends soon, and give no aid and succour –  or simple encouragement by turning up to share celebratory drinks – to the evil regime and its leaders while they last.

Not doing very well at all

I heard the Prime Minister on Radio New Zealand this morning running (again) the same spin that seems to go with the job, that somehow if New Zealand’s economic performance is perhaps not all we might hope for, it is at least as good –  better is the typical claim –  than other advanced countries.     Almost always such claims seem to rest exclusively on the rapid and policy-driven population growth New Zealand governments have chosen –  which boost the headline numbers, regardless of whether they leave the average New Zealander better off (in New Zealand’s case, experience increasingly suggests not).

But any meaningful comparison of economic growth across countries needs to adjust for differences in population growth rates.  Per capita statistics aren’t a radical innovation.  They have long existed for exactly that sort of purpose.

It used to be quite hard to get a reasonable sample of countries’ quarterly real GDP numbers.  But the OECD now routinely publishes such numbers.   A few countries seem to be a bit slow at providing the numbers the OECD uses, but when I checked there were 32 OECD countries with quarterly real GDP numbers up to and including the June quarter of 2019 (our most recent data).

This chart shows the latest annual growth rates for those countries, using national agency data for Australia and New Zealand and the OECD data for the rest.  There are two measures: the annual percentage change is the increase from the June quarter 2018 to the June quarter 2019, and the annual average percentage change is the increase from the year to June 2018 to the year to June 2019.   The latter series is a bit less noisy, but also a bit less timely.  As it happens, this time New Zealand’s rank is exactly the same on both measures.

Growth in real pc GDP

There are countries that have done worse than New Zealand: if one broke the group into thirds we’d be close to the bottom third of countries.  But that shouldn’t be much consolation, since we have much lower starting levels of GDP per capita (and GDP per hour worked) than most of the countries to the left of the chart.  The vision was (once) supposed to be that we might once again catch up with them.

Instead, at best we’ve been roughly matching the countries that are much richer and more productive than New Zealand, while the countries that are increasingly similar to us in productive levels rack up really strong growth rates (see seven of the eight countries to the right of the chart –  and the Irish numbers are generally best discounted because of the corporate tax distortions).       Here are the respective productivity levels

east europe GDP phw

Over the last year, these countries averaged growth in real GDP per capita of just over 3.5 per cent per annum.  New Zealand?   About 0.8 per cent.     And yes growth rates are slowing around the world, but over the last three years, those eastern European successful economies averaged 4.3 per cent per capita growth, while New Zealand averaged 1 per cent (in the bottom third of OECD countries).  That is the sort of catch-up that can be achieved.

Are there potential caveats to all this?  In respect of comparisons with the older advanced economies (those now mostly materially richer and more productive than we are), yes.   GDP numbers are revised and with the added imponderable of the new results of the flawed census there will be changes to data over the next few months (SNZ is releasing some new labour market estimates later this morning). But nothing is likely to change the pattern I illustrated the other day

pc GDP growth

Growth in real per capita GDP – never good at the best of times this decade (compared to previous cycles) – has been tailing off, and that conclusion is most unlikely to be changed by any revisions.

Even more certainly, no conceivable revisions are going to change those huge gaps between the growth rates (per capita) of the rapidly emerging eastern European countries –  every single one of which was until now poorer and less productive than New Zealand for at least the last 160 years –  and the pitifully poor growth rates –  per capita GDP or productivity –  managed by New Zealand.  It is a bi-partisan failure, but Labour, Greens, and New Zealand First are now in government.  It is their responsibility, but they seem clueless, careless (ie many just don’t seem to care much if at all), and determined to do whatever possible to try to pretend there isn’t a problem, a failure, and that all is really pretty rosy in the economic garden, and if there are any issues they are all the fault of others.

The problem, the failure, starts at the top, with a Prime Minister and Minister of Finance who continue to simply repeat the spin, which bears little or no relation to the dismal reality of New Zealand’s multi-decade productivity underperformance.  But they are aided and abetted by the Governor of the Reserve Bank, who simply makes things up (he was yesterday out claiming that “The New Zealand economy has proved resilient through a period of weakening global growth and heightened global uncertainty”) and the situation won’t be helped by a Secretary to the Treasury who knows almost nothing about New Zealand or about managing a national economy.  Our economic and political institutions, and their key individuals, are failing us.  New Zealanders –  not those key decisionmakers and advisers –  pay the price of failure.