An expert weighed in on Reserve Bank reform

I was exchanging notes last week with someone who is doing research on New Zealand economic policy, and the development of economic institutions, in the 1980s and 1990s.  In the course of that conversation he sent me a copy of interesting short paper –  presumably obtained from the national archives –  from the period when the thinking and debates that led to the Reserve Bank of New Zealand Act 1989 were underway.

Reform of the Reserve Bank had been in the wind for some time.  Loosely, the Reserve Bank tended to be keen on an independent central bank, and recognised that some accountability procedures would be part of the price of that.  On the other side of the street, the Treasury was keen on an accountable and efficient central bank.  Neither institution –  nor the key ministers at the time –  wanted the Minister of Finance to be determining day-to-day monetary policy. (Ministers determining policy adjustment had been the standard practice, by law, for decades – and it was the practice at the time in most western countries, the exceptions being Switzerland and West Germany and (more or less) the United States.)   Everyone involved wanted a much lower average inflation rate than New Zealand had had in the 1970s and 1980s.

The Treasury was heavily involved in work on reshaping the institutional form of much of what central government did.   Of particular relevance was the new state-owned enterprises (SOE) model, adopted for many/most government trading enterprises (NZ Post, for example, is still with us today).    The Reserve Bank, then as now, was a somewhat anomalous organisation and part of the – at times – acrimonious debate between the Reserve Bank and the Treasury over several years reflected the idiosyncratic nature of the institution, and differing views over what parallels or comparators were relevant.    For example, were banknotes or the retail government banking operations, or the sale of government bonds really just commercial activities really just commercial activities.  And might the (apparent) policy goals be achieved better in an organisation given more commercial incentives.

At one end of the spectrum was a proposal out of The Treasury in late 1986 to turn the Reserve Bank into an SOE (it was never quite a final Treasury proposal, but was written by a senior Treasury adviser and taken seriously as the highest levels of The Treasury.  For anyone interested, you can read more about it in Innovation and Independence, the 2006 history of the Bank (bearing in mind that that history was very much written from a Reserve Bank perspective, one of the authors not only having been an active protagonist in the late 1980s debates but at the time of writing serving as chair of the board of the Reserve Bank).

The proposals were stimulating, far-reaching (including allowing for the Reserve Bank to be declared bankrupt and statutory managers appointed) and –  in the views of probably all Reserve Bankers involved at the time (and in my view now) –  quite unrealistic, and failing to really grapple with the reasons for having a central bank at all.  I am one of those who believes that the economy and financial system could function adequately without a central bank –  although on balance I think a central bank can improve our ability to cope with severe shocks –  and in many respects the logic of the Treasury position might have been better developed into a proposal to explore whether we could do without a central bank altogether.  But they didn’t.  (Had the Bank been abolished, my position –  then and now –  is that New Zealand would fairly quickly have become a de facto part of the Australian dollar area, with monetary conditions influenced by the RBA with Australian perspectives in mind.  That is probably clearer now than it was then –  in 1986/87 only Westpac and ANZ of the larger banks were Australian owned.)

But the point of this post isn’t to rehearse all the old debates. I was overseas on secondment at the time, and only got involved in the debates (which lingered in various forms for several years, even after the Reserve Bank Act was passed) a bit later. But I was intrigued by this one particular paper I was sent last week.

The Reserve Bank has received the “Reserve Bank as SOE” proposal in November 1986.  At the time, the Reserve Bank Board was the decisionmaking body for the Bank itself (although not on monetary policy, which was in law set by the Minister).   The Board asked management to obtain independent expert analysis and advice on the Treasury ideas and for their March 1987 meeting the Board had in front of it a six page commentary from Professor Charles Goodhart.

Goodhart is one of the more significant figures in the last 50 years or so in thinking and writing about central banking.   At the time, he was Professor of Money and Banking at the London School of Economics and had previously served as Adviser to the Governor of the Bank of England.  He had relatively recently published an influential book The Evolution of Central Banks: A Natural Development? (and had been the star guest, and guest lecturer, at the Reserve Bank’s somewhat-extravagant 50th anniversary celebrations in 1984).  Goodhart was very smart and thoughtful, but well-disposed to a traditional (British) view of central banks.

A decade later, Goodhart served as one of the first members of the UK Monetary Policy Committee, after the newly-elected Labour government in 1997 gave the Bank of England operational independence in the conduct of monetary policy.  But in 1987, the Bank of England was, to a considerable extent, the executing agent for the policy choices of the Chancellor of the Exchequer –  the Chancellor being advised by both the Bank and the Treasury, and typically being closer to The Treasury (in the UK ministers have their offices in the department for which they are responsible, not something akin to the Beehive).  It is worth noting that by 1987 the UK had successfully lowered its inflation rate very substantially (the UK inflation record in the 1970s had been, if anything, worse than New Zealand’s).

It is perhaps also worth noting that when the Reserve Bank of New Zealand Bill was finally brought to Parliament in 1989, Goodhart played an important role in providing public support (including FEC testimony) for the chosen model.  Part of that involved providing an academic counterweight to the New Zealand academic (macro)economics community, most of which, at very least, sceptical of the legislation.

But that was 2.5 years later, long after the notes for the Reserve Bank Board had been written.  In those notes, Goodhart’s stance –  while useful to the Bank in countering Treasury – was very different to the legislation he later provided public endorsement to.

The first half of the paper (history and theory) is interesting, but not particularly controversial for these purposes. But the second half is about “policy conclusions”, drawing from an analysis that was generally in favour of (a) discretionary monetary policy, and (b) a central bank not influenced by profit-maximising considerations.

Here is his view on who should do what

goodhart 1

Get the Minister of Finance further away from the conduct of monetary policy and let the Reserve Bank itself decide what rate of inflation to target.  (This was more than year before “inflation targeting” itself became a thing, and was presumably just about setting a broad direction for policy –  in New Zealand at the time there was, for example, beginning to be talk about “low single figure inflation”).

I don’t suppose that idea went down overly well with his Treasury readers (including the Secretary to the Treasury who was then a member of the Board).

One of the later mythologies that developed around the Reserve Bank Act (over the years we spent a lot of time rebutting it) was that the Governor’s salary was tied to the inflation target.  It never was.    But until reading this paper I hadn’t realised where the possibility of making such a link had come from.  Here is Goodhart, talking about accountability.

goodhart 2.png

Wow.  At this stage, there was still no sense of making the Governor the single decision maker, but a leading academic writer on central banking was seriously proposing not just that the Reserve Bank should be able to set a target rate of inflation for itself, but that a range of key executives should be partly paid in the form of options that would pay off if the target was met.    He doesn’t seem to notice, for example, the distinction between a private business (operating in a market it can’t control) and a public agency able to do whatever it takes, at whatever short-run cost, to achieve a target rate of inflation.

At the time, there was still a presumption that decisionmaking at a reformed Reserve Bank would be made (ultimately) by the Board –  as, of course, responsibility in SOEs and many other Crown agencies rested with the respective boards.  The Board was largely non-executive (Governor, Deputy Governor, Secretary to the Treasury plus other members appointed by the Minister) and Goodhart moves on to discuss the issue of whether non-executives could be involved in monetary policy decisions.


good 4

Reasonable points in some respects (how to manage potential and actual conflicts has been an issue even in the recent appointment of members of the new MPC), although note that in Australia the Reserve Bank of Australia Board –  which sets monetary policy –  is very similar in composition to the way the RBNZ Board was in the 1980s.

Perhaps more interesting is about the qualms Goodhart has –  in early 1987 –  about the case for an independent Reserve Bank, in particular around the case for a more active coordination (at least in some circumstances) of fiscal and monetary policy.



Goodhart’s paper ends with this paragraph.

good8If you were generous, you could interpret the final Reserve Bank of New Zealand model as looking something like that paragraph.  Unlike the Bundesbank, the Reserve Bank of New Zealand never had the power to set any specific policy objective for itself, and there was explicit override provisions built into the legislation allowing the government to (temporarily) override the agreed (Governor and Minister) policy targets.  But this paragraph sounds a lot more like the Bank of England in the 1980s, than the case made in public for the Reserve Bank of New Zealand Act 1989 (much of which was about having as few residual powers for  Minister as was consistent with getting the legislation through the Labour Party caucus).

In fairness, the Bank asked for these comments from Professor Goodhart at relatively short notice. On the other hand, he was at the time a leading academic writer in the area, and a former senior practitioner.  And so I am still struck by the conflicting strands of thought that one finds in this short paper –  on the one hand, the idea of options to reward senior central bank staff for meeting a target they might specify themselves, and on the other a real concern about the potential disadvantages in separating fiscal policy too far from monetary policy, and thus some ambivalence about too much operational autonomy for the Reserve Bank at all.

Having said all that, in a way what struck me most about the Goodhart paper is what wasn’t there.    The UK’s disinflation experience in the 1980s had a wrenching one.  Economic historians will still debate the contribution of monetary policy to the peak of three million people unemployed, but no one seriously doubts it played a part.  At the time, there hadn’t been many economywide costs to the degree of disinflation New Zealand had so far managed –  the credit boom and stock market excesses were still in full swing-  and for a time that was to induce a degree of complacency among New Zealand advisers (I recall a meeting I was in perhaps a year or so later at which the then Deputy Secretary to the Treasury was telling the IMF about how modest he expected the costs of disinflation to be –  the head of the IMF mission politely begged to differ).

But in this paper there is no mention of output costs at all  – either those associated with getting inflation down to a much lower average level, or the short-term deviations of output from potential that would come to play such a large role in central bank thinking in subsequent decades.  Just none.  It is quite extraordinary  (and thus when Goodhart talked about tying staff pay to the inflation target, no sense of the political impossibility of giving central bankers financial bonuses for actions that would, at least temporarily, raise unemployment –  even if one could accurately and formally specify a binding target for the life of the options he proposed).

What of Reserve Bank staff ourselves?  From mid-1987 I was Manager of the Monetary Policy (analysis and advice) section at the Bank, and thus quite heavily involved in clarifying what it was we were going to target, how and when.   If memory serves, I think many of us were probably too complacent, perhaps a little blind, around the short-run issues, and tended to work on an over-simplified mental model in which once inflation was lowered to target all we really had to worry about were things like oil price shocks or GST adjustments (we didn’t explicitly – and probably not implicitly –  think much about significant positive or negative output gaps developing).

On the costs of disinflation itself, we were (on the whole) more realistic, but to some extent that depending on the individuals.  There were “battles” between what might loosely be called “the wets” and “the dries”, the former tending to emphasise the transitional costs and the latter the medium-term goal.   Some of the wets (I was mostly of the other persuasion) probably doubted that the 0 to 2 per cent inflation target, adopted in 1988, was really worth pursuing.  Perhaps what united us was a belief that a lot of other reform –  greater fiscal adjustment and more micro reform –  would reduce the costs of getting inflation sustainably down.

Some 20 years ago now I wrote a Bulletin article on the origins and early development of the inflation targeting regime.  In that article, I tried to capture some of competing models that influenced the legislative framework (a funny mix of independence –  not trusting politicians –  and accountability –  not trusting officials and having ministers hold them to account). I also reported some extracts from some of the papers we wrote (I often holding the pen) as the target came together.    From one early and somewhat ambivalent paper (and I can’t recall why shipping got so much attention that month)

Moreover, the Bank noted that “the potential improvements in living standards to be derived from more rapid and complete removal of import protection, and the deregulation of such grossly inefficient sectors as the waterfront (already under
way) and coastal shipping, far outweigh the real economic benefits of slightly faster [emphasis added] reductions in inflation”. In an early echo of what later became a dominant theme in subsequent years, the Bank argued that if price stability was to be pursued over a relatively short time horizon, everything possible needed to be done at least to try to influence expectations and wage and price-setting behaviour.

This post isn’t about having a go at Charles Goodhart, The Treasury, the Bank, or me and my colleagues who were working on some of this stuff at the time.   Mostly, it is just about history, and the sober perspective that history often provides –  things that seemed clear at the time seem less clear with the perspective of time, and some things –  that one later realises are really quite important –  that hardly get attention at all.  If it is an argument for anything, it is probably for more open and deliberative government and policy development processes, perhaps even for incremental and piecemeal (in Popper’s words) reform.   That probably never appeals to reformers –  perhaps especially not young ones  –  and perhaps there are occasions when it can’t be (practically) the chosen path, but blindspots are all too real.

As for the Reserve Bank Act 1989, if there were mistakes and weaknesses in its design (most especially the single decisionmaker model), it did probably serve New Zealand fairly well for several decades.  It was, almost certainly, superior to the Atkinson/Treasury scheme.   And yet one can also overstate the difference legislation really makes –  Australia having made a similar transition to low and stable inflation under legislation still much as it was first passed in 1959.




Honouring Israel Folau

This blog is, mostly, about things to do with economics and public policy.   The stepping-off point was my background in monetary policy, financial markets, and financial regulatory issues over the course of a long career at the Reserve Bank, together with something I had come to care rather more about, the decades-long underperformance of the New Zealand economy and the associated policy failures.  I range more widely these days, but always try to anchor (dragging as the anchor may be) more or less close to policy and associated analytical issues,  with a heavy weight on New Zealand issues and perspectives.

The blog is also, these days, the forum through which the most people encounter me.   And thus it represents something of who I am.  When I set up the blog, I took the opportunity to note quietly (on the About Michael Reddell page) that my first loyalty was to God, as revealed in Jesus Christ, and linked to another low-key, intermittently updated, blog I run in which I sometimes offer thoughts on matters ecclesiastical, the occasional interface with policy, the inspiration I take from great hymns and poems etc.  I didn’t, and don’t, want to make a great fuss about it, and the statement was in part a check on myself: the standard I try to live by in conducting the blog is a Christian one –  how I interact with people, when I do (and don’t) write and so on.  Better to make those standards explicit, and open myself to accountability if (when) I fall short.

I don’t suppose my faith ever had any impact on what OCR I recommended, or much impact on what I thought the inflation target should be (although the Bible is strong on honest weights and measures).   I don’t suppose those holding the dominant alternative faith (some sort of secular Enlightenment worldview) thought their beliefs made much difference to their views on such technical matters either.   But all of us, in the way we interact with others, the choices we make, the things we say no to, are influenced and shaped by our presupposition, beliefs, and cultures, theistic or otherwise.    There were libertarians and libertines in the course of my working life.  And there were serious and orthodox Christians.

So why this post?  It is about Israel Folau and what his treatment this week –  partly at the hands of the ARU, but more so that by media, politicians etc –  says about the room for orthodox Christian belief in public in modern day New Zealand and Australia (the situation seems similar in the UK and Canada, if more mixed in the United States).

There are things where I disagree with what I know of Israel Folau’s reported views.  There was a story out of Australia yesterday about some remarks he’d made recently in a sermon.

Celebrating Christmas and Easter is wrong, Israel Folau told parishioners at his church last month.

So too is wetting babies’ heads during Christenings.

For some time, the Wallabies superstar has been preaching during Sunday worship.

Folau, once purely a devout follower, has in the past 18 months developed into a church leader with strong opinions on Christianity.

He repeatedly attacks the Catholic Church and Christians who do not devoutly read the bible.

Giving the most comprehensive insight into Folau’s mindset and beliefs, a video obtained by The Daily Telegraph shows one of the world’s most famous rugby players attacking the “man-made” traditions of the two holiest periods in the Christian calendar.

“Christmas and Easter, that’s man-made,” Folau tells worshippers.

I don’t happen to share his interpretation on most of those points (the Bible, however, remains central to Christian faith, and should be read by those who follow Christ).  But I understand the case he is making.  There are whole Christian denominations that don’t approve of, or practice, infant baptism (“wetting babies’ heads during Christenings”) –  it was the tradition within which I was raised. In our part of the world, the denominations still holding their own (or growing) tend to be those which eschew infant baptism.

What of Christmas and Easter?   There is a perfectly respectable argument, grounded in Scripture, for the case Folau is making –  if I never quite shared it, I was once quite sympathetic towards it.   The celebration of Christmas and Easter (and Pentecost, the third great Christian festival) was banned during the Commonwealth period in 17th century England, and banned or simply not practised in a number of the US colonies long after that. Even today, there are plenty of Protestant churches –  perhaps especially in the US –  that would not have special Good Friday or Christmas services.   I recall once commenting to my mother about how our Baptist churches seemed not to do Good Friday well, and she responded by pointing out that when she was young her –  large established – Christchurch Baptist church didn’t have Good Friday services at all.

Folau’s views on these issues might seem odd to some (many).  But there is a long history of serious people with similar views.  People who take the Bible seriously, as their authority in faith and conduct.

But, of course, that story was really only a bit of colour to the Folau story, perhaps designed to feed some sense of Folau as a nutter.  No one would care –  Prime Ministers on two sides of the Tasman wouldn’t be commenting –  if a prominent rugby player had simply been heard declaring that he didn’t think Easter should be celebrated.  Probably neither do most atheists, and all Muslims.  As it happens, Good Friday isn’t even a public holiday in the (somewhat more Christian) United States.   Even within the Christian tradition, most –  I don’t know about Folau –  would treat most of this subset of issues as second order in nature.

No, what really bothered those who have been up in arms this week (and it carries through to editorials this morning in both our main newspapers) is that a top rugby player takes the essentials of his Christian faith seriously, and isn’t afraid of stating those beliefs –  not, it seems, in the middle of game of rugby, or even in team practices (where people couldn’t avoid him), but in church and on social media.

Those essentials?   Two, on my reading.  The first, the reality of sin, which puts on uncrossable barrier between God and man (see the story of the expulsion of the Garden of Eden for how the Jews captured this belief).  And yet God doesn’t give up on us.  Christians proclaim –  and (most) will celebrate specially next Sunday – that in the death and resurrection of Jesus God took the initiative and opened up the way to reconciliation.  Those who would avail themselves of this offer –  or call –  do so in repentance and humility, resolving to turn aside from their sin and, with the aid of God’s Holy Spirit, to seek to put on holiness.  Intent matters in this story, for in this life none of us succeed in putting off sin completely (indeed, Martin Luther once argued that the most holy people remained most conscious of how far short of God’s standard they still fell).

And the second, is what evangelical Christians term the Great Commission – the last words of Jesus on earth, at least as recorded in the gospel of Matthew.   Go, preach the gospel to all nations, make disciples, and teach them to obey. (“Obey” isn’t a popular word in our society.) From a Christian perspective, it is a glorious truth –  good news of salvation open to all human beings, a salvation that has implications for how we should live –  and a serious responsibility.

The responsibility stems, in part, from a belief –  firmly grounded in the Bible (even if it isn’t necessarily the only possible interpretation) – that continued rejection of the free offer of salvation, available to all who repent and will to turn from their sins, is eternal separation from God, often characterised (by orthodox creeds and believers) as Hell.  No serious believer could (or should) wish that fate on anyone –  not Brenton Tarrant, Adolf Hitler, Xi Jinping, nor our neighbours and friends.

Here, I’m not asking you to believe the Christian message –  the gospel, or good news – but simply trying to describe the world view of an orthodox Christian.  I don’t speak for Israel Folau, but they are my own views, and (from what I’ve read and heard) seem to be something like his.    He was an adult convert to Christianity –  raised Mormon apparently –  and I rejoice in his apparent zeal for the faith, and in his witness.

This was the Instagram post that has excited the mob this week

folau 2.png

That is the essence of the gospel –  sin abounds, and all of us fall short, and yet… all who repent, who turn away from sin, there is the offer of Christ’s sacrificial love and restoration.  He even puts a Scripture text alongside the simplified graphic.

It isn’t as if the text stands in isolation from the rest of the Bible.

Here, at a very general level, is St Paul in the books of Romans

23 For the wages of sin is death; but the gift of God is eternal life through Jesus Christ our Lord.

Here, Paul writing (inspired by God, so the church has traditionally taught) to the church in Corinth

Or do you not know that wrongdoers will not inherit the kingdom of God? Do not be deceived: Neither the sexually immoral nor idolaters nor adulterers nor men who have sex with men[a] 10 nor thieves nor the greedy nor drunkards nor slanderers nor swindlers will inherit the kingdom of God. 11 And that is what some of you were. But you were washed, you were sanctified, you were justified in the name of the Lord Jesus Christ and by the Spirit of our God.

Or from the book of Revelation

He who was seated on the throne said, “I am making everything new!” Then he said, “Write this down, for these words are trustworthy and true.” He said to me: “It is done. I am the Alpha and the Omega, the Beginning and the End. To the thirsty I will give water without cost from the spring of the water of life. Those who are victorious will inherit all this, and I will be their God and they will be my children. But the cowardly, the unbelieving, the vile, the murderers, the sexually immoral, those who practice magic arts, the idolaters and all liars—they will be consigned to the fiery lake of burning sulfur. This is the second death.”

I could go on.  These aren’t exhaustive lists: any unrepented sin that separates human from God.   It is New Testament teaching and Old –  read in Exodus or Deuteronomy how fearfully the people of Israel are recorded as receiving what we now know as the Ten Commandment.  It has been the consistent teaching of the church for the best part of 2000 years, and in the Jewish teaching and tradition before that.

(As a reminder, Christianity has been the religion that predominated in the West –  and western offshoot societies (including modern New Zealand) – for 1500+ years.  That doesn’t make it true, of course, but it played a key formative role in the societies that formed us.)

Of course, no one in the public domain was much bothered about Folau highlighting that adultery, theft, and lies fall short of God’s standard.   Even in today’s society –  degenerate as it is in many respects –  most people aren’t going to defend those sorts of acts (or tar anyone who suggests that such behaviour isn’t acceptable).   All the fuss was about Folau’s report of the biblical – and longstanding Christian and Jewish (and Muslim for that matter) –  view on homosexual practice. It is sinful –  wrong.  Note that in Folau’s list, homosexual practice isn’t singled out –  it comes between drunkenness and adultery, together with lies, sex outside marriage, theft and idolatry.   The Bible takes a dim view of homosexual acts and of sexual sin more generally –  reflecting, no doubt, the fundamental importance of sex in any society, and perhaps especially one teaching that men and women are made, in the image of God, to complement each other – but you will read the New Testament in vain for any sense of it as uniquely wrong.  The sins I struggle with matter just as much in God’s sight –  or at least so the church has traditionally taught.

I’m well aware that there are plenty of liberal Christians who will claim that all this is irrelevant –  that they know better than Moses, Jesus, St Paul, or the church through 2000 years.  I know many of their arguments around translations, social context, and so on and so forth.  Many are in a hurry to keep up with the spirit of the age, whichever chaotic direction that spirit leads

But those points are irrelevant here.  It isn’t for the baying masses, the leader writers of newspapers, Prime Ministers, or heads of rugby bodies, to define Christian faith and teaching.   As Folau presumably believes, (and I certainly do) these are revealed truths and teachings, the same yesterday, today, and forever.  It is the truth we seek to live by (however inadequately).  It was, I’m pretty sure, the sort of truth held by Billy Graham when he attracted tens of thousands to his New Zealand rallies only a few decades ago.

If –  as most New Zealanders and a large proportion of Australians now claim to –  you don’t believe in the existence of God, let alone of eternal separation from God or Hell, it is hard to know why what Folau is saying should bother you.   You surely believe he is simply deluded and wrong, as he will discover (or rather not) when he dies.

That probably is the view of a fair number of people in New Zealand and Australia today.  But it isn’t the view of those holding the commanding heights –  MPs, leader writers, columnists, business leaders and so on –  who have demanded that it be stopped.  They simply cannot abide the thought that someone of any prominence should openly affirm that sin is sin, and that homosexual acts are among the things labelled as sin.

Here I’m not mainly interested in the Australian Rugby Union. I have a modicum of sympathy for their position, even if (as I noted in an earlier post elsewhere on these issues) the problem was partly one of their own making.   Rugby could just be rugby, but that’s not enough for today bosses.

My interest is more in what it says about our society – New Zealand and, it appears, Australia –  that no prominent person is free to express centuries-old Christian belief (views backed, rightly or wrongly, by the law of the land until only a few decades ago) when it trespasses on the taboos and sacred cows (“homosexuality good”) of today’s “liberal” elite.  And if no prominent person can –  and it is interesting to note that not a single church leader has been willing to stand up openly for Folau, and the Scriptures –  how will those less prominent be positioned.   Folau may lose a multi-million dollar contract, but he’ll already have earned much more than many ordinary working people make in their life.   But what of the ordinary employee of a bank or of one of those right-on government agencies.  It might not even be a personal social media account, or a speaking engagement at the local church.  It might be nothing more than a reluctance to participate in celebrations of what (in their belief, in the tradition of thousands of years) sinful acts.   The issue here isn’t someone proselytising across the counter of the bank, any more than Folau’s “offence” involved activity in the middle of a game, but a totalitarian disregard for any view –  no matter of how longstanding –  that doesn’t fall into line with today’s orthodoxy.

I don’t envisage writing any more than usual here about aspects of Christian faith –  perhaps the odd Christmas and Easter post, and the occasional somewhat relevant allusion – but these are my beliefs: theft, idolatry, lies, adultery, dishonouring one’s parents, covetousness, homosexual acts, dispossessing the poor are all (among the) sinful acts.   The just wages of sin is death, and yet the free gift offered in Christ, conditional only on penitence and a resolve to amend one’s way, is salvation.  I won’t celebrate what God has called sin (or simply keep quiet).     The message of the gospel is supposed to be uncomfortable, but akin to the surgeon’s knife that offers a path to something much better.

If all that makes you uncomfortable reading what I have to say about the OCR, bank capital, immigration, productivity, the PRC or whatever, so be it.  You can choose to stop doing so. That is a choice that only you can make, consistent with your own beliefs.  For me, I will try to prioritise Jesus, focused on the long (and faltering) obedience in the same direction that he called his disciples to.

There is a line around the Folau case of the sort “why couldn’t he just keep quiet, and save his views for home and church”.  That isn’t what disciples of Christ are called to.

(Nor, probably, should it characterise a free society. Having said that, I’m sceptical of process liberalism, and doubt that any society can really tolerate too much diversity for long.)

I do end up wondering how long a very senior unelected public figure, serving in a field close to the Prime Minister’s own portfolio, can last when that person serves as President of an organisation  –  a mission organisation I donate too, and used to be involved with – whose statement of belief includes this

God, in revealing himself, inspired the Holy Scriptures so that they are entirely trustworthy and have supreme authority in matters of doctrine, faith and conduct.

and next

We all were made for fellowship with God, but disobeyed him. So we all have become sinners, guilty in God’s sight, under his wrath, and alienated from him.

and goes on

  • Jesus Christ took the sin of the world on himself when he died on the cross as our representative and substitute. This is how God showed his love for us and provided the only way for us to be forgiven and reconciled to him.

  • Jesus of Nazareth was raised from the dead by God.

  • The Holy Spirit brings us to trust Christ and repent of our sins, lives in us, and develops our new life in Christ in the fellowship of the Church.

That would seem to be very close to what Israel Folau has been saying to anyone who chose to read his social media posts (or the now countless repeats in media here and abroad).  And called out for doing so by the Prime Minister.

I honour Israel Folau’s courage, and am inspired by his example.   Perhaps our government will go the path of attempting to make such words “hate speech” (as, whatever the intent, seems to been happening in the UK), or perhaps not, but it is speech –  from the Bible –  Christians are called to proclaim and to bear witness to.

Finally, words of Jesus

33 but whoever denies me before men, I also will deny before my Father who is in heaven.

It is almost always easier just to go along, to accommodate, to fit in, to keep quiet –  even in an erstwhile “private life” – (and that would be the advice of many to Folau –  including perhaps many who want to see him play rugby, something I have little or no interest in) but that isn’t the call of Jesus to those who chose to follow him.

It was an unusual post.  Then again, tomorrow begins what (most) Christians mark as Holy Week.  I’ll be back to monetary policy –  some older history of our institutions –  on Monday.

Entry level house prices in US cities

A few days ago an email turned up from the US think tank, the American Enterprise Institute, touting a new set of data.

Housing markets are inherently local, making them notoriously difficult to analyze due to the lack of reliable data at the local level. A new dataset from the AEI Housing Center, the first in a series of quarterly reports, aims to fill this void by analyzing housing market data for the 60 largest US metropolitan areas, as well as for the nation as a whole. The current dataset looks at housing data from 2018:Q4.

And so I clicked the link.  This was the summary national data

US national housing

US$197000 for an “average entry-level sale price” caught my eye (that is about NZ$292000 at the current market exchange rate, and of course Americans are –  on average – earning more than New Zealanders).  And of course that is a nationwide number, including the fruit of such dreadful housing markets as those in and around San Francisco.

So I started checking out some of the data for some of the cities (metropolitan statistical areas).

Here were the most expensive ones (in USD terms)

San Jose 511000
San Francisco 485000
Los Angeles 427000
San Diego 419000

At current market exchange rates, I guess those might be roughly comparable to prices in Auckland and Wellington.

But here is a chart of a group of cities (non-exhaustive) I found with prices of $NZ300000 or under.

US housing 2

Remember that these aren’t tiny places.  The whole dataset is for the 60 largest metropolitan areas.   Some of these places are smaller than Auckland, but I couldn’t see any smaller than about a million people.   A couple of the places on the chart are among the largest ten US cities.

Now perhaps, like me, you think New Zealand’s exchange rate is materially overvalued.   But even if you thought that a long-term structural fair value exchange rate was more like 0.5 (as distinct from the current market rate of .67) the median of the cities in the chart would still have average entry-level homes (new and existing) selling for not much over NZ$300000.

How do the AEI researchers derive their numbers?

The study tracks housing activity both for the entire market and for entry-level and move-up buyer segments. We only focus on institutionally financed sales (meaning we exclude cash sales or sales with seller financing.) We define entry-level as all sales below the Federal Housing Administration (FHA) 80th percentile price in a metro and quarter. The rational for a dynamic price cut-off at the metro level is that the share of entry-level buyers varies across the country. According to FHA’s Production Report, around 80% of FHA’s purchase loans go to first-time buyers, who mostly compete with other first-time buyers from other agencies for entry-level housing. The 80th percentile price cut-off, therefore, captures this market segment reasonably well. This is confirmed by the data. Across the nation, the entry-level segment consists largely of first-time buyers, while the move-up segment consists mostly of repeat buyers.

That looks plausible.  Perhaps people who know the data better will be able to pick holes in what they’ve done but –  especially given the pervasive role of federal agencies in the US housing finance market – the numbers are unlikely to be off by enough to materially affect the contrast between the government-induced scandal that is the New Zealand housing market.

CEOs, the PM, and the degraded state of the public sector

What do you think of when you think of a CEO of a large or prominent New Zealand entity?   Mostly, I think of a highly-paid confident political operator and virtue-signaller.

I’m sure there are exceptions (many of them will be the ones who consciously choose to kept a modest profile).  There will even be some hugely-impressive people who’ve created and built businesses that have made them and society as a whole better off.  Sadly –  marker of our long-term economic failure –  there aren’t many of them, at least among that “large or prominent” grouping.

But apparently I don’t really know what I’m thinking at all.   At least according to a bunch of highly-paid corporate bureaucrats (private and public).

I opened the Dominion-Post newspaper this morning to find a full page advert, half of it in Labour Party red, screaming “What does a CEO look like?”.   Well-dressed, highly paid, and scared of upsetting anyone was my first thought?

But I was wrong (at least according to this advert)

“Admit it. You pictured a white middle-aged male didn’t you.”

Well, no, I didn’t actually.  Of course, the majority of (big private business) CEOs in New Zealand probably are white, middle-aged, and male, but (conservative as I am) I try to view people on their merits, not their sex, skin colour, age, religion or whatever.  In passing one might note that most people in New Zealand are “white”, and mostly I’d expect heads of big and powerful agencies to be middle-aged (that loose label than can encompass anything from about 37 to 67 – although at least one 12 year old reader of the paper tells me 35 is really the starting point).

Ah, but really age has nothing to do with.  It is all about sex.

Could it be because every time we see a female CEO we still refer to her as a “female CEO”?

Speak for yourself, because I know I don’t.  Incompetence (and no doubt competence) knows no bounds of sex.

But apparently it is “indefensible”, this crime that the advertisers have convicted us –  the (overwhelmingly) liberal readers of the Dom-Post –  of, the more so

in a country where a mother in her late thirties is up there on the world stage being a pretty excellent Prime Minister

I guess advertisers are welcome to their opinion.  Personally, I view our current Prime Minister as proof that we have now reached the generally welcome stage in public life where a woman leader can be as useless and ineffectual as any man (Elizabeth I, Catherine the Great, Margaret Thatcher, and Golda Meir may well have been in days when a woman had to be markedly better to excel).

They go on, strangely, to describe the Prime Minister as “the CEO of New Zealand”, which is wrong both in law and in substance.  The government is not the country.  The “CEO of New Zealand” is invoked in support of their cause –  “ask her and she’ll tell you”.

And who is behind this advert?  Given the Labour Party colour and the slathering praise of the Prime Minister you might have assumed it was paid for by the Labour Party, or some front body.

But it wasn’t the Labour Party.  It was a group called Champions for Change.  When you look them up you find that they are a bunch of CEOs and board chairs (one was a chair until very recently when a High Court judgment against her saw her ousted), who also seem to have forgotten the name of the country (it isn’t called Aotearoa New Zealand).  There are 52 of them, about 30 per cent female and the rest male.   They represent (note the word –  these people aren’t here as individuals) 45 organisations (their logos bedeck the front page of the website).

If people in the private sector want to spend their money, or that of their shareholders, on praise of the Prime Minister –  a party political figure –  that is, of course, their choice.

But who is on this list of leaders?  Among them is

Gabs Makhlouf, Secretary to the Treasury

Mike Bush, Commissioner of Police

Peter Chrisp, Chief Executive of New Zealand Trade and Enterprise

and the Ministry for Women (CEO not pictured) is also a sponsor.

These people have clear responsibilities to be neutral public servants, not putting public money under their control into full-page adverts championing the Prime Minister personally.   There are State Services Commission guidelines around the political involvement of public servants, and if involvement in an advert like this doesn’t breach those standards, there is something very wrong with how the guidelines are written.    Among the key points of those guidelines

Very senior State servants, and those who have regular, direct contact with Ministers, or represent a public face of their agency should exercise careful judgement when considering involvement in political activities.

Judgement that seems to have been sorely lacking in this case.

These aren’t the only public sector people involved (although they are the clearest breaches of acceptable conduct).

We also have the CEO of Auckland Council (note the Labour mayor) and the chairs and chief executives of various SOEs (wholly state-owned) and majority Crown (or council)-owned companies.  That list includes New Zealand Post, Air New Zealand, Genesis Energy, Ports of Auckland, and Transpower.    You could add in a couple of a university senior managers as well, one of whom (Massey) must be very grateful to the Prime Minister for giving her cover in her little spot of bother last year.

I get that these individuals, and even their organisations, might want to bash the public around the ears and do their virtue-signalling, but they simply shouldn’t be using their office (and public resources) to champion the Prime Minister.  It is the sort of thing one expects in degraded semi-authoritarian states, not in New Zealand.  It should be totally unacceptable.

One other thing that was striking about the advert was that looking through the organisations these people represent there were (see above) lots of public sector agencies, government bodies, and Crown-owned businesses. There were plenty of local bosses for big overseas businesses.  There were people from really highly-regulated entities (looking at you banks), really quite dependent on government favour, and professional services firms –  dead keen on government contracts – likewise.  There wasn’t, as far as I could see, a single representative of a successful outward-oriented New Zealand business that had developed in the last 30 years (and, actually, only a couple of inward focused ones).

It was not a confidence-inducing sign that these people really had any idea how to build and lead a top-performing business in a genuinely competitive environment. But I guess they know how to keep on the right side of the Prime Minister.

As I say, private sector people can do or say (“get with the project peasants”) whatever their board and shareholders are happy with.  Public sector figures –  particularly the heads of such important agencies as the Police and The Treasury – need to get out, and stay out, of partisan political projects.  They need to called to order, but in the degraded state of modern New Zealand (isn’t Shane Jones still a senior minister?) you’d have to wonder who would actually do that.

(UPDATE: And I almost forgot to mention that the CEO of Stuff –  publishers of the Dominion-Post – is also part of the slathering praise of the Prime Minister.)




Foreign interference and deference to foreign powers

On Monday evening, the Australian ABC network broadcast its Four Corners current affairs show, with a feature slot (the link will take you to the video or to a full transcript) on what they describe as the PRC’s “covert political influence campaign in Australia”.

Somewhat corrupted as the system might be, they seem to take this stuff quite seriously in Australia: just this week, there have stories expressing concern about the Opposition leader attending the wedding of the daughter of a PRC billionaire (and donor) who was then a resident of Australia but has subsequently been stripped of his residency and right of return on security grounds.   And, around issues raised in the ABC programme, former Prime Minister Malcolm Turnbull has been out calling for action around claims that a Liberal minister had allowed preferential access to this same billionaire.   Sure, it is election time (and Turnbull no doubt wants his revenge on Peter Dutton) but the contrast to New Zealand is pretty stark.   As Turnbull put it, “this is the national security of Australia”.   The programme including comments from the former ALP senator forced to resign over his too-close ties to PRC-linked interests.

The programme has clips from Andrew Hastie, the chair of the federal parliament’s intelligence and security committee, and from Christian Porter, Australia’s Attorney-General, responsible for the foreign interference laws.

ANDREW HASTIE, MP: In Australia it is clear that the Chinese Communist Party is working to covertly interfere with our media and universities and also to influence our political processes and public debates.


ANDREW HASTIE, MP: We’ve had multiple briefings at the top secret level from ASIO and other agencies that foreign interference is being conducted in Australia at an unprecedented level.


ANDREW HASTIE, MP, CHAIR, COMMITTEE FOR INTELLIFENCE & SECURITY: There are several authoritarian states who are involved in foreign influence across the globe. But in Australia the Chinese Communist Party is probably the most active. China is seeking to influence our elites, particularly our political and business elites, in order to achieve their strategic objectives.

There is chapter and verse –  including emails –  on one particular episode of the PRC embassy/consulate pressuring a local council to decline sponsorship from one of the few Chinese-langugage media outlets that won’t bend to PRC pressure.

Or accounts of an ethnic Chinese radio host –  himself too scared to talk to the ABC –  whose programme was stopped because he wouldn’t bend to the demand to not say anything negative on air about the PRC or the CCP.

We had comments from John Garnaut, previously Fairfax’s correspondent in Beijing, and then senior adviser to Malcolm Turnbull (and author of a classified report on PRC influence/interference in Australia).

Of the aforementioned billionaire

JOHN GARNAUT, FMR ADVISOR PM, MALCOLM TURNBULL: There is a lot of well documented evidence, to use your word, of Huang Xiangmo’s umbilical connection to political organizations which were guided, if not controlled, by Beijing. He was the president of the most important United Front work department platform in Australia.

JOHN GARNAUT, FMR ADVISOR PM, MALCOLM TURNBULL: Well, it tells us how cheap our political systems are. I mean, it’s extraordinary that nobody did any due diligence, any serious background checks for so long. In fact, it was the case also, people weren’t even reading the newspaper. So, political systems and parties just took what they could for as long as they could get away with it. And the danger was, that they were becoming financially dependent on a foreign political system. And that is a precarious place to be.

SAM DASTYARI, FMR ALP SENATOR: I’ve been very upfront and honest. I was too close to the big donors like Huang Xiangmo, I paid a very, very high price for that, I resigned from Parliament because that was the most appropriate thing that I could do.

Dastyari goes on to note his (successful) efforts to get approval from Peter Dutton for an (almost unprecedented) private citizenship ceremony for the wife and children of the billionaire.

Of the billionaire, Andrew Hastie observes

ANDREW HASTIE, CHAIR, COMMITTEE FOR INTELLIFENCE & SECURITY: He did have a lot of access. Um, he was photographed with a lot of senior figures. undeniably, he had a lot of influence. And, um, you know, you can make the connection between his donations and that influence.

Later in the programme it turns to the situation of Professor Anne-Marie Brady, whose house was broken into the day before she was due to testify before Hastie’s committee.

PROF. ANNE-MARIE BRADY, UNIVERSITY OF CANTERBURY: There are many indications that from the start, from what was taken and what was left behind, that make it look like it was not your normal burglary, for example, targeting of a broken laptop. Of no value to anybody, unless you wanted to know who my contacts are or get other evidence off my laptop. Taking a burner phone that I’d last taken to China, but not taking cash, not taking other valuables that are of great re-saleable value. That’s unusual.

ANDREW HASTIE, MP, CHAIR, COMMITTEE FOR INTELLIFENCE & SECURITY: We were very disturbed. We had an esteemed academic from New Zealand, telling us that she’d had her, ah, home broken into, her laptops taken from her, and she was suggesting foreign interference. We took it very seriously.

The presenter goes on to report that

Government sources [NB, presumably Australian government sources] have confirmed to Four Corners that intelligence assessments identified China’s spy service, the Ministry of State Security, as the prime suspect behind the intimidation of Brady. Just after she was called before the Australian parliament, Chinese intelligence agents interrogated her academic collaborators in China about her testimony, which had been published on the parliamentary Hansard record.

PROF. ANNE-MARIE BRADY, UNIVERSITY OF CANTERBURY: There was a visit to the university who had hosted me in November 2017, also from the Ministry of State Security, and they were upset that I had spoken to Hansard about that evidence. All these kind of factors told me that I was of interest to the Ministry of State Security in China.

There is more on the intimidation and imprisonment of a couple of Chinese-born Australians.  Well worth watching and reading.

Perhaps the other bits worth quoting relate to the question of political donations.  Here is Hastie

ANDREW HASTIE, MP, CHAIR, COMMITTEE FOR INTELLIFENCE & SECURITY: When it comes to donations, particularly, politicians should be naturally circumspect about who they receive donations from. Particularly if donors have connections to overseas, and particularly to foreign governments who are seeking to influence our political processes.

Would that we heard anything of the sort from any New Zealand MP.  The programme goes on from there to focus on one particular donation

Jack Lam is a member of three organisations involved in the Chinese Communist Party’s united front overseas influence network. He also a fugitive. In 2017, Lam was charged with paying a 1.3 million dollar bribe to senior immigration officials in the Philippines.
After fleeing the Philippines, Jack Lam visited his Australian golf club, twin creeks. It was there in February 2018 that Lam and fellow director Tommy Jiang hosted a golf day. Their special guest was Tony Abbott, who as prime minister had been warned by ASIO about foreign influence and donations. A fortnight later, Tony Abbott was again hosted by Twin Creeks, this time for an event supporting his local liberal party branch. Mr Abbott told the fundraiser he was no friend of communism, while the liberal party later declared $40,000 in services donated by Twin Creeks.

JOHN GARNAUT, FMR ADVISOR PM, MALCOLM TURNBULL: Look, if I was a politician, I wouldn’t be taking money from somebody who is involved in a foreign propaganda outlet.
JOHN GARNAUT, FMR ADVISOR PM, MALCOLM TURNBULL: Because there’s at least the risk of the perception of conflict of interest, of being tainted.

That’s all Australia, of course.  But why, given what we know about Australia, and the work of people like Anne-Marie Brady on New Zealand, why would anyone suppose that the situation here would be any less serious?  The names, laws, and precise details will differ, but the interests – on both sides of those corrupted exchanges – won’t be.

But what do we have here?  Take those Four Corners comments about the Brady break-ins.  The Prime Minister has shown a longstanding preference for nothing uncomfortable to be discovered about those break-ins, never once making a robust public defence of Brady’s position and the appropriateness of her work. It all seemed embarrassing and potentially awkward for the government.

The Herald had an article on Tuesday following the Four Corners programme, which included this (with, incidentally, a Huawei advert appearing between the second and third paragraphs when I downloaded the article)

But last night Australia’s Four Corners current affairs TV show said conclusions had been reached behind closed doors in Canberra.

“Government sources have confirmed to Four Corners that intelligence assessments identified China’s spy service as the prime suspect behind the intimidation of Brady,” the programme said.

The claims were rejected last night by Ardern, the minister responsible for national security, who said she had seen no such assessment.

“This claim is completely wrong. I have received no advice identifying the Ministry of State Security as the prime suspect.”

It is a strange comment, because the transcript suggests that the comment was about Australian government sources.  What would our Prime Minister know about the views of the Australian security services on such issues?    Perhaps the ABC meant New Zealand government sources, but even if so, given her clear lack of interest in any embarrassing outcome to the Brady case, why would she even necessarily know who  the New Zealand Police and security services regarded as the prime suspect?    Perhaps it would be constitutionally appropriate for her to be told if she asked, but if her office made clear that she didn’t want to know any potentially embarrassing (but not beyond reasonable doubt) stuff I doubt they would be rushing to tell her.  After all, Andrew Little, not her, is Minister for the SIS, and Stuart Nash, not her, is Minister of Police.  It might be quite convenient for her not to know, given her apparent desire to keep firmly on the right side of Beijing.

Ah, but of course we have the inquiry into potential foreign interference being conducted by Parliament’s Justice Committee.  Under pressure –  after attempting to block Anne-Marie Brady from appearing –  the committee finally opened public submissions.  But who chairs the committee?  Why, the same person who (a) tried to block Brady, and who (b) has strong connections to various United Front bodies, and is on record as supporting, for example, PRC perspectives on Tibet.  I don’t suppose he will be fronting for any current affairs programme any time soon on PRC interference in New Zealand, or that he would have much credibility if he did.

This morning, the heads of the GCSB and the SIS appeared to testify to this inquiry.  The text of their public remarks is here.  It was all pretty tame and, mostly, quite convenient stuff.   They claimed they would give more material in a classified briefing to the committee –  of the sort which, if disclosed, would “be likely to affect New Zealand’s national interests in an adverse manner”.  You mean like naming names (countries or individuals), which would no doubt be uncomfortable for our politicians, but might well be in the interests of our country?

There were a few interesting snippets nonetheless.

NZSIS and GCSB therefore use “foreign interference” only to describe an act by a foreign state, or its proxy, that is intended to influence, disrupt or subvert a New Zealand national interest by covert, deceptive or threatening means.

That must be frightfully convenient.  So if, for example, someone who had served in a foreign state’s military intelligence and had close ongoing ties with, including business interests in –  all of which had been widely known for some time – was sitting in the New Zealand Parliament that wouldn’t count as “foreign interference”?  I guess not, it is more like “domestically-chosen subservience”.

Offering well-paid jobs to former members of Parliament and ministers in entities owned or controlled by foreign state wouldn’t count as “foreign interference” either on this definition.  The incentives in those arrangements are quite obvious.

Much of the GCSB/SIS commentary seems very concerned with material along a spectrum of what they label “misinformation”, “disinformation” or “malinformation” (you can look up their definitions for themselves).  As they note, there wasn’t much sign of this stuff in the 2017 election.  On the other hand, there is a very major media outlet that runs People’s Daily articles, has a Chinese-language outlet, which is alleged to select stories for their acceptability to Beijing, translate articles in similar directions, and where the parent outlet allows one its staff –  who serves on the Advisory Board of the government-funded smooth-the-Beijing-waters propaganda body  –  to write about PRC issues (at all, let alone with no disclosure of that potential conflict).

Is there some good stuff?  Sure.

Motivated state actors will work assiduously over many years, including in New Zealand, to covertly garner influence, access and leverage.

But there is also quite a bit that reads as if the GCSB/SIS would really preferable the great unwashed were not even aware of the issue (emphasis added)

I would also note, given public commentary on these issues, that interference efforts do not need to be successful to cause damage to our democracy. Trust in the institutions of government and democracy can easily be eroded.


Whether or not interference activities are effective, growing awareness of them creates room for the perception, domestically and internationally, that foreign states wield improper influence in New Zealand. This perception may be concerning to New Zealand’s partners and may degrade confidence in our values and democratic institutions;

Perhaps you didn’t intend to convey a sense that it would be better if only all this were kept under wraps, but that is how it read to me.

What about some other good stuff?

Manipulation of expatriate communities is a vector for interference. Some states engage overtly or covertly with their diaspora as a means to achieve strategic aims. NZSIS is aware of efforts by foreign states to covertly monitor or obtain influence over expatriate communities in New Zealand. Shared culture, language or familial connections can facilitate this. Ongoing family ties in the foreign state can be leveraged to suppress unwelcome political or religious activity.

Foreign language media is another way through which expatriate communities or diaspora populations can be influenced or mobilised towards particular issues, including issues relevant to elections.

Which country has a large diaspora here, where such issues might be relevant? North Korea?  No.  Russia? No.   Iran?  No.   (Not even what is left of ISIS).  So I guess that leaves the PRC.  But haven’t people in a position to know suggested that the chair of the committee hearing this evidence is close to the PRC embassy?

On political donations, they pull their punches.

….political donations are a legally sanctioned form of participation in New Zealand politics. However, NZSIS becomes concerned when some aspect of the donation is obscured or is channelled in a way that prevents scrutiny of the origin of the donation.

One of the main reasons we become concerned about these activities is because as relationships of influence, or a sense of reciprocity is established, they may be used as leverage to facilitate future interference or espionage activity.

I have already commented on the constraints we face in talking about specific intelligence. However, in broad terms, I can say that we have seen activities by state actors that concern us.

So it wouldn’t raise concerns with the SIS if a New Zealand citizen with close ties to the PRC /CCP authorities arranged for fully-disclosed and lawful substantial donations to a political party?

Or if such donors –  often photographed with New Zealand political figures –  were being given royal honours?

I guess not, because after all whatever motivations the PRC might have, in the end it is willed deference, and deliberate looking the other way, by New Zealand politicians.    Remember that Andrew Hastie quote from the Four Corners programme

ANDREW HASTIE, MP, CHAIR, COMMITTEE FOR INTELLIFENCE & SECURITY: When it comes to donations, particularly, politicians should be naturally circumspect about who they receive donations from. Particularly if donors have connections to overseas, and particularly to foreign governments who are seeking to influence our political processes.

Would that they were, would that they were.

Quite probably the heads of the SIS and GCSB are well-intentioned people, but when I got to the final page of their testimony there was a line that highlighted the kabuki-theatre nature of this inquiry.

We also need to equip those on the front line of our democracy – Members of Parliament, Ministers, political parties and relevant government agencies – with the capability to identify and protect themselves from foreign interference risks.

It is our political parties, members of Parliament, and ministers who are the real problem here (enabling most –  but not all –  of what probably should be of real concern), and yet Kitteridge and Hampton have to go through the motions of pretending they are the solution.

This is a Parliament where not one member, from the Prime Minister down, will express the slightest concern that Jian Yang –  acknowledged former member of the PLA intelligence system, someone who acknowledges misrepresenting his past on his residence/citizenship firms, someone who was a CCP member (and experts tell us no one leaves voluntarily) –  sits today –  as he has for eight years now –  in the New Zealand Parliament.  One where the presidents of the National and Labour Party compete in their gushing praise of Xi Jinping and the CCP.  One where the government refuses to say anything about gross human rights abuses, and the Opposition foreign affairs spokesperson channels CCP propaganda.  And where close to these things know that there is a significant issue around political donations, and yet no party is willing to take a lead, acting in a “circumspect” way, even around transactions that may be lawful but are not proper.

There was one last story out of this morning’s select committee hearing, reporting Jami-Lee Ross

The now-independent MP followed up his question by asking if Bridges had been basing his comments on a briefing from her when, in an alleged conversation between Ross and Bridges on May 14 last year, Bridges said the Chinese community were keen on a Chinese minister in a future Government.

“He said to me ‘I can’t do it because basically the spooks are telling me he’s a Chinese spy’,” Ross said.

Can’t imagine who he was referrring to…..

Wouldn’t it be pretty dreadful if such a person were still sitting in the National Party caucus?

Surely such a thing couldn’t happen?

But in New Zealand it seems to.





One of the great things about growing kids is the questions they ask.  Yesterday afternoon as we were talking about various countries’ economic performances my 15 year old, who is doing year 12 economics and is intensely interested in international affairs (and knows to distinguish between GDP and per capita GDP), asked me if I thought Russia could ever be the richest country in the world (per capita was what he meant).

I’d never thought about it before. On five seconds of thought, my answer was along the lines that I couldn’t see why not, in principle.  No single country or even region has had a monopoly, over the centuries, on the status of being richest and most advanced.  And, for what it is worth, Russia has abundant natural resources, had a strong tradition of maths and science, and as a cold country it is one of those where modelling suggests that global warming may well be economically beneficial.

But it prompted me to go and look at some data.  From the latest IMF World Economic Outlook tables.  Here is where Russia currently sits in terms of GDP per capita.

russia 1

Of all the countries and territories in the IMF database, Russia sits just outside the upper quartile.  But the group of countries it sits among is substantially made up of EU and/or OECD countries (Estonia, Portugal, Poland, Hungary, Greece, Latvia, Turkey, Croatia, Romania and Chile).   Economists often think of Chile as some sort of poster-child of good economic management, and I’ve been intrigued by Uruguay’s strong performance in the last couple of decades, but both are still materially poorer than Russia.   And Russia –  70 years of Communist rule, a deeply destructive war, rarely any stable sense of property rights or the rule of law, and a raft of sanctions in more recent years sits at about 75 per cent of the average per capita income of New Zealand.   100 years ago, on the eve of World War One, the end of the first great age of globalisation, (the Maddison database records that) Russia had GDP per capita not half that of Argentina, Chile, or Uruguay, and about 30 per cent of that of New Zealand, Australia, Canada, the US, and the UK.

The Russian story is flattered to some extent by fairly long working hours (average annual working hours per worker are about 10 per cent higher than those in New Zealand) and by a shorter life expectancy (even than much poorer China).  But here is a similar chart for labour productivity (real GDP per hour worked) from the Conference Board database.

russia 2.png

Russia sits slightly further down the rankings, but (broadly speaking) among the same group of countries.

To the extent geography matters, Russia has more neighbouring countries than any country in the world and its economic outcomes look better than most of the neighbours (North Korea at one extreme and Norway at the other).  And if one compares Russia’s GDP per capita with that of either Western Europe (source and origin of the Industrial Revolution) or with the Anglo offshoot countries (US, Canada, Australia and New Zealand), which once led the world league tables, Russia’s relative performance now seems to be at least as good –  probably better –  than at any time in the last few hundred years.  It is hardly a stellar economic performer but –  against all the (mostly self-imposed) obstacles – the last century has been one of continued catch-up and convergence.

Of course, the bigger story is probably one of missed opportunities.  Look, by contrast, at what Singapore, Taiwan, and South Korea have managed –  even Malaysia, now appearing on both those charts above –  and it leaves open the possibility of what Russia might have been, perhaps (but probably not) might still be.

The Emperor’s clothes are threadbare

When you worked for an organisation for 30+ years you really do try to look for the best in it. Perhaps it is just me, but I tend towards optimism (notwithstanding Cassandra) and so have had trouble appropriately calibrating my expectations of the Reserve Bank.  They keep surprising me on the downside.  It isn’t so much the specific policy choices themselves (reasonable people might differ) as the too-often threadbare cases they mount in support of interventions which have taken the fancy of successive Governors, or causes Governors (especially the current one) have used their official bully-pulpit to champion.

I had another example yesterday when I opened a (very belated) response from the Bank to an Official Information Act request I’d lodged a couple of months ago.

You’ll recall that last December the Governor launched a consultative document in which he proposed to massively increase the amount of capital banks have to hold to conduct their current level of business. There had been no prior socialisation of this work, testing the analysis in expert fora etc.  Just a (very far-reaching) proposal.  A month or so later, in response to various OIA requests, they finally released some of the relevant background papers (one of which they had only written after the consultative document was released).  (In fact, four months into the consultation there was another big new supporting document released last week, although those who’ve looked at it closely say it doesn’t really shed any fresh light on the issues.)

By February, the Bank’s Monetary Policy Statement was due.  To their credit, the Bank devoted a box (Box E),  a couple of pages in length, to the proposal, under the heading “Monetary policy implications of higher bank capital requirements” (pages 35 and 36).

They make a number of claims in the box.  They correctly note the need to distinguish between the transition and the long-run (itself something of a concession, since there was no discussion of the transition at all in the consultative document itself).

Of interest rate effects they note

All other things unchanged, bank funding costs would rise as a result of their higher capital requirements, because the cost of equity (in terms of investors’ required rate of return) is usually higher than debt. This could lead banks to increase lending rates, lower deposit rates, and/or tighten credit standards in order to retain their expected return on equity.

However, in reality, the impact on the lending and deposit rates will be affected by a range of offsetting forces.

The extent that banks will be able to pass on their potentially higher funding costs – in the form of higher lending rates and lower deposit rates – will be constrained by:
• competition from both within the banking sector and alternative
sources of funding (for example, capital markets); and
• other interest rates in the economy being broadly unchanged, or
lower, as risk premia in New Zealand decline.

Hard to argue with most of that (I would make an exception for the second bullet).

They went on to elaborate that particular point (a little)

The increased stability of the banking system should reduce the risk premium associated with investing in New Zealand. This results in a reduction in the expected frequency and severity of economic disruption associated with systemic financial crises.

Summing up

In the long run, bank lending rates are likely to be slightly higher. How much higher depends on a range of factors, such as how much the cost of equity and debt for banks declines, the degree to which risk premia in New Zealand fall, and how competitive pressures affect banks’ ability to pass on costs to customers in the form of higher lending rates or lower deposit rates. The Bank expects that the spread of banks’ lending rates to the rates at which they borrow will settle in the range of around 20 to 40 basis points higher as a result of the proposed changes, although the exact effect is uncertain.

And then there is a further claim

Higher bank capital requirements could also improve the government’s fiscal position. A higher share of bank equity funding would likely increase tax revenue from the banking sector since debt funding is tax-deductible while equity funding is not. The value of any perceived implicit public guarantee of the banking system would also be reduced as the system becomes safer, improving the government’s credit profile.

And there was a final interesting observation

If implemented, changes to bank capital requirements are likely to affect economic conditions through a number of channels.

At his press conference that day, the Governor was also quizzed extensively about the capital proposals.  In the course of that press conference the Governor told the assembled media that the proposed capital requirements would be well within the range of norms” seen in other countries.

All of which was interesting, but supported (on the day) by no further analysis.  And so I lodged an official information act request

I am writing to request copies of any analysis undertaken by or for the Bank in support of Box E in today’s Monetary Policy Statement, including (but not limited to) the numerical estimate of the impact on the banks’ lending margins.

I am also requesting any material/analysis used to support the Governor’s claim (at the press conference) that the proposed capital requirements will be “well within the range of norms” seen in other countries.  I would note that there was no such supporting material in the Bank’s consultative document.

And finally on Monday, having had the request extended for a month to allow for, as they put it, “ongoing consultations” I had my answer.

I have tended all along to assume that the Bank would have done extensive and detailed analysis, and would have been keen to get that analysis out into the public domain to, as they would see it, strengthen the case for the proposals they clearly believe to be in the public interest.

But the evidence is increasingly against that presumption.  The response from the Bank is here.    There was only six pages of it.   There is, apparently, one (possibly substantive) paper

Paper 1.6: What might higher bank capital requirements mean for monetary policy?

But they simply refuse to release any of that, on principle.

The second document is a single page exercise in arithmetic, described as

Table: Stylised example of the pricing impact of different required returns on equity

I did not check every calculation but I have no reason to doubt the numbers are what they say they are. It is the sort of exercise a new graduate should have been able to churn out in a couple of hours.  It appears to be the source of the suggestion that bank lending margins might widen by 20 to 40 basis points.    But –  being a stylised example in a simple table –  there is no discussion or analysis about whether the scenarios are the correct ones, no engagement with estimates other analysts have come up with, no discussion of (for example) whether for the wholly-owned Australian banks (which dominate the market) group earnings variability etc might not be a relevant metric (shareholders in ANZ Banking Group probably do not great care whether the profits –  mean and variance –  come from the New Zealand operations, the Australian operations, or anywhere else in the world).  Just nothing.

There is no discussion or analysis of those (entirely reasonable) points in the MPS about the extent of competition from entities not subject to the capital requirements, possibilities of disintermediation and so on.  Nothing.

There was also, apparently, nothing to support the claim made by the Bank that overall New Zealand interest rates would fall if the capital proposals were adopted, and nothing to support (or quantify) the suggestion that the capital proposals might be fiscally positive (recall that in his speech a few weeks later, Geoff Bascand suggested that the proposals would permanently reduce the level of GDP by up to 0.3 per cent, which would surely also have some fiscal consequences).

And that was that on the material in the two page box: one page of arithmetic.  Breathtaking really.

The rest of the release was devoted to material to support the Governor’s claim that the Bank’s proposed capital requirements would be, in the words of the Governor, ‘”well within the range of norms” in other advanced countries.

One piece they released was this slide they had used in a presentation to the Minister of Finance on the day the Governor made his public comments.

MOF slide.png

The comparisons with Australia –  surely the most relevant? –  are simply asserted, with no supporting evidence or analysis (nothing that, for example, recognises that the Reserve Bank is proposing to pull up the floor (on the weights used in calculating risk-weighted assets in the first place) much further than Australia has done).  Nor do they acknowledge to the Minister that the sorts of capital they propose to rule out not only does the job in the event of a bank failure (and bank failures of trans-Tasman banks are inevitably going to be handled in a trans-Tasman way), but is much less expensive than what they are proposing to require.

In any case, this slide is not analysis, and we do not gain any insight from being told that the Governor told the Minister the same as he told the journalists.  In reality, it seems to be enough for the Bank to say it is “hard to do” the comparisons, so do not expect us to do them.

You will have noticed a couple of other comparisons on the slide. They are covered a bit more extensively in a document described as

Media resource: international comparisons of bank capital ratios, 12 December 2018

That was the day before the consultative document was released.  Presumably some people have had this document for months, and yet the Bank took two months to release it under an OIA.

Among the shonkiest bits of the document is a comparison (using World Bank data) of the unweighted 2017 ratio of total capital to total assets.  Of the seven other countries they choose to cite, New Zealand conveniently would sit almost bang on the median  But so what?  First, these proposals are to markedly increase the amount of capital banks in New Zealand have to hold: in fact on the numbers the Bank uses in that stylised table (see above) total capital to total asset after these changes were implemented would be above those of any of the seven other countries the Bank sought to compare us with.  And second, and perhaps more importantly, the reason why capital frameworks focus on risk-weighted assets is that not all assets have similar risk characteristics: the balance sheets of New Zealand banks, for example, look very different to those of US banks.

But I suspect the Bank itself doesn’t really regard that data as relevant.  They seem to put most weight on the S&P framework, and some on the BIS comparisons.   I dealt with both of those at some length in my post on Geoff Bascand’s February speech.   Of the BIS comparisons I noted then

All else equal, a 16 per cent capital ratio calculated on Reserve Bank rules could easily be equivalent to something like 19 per cent in many other countries’ systems.   And not even the 95th percentile of G-SIB banks will –  according to the BCBS table –  have a Tier 1 capital ratio of 19 per cent.

But here is the rather plaintive tone of the Bank’s comments in the 12 December document, finally released now.


“We acknowledge that there is a genuine interest…..which cannot easily be met”.    Give us strength.  Well, give us a rigorous and robust official agency, because on this sort of evidence we certainly don’t have one at present.

Here is some of what I wrote about the S&P numbers in February

The rating agency S&P engages in its own attempt to calculate risk-weighted capital ratios for a large number of banks, using its own risk-weighting framework.   But a great deal depends on the “economic country risk score” the S&P analysts assign.    And they take a dim view of New Zealand, assigning us a score of 4 (on a 10 point scale).  Here is what that means for housing risk weights

S&P risk weights

And there are similarly large differences for the corporate risk weights.

As I said, S&P gives New Zealand a 4.   But Sweden, Norway, Belgium, Switzerland, and Canada all get a 2.    You might think there are such large systematic economic risk differences between New Zealand and those countries, but I doubt the Bank really does, and I certainly doubt. I wrote about this a few years ago where I noted

The S&P model appears to put quite a lot of weight on New Zealand’s relatively high negative NIIP position. But I think they are largely wrong on that score too. First, the NIIP/GDP ratio has been fluctuating around a stable average for 25 years now. That is very different from the explosive run-up in international debt in countries such as Spain and Greece prior to 2008/09. But also the debt is largely taken on by the government (issuing New Zealand dollar bonds) and the banks. No one seriously questions the strength of the government’s balance sheet, or servicing capacity, even after years of deficits. And the ability of banks to borrow abroad largely depends on the quality of their assets and the size of their capital buffers. If asset quality really is much poorer than most have recognised, rollover risk could become a real problem, but it isn’t really an independent source of vulnerability.

Score us as a 3 or even a 2 and suddenly the Deputy Governor’s chart will have the implied capital ratios for New Zealand banks a lot higher.

The Bank knows all this, but despite attempting to rely on these numbers they make no effort to highlight the limitations (and there are others with the S&P methodology).

As I noted in that earlier post

There aren’t easy right or wrong answers to some of these issues, but the uncertainties just highlight how much better it would have been if the Reserve Bank had engaged in an open consultative process at a working technical level, before pinning their colours to the mast with ambitious far-reaching proposals.

(Incidentally, I see that I also made this point in February.

As another marker of what is wrong with the process, the Deputy Governor told us yesterday that the Bank will be releasing an Analytical Note on the Bank’s estimates of the costs of their proposals: it will, we were told, be out in a “couple of weeks”, by when two-thirds of the (extended) consultative period will have passed.

That Analytical Note still hasn’t been published.)

In truth, despite the Governor airily declaiming that his proposals are nothing to worry about, and comfortably within the range of international requirements, so far they have produced no evidence or analysis that could lead reasonable observers to share his confidence.  That simply isn’t good enough.

There is no sign, for example, that the Bank has ever seriously engaged with APRA and in a mutual process sought to robustly assess how each regulator’s proposals would apply to the same portfolio of assets.    If the two agencies both agreed on the results, I’d probably be persuaded (not necessarily that we need such high ratios, but on the relative demandingness of the two sets of rules themselves).   Similarly, they have made no effort to sit down with the regulators in the countries with the (apparently) most demanding capital rules (Sweden?) and look at how their rules and those the Reserve Bank are proposing might work out (in terms of required capital) for the same portfolio of assets.  It might not be easy to do, but….that is what we fund the Reserve Bank and pay Reserve Bank staff for.  There are huge amounts of money involved here  (my former colleague Ian Harrison called it The 30 billion dollar whim and, on a quite different approach I suggested that the Bank’s own guesstimates of the real economic costs could easily capitalise to $15 billion).

With no sign that the New Zealand financial system is imperilled –  recall that the Bank itself tells us every six months that it is strong and stable –  there is no obvious a priori case for much higher capital requirements: any such case needs to be made rigorously, in detail, with lots of careful scrutiny.  In other words, in ways quite unlike how the current ambitious proposal has been done.   It may have been the outcome of a meandering multi-year process (on lots of things other than the minimum ratio), but in the end it looks a lot like the fruit of a gubernatorial whim, without even the decency of constructing a robust ex post rationalisation that would withstand serious scrutiny.

That simply isn’t how policy in a serious country should be made.   And the frightening thing about the New Zealand system is that if the initial proposal was one man’s whim, the same one man is the final decision maker: prosecutor, judge and jury in his own case, with no subsequent rights of appeal.  There is no decisionmaking board, no separation of management from final decisionmakers, no powers for the Minister of Finance to have any say.  Just one unelected man pursuing a whim.

(If you still happened to think that policy advice in New Zealand was that of a serious country –  actual whether you do or don’t –  don’t miss checking out Eric Crampton’s post yesterday on a new adventure and enthusiasm for The Treasury.   As a flavour

Imagine surprising Aotearoa with a strain of compassion so delightful that it re-wires our collective consciousness!

Don’t miss clicking through to the feelings game.  You too might want to spend $113.85 on a set of feelings cards, devised by a business set up by a former Treasury staffer who

She saw an opportunity for her and other people within the Ministries to more deeply, creatively and energetically serve New Zealanders by bringing more of their hearts to work and being able to more empathetically connect with colleagues, staff and service end users.

Spare us.   As one of New Zealand most eminent economists, now resident in Canada, put it “if I were dead, I’d be rolling in my grave”  )