Author: Michael Reddell

The superannuation sky is not falling

Michael Reddell Superannuation

When there isn’t much, if any, political or community impetus to do anything about a looming issue, it can still be useful to be told that the sky isn’t falling –  at least if that analysis is correct – but it probably isn’t an approach likely to attract too many readers.

The New Zealand Initiative last week released just such a report on New Zealand Superannuation, under the (slightly laboured) title Embracing a Super Model: The superannuation sky is not falling. (I was among those who provided comments on an earlier draft of the report.)

There are lots of interesting charts, even if perhaps most are familiar to anyone who has been reading in this area.  And there are helpful reminders of the (very) good features of our NZS system

There is a lot to like about the NZS model:

  • Low poverty rates: The material hardship rate for the elderly is low compared to other groups in New Zealand and is one of the lowest compared with European countries. The standard hardship rate for superannuitants is 3%, compared with 11% for the whole population and 18% for households with children.
  • Relatively affordable: NZS is more affordable than public pension schemes in many OECD countries, both today and in 2050. At around 8% of GDP, the projected public expenditure on NZS in 2050 is still lower than what many OECD countries are spending today. These include oft-acclaimed systems like in Denmark, Finland, Norway and Sweden.
  • Simple and efficient: NZS does not distort incentives for employment and savings as much as means-tested systems. When an NZS surcharge was introduced from 1985 to 1998, people went to great lengths to avoid paying it by hiding their assets. The simplicity of a universal benefit also lowers administrative costs.

(although, as I noted in a post a few months ago some OECD data appear to raise questions about those relative poverty rates.)

Our system has the further merit, at least in my view, that it explicitly focuses on providing a modest level of income support, leaving the responsibility for any higher material standard of living in old age a matter for individuals and families.  (Having said that, the tax system we have had in place since 1988/89 –  taxing income on savings made out of after-tax income at least as heavily as income from labour –  is quite out of step with that particular vision.)

When it comes to recommendations for change, the New Zealand Initiative report is curiously bloodless.  I agree with some of their recommendations, disagree with others, and noticed an important omission.  But with no sense of any fiscal urgency, the author seems a little at sea.  For my tastes, there was a missing moral dimension – a sense of right and wrong.  Debates about how we care for our elderly seem almost inescapably moral in nature.  Of course, economists have little or nothing distinctive to add in that area, but the Initiative seems reluctant to even attempt to make a case.

Their first recommendation is one I’d agree with

Recommendation 1: Link the pension age to health expectancy

Doing so would save some money –  potentially quite a lot of money over time.  But to me, the stronger argument isn’t about saving money per se, but about a sense of right and wrong.    In an age when most people aged 65 are perfectly capable of working –  thanks to the changing nature of jobs and the improvements in the health status of people –  what possible case can there be for paying a near-universal living allowance, raised by taxes with all their deadweight costs, to everyone of that age?   No one argues –  the Initiative certainly doesn’t –  that people who are physically unable to work should have to, but that is true of people at any age (it is why, for example, we have the Invalids Benefit).   I also don’t have a problem with society agreeing that it doesn’t expect people past a certain age to provide for themselves (or within families), unless they particularly want to work.  But given the health status of most people aged 65 how can 65 possibly be the appropriate age now?   As a chart in the report illustrates, more than 50 per cent of men aged 65-69 are still in the labour force.

I’m much less convinced by the second recommendation

Recommendation 2: Index NZS to CPI only rather than both CPI and wages

• NZS is indexed to both inflation and the average ordinary time wage. Decoupling NZS from rises in wages is a way of ensuring productivity gains reduce the costs of NZS. The real purchasing power of NZS should remain the same while the real purchasing power of wages would increase.

Although it isn’t quite stated this way, this recommendation is an assertion that the relative living standards of a large chunk of elderly New Zealanders are too high (for the bottom four deciles of the over-65s, NZS makes up almost their income).  It is to guarantee a material increase in the relative poverty rate of older New Zealanders, substantially so over, say, a 20 or 30 year horizon. In fact, what would be likely to happen is that a whole raft of means-tested forms of assistance would be added to the system, detracting from one of the great strengths (see above) of the current system.  Also, even if the analysts recommending CPI indexation rather than wage indexation are willing to live with the full ramifications of such a system  –  in principle, 100 years from now the real value of NZS would be the same as now, even though real wages might be several multiples of what they are now –  the political system just won’t do so.   Break the link to wages now, and it is likely to be back a decade from now.

(One plausible compromise recommendation might be to lock in the real purchasing power of NZS at the point a person first receives it –  eg you might get 65 per cent of the average wage as it was when you turned 65 (or 68) –  and the person turning 65 (or 68) five years hence would get 65 per cent of average wages then.  Both would only be CPI-indexed from there forward, but future old people would get to share in the productivity gains the community manages to secure.  This approach would parallel how private defined benefit pension schemes work.)

What of the third recommendation?

Recommendation 3: Contributions to NZ Super Fund should not be at the expense of paying down debt

The Super Fund should not be relied on to reduce the future costs of NZS (it cannot do that), and contributions to the Fund should not come at the expense of paying down debt.

I get the impression that the New Zealand Initiative isn’t very keen on the New Zealand Superannuation Fund, but is reluctant to call a spade a spade and call for its disestablishment.  There is an analytical point to be made-  NZSF doesn’t materially affect the future affordability of NZS –  but there is an at least equally important debate to be had about whether runnning a highly-leveraged (wholly leveraged) investment fund trading world markets –  and making politically convenient plays whether around climate change, light rail, or whatever – is any sort of natural or appropriate role for government.   I don’t think so, and I doubt the Initiative does either, but they seem strangely unwilling to say it (I guess they want to keep on good terms with the government).  Note that the existence or not of the NZSF is a different issue from the question of whether governments running a welfare system, especially for old people, should also run much lower levels of net debt (even net assets) than some stylised government doing only law and order and infrastructure might. I think they should.

And what of the fourth recommendation

Recommendation 4: Productivity growth will make NZS – and everything else – more affordable

Faster rates of productivity growth relative to increases in the real interest cost of government borrowing can allow increased government spending without falling into a public debt spiral. Raising productivity growth is a way of making NZS (and everything else) more affordable, and gives future governments more options and flexibility to adjust to changing economic and political circumstances.

Well, of course, although on the narrow NZS point this is a less-strong argument than it appears.  When net debt is near-zero, debt servicing costs aren’t a particularly important consideration.  The Initiative argues for CPI-indexing partly so that productivity gains will improve the fiscal position, although that seems to me to put the emphasis in the wrong place.  Faster productivity growth –  and recall that ours has been lamentable for decades –  offers the prospects of better material living standards for almost everyone  including, as they note, flexibility about support for the elderly.

But in practice, this isn’t so much a New Zealand Initiative recommendation as an aspiration.   We’d all prefer that productivity growth had been, and would be in future, faster. But wishing it doesn’t make it so, and the Initiative hasn’t been particularly strong on identifying the key factors, or policy issues, that might explain that failing and offer credible New Zealand-focused pathways out of it.

Finally, turning back to NZS itself, it was striking that –  as far as I could see –  there was no discussion in the report of the rather weird aspect of our system: that in a country with so many immigrants and emigrants, we offer a universal benefit to anyone who has lived in New Zealand for 10 years after turning 20, including 5 years after turning 50.  It is made worse by the fact that we have Social Security Agreements with various countries, notably Australia and the UK, which mean that residency in those countries counts as residency in New Zealand for NZS purposes.  Is this affordable?  Perhaps so in the same sense the New Zealand Initiative notes that the overall NZS system could be afforded. But is it right?  Well, that seems like a moral question –  informed no doubt by analysis –  and one where I’m pretty clear what the answer should be. It is simply wrong.

Welfare systems should be about “looking after our own”, and if you went to Australia at 20 and spent your entire working life there, I don’t see any good reason for New Zealand taxpayers to support you back here in retirement (of course, we don’t know how material these numbers might be).  Or if you happened to come to New Zealand first at 55.    A graduated system, in which NZS payments are proportional to the time spent in New Zealand between 20 and 65, seems both fair and fiscally prudent.   Take the 10 year residency (real residency) as a starting point at which you might get, say, a third of the standard NZS at 65, and scale it up so that after say 30 years you get the full benefit.  (Will there be a few hard cases? No doubt, but that is where charity and family support should be expected to fill the gaps.)

It will be interesting to see what, if any, NZS policy the opposition National Party comes out with.  The previous government, at the very end of its term, and having changed leaders, did promise to phase in –  very very slowly – an increase in the NZS eligibility age to 67.  But only if they were re-elected, which they wern’t.  And doing nothing about other features of the system –  dealing with any life or health indexation (in full or in part) –  or the very short residency requirements.  With Labour and New Zealand First seemingly fully committed to the current parameters of the system, it would be a brave Opposition to campaign for change, especially from a party with little obvious sense of an ability to engage on matters of right and wrong.   One should probably never wish for a recession –  especially now given the limited capacity of the authorities in so many countries to respond –  but perhaps it will take a recession to get our leaders to more seriously address the NZS issue.  That was, after all, what it took in 1989 and then 1991 when Labour started, and National greatly accelerated, the move back to 65.

 

The China Council disgrace themselves and shame us

Michael Reddell China, NZ politics

It is only a couple of weeks since the (largely) taxpayer-funded New Zealand China Council, which in its Annual Report –  signed off presumably by the heads of MFAT and NZTE (who sit on the Board) – was recently deploring what it regards as the “unedifying debate” about the extent of foreign (PRC) influence in New Zealand, was out in public with this lament

The New Zealand China Council is disappointed to learn plans for Huawei’s involvement in the development of Spark’s 5G network have been put on hold.

It didn’t seem to bother them that our intelligence services might have had serious concerns about threats to New Zealand’s national security. No, the bother seemed to be that a PRC company, under the thumb of the party/State (as all PRC companies are by law), had had it plans frustrated.   Surely, an outfit that had the interests of New Zealand and its people first and foremost would have been pleased to hear that any such threats was being stymied?   But then it has never really been clear whose interests the China Council, and its Board and staff, serve.  No doubt at least the public servants involved try to tell themselves they are really working in the interests of New Zealanders –  by pandering to Bejing at every opportunity –  and as for the rest of them (business people, MPs) why would they greatly care about New Zealand interests when personal interests are advanced by using taxpayers’ money in an attempt to keep the population quiet and Beijing happy?  We are told that both MPs, for example, have close ties to the PRC Embassy and to various PRC United Front bodies.  Jian Yang goes further than that –  not only a former PRC intelligence official and a Communist Party member, but he seems to spend inordinate amounts of his time –  paid as a New Zealand MP –  in some mix of business and propaganda in the PRC (in league with his party president Peter Goodfellow).

These people seem to have no values, represent no moral perspective, that might underpin New Zealand and its freedom and political system. They seem to act as if the PRC is just another normal country. More likely, of course, they know it isn’t and yet they just don’t care. There are deals to be done, donations to flow. And in the China Council’s case, our taxes are paying for it.

But what caught my eye over the weekend were a couple of tweets from the China Council’s Executive Director, former diplomat, Stephen Jacobi.  It is a personal account, but when you are the chief executive there is no credible distinction.

I’m no great fan of Destiny Church or Brian Tamaki, but in this single tweet Jacobi diminishes himself even further.   A New Zealand citizen, keen to have a programme he is promoting run in prisons –  but who hadn’t even got round to applying for funding/permission –  represents a threat apparently far exceeding that of the People’s Republic of China.  Yeah right.

Whether it is the theft of intellectual property, the intimidation of Anne-Marie Brady, the threats to ethnic Chinese New Zealanders (and the attempts to divide their loyalties), the way in which our political system is compromised by donation flows from people with close PRC associations, the presence in Parliament of Jian Yang (in particular) and Raymond Huo – neither of whom has ever uttered a public word critical of one of the worst regimes on the planet –  the presence of PRC-government funded workers (selected for political loyalty/reliability) in our school classrooms, the partnerships our universities have formed with this regime, and the way they’ve exposed themselves to economic pressure and threats from the regime, the way our mayors (and MPs) seem to fall over themselves to associate with the PRC, or a Leader of the Opposition who seems not to like non-binding agreements except when they aspire to fusing civilisations with the PRC (it was his signature on the BRI agreement last year)……and that’s just some of the stuff at home, let alone what they do in other countries and to their own people.   The PRC is, quite simply, consequential in a way that Destiny Church is unlikely ever to be, even in New Zealand. And, of course, Jacobi knows all this, but he has a job to do….and never mind about the facts or the threats.

The previous tweet –  actually retweeted –  on Jacobi’s feed was perhaps equally telling about how the powers that be in New Zealand see things

The Confucius Institutes, part of the PRC government’s worldwide programme attempting to influence opinion in their favour (or at least neutralise it) –  instruments of PRC foreign policy,  hosted and highlighted by the New Zealand consulate in Chengdu (where these people who labour for Beijing were visiting for the worldwide conference of the Confucius Institute movement).  I guess it is a bit confusing when your former senior official, Tony Browne, former New Zealand Ambassador to China, now sits on the global advisory board for the Confucius programme, advancing Beijing’s interests (while helping run training programmes for rising Communist Party officials).  The Newsroom article this morning on some of these issues is worth reading.

(I guess MFAT has form in these area. I’ve just been reading Anne-Marie Brady’s book about Rewi Alley and was struck –  if perhaps not surprised –  by the way New Zealand government’s were attempting to use that shameless fellow traveller and apologist, who openly defended and championed the PRC through the worst of the Great Leap Forward and the Cultural Revolution, to advance their dealings with a vile regime –  the same party, same regime as now, just better suits and better technology.)

How much better for our taxes to be used to expose New Zealand kids, and New Zealand citizens, to the nature of the regime which, in sheer brutality and suppression of human freedoms, must now rank among the very worst we’ve seen?  But I guess that might disrupt the trade opportunities of the people on the China Council’s boards.  Deals might not go through, donations might be interrupted.  Well, frankly, values are things for which you are willing to pay a price. And it isn’t clear that China Council has any such values – and none of them ever utter any.

Are these people any worse than our political “leaders”?  Perhaps not –  although probably no elected politician would be quite as crass as Mr Jacobi –  but that is a standard so low, it is barely even worth considering.

At a personal level, Mr Jacobi appears to be a Christian himself.  This appeared on his Twitter account yesterday

There probably aren’t many Anglicans in the PRC, but I’m sure Mr Jacobi is well aware of the mounting campaign by Xi Jinping to domesticate, sinify, and (preferably) eliminate religion – Christian, Buddhist, Muslim or whatever – from China.  When the largest country in the world adopts that sort of approach –  not just around religion – it is a threat to us all.   As another more famous Anglican once put it

No man is an Iland, intire of itselfe; every man
is a peece of the Continent, a part of the maine;
if a Clod bee washed away by the Sea, Europe
is the lesse, as well as if a Promontorie were, as
well as if a Manor of thy friends or of thine
owne were; any mans death diminishes me,
because I am involved in Mankinde;
And therefore never send to know for whom
the bell tolls; It tolls for thee.

MEDITATION XVII
Devotions upon Emergent Occasions
John Donne

I’ve recently subscribed to a newsletter, Bitter Winter, from an Italian think tank on religious freedom (or lack of it) in the PRC.  These, perhaps, are the sort of evils our universities willingly partner with.   This is the sort of stuff our officials and politicians simply ignore.  But then these are the same people who disgrace themselves singing from the Party songbook about “vocational training” in Xinjiang.

That’s religious freedom.  Then there is political freedom (lack thereof), freedom of speech, freedom from surveillance, the rule of law, and so on. Not one of these the PRC has, or even claims to aspire to.  And yet MFAT, our politicians, and the China Council –  all funded by tax dollars – seem content to treat the PRC as a normal country, run by basically decent people, rather than as an evil regime with no moral core, a regime from which every decent person should keep their distance, and a regime which every decent person should avoid putting themselves in the thrall, and under the threat, of.

It isn’t even as if there is the excuse of novelty –  Nazi Germany was five years old in 1938, not 69 years old.   We know very well what the PRC regime is like –  even those who defend it know, even if they prefer to pretend otherwise. We could (and should) choose a distant and formal relationship –  if your firm wants to deal with Beijing, don’t expect help from the government –  but instead the deals and donations seemed to have warped any sense of decency, in ways that would have been unimaginable 45 years ago when New Zealand was first establishing diplomatic ties with the PRC.

 

 

Where have real house prices risen and fallen?

Michael Reddell Housing, Uncategorized

The QV house prices indices for November for each of the territorial local authority areas were released last week.  Much of the headline coverage is around the fact that in the last year Auckland prices have barely changed, while those in places like Dunedin, Invercargill, Palmerston North and Whanganui have shown double-digit rates of increase.  Even Wellington prices rose 7.4 per cent –  something brought home to me when a house across our driveway went for $2 million recently (a very big house).

Cycles are often not in synch from place to place and I’ve sometimes found it an interesting reference point to look back and see how (real) house prices have changed since the peak of the previous surge upwards in house prices, in mid 2007.  That, of course, was just before the onset of the last recession in New Zealand.

Here is a chart showing (mostly) the cities

house prices 2018 1

Auckland is, of course, still far worse –  total real increases (as well as levels) –  than any of the other cities.  But I was interested in a couple of things.

First over the (little more than a) decade. the increase in real house prices in Dunedin is well above that in many urban areas, and about the same as the increase in Wellington prices.  In the absence of population pressures, that Dunedin increase took me a bit by surprise.

And second was Christchurch.  There was a big rise in Christchurch prices a few years ago –  housing was in genuinely short supply following the earthquakes –  but looking back to before the recession and earthquake, and forward to today, Christchurch house prices haven’t increased in real terms very much at all.   Christchurch city has had less population growth than, say, Auckland or Wellington, but is still estimated to have 6 per cent more people than it had in 2007.

Much of the population growth (about 75 per cent of it) in greater Christchurch since the earthquakes has been in the Selwyn, in particular, and Waimakariri districts.  People sometimes talk about how responsive the two councils’ policies have been in facilitating this growth.  There is clearly something to that, but it is worth noting that neither locality seems to offer anything like the sort of easy ability to build and develop land that we can observe in many fast-growing places in the United States.  Real house prices in Selwyn, for example, have risen by about 20 per cent in the last decade.  And there is are enormous amounts of flat land in Selwyn.

And my other chart is of the TLAs at the bottom of the scale –  the places where real house prices are still lower than they were at the peak of the boom in 2007.

house prices 2018 2

Not, it seems, because (say) land use laws were freed up and the cost of bringing new houses to market has fallen.  In some of these places, prices are probably now below replacement cost (at least on existing land use regulation).    Most, if not all, look like the sorts of places that would benefit from the sort of much lower real exchange rate that I remain convinced has to be a part of any successful economic adjustment in New Zealand –  not that either main party seems to have any interest in effecting such a transition.

It is a sad and shameful record for our politicians.  One neither hears them talking of a goal to get house prices back down again, nor sees them implementing or advocating policies that might make a credible long-run difference.  I guess it won’t greatly matter for the kids of people like the Prime Minister or the Leader of Opposition, but what about the kids of the rest of us? It saddens me to listen to my kids talking about how difficult they think it will be to ever afford a house (in places with decent jobs), but it angers me how (practically) indifferent our political leaders –  central and local – seem.

Earnings advantage of the tertiary-educated

Michael Reddell Education, New Zealand economic performance, Uncategorized

Skimming through the tweets of the chairman of the Productivity Commission –  who often includes interesting charts –  I spotted this picture.

returns to education

It is an interesting chart on a number of counts.  First, in every country shown, except the UK, the earnings advantage to tertiary educated workers is higher –  often materially so –  for older workers than for younger ones.  Second, all the countries at the far left of the chart are among the poorest of all those shown (the sample is OECD countries and “partner countries”).  And thirdly, of course, that New Zealand is over towards the far right of the chart, where the earnings advantage to tertiary educated workers is pretty low (and especially so for older workers).   The chart is drawn from this short OECD note.

Making sense of the numbers isn’t straightforward.    First, note that the chart isn’t claiming to illustrate returns to tertiary education, but the earnings margin of people who have had a tertiary education over those who haven’t.  The difference matters –  people who undertake tertiary education are different, in various dimensions, to people who don’t.    I’m in that older age group, and if I think back to my Auckland high school, only about 10 per cent of those who started in the third form made it to the seventh form.  Most of them probably did go on to university, and perhaps a few others did tertiary study later, but it was a cohort that was much more intellectually capable, on average, than the other group.   Since university was all but free to attend in those days, there weren’t even obvious financial barriers excluding capable people from poorer families.

These days, of course, a much larger share of young people undertake tertiary education.  But that probably means that the intellectual capability of the median tertiary qualifed person today is lower relative to that of the population as a whole than was the case 40 years ago.  It isn’t clear that is true if we compare the median of those with tertiary education and those without it (since the median of those without it is now likely to be quite a bit lower relative to that of the population as a whole).

Productivity performance in New Zealand has been poor for a long time, and we now start a long way behind the better-performing OECD countries.  If there were a lot of really good opportunities here then all else equal, and given how far behind we start, I might have expected the returns to enchanced skills (not, of course, the same as having a tertiary education) to be higher here than in many other countries.  The greater international mobility of people with better educational qualifications might have tended to work in the same direction.

But instead, those with tertiary educations aren’t doing well absolutely (low productivity country) or relative to those without.     And so you are left wondering quite why immigration policy is oriented towards recruiting lots of “skilled”  migrants –  particularly those with New Zealand tertiary education –  and why “education” policy is oriented towards encouraging yet larger proportions of people to undertake tertiary education.  None of which prevent’s Treasury’s living standards dashboard  – which we are told is going to help shape next year’s Budget – including the share of the population with a university degree of one of their “wellbeing indicators”.

(As far as I can tell, this particular chart also doesn’t taken of the fact that getting a tertiary education costs a lot of money –  directly (fees and living costs) and indirectly (foregone time in the labour force) and thus, if anything, probably overstates the advantage held by the tertiary educated.  There are other estimates of overall lifetime earnings advantages (or otherwise)).

Don’t legislate depositor preference

Michael Reddell Dairy, deposit insurance, Financial stabilty, Reserve Bank Act reforms

The government has underway a fairly comprehensive review of the Reserve Bank Act.  The first phase –  around monetary policy –  was pretty narrow in scope, rushed, and has resulted in not very good provisions now about to be legislated by Parliament.  I was always a bit sceptical about Phase 2, partly because of the way Phase 1 was handled and partly because the Minister of Finance had never displayed any particular interest in the issues.

But, for the moment anyway, I’m willing to revise my judgement.  Earlier last month a 100 page consultative document was released, the first of three as the Treasury and the Bank (aided by a somewhat questionable, secretive, independent advisory panel) work their way through the numerous issues involved in overhauling the Reserve Bank legislation and institutional design.

Yesterday, I attended a consultative meeting at The Treasury on the issues in the current document.  It was an interesting group of people and quite a good discussion, although even 2.5 hours is barely enough to do much more than scratch the surface on the wide range of issues in the document –  everything from the role of the Board to regulatory perimeter issues (including whether banks and non-bank deposit-takers should be subject to the same regulatory regime – most people seemed to think so).  Truly keen people can spend their summer preparing written submissions (due in late January).

What was striking –  part of what leads me to provisionally revise my view –  is just how much official resource is being put into this one review.  At yesterday’s meeting there were six members of the review team, and that wasn’t all of them –  and even they only report to their masters in the Reserve Bank and Treasury, many of whom will probably engage quite extensively on the issues. And the process has at least another year to run.  Despite having long championed the cause of reforming the Reserve Bank, I couldn’t help wishing that the same level of resource was being devoted to getting to the bottom of the causes, and compelling remedies, for New Zealand’s astonishingly poor long-term productivity performance.    There is little sign The Treasury has any resources devoted to that issue, the one that has the potential to make a huge difference to the lives of all New Zealanders.

But in this post I wanted to touch on just one specific issue that came up yesterday which surprised quite a bit and worried me quite a lot.   Chapter 4 of the document is devoted to the question of “Should there be depositor protection in New Zealand?”.  Of course, to the extent it adds in value at all, prudential regulation does help the position of depositors (reducing the probability of failure, and limiting the potential chaos if a major failure happens), but New Zealand’s legislation is unusual in that there is no explicit depositor protection mandate (the legislative goals are about the financial system, not individual institutions or their creditors).  Linked to that, we are now very unusual among advanced economies in having no system of deposit insurance.

I wrote about some of these issues, in response to a journalist’s queries, when the consultative document first came out.  But my focus then was on deposit insurance, and in particular on the realpolitik case I see for instituting deposit insurance, to give us the best chance that when a bank gets into serious trouble it will be allowed to fail, and its wholesale creditors –  the ones who really should know what they are doing –  can be allowed to lose their money.   Without deposit insurance, my view is that big banks will always be bailed out.  Perhaps they will even with deposit insurance, but by separating the interests of retail creditors from others, at least political options are opened.

But in focusing on deposit insurance, one thing I hadn’t really noticed in the chapter was the idea of providing depositors with additional protection by legislating depositor preference.  Depositor claims on the assets of a bank rank ahead of those of any other creditors.   Such a provision exists in the Australian legislation –  for Australian depositors.  It was a big part of the reason why New Zealand eventually insisted that Westpac’s retail business in New Zealand be locally incorporated (ie conducted through a New Zealand subsidiary).

To the extent I’d noticed the discussion of the depositor preference option, I’d assumed it was a bit of a straw man, there for completeness perhaps.  Surely, I thought, no one would seriously suggest that New Zealand adopt such a legislative preference.   But, going by the discussion at yesterday’s meeting, it seemed I was wrong and that officials are actually seriously considering this option.   They seem to see it as a complement to a deposit insurance scheme.  I think it would be quite wrongheaded.

In my incomprehension, I asked why  –  starting with a clean sheet of paper – anyone would think legislated depositor preference was a sensible route to consider.  The response seemed to be that it would be a way of reducing the cost of deposit insurance, and increasing the credibility of a deposit insurance scheme.  Both seem weak arguments, especially in the New Zealand context.

One argument sometimes advanced against deposit insurance is that in the event of a systemic financial crisis the cost could be so overwhelming that it would either over-burden public debt, potentially triggering a fiscal crisis, or lead to governments retrospectively walking away from the insurance commitment (simply legislating to not pay out).  In fact, we know that for reasonably governed countries that practical limits on the ability to take on new public debt are not very binding at all.   And we know that New Zealand has (a) very low levels of net public debt by advanced country standards, and (b) a banking system of only moderate size (relative to GDP) by advanced country standards.    Total household deposits with all registered banks are about $175 billion.  Not all of those would be covered by a deposit insurance scheme, even one that capped cover at a relatively high $200000.

Now lets assume something really really bad happens: banks lend so badly over multiple years that when the eventual reckoning happens loan losses are so large that 30 per cent of all bank assets are written off.   This would be absolutely huge –  far far beyond anything in Reserve Bank stress test, for beyond advanced country experience for retail-oriented banks.  But one can’t rule out by assumption utter disasters.  30 per cent of bank assets is currently about $175 billion as well.  There is about $40 billion of equity to run through, and then the creditors start bearing the losses.  Household deposits are about a third of non-equity liabilities, so in this extreme scenario the deposit insurer (and residual Crown underwriter) would face bills of up to perhaps $50 billion (a generous third of $135 billion of losses to be distributed across creditors and insurers).    And remember how extreme this scenario is: it assumes every bank in the system fails, and fails dramatically (not just slightly underwater), and that every household deposit is fully covered by deposit insurance.  In this really really bad, highly implausible scenario the bill presented to the depositor insurer is equal to less than 20 per cent of GDP.

Reasonable people can, of course, differ on whether deposit insurance is a good idea at all, just better than the likely alternative (my view), or something to be eschewed at all costs.  But in no plausible world would even a commitment of 20 per cent GDP overwhelm New Zealand public finances, or cast doubt on the ability of the New Zealand government to honour its obligations.   And none of this takes into account the likelihood that any deposit insurance scheme would be set up funded by insurance levies  Levy depositors, say, 20 basis points a year and you’ll be collecting (and setting aside) $350 million a year.  As I recall it, prudential policy (bank capital requirements) are currently set with a view to expecting systemic crises no more than once in a hundred years (the Governor the other day talked of extending that to once in 200 years).    If the really really bad systemic crisis hits in year 1, the government needs to borrow more upfront (recouped over time by the annual insurance fees).  If the really really bad crisis hits in year 150, there is a large pool of money standing ready, accumulated from those same annual insurance fees.

(Of course, in any scenario in which banks have lent so badly –  and regulators regulated so poorly –  that 30 per cent of all assets are written off, the economy is likely to be performing very badly for a while, and the public finances will be under some pressure anyway.  But those problems are there regardless of the resolution method chosen.)

The other argument I heard advanced for a legislated depositor preference is that it would reduce the cost of deposit insurance.    That might look like a superficially plausible argument, but it is almost certainly wrong in any economically meaningful sense.   Sure, if your bank is funded 50/50 by retail depositors on the one hand and wholesale creditors on the other, the chances that a deposit insurance fund will ever have to pay out to the depositors of that bank, in the presence of legislative preference, is very small (roughly speaking, losses would have to exceed 50 per cent of all the assets for depositors to be exposed to loss –  and thus the deposit insurer).    But if you don’t pay for your insurance one way you will pay for it another way.   If depositors have first claim on bank assets and all other creditors are legislatively subordinated, over time depositors are likely to earn lower interest rates than otherwise (less risk to compensate for) and other creditors more).   It might be hard to show this effect in the case, say, of the big Australian banks, but then no one seriously thinks the Australian government would do anything other than bail out those banks in the event of a crisis.  But we can see the pricing on existing subordinated debt issued by banks around the world – it yields, as you would expect, more than deposits.  It is much riskier.

Of course, it is true that legislating a depositor preference largely shifts the problem from the Crown balance sheet (underwriting the deposit insurer) to those of banks and their creditors.  That might look like a smart thing to do  –  internalising the issue and all that –  but in fact it is a subterfuge: trying to meet a public policy priority (depositor protection) by forcing banks to change their entire business model.  Much better to do things in a direct and transparent way: if you want deposit insurance, charge for it directly, and allow banks to determine how they operate their businesses (funding structures etc) given the insurance levies they face, and the market opportunities.  Doing so also operates more fairly – and efficiently – across different types of banks.  Depositor preference accomplishes nothing at all  in a bank that is 100 per cent deposit-funded, and such institutions should be competing on a competitively neutral basis with other banks with different mixes of funding.

In the consultative document, and again in the discussion yesterday, officials seemed to see a model in which wholesale creditors are exposed to more risk as a “good thing”, conducive to effective market discipline.  I’m with them on that point in so far as people -especially wholesale creditors –  who lend to banks should face a real risk of losing their money.  But depositor preference in effect says that the only way non-depositors can lend to banks is through instruments on which the losses mount extremely rapidly if anything goes wrong.  There is no good case for that (even if, as some do, you think it is reasonable to require banks to issue some tranche of subordinated or convertible debt).   It is a doubly surprising argument to hear mounted in New Zealand where for years –  and especially since 2008 –  we have been repeatedly reminded of the heavy exposure of our banks to offshore wholesale funding markets.   None of those holders has to take on exposure to New Zealand or New Zealand banks.   Legislate depositor preference and what you will do is to significantly increase the risk of those funding markets, for New Zealand, freezing, and yields on secondary market instruments going sky-high, at the first sign of any trouble, or even just nervousness.    Retail runs are one issue to think about, but as we saw globally in 2008 wholesale runs can be just as real, and perhaps more threatening (and lightning fast) –  I discussed the Lehmans story here.

I hope the legislated depositor preference option is taken off the table quickly.  It has the feel of clever wheeze intended to ease the path for deposit insurance.  Much better to make the case –  and there is a sound one –  for a properly funded deposit insurance scheme on its own merits.

On a totally different subject there was a surprising article in the Herald yesterday in which a former MPI official was discussing openly concerns held in 2008/09 about the potential financial health of Fonterra.   I was involved in this work at the time, working at The Treasury, and have always been a bit surprised that there wasn’t more open analysis of the issue at the time.  Just drawing on public information, the combination of:

  • a quite highly indebted cooperative,
  • largely frozen international credit markets (not just for banks),
  • highly-indebted farmer shareholders,
  • a model in which shareholder farmers could redeem their shares in Fonterra when their production dropped,
  • a drought the previous year (reducing production) and
  • low product prices, encouraging some farmers to further reduce production, and
  • the potential for some highly-indebted farmers to be sold up by their banks

was a pretty obvious basis for some vulnerability.    Fortunately, the particular extreme combination of risks never really crystallised.   One aspect of the 2008/09 crisis that was always interesting was –  in the words of one investment bank CEO at the time –  “one of the few markets that remain open is the New Zealand corporate bond market”.  That was because it was, and always has been, primarily a retail market, different from the situation in many other countries (reflecting regulatory differences).  In early 2009 Fonterra was able to run a highly successful domestic retail bond issue.  Subsequent changes to the Fonterra capital structure mean that in future serious downturns, redemption risk is no longer a consideration.  That, however, leaves more of the (liquidity) risk on farmers themselves.

Abdicating a basic responsibility

Michael Reddell China, NZ politics, Uncategorized

The Herald this morning reported on a new open letter in support of Anne-Marie Brady, this one from 169 (at present –  the letter is still open apparently) overseas experts on issues relating to the People’s Republic of China.   As the signatories note:

Since the publication of her work on global United Front work, Brady’s home and office have been subjected to burglaries, during which no valuable items other than electronic devices were stolen. Most recently, her car was found to have been tampered with in ways consistent with intentional sabotage. According to media reports, Interpol and the New Zealand Security Intelligence Service  (SIS) are involved in the investigation. In China, academics were interrogated by Ministry of State Security agents after their institutions hosted Brady. Brady has also been personally attacked in media under the direction of the CCP, both in the PRC and in New Zealand. Taken together, these circumstances make it likely that this harassment campaign constitutes a response to her research on the CCP’s influence, and an attempt to intimidate her into silence.

Despite the evidence of CCP interference provided in Brady’s research, of which the harassment campaign appears to be a further example, the New Zealand government has been slow to take action and failed to acknowledge that a problem exists…..

Far from unique to New Zealand, the CCP’s global United Front tactics and other political influence operations have been documented in other locations, in Europe, Oceania, Asia and the Americas. ….Whether within or without the limits of the law of their target countries, these activities have considerable effects on their societies and merit evidence-based research and the attention of politicians and the media. The harassment campaign against Brady risks having a chilling effect on scholarly inquiry, allowing the CCP to interfere in the politics of our societies unfettered by informed scrutiny.

We urge the New Zealand authorities to grant Professor Brady the necessary protection to allow her to continue her research, sending a clear signal to fellow researchers that independent inquiry can be protected in democratic societies and conducted without fear of retribution.

We join other voices in support of Professor Brady, which have included statements by a New Zealand Chinese community organisation, some of her Canterbury University colleagues, New Zealand academics and two Australian Sinologists, as well as many others on social media.

We further hope decision makers and the public at large, in New Zealand and elsewhere, will engage with evidence-based research on the CCP’s United Front tactics, such as Brady’s Magic Weapons, and give due consideration to policy advice emanating from such research.

It is welcome that these (mostly) foreign experts are coming together in support of Professor Brady. But what sort of country have we become where such stands are even thought necessary?   Once upon a time this was a bastion of democracy and liberty, and now our “leaders” cower in the corner, apparently unbothered about “little things” like the apparent intimidation of Professor Brady.   It is a shameful choice.  There are deal flows to keep going –  students to enrol for the new academic year for example –  and funding political parties doesn’t seem to come cheap.   And barely a voice in Parliament –  none from anywhere in our main parties – that appears troubled in the slightest.

Before I saw that open letter I’d been meaning to draw attention to an even more trenchant statement from closer to home, this one by Paul Buchanan, a former academic with a background in the US system, and who now runs a consultancy that describes itself this way

36th Parallel Assessments is a non-partisan, non-governmental geopolitical risk and strategic assessment consultancy.

Buchanan is an American who has lived here for a long time, and is in the process of becoming a citizen.  From what I’ve read of his stuff over the years, his personal politics probably lean left. But his post pulls few punches about the abdication of responsibility being displayed by the Labour-led government on this issue.

I do not mean to bang on about the Anne Marie Brady case but since it is coming up on one year since the campaign of criminal harassment began against her, I feel compelled to mention how the Labour-led government’s silence has been used as a window of opportunity by pro-China conspiracy theorists to question her credibility and defame her. Until I blocked the troll I shall call “skidmark,” this was even seen here on KP [Kiwipolitic blog] where he launched numerous attacks on professor Brady as well as question the very notion that the burglaries and vandalism that she has been subjected to were somehow related to her work on PRC influence operations in NZ.

He goes on the outline a number of strands of attack made on Professor Brady  by these “trolls”, each more far-fetched or unpleasant than the last.   There are even people echoing the ludicrous and desperate claim made on the hustings last year by the then Attorney-General Chris Finlayson that Professor Brady was saying the stuff she was becasue she was “racist”.

Buchanan goes on

It is very likely that the government’s reticence to talk about the case is due to diplomatic concerns, and that political pressure has been put on the Police and SIS to delay offering any more information about the status of the investigation

That’s a serious claim, but almost nine months on –  while the Prime Minister pretends this is just a normal suburban Police inquiry – it sounds plausible.  Police, after all, have form in bending to the political wind.

Gathering from the tone of her recent remarks it appears that Ms. Brady is frustrated and increasingly frightened by the government’s inaction. I sympathise with her predicament: she is just one person tilting against much larger forces with relatively little institutional backing. I also am annoyed because this is a NZ citizen being stalked and serially harassed on sovereign NZ soil, most probably because of things that she has written, and yet the authorities have done pretty much nothing other than take statements and dust for fingerprints.

And expressed no hint of concern, let alone outrage, at the possibility of the involvement of a foreign power.  (And, of course, no apparent interest at all in taking seriously the substantive concerns Professor Brady was highlighting about PRC “sharp power” in New Zealand.)

Buchanan concludes with a telling parallel and highlights just how unacceptable the government’s handling of this matter –  apparently more interested in Beijing than in Brady –  should be seen as.

If this was a domestic dispute in which someone was burglarising and vandalising a neighbour’s or ex-partner’s property, I imagine that the cops would be quick to establish the facts and intervene to prevent escalation.  If that is the case then the same applies here. Because to allow these crimes to go unpunished without offering a word as to why not only demonstrates a lack of competence or will. It also encourages more of the same, and not just against Ms. Brady.

If one of the foundational duties of the democratic state is to protect the freedom and security of its citizens, it appears that in in this instance NZ has so far failed miserably. The government needs to step up and provide assurances that the investigation will proceed honestly to a verifiable conclusion and that it will work to ensure the safety of Anne Marie Brady against those who would wish to do her harm.

To not do so is to abdicate a basic responsibility of democratic governance.

Of course, the main opposition party shares in responsibility for, and ownership of, the government’s shameful abdication.

As I noted, one of the ludicrous claims made against Professor Brady –  fluent in Chinese, married to a Chinese man –  is that her work is motivated by racism.  One of those who has made such claims in the Chinese-language media is Auckland writer Morgan Xiao, a past or present international student at the University of Auckland.  He apparently writes fairly prolifically in various of the (CCP-controlled) Chinese-language outlets, which is of course his right.   His Facebook page however advertises his Labour Party associations, listing himself as a member of Labour Botany electorate committee, and featuring of photo of himself posing with the Prime Minister.   His writings are pretty pro-Beijing, and very anti-Brady.  He has accused her of racism, and also of running the arguments she does because she has been paid by the Americans to do so.  It is pretty florid stuff –  he has new piece here this week (open in Chrome and Google Translate will give you the gist).

A few weeks ago, the Auckland-based dissident author, and editor of the Beijing Spring magazine, Chen Weijian published (in Chinese) a takedown of some of Morgan Xiao’s recent writing on this subject.   I’ve previously published a translation of Chen Weijian’s article on Yikun Zhang (he of the National Party donations controversy, the Labour-bestowed QSM, and the close Beijing connection), and I was approached as to whether I’d be willing to make more widely available a translation of the latest article.   The translation has been undertaken by Luke Gilkison (and reviewed by a native Chinese speaker) a recent graduate in Chinese language and literature who has also spent time living and studying in China.  Both he and I would emphasise that the article is the work of Chen Weijian, and the views expressed are his and his alone, but his arguments seem to deserve wider circulation, especially given that Morgan Xiao himself is repeatedly returning to the issues.   The rhetorical style isn’t mine, and in some areas his conclusions seem a little over-optimistic to me (I’m not so sure that “the mainstream political ideology of our time is liberal democracy”).    But for those interested, the full translation is here

Chen Weijian Morgan Xiao Gilkison translation

As a flavour

On the matter of New Zealand–China relations, Xiao went on to say this: 

For a long time now, the National Party and the Chinese government have had frequent interactions. Many former National MPs have gone on to consultancy jobs within CCP-linked companies, and every time the Chinese government hosts an event, the number of National Party attendees far exceeds that of any other party. It’s evident that within National, at least, it is well known that China and New Zealand’s relationship is innocuous – otherwise how could these two parties, National and the CCP, be so close? Would that not be treason? 

This last part is said very well. Although I don’t know for sure what National would say to these assertions, I’m fairly sure they would have some choice words for this young man. Something along the lines of, “How on Earth is this helping us? You’re clearly intending to ruin us. Subterfuge!

And

He writes an editorial column on the website Skykiwi, and he’s a contributing writer for the People’s Daily, a state-run Chinese newspaper, where he writes under his Chinese name, Xiao Zhihong (肖志鸿). You’re more likely to find Xi Jinping thought in his Skykiwi column than anything reflecting New Zealand values. This quote from Xi Jinping appears in one of his columns, for example: “Our vision for democracy is not merely a system of one person, one vote. We strive to reflect the will of the people, and in this regard we not only do not fall short of the West, but we greatly surpass it.”

How does Xiao understand CCP-style democracy and “universal values”? This is his opinion on the Tiananmen Square massacre: 

Murderers and arsonists are criminals with no hope for rehabilitation. ….. But those June 4th bottom-feeders burnt and beat to death hundreds of soldiers, set fire to thousands of vehicles, and looted an army arsenal. People who commit wanton violence and destruction like this are beyond hope of rehabilitation. The condemnation of these crimes is a universal value. I say let us string up these June 4th rioters and beat them!

Perhaps if the Prime Minister ever chooses to speak out against the intimidation of Professor Brady, or to begin to take seriously the issues Professor Brady has repeatedly raised, she might make clear that she strongly disapproves of this sort of stuff from a Labour Party electorate committee member.

Then again, I guess Morgan Xiao was really only following her lead, when a few months ago she was committing to closer relations between Labour and the CCP and of party president Nigel Haworth who was in Beijing praising the regime and Xi Jinping just a few months earlier.

It is an abdication of New Zealand values –  hand in hand with the National Party.  We need leaders who see government, and international relations, as more than just the sum of the deals, the sum of the flow of political party donations.  There is little sign that we have such “leaders” anywhere in politics.

I didn’t move to Australia; my bank came to me

Michael Reddell Banking, NZ politics

I was in town for a meeting earlier in the week, and walking along Lambton Quay I noticed this gigantic advertisement adorning the wall of an office building.

TSB photo.jpeg

I’ve always quite admired TSB, as the little bank that could. When I paid more attention to these things, they seemed to have innovative products, good technology, and had to stand on their own feet.  Oh, and there was the feisty CEO who once told visiting central bankers worrying about pandemic risks and bank preparedness that in New Plymouth they had bigger risks to worry about, turning around as he spoke and pointing out the window at Mt Egmont, which will erupt again.

I guess they have always played the “local bank” line in their marketing to some extent, but it was the brazenness of that billboard that astonished me.  Both the message and, even more so, the location.   This is central Wellington, and if there is any sort of “ground zero” for commitment to an open outward-oriented economy surely it must be here.  Much as I dislike the word, New Zealand’s “globalists” disproportionately live and work here.  Within a radius of a couple of hundred metres from this billboard you capture Treasury, MBIE, the Reserve Bank, MFAT, the Ministry for Primary Industry, and the Productivity Commission.  Why, the “right-wing” business think-tank the New Zealand Initiative is just over the road –  Eric Crampton and Oliver Hartwich must just be grateful the billboard faces away from their offices and they don’t have to see this crass effort every time they look out the window.

Perhaps Gabs Makhlouf, Brook Barrington, Adrian Orr et al don’t get out for a lunchtime walk, but their minions do and they must be the target audience for this billboard – Lambton Quay is always at its busiest at lunchtime.

And firms spend money on marketing presumably because they believe it will work –  “work” in this context presumably being drawing in new customers (unless it is just designed to court more Shane Jones Provincial Growth Fund goodies for Taranaki –  TSB being owned by a community trust.)  Are Wellingtonians really going to be swayed by this sort of crude nationalism and economic illiteracy.  It scares me a bit if so.

I didn’t move to Korea and yet the screen I’m typing to was made by a Korean company, and the profits from its design and manufacture presumably accrued to the owners of Samsung.   I didn’t move to the United States, and yet the platform this blog uses is (I think) American, and the profits from what I pay for using it accrue to the owners of that company.   One could go on –  the car, the printer, the TV, the bottle of French wine, or those Californian oranges in the fruit bowl.  The jersey I’m wearing is American and the books on the shelves next to me are from all over the Anglo world –  there will (producers hope) have been profits associated with each of them.  And although there probably isn’t much profit involved, my morning newspaper is produced by an Australian-owned company.  And yet, like 400000+ others I live in Wellington.

It is trade, and it is a good thing –  usually mutually beneficial, and if there are occasional exceptions to that presumption, you wouldn’t expect them to be successfully highlighted down Lambton Quay (even if too many public servants are all too keen on the possibilities of clever government interventions in our lives).   I didn’t move to Australia, and yet the shareholders of ANZ invested some of their savings to provide banking services to New Zealanders like me.  That was good of them –  in fact the earliest progenitors of ANZ were setting banking services here in 1840 (10 years earlier than the founding of what became TSB) when there wasn’t much organised here at all.   The profits from those transactions accrue to the shareholders (many but not all of whom are in Australia), because they provide the risk capital that underpins the business.  And while the TSB talks of the profits “moving to” Australia, in fact successful businesses –  that find willing purchasers of their services –  typically reinvest many of the profits in the business, right here in New Zealand.    Banking is a big business –  some might think too big and views will differ on that, but that isn’t the line TSB is running –  so it takes lots of capital.  That will, often or even typically, mean generating quite large profits –  the returns on that capital.

(Although it is a bit of a distraction, one could note that of the five New Zealand owned banks, four are directly capital-constrained by their ownership structures –  Kiwibank being government-owned, TSB owned by a community trust, and SBS  and Coop being a (modestly-sized) mutuals –  and only one of the NZ-owned banks manages a credit rating better than BBB. Not one of those institutions could even begin to displace the major players, and the risks facing New Zealand would increase if they were to try.)

TSB’s billboard proclaims to sophisticated (as they like to think) Wellingtonians that TSB is “proudly supporting New Zealand”.  This sort of crass attempt to play some sort of crude nationalist card supports no one other than themselves –  and perhaps the Shane Jones-isation of New Zealand politics.  It diminishes, and reflects poorly on, those who commission the advert, who surely know better.  They should stop trying to gull New Zealanders with some weird autarkic vision that, if followed through on, would be bad for a big country, and totally crazy for a small one.

I once worked for someone who told me his maxim was that from choice he would always use an overseas provider if he could (as I recall this was in the Ansett vs Air NZ days) to keep the pressure on the New Zealand providers to work harder and produce excellent products and services.  I never went fully along with him, but having seen that distasteful TSB advert on Tuesday, it actually gave some small pleasure to be in an ANZ branch yesterday and to receive friendly, helpful, accommodating service on the small matter I wanted dealt with. I’d say I’d be happy to have seen the resulting profits accruing to Australian shareholders, but they were so helpful they even waived the small fee on the matter in question –  lifetime customer value and all that I suppose.

As for TSB, they really should do better.  I hope Wellingtonians passing that big advert look on with disdain, grateful instead for the opportunities that foreign trade and investment –  in both directions –  created, and continues to create, for New Zealanders.    Or would we welcome British consumers being regaled with billboards proclaiming “you didn’t move to New Zealand, so why should the profits on that leg of lamb?”.

UN Compact on Migration

Michael Reddell Immigration, NZ politics

Various readers have commented in recent weeks on the United Nations Global Compact for Safe, Orderly, and Regular Migration, due to be signed next week by as many governments as can be mustered in support.   I’d had a quick skim through it and decided not to write about it here, as not only was it a non-binding political declaration, but most of it seemed more relevant to countries dealing with substantial illegal migration (and with migration mainly from very poor or disrupted countries – again, not the main situation in New Zealand).   And, as I pointed out to various readers, who needs the United Nations for immigration policy and practice to cause problems at home.  We have successive New Zealand governments, cheered on by the business and political “elites”, to do that for us.

But when I saw yesterday that the National Party –  as pro-immigration as they come – had indicated that (a) it would not support signing, and (b) it would withdraw from the agreement when it returned to government, I thought I should take another look.  It would, after all, be unusual to find myself in more of a middle-ground position on immigration issues that the National Pary.  Then it emerged that the current government has still not yet decided whether to sign up.   My suspicion remains that National’s stance is more about positioning relative to New Zealand First –  the contest for provincial votes –  than anything of substance.

Overseas, I was aware that the United States and Australia had decided not to sign, as well as a few eastern European countries – including some places whose democratic credentials are no longer unimpeachable.    But when I went looking, I found this article suggesting the pushback in Europe is spreading.    Austrian and Italy have refused to sign, and governments in Belgium, Germany and the Netherlands are under pretty intense pressure (from within).  In Holland, for example

The government ordered a legal analysis of the text last week to ensure that signing it will not entail any legal consequences. The Cabinet finally decided on Thursday that it would support the pact, but would add an extra declaration, a so-called explanation of position, to prevent unintended legal consequences.

So I reread the document, more slowly this time.  I can’t see any substantive need for the document –  it seems more about political rhetoric and framing than anything else –  and have long been deeply sceptical that the United Nations adds any value to anything much.   And, yes, the document has a pro-migration tinge to it (it talks of wanting to “promote” migration) and a rather “globalist” set of presuppositions (including the demonstrably wrong statement –  especially in the context of remote island states – that “no State can address migration alone”).   But that doesn’t mark it out from dozens of pointless international fora and international declarations.    And there is little doubt that the “elite” mindset, in Europe and its offshoots anyway, is mostly pretty strongly pro-immigration.

But it still isn’t clear to me quite what additional damage would be done by signing up to this pointless agreement.   Sure, even “non-binding” agreements will, at times, be used in domestic and international fora as a rhetorical stick to beat governments with if they ever look like stepping out of line with the mainstream.  But those sorts of arguments rarely deflect a government for long if it has domestic public opinion behind it in some direction or another (for good or ill).

There is some questionable economics in the document.  For example

Promote effective skills matching in the national economy by involving local authorities and other relevant stakeholders, particularly the private sector and trade unions, in the analysis of the local labour market, identification of skills gaps, definition of required skills profiles, and evaluation of the efficacy of labour migration policies, in order to ensure market responsive contractual labour mobility through regular pathways.

Or, alternatively, one could just let the market work it out.  When there are incipient skill shortages, wage rates tend to rise.  Same thing happens when, for example, bad weather creates a shortage of spinach or lettuce.    But, daft as the economics is, this stuff is the mindset of politicians and officials adminstering immigration schemes all over the western world. including New Zealand.  Recall that in New Zealand the current government is trying to get more actively involved in this sort of thing.

There are also totally vacuous bits, like the commitment to support and promote the United Nations International Day of Family Remittances.  Just what the world needs: another United Nations “day”.

Perhaps three clauses troubled me a little more.

There was this one

Enable political participation and engagement of migrants in their countries of origin, including in peace and reconciliation processes, in elections and political reforms, such as by establishing voting registries for citizens abroad, and by parliamentary representation, in accordance with national legislation.

I guess I can see what they are probably driving at (diasporas helping the reconstruction of the country of origin after say a protracted civil war). But, normally, we should expect migrants to commit themselves to their new country and its processes and political values and not be creating doubts about where their loyalties lie.  But in a country in which Jian Yang and Raymond Huo are MPs –  while still closely associating themselves with political interests in their country of origin –  and people like Yikun Zhang appears encouraged to play both sides –  it is hard to see how this particular provisions make things here any worse than they already are (around a small handful of our migrants).

And then there was this one

Promote mutual respect for the cultures, traditions and customs of communities of destination and of migrants by exchanging and implementing best practices on integration policies, programmes and activities, including on ways to promote acceptance of diversity and facilitate social cohesion and inclusion.

Which presents the issues as symmetric when they really should be asymmetric: the focus should be on encouraging the assimilation of the migrants, and ensuring their respect for the “cultures, traditions and customs” of the destination community –  just as when you go to someone else’s place for dinner you respect their practices, table manners etc.   One could also argue that encouraging “acceptance of diversity” and facilitating “social cohesion” are two contradictory, often mutually inconsistent, goals.  But again, flakey as all this stuff is, it is the way our bureaucratic and political “leaders” think and act anyway.  If the behaviour is a threat, it is hard to see that the UN agreement would be more of one.

Relatedly

Support multicultural activities through sports, music, arts, culinary festivals, volunteering and other social events that will facilitate mutual understanding and appreciation of migrant cultures and those of destination communities.

Quite what business this is of the UN –  or even of national governments actually – one has to wonder, but there is the “globalist” mindset for you.   And, again, it is pretty much what central and local governments do anyway.  I was interested that “religion” wasn’t on the list

And then, of course, there is Objective 17 (of the 23 in the document) which I have seen people express more serious concern about.

OBJECTIVE 17: Eliminate all forms of discrimination and promote evidence-based public discourse to shape perceptions of migration

We commit to eliminate all forms of discrimination, condemn and counter expressions, acts and manifestations of racism, racial discrimination, violence, xenophobia and related intolerance against all migrants in conformity with international human rights law. We further commit to promote an open and evidence-based public discourse on migration and migrants in partnership with all parts of society, that generates a more realistic, humane and constructive perception in this regard. We also commit to protect freedom of expression in accordance with international law, recognizing that an open and free debate contributes to a comprehensive understanding of all aspects of migration.

If that isn’t muddled I don’t know what is –  let alone, unrealistic (in no conceivable world are “all forms of discrimination” going to be “eliminated”).

The specifics under that Objective include commitments to

Enact, implement or maintain legislation that penalizes hate crimes and aggravated hate crimes

So-called “hate crime” legislation is almost always bad law and bad policy.  Punish assaults or murders or whatever as that: bad and unacceptable acts, regardless of who they are committed against or why.

And this

Promote independent, objective and quality reporting of media outlets, including internet based information, including by sensitizing and educating media professionals on migration-related issues and terminology, investing in ethical reporting standards and advertising, and stopping allocation of public funding or material support to media outlets that systematically promote intolerance, xenophobia, racism and other forms of discrimination towards migrants, in full respect for the freedom of the media.

Again, muddled at best.  You want to stop any public funding to outlets whose views are “unacceptable”, while having “full respect for the freedom of the media”.   Since I’m not entirely convinced there is a good case for public funding of any media outlets –  and since the publicly-funded outlets in New Zealand are champions of high immigration and all “worthy” leftist causes anyway –  it isn’t clear what difference this might make in New Zealand.    And there seem to be some MPs –  particularly in Labour and the Greens –  who aren’t too keen on allowing free speech on such issues anyway, whether or not we sign up to UN non-binding declarations.

And finally under Objective 17

Engage migrants, political, religious and community leaders, as well as educators and service providers to detect and prevent incidences of intolerance, racism, xenophobia, and other forms of discrimination against migrants and diasporas and support activities in local communities to promote mutual respect, including in the context of electoral campaigns.

All very asymmetric –  nothing at all about engaging with communities that might be uneasy about high immigration, or the immigration of groups with values antithetical to those of the destination community.  Perhaps, in some respects, this commitment troubles me more than most.   “Intolerance” is not an offence (in principle or in law) and it is the perfect right of people to debate –  perhaps especially in election campaigns – the future composition of their society.   A Saudi Wahhabi, a Chinese Communist Party zealot, an American evangelical, and a French secularist are all very different sorts of people. In large numbers, each group transplanted to (say) New Zealand would make a material difference to the society and polity we have here.  Those debates matter –  unless, apparently like the authors of this document –  you regard all differences of culture, politics, religion etc as superficial rather than fundamental.

As I said at the start, there is no obvious need for this document.  And even if there were obvious gaps, the very fact that it is a non-binding political declaration suggests it could meet no substantive need.  But in a New Zealand context, there are policies and practices around immigration that are much more damaging and threatening, particularly to our long-term economic performance, and perhaps in other areas too.  Among them:

  • the immigration policies of the National Party
  • the immigration policies of the Labour Party
  • the immigration policies of the Green Party
  • the immigration policies of ACT, and
  • the immigration policies of New Zealand First

I think that pretty much covers the spectrum.

There is no conceivable universe in which some international declaration –  or even agreement – around immigration would be more liberal and (in our specific economic circumstances) more damaging than what our political parties have done to us all by themselves.

 

 

Promoting constructive vigilance

Michael Reddell China, NZ politics, Uncategorized

That was the sub-title to the substantial (200 pages or so) new report released last week by the Hoover Institution at Stanford University on Chinese (PRC) influence activities in the United States (but with eight case studies on the situation in other countries, including one on New Zealand which draws largely on the work of Anne-Marie Brady).

The report is the product of a working group of 33 academics, think-tankers, and journalists specialising in PRC-related issues.  Around half those involved are academics.  Of the 33, 10 are ‘international associates’ –  again, about half academics –  bringing perspectives to bear on PRC activities in other countries, including three Australians and Anne-Marie Brady.

I read the report over the weekend.  I’m not sure there is a great deal new in it, but it is easy to read, and extensively documented, and the accumulation of material helps build the picture.     And even on New Zealand, there are striking lines from the Magic Weapons paper that one forgets

The Chinese government considers New Zealand an “exemplar of how it would like its relations to be with other states.” One unnamed Chinese diplomat even characterized relations between the two countries as similar to China’s close ties with totalitarian Albania in the early 1960s.

Or bits I’d never noticed previously

Individuals with strong ties to United Front organizations have donated several million dollars, primarily to the National Party. One such individual, who donated $112,000 to the National Party in 2017, is listed as an officer of no fewer than seven United Front organizations.

Then again, it was Labour bestowing the QSM on Yikun Zhang.

But the focus of the report is on the United States.  In many areas one is struck by the similarity of the story to the work done on these issues for New Zealand.

The Chinese Communist party-state leverages a broad range of party, state, and non-state actors to advance its influence-seeking objectives, and in recent years it has significantly accelerated both its investment and the intensity of these efforts. While many of the activities described in this report are state-directed, there is no single institution in China’s party-state that is wholly responsible…..   Because of the pervasiveness of the party-state, many nominally independent actors— including Chinese civil society, academia, corporations, and even religious institutions— are also ultimately beholden to the government and are frequently pressured into service to advance state interests.

or

China’s influence activities have moved beyond their traditional United Front focus on diaspora communities to target a far broader range of sectors in Western societies, ranging from think tanks, universities, and media to state, local, and national government institutions. China seeks to promote views sympathetic to the Chinese Government, policies, society, and culture; suppress alternative views; and co-opt key American players to support China’s foreign policy goals and economic interests.

or (more remarkably in the much larger US market)

In the American media, China has all but eliminated the plethora of independent Chinese-language media outlets that once served Chinese American communities. It has co-opted existing Chinese-language outlets and established its own new outlets.

The report builds to a set of policy principles and recommendations.  They group the principles and recommendations under three headings: Transparency, Integrity, and Reciprocity.   Under the first two headings, most of what they suggest seems (a) sensible, and (b) relevant to other countries where these issues arise, including New Zealand.

Here are the Transparency principles (there are more detailed recommendations below many of these).

Transparency is a fundamental tenet and asset of democracy, and the best protection against the manipulation of American entities by outside actors.

• American NGOs should play an important role in investigating and monitoring illicit activities by China and other foreign actors. They should as well seek to inform themselves about the full range of Chinese influence activities and the distinctions between legitimate and illegitimate influence efforts.

• Congress should perform its constitutional role by continuing to investigate, report on, and recommend appropriate action concerning Chinese influence activities in the United States. It should update relevant laws and regulations regarding foreign influence, and adopt new ones, to strengthen transparency in foreign efforts to exert influence.

• Executive branch agencies should similarly investigate and publicize, when appropriate, findings concerning these activities, with a view to promoting healthy and responsible vigilance among American governmental and nongovernmental actors.

• The US media should undertake careful, fact-based investigative reporting of Chinese influence activities, and it should enhance its knowledge base for undertaking responsible reporting.

• Faculty governance is the key to preserving academic freedom in American universities. All gifts, grants, endowments, and cooperative programs, including Confucius Institutes, should be subjected to the usual procedures of faculty oversight.

• US governmental and nongovernmental sectors should disclose financial and other relationships that may be subject to foreign influence.

And yet, to reflect on this list of items is to realise how much more serious the issue is here.   There are few relevant NGOs, the media is struggling and thinly-resourced, and instead of Parliament taking any sort of lead we have the former PLA intelligence official sitting in Parliament, not apparently bothering either National or Labour, and Raymond Huo –  with various United Front connections, and openly championing PRC perspectives –  chairs our Parliament’s Justice committee, dealing with electoral law.    The Opposition leader is soliciting large donations through people with close connections to Beijing, and Jian Yang is reputed to be the biggest National Party fundraiser.  (Again, in this regard US campaign finance laws, including disclosure provisions, are well ahead of our own.) The National Party’s president praises the Beijing regime and its leader, and if Labour’s president hasn’t been heard from for a while, he has form in that area too.   Our system is already corrupted, whereas (from the report) on this particular dimension the threat to the US system is still nascent.

As for the executive (political and official), they remain keen to say quite as little as possible – on any dimension of the issue (donations, cyber-security, Chinese language media, threats –  whether to Professor Brady or people in the ethnic Chinese community), and direct money to propaganda outfits like the New Zealand China Council to help keep the populace in line.  Winston Peters this morning refused to even accept an interviewer’s description of the PRC as becoming “increasingly authoritarian” (although, as he implied, there has not been a time since 1949 when it been anything other than highly authoritarian and repressive).

What of disclosure?  I linked the other day to a comment from consultant and former academic Paul Buchanan about PRC funding of parts of our universities.  If true, these contributions (and those of any other foreign government) should be fully and routinely disclosed.   And what about travel?   In the flurry of stories about Yikun Zhang it emerged that the Mayor of Southland had been travelling to the PRC, working closely with (and travelling at the expense of) Beijing-affiliated Zhang.   I was struck reading the Hoover report by the observation that US members of Congress can’t accept gifts of travel, and the same day I read that a reader sent me a link to a story about Clutha Southland National MP Hamish Walker (and other local body officials) on (PRC) paid trips to China.   Shouldn’t any such (paid for) trips simply be prohibited?  I’m sure MPs do their jobs better for some travel, but either they personally or the New Zealand taxpayer should be paying.  Not vested interests –  corporate or other governments.

What about integrity?  These were the high-level principles

Foreign funding can undermine the independence of American institutions, and various types of coercive and covert activities by China (and other countries) directly contradict core democratic values and freedoms, which must be protected by institutional vigilance and effective governance.

• Openness and freedom are fundamental elements of American democracy and intrinsic strengths of the United States and its way of life. These values must be protected against corrosive actions by China and other countries.

• Various institutions—but notably universities and think tanks—need to enhance sharing and pooling of information concerning Chinese activities, and they should promote more closely coordinated collective action to counter China’s inappropriate activities and pressures. This report recommends that American institutions within each of the above two sectors (and possibly others) formulate and agree to a “Code of Conduct” to guide their exchanges with Chinese counterparts.

• When they believe that efforts to exert influence have violated US laws or the rights of American citizens and foreign residents in the United States, US institutions should refer such activities to the appropriate law enforcement authorities.

• Rigorous efforts should be undertaken to inform the Chinese American community about potentially inappropriate activities carried out by China. At the same time, utmost efforts must be taken to protect the rights of the Chinese American community, as well as protecting the rights of Chinese citizens living or studying in the United States.

• Consideration should be given to establishing a federal government office that American state and local governments and nongovernmental institutions could approach—on a strictly voluntary basis—for advice on how best to manage Chinese requests for engagement and partnership. This office could also provide confidential background on the affiliations of Chinese individuals and organizations to party and state institutions.

That last suggestion seemed like one that should be considered here, as local government figures seem all to keen on accepting PRC approaches for relationships, oblivious to (or unconcerned by) the wider political context.  I’m not sure what Yikun Zhang’s interest in the Mayor of Southland specifically is, but I’m pretty sure it isn’t just that they got on well over a beer.  As the  report notes

….it is important for local officials to understand that local American “exchange” companies that bring Chinese delegations to the United States and promote professional interactions between the United States and China all depend on official PRC sanction and have received approval to receive Chinese delegations. The business model of such companies is, of necessity, as much political as financial. Even if they conduct high-quality programs, they should not be viewed as disinterested actors. They, too, are subject to rules made by the Chinese Communist Party, its united front bureaucracy, and united front strategic imperatives.

Where I was a bit more sceptical –  and where there seems to be some ongoing debate –  was around the idea of Reciprocity.    As academics, think-tankers and journalists, they are  –  as group – frustrated over how difficult it is for many to get visa access to the PRC, research in the PRC, use PRC government archives etc.  They contrast this to the fairly open access PRC researchers and employees of PRC media outlets have in the United States, and propose that the US should tighten up to try to gain greater access for outside researchers and journalists to China.  One can understand their grievance, but are these people really suggesting that open societies (the US or places like New Zealand) should adopt a PRC approach to things?    When it comes to foreign trade, “retaliatory” tariffs mostly end up hurting consumers in the country imposing them. Perhaps things are different when it comes to idea, research etc, but surely one of the great strengths – not vulnerabilities –  of our sort of system is our openness?

Early in the report I was struck by the observation that the working group did not “generally oppose” Confucius Institutes  (three in New Zealand, very many in the US –  although some have since been closed by the host universities).  But as I read on I found the specific recommendations

Confucius Institutes We do not endorse calls for Confucius Institutes to be closed, as long as several conditions are met.

US institutions should make their CI agreements public to facilitate oversight by members of the university community and other concerned parties. Those agreements, in turn, must grant full managerial authority to the host institution (not on a shared basis with the Hanban), so the university has full control over what a CI teaches, the activities it undertakes, the research grants it makes, and whom it employs. The clause in all Hanban contracts that CIs must operate “according to China’s laws” must be deleted.   If these standards cannot be attained, then the CI agreements should be terminated.

Furthermore, universities should prevent any intervention by CIs in curricular requirements and course content in their overall Chinese studies curricula or other areas of study by maintaining a clear administrative separation between academic centers and departments on the one hand, and CIs on the other. Finally, universities must ensure that all public programming offered by their CIs conform to academic standards of balance and diversity and do not cross the line to become a platform for PRC propaganda, or even a circumscribed view of a controversial issue. In fact, this report would suggest that universities not permit Confucius Institutes to become involved in public programming that goes beyond the CI core mission of education about Chinese language and culture. To go beyond these two categories invites opportunities for politicized propaganda.

As I understand it, few of those tests would be met in respect of the New Zealand Confucius Institutes (the one that is, as I understand it, is that the Confucius Institutes are not involved in the host university’s own courses or curriculum).   And, in addition, there is the unstated dimension as to whether our governments and universities should be facilitating the presence of PRC-appointed and paid staff in our schools –  the PRC being one of the most heinous regimes on the planet (as well as ruling a relatively poor country, which means we allow the taxes of poor foreigners to help pay for the education of our kids.)  If the PRC wants to subsidise Chinese-language learning then good luck to them, but let them set up downtown and market for clients in the way other countries’ language-teaching operations (Alliance Francaise, Goethe Institute) do.

Reprising a theme in my post on Saturday, there was this line about the compromised nature of universities.

The message from China to US universities is clear: Do not transgress the political no-go zones of the Chinese Communist Party or government, or you will pay a price. Sometimes the pressure is overt; other times it is more subtle and indirect, but no less alarming. Some American faculty members report troubling conversations with university administrators who continue to view Chinese students as such a lucrative revenue stream that it should not be endangered by “needlessly irritating Chinese authorities.”

There is lots more in the report, which is well-worth reading if you have the time.

Perhaps my bottom-line unease about the report was a bit of a reluctance to call a spade a spade.    For example, at least amid the discussion of the difficulties foreign academics and journalists face in the PRC, there was either a touching naivete, or a wilful refusal to face the fact, that the PRC is not a normal country, that just needs a few nudges to bring their attitudes and behaviours into line.   Why would one expect the PRC to behave differently, given the nature of the regime?   Obviously, all those involved know much about the true situation, but there was an apparent reluctance to say out loud that the party/State is  –  and for decades has been –  a malevolent force, at home, abroad, and increasingly in other countries.  Look at the tens of millions killed under the depraved indifference of the Party, the masss incarcerations, the forced organ transplant, at the near-total absence of freedom of speech, freedom of religion, the rule of law, or at the decades of the one-child policy. Look at the huge scale industrial espionage.  Look at the militarisation of the South China Sea, the constant threats to free and democratic Taiwan, or all the influence activities the report documents in the US and other countries, including attempting to subvert ethnic Chinese abroad and pressure them –  whatever there citizenship –  to advance PRC ends.  I know some people regard comparisons between the PRC and late-1930s Germany as overstated or unhelpful.  But such parallels seem increasingly valid –  not as prophecy, but as description –  and helpful in prompting those –  some perhaps individuallly decent people –  who just go along, to stop and think about the nature of the evil they accommodate or abet.  New Zealand politicians, of both stripes, as an example.

We have to be more than sum of our deals, more than the flow of political donations.

People might (as I do) distrust Trump on these issues for his typical inconstancy.  The difference here is that there is a constancy, but one that seems determined to, in effect, serve PRC interests, not the interests of New Zealanders, or the values that underpin our society (perhaps those involved try to tell themselves the two interests are much the same?).   That is why I still regard the “choose between China and the US” line as a false one.  Our governments could choose to go along with much of whatever (limited amount) the US is doing in foreign policy (or not), and still have abandoned any sense of integrity around our own system.  Personally, much as I welcomed the decision to buy the P-8 aircraft earlier in the year, I’d be more persuaded by our “leaders” if they had

  • combined to get Jian Yang and Raymond Huo out of Parliament,
  • defunded the China Council,
  • amended electoral laws to stop Phil Goff funding his mayoral campaign with anonymous mainland donations and to force comprehensive disclosure (at the level of the ultimate human donors) of all significant political donations,
  • done something to manage the exposure of the universities and the way in which that exposure risks compromising effective freedom to speak,
  • agreed together to stop issuing statements of praise for the PRC and Xi Jinping, and
  • foreswore accepting donations from anyone with significant United Front connections.

As a start.

Without steps like that, we could end up banning Huawei,  buying P-8s, being in the good graces of the US and Australia, and it just wouldn’t matter much. We’d still have severely compromised the integrity of our political system and our own longer-term interests.

 

What?

Michael Reddell Adrian Orr, Financial stabilty

In the press release for last week’s Reserve Bank Financial Stability Report, the Governor commented that

Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

In commenting briefly on that, I observed

Time will tell how persuasive their case is, but given the robustness of the banking system in the face of previous demanding stress tests, the marginal benefits (in terms of crisis probability reduction) for an additional dollar of required capital must now be pretty small.

There wasn’t much more in the body of the document (and, as I gather it, there wasn’t anything much at the FEC hearing later in the day), so I was happy to wait and see the consultative document.

But the Governor apparently wasn’t.  At 12.25pm on Friday a “speech advisory” turned up telling

The Reserve Bank will release an excerpt from an address by Governor Adrian Orr on the importance of bank capital for New Zealand society.

It was to be released at 2 pm.   The decision to release this material must have been a rushed and last minute one –  not only was the formal advisory last minute, but there had been no suggestion of such a speech when the FSR was released a couple of days previously.

And, perhaps most importantly, what they did release was a pretty shoddy effort.    We still haven’t had a proper speech text from the Governor on either of his main areas of responsibility (monetary policy or financial regulation/supervision) but we do now have 700 words of unsubstantiated (without analysis or evidence) jottings on a very important forthcoming policy issue. which could have really big financial implications for some of the largest businesses in New Zealand and possibly for the economy as a whole.

The broad framework probably isn’t too objectionable.  All else equal, higher capital requirements on banks will reduce the probability of bank failures, and so it probably makes sense to think about the appropriate capital requirements relative to some norm about how (in)frequently one might be willing to see the banking system run into problems in which creditors (as distinct from shareholders) lose money.  At the extreme, require banks to lend only from equity and no deposit or bondholder will ever lose money (there won’t be any).

But what is also relevant is the tendency of politicians to bail out banks.  Not only does the possibility of them doing so create incentives for bank shareholders to run more risks than otherwise (since creditors won’t penalise higher risk to the same extent as otherwise), but there is a potential for –  at times quite large –  fiscal transfers when the failures happen.  Politicians have more of an incentive to impose high capital requirements on banks when they acknowledge their own tendencies to bail out those banks.  If, by contrast, they could resist those temptations –  or even manage them, in say a model with retail deposit insurance, but wholesale creditors left to their own devices –  it would also be more realistic to leave the question of capital structure to the market –  in just the same way that the capital structure of most other types of companies is a mattter for the market (shareholders interacting with lenders, customers, ratings agencies and so on).

But nothing like this appears in the Governor’s jottings.  Instead, we have the evil banks, the put-upon public and the courageous Reserve Bank fighting our corner.   I’d like to think the Governor’s analysis is more sophisticated than that, and one can’t say everything in 700 words, but…..it was his choice, entirely his, to give us 700 words of jottings and no supporting analysis, no testing and challenging of his assumptions etc.

There are all manner of weak claims.  For example

We know one thing for sure, the public’s risk tolerance will be less than bank owners’ risk tolerance. 

I think the point he is trying to make is about systemic banking crises –  when large chunks of the entire banking system run into trouble.  There is an arguable case –  but only arguable –  for his claim in that situation, but (a) it isn’t the case he makes, and (b) I really hope that (say) the shareholders of TSB or Heartland Bank have a lower risk tolerance around their business than I do, because I just don’t care much at all if they fail (or succeed).  Their failures  –  should such events occur –  should be, almost entirely, a matter for their shareholders and their creditors, with little or no wider public perspective.

There are other odd arguments

Banks also hold more capital than their regulatory minimums, to achieve a credit rating to do business. The ratings agencies are fallible however, given they operate with as much ‘art’ as ‘science’.

Bank failures also happen more often and can be more devastating than bank owners – and credit ratings agencies – tend to remember.

And central banks and regulators don’t operate “with as much ‘art’ as ‘science'”?   Yeah right.   And the second argument conflates too quite separate points.  Some bank failures may be “devastating” –  although not all by any means (remember Barings) –  but the impact of a bank failure isn’t an issue for ratings agencies, the probability of failure is.   And I do hope that when he gets beyond jottings the Governor will address the experience of countries like New Zealand, Australia, and Canada where –  over more than a century –  the experience of (major) bank failure is almost non-existent.

The Governor tries to explain why public and private interests can diverge (emphasis added)

First, there is cost associated with holding capital, being what the capital could earn if it was invested elsewhere. Second, bank owners can earn a greater return on their investment by using less of their own money and borrowing more – leverage. And, the most a bank owner can lose is their capital. The wider public loses a lot more (see Figure 2).

But what is Figure 2?

figure 2

Which probably looks –  as it is intended to –  a little scary, but actually (a) I was impressed by how small many of these numbers are (bearing in mind that financial crises don’t come round every year), and (b) more importantly, as the Governor surely knows, fiscal costs are not social costs.  Fiscal costs are just transfers –  mostly from one lots of citizens (public as a whole) to others.  I’m not defending bank bailouts, but they don’t make a country poorer, all they do is have the losses (which have arisen anyway) redistributed around the citizenry.  If the Governor is going to make a serious case, he needs to tackle –  seriously and analytically –  the alleged social costs of bank failures and systemic financial crises.  So far there is no sign he has done so.  But we await the consultative document.

There is a suggestion something more substantive is coming

We have been reassessing the capital level in the banking sector that minimises the cost to society of a bank failure, while ensuring the banking system remains profitable.

The stylised diagram in Figure 3 highlights where we have got to. Our assessment is that we can improve the soundness of the New Zealand banking system with additional capital with no trade-off to efficiency.

and this is Figure 3

capital chart

It is a stylised chart to be sure, but people choose their stylisation to make their rhetorical point, and in this one the Governor is trying to suggest that we can be big gains (much greater financial stability, and higher levels (discounted present values presumably) of output) by increasing capital requirements on banks.

I don’t doubt that the Bank can construct and calibrate a model that produces such results.  One can construct and calibrate models to produce almost any result the commissioning official wants.  The test will be one of how robust and plausible the particular specifications are.  We don’t know, because the Governor is sounding off but not (yet) showing us the analysis.  Frankly, I find the implied claim quite implausible.   Probably higher capital requirements could reduce the incidence of financial crises.  But the frequency of such events is already extremely low in well-governed countries where the state minimises its interventions in the financial system, so I don’t see the gains on that front as likely to be large.    And, as I’ve outlined here in various previous posts I don’t think that the evidence is that persuasive that financial crises themselves are as costly as the regulators (champing at the bit for more power) claim.  And many of the costs there are, arise from bad borrowing and lending, misallocation of investment resources, which are likely to happen from time to time no matter how well-capitalised the banks are.

There are nuanced arguments here, about which reasonable people can disagree. But not in the Governor’s world apparently.

He comes to his concluding paragraph, the first half of which is this

A word of caution. Output or GDP are glib proxies for economic wellbeing – the end goal of our economic policy purpose. When confronted with widespread unemployment, falling wages, collapsing house prices, and many other manifestations of a banking crisis, wellbeing is threatened. Much recent literature suggests a loss of confidence is one cause of societal ills such as poor mental and physical health, and a loss of social cohesion.

Oh, come on.  “Glib proxies”……..    No one has ever claimed that GDP is the be-all and end-all of everything, but it is a serious effort at measurement, which enables comparisons across time and across countries.  Which is in stark contrast to the unmeasureable, unmanageable, will-o-wisp that the Governor (and Treasury and the Minister of Finance) are so keen on today.

As for the rest, sometimes financial stresses can exacerbate unemployment and the like,  but the financial crises typically arise and deepen in the context of common events or shocks that lead to both: people default on their residential mortgages when they’ve lost their jobs and house prices have fallen, but those events don’t occur in a vacuum.  And anyone (and Governor) who wants to suggest that mental health crises and a decline in social cohesion can be substantially prevented by higher levels of bank capital is either dreaming, or just making up stuff that sounds good on a first lay read.

The Governor ends with this sentence

If we believe we can tolerate bank system failures more frequently than once-every-200 years, then this must be an explicit decision made with full understanding of the consequences.

As if his, finger in the dark, once-every-200 years is now the benchmark, and if not adopted we face serious consequences.   Let’s see the evidence and analysis first.  Including recognition that systemic banking crises don’t just happen because of larger than usual random shocks –  the isimplest scenario in which higher capital requirements “work” –  but mostly from quite rare and infrequent bursts of craziness, not caused by banks in isolation, but by some combination of banks and (widely spread) borrowers, often precipitated by some ill-judged or ill-managed policy intervention chosen by a government.   Higher capital ratios just aren’t much protection against the gross misallocations that arise in the process –  in which much of any waste/loss is already in train (masked by the boom times) before any financial institution runs into trouble (the current Chinese situation is yet another example).

Perhaps as importantly, under the current (deeply flawed) Reserve Bank Act the choice about capital is one the Governor is empowered to make.  But his deputy, responsible for financial stability functions, had some comments to make on this point in a recent speech (emphasis added)

And Phase 2 of the Government’s review is an opportunity for all New Zealanders to consider the Reserve Bank’s mandate, its powers, governance and independence. The capital review gives us all an opportunity to think again about our risk tolerance – how safe we want our banking system to be; how we balance soundness and efficiency; what gains we can make, both in terms of financial stability and output; and how we allocate private and social costs.

It may be that the legislation underpinning our mandate can be enhanced, for example, by formal guidance from government or another governance body, on the level of risk of a financial crisis that society is willing to tolerate.

These are choices that should be made by politicians, who are accountable to us, not by a single unelected and largely unaccountable (certainly to citizenry) official.  We need officials and experts to offer analysis and advice, not to be able to impose their personal ideological perspectives or pet peeves on the entire economy and society.

We must hope that the forthcoming consultative document is a serious well-considered and well-documented piece of analysis, and that having issued it the Governor will be open to serious consideration of alternative perspectives.  But what was released last Friday –  700 words of unsupported jottings –  wasn’t promising.

(I should add that I have shifted my view on bank capital somewhat over the years, partly I suspect as a result of no longer being inside the Bank. It is somewhat surprising how –  for all one knows it in theory –  things look different depending on where one happens to be sitting.  But my big concern at present is not that it would necessarily wrong to raise required bank capital, but that the standard of argumentation from a immensely powerful public official seems –  for now – so threadbare.)