Culture and conduct in question

Stuff’s new, apparently Canadian, journalist Kate MacNamara is doing a pretty good job of keeping up the pressure on the Governor of the Reserve Bank, Adrian Orr.  It is hard to believe a New Zealand journalist would have done so –  one column perhaps, but not three in a week.  Then again, I’m pretty sure we’ve never had a Reserve Bank Governor behaving in quite such an egregious and unacceptably poor way –  not as a single lapse of judgement either, but as a sustained pattern of behaviour.  Sadly, the conduct of the Board (and the Minister?) in such matters, of which more below, is all too typical of the New Zealand establishment.

MacNamara’s latest (“Orr’s culture and conduct in question”) was in the Sunday Star-Times yesterday.   She frames the issue as one of whether the desired end (a stronger banking system) justifies the means (Orr’s conduct).  I’m not sure that is the best way to frame the issue, but here is her take

In December, the Reserve Bank released its boosted capital reserves proposal and asked all interested parties to make submissions.

It would be an open process, the bank said, welcoming all views. But that characterisation was soon at odds with the governor’s behaviour.

Numerous parties involved in the submission process described a pattern of behaviour by Orr of belittling and berating those who disagreed with him.

Orr has penned his critics letters and threatened to broadcast them. He has confronted submitters on the sidelines of industry conferences. Sometimes he called them up at odd hours to tear a strip off them for their views.

And that is before starting on the not-particularly-robust analysis in support of the Governor’s proposal  –  for a huge increase in bank capital ratios, after years when the Bank assured us the system was sound and robust – that the Bank has, only slowly, been rolling out.  Cost-benefit analysis anyone?  Only after he has made his final decision –  for which there are no rights of appeal –  the Governor tells us.

As MacNamara notes, Orr wields an extraordinary level of power in this area –  unparalleled, as far as I know, anywhere in the advanced world.  He can wheel up a proposal, working to no very well defined parliamentary mandate, has only to jump through process hoops around consultation, and then makes the final decision all by himself.  There are no substantive appeals allowed, and the Minister of Finance cannot overrule him (though could, if he chose, bring other pressures to bear).

One of my criticisms of the Governor is that he doesn’t stay in his lane, and sounds off on all manner of highly political issues in pursuit of his personal ideological agendas (in ways we’d find quite unacceptable if other senior independent figures –  the Police Commissioner, the Chief Justice eg – were to do it).  Sadly, that has become quite common –  especially around climate change – among central bankers globally, and Mark Carney (Governor of the Bank of England) has made pretty clear his personal views on Brexit.  As MacNamara notes, apparently

To provide a little context, Orr was recently compared in his outspokenness to Bank of Engand governor Mark Carney.

Paul Waldie covers Carney in London as the European correspondent for Canada’s Globe and Mail newspaper. Carney was previously governor of the Bank of Canada.

Carney has been criticised for playing politics in his estimations of the cost of Brexit in the United Kingdom.

But Waldie is emphatic. “He’s never rude. He’s never personal. He doesn’t hit back at his critics. He’s cool-headed.”

Carney provides no precedent for phoning adversaries after hours, neither blasting them from the lectern or on the sidelines of industry meetings and events.

He gives serious thoughtful speeches as well.

MacNamara concludes

On the contrary, Orr appears to be unrivalled among central bankers in the developed world for the tempestuous and personally directed venting of his views.

I’ve watched, and participated in, central banking for a long time, and that would be my view too.  MacNamara introduces another overseas expert on such matters.

Annelise Riles of Northwestern University’s Buffett Institute for Global Affairs, who’s studied the behaviour of central bankers and has even written a book about them, couldn’t think of a single comparator in contemporary times.

Central banks certainly use many channels to communicate with banks, she said. And it’s not uncommon for central bankers to let banks know how they feel.

“But berating them publicly is just not seen very much,” she said. And though private exchanges are less visible, she couldn’t think of any examples of bald incivility or hostility.

Central bank heads often aren’t even close to saints  (just think back a few years to the way Graeme Wheeler and his top team –  including the current Dep Governor – were used in a not-at-all subtle attempt to shut down criticism from the BNZ’s Stephen Toplis), but nonetheless Orr’s sustained pattern of conduct seems to stand out.  Perhaps the only “defence” one might make of it is that what you see is what you get –  he has always been known for these sorts of tendencies.  He can behave fine when he is on top in an unquestioned way, but put him under any sort of pressure and he isn’t someone to conduct himself with dignity, civility, and respect.

I haven’t had particularly bad experiences of Orr’s personal conduct myself. I had quite a bit to do with him in his two earlier stints in the Reserve Bank, but when he was Chief Economist I was in the Financial Markets Department and when he was head of financial markets and bank supervision I was in the Economics Department.  I saw shonky analysis in support of questionable policies, and didn’t have much time for his divisive style (which, remarkably, he owned up to in a farewell speech when he left the Bank the first time).  But I was left some mix of underwhelmed and bemused  –  at this extremely ambitious, outgoing, sometimes amusing, opportunistic, but not fundamentally serious person –  rather than having any particular sense of personal grievance.  When he was appointed Governor I wrote a couple of posts (one here) that I still think read as a pretty balanced treatment, if generous with the benefit of hindsight.

Others have had a much stronger view.  This comment was left on my Saturday post by Geof Mortlock, who worked directly under Adrian during both of Orr’s previous Reserve Bank stints.

None of what we are seeing with Adrian Orr surprises me in the least. It is precisely what I had expected when he was appointed as governor. The problems so clearly revealed now for all to see were very much evident to me and many others when Orr was deputy governor and head of financial stability in the period 2003 to 2007.  He created a sense of panic when there was no need for it. He engaged aggressively with Australian banks when mature, adult dialogue would have been far more effective and appropriate. He facilitated and abetted an aggressive and petulant fight with APRA, RBA and Aussie Treasury over trans-Tasman regulatory issues rather than seeking to resolve them in a considered, intelligent manner. He engaged aggressively with staff and routinely bullied them. He created a deep level of stress in the RBNZ among staff that contributed to the departure of some key people. I can attest to what it was like working with him. I and others departed the RBNZ because of the severe impact he had on morale and because of concerns over mismanagement of issues and because of the appalling culture that he and others created in the RBNZ. Bollard presided over much of this, either unaware or unconcerned, and did nothing to address the matter from what I could see.

Now that Orr is governor, his unsuitability for the job is evident for any impartial observer to see. The lack of judgement, unsuitable temperament, lack of maturity, inadequate knowledge of the issues and a serious failure to intelligently addressthe policy issues are all obvious to anyone who cares to look at his performance.

Sadly, the RBNZ Board seems to lack the competence or mettle to do anything about it. Its recent annual report was a pathetic effort at exercising meaningful scrutiny over Orr. Even more sadly we seem to have a minister of finance who is asleep at the wheel and either turning a blind eye to Orr’s appalling incompetence in handling the tasks entrusted to him or who is happy to see Orr playing an overtly political role that is totally inappropriate for someone holding office as governor.

It is time that the people with authority over Orr did something about his conduct, statements and handling of policy issues. The RBNZ’s credibility is at stake. And serious policy outcomes are under threat. Robertson and the Board need to take action to address the Orr problem.

Ah, the Board.  They got us into this mess.   Assuming they followed the provisions of the Act (and didn’t just take guidance from Grant Robertson) they are the one’s responsible for his appointment as Governor.  They don’t have many other specific powers, but they have an overarching responsibility to keep under “constant review” the performance of (a) the Bank, and (b) specifically, the Governor in whom most of the powers of the Bank are still personally vested.    If the Board isn’t satisfied they must advise the Minister in writing, and may go so far as to recommend the dismissal of the Governor.  (Regardless of the views of the Board, the Minister may also recommend dismissal of the Governor is satisfied that the Governor has not “adequately discharged” the responsibilities of his office.)

Last week I suggested that one omission from the first MacNamara article was any sign of having approached the Board.  I didn’t expect she’d get much if she asked, but what the chair said was likely to be telling, even if he simply stonewalled.   Anyway, for this week’s article MacNamara went to the chair, the economist academic (and Vice-Chancellor of Waikato) Neil Quigley and sought comment.  This is what she got.

Orr’s chequered behaviour is not something on which the Reserve Bank chairman, Neil Quigley, is prepared to act.

“I have not received a formal complaint from any party about the governor’s interaction with them,” he said. “The Board has full confidence in Adrian Orr’s leadership.”

Some people will argue that Quigley had little choice but to express full confidence (for a corporate board you back the incumbent until you sack him or her).  I don’t agree with that take, given that the Reserve Bank’s Board is explicitly set up as a monitoring and accountability body, with its own public reporting responsibilities etc separate from those of the Bank.     It isn’t an executive body.

But what startled me wasn’t the formulaic “full confidence” line  so much as the rest of the comment.  Here is how Eric Crampton phrased his response to Quigley’s comments

eric orr.png

Quite.   Of course, Orr doesn’t have much power over some people who have been badly treated by him –  for example, the academic Martien Lubberink –  but the general point, that one is dealing a very powerful man here, is well made.  How did the Board so diminish its own sense of its role that the only thing they’d be interested in is a “formal complaint”?  And why would they suppose anyone would bother them when the Board –  under Quigley and his predecessors (think of the Toplis business or the OCR leak) –  has a long record of really only acting as fronts for successive Governors (even on rare occasions when something approaching a “formal complaint” has been made).    It is almost like a climate in which everyone knows there has been, say, a culture of sexual harrassment in an organisation, perhaps starting from the top, but no one quite has the courage to lodge a formal complaint –  the fact that “everyone knows” something should still put a Board on notice that there is something to get to the bottom of, something that needs addressing.   Quigley and his colleagues surely are reading the newspapers and other commentary and they should be keeping an ear open on the cocktail party circuits etc they no doubt frequent. It is their job –  “constant review”, not simply responding to a “formal complaint”, whatever one of those might be in this context.

That is what serious people doing the Reserve Bank Board job would be doing.  But, of course, no one –  with the possible exception of the Governor –  has any confidence in the Board to do its job.  It is why the government has made an in-principle decision to remove that role from them, but in the meantime perhaps they do a public service in demonstrating just what a pointless useless entity there are.  I gather the Board has its monthly meeting on Friday,  It is time for a rethink, and for beginning to finally take seriously the growing concerns about the Governor, not waiting for “formal complaints” Perhaps Quigley’s comment could even perhaps spur a few people to consider lodging ‘formal complaints” –  not necessarily because as individuals they can’t cope with a rude bully, but because we should expect much better standards of behaviour from powerful public figures.

The whole episode –  the bank capital review –  has been characterised by poor process, poor substance, and astonishingly poor conduct, all of which are the Governor’s personal responsibility.  He needs to be called to account –  and not just by a journalist and a few specialist commentators –  by those formally charged with doing the job (Board and Minister), but also by his own senior managers (eg he has a deputy governor with a secure statutory position and earning $600000 per annum), decent people who must be getting increasingly uncomfortable with the boss’s style.   Apart from anything else, it is simply a shocking model for up and coming central bankers and financial system regulators.  People are shaped, for good and ill, by those who lead the organisations they are part of.   Rigour, detachment, courtesy, openness, gravitas, judiciousness and so on are the sorts of qualities we should expect to find in a Reserve Bank Governor.  Not one of them seems to characterise the incumbent.  It isn’t a single lapse of judgement, but a systematic pattern of  the sort of culture and conduct that should alarm anyone who cares about good governance and high-quality policymaking in New Zealand.

Unfit to govern?

I’m presuming Stuff’s Kate MacNamara won’t be very welcome at the Reserve Bank for quite some time.

She was the author of the double-page spread in last week’s Sunday Star-Times about the Governor (“Portrait of the Governor as a strongman” – note that is one word, not two, and the difference is quite important).  I wrote about that earlier in the week.  As a reminder of some of that article, it included this

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

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

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

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

“I’m worried about what he’s doing.”

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

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

and this, re the Governor’s approach around the bank capital debate

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

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

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

The Governor was reported to have refused any comment when approached for that story.

MacNamara followed her story up with a detailed piece on the Bank’s staffing and the loss of a succession of highly-qualified and experienced researchers over this year.  Names were named –  people who probably hoped never to see their  names in the general media –  and specific information was clearly provided to the journalist from insiders and people still very well-connected to the Bank’s Economics Department.  The story listed the departure of seven capable researchers who had left in the last year or so (and, at that, missed another name).  Those are large numbers.   In my time at the Bank it would have been rare to have had more than perhaps 10 researchers across the (then) Research and Modelling teams.

MacNamara’s sources were clearly keen on promoting a narrative of a hugely important and influential research function.  One might perhaps say, if only.  I have a high regard for several of the people in the list of the departed.     But the Bank’s key policy initiatives in recent years, whether in monetary policy or financial regulation, didn’t stem from, and were rarely directly supported by, good quality research generated by Bank researchers (there was some good work done, but often fairly tangential to the Bank’s immediate interests/needs).   The sources were also apparently keen on recently departed, having been effectively demoted, former chief economist John McDermott.  I have been on record as believing that Orr’s decision re McDermott was one of the better he has made, and as senior manager in charge of the research function McDermott has to take responsibility for the limited relevance of the research function over the last decade.    Even the Bank’s macroeconomic analysis was pretty underwhelming over much of that period.  All that was under previous Governors.   I’m critical of Adrian Orr for many things, but he can’t be blamed for that (whatever mix of factors played a part in the individual choices of the researchers to leave – and several of those who left were foreigners who had probably never seen their long-term future being in New Zealand).

The Bank must have been taken aback by MacNamara’s forthcoming story

A Reserve Bank spokeswoman said she could not answer quickly questions about staff departures and replacements.

She was unable to say how many staff with graduate degrees in economics or finance have departed in the last 18 months.

Neither could she tally immediately how many staff have joined in that time with similar academic credentials.

Pretty bad staff work, given that they must have known this issue was a point of vulnerability –  even the Annual Report had included a table showing high total staff turnover –  for which they should have been prepared.    Since the Bank publishes a page with details of their Economics Department research and analysis staff, it only took me a few minutes to run down the list and find several new PhD staff the Bank had hired relatively recently (albeit, by the look of it, only one with any knowledge of New Zealand).   It shouldn’t have been hard for the Bank to have got that information to the journalist.

(The article is mostly focused on the Economics Department, and although the journalist attempts to draw connections to the Bank’s poor performance around the bank capital proposals that is a bit unfair to the Governor – only rarely have Economics Department research staff had anything much to do with financial regulatory issues. Maybe it would be better if they did –  I used to argue for a broader focus (ie some actual research around the regulatory functions –  but the choice not to also long pre-dates Orr.  The absence of these particular researchers will have made little or no effective difference to how the bank capital proposals were made and marketed –  those choices were the Governor’s.

The sources who spoke to MacNamara were clearly also keen on PhD qualified staff.  The story highlights that there is no PhD held by anyone in the top-tier of the Bank (first time since 1988 I think), and repeats the contrast between the qualifications of McDermott and his replacements (new chief economist, new Assistant Governor).    Personally, I think this issue in considerably overdone.   Qualifications are not without value, of course, but research qualifications only take you so far in managing and leading a public sector policy organisation.  As I’ve pointed out, over the last 40 years the Bank has had 10 chief economists, only four of whom had PhDs, and at least on my reckoning both the best and worst of them had PhDs.   During the period when the Reserve Bank of Australia was widely-regarded as one of the best central banks in the world, it was led by people with much the same sort of academic qualifications as, say, Adrian Orr.  The presence or absence of a PhD at the top table is not what gave us a rushed, over-reaching, capital proposal with no ex ante cost-benefit analysis.  That is much more about the temperament and character of the Governor (and his right hand people who clearly weren’t willing or able to insist on something better).  In fact, the chair of the Bank’s Board not only has a PhD but is a university vice-chancellor no less, and he claims (in the recent Annual Report) that all is just fine at the Bank.

In many respects I don’t disagree with Eric Crampton’s concluding comment in the article

Eric Crampton, chief economist at the public policy think tank The New Zealand Initiative, said it mattered more in a small country like New Zealand that the Reserve Bank has internal research depth.

“There are very few academic macroeconomists and monetary theorists who pay much attention at all to New Zealand policy. There are, at most, a small handful who do.

“That means that having some of that serious firepower in the Bank matters more,” Crampton said.

Except that, in reality and in other countries, research depth inside and outside the central bank tend to be complements rather than substitutes.  And there is little point in having much of a research capability if it isn’t used to support robust policymaking and analysis. It hasn’t been for some time at the Bank, and that is mostly a reflection on a succession of senior managers and Governors (now including Orr), not on the staff involved.

The real prompt for this post was when, by chance, I noticed a statement from the Bank on its website, apparently released with no fanfare yesterday.  Here is the whole thing.

integrity.png

Get the sense Orr is feeling a bit embattled?

But instead of fronting up to, say, Kate MacNamara we get bluster and distraction (and this common confusion –  often found among senior public servants these days –  about the name of the country).

No one criticised their individual staff.  If there are criticisms to make they are of the leadership itself, mostly that of the Governor –  both because he is chief executive, and because he has a long track record of surrounding himself with people who will do his bidding and not challenge him.

See how the Governor suggests that the Bank somehow has a higher capacity for identifying what is good for New Zealand (yesterday, today and forever) than others, or even that they have a mandate to do so (they don’t).

See his claim that he holds “informed and mature conversations”, and contrast that with, for example, the rushed way they put out the bank capital proposals, the backfilling they had to do as the year went on, the refusal to engage on the substance of any concerns/challenges, the attempts to slur critics and regulated institutions alike, and those descriptions above of Orr’s “angry weekend phone calls” and the like.  This is the same Governor who has not given a single substantive speech on either of his core areas of policy responsibility in over 18 months in office.  It would be unheard of in any other other advanced democracy.

It is past time the Minister of Finance took the situation in hand. He is the one actually accountable to the public for the Reserve Bank.  He needs to be asking the Board chair and the Governor just what is going on, and why they are content for bluster to substitute for serious analysis and considered engagement –  not from staff, but from the Governor himself.   The problems at the Bank are at the top –  Board, Governor, and a weak senior management team –  not among the staff.   The Governor’s statement is an attempt at distraction, trying to suggest he is sticking up for staff (who don’t need it) when the problems start with him (and those paid to hold him to account).

Bluster shouldn’t be able to substitute for serious accountability.

 

 

 

 

 

Portrait of a strongman

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“I’m worried about what he’s doing.”

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

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

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

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

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

Another quote from the article

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

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

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

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

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

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

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

A rather well-paid Governor

When Adrian Orr was appointed Governor – in late 2017, taking up the job in March last year –  we were given to understand that

Orr’s salary at the central bank would be “in the range of the current governor” [that was reported as a quote from the Minister] “, whose most recent salary has been reported to be around $660,000 a year”.

At the time there was an (unlawfully appointed) “acting Governor” holding office, but it had been announced that he was being paid the same as the previous (lawful) Governor.   The most recent substantive Governor, Graeme Wheeler, had left office a couple of months earlier.

Wheeler’s last full financial year as Governor was the year to June 2017.  In that year, the highest paid person at the Bank is reported (Annual Report) to have received between $850-$860K that year, with a note disclosing that

The highest remuneration band includes a payment of $101,000 for accrued annual leave, which was paid in cash rather than taking annual leave.

In other words, his final year salary looks to have been around $750-$760K per annum.   As I pointed out in this post, it looks as though Wheeler had had perhaps a $90000 payrise that year (the case for which was distinctly questionable, but that is another post).

What of Orr?  The Reserve Bank’s Annual Report was released today.  Orr was in office for the full year, and there are no footnotes suggesting extraordinary payments (eg see above), and the relevant table suggests that the highest paid person at the Bank received $820-$830K last year.

Perhaps among the elites where Grant Robertson moves an additional $70000 a year is a mere bagatelle and pardonably covered by “within the range” of the previous Governor. One suspects ordinary voters might be more sceptical.   (And even if the Minister and the Board thought the Governor’s first year performance was superlative, the overwhelming bulk of the annual payment disclosed today has to relate to the rate at which Orr was first appointed –  and it is hard to believe the Minister would be giving the Governor a big rise when he is telling listed companies he is a shareholder in not to raise directors’ fees at all.)

In truth, high as the Governor’s pay is relative to other government agency CEOs, I would have no real objection to paying that amount for a really top-notch person. It is, after all, a job of great (barely trammelled) power and responsibility.   I strongly object to paying that amount of money for someone who just makes stuff up, tramples across the boundaries of his role, and who shows little no in-depth command of the issues and material he is responsible for.   You might have thought my comments on his speech last week were fairly critical, but my assessment was pretty moderate by the standards of comments I’ve had on it from other knowledgeable people (“woeful”) was the latest one I heard this morning –  and that is before getting started on his really rather appallingly-bad (but well off reservation) second speech last week.

But, as ever, not a murmur of concern is heard from the Bank’s Board or the Minister.  For the latter, it must be convenient that the Governor spins so often, perhaps to keep spirits up.    That might be a job for the Minister and the Prime Minister.  It most certainly isn’t the role of the Governor, and his stewardship to date is diminishing his own standing and that of the institution he leads.  With a Secretary to the Treasury who knows nothing about New Zealand (but at least has an excuse for not doing so) and a Governor of the Reserve Bank who, whatever he really knows, just makes stuff up, the public are very poorly served by our key economic institutions.   Responsibility for that rests with the Minister of Finance.

A strikingly poor speech from the Governor

On Wednesday afternoon the Reserve Bank Monetary Policy Committee released their latest OCR decision.  It was, as predicted, no change in the OCR.  I don’t think it was the right decision on the substance (some background to that here) but at least it was in line with the Governor’s public comments following the previous surprise decision.

I didn’t have that much to say about the two pages (statement plus “minutes”) they released.  So just a few quick points:

  • in the statement the Bank continues to overstate the contribution of the “trade war” to the slowdown in global trade and global growth.  It is a convenient “newspaper headlines” story, but the way they use it suggests they haven’t thought much more deeply about the issues,
  • they talk up the prospects of economic recovery, based on the reduction in interest rates, but never seem to recognise that interest rates had been cut for a reason.  Unless the OCR is cut by more than any fall-away in economic fundamentals, you wouldn’t expect to see a rebound.  As I pointed out last week, actual cuts in variable retail rates lag well behind the fall in market-determined long-term rates,
  • there is something inappropriate about the Bank talking up the idea of fiscal stimulus three times in two pages (not that fiscal stimulus might be out of place in some circumstances, but it is entirely a matter for the elected government).  On the other hand, I guess we should be grateful that the Governor has stepped away from his August comment that “of course the government has to be spending more”.
  • it is interesting that, at least as written, the MPC appears not to have any bias on the direction of the next move in the OCR.   They are very widely expected to cut in November and cut again next year but there is nothing in this statement to lead one to think the MPC shares that view –  if anything, in the minutes we read that “some members”, with a cost-plus model of inflation apparently, believe there is “potential for rising labour and import costs to pass through to inflation more substantially over the medium-term”.   Their predecessors were hawking similar lines in 2015/16.

It is 18 months today since Adrian Orr took office at Governor of the Reserve Bank.  I’ve not infrequently bemoaned the fact that in that time Orr has not given a single substantive on-the-record speech on monetary policy or banking regulation/financial stability (the Bank’s two main areas of responsibility).  Yesterday Orr gave short speech to a corporate audience in Auckland, which dealt with both monetary policy and (in more abbreviated form) banking regulation.  I guess we should be thankful for small mercies.

Sadly, the contents of the speech suggest we have a Governor who simply makes stuff up whenever it suits him.  It is extraordinary in such a powerful public figure, one supposedly operating as an independent and judicious technical expert.  Much of it comes across as almost delusional –  perhaps welcome to his mates in the Beehive, but even they must sometimes wonder whether independent public institutions aren’t meant to be more than cheerleaders.

To take just a few examples of what I have in mind, start here

The good news for New Zealand, unlike many other OECD economies, is that our government’s books are in good shape and there is already a strong fiscal impulse underway from public spending and investment. 

There is no disputing the first half of the sentence.  It is to the credit of successive governments of both parties that government debt has been kept pretty low and stable over recent decades.  But what about that second claim, about the “strong fiscal impulse”?  Well, it simply isn’t supported by the facts at all.    This is from my post on last month’s Monetary Policy Statement when the Governor tried to run the same sort of line.

In fact, it prompted the perfectly reasonable question from Bernard Hickey about whether fiscal policy was actually very stimulatory at all.   The standard reference here is The Treasury’s fiscal impulse measure.  This is the chart from the Budget documents

fisc impulse.png

It isn’t a perfect measure by any means, and in particular one can argue about some of the historical numbers. In my experience, it is a pretty useful encapsulation of the fiscal impulse (boost to demand) for the forecast period. In fact, the measure was originally developed for the Reserve Bank –  which wanted to know how best to translate published forecast plans into estimated effects on domestic demand/activity.

And what do we see.  There was a moderately significant fiscal impulse in the year to June 2019.  That year ended six weeks ago.  For current and next June years, the net fiscal impulse is about zero, and beyond that –  which doesn’t mean much at this stage –  the impulse is moderately negative.    All using the government’s own budget numbers.  And consistent with this, operating revenue in 2023 is projected to be higher as a share of GDP than it is now, and operating expenses are projected to be lower (share of GDP) than they are now.    The Budget is projected to be in (fairly modest) surplus throughout.

And yet challenged on this, the Governor seemed to be just making things up when he claimed that we had a “very pro-active fiscal authority” and that “the foot is on the fiscal accelerator”.    It just isn’t.  Orr must know that (after all, he had Treasury’s Deputy Secretary for macro sitting as an observer in this MPS round).  One even felt a little sorry for the Bank’s chief economist spluttering to try to square the circle, but basically acknowledging that Hickey’s story was right, not the Governor’s.   Perhaps, you might wonder, the Bank thinks the fiscal impulse measure is materially misleading and has its own alternative analysis of the government’s announced fiscal plans. But that can’t be so either: there is no discussion of the issue in the Monetary Policy Statement.

(Incidentally, on Morning Report this morning Grant Robertson tried the same sort of line, only for the presenter to point out to him the fiscal impulse measure, reducing the Minister to spluttering “but we are spending more than the last lot”.  That is true, but the material overall fiscal boost was last year –  and growth and activity were insipid even then, inflation still undershooting the target.)

Was he being deliberately dishonest or simply making stuff up as he went protraying things as he’d like them to be?  You can be the judge, but neither alternative puts our central bank Governor in a good light.

Given that he has since had another 7 weeks to get his lines straight and yet repeats the same line, it looks even worse for him now.  As I said last month, if the Bank has an alternative take on the demand implications of fiscal policy it surely behooves them to lay it out for scrutiny, not just make idle claims inconsistent with their longstanding standard reference source the Treasury estimates).

Just as preposterous was this claim from the Governor

The low level of interest rates globally over recent years primarily reflects low and stable inflation rates – a deliberate and desired outcome of monetary policy.

Here the Governor was repeating much the same nonsense it is reported that he ran to Parliament last month

Over the weekend, I came across an account of the Governor’s appearance on Thursday before Parliament’s Finance and Expenditure Committee to talk about the Monetary Policy Statement and the interest rate decision. …. The Governor was reported as suggesting although neutral interest rates had dropped to a very low level, that MPs should be not too concerned as we are now simply back to the levels seen prior to the decades of high inflation in the 1970s and 1980s.

I’m not going to repeat the entire post I devoted to illustrating just how unusual global (and New Zealand) interest rates now are, both in nominal terms and (even more so in the long sweep of history) on real terms.  In centuries past there was little or no rational expectation of sustained inflation, while these days everyone agrees that medium to long-term inflation expectations are somewhere between 1 and 2 per cent.  The Governor may also have forgotten, in a New Zealand context, that the inflation target here is now materially higher than it was, say, 25 years ago.   Interest rates are, of course, far lower.  Here is just one chart from the earlier post, showing how unusual global interest rates were even five years ago (things are still more anomalous now, especially here).

As a final chart for now, here is another one from the old Goldman Sachs research note

GS short rates

In this chart, the authors aggregated data on 20 countries.  Through all the ups and downs of the 19th century and the first half of the 20th century –  when expected inflation mostly wasn’t a thing –  nominal interest rates across this wide range of countries averaged well above what we experience in almost every advanced country now.

Why does the Governor say this stuff?  Does he have no advisers left who are willing to tell him that what he says just isn’t so?

There are claims that the domestic economy still has “ongoing momentum” and that there is “strong demand for goods and services”.  These claims appear to be based the Governor’s interpretation of comments from the small group of firms the Bank went and visited recently.  Never mind the economywide measures, whether the range of business confidence and activity measures, or…..well, the national accounts.

pc GDP growth.png

He goes on repeatedly about how interest rates make it a great time to invest, as if he’d not given a thought to possible reasons why interest rates might be low (NB, it isn’t just because inflation came down again, see above).  He claims we have a “great environment to invest”, talks of “low hurdle rates for investing”, but seems not to recognise that in a climate of uncertainty, whether around policy (here or abroad) or the economic outlook, the option of simply waiting has considerable value, or thus that there is little reason to suppose that hurdle rates for investing have dropped much, if at all, in more recent times.

As a bureaucrat Orr is apparently convinced it is a great opportunity to invest and that profitable investment opportunities abound.  Experience suggests that people with a bottom line to meet disagree with him.  Here is the Bank’s own chart from the most recent MPS showing business investment as a share of GDP, with a few observations from me.

bus investment RB.png

As I’ve noted here repeatedly, business investment never recovered strongly from the last recession, and if anything (as share of GDP) has been falling back again in the last few years, even as population growth remained strong.

But despite the feeble business investment performance, the Bank expects business investment to recover from here.  There is no hint as to why they believe that is likely…. If there is any basis for their beliefs it seems to be little more than the repeated claim by the Governor and the Minister that it is “a great time to invest” in New Zealand.  But firms didn’t think so over the last five years –  even with unexpected population shocks –  and surely the reason the Bank is cutting the OCR has quite a bit to do with deteriorating conditions and investment prospects here and abroad?

But what do firms know?

Orr seems to more or less acknowledge the uncertainty issue, in these strange sentences, tinged with corporatist sentiments

However, there remains a loud call from all quarters of the country for leaders to better signal investment intent, and ensure we have the policy and goodwill to facilitate access to capital and resources to execute.

This call for investment-intent is to all collectively-owned (e.g., Iwi), Crown-owned (i.e., central and local government), and co-operatively owned (e.g., traditional primary sector) sectors. It is not just to traditional businesses, or any one party.

Easily said, harder to do without a clear desire to work together over an agreed horizon.

Or he could just have mentioned the major policy uncertainties.    Whatever your view on the merits of any of these issues (and I’m steering clear of expressing such views) mightn’t you think that uncertainty around the ETS, water quality policy, highly productive lands policy, the future of the RMA itself, whether any more significant roads will be built by a government apparently averse to them, bank capital regimes, the future of extractive industries might all be among the sorts of factors that might leave businesses and potential investors just a little wary, and pricing that uncertainty into their decisions around investment?

It all comes to a climax in this extraordinary claim in the Governor’s final paragraph (emphasis added).

In summary, we are not alone in the low interest rate environment, this is a global phenomenon. However, what we do have is more policy and business opportunities than most OECD economies and this is something that we need to take advantage of.

If by that he means that New Zealand productivity and per capita income rank far behind most of the OECD countries we used to like to compare ourselves to and that, at least in principle, those gaps could be closed, then I’m right with him.  But absolutely nothing about how policy has been run by successive governments for at least 25 years now has (so it appears from the evidence of hindsight) been consistent with closing those gaps: the productivity gaps in particular have just kept on widening and (though you would never know it from the Governor’s speech) we’ve had little or no productivity growth at all for the last five or more years.  Nothing about current policy suggests that record will improve in the next five years, and if anything one could mount a plausible argument that the measures adopted by the current government are heightening the risk of even worse (relative performance outcomes) in the next five.   Not only is this stuff well outside the Governor’s area of responsibility –  which is about macro and financial stabilisation –  but he either just doesn’t know what he is talking up or knowing better he just mouths such platitudes anyway.

Finally, there are several paragraphs in the speech about the Governor’s proposals to hugely increase the amount of capital locally-incorporated banks will need to have to back current balance sheets.    Notionally, there is process of consultation and deliberation going on at present. But when you read from the sole decisionmaker words like these,

Our proposals would see significant increases in shareholder capital in banks. With banks having more of their own ‘skin in the game’, the owners will sharpen their long-term customer focus, and it will reduce the chance of a bank failure and the cost on society as a whole should a bank fail. These outcomes are highly desirable for the long-term economic health of New Zealand, and should promote deeper and more liquid local equity and debt markets.

We finalise our decisions in early-December this year. Whatever our final decisions, we will be insisting on transition to higher capital at a sensible pace.

with all those “will”s, you get a pretty strong sense of pre-judgement.  That is, of course, what you’d expect when those proposals were based on very weak analysis –  numbers plucked out of the air at the last minute –  and when the Governor is prosecutor, judge, and jury in his own case, and where he knows that there are no effective appeal rights against his verdict as unelected unaccountable decisionmaker.

It really isn’t good enough.  Citizens should expect better.  The Bank’s Board is paid to hold the Governor to account, but they are almost worse than useless (they provide shadow without substance, suggesting there is scrutiny and accountability when there isn’t).  If the Minister of Finance were doing his job, or Parliament’s Finance and Expenditure Committee was doing its job, some pretty hard questions would be being asked about just what is going wrong at the Bank, and how such shallow –  and frankly embarrassing –  material is emerging from the mouth of such a powerful public figure.

Instead, no doubt, things will continue to drift, and the slow decline of New Zealand’s economic institutions –  hand in hand with the continuing decline in New Zealand’s relative economic performance – will continue.

But, you businesses out there really should be investing. This Governor tells you so.

 

 

 

A good time to invest?

A day or two ago I started reading a new book on, among other things, the decline in trust in “experts” that is said to increasingly pervade Western societies.  I’ve written previously about my scepticism that supposed experts are people we should repose much trust in, on things other than the most narrowly technical matters.  I want an expert carrying any surgery I or my family need and when, for example, it comes to house renovations

A good architect, and capable expert builders and other tradespeople, can together enable an outcome that I couldn’t deliver myself. Most of us need, and value, expert advice, and expert execution, but the decision to renovate the house, and how far to go, is the customer’s. It is about choices and preferences on the one hand, and advice from experts who actually usually know what they are doing on the other.

It isn’t clear to me that there are very many areas of public policy where arrangements should be much different.

And I often wonder just how much real expertise –  on matters beyond the most narrowly techical – can be found in most of the public sector agencies in which some encourage us to place our trust.   The Governor of the Reserve Bank is one of those figures in whom the law places a great deal of power.   Doubts about whether that is a wise choice, at least about the incumbent, were given further fuel by his performance on TVNZ’s Q&A last night.

I don’t have the time today to unpick it all, including his continued claim that fiscal policy is adding to demand/activity, when The Treasury’s fiscal impulse measure suggests it isn’t (all that has happend in the Budget update numbers is that fiscal policy is now estimated to have roughly a zero effect on demand over the next few years, rather than the slight drag previously projected).  Orr seems to be champing at the bit to have the government spend more –  especially capital spending – but he was careful and never quite said so last night.

Where he is much less careful is around investment more generally.    Last night he followed up from his claim at last week’s press conference that the country was in a great condition, with the renewed suggestion that now was a wonderful time to invest, that businesses need to “keep going” on investing, and that it was hard to be nervous about investing with such low risk-free interest rates and (so he asserted) such low hurdle rates of return.  (Doesn’t he follow the world news?)    This wasn’t just so in New Zealand apparently: there were global “infrastructure deficits” and generational opportunities.  Closer to home his extraordinary assertion was the New Zealand had only “quality problems” –  the bizarre line John Key used to use about Auckland’s housing and transport problems.

You really have to wonder what insight the Governor thinks he is blessed with that eludes people in the private sector and in government, here and abroad.   It isn’t as if he offers us a detailed piece of argumentation and analysis in support of his story.  It seems to be mostly just handwaving and wishful thinking.   Not exactly a sound basis for policy, or for encouraging us to put any trust in him.

In writing about the MPS last week, I reproduced one of the Bank’s own charts about investment.

bus investment RB

Business investment –  in blue –  has been fairly weak and (if anything) weakening further.  It is not just some sort for post-election blues, businesses not liking having Labour and the Greens in office.  The picture is pretty consistent for years now.   Which suggests it might be reasonable to suppose that people who own,  or are considering starting, businesses have been making rational choices, with the information available to them, about the prospects for investment in New Zealand.  In sum, not particularly good –  and this despite the considerable boost to demand (and need for domestic buildings etc) that a big unexpected shock to the population will have given rise to.

Consistent with that, the Governor may not be aware that productivity growth in New Zealand has also been lousy for years now –  almost non-existent in the last few.  Profitability and productivity are not, at all, the same thing, but they often go hand in hand –  great opportunities, offering high returns to shareholders, are often ones that will tend to lift the overall productivity of the economy.  New productivity opportunities are often only realised through a new wave of investment (which firms will only undertake if they expect those projects to be profitable).

And we could add to the list of symptoms –  perhaps the Governor also counts them as “quality problems” –  things like a tradables sector that has been going sideways, exports as a share of GDP not rebounding at all, the failure of the government to do anything material to fix the housing market, high corporate tax rates, and a range of actual or looming regulatory restrictions on investment opportunities in New Zealand.   Not the sort of things most people would call “quality problems”.

Of course, the Governor is particularly keen on more public capital spending –  infrastructure.   But, here again, if the opportunities were so great, the numbers would be likely to speak for themselves –  really high benefit/cost ratios showing up when projects are evaluated.  Perhaps the Governor is privy to such estimates, but the rest of us are not so favoured.  Too many of the projects that do go ahead seem like borderline cases at best.

Much of any reasoning the lies behind the Governor’s claims seems to rest on little more than the fact that interest rates are low. But in and of itself, that tells us almost nothing.  After all, interest rates are (very) low for a reason, and as I noted in my post yesterday no one –  including the Reserve Bank, at least based on anything they’ve shown or told us –  has a compelling story about just what is going on and why.   But the revealed behaviour of firms doesn’t suggest they’ve seen it as some windfall that means it is a great time to invest –  with perhaps the only challenge being which of the abundance of riches of possible high-yielding projects one might tackle first.

Out of interest I had a look at other advanced countries.  After all, these extraordinarily low interest rates prevail across almost all of the advanced world (and, as I’ve noted previously, implied forward rates are still higher here than in most countries).  The IMF has data on total investment as a share of GDP for a group of 30+ advanced economies.  In all of them, real and nominal interest rates are (of course) far lower than they were in, say, the 2000s prior to the 2008/09 recession.   Notwithstanding that, for the median of these 35 advanced countries, investment as a share of GDP last year was 2.7 percentage points of GDP lower than it just prior to the crisis/recession.   That is a significant reduction, despite the wonderful investment climate the Governor blithely talks of, in which it would be hard for anyone to be nervous about investing.   Only four of the 35 countries had investment now higher than it was then (Sweden, Norway, Germany, and Austria –  only Sweden more than 1 percentage point of GDP higher).

Now, these IMF numbers are total investment not business investment, and I don’t have the time today to recalculate the business investment numbers (for OECD countries), but it isn’t a picture that suggests that most people actually making investment choices share the blithe optimism of the Governor.   It isn’t particularly confidence-inspiring, or suggestive that he knows much on this topic on which he opines so often.

He could, of course, be right.  Perhaps there really are opportunities just left on the table, even though they offer high returns and/or modest risk.  If so, the market is open.  There is nothing to stop the Governor handing over the reins at the Reserve Bank and seeking an appointment as a private sector CEO, or indeed attracting capital from new investors to start his own enterprise.

I imagine most people will be content to respect the wisdom of crowds –  without necessarily fully understanding it –  and to conclude that when investment has been sluggish for years, even as aggregate demand is ok, labour is fairly fully-employed, and credit conditions haven’t been overly constraining that, despite the very low interest rates, there are huge numbers of attractive propositions going begging because people with their own money at stake aren’t persuaded by the Governor’s rhetoric.

We have very serious economic problems in New Zealand.  They aren’t being addressed by our politicians or our officials, and the Governor seems more interesting in playing distraction, whistling to keep spirits up, than getting to the bottom of those really serious and longrunning economic failures.    Fortunately, in his current role the Governor has almost no say over investment –  other than to opine –  but the lightweight rhetoric does nothing to instill confidence about his handling of those areas where he has great (and excessive) power: bank capital for example.

On other matters, an unexpected family death means I’ll be in Christchurch for the next few days and there won’t be any more posts until Monday.

 

As obstructive as ever

Late last week I suggested that Pattrick Smellie of BusinessDesk was being more than a little generous to the Reserve Bank when he suggested that, even though the Governor was now displaying some of the same bunker mentality as was on display late in the Wheeler years, more generally

The RBNZ is now more open and transparent.

There was no evidence then for that proposition.  As I noted

it just isn’t so –  the capital review is only the latest example, but nothing material has changed about monetary policy, we’ve had no serious speeeches from the Governor on his core responsibilities, and they play OIA games just as much as ever

And today I’ve had another couple of fresh examples illustrating my point, and a reminder of a third.

The reminder?  Contact from the Ombudsman’s office about a complaint I lodged some time ago when the Bank took a grossly excessive amount of time to release material I’d requested –  relevant to bank capital review – all of which, in turned out, had already been given to other people (and thus should have been able to be released almost immediately).

And the new examples?    More than two months ago I asked both the Bank’s Board and the Minister of Finance for papers relevant to the appointment of members of the new Monetary Policy Committee.    After a while, both parties extended my request.  I wasn’t unduly bothered, although even then the notion ran around in my head that a pro-active release might have been a good idea, around the first appointments to a powerful new body.    Today, the Minister of Finance did release a fair amount of material (I haven’t read it yet), but what about the Bank’s Board?   Well, they just sent me a note extending the request yet again, using as their justification –  after having had 2.5 months already

because of the consultations necessary to make a decision on the request such that a proper response to the request cannot be made within the original time period.

And this is what Pattrick Smellie thinks is a “more open and transparent bank” (bear in mind that the Governor sits on the Board, and the Governor’s staff will do doing all the actual work).

Quite possibly the request for information around the MPC appointments could have taken a bit of effort.   But my other example of the Bank continuing on as ever, playing games outside both the letter and the spirit of the OIA, is one where they could easily have responded fully and openly within a day or two of the original request.

On 11 May, I lodged the following request

nzi oia

I was pretty sure he would have been speaking without notes or slides (but if there had been any they’d have been easy to send on –  after all, the material had already been provided to private sector people).   And since the request was made just a day after the presentation, it should have been very easy for the Governor to have jotted down a quick summary of what he had said, and how he had answered questions on two specific topics.

But 20 working days have now passed –  and recall that under the law the requirement is to respond “as soon as reasonably practicable, but no later than 20 working days” –  and this afternoon this request was also extended for another couple of weeks, again allegedly because the consultations necessary to make a decision could not be made within the original timeframe.  Yeah right.   (In fact, there shouldn’t need to be any consultations at all.  I asked only for the Governor’s words, which are official information.)

Why did I frame the request around those specific points?  It was easy to anticipate that the Governor would get lots of questions about his bank capital proposals, probably not (from that audience, which includes both private businesses and banks) sympathetic ones.  And about the Bank’s research capability?  That reflected a post here on the morning the Governor was to meet the New Zealand Initiative over lunch.

On which note, one hears that the Reserve Bank’s research function has been  substantially gutted, with several recent resignations in recent months from among their best-regarded and most productive researchers (and the manager of the team left this week and is reportedly not being replaced).    The Bank’s research function once played a very influential part in policy and related thinking, but that is going back decades now.   Even with a Chief Economist who himself had a strong research background, the research team never quite found a sustained and valuable niche in recent years, even as some individual researchers have generated some interesting papers, often on topics of little direct relevance to New Zealand.  One of the most notable gaps is that the Bank has become increasingly focused on financial stability and financial regulation, and yet little or no serious research has been published in those areas of responsibility (a senior management choice).  That weakness has been evident in the recent consultation document(s) on bank capital.

One can always question the marginal value of any individual research paper, but we should be seriously concerned if the Reserve Bank under the new wave of management is further degrading the emphasis on high quality and rigorous analysis.  Apart from anything else, a good grounding in research has often been the path through which major long-term contributors to the Bank have emerged, including former chief economists (and roles more eminent still) Arthur Grimes and Grant Spencer.   I see that the Governor is delivering an (off the record) talk at the New Zealand Initiative today: perhaps someone there might like to ask just what is going on, and what place the Governor sees for a research function in a strongly-performing advanced country central bank.  Not even he, surely, can count on Tane Mahuta for all the answers.

So I was interested to see if anyone with the opportunity had asked the question.

(As it is, I heard on the grapevine that at this event the Governor may have attempted to fend off any criticisms of his tree god nonsense with the allegation that criticism was simply “racist”.)

I’m more amused than outraged.  Because the Bank’s –  the Governor’s –  conduct is simply par for the course: obstructive whenever they can get away with it, as they have been for a very long time.   There is no sign –  none –  that in this regard the Orr regime is any better than what went before.  You might now get cartoons with your MPS or FSR, but what you won’t get is an open, transparent, and accountable Reserve Bank, seriously interested in substantive engagement or searching scrutiny.  That’s a shame.  And it is something the Board and the Minister should take a lot more seriously, including when the Minister exercises his new statutory power to appoint the chair and deputy chair of the Bank’s Board –  finally making it clear that the Board work for the Minister and the public, not for the Governor or their own quiet lives.

UPDATE: A commenter points out that a second extension, made outside the initial 20 day window, is itself in breach of the OIA.  Even the SSC agrees with that interpretation.

MULTIPLE EXTENSIONS You can extend the time limits for a request more than once, providing all extensions are made within the original 20 working day time period after receiving the request (see section 15A(3)).