There seems to have been almost no media coverage of an extraordinary statement put out late on Wednesday by the going-rogue Governor of the Reserve Bank, Adrian Orr. Perhaps he was fortunate that all eyes were already on Thursday’s Budget.
I’ve been drawing attention to the way in which Orr has been speaking out on all and sundry issues – often contentious political issues – for which neither he nor the Bank has been assigned responsibility by Parliament. We’ve had climate change issues, infrastructure spending, both sides of the bank conduct issue (where he was defending the banks only to flip sides and start poking a stick at them), sustainable agriculture, and capital gains taxes. (Various posts touching on the Governor’s comments are here.)
Last week he was at it again, giving an interview to Stuff’s Hamish Rutherford in which he took the opportunity to attack the way the Christchurch rebuild had been done, including in particular the lack of opportunities for his former employer, the New Zealand Superannuation Fund. And a couple of days out from the Budget, he took another opportunity to call for more government infrastructure spending, more government borrowing, and to offer his thoughts on public procurement processes. Anyone would think he was a party leader at election time.
There were two separate classes of issues arising out of the interview with Hamish Rutherford. The first was around the details of what Orr was saying about the Christchurch rebuild and the substance of NZSF’s involvement or lack of it. The former minister, Gerry Brownlee, understandably took umbrage at the substance of Orr’s remarks, but the details of that particular spat weren’t my concern (although a commenter in detail here suggests Brownlee was on the stronger ground).
The second class of issues – and the focus of my concern – is around the appropriateness of the Governor speaking out at all on these (and the other) issues. As I summed it up the other day, the Governor’s comments are very unwise and quite inappropriate – and would be so regardless of any substantive merits in his views. The Governor holds an important public office, in which he wields (singlehandedly at present) enormous power in a limited range of areas. It really matters – if we care at all about avoiding the politicisation of all our institutions – that officials like the Governor (or the Police Commissioner, the Chief Justice, the Ombudsman or whoever) are regarded as trustworthy, and not believed to be using the specific platform they’ve been afforded to advance personal agendas in areas miles outside the mandate Parliament has given them. We don’t want a climate in which only partisan hacks have any confidence in officeholders, and only then when their side got to appoint the particular officeholder. And that is the path Adrian Orr seems – no doubt unintentionally – to be taking us down. As I’ve noted previously, as his time in office lengthened, Don Brash made something of the same mistake. That was unfortunate and inappropriate, but in 14 years in office I’d be surprised if Don managed as many overtly political comments as Adrian Orr has delivered in less than two months.
I’ve had conversations with people, including journalists, who can’t really see a problem. I guess Orr is still in his honeymoon phase, and the journalists are still just grateful they no longer face a Governor who wouldn’t even communicate properly on issues that were his clear and specific responsibility. Perhaps it helps to see the problem by supposing that a new Governor had come to office and was giving interviews calling for, say,:
- doing nothing about climate change,
- cutting capital taxes,
- lamenting that the government had not just stayed out of central Christchurch and had just landowners get on with it,
- suggesting that the state stay out of housebuilding,
- promoting irrigation schemes, and (for the sake of argument)
- attacking light rail
That new Governor might be perfectly technically capable of doing monetary policy and financial regulatory tasks. But nonetheless, there would almost certainly be an outcry – people from the left attacking the Governor for his attacks on policies of the government of the day, and people on the right using the Governor’s comments to buttress their anti-government rhetoric. It would be unwise, and should be quite unacceptable for a Governor to be making such comments. And it is no more wise, or acceptable/appropriate, for him to be making comments on the other side of such issues.
I’m not suggesting that the Governor is an active Labour/Greens partisan, making the comments he does to try to advance the interests of the governing parties. Probably he believes he is better than them anyway. But clearly his personal views on all manner of issues seem to align with those of Labour (in particular), and since he has lots of turf battles to win (around the reform of the Reserve Bank) he probably judges that it doesn’t hurt his personal cause to be speaking as he has. But even if that works out for him in the short-term it isn’t desirable. His interests aren’t the national interest. It is conceivable that the second half of his term could see him working with a National government, and he’ll have made that more difficult with these overtly political comments, ranging well beyond his brief. And he will have increased the risk that future Reserve Bank Governor appointments will be made on an overtly partisan basis – “if the Governor feels free to speak on absolutely anything, we want someone who’ll be championing our particular causes”. That would be highly undesirable.
After Orr’s comments last week, there was an outraged response from Gerry Brownlee (on the specifics) but there was also a response from the Opposition leader, Simon Bridges. That upped the ante quite a bit, even though Bridges’ statement was pretty moderate.
Bridges did not directly answer questions about whether he believed Orr comments were a sign he had sided with the new Government, or on the tone of Brownlee’s comments, but said Orr would have taken a lesson from the episode.
“I am sure he [Orr] will have seen what Mr Brownlee has said, and you know, there’ll just be a lesson there in terms of sticking to the knitting in terms of what his remit is.
“I’m sure he’ll want to be very careful about not wanting to step into legitimate political debates, rather than his mandate as Reserve Bank governor.”
Bridges said National had supported Orr being appointed governor.
“He’s a good guy, he’s a clever economist, he’s a great communicator, so he’s got the skills to be governor.”
That “stick to his knitting” line was particular welcome, but it was still a pretty emollient statement. Opposition leaders don’t wade in every day criticising the Governor – in fact, memory suggests (perhaps incorrectly) it is really quite unusual – but it was clearly a statement that was seeking a de-escalation. There was no criticism of Orr’s appointment or his basic skills and qualities, and really just a quite moderate call for a minor course correction. When I saw the Bridges comments, I assumed that would be the end of the matter: the Opposition would take it no further, Orr would retire to lick his wounds and reflect, and perhaps in time emissaries might be dispatched to make clear that the Bank recognised where its core responsibilities did and didn’t lie. Others at the Reserve Bank, meanwhile, (better schooled in the responsibilities and limits of a central bank) would breath a sigh of relief
But no. Instead late on Wednesday the Governor put out a full page statement under the Reserve Bank name defending himself, and if anything taking the offensive, claiming the freedom (nay, responsibility) to speak out on almost anything. “Doubling down” was my quick summary.
The Governor began
I greatly respect and appreciate the operational independence of the Reserve Bank.
Maybe, but talking so freely on all manner of contentious political issues does nothing to foster long-term public support for that operational independence.
My comments about infrastructure investment reported in the recent Stuff article of 15 May related not only to my previous role as CEO of the NZ Super Fund, but also to my current role as Governor of the Reserve Bank.
There are two points here. First, as Governor he shouldn’t be giving interviews about his previous job – we didn’t hear Don Brash giving interviews about Trustbank or Alan Bollard about Treasury once they were Governor. It is all the more important to maintain that clear separation given that in this case the Governor had previously had another government job. But, second, this is where he begins to double-down, claiming that it is right and appropriate, as Governor, to be talking openly about these contentious political issues, for which he has no direct policy responsibility.
I spoke openly and frankly because that is a desired feature of the role of Reserve Bank Governor.
Yes, we would welcome a Governor who spoke clearly, and accessibly, on the issues Parliament has assigned to him. His immediate predecessor didn’t do that bit of the job well at all. But that is very different from a Governor sounding off, without nuance, on all manner of highly contentious issues. The Governor himself may “desire” to do so – and no doubt it makes good copy so journalists won’t say no – but perhaps the Governor could point to any other indication that the public interest is being served by the approach he is taking?
There follow a couple of paragraphs about the specifics of NZSF and Christchurch rebuild issues, including
Any lack of investment by the NZ Super Fund was not caused by lack of commitment from either Mr Brownlee or the NZ Super Fund. Rather it was due to no access for third-party capital into the core infrastructure space, for example, ports (air and sea), transport, electricity distribution and so on. These were decisions made by the appropriate authorities at the time.
It still isn’t clear why NZSF involvement (or any third-party capital) would have been appropriate in any of the major public aspects of the rebuild process, most of which were (as my commenter points out) well below the size threshold NZSF itself says it is looking for (and bigger ones, notably the convention centre and the stadium remain of questionable economic value). But, even setting that to one side, there is something extraordinary about this issue being fought on the website of the operationally-independent Reserve Bank. It is, quite simply, none of the Bank’s responsibility.
But here the Governor pivots to try to claim that this is all very much part of his new responsibilities.
That challenge is not unique to Christchurch or New Zealand. It is a global financial challenge and one that leads to financial instability at times, especially stressed balance sheets.
This is a stretch, to say the very least. Even if we were to allow that it was a “global financial challenge”, it wasn’t one in Christchurch, and certainly posed (and poses) no threat to financial stability in New Zealand. One might, as well, worry about pots of government money, and the way they can be used to subvert good decisionmaking, robust allocation of capital, and so on – perhaps especially if the Governor of a central bank starts championing the causes of such government funds.
The Governor attempts to generalise
The Reserve Bank Act requires us to promote a sound and efficient financial system. The Policy Targets Agreement that I have signed with the Minister of Finance also requires that, along with maintaining low and stable inflation, the Reserve Bank must contribute to maximising sustainable employment.
But even here he, no doubt deliberately, skates over some important language in the Act and the Policy Targets Agreement. For example, the Act does not require the Reserve Bank to “promote a sound and efficient financial system” . Here is the key provision of the Reserve Bank Act
Exercise of powers under this Part
The powers conferred on the Governor-General, the Minister, and the Bank by this Part shall be exercised for the purposes of—
promoting the maintenance of a sound and efficient financial system; or
avoiding significant damage to the financial system that could result from the failure of a registered bank.
In other words, it isn’t a general obligation, but a constraint on how the Bank’s statutory powers are used. The specific statutory powers to regulate banks must be used in a way that promotes the maintenance of a sound and efficient financial system. There is quite a difference from weighing in championing PPPs, more government debt, or specific solutions to particular Christchurch rebuild issues.
Similarly, in the Policy Targets Agreement – a provision governing the conduct of monetary policy – there is just this descriptive statement
The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.
and a requirement to explain in each MPS
The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.
No one thinks that offering interviews on PPPs, sustainable agriculture, or the Christchurch rebuild is what is meant by “the conduct of monetary policy”.
Well, no one other than the Governor that is. Because he goes on
I have spoken about specific issues recently because increased infrastructure investment opportunities provide sound investment choices, risk diversification for financing goods and services, and improves maximum sustainable employment by relieving capacity constraints. These are all core components of the Reserve Bank’s role and something we often speak about in our Financial Stability Reports.
I almost fell off my chair laughing when I read that line. When I was young at the Bank we used to occasionally argue that we were free to talk about absolutely anything because almost anything could be argued to affect price stability, in some form or another (resource usage and all that). There was even a statutory provision.
Formulation and implementation of monetary policy
In formulating and implementing monetary policy the Bank shall—
have regard to the efficiency and soundness of the financial system:
consult with, and give advice to, the Government and such persons or organisations as the Bank considers can assist it to achieve and maintain the economic objective of monetary policy.
But no one took that sort of ambitious – rather silly – argument very seriously. At least, it appears, until the Governor came along. Now, it seems, the Governor wants to openly argue that absolutely anything if within his purview.
Even then he seems confused. For example, he claims that
…..increased infrastructure investment opportunities………improves maximum sustainable employment by relieving capacity constraints.
Well, maybe eventually if the infrastructure investment itself is robust and cost-effective (a test much infrastructure spending in New Zealand fails). But, as no doubt his economists could point out to him, in the short to medium increased infrastructure spending puts more pressure on resources, and exacerbates capacity constraints and inflationary pressure (all that additional spending before the capacity comes on line). And then he goes on to assert that these are “core components” of what the Reserve Bank does. and are “something we often speak about in the our Financial Stability Reports”. Which is an odd claim, since issues about relieving capacity constraints would appear more naturally to belong in Monetary Policy Statements. And doubly odd in that when I checked the most recent Financial Stability Report, there was a but one reference to “infrastructure” in the entire document, and that a reference to something they call the “retirement saving infrastructure”. But there is a new FSR out next week, so I guess the Governor will be ensuring it does touch on infrastructure issues?
It all smacks of a statement pulled together in a rush, under pressure. He clearly hasn’t stopped to think of the total non-viability of a Governor addressing such issues in ways the government of the day doesn’t like (and thus the inappropriateness of only addressing it in ways they do like) or of the implications of his position – at future press conferences or FEC hearings he’d have no grounds to refuse comments on almost any aspect of policy some mischevious questioner wanted to ask about. Immigration policy Governor? Welfare policy Governor? And so on. It is a reckless path.
It isn’t unlawful, of course, for the Governor to speak on these issues. Perhaps, over time, a Governor could develop a sufficient reputation in office for his stewardship of his core responsibilities that people look to him or her to comment occasionally on a slightly wider range of issues. But to wade in, on so many contentious issues, in an utterly non-nuanced way, so early in his term seems extremely unwise and quite inappropriate. The Minister of Finance and the chair of the Bank’s Board should be making that point forcefully to the Governor, as often as is necessary until his behaviour changes.
Back when the Reserve Bank Board advertised the job last year, two of the qualities they claimed to be looking for were:
Personal style will be consistent with the national importance and gravitas of the role.
The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.
Orr’s approach at present isn’t consistent with either of those.
And he appears to be carrying on as he started. In the Sunday Star-Times yesterday, Orr was again being quoted on things that are little or none of his responsibility.
Last year, New Zealand banks reported a combined $5.19b in profits, up just over $355 million year-on-year.
New Reserve Bank governor Adrian Orr said he was perplexed by the ongoing strength in bank profits.
Perhaps he might be “perplexed” but it really isn’t anything to do with a prudential regulator. If there are competition issues, we have a Commerce Act and government ministers. He went on
Checks on whether bank profits were sustainable would form a significant part of the “culture check” being undertaken by the Reserve Bank and Financial Markets Authority, Orr said.
A Royal Commission of Inquiry into Misconduct in the Banking, Superannuation and Financial Services Industry in Australia revealed serious misconduct by New Zealand banks’ parent companies.
That prompted New Zealand regulators to demand more information from New Zealand banks, which they had until May 18 to deliver.
“I think you’ve always got to be sure that they are competing properly and they are behaving responsibly,” Orr said.
“If they’re making profits, good on them, but let’s make sure they’re long-term sustainable profits and there’s true competition in the markets.”
To repeat, almost none of this is anything to do with the Reserve Bank’s statutory areas of responsibility. Perhaps it plays to a populist mood, but it fails to respect boundaries, including the reasons why we assign different functions to different agencies. And the public mood is a fickle mistress.
Perhaps comments on bank profits are slightly less egregious, in some circumstances, than those on climate change, sustainable agriculture, capital gains taxes, PPPs or whatever, but none of its suggests a Governor with the sort of self-discipline and recognition of limits that the role demands. Much of it seems more attuned to grabbing headlines, than to offering the sort of nuanced reflection that might occasionally provide a useful contribution to a thoughtful debate on some important issues.
It is still early days in the Governor’s term, but a change of approach is already well overdue. It is not as if there aren’t plenty of issues that the Governor is most definitely responsible for – and accountable for – that he could be getting quietly on with.