Orr defends himself

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.

He disagrees

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

68 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—

(a)  promoting the maintenance of a sound and efficient financial system; or

(b)  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.

10 Formulation and implementation of monetary policy

In formulating and implementing monetary policy the Bank shall—

(a)  have regard to the efficiency and soundness of the financial system:
(b) 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.

 

Very unwise and quite inappropriate

That was my immediate reaction yesterday when someone asked my view of Reserve Bank Governor Adrian Orr’s latest public comments, on the Christchurch rebuild, PPPs, government infrastructure spending, and so on.

Here was just a sample of what the Reserve Bank Governor said, as reported by Stuff’s Hamish Rutherford

Orr, who is now the governor of the Reserve Bank, made an enthusiastic plea for New Zealand to embrace “third party capital” – a reference to public private partnerships – as a means of boosting investment in infrastructure.

“This country, we’ve gone through the lowest ever global interest rates, we’re in good fiscal health. Why aren’t we investing?” Orr said in an interview.

“Personally, as a citizen of New Zealand I’m very pleased to see public investment being planned and trying to get underway, and I’m even more pleased as a citizen of the world that third party capital is increasingly being allowed to be part of the public infrastructure investment.”

Orr acknowledged he was giving a plug for his former employer, the NZ Super Fund

He goes on to complain about the rebuild process, and the lack of investment opportunities for NZSF, about public procurement processes, even weighing on the woes of Fletcher Building.

As I’ve said before, if having left the NZSF job he was now retired –  or even just joining the ranks of company directors and consultants –  there would be no problem with him expressing his views.

But he is a public servant.  And as Governor of the Reserve Bank he personally exercises an extraordinary degree of power, singlehandedly making the monetary policy decisions, as well as exercising a huge range of regulatory powers over banks, insurance companies and other non-bank deposit-takers.  He is the most powerful unelected individual in New Zealand.    In the areas Parliament has empowered him.

But the stuff he was talking about in his interview yesterday was –  again –  none of his official business.  He is welcome to his personal views, but when he speaks publically he should be speaking only on the things he has official responsibility for.   Either that, or change jobs and make a run for Parliament.  As someone observed to me recently, too often Orr sounds as if he would really prefer to be Minister of Finance.  But he isn’t.  He has no popular mandate, and responsibilities only as specifically laid down in various bits of legislation (primarily the Reserve Bank Act).

Why does it matter?  Because if the public is to be confident in delegating huge amounts of power to unelected officials, they also need to be confident that those unelected officials aren’t misusing that power, or the pulpit it can provide, to pursue personal or political agendas.

I’ve written several posts recently about the new book, Unelected Power, by former Bank of England Deputy Governor Paul Tucker.  Touching on some of these sorts of issues, Tucker notes that in his time at the top of the Bank of England he never knew the personal politics of his senior colleagues, and he was glad of that.   Perhaps that is just the famed English reserve, but it is something to reflect on here.  I’ve written previously about Don Brash overstepping that mark –  in a way that really soured relations between the Bank and the then government.   Arguably Orr’s case is worse, both because he is weighing in on immediately relevant political issues, including more or less directly attacking the stewardship of the previous government, and because he is overtly on the same side as the current government.  When (as central bank Governor) you openly disagree with the current government on general policy issues it might still be unwise and very wrong , but at least no one thinks you are in league with the government.   The whole case for an independent central bank, is so that they can act independently, in those specific areas Parliament has asked them to handle.  The Christchurch rebuild, PPPs, infrastructure finance more generally, are not among those responsibilities.  Nor, for that matter, is “giving a plug” for the Governor’s former employer.

When the initial Stuff story appeared, I was a bit surprised the journalist didn’t seem to have sought a comment from the Opposition Finance spokesperson, who as it happens is also a Christchurch MP.   You just do not see anything like this degree of overt political comment from central bank Governors in other advanced economies, and one of Paul Tucker’s other points is that delegating power to independent agencies really only works well if the legislature is effective in scrutinising and holding it to account the independent agency, including ensuring that it is (a) doing its job, and (b) only doing its job (in other words, sticking to the mandate democratically elected people have given them).   Parliamentary scrutiny of the Reserve Bank was very weak under the previous government, and appears to be no better now.  There is still no word from Amy Adams about the Governor flagrantly overstepping the bounds.

But a few hours later, her colleague Gerry Brownlee came out swinging at the Governor.  I don’t often agree with Mr Brownlee, but on this occasion his remarks seemed both forthright and to the point.  He was “incensed”

Brownlee said he was “incensed” by the comments which he believes mischaracterised the situation. As Canterbury Earthquake Recovery Minister he visited the fund about investment options but were told were not on the scale the fund needed.

“It certainly looks like the Reserve Bank governor has bought into the current Government’s mantra that everything the previous government did was wrong and everyone should join in in saying so.

“And I think that’s a very dangerous position for him to be in.”

When a senior MP describes himself as “incensed” by comments made by the central bank Governor –  especially when they aren’t about things in the Governor’s remit –  it is time for the grown-ups in the room to wake up and do something about the situation.   When the Governor so undermines confidence in himself, he weakens his own position, he weakens the Bank, and that is potentially damaging for the country.

I’m still a bit puzzled by what game the Governor is playing.

It could be that he just hasn’t yet adjusted to his new role.    In various earlier incarnations he was chief economist for the National Bank and for Westpac.  In roles like that part of his job was to say to provocative stuff in an interesting way, to get coverage for him and his bank. Back in the spotlight now, with every serious media outlet only too happy to report his every word, perhaps he just hasn’t adjusted yet.   I find that a little hard to credit, for various reasons, including that he is 55 not 35, has already spent  eleven years as a public sector CEO, and that yesterday’s remarks weren’t the first time he’s overstepped.

Perhaps, too, he just sees no connection between the comments he makes on climate change, infrastructure finance, the Christchurch rebuild, PPPs etc and his day job.  But he’d have to be extraordinarily naive to believe that, and he isn’t.  His views are reported because he is the Governor, not as “Adrian Orr, citizen of Devenport [or wherever he now lives]”.  Another really senior unelected role is that of the Chief Justice: just think of the outrage if she were out giving speeches and interviews on all manner of political issues, unrelated to the administration of justice.   That is a measure of how wrong Orr’s current stance is –  and he wields more power personally than the Chief Justice.

And that leaves the even more unwelcome possibility that, in some sense, Orr is playing politics.   A former colleague put it to me the other day that “Orr is a political animal, par excellence”.   I’m sure he is only ever uttering his own genuinely-held views, and I’m not sure he is even that good a political player (on the evidence of the last few weeks) but look at his incentives.  The Governor has a huge number of turf battles to fight and win this year, around the various stages of the review of the Reserve Bank Act.    Will the Bank keep prudential responsibilities in house?  Even if so, will the policymaking powers stay with the Governor, move to a committee, or be removed back to the Minister?  What sort of people will be appointed to the new Monetary Policy Committee, and what sorts of constraints will the Minister put on their freedom to challenge the Governor?  Might tighter budgetary constraints be put on the Bank, or regular (properly-resourced)_ provisions for external reviews be established?   And so on.

And how to win those battles?  Good quality analysis and advice goes only so far.  Orr might reasonably conclude that things are more likely to go his way, if the Minister and his Cabinet colleagues (and parties outside Cabinet) smile benevolently on the Governor and think of him as “one of us”.

I’m not fully persuaded this is the bulk of the story either.  Orr has, after all, been a public servant for the last 15 years, and if his approach is all about political game-playing and seeking leverage with ministers, you’d have to think he’d have the art down pat better than the overtly political stuff on display in recent weeks.   There has to be a risk that, whatever his intentions, he has overstepped the mark so far and so often, so early, that at least some in government might be having a case of buyer’s remorse, wondering quite what they have got themselves into with this new Governor –  who might be “sound” ideologically, but seems to lack that deeper sort of soundness the nation should be able to count on.

Whatever the explanation, it needs to stop.

When there was speculation last year as to who might be the next Governor, one reason on my list of factors counting against Adrian Orr was precisely that he was a strong character, given to speaking his mind, and one whom the Board (and specifically the Board chair) might find hard to keep on a leash.  The same thought might, I speculated, worry a new Minister of Finance.    Of course, in the Board’s case it has become increasingly clear that they see themselves as facilitators for, and defenders of, the Governor, not needing to do anything to hold him to account.  But if they really care at all about the institution, and about good governance in New Zealand, they need to call the Governor to order now.

I noted earlier my surprise that the Opposition finance spokesperson had not commented on the way the Governor is operating.  Neither, it appears, has the Minister of Finance.   Perhaps it would be worth some journalist asking the Minister for his comments, even if only to record him refusing to comment, washing his hands of any responsibility (for the conduct of someone he appointed, in an agency he is responsible for).

The Governor is damaging himself, and he is damaging the institution.  It is early days and there is still time for a course correction, but it needs to happen now, and to be decisive.  It isn’t, after all, as if the Governor is without messes to clear up in his own areas of responsibility (eg here and here).  And leave politics –  including public finance, infrastructure, climate change or whatever  – to those we’ve elected.

(I have deliberately avoided engaging with the content of the Governor’s comments.  Even if I fully agreed with him, they would still be unwise and quite inappropriate, and it is the process point –  good governance – that matters most.)

UPDATE: I notice that issues about Orr’s remarks are beginning to be highlighted elsewhere.

UPDATE 2: Rereading the post I wrote when Orr’s appointment was first announced, there is nothing (positive or otherwise) in it I’d resile from now, and some of the potential areas of concern touched on then already seem to be being realised.

UPDATE 3: For those who don’t normally read the comments here, I suggest at least looking at the one by former Reserve Bank official, Geof Mortlock.

UPDATE 4:  The Minister of Finance has indeed refused to comment.

Eyes determinedly shut

After a series of posts late last year, I haven’t written much recently about the New Zealand economic and political relationship with the People’s Republic of China.  It isn’t that I’ve lost interest, or become somehow less convinced of the importance of the issues. It remains, for example, a disgrace that unrepentant former PRC intelligence officer Jian Yang  –  who now acknowledges misrepresenting his past on official documents –  sits in our Parliament, protected by his own party and not subject to any critical scrutiny from the new Prime Minister or her party.  All parties seem determined to look the other way.  Businesses trading with the party-State no doubt quietly cheer them on.  Don’t ever rock the boat, don’t ever display any self-respect, seems to be the watchword.  Deals need doing, bottom lines enriching.

I’ve been busy with other things, but yesterday was the “China Business Summit 2018” in Auckland, operating under the logo “Eyes Wide Open”.    The Prime Minister and the Minister for Trade and Export Growth both gave what were billed as keynote speeches.  I want to focus on the Prime Minister’s speech, but couldn’t go past David Parker’s risible description of

“China’s leadership on issues like…trade liberalisation have the potential to add momentum to collective efforts in the region”.

No serious observer –  no one with other than an obsequious political agenda –  could regard the PRC as a leader in the cause of trade liberalisation.  The PRC lags badly, mostly to the detriment of their own citizens. That is so whether it is tariffs under consideration, or non-tariff barriers, and it is as true of the letter of law as well as the way laws are actually applied (recalling that the PRC is not exactly known for the priority placed on the rule of law.  As the Chief Justice of the PRC regularly reminds people, in the PRC the law is at the service of the Party.

Curiously enough, even Stephen Jacobi –  executive director of and spokesman for the (largely) taxpayer-funded advocacy group the New Zealand China Council seems to agree.  He is reported in another article this morning again stressing how difficult it will be to get the upgrade to the New Zealand/China preferential (“free’) trade agreement unless New Zealand gets more actively on board with the PRC geopolitical initiative, the Belt and Road.    Because, let’s be clear, the PRC’s barriers to international trade are a great deal higher than those New Zealand still has in place.  For them, deals (“FTAs”) are primarily about politics, not about some rules-based international order –  which may from time to time be useful to them, but only instrumentally.

But what of the Prime Minister’s speech?

There is lots of gush, and little reality.

We will look to cooperate with China to promote regional stability and development

How, one wonders, do we see the PRC promoting regional stability –  that isn’t just the quiescence of the indebted, the intimidated, or the bought – in  flagrant aggression in the South China Sea, standoffs with India, in the repeated threats to prosperous and democratic Taiwan, in the intimidating patrols around the Senkaku Islands, in loading up developing countries with debt, in the threats to democracy in places like Cambodia or the Maldives?

She moves on to note that

The Belt and Road Initiative is a priority for China.  New Zealand is considering areas we want to engage in the initiative, and other areas where we will be interested observers.

In fairness, that is hardly a ringing endorsement –  and perhaps less than her audience would have liked –  but recall what our government (previous one) has already signed up to in the Memorandum of Arrangement.  I wrote about that a few months ago.  You might recall that the two governments agreed.

BRI 3
I think the ball is in the PRC’s court when it comes to avoiding threats to regional peace.  By pretending otherwise, New Zealand governments simply give cover to the PRC agenda.

Of course, there is worse in the agreement, with talk of us both promoting the “fusion of civilisations”

BRI 2

As I noted in the earlier post

I’m quite sure I – and most New Zealanders –  have  little interest in pushing forward “coordinated economic…and cultural development” with a state that can’t deliver anything like first world living standards for its own people (while Taiwan, Singapore, South Korea etc do) and whose idea of cultural development appears to involve the deliberate suppression of culture in Xinjiang, the persecution of religion (Christian, Muslim, Falun Gong or whatever), the denial of freedom of expression (let alone the vote) and which has only recently backed away from compelling abortions.  And that is just their activities inside China.    “Fusion among civilisations” doesn’t sound overly attractive either –  most of us cherish our own, and value and respect the good in others, without wanting any sort of fusion,and loss of distinctiveness.  But perhaps Simon Bridges [who signed the agreement for the previous government]  saw things differently?

Perhaps one day the Prime Minister could tell us, straightforwardly, whether this stuff –  an agreement the New Zealand government is party to – reflects her values?

In her speech yesterday there was a whole section headed “New Zealand Values”

This brings me back to something that this government has placed front and centre of its agenda – our values

But what might those values be?  She goes on to tell us (or at least I think she does –  the language is a bit garbled).

This is why my government is placing such an emphasis on our core values, like on environmental and climate change issues. 

So that was no mention of:

  • democracy,
  • rule of law, domestically and internationally,
  • freedom of speech,
  • freedom of religion,
  • standing by countries that share similar values, when they are threatened.

or anything of the sort.  Just climate change and the environment (although are those “values” or just issues?) –  where, conveniently, her rhetoric and the PRC seem to, for now, align.

Then she moves to the standard fallback line of one New Zealand minister or Prime Minister after another.

Naturally, there are areas where we do not see eye to eye with China. 

We will just never, ever, come out and clearly and state what those differences are.  Instead, she trivialises the (unspoken) differences

This is normal and to be expected with any country, especially where we have different histories and different political systems.

It is as if she treats the PRC as a normal country, rather than one of the biggest abusers of domestic human rights and most aggressive external powers anywhere.  It is today’s Soviet Union, except probably with more evidence of an active external aggressive agenda.   Our Prime Ministers a generation or two back didn’t trivialise the difference between the Soviet Union and the West in the way that John Key did, and Jacinda Ardern does.  Then again, I’m pretty sure we didn’t have party presidents (Haworth and Goodfellow) issuing congratulary statements on the occasion of meetings of the Soviet Communist Party.

But there weren’t big business interests –  private and government (think universities) –  with dollars at stake then.

Of course, the Prime Minister tries to cover herself with talk of

New Zealand and China can and do discuss issues where we have different perspectives.  We can do this because we have a strong and a mature relationship – a relationship built on mutual respect; and a relationship that is resilient enough for us to raise differences of view, in a respectful way.   This is a sign of the strength and maturity of our relationship.

But it is just words when our leaders –  accountable to the citizenry, not to Fonterra, Zespri or university vice-chancellors –  will never utter a word of concern in public.   Maybe they do occasionally raise issues in private –  and the PRC authorities politely ignore them – but even that argument was undercut by the Deputy Prime Minister in comments yesterday

The foreign minister was asked whether China’s influence in New Zealand, Australia and the Pacific would be on the agenda during his trip.

“I’m in a job called foreign affairs, and diplomacy is rather important. You’ll know I’m naturally a tactful person, and I won’t be raising those issues in the way you put them.”

These aren’t values they stand for, just dollars.

The Prime Minister can talk in generalities all she likes

Our reputation as a leader on environmental issues; as a fair player internationally; as a defender of the international rules-based system, a system which privileges state sovereignty and dispute settlement on the basis of diplomacy and dialogue, is fundamental to who we are as a nation and as a society.

But specifics are what count.  Anyone can give POLSCI 101 talks, but when she won’t (say) stand up and call unacceptable China’s illegal creation of new artificial islands in the South China Sea, its illegal assertion of sovereignty, and the militarisation of those new “islands” –  to reference just her talk of “a system which privileges state sovereignty and dispute settlement on the basis of diplomacy and dialogue” –  it is hard to take her seriously on the values score.  When she won’t call out Jian Yang’s position, or the way in which PRC-affiliated entities have gained effective control of Chinese language media in New Zealand, or the way several universities and many of our schools are taking PRC money on PRC terms, it is hard to take her seriously when she talks of values, even as it directly affects New Zealand.   [UPDATE: This very morning she managed to openly criticise actions of two other countries.]

But probably the big-business entities putting pressure on the government to do whatever it takes to get the “FTA” upgrade –  unconcerned about values, but very interested in bottom lines –  will be happy with her.

It all seems a lot more Neville Chamberlain than Michael Joseph Savage (whose government was quite critical of the appeasement of Nazi Germany).  But however deluded Chamberlain was, nobody supposed his stance was just about the money.

And, since most of you come here for the economics, I was struck by an account I saw of the appearance last week by the Governor of the Reserve Bank at Parliament’s Finance and Expenditure Committee, where he was asked about China.  Astonishingly, the Governor reportedly claimed that the Chinese economic story was well-understood –  I think most of those close to it would argue that anyone who thinks they really understand it is only revealing how much they don’t know – but then he want on to make what is simply a factually inaccurate statement.  He claimed, so it is reported, that China was in some “miraculous” period where it was moving into “first world economic wealth”.

Productivity is the foundation of prosperity.  The cohort of countries near the very top of the OECD league tables (several northern European ones and the US) have real GDP per hour worked, in PPP terms, of around US$70 an hour.   Here –  from the Conference Board database – are the 2017 numbers for the various first world Asian economies, and for the PRC.

Real GDP per hour worked (USD, PPP)
Singapore 64
Hong Kong 54
Taiwan 51
Japan 46
South Korea 37
(PR of) China 14

Even underperforming New Zealand manages US$42 an hour.  Other countries matching the PRC productivity numbers include such denizens of the first world as Indonesia, Ecuador, and Peru.

It sounds as if the Governor has been buying the hype.  But I suppose his political masters won’t be unhappy: flattery and never ever uttering a sceptical word are among their watchwords.

 

 

Something of a mixed bag

The Monetary Policy Statement was released this morning, followed by the Governor’s press conference.  It was less entertaining than I’d feared, and he mostly stayed on mandate – albeit drifting off onto answering several questions about bank conduct (with no real attempt to tie his rhetoric to the Bank’s statutory responsibilities) rather than monetary policy.  Then again, the journalists seemed to give him a fairly easy time.  I’ll come back to some of the comments and questions a bit later.

I heartily commend the Bank on one thing.  This is from the first paragraph of the MPS

The direction of our next move is equally balanced, up or down. Only time and events will tell.

That puts them in a quite different place than the financial markets as a whole, or than respondents to the Bank’s survey of expectations, where almost everyone is convinced the next OCR change will be an increase.  After my post yesterday on the Survey of Expectations, the Bank sent out to respondents their slightly more detailed report.   That showed that none of the 41 respondents expected the OCR a year from now to be lower than it is today (I do, but although I printed off a copy of my answers, I seem to have omitted to submit them).    Sure, each individual respondent will have a probability distribution around their own responses, but it is a telling contrast to the Bank that not one has a central expectation of a lower rate.  Presumably the Governor’s willingness to be so upfront about this even distribution of risks over the next year or two (albeit not substantively that different from the line the Bank has taken previously) will have contributed to the fall in the exchange rate this morning.

That said, I’d issue the same caution as I’ve made previously. The Governor claimed, in his very first line that

The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come.

“Will” is a very strong statement in a very uncertain situation (domestically and globally).  Wise central bankers don’t hold themselves out as knowing more than they do.  The Governor’s hunch at present might be that the OCR won’t change for a while, but he doesn’t (and can’t) know that much, and bald statements of this sort risk leaving the Bank more unwilling to move quickly (up or down) than might prove warranted.  The contrast with the modest tone of current RBA statements is striking.

We also had an outburst of transparency. The Governor told us that the decision to hold the OCR had had the unanimous support of his Governing Committee colleagues, and his internal Monetary Policy Committee staff advisers.    It is nice of him to tell us.  Graeme Wheeler did that once, apparently to buttress the case for the move he was then making, but then adamantly refused to release the same information about other (historical) decisions –  I discovered recently that the Ombudsman is still working his way towards a decision on my request that he review Wheeler’s decision.  Perhaps the new Governor could change courses and make this information routinely available, with a suitable (but modest lag).   Disclosure of information can’t threaten the national economic interest –  Wheeler’s assertion –  just when it happens not to suit the Governor for it to be released.

There was plenty of gush about the economy.  This line took me a bit by surprise

The recent growth in demand has been delivered by an unprecedented increase in employment.

But this is the chart of the HLFS employment (corrected for the series break in 2016).

HLFS E

Perhaps he just meant “unprecedented” since the last growth phase?

And amid all the talk about employment –  and the welcome (overdue) focus on labour market indicators –  the word “productivity”, and the near-complete lack of any growth it over recent years, appeared not once in the text of the entire document.  Nor in the Governor’s discussion of what he saw as puzzlingly low wage inflation.

In the course of the press conference, the Governor talked about his goal being to communicate better and more widely –  not just to “four bank economists” –   and about how the Bank would have to learn to communicate in plain English.  It is a laudable goal I guess, but it did sound a lot like the lines Graeme Wheeler was using only a few years ago.  Wheeler avoided one on ones with journalists of course (at least ones that might ask awkward questions), which Orr does not seem likely to do, at least in his early stages.  But Wheeler also made much of the number of speeches he and his staff were doing up and down the country in his early years.  Communication seems easy when you are starting out, and aren’t on the back foot.

I mentioned earlier that the Governor mostly stayed on mandate in the press conference.  There were a couple of small exceptions.  The first was when he was asked about what the obstacles were in the housing market, and his first clear simple response was “lack of affordable land”.   Graeme Wheeler was simply never that clear, and it was never clear if he actually appreciated the importance of the land issue and the associated regulatory failures.  Housing policy isn’t a matter for the Bank, but it is encouraging that the new Governor appears to recognise, at an analytical level, the core failure.   The other exception, which seemed to pass unnoticed (or not followed up anyway) was when the Governor suggested that with interest rates at current levels the government should be doing more investment spending.  Those aren’t calls for the central bank, on an issue where there will considerable partisan division of views.

Two aspects of the monetary policy responses puzzled and disconcerted me.

Bernard Hickey asked the Governor what he thought of the argument that central banks should be raising inflation now, so as to raise nominal interest rates, to provide more policy leeway in the next serious recession.   Orr’s rather glib response was that “I don’t think much of it at all”, suggesting that (a) central banks should just do what is right now, and (b) that there are other tools, methods and instruments.   Which is fine except that core inflation – even in New Zealand –  has been well below target for years so that, at least with hindsight, the central bank hasn’t been doing the right thing now.  Partly as a result market measures of inflation expectations are well below target.  And there is no other country where supplementary instruments (eg QE) have been so demonstrably successful that core inflation has quickly got back to target, even in a gradual recovery phase.   The Governor needs to get to grips with preparing more seriously for the next recession.  It will be along, perhaps before too long.

Perhaps even more startling, was his response when asked a question in which it was noted that Graeme Wheeler had failed to hit the inflation target midpoint, and Orr was asked whether he would be happy to be judged on his performance against that metric.  That seemed to set the Governor off in defence of his predecessors, claiming that the economy was in near-ideal cyclical sweet spot, and that he could not imagine a better place to start from as Governor.  A bit later he chipped in that he thought the Bank had been doing a ‘remarkable” job in forecasting core inflation –  a variable that hasn’t been anywhere near the explicit 2 per cent target since that target was put in place by Bill English almost six years ago.  I wouldn’t have expected him to criticise his predecessors explicitly –  although he more or less did so when discussing communications approaches –  but surely we should have hoped that the new Governor might have regretted that inflation had so persistently undershot, and committed to do everything in his power to avoid a repeat?   His failure to do so is a little disconcerting to say the least.    Even with a focus on employment/unemployment, the Governor’s own charts suggest that the labour market was allowed to run with quite unnecessary excess capacity for several years because the Bank misjudged the extent of inflation pressures.

Once again, we have a set of Bank projections that suggest things are just about to come right.  Productivity, for example, is just about to pick up, and so is inflation.  The Bank thinks that in two years time we will be almost back to 2 per cent inflation.  The problem, of course, is that the Bank has been running the same line for years now, and it just hasn’t happened.  Partly perhaps because he embraced the record of his predecessors, the new Governor gave us no reason to be confident that this time things really will be different.  That is quite a gap.

I see that ASB, continuing the plays on the Governor’s name, deems it an “Orrsome start”.  I wouldn’t call it an “Orrful start”, but if there are some encouraging aspects, there is plenty of room for improvement.  The Governor  –  being fluent –  seems to be prone to speaking a bit more quickly than he thinks.  Over time, that won’t necessarily serve him, or the Bank, that well.     But the absence of solid answers about why this time inflation really will get back to target –  in an economy that seems unlikely to grow even as fast as (the modest rates) managed over the last few years –  remains the most obvious gap.  Perhaps MPs could consider asking the Governor this afternoon about why we should believe him and his colleagues this time?

Perhaps the Reserve Bank (and the FMA) should heal themselves

Suppose that the rules of a superannuation scheme explicitly required that any rules changes that could have an adverse effect on the interest of any member in that scheme could only be made with the unanimous consent of such members.

Suppose too that nonetheless the trustees of such a scheme went ahead and changed the rules of a defined benefit scheme in a way that allowed the employer to arbitrarily (ie no constraints at all) reduce the rate at which pension benefits were calculated (including in respect of periods of employment, and employee contributions, prior to the rule change).  No consent from potentially affected members was sought for this change.

Suppose that in making this change, they had the endorsement/consent of the board of directors of the employer, and of the chief executive of the organisation.

Suppose too that that new power was actually exercised by the employer, in a way which led to longstanding employees later retiring with pensions considerably lower than they would otherwise have been.  That represented a substantial wealth transfer (probably millions of dollars) to the employer.

And suppose that the Government Actuary had been required to give consent to such a rule change, and in fact did so.

That looks to me a lot like serious misconduct, quite possibly illegality.

And who are the players in this tawdry drama?

Well, there was the Government Actuary, a task now absorbed by the Financial Markets Authority.

And there was the Reserve Bank of New Zealand, its Governor (appointed by the then Minister of Finance), and its Board (all appointed by the then Minister of Finance).  Serving on both the board, and the trustees of this superannuation scheme, was the Governor, and someone who is now chair of the New Zealand arm of Transparency International, an NGO allegedly committed to good governance etc.

The initial misconduct happened quite long time ago.  In 1988 in fact.    But for years now some members have been trying to get redress, and even recognition of the problem.  It has been going for sufficiently long that when Adrian Orr was last at the Bank –  as Deputy Governor and Head of Financial Stability –  he was involved, fobbing off concerns raised by some of his own staff.

Four years ago, a particularly persistent member formally raised the issues (the one I’ve outlined here isn’t the only example, although is probably the most serious) with the trustees of the superannuation scheme.  The initial response of the Board-appointed chair (and current Deputy Governor and Head of Financial Stability) was to attempt to close the issues down immediately, without undertaking any investigation. I guess if you don’t turn over stones, there is no risk of finding awkward stuff under them.  Fortunately, other trustees stymied that bid.

After a couple of years’ delay, the trustees somewhat reluctantly came to the view that probably member consent should have sought, and that the decision not to have done so was not necessarily one they themselves would today have made.  But………they weren’t going to do anything at all about rectifying the situation, claiming (on grounds almost totally without foundation) that no one had actually been adversely affected.  These are trustees who, by common law and now by statute, are required to operate in the interests of the members of the scheme (beneficiaries of the trust).  But who could easily have been misinterpreted as operating in the interests of the Reserve Bank (a majority of trustees appointed by the Reserve Bank Board –  the entity that has spent the last few decades providing cover for Bank management).  Under the (relatively) new Financial Markets Conduct Act, superannuation schemes are now required to have an independent trustee –  the one on the Reserve Bank scheme (whatever his other useful contributions) declared early on that he had no desire to be caught in the middle trying to sort out such difficult issues, and (from my memory) has barely uttered a word in all the debates since about these issues.

And what of the FMA?  It is now must be almost a couple of years since the member elevated the issue to the FMA, lodging a formal complaint with them.    And since then the FMA appears to have done almost nothing (there was a meeting with the trustees well over a year ago, but it involved little more than description of the issue –  and at the time the FMA themselves didn’t even seem to have a good grasp on their own act).   Perhaps it is typical for the FMA?  I don’t have anything else to do with them, so have no basis for knowing.  Perhaps there are legal constraints (old legislation) on their ability to actually do anything formally.  But there has been no informal action, moral suasion, either.   Indeed, their inaction could be easily be misinterpreted as having something to do with the fact that the organisation itself (as the Government Actuary) had signed off on the, almost certainly unlawful, rule change.  And perhaps too from the sheer awkwardness of having to investigate serious concerns about an entity associated with their fellow regulator, the Reserve Bank, an entity then chaired by someone who is now Head of Financial Stability (Bascand is no longer the chair, but is still a trustee).  Or from signs that the independent trustee regime they administer seems to be adding only overhead.

I don’t want to bore readers with the details of this particular tawdry episode.

But when we have the new Governor  –  with legislative responsibility only for prudential issues –  lurching from two weeks ago suggesting there were no particular conduct issues in New Zealand, because we had a quite different culture, to last week suggesting that it really wasn’t his call (on an inquiry) but he was sure banks were examining themselves, to news this morning that he and the FMA head had summoned the heads of the big banks to a meeting, demanding they prove a negative (that there is no “misconduct” going on), and (in the FMA head’s case) apparently threatening legal action against those who don’t cooperate, I could only think

Physician heal thyself

or continuing the biblical theme

And why do you look at the speck in your brother’s eye, but do not consider the plank in your own eye? Or how can you say to your brother, ‘Let me remove the speck from your eye’; and look, a plank is in your own eye? Hypocrite! First remove the plank from your own eye, and then you will see clearly to remove the speck from your brother’s eye.

(As background, I am both a member and an elected trustee of this superannuation scheme. I have recorded in the minutes my dissent from the majority view of trustees, and have expressed my own concerns directly to the FMA.  As I joined the Bank, and the scheme, not long before this particular questionable rule change was made, it probably did not materially adversely affect me.)

The Governor on banking and deposit insurance

There was another interview the other day with new Reserve Bank Governor Adrian Orr.  This one, on interest.co.nz, focused on issues somewhat connected to the Reserve Bank’s responsibility for financial sector prudential regulation/supervision, and associated failure management responsibilities.

In the interview Orr touched again on an idea he has already alluded to in one of his interviews: the idea of getting a clearer, more quantified, sense from Parliament as to what it is looking for from the Reserve Bank in its conduct of regulatory policy.

It is an appealing idea in principle.  For monetary policy, Parliament has specified a goal of price stability, and in the Policy Targets Agreement the (elected) Minister of Finance gives that operational form (a focus on 2 per cent annual inflation, within a range of 1 to 3 per cent).   There is nothing similar for the extensive regulatory powers the Bank has.

In respect of banks, section 68 of the Act sets out the goals

68 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—

(a)  promoting the maintenance of a sound and efficient financial system; or

(b)  avoiding significant damage to the financial system that could result from the failure of a registered bank.

Which is fine as far as it goes –  and what isn’t there (eg a depositor protection mandate) is often as important as what is.   But it isn’t very specific, and provides no guidance as to how to interpret the idea of an “efficient” financial system (as a result, it has been debated internally for decades), no sense of how sound the system should be (or even what a “sound system”, as distinct from sound institutions, might be.   And the same overarching provision (sec 68) has seen the Reserve Bank’s approach to bank regulation and supervision change very substantially over the years, with little or no involvement from Parliament.

There is a reasonable argument –  made quite forcefully in former Bank of England Deputy Governor Paul Tucker’s new book on such matters – that if in a particular aspect society’s preferences aren’t reasonably stable, and able to be written down reasonably well, then policymaking powers in that area should not be delegated to an independent agency (let alone what is formally a one-man agency).  With the second stage of the review of the Reserve Bank Act underway, Orr can obviously see a threat to the Bank’s powers, and thus he suggests an attempt be made to have Parliament articulate its preferences, and views on possible trade-offs, more directly.  If they could do so, having unelected decisionmakers then working to deliver on that mandate might be less democratically objectionable, and the Reserve Bank might have a greater degree of legitimacy in these areas than it does now.

And so the Governor told his interviewer

“For inflation targeting we’ve got a clear target [being] 1% to 3% on average. For the prudential regulation, – how do we articulate that target? In other words what is the risk appetite of the people of New Zealand as represented by Members of Parliament for banking regulation? Do you screw it down to one corner where nothing can happen – it’s very sounds but totally inefficient, or do you have trade-offs allowing firms to come and go and consumers to be aware etc? So that is going to be a really good, useful articulation that will come out of that,” says Orr.

At first blush it sounds promising, and I’m certainly not going to discourage an effort to try to uncover such an articulation of preferences.  But I am a little sceptical that anything very stable or useful will emerge from the process.  I’d prefer that all rule-making powers were removed back to the Minister of Finance (or indeed Parliament), leaving the role of the Reserve Bank as (a) technical advisers, and (b) implementers.

It might be fine to express a view that banking system regulation should be designed on a view that there should be no major bank failure on average more than once in a hundred years   – actually about the rate in New Zealand history –  or, indeed, five hundred years.    That might (and has in the past internally) be some help in how one calibrates capital requirements for banks.  It will, however, be almost no help in deciding whether LVR restrictions are a legitimate use of coercive, redistributive, government powers.  Or whether we care much about small institutions.  Or, indeed, whether the Reserve Bank should have the power to approve (or not)  the appointment of senior staff in banks.   And even if society could express a stable preference for a regime designed to deliver no more than one failure per 100 years, it provides very little basis for that other vital strand of the governance of independent agencies –  serious accountability.    Good luck could readily deliver a 50 year run of no failures without reflecting any great actual credit on the central bankers in charge at the time (who might have been doing fine, or doing a lousy job).  And if the one in a hundred year shock happens next year, it will still be very difficult to say with any certainty that the central bankers were doing the job they were asked to do –  they may well have been, and just got unlucky, and the public is likely to want scapegoats.    Elected politicians serve that role better than unelected technocrats.

But if there is anything more to the idea the Governor is toying with, it would be good to get some material into the public domain in due course, and have it scrutinised or debated.

In his latest interview, the Governor also touched again on the calls for a royal commission into conduct in the financial sector, as underway at present in Australia.  This time he is a lot more moderate, explicitly recognising that it isn’t his call.

Against the backdrop of the unacceptable conduct coming to light in Australia’s Royal Commission on financial services, Orr doesn’t believe New Zealand needs its own Royal Commission. However, he says the impact of the Australian one is certainly being felt in NZ.

“There will be not a single bank in New Zealand that is not, at the moment, really checking every cupboard for skeletons here in New Zealand. That is without doubt. This has really put the wind up the banks to say ‘hey, what is the alternative to sound regulation, it’s a Royal Commission’. We’re meeting collectively with the CEOs, we’re meeting individually with the chairs, and we always do on a regular basis,” Orr says.

“Is a Royal Commission necessary? At the moment in my personal opinion no, but I’m not the one who would call one anyway.”

Orr says while the Australian Prudential Regulation Authority is “being held up as some [sort of] global best practice,” and works alongside the Australian Securities and Investments Commission and the Reserve Bank of Australia with all having “heavy boots on the ground,” they’re still having “this cultural challenge.” Thus more hands-on regulation than the Reserve Bank’s light touch regulatory oversight of banks isn’t necessarily the best way forward.

But it is an odd mix of responses.  On the one hand, Orr seems to come across as something of a champion or defender of the banks in New Zealand.  That is no part of his role.  He is the prudential (soundness) regulator, in the public interest –  recall section 68 of the Act, quoted earlier – and his role (the Reserve Bank’s role) has almost nothing to do with conduct standards.

And he seems to be attempting distraction on other issues by conflating prudential/systemic issues with conduct issues.  Thus, when various people (including the IMF) have argued that New Zealand should adopt a prudential regulatory regime more akin to APRA’s (which, in effect, operates here to a considerable extent anyway, because APRA is focused on the entire Australian banking groups), Orr doesn’t engage in the substance of that debate, but attempts to muddy the water by making the point that a more intensive prudential regime in Australia hasn’t prevented some of the conduct issues coming to light in the Royal Commission.  Indeed, but why would one imagine it should?   They are two quite different issues.  In the same way, an investigation into whether the local supermarket was meeting minimum wage or holiday pay provisions for its staff wouldn’t expect to shed any light on food-handling issues in the same supermarket.

Part of the legitimacy of independent central banks involves them being seen to speak in an authoritative and trustworthy way.

But the comment from the Governor that led me to read the account of the interview was on the vexed subject of deposit insurance.   The article had this as (part of) its headline

RBNZ Governor says differences between deposit insurance & minimum deposit not frozen in OBR scenario are ‘technicalities’

That sounded like an intriguing claim.  You’ll recall that the Reserve Bank has long staunchly opposed deposit insurance (eg articles/speeches referenced here), even though people like The Treasury, the IMF, and various other commentators (including me and my former RB colleague Geof Mortlock) favour it.  The new Governor doesn’t seem to share the Bank’s long-running opposition.

Asked whether the Reserve Bank should get an explicit statutory objective to protect bank depositors and/or insurance policyholders, Orr says deposit protection, or deposit insurance, is “something that’s going to be here in the future.” NZ’s currently an outlier among OCED countries in not having explicit deposit insurance.

“I think that’s something that’s going to be here in the future. We need to work our way through what it means

I’m surprised that change of stance didn’t get more coverage.  Of course, whether or not we have deposit insurance isn’t a decision for the Reserve Bank; it is a matter for the government and Parliament.  Nonetheless, if the Reserve Bank Governor is going to withdraw the bank’s opposition, that removes a significant bureaucratic roadblock.  Well done, Governor.    (To be clear, I favour deposit insurance not as a first-best outcome, but as a second-best that makes it more likely that future governments will allow troubled financial institutions to fail, rather than bail out all the creditors.)

But it was the Governor’s next comments on the issue that were more troubling, and which suggest he hasn’t yet got sufficiently to grips with the issue before opening his mouth.

I think people have been talking across each other a lot,” Orr says.

“The bank here has got a policy called Open Bank Resolution. And that is the idea that if a bank is too large to fail, we have to keep it open. But we have to recapitalise. So the current owners or investors who have largely done their dough, how do you recapitalise it and how do you have the door open the next day?”

“As part of that open bank resolution, we’ve already said there can be a de minimis around depositors money that they will have access to. We just need to speak in better English to say ‘you know you are going to have some cash there, you are going to be able to get your sandwiches, meet your bills, do all of that on the Monday. Because if it didn’t happen that way, then that one bank failure creates all banks to fail, there’s [bank] runs everywhere’,” adds Orr.

When it was put to him that depositors having access to a de minimis sum if open bank resolution was implemented on their bank isn’t the same as explicit deposit insurance, Orr suggested the difference is merely technical.

“We could have a discussion through that legislation to say ‘economically it’s the same, could we call it the same, or is it part of a failure management?’ I believe it’s the same end outcome, the technicalities behind it are just technicalities. We need to be able to say to the public ‘if we’re shutting the bank down, what do you have access to, what is the guaranteed de minimis or minimum, or protection,’ and then we need to work out how is that going to be funded.”

There is a lot of mixed-up stuff in there.

For a start, the question of how we manage the failure of a bank in New Zealand has nothing whatever to do with the idea of foreign taxpayers bailing out New Zealand depositors.  I’m not aware that anyone supposed that was very likely.  Indeed, all our planning –  including the requirement for most deposit-taking banks to incorporate locally –  has been based on the idea that New Zealand is on its own (although for the Australian banking groups, whatever happens in the event of failure is likely to be negotiated by politicians from the two countries).   Instead the general issue here is

  • should a large bank simply be allowed to close if it fails, and handled through normal liquidation procedures (few would say yes to that).
  • if not, how best can the bank be kept open,
  • it could be bailed out by the government (benefiting all creditors, including foreign wholesale ones),
  • or the OBR tool could be used, in which all creditors’ claims would be immediately “haircut”, so that the losses fall on shareholders and creditors not on taxpayers but  the bank’s doors remain open.

Within the OBR scheme there has always been the idea of a de minimis amount which might not be haircut at all.  It isn’t an issue about liquidity –  as the Governor suggests –  because in the reopened bank everyone has access to some of their money.  It is an explicitly distributional issue.   For example, a welfare beneficiary might have only $100 in their account (living almost from day to day),  such accounts in total won’t have much money in them, so it might be easier (involve many fewer creditors, and less immediate resort to eg foodbanks) and in some sense fairer just to give people with such small balances immediate access to all their money and not have them share in any losses (or have to bother about ongoing dealings with those handling the failure).  It has mostly been seen as a matter of administrative convenience, but also of realpolitik (reduce the number of voters affected by losses in a failure).   And if these very small creditors are fully paid out, it does involve a transfer of wealth from all other creditors, but the amounts involved, even cumulatively, are pretty small.

In recent years, there has been talk of this de minimis amount creeping up.    There have even been suggestions of something as large as $10000 –  in other words, if you have less than $10000 in your (failed) bank, you wouldn’t face any losses.    It must be this sort of thing the Governor has in mind when he talks of the difference between deposit insurance and the de minimis being little more than “technicalities”.

But he is still wrong:

  • first, the de minimis would only apply where OBR was used, and OBR is only one option.  Even if looks like an attractive option, in some circumstances, for a large bank, it might not be a necessary or appropriate response to the failure of a small bank.
  • second, the de minimis is being paid out of other creditors’ money (it is essentially a (small) depositor preference scheme).   That might be tolerable for very small balances –  other creditors have an interest in lowering administrative costs of managing the OBR –  but is most unlikely to be defensible, or acceptable, for larger de minimis amounts,   Perhaps the Governor has in mind, the government chipping in directly to cover the larger de minimis amounts, but relative to a proper priced deposit insurance regime that seems far inferior, and different by degree, not just by “technicalities”.
  • third, no de minimis amount I’ve ever heard mentioned comes close to the sorts of payout (coverage) limits in typical deposit insurance schemes abroad.  As the author of the interest.co.nz piece points out  “Under Australia’s deposit insurance scheme, deposits are protected up to a limit of A$250,000 for each account-holder at any bank, building society or credit union that’s authorised by the Australian Prudential Regulation Authority”.    Attempting to rely on the de minimis –  as people like the Governor sometimes do in advance of the failure –  is just a recipe for increasing the likelihood of a full bailout at point of failure, as the amount envisaged just won’t match public expectations/demands (as revealed in other countries).

To repeat, it is good that the new Governor appears to be shifting ground on deposit insurance.  But let’s not settle for half-baked responses, using a vehicle never designed to deal with the issue of deposit insurance.  Legislate and put in place a proper deposit insurance scheme, and levy depositors to pay for the insurance.

Do that and, as I’ve argued previously, the chances of being able to use OBR –  to impose losses on large and wholesale creditors, including foreign ones – will be materially increased.  Without sorting out deposit insurance properly, most likely any future government faced with a failure of a large bank will just fall back on the tried, true, and costly solution of a full state bailout.

 

 

A garrulous Governor

We’ve had talkative new central bank Governors previously.  Shortly after Don Brash took office people took note of the way he was commenting pretty freely on a lot of issues.  Tom Scott captured it this way.

brash 3.png

If the latest new Governor is really keen on transparency and openness on things he has responsibility for, I could readily offer a list of suggestions (well short of webcasting MPC deliberations).  He could, for example, publish (with a short lag)

  • the minutes of the Governing Committee meetings in which he makes his OCR decisions,
  • a summary of the written advice (recommendations and risks) he gets from his internal Monetary Policy Committee, and
  • the background papers generated internally in the process of deciding on his forecasts and OCR decisions.

On the latter point, I’m still engaged in an appeal to the Ombudsman to get hold of the analysis the Bank used last November in making written (but not substantiated) Monetary Policy Statement comments about the macroeconomic impacts of various of the new government’s policy initiatives.   To be clear, there was no problem with them making comments –  things like Kiwibuild should affect demand pressures and thus the near-term inflation outlook – the issue was the lack of detail, and the refusal then to release the background papers.

Perhaps the new Governor will take steps along these lines.  We have not yet seen an OCR decision on his watch, and journalists must already be relishing the first scheduled Orr press conference next month, given his readiness to comment at length on all matter of things that are no part of the responsibility of the Reserve Bank.  It is great that he is fronting up to the media –  in a way quite unknown during Graeme Wheeler’s term –  but is there anything about which he will say, if asked, “well, that isn’t really something that would be appropriate for me, as central bank Governor, to comment on”?  There has been no sign of such restraint so far.

I wrote on Friday about the Governor’s interview on Radio New Zealand.  In a comment to that post, one of my former colleagues described it as

I thought it was rather a good one – compared with many of the media beat-ups about this and that with which we seem to be currently afflicted. And refreshing to hear interesting perspectives about the need for coherent approaches to our strategic directions, and the risks associated with longer term structural adjustments in several dimensions.

As I noted in response, if you didn’t know who the interview was with, there was no particular problem with the content (reasonable people can have quite different views on the substantive issues and we benefit from debate).  Had it been an interview with think-tank person, an academic, a journalistic commentator, or even a retired Governor or Secretary to the Treasury, it might have been a welcome addition to the ongoing dialogue on important economic and social issues.

But it was the independent Governor of the central bank, banging the drum for a whole lots of causes where his words will have been music to the ears of the current government, on issues where (even if he may have some personal expertise/experience on some of them) the Reserve Bank has no responsibility, and no institutional expertise.   It would have been almost as bad if he had been taking the opposite position on those issues, or advocating a bunch of right-wing causes.  And I only say “almost as bad”, not to take a view of the merits of those issues, but simply because at least if Orr was overstepping the mark on the right-wing side, there would have been no suggestion that he was trying to butter-up the current government – championing many of their causes –  in a year when he has a lot of turf battles to fight and win.  There are all the legislative details of the Stage 1 changes to the Reserve Bank Act, and the subsequent provisions of the Charter, let alone Stage 2 where if things go badly for the Governor he could find his powers very greatly reduced –  or indeed find the regulatory/supervisory functions split out of the Reserve Bank altogether.   The decisions the government finally makes are more likely to go the Governor’s way if the government finds him useful, supportive, and generally agreeable.

I don’t suppose that there is anything dishonest in what the Governor is saying.  I presume he is quite as left-liberal (“a passion for issues such as social equality, diversity and the environment”) as his comments and journalists’ accounts of interviews suggest.  But the personal politics –  views on all manner of other issues –  of the Governor shouldn’t be relevant to his conduct in office, and shouldn’t be on display at all.  It isn’t just the Governor: the same goes for the Commissioner of Police, the Chief Justice, the Chief Electoral Officer, the Ombudsman, the Parliamentary Commissioner for the Environment, the Auditor-General, the Inspector-General of Intelligence, or whoever (let alone heads of government departments).  When the personal politics of any of these people is on display – on issues for which they have no official responsibility – it degrades the office, and diminishes the likely general respect for the office-holder (even as the groupies of one side or the other mostly welcome the support).  It also complicates the ability of the office holder to serve a government of a different stripe: Orr, for example, has a five year term, only half of which is before the next election.  It isn’t a role where the holder simply serves at the pleasure of the government of the day.

The Governor’s garrulity was on display again yesterday in a fairly short pre-recorded interview on TVNZ’s Q&A programme.  This time the topics weren’t climate change, sustainable farming, or infrastructure finance.  Instead, this interview covered capital gains taxes and the Australian banking royal commission.    Whether or not a capital gains tax is a good idea isn’t really a matter for the Reserve Bank.  It is a (highly) political choice, with various technical tax policy perspectives offering reasons why one might favour such a tax or oppose it.  As the Bank itself has previously noted, there is no evidence that whether or not one has a CGT makes much difference to the housing market or house prices.   Now, to be fair, the Governor didn’t specifically say he favoured a CGT, but at the end, having attempted to suggest that there were relevant financial stability dimensions, he observed “we need a more efficient level playing field around tax”, to which Corin Dann responded –  with no objection from the Governor – “I’ll take that as a yes”.   Perhaps he should have gone on to ask the Governor whether the “level playing field” he favoured –  with no actual responsibility for tax policy or the housing market –  included the family home in his CGT.    (Incidentally, in both the Q&A and Radio NZ interviews I heard the Governor suggest that 90 per cent of household net worth is in housing.  He is quite wrong about that.  The numbers are on his own institution’s website.)

Then there was the matter of the Australian Royal Commission into banking, and the question of whether such an inquiry was required here.  To be clear, the Australian Royal Commission was ordered by the Australian government, under intense political pressure.  It had – and has –  almost nothing to with the financial soundness of the banking system, or any of the sorts of issues the Reserve Bank of New Zealand has responsibility for in New Zealand.  It seems to be mostly about consumer protection (and abuse) issues.  So what possessed the Governor to declare that we don’t such an inquiry in New Zealand?  It isn’t his responsibility –  either formally (it is for the government to set up Royal Commission) or even covering the Bank’s policy ground (the “soundness and efficiency of the financial system’).  He went on to declare that the banking culture in New Zealand is “infinitely better than in Australia” –  one might hope so, but given that they are mostly the same banks, and several are or were until recently headed by New Zealanders, you have to wonder what evidence he has for that belief.   The substance of the issue –  abuses in the Australian banking system etc –  isn’t one I focus on, and so I don’t have a view on whether we need an inquiry or not (although the final Australian report could shed light on that).  But quite how, three weeks into the job, the Governor can express so much confidence in the Reserve Bank, the FMA, and MBIE in dealing with such issues – “all over them, every day” was the flavour –  is a bit beyond me.  Perhaps he could look into the approach to such things of his own Deputy.

There are, of course, plenty of cases where central bank Governors overstep the bounds in their comments –  it is common enough to prompt Willem Buiter to write the paper I linked to on Friday –  but few with quite the degree of abandon of our new Governor.  For his own good, and that of the institution and New Zealand public life (avoiding the politicisation of key institutions), he needs to be reined in.   In one of the Stuff profiles on the new Governor he observed

The problem was finding something which suited his temperament.

“I am certainly attracted to wanting to make a difference.”

He is also attracted situations involving drama and excitement.

“Being a ginger, I tend to run towards the fire, rather than away from the fire.

Sounds like the sort of character that would suit many roles.  It doesn’t naturally sound like a Governor of a central bank.  Central banking –  monetary policy and financial stability –  done well should be boring (and not very politically divisive).  The image I often used to use was of the fire brigades at airports.  In an ideal world, if you ever give it a thought you take comfort from knowing they are there, but you don’t expect to hear from them, and hope they are never needed to do much.  The parallel isn’t exact, but I’d argue it is closer to the ideal than a garruous Governor sounding off on every policy question some journalist happens to ask.  If he continues as he is starting, the value of his words will be greatly devalued.  And that would be a shame.

The Governor and the Minister of Finance should also give some thought to how the communications style the Governor is adopting fits with the approach to communications that the Minister announced a few weeks ago.    In that announcement, the Minister indicated that he would be legislating to establish a statutory Monetary Policy Committee, in which the Governor would have a majority of insiders, a role in appointing the outsiders, and in which

The Governor will chair the MPC and will be the sole spokesperson on its decisions.

Other MPC members are not be allowed to give speeches or interviews offering their own perspectives.

The Reserve Bank’s stance has been that if individual members were free to speak (as they are, say, in the US, UK, and Sweden) and are individually accountable for their advice and votes), it would be a “circus”  (though as Bernard Hickey points out, this example is hardly evidence of something wrong with the system).  At present, legally, the Governor is speaking only for himself –  as the sole lawful decisionmaker –  but soon, at least on monetary policy matters, he will become no more than first among equals.  Even at present, there is a real risk that the Bank’s messages on monetary policy and financial stability –  including the crucial ones about the limits of what Bank policy can do –  will be drowned in a cacaphony of comment on all manner of things, that commentators will come to assume it is normal for the Governor to comment on.  I’d welcome the open contest of ideas, and evidence of a range of views, on the appropriate path of interest rates, or how best to build monetary policy space for the next recession.  I’m not sure it would wise to have one –  let alone six – members of the MPC all offering their thoughts on climate change, the merits of a CGT, or whatever.  It is time for the Governor to stop and reset –  and for the Board and Minister to have a quiet chat, and encourage the Governor to think again.