Adrian Orr

Central bank losses and the BIS

Michael Reddell Adrian Orr, LSAP

The Bank for International Settlements (BIS) is a club of central banks. That isn’t a pejorative label, just a straight factual description. 63 central banks (including the RBNZ) are the shareholders and the institution exists primarily to generate material for, and host meetings of, central bankers. They collate statistics and generate research with a central banking focus. They still provide some financial services to central banks. The chief executive (“General Manager”) is chosen from the ranks of highly-regarded senior central bankers (the current incumbent, Agustin Carstens was (among other things) formerly Governor of the Bank of Mexico and Deputy Managing Director of the International Monetary Fund).

As I mentioned in yesterday’s post, Adrian Orr had been citing material published recently by the BIS in defence of his suggestion that central bank losses from discretionary interventions really don’t matter and are more of an “accounting issue” than an economic one. When that material came out last month I drew attention to it, and (briefly) to the limitations, on Twitter, but since the Governor suggests that the BIS has the answers I thought it might be worth taking another look and unpicking what is, and isn’t, there in the two short BIS pieces. The first is an op-ed from Carstens, published in the Financial Times but the full text of which is on the BIS website and the second is a six page note by several BIS staff “Why are central banks reporting losses? Does it matter?

The Carstens op-ed is short enough I can take it paragraph by paragraph.

It begins with the title “Central banks are not here to make profits”. That is both true and a distraction. First, hardly any aspects of what governments do exist to make money, Second, unlike most arms of government, central banks should typically be at least modestly profitable (as monopoly provider of zero interest banknotes and of residual liquidity to the financial system). Third, when discretionary interventions are being considered the likely profits or losses, and the associated risk to taxpayers, should be at least one part of the full assessment of the pros and cons. And, finally, when interventions are being evaluated ex post, financial outcomes should be at least one part of a full assessment. Costs and benefits both matter.

As context here, one might note that the Reserve Bank of New Zealand, which used to have a low-risk small and stable balance sheet, made a profit each and every year for decades (without support from taxpayer indemnities). It was the normal state of affairs (seignorage earnings, with some volatility up and down as the proceeds of the note issue and the Bank’s equity were typically held in government bonds).

But on to the text

Unlike businesses, central banks are designed to make money only in the most literal sense. They have a mandate to act in the public interest: to safeguard the value of the money they issue so that people can make financial decisions with confidence. The bottom line for central banks is not profit, but the public good.

As noted, this does not mark out central banks from other government entities. Resources used, risks assumed, need to be rigorously evaluated along with programme effectiveness.

Today, following an extraordinary period in economic history, some central banks are facing losses. This is particularly true if they bought assets such as bonds and other securities to stabilise their economies in response to recent crises. Many will not contribute to government coffers for years to come.

“believing that by doing so” they would stabilise their economies. Note that in a formal sense that final sentence is not true of the RBNZ, since the Crown indemnity means losses from their interventions are borne directly by the taxpayer, not via impaired central bank capital. More generally, whatever the formal arrangements – and they differ widely across countries – mark to market accounting reminds us that the best guess is that large losses have already happened.

Does this mean that central banks are unsound? The answer is “no”. Losses do not jeopardise the vital role played by these institutions, which can and have operated effectively with losses and negative equity. And the unique nature of central bank tools means that sometimes losses are the price to pay for meeting their objectives – to support growth and jobs, ensure stable prices and help keep the financial system safe and stable.

In normal times, it is possible for central banks to both fulfil their mandates and earn profits without taking on significant financial risk. Traditionally, being the unique issuer of money provides a reliable revenue stream. But central banks with large foreign exchange reserves, built to cushion external shocks, will often experience ups and downs in income from exchange rate fluctuations. This means they sometimes make losses when pursuing their goal of a stable currency.

Agree entirely with the first two sentences, but they aren’t really the point and I’m not aware of any serious observer arguing to the contrary. The third sentence is much much more arguable, and neither in the brief op-ed nor in the longer Bulletin does the BIS really defend the claim. Most discretionary central bank interventions, if justified at all, should be stabilising and thus profitable (eg the Bank of England bond market interventions late last year). As Carstens notes, for countries with large foreign reserves holdings, exchange rate fluctuations will typically generate substantial year to year gains and losses simply from passive holdings but if that is an issue for Switzerland (where the BIS is based) it isn’t for most of the advanced country central banks we usually compare the Reserve Bank to. And there is likely to be a difference in how one sees passive structural positions and active discretionary interventions.

In times of crisis, central banks may also need to take on additional risks. And they do so with their eyes wide open. One example is the purchases of government bonds, including those made during the great financial crisis and more recently during the Covid-19 pandemic, in order to avert economic disaster by supporting financial stability, keeping credit flowing and boosting economic activity.

All this simply asserts what it does not show. But there is also an important distinction, not drawn here, between interventions to help restore market functioning (the initial QE back in 2008, and the initial bond buying in March 2020) which, support them or not (there are, after all, some moral hazard risks), should typically be expected to be profitable, perhaps even on a risk-adjusted basis, and large scale bond-buying with the goal of influencing the entire level of the yield curve. There is little evidence that many central banks (notably the RBNZ) really did much serious advance analysis on the use of this tool, the financial risks associated with it, the likely effectiveness of it, let alone exit strategies. In a NZ context, we should give no weight to the suggestion in the final sentence that the LSAP was necessary to “avert economic disaster”.

In the last decade, with inflation and interest rates low for a long period, these bond purchases boosted income. In fact, some central banks were able to transfer unusually large profits to governments. But in the wake of the pandemic and given the invasion of Ukraine by Russia, inflation has returned. This requires higher interest rates to contain spiralling prices – and exposes central banks to losses related to assets purchased in past successful rescue efforts.

Here Carstens touches on one of the problems with the 2020 QE interventions: central banks, including our own, seem to have been lulled into a degree of complacency about the risks they were taking on by the fact that QE done in other countries in the wake of the 2008/09 recession had not ended up costing central banks or taxpayers lots of money because the longer-term trend of falling real interest rates had continued. There was, however, no reason to suppose it would do so indefinitely, and a continuation was in any case less likely with bond yields near 1 per cent than with bond yields at, say, 5 per cent.

Central banks should put purpose above profits. Would it make sense for a central bank with large foreign currency reserves to increase their value by haphazardly triggering a devaluation of its own currency just to generate a windfall? Or for a central bank with domestic currency assets to keep interest rates low, even in the face of high inflation, just to preserve low-cost funding and generate profits? Such actions would be wildly inappropriate, violate their mandates and destabilise the economy.

By this point in the article, handwaving and straw men are well and truly to the fore. The issue is much more about the risk analysis – financial and otherwise – undertaken before the initial discretionary intervention (and at each stage of it), not how one clears up the mess afterwards. No one I know has suggested central banks should not allow interest rates to rise simply to protect their own financial positions, but there are serious questions about whether those (known to be) highly risky asset swaps should have been done in the first place.

The soul of money is trust. To operate effectively, business must maintain the trust of investors. And central banks must maintain the trust of the public.

Governments also have a role to play in the face of today’s central banks’ losses. Because these institutions are ultimately backed by the state, trust in money requires sound government finances and good financial management.

Blah, blah, blah. But one might add that maintaining the trust of the public in a modern era typically involves both demonstrated competence, openness and transparency, and acknowledgement of errors – not just patting people on the head and telling them “don’t worry, its complex, we are the experts and we have it in hand” even as staggering real losses are run-up and realised.

And finally

Losses matter because they may inflict a bruise on public finances but a far greater injury would result from central banks neglecting their mandates in order to avoid a loss. The public, via elected officials, have given central banks the job of price and financial stability because of their enormous societal benefits. Now, and in the long term, the costs from central bank losses are insignificant compared to the costs of runaway inflation and prolonged economic crisis.

Perhaps that first phrase is key. Losses matter, they are real. Nowhere does Carstens suggest they are “just an accounting issue”. The rest of that paragraph is really just handwaving and distraction, culminating in that outrageously misleading final sentence which seeks to suggest that there is some inescapable tradeoff between “insignificant” central bank losses and “runaway inflation and prolonged economic crisis”. There simply isn’t – and starkly there clearly wasn’t when central banks like the RBNZ launched and kept up their highly risk bond buying in 2020. With hindsight – and no matter what people might have claimed to believe back then – large scale bond-buying kept on well into 2021 or in some cases 2022 did not keep us from “runaway inflation and prolonged economic crisis”. Instead, overall central bank responses to Covid delivered us a really severe outbreak of (core) inflation, which central banks are now grappling to get back down again.

The Carstens piece is best seen as distractive spin for central banks by the chief executive of their own club. That needn’t necessarily mean there are no useful points their own lobbyist could ever make, but there were almost none relevant to the issues at hand, or the challenges that have been posed to Orr, in this piece.

More generally – and if this is a central bankers’ conceit, they probably aren’t the only interest group to suffer this fault – there is no sense anywhere in the Carstens piece that central banks might ever make mistakes, that some interventions might be worthwhile and appropriate and others not. But when central banks have done even their core job so poorly over the last couple of years – see core inflation rates across much of the world – the absence seems particular notable.

I’m not going to attempt a similar paragraph by paragraph treatment of the longer BIS staff note. It has some useful material in it, particularly for those less familiar with these issues, even if it has a strong focus on “whether losses matter for a central bank” (as they note, losses do not compromise a central bank’s technical ability to fulfil its mandate), rather than whether they matter for taxpayers, citizens, and those wishing to hold a central bank to account. I wanted to pick up briefly just the last couple of paragraphs, on how central banks should respond to losses.

“Effective communication” does not include trying to spin public audiences or MPs with assertions that real economic losses – that leave taxpayers poorer – are “just an accounting issue”. It should not include handwaving assertions about the wider benefits being “multiples” of the losses. It should include careful analysis and research evaluating the actual macroeconomic impact, including by comparison with the gains that less financially risky interventions might have offered. It should include careful ex ante disclosed risk analysis (the case for which was all the stronger for central banks coming late to the QE party, like the RBNZ or RBA). And it should include explicit recognition by central banks that they can, and sometimes do, make mistakes, even substantial ones. None of that has characterised the Reserve Bank of New Zealand through this episode.

And what of that final paragraph? It has the feel of editorial spin. Although it has become common in this field to claim that big financial losses are sometimes the price that has to be paid, there is rarely any rigorous attempt made to demonstrate the truth of that claim in respect of discretionary ad hoc interventions like the LSAP (or peer programmes abroad). Central banking done well should be profitable, from the nature of the institution – not because a central bank sets out to maximise profits (such a beast would be dangerous indeed) but because of its position in the market/economy and the monopolies the state gives it central bank.

Finally, and reverting specifically to New Zealand, one of my consistent criticisms of the LSAP programme is that there is no evidence in any of the material that has been released that the Reserve Bank or Treasury ever conducted or provided a robust analysis of what could go wrong when seeking the approval of the Minister of Finance for such huge punts on the bond market (and punts they were).

As just one example, consider this Treasury report to the Minister dated 1 May 2020 (so six weeks after the LSAP had been launched, and well after the initial US-led disruption to bond markets had settled down), in support of the Reserve Bank’s bid to expand the LSAP programme, and increase the associated financial risks. Here is the relevant bit of the financial risks section

Written in a way to suggest the programme was more likely to make money than lose it (despite the record low interest rates at the time) and with a “large but plausible” downside scenario involving the OCR only getting back to 1 per cent by this year, with no attempt at all to offer tail risk estimates of the extent of the possible loss. It simply isn’t the sort of analysis that should prompt any degree of confidence in either the Reserve Bank or the Treasury.

But this is the sort of stuff that Orr apparently stands by 100 per cent, with no regrets for anything he or the MPC were responsible for.

Central bank inadequacy and spin

Michael Reddell Adrian Orr, LSAP, Monetary policy

Last Friday the Reserve Bank Governor, Adrian Orr, gave a keynote address to the Waikato Economics Forum. This event seems to have become part of the annual economic policy calendar, with Waikato University boasting that

The forum will bring together an outstanding lineup of top economists, business leaders and public sector officials, who will share their expertise on how we can address the major challenges facing our country today.

Sold that way, you might have thought that when a really senior and powerful public official turns up for a keynote address to an assembled economically literate audience he’d have delivered some fresh and interesting insights, going rather deeper than he might to, say, a provincial Rotary Club. Doubly so when in that official’s area of policy responsibility things have proved so challenging in the last few years, when so much taxpayers’ money has been lost, and when core inflation is so far outside the target range the government has set. It was just a couple of weeks after the latest Monetary Policy Statement, so would have been a great opportunity for the Governor to expand on the issues and shed light on how, and how rigorously and insightfully, he sees things .

Instead we got “Promoting economic wellbeing: Te Pūtea Matua optimisation challenges”, a title that held out little or no hope and offered less across a sprawling 12 pages of text. Attendees must have wondered whether it had really been worth getting out of bed early enough to hear the Governor at 7:40am. As for me, I read it twice, just to be sure.

Faced with major policy failures – and the core inflation outcomes cannot really be considered anything else, no matter how many allowances might be made – there is not a single fresh or interesting insight in the entire speech, In fact, it is the sort of address one of Orr’s junior staff could easily have given, as a “functions of the Reserve Bank” talk, to a Stage 2 university economics class.

Perhaps it would be one thing if (a) little or nothing interesting was going on in the economy or with inflation, or (b) if the Governor and other members of the Monetary Policy Committee were giving speeches on monetary policy matters every couple of weeks, although one might still – given the character of the audience – have reasonably expected more, including because good and thoughtful speeches offer insights into the quality and character of decisionmakers and their advisers. As it is, a great deal is going on, a great deal that has taken the Bank (and most others) by surprise, and that is still ill-understood (eg why did almost everyone get it wrong, what did we miss, what do we learn?), and serious speeches by MPC members on things to do with monetary policy, inflation etc are – unlike the situation in most other advanced countries – very rare. As far as I can see, the last serious monetary policy speech the Governor gave was to the Waikato forum a year ago, the chief economist has not given any speeches on monetary policy or inflation (nor, perhaps mercifully, has his boss), none of the external MPC members has ever given a speech on these topics or put their names to specific views or lines of analysis/reasoning/evidence, and the Deputy Governor’s last speech on monetary policy was 18 months ago, when the Bank was barely worried about inflation at all.

It is inexcusable in people who wield so much power, perhaps for good longer term but certainly for ill in the last couple of years. And it seems to speak of some combination of the utter arrogance Orr routinely displays when he does speak, and the probable absence of any fresh or interesting analysis in the entire institution. If they had such insights, such research, such analysis, surely they’d be wanting to impress us with it? But the Bank now publishes hardly any formal research and it is rare to find even an insightful chart in an MPS. If spin seems to be the order of the day, and it so often does (see below) they aren’t even very good at generating supporting material, let alone providing any serious accountability.

There really wasn’t much interesting in this keynote address at all, but I did want to highlight just a few of the spin lines.

On the straight economics there was this

Low and stable inflation is a necessary outcome for economic wellbeing in the longer term

I’m deeply committed to the case for price stability (ideally, an even lower inflation target than we have now) but this is simply overblown nonsense, which discredits the case for low and stable inflation. A more serious Reserve Bank in years gone by might, much more reasonably, have framed the point simply as “tolerating high inflation won’t make us any richer, and will come with all sorts of distortions and costs, and in the longer term if price stability doesn’t determine whether or not we are prosperous and productive, it is still the best limited contribution monetary policy can make.

Then there was the corporate spin

Looking ahead, in striving to be exceptional in our work,

Perhaps it is good to aim to be exceptional (although few people or institutions ever are), but…..the Orr Reserve Bank, when we get speeches like this, and few of his decisionmakers ever expose themselves to any sort of serious scrutiny, and when leading from the top the Governor is reluctant to ever express regret for anything he/they might have done, or failed to do. Great institutions – especially powerful public ones – acknowledge openly and learn from their mistakes.

I’ll skip the empty waffle about climate change (“we have a key part to play”) or the political posturing about the Treaty of Waitangi (which is apparently part of a “move from being a good to a great Central Bank” – who granted them even a rating of “good?)

At the end of the speech there is a section headed “Our research programme”, where Orr asserts

Te Pūtea Matua has a long tradition of pursuing policy-relevant research and as a full service central bank our research programme covers all three strands of work we are tasked to deliver.

It used to be true that the Bank had a strong record of policy-relevant research on things around monetary policy, inflation, and the cyclical behaviour of the economy. But no more – just check out how little research they’ve published in those areas in recent years, It has (sadly) never been true that the Bank has had any sort of sustained tradition in policy-relevant research around either its mushrooming financial regulatory and stability responsibilities (in fact, there were conscious decisions by successive Governors not to invest in such research), or its cash responsibilities, and there is no sign that has changed for the better. Instead, we just get spin like this.

And then in conclusion Orr asserts that

We are a learning institution and we enjoy collaboration.

Learning institutions engage, learning institutions aren’t prickly and defensive, learning institutions don’t just make stuff up, learning institutions don’t claim to regret nothing, learning organisations – especially amid the biggest surprises/policy failures in decades – don’t give keynote addresses like this. And collaborative institutions don’t engage in the sort of defensive abuse Orr is sadly all too well known for.

Learning organisations, agencies that are exceptional in their work, great central banks, don’t just make stuff up. Orr does.

The Herald’s Jenée Tibshraeny had a nice piece yesterday on just the latest example, from the question time after Orr’s Waikato speech. He was asked a question about central bank losses from things like the LSAP bond-buying programme (about 1.03 hrs into the video of the day), specifically citing the (recently newsworthy) losses the German central bank had been recording and disclosing. Instead of responding seriously and substantively, Orr blustered, attempting to imply that these were really just accounting issues (as if good record keeping doesn’t matter), muddying the waters by getting into questions about how much central bank equity matters, and condescendingly suggesting that while such issues “hurt the brain” people need to start exercising their brain, and “calm down”. The questioner himself clearly wasn’t satisfied, and asked a follow-up, but Orr simply talked out the clock, even suggesting (astonishingly) that the BIS – a bunch of technocrats in Basle – had explained it all for the public.

There are two points people like the BIS have made that are of course true, and as general points have never really been disputed by serious commentators and observers.

First, central banks don’t exist to maximise profit. They exist (in their monetary policy functions) to deliver low and stable inflation, and

Second, central banks can in principle function perfectly well with low, zero, or even negative equity (I spent a couple of years working for one that not only had negative equity but wasn’t even able to produce a proper balance sheet for a prolonged period).

But harping on those sorts of points is simply irrelevant in the face of the huge real losses to taxpayers that central banks have sustained in the last couple of years.

In New Zealand’s case, as it happens, the negative (or impaired) equity issue doesn’t even arise, since the Bank in advance wisely sought a government indemnity for any losses the LSAP might lead to. As a technical matter they didn’t need to – they could have run through all the equity the government had given them and recorded huge negative equity. Nothing about the Bank’s ability to function would have changed one iota, but some hard questions no doubt would have been asked, and Orr reasonably enough preferred to have any blame shared.

But none of that changes the fact that the MPC’s choices around the LSAP – signed off on by the Minister of Finance, with Treasury advice – have cost taxpayers in excess of $9 billion: not “just accounting issues” but real losses. That is what happens when a government agency (central bank) does a huge asset swap, transforming much of the government’s long-term fixed rate debt into effectively floating rate debt just before short-term rates rocket upwards. Had the LSAP programme never been launched – or even if it had been halted a few weeks in once bond markets had settled down from the US-led turbulence of March 2020 – taxpayers and the Crown would be that much better off, in real purchasing power terms. And none of Orr’s spin and distraction – and none of the BIS material – ever seriously engages with those real losses. Instead they respond to points that are not those serious critics are making.

And if one happens to think the LSAP made a meaningful economic difference – as Orr still seems to claim – then that only reinforces the point, since it added to the level of stimulus that helped deliver the core inflation, miles outside the target range, that central banks are now struggling to get under control and reverse. Better not to have had the real economic losses, and of course with hindsight we know the level of monetary stimulus was too large for far too long.

(As I’ve argued in numerous posts here over the last 3 years, I don’t believe the LSAP made much meaningful difference to anything – simply added huge risk, without any serious advance risk analysis, culminating in huge losses. I was encouraged to see in Tibshraeny’s article that the former Deputy Governor, Grant Spencer – able economist and former bank treasurer – seems to have the same view

“The main benefit was that it smoothed the disruption to the bond market that occurred in April/May 2020 when there was some real volatility in the bond market and bond rates spiked up,” Spencer said.

“After that, the rest of the purchases, I would say, had very little effect on the term structure of interest rates.”

Well quite. The initial intervention may not have been necessary but could have been highly profitable on a small scale. The latter purchases made no difference to short to medium interest rates (set by the OCR and expectations about it) and little to longer-term rates. Had they wanted short rates lower, the OCR could always have been cut by another 25 basis points, at no financial risk to taxpayers.

Orr seems to have backed away somewhat from a line he gave Tibshraeny in an interview last year, where he claimed that the macro benefits of the LSAP programme were “multiples” of the losses (and the Bank’s five-year monetary policy review last year provided no serious support for such claims) preferring now just to rely on bluster, distraction, and the hope that people will eventually get tired, or confused, and forget.

Orr’s comments on Friday reminded me that I’d heard that Orr had also been trying on the handwaving “it’s just an accounting issue” at FEC after the recent Monetary Policy Statement. I hadn’t listened in at the time and finally did so this morning.

If National Party members don’t always ask very good questions on this issue, at least they show no sign yet of being willing to let it go. In doing so, they bring out Orr at his prickly, blustering, and basically dishonest, worst.

Willis asked if it was not regrettable that there had been a direct fiscal cost from the LSAP programme of about $9bn. Orr’s response was a single word: No.

Willis followed up asking if he was really saying that these losses were justified. This time, she got a three word response “Yes, I do”.

Orr went on to state that he “100% stood by” the LSAP and its losses, getting a bit more expansive and asserting/reminding the Committee that central banks could operate with negative equity – as noted above, this is pure distraction in the NZ context since the Reserve Bank’s capital was not impaired at all (although taxpayers’ “equity interest” in the NZ government was) – and explicitly going on to assert that it was “an accounting issue not an economic one”. As applied to the LSAP, that is simply false, yet another outrageous attempt to mislead Parliament.

And he wasn’t finished. Willis asked if he was saying he had no regrets at all. His response? “Those were your words”, before falling back on his regrets for things he had no responsibility for – regrets Covid, regrets Ukraine, regrets Gabrielle, even passively regrets that New Zealanders are experiencing high inflation – but no regrets for any choices he made might have actually made, not ones that costs taxpayers $9 billion, and certainly not ones that led to core inflation of about 6 per cent and likely “need for” a recession. Spinning again, he repeated the line he is fond of that if they’d tightened one quarter earlier it would have made very little difference. No doubt so, but the big mistakes – perhaps pardonable, perhaps even understandable, but big mistakes nonetheless – weren’t about one quarter, but about fundamental misjudgements in 2020 and early 2021, on things Parliament has delegated Orr and his MPC responsibility for, as supposed technical experts. And yet they refuse to take any real responsibility, falling back on attempts to distract MPs and avoiding serious engagement with anyone else.

There has been a lot of focus in the last week or so on Rob Campbell’s mistakes, for which he has rightly paid a price and no longer hold Crown appointments.

But Orr managed to lose billions – having done no advance risk analysis, having talked rather negatively on bond-buying strategies only a few months prior to Covid – and delivered us very high core inflation, core inflation reflecting largely domestic demand imbalances well under Reserve Bank monetary policy influence, refuses to engage seriously, actively and repeatedly misrepresents things and misleads Parliament, and treats those to whom he is accountable with prickly disdain and no respect whatever, and yet keeps his job, and starts a second term later this month. It is a sad reflection on how degraded New Zealand politics and policymaking has become when accountability now appears to mean so little.

Reappointing Orr – some documents

Michael Reddell Adrian Orr, Reserve Bank Board

Yesterday’s Herald had an interesting article on the reappointment late last year of Adrian Orr as Governor of the Reserve Bank. The article appeared to have been prompted by the Bank’s response to an OIA I lodged last year asking for background material on the reappointment. A link to that OIA response is now on the Bank website.

The key quote was this, from the letter from the Board chair Neil Quigley to the Minister of Finance recommending Orr’s reappointment.

“The governor will also model the highest standards of behaviour in promoting a safe environment for debate and in treating with respect those people with different views from their own, consistent with Public Service Commission guidelines,” 

The best that might be said for that claim is that it may represent wishful thinking that somehow their leopard once reappointed might change his spots. So many people who have interacted with Orr was Governor, or observed him interacting with others, could testify that he has modelled none of that sort of behaviour (and there are specific accounts on record from people for Victoria University’s Martien Lubberink and the NZ Initiative’s Roger Partridge, as well as the story that Quigley himself one day felt obliged to pull Orr out of a Bank Board meeting over concerns about Orr’s conduct in the meeting). Watch any Orr appearance at FEC and much of time his response to challenge and questioning has been pretty testy. There must have been a recent Damascene conversion for Quigley’s assertion to the Minister to be anything other than wishful thinking at best. More likely it is just outright spin.

There was another interesting quote in the Herald article itself, from Chris Eichbaum a Labour-affiliated member of the outgoing board (both the outgoing board and the new Robertson board recommended the reappointment). Eichbaum is quoted as claiming that

An outgoing board member, Chris Eichbaum, confirmed to the Herald the old board went through a “robust and exhaustive”, “backward and forward-looking” process before coming to its decision to endorse Orr.

However, the Bank released summary minutes of the relevant meeting of the non-executive old-Board directors on 12 May last year (which, incidentally, was attended by Rodger Finlay, at the time chair of the majority owner of Kiwibank, the subject of Reserve Bank prudential supervision). The entire meeting lasted only an hour, with five items on the agenda, including the Annual Review for the then Deputy Governor.

“Perfunctory” looks like a more accurate description than “robust and exhaustive” – which isn’t surprising since the old Board had no formal responsibility any more and most of the members were by then probably more interested in their own next opportunities beyond 30 June (I recall one telling us at about that time of the next role he was going to take on once he left the Bank Board). You get the impression that the new Board – on average even less fit for office – must have been even more perfunctory in its deliberations because the Bank neither released nor withheld minutes recording their deliberations on the matter (at their very first meeting on their first day in office, 1 July). Note that not even the Bank’s own self-review of monetary policy was yet available to either Board.

The Reserve Bank OIA response was not, however, the only relevant one. When Orr was reappointed I lodged requests with the Bank, The Treasury, and with the Minister of Finance. They all obviously coordinated their responses since all three were late and all three finally arrived on the same day.

What was interesting in these releases is what wasn’t there (not what was done but withheld, but what appears never to have been done). Thus one of the better aspects of the amended Reserve Bank legislation was supposed to be a heightened and more formalised role for The Treasury in monitoring the Bank on behalf of the Minister of Finance. But there is no advice at all from The Treasury to the Minister of Finance on the substantive pros and cons of reappointing the Governor even though (a) Treasury had just taken on a new heightened role and responsibility, and (b) the question of reappointment was arising amid the biggest monetary policy failure for decades. They drafted the Cabinet paper for the Minister of Finance to reflect the Minister’s own views, but that seems to have been all. There is no sign Treasury was even made aware, let alone asked for advice, when the two Opposition parties raised concerns about the proposed reappointment, even though this was the first time such consultation provisions had existed for a Governor appointment.

As often seems to be the case, the Minister of Finance’s response was fullest, although there were these documents withheld

Intriguing, since there is no sign in any of the other documents of any legal doubts about the ability to reappoint (and all these documents pre-date the letter from Quigley cotaining the Board’s recommendation to reappoint Orr).

The statutory provisions the Minister had inserted require the Minister of Finance to consult other parties in Parliament before recommended to the Governor-General the (re)appointment of a Governor. It was an interesting addition to the legislation (and arguably there is a stronger case for such a provision for the Governor than for Board members, where the record indicates that the Minister had already treated the consultation provision as no more than a cosmetic hoop to jump through on the way to doing whatever he wanted) and certainly suggested an intent that anyone appointed as Governor should at least command the grudging acceptance of other political parties (perhaps especially the major ones) given the huge discretionary power the Governor, Bank and Governor-dominated MPC wield.

Here is the body of the letter sent to the other parties on 19 September

Interestingly, the letter makes no substantive case for the proposed reappointment, addresses nothing (good or ill) about his record etc. I guess parties might be presumed to know Orr, but it still seems a little curious to make not even a one sentence case. But that is the Minister’s choice.

Three of the four non-Labour parties in Parliament responded (the Maori Party did not). This was the response from Genter/Shaw for the Greens

Being an unserious party, they supported reappointment because of things the Bank and Governor have no statutory responsibility for.

Both National and ACT expressed opposition to the reappointment. The letter from Nicola Willis has been released previously and so I won’t clutter the post by reproducing it all here. Their opposition was on the (deeply flawed) ground that they believed no five year appointment should be made for a term starting in election year (even though the starting date for the second term was in March 2023 and the election then seemed likely to be in October or November). However, Willis ended her letter this way.

Willis has since described the reappointment as “appalling”, but seems to continue to rely on the argument about a five-year term even though (as I’ve pointed out previously) their 2017 comparison is flawed and the legislation has always been designed deliberately not to make it easy for new governments, of whatever stripe, to come in and appoint their own person.

We had known that ACT was opposed to the reappointment but had not seen the body of Seymour’s letter back to Robertson. It is a couple of pages long and raises substantive concerns about both style and policy substance (but rightly not questioning the ability of the government to make a five year appointment). It has a distinctive Seymour style to it (and so even as an Orr sceptic some lines jar with me) but it is an undeniably serious document, in response to the first ever statutorily-required political party consultation over the appointment of a Governor.

But it was all just ignored. This is what little the Minister of Finance told Cabinet

so not even a hint as to the nature of the concerns the Opposition parties had expressed, or any reflection on what expectations (around multi-party acceptance, if not endorsement) the government’s own legislation might have given rise to.

After the Cabinet paper had been lodged, Robertson did write back to Nicola Willis in a fairly substantive letter (the full text of this and other documents is in here)

Robertson OIA on Orr reappointment 2022

The Minister rightly pushes back on the argument about pre-election appointments, highlighting the substantial differences to the 2017 case (and actually makes the interesting point, that I had not noticed, that the law provides for only a single reappointment, so any one year term for Orr would have to have been his final term).

Perhaps of more substantive interest are the comments from the Minister on the Governor’s monetary policy stewardship

A lot more spin than substance, that fails (completely but no doubt deliberately) to distinguish things central banks are responsible for and those they aren’t really, chooses not to distinguish shocks that New Zealand did not face (eg global gas prices), and in the end is simply complacent about the serious core inflation outbreaks here and everywhere else. There is no sense of any accountability.

The Minister’s letter ends this way

Not only has the entire legislative structure long been built around a model in which the Minister of Finance has always been free to reject a nominee (but cannot impose his or her own favourite) but it was Robertson’s own government that added the political party consultation provisions. Rejecting an Orr nomination – especially after both Opposition parties had expressed serious concerns – would not to have been to politicise the process, but would simply have been the Minister of Finance doing his job. As it is, the risk now is that the consultation provisions will come to be regarded just as an empty shell.

Those paragraphs above from the Minister’s letter to Willis are nonetheless of some interest because they are the only material, across three separate OIA responses, even mentioning the conduct of monetary policy on the Governor’s watch. In the Board minutes (see above) there was no sign of any consideration or analytical input (not that none of the Board members really had the capability to provide such an assessment themselves. In the Quigley letter to Robertson there is this

which is not only input-focused (rather than outcomes), focused on March 2020 (rather than the aftermath), but shows no sign of any critical reflection or evaluation. And in the Minister’s paper to Cabinet monetary policy and inflation – let alone $9bn of avoidable losses to the taxpayer – get no mention at all, just burble about Orr as a change manager (leading decline and fall perhaps?)

It was a poor appointment (my long list of reasons was in this post) even if one that was always to have been expected, since Robertson had never displayed any serious interest in accountability or performance, or much in the substance of the Bank’s role at all (and failure to reappoint might have risked raising questions about the government itself). But it is still a little surprising how short on substance, around the key failings of the Governor in recent years (style and substance), the documented parts of the process leading to reappointment seem to have been.

There are, of course, some levers open to a new National/ACT government were they to win the election, but it would be a little surprising if they do much at all. More likely, the decline and fall of a now bloated and unfocused institution will continue through Orr’s second (and apparently final) term.

Reluctantly and belatedly recognising conflicts of interest

Michael Reddell Adrian Orr, Reserve Bank Board, Rodger Finlay

For just over six months now I’ve been on the trail of questionable appointments to the new Reserve Bank Board. Most of the Board members aren’t really fit for office in anything other than ornamental roles – this in the midst of the worst monetary policy failure in decades and the Board being responsible for key appointments and for holding the MPC to account. But my main focus has been on the appointment last October of Rodger Finlay, while he was chair of the majority owner of Kiwibank, with a lesser focus on Byron Pepper, appointed in June this year while also serving as a a director of an insurance company operating in New Zealand (the largest shareholder in which was another insurance company subject to prudential regulation by the Reserve Bank.

The Reserve Bank has spent months trying to avoid/delay answering questions about these appointments. For any first time readers, the appointments themselves are made formally by the Minister of Finance, but materials previously released make it clear that the Reserve Bank (and The Treasury) were actively involved in the selection and evaluation of candidates for Board positions (as is quite customary).

A few weeks ago, the Bank gave me Hobson’s choice. Either face the likelihood of them declining the entire OIA request I had had with them (with the chance that one day, a year or two hence, the Ombudsman might make them give me more) or accept something of a black-box offer.

I took the offer. Yesterday I received their response.

RB pseudo OIA response re Finlay and Pepper Dec 2022

As I will lay out, there is some interesting material included, but as I had half-expected it is a pretty cagey and dishonest effort, since it includes nothing at all about how conflicts of interests had or had not been handled in the selection, interview, and evaluation process prior to the appointments being made.

Taking Pepper first, the documented provided is a four page letter dated 27 July 2022 (a month after Pepper’s appointment had been announced) to Pepper from Neil Quigley, the chair of the Board. In that letter, which addresses advice from both internal and external legal counsel, Quigley acknowledge that Pepper himself had been entirely upfront

I acknowledge that you have pro-active and transparent in declaring the above interests in each of your pre-appointment discussions with RBNZ board members and senior executives of The Treasury, and that you subsequently confirmed these in your pre-appointment interests disclosure to RBNZ staff.

But…

The RBNZ is …. under constant scrutiny from both its regulated institutions, market participants and interested members of the public as a whole. The RBNZ is also subject to the Official Information Act, and more generally as a public institution has an obligation to respond in good faith, and within the limits of privacy and commercial sensitivity, provide good faith responses to
questions and enquiries received. As a result, the RBNZ needs to set the highest standards, and take appropriately conservative approaches to the management of interests and the avoidance of both actual and perceived conflicts of interest, as both Mr McBride and Mr Wallis point out in their advice to me. This also means that the RBNZ needs to avoid complexity and opaqueness in managing in the interests of Board members, because these are challenging to explain to journalists and to the
public.

and “the legal position will not stop interested members of the public from asking us how we manage the situation”.

Quigley (no doubt here also by this time reflecting the stance of the Governor) writes

Pepper then chose to give up the insurance company directorship (he could presumably instead have resigned the Reserve Bank directorship).

A few quick points:

  • one might have some sympathy with Pepper himself. He appears to have hidden nothing, and the Reserve Bank Board role was the first government appointment he appears to have received.   A really strong ethical perspective should probably have had him recognising from the start that it was going to be a dreadful look to be both an insurance regulator (director thereof) and director of an insurance company operating in New Zealand (even one not directly regulated by the Bank), but (a) he’d been open, and (b) had got through the recruitments consultants the government was using, discussions with senior RB and Treasury figures, and Cabinet.
  • did Neil Quigley (and Orr and the rest) not appreciate previously that appointees to the new, much more powerful, Reserve Bank Board were going to receive scrutiny, and that actual, potential or perceived conflicts of interest would inevitably be a major focus for a Board responsible for prudential regulatory policy across banking, non-bank deposit-taking, payments systems, and insurance?  If not, why not?
  • even at the late date of the letter, Quigley seems to regard the problem as being as much the OIA rather than the importance of appointments to powerful regulatory agency bodies being above reproach or ethical question.  In fact, it is blindingly clear that Quigley, Orr and the rest of them approached Board appointments only with the narrowest legal constraints in mind.  If, as the law was written, the Pepper (or Finlay) appointments were not illegal (and they weren’t) there could be no problem. Astonishingly, in both cases The Treasury –  much more experienced in making and advising on government board appointments generally – seems to have gone along (as did the Minister of Finance and his colleagues).  It is a poor reflection on all involved.

And that is all I want to say about Pepper. In the end, the right thing seems to have been done, but only after public and media scrutiny and criticism.  Recall that a few years ago Orr got on his high horse about “culture and conduct” in the financial sector: we really should have been able to expect a much higher pro-active standard around key appointments than was evident here, and as so often concerns brought to light on the things we the public get to see leave one wondering about the standards the Bank and Board chair apply in areas we don’t easily get to see. 

What of the Finlay issues?

What has been released (link above) is a three-page summary, apparently prepared by the Bank’s in-house lawyer summarising various selected bits of correspondence relevant to the handling of Finlay’s conflicts of interest but only from the time his appointment to the Reserve Bank Board, from 1 July 2022, was announced in October 2021 (plus some editorial spin intended to try to shape the interpretation drawn by readers).  Between those two dates Finlay was paid to serve on the “transition board” handling the establishment of the new governance regime, but previous OIAs have disclosed that he also routinely attended meetings of the then-official Reserve Bank Board during this period.  My OIA request had explicitly covered a period starting on 1 April 2021, shortly before the public advertisements had appeared for positions on the new Reserve Bank Board, and it is telling that the Bank has chosen to release nothing from the selection and evaluation period.

Were this Reserve Bank document to be the only material we had, it might appear that everyone had acted honourably and appropriately in a slightly difficult time (what with secret discussions around the future ownership of Kiwibank going on in the background that very few people –  Treasury, Bank or even Ministers –  could reasonably be made aware of).

Thus

  • on 18 October 2021 we are told that Rodger Finlay “had outlined all interests that might potentially be relevant. In particular, he declared interest [in] (as a director of) NZ Post and Ngai Tahu holdings.” (this latter, which I have not focused on relates to the substantial – but not controlling – stake Ngai Tahu was taking in an insurance company that is subject to Reserve Bank prudential supervision)
  • on 20 October, the Governor asked about commitments Finlay had made about “management of conflicts of interest”, with Quigley weighing in that the Bank needed to “remain conservative on this front and maintain a very low risk appetite, particularly regarding Kiwibank”
  • on 17 November, a couple of senior Bank staff met Finlay who “outlined how particular interests could be eliminated before 1 July 2022 [presumably a first reference to the prospect of changed Kiwibank ownership] and how any COIs that could not be eliminated could be managed post 1 July 2022”
  • on 23 November, the Governor noted that “Kiwibank’s ownership structure would be resolved by July 2022….The Governor sought more information on how any conflicts through Ngai Tahu Holdings could be managed”.  Quigley responded “noting that it is important to avoid or resolve perceived COIs as it is to avoid or resolve actual COIs”, noting that he would discuss the Nagi Tahu situation further with Finlay, but “expected NZ Post will resolve itself by July 2022”.
  • on 17 March 2022, Finlay emailed the chair and Governor indicating he had been advised that NZ Post’s divestment from Kiwibank would be complete before 1 July 2022, and that he was no longer chair of the Ngai Tahu Holdings Audit Committee.

In the editorial at the end of the document this appears

finlay dec 22

(That final paragraph is not very satisfactory, since my OIA request had been explicitly about conflicts of interest generally, and not just the Kiwibank case, although it is slightly encouraging that the Bank has at least been cognisant of the conflict, even if it is not dealt with at all adequately by the restriction mentioned, since it seems Finlay is free to participate in discussions and votes on policy matters that affect a regulated company he has a significant interest in, as director of a significant shareholder.)

All that might sound fairly exculpatory for the Bank (perhaps especially Quigley, who seems to have been more concerned than management) and for Finlay – all honourable people acting in an honourable and above-board way, and all that.

Except that (a) not only does none of this cover the period before Finlay was appointed, but (b) what little the Bank released is far from all we now know about what went on.  I’ve written various posts on various material Treasury and the Minister of Finance have released.  Of particular interest is the “incident report” prepared over the signature of Treasury deputy secretary Leilani Frew. You will recall that the Secretary to the Treasury had had to apologise in writing to the Minister of Finance in late June for the failure of Treasury staff to ensure that Finlay’s conflicts re Kiwibank were disclosed in key papers to the Minister and to Cabinet.   The “incident report“, which I wrote about here, had been requested by the Secretary, to identify what went wrong and what lessons there were for the future.  Since it wasn’t written for publication, and The Treasury had by this time already owned up to an error, and since it covers the full period, it should be treated as a much more reliable and complete account than what the Bank has now selectively released.

Of direct relevance

Conflicts of interest were closely considered throughout this process. G & A Manager Gael Webster sought statement of conflict protocols from the Chair of the RB board, set up the process for the appointment of Transition board members and the new board, and contracted Kerridge & Partners to run the recruitment process, initially for the Transition board.

Kerridge met with the Treasury and RB Governor where conflicts were discussed, and Kerridge was provided with the Bank’s conflict protocols.

We also already knew, and the incident report confirms, that Finlay himself disclosed no possible conflicts to the consultants or the interview panel (not Kiwibank, not Ngai Tahu).

The report goes on

The due diligence interview with Mr Finlay proceeded with a panel comprising Sir Brian Roche as chair, Neil Quigley and Tania Simpson from the current RB board, Caralee McLeish, Wayne Byres (chair of the Australian Prudential Regulation Authority), and Murray Costello. The panel knew that Mr Finlay was chair of NZ Post which owned a majority share in Kiwi Group Holdings Ltd, which in turn owned Kiwibank, which is subject to regulation by the RB.

Sir Brian recalls conflicts being discussed but it was considered Mr Finlay was not conflicted. The RB’s Conflict of Interest policy stated that Mr Finlay would have a conflict that should be declared if he was a director of Kiwi Group Holdings Ltd, or a director of its subsidiary banking company Kiwibank Ltd. Neither of those situations existed and Mr Finlay is completely removed from the governance and operations of Kiwibank.

This reflects poorly on every single one of these people. There is no sign any of them were yet aware of the Ngai Tahu issue (which, see above, the Bank itself now appears to regard as a real conflict) but as regards Kiwibank they seem to have been driven by a narrow and legalistic interpretation – that can only have come from the Reserve bank side – that whatever was not illegal was therefore entirely proper and unproblematic).

Now, quite possibly – we don’t know – discussions around the future ownership of Kiwibank were already underway by mid last year (when the interview and evaluation were going on), but we know that The Treasury staff dealing with this appointment were not aware of that project until March/April this year, it seems unlikely the matter would have been disclosed to a foreign regulator (Byres, Kiwibank having no Australian presence), there is no sign Roche was aware (or surely he would have mentioned it as a consideration when asked in June/July 2022 by people who themselves were now aware), and even if Quigley was aware there is no obvious reason Simpson should have been advised (the old RB Board being purely advisory on policy matters). It seems quite safe to conclude that judgements – in which the Reserve Bank shared – about Finlay’s acceptability for the Reserve Bank Board role were made in the expectation that he would continue to be NZ Post chair and that NZ Post would continue to own the majority of Kiwibank. And it is just inconceivable how they – and especially the RB people, who should have been most concerned with, and conscious of, appearance risk – thought it was okay.

(In the material the Bank released there is an attempt to minimise Finlay’s role at Post and Post’s role re Kiwibank, but none of it changes the fundamental fact that Reserve Bank policy decisions would potentially severely affect the operations and fortunes of an entity NZ Post, chaired by Finlay, majority owned.)

The “we all knew what we were doing and there was never going to be a problem because the Kiwibank ownership would be resolved before 1 July 2022” line just does not wash. A much more compelling story is that all involved were running with narrow legalistic interpretations – it was lawful, therefore just fine – and had lost any sense of the big picture around integrity and appearances of integrity. For some reasons – not really clear, although I’ve heard suggestions they are similar personalities – Orr wanted Finlay and nothing was going to stand in the way.

The story the Bank now spins about how “we were all doing the right thing but just couldn’t write it down, even in Cabinet papers” doesn’t stack up for a moment:

  • it is entirely inconsistent with the fact of the Secretary to the Treasury’s written apology
  • it is inconsistent with the account of that interview panel (and of Finlay’s non-disclosure of any conflicts)
  • it is inconsistent with the twin facts that (a) the Minister of Finance had to consult with Opposition parties on the appointment and b) that the appointment was disclosed on the RB website by the end of 2021 (even if no one much noticed then).  Had the true story really been “oh, we’ll have changed the ownership of Kiwibank by 30/6/22 so that NZ Post won’t own it by then” the commerical-in-confidence story would have prevented them giving an honest answer to any Opposition party that had been on the ball and asked about apparent conflicts, or the people like me and the journalists who wrote about the issue if we had picked it up earlier. 
  • there is no sign in any of the papers released of the Bank raising any concerns late in the piece as it became clear that the Kiwibank ownership situation would not be sorted out by 30 June 2022 (no sign eg of them urging the Minister to get Finlay to take leave of absence from the RB Board until it was sorted out).  All the signs are that they just did not care very much, if at all. It wasn’t unlawful, and if it wasn’t ideal it was still okay.  If there is evidence that this is not the correct interpretation they could readily have released it.

No, the decision to appoint Finlay back in October 2021 was clearly taken on the narrow basis that the law did not prevent Finlay being appointed even if he chaired the majority owner of Kiwibank.  And that reflects very poorly on everyone involved –  Orr, Quigley, Byres, Treasury and the Minister of Finance (and his colleagues).    It would not have happened in any moderately well-governed country, but it happened here, made worse by the refusal of the Reserve Bank (Governor and chair) to take any responsibility for an egregious misjudgment, the sort of defensiveness that feeds the slow corruption of the state.

Suppose that Finlay was really appeared like a potential star catch as a potential Reserve Bank Board member (not clear why he might but just suppose).  Suppose too that you (Governor, Minister, Board chair, Secretary to the Treasury) knew that negotiations were getting underway to get Kiwibank out from under NZ Post, and you thought those would be likely to be sorted out by mid 2022.  It would have been easy enough, and entirely proper, to have made an in-principle decision to appoint Finlay but to delay any consultation with the Opposition and any announcement until the conflict –  real and substantial –  was removed.  Perhaps that might have meant Finlay taking up his appointment at the Reserve Bank on 1 September rather than 1 July, and his services –  just another professional company director (as Treasury notes in that report “there were other candidates the Minister could have considered for the Reserve Bank”) – wouldn’t have been available to the Governor during the transition period.  It would have been a perfectly right and proper thing to have done.  But Orr –  and apparently Quigley, MacLeish, and Robertson –  just didn’t care.  In Orr’s case, still doesn’t it seems.  As so often with him, responsibility, contrition, and doing the honourable thing (doing, and being seen to do) count for little or nothing.  There are no standards, just the bare minimum of (inadequate) legal restrictions, and whatever he can get away with.

UPDATE 23/12:  The Bank has chosen very consciously to play silly games and to deliberately not provide any material re Finlay for the period prior to mid-October 2021, the period in which the selection, evaluation, assessment and recommendations to the Minister of potential candidates was taking place.  It is clearly the period they don’t want light shed on, and as would have been very clear from my earlier writings it was a period of considerable interest to me (and was explicitly covered in my original requests).  Accordingly, I have lodged a new request with the Bank for all material relevant to the selection, evaluation etc of Finlay and Pepper, for the periods up to mid-October 2021 in Finlay’s case and up to 30 June 2022 in Pepper’s case.  

For those interested in reading further, Jenee Tibshraeny had an article in the Herald this morning prompted by the OIA material in this post. including a brief and unconvincing comment from Finlay (the first we’ve heard from him I think).

Monetary policy appointments

Michael Reddell Adrian Orr, MPC

I watched the Q&A interview yesterday with the Leader of the Opposition Chris Luxon. Monetary policy and the position of the Reserve Bank Governor came up.

It is really quite disappointing that the Minister of Finance, presumably with the acquiescence of the Prime Minister, has so politicised the situation that a Leader of the Opposition can reasonably be asked what he would expect (eg possible resignation) of the Reserve Bank Governor after the election if National wins. If he is at all serious about his answer – appoint an independent reviewer as soon as they take office and only decide after that – it is a recipe for considerable, unwelcome, market uncertainty, and further reputational risk for New Zealand and its system of economic governance.

We really should have appointees to such positions that both sides of politics can respect and trust. That has always been implicit in the model under which the central bank is given operational autonomy over monetary policy (and the massive cyclical influence that involves), the Governor (and MPC members) are appointed for terms not coinciding with, and longer than, parliamentary terms, and (in NZ since 1990) where the Minister of Finance cannot simply appoint his or her own person as Governor. That expectation was further reinforced when the current Prime Minister and Minister of Finance in 2018 amended the Reserve Bank Act to explicitly require consultation with other parties in Parliament before a person is (re)appointed as Governor.

When Adrian Orr was first appointed at the end of 2017 that “general acceptance” threshold was probably met. There was plenty of Orr sceptics about. although often rather quietly (since they or their employers had to deal with either NZSF or the Reserve Bank, and Orr was never known for embracing criticism), but there was no great controversy about the appointment (as it happened the search and selection process had been well underway before the election and change of government, and the Bank’s Board – which put forward Orr’s nomination – had been entirely appointed by the previous National government).

It isn’t the case now. The two main Opposition parties had both made clear to the government, when the legally-required consultation occurred, that they had concerns about the proposed reappointment. But there has been no hint or sign that the Minister of Finance made any effort to engage to allay those concerns, instead – his own legislation notwithstanding – he simply pushed ahead and reappointed Orr, having had the nomination made by the new Reserve Bank Board, possessed of almost no subject expertise, he himself had appointed just a couple of months earlier. Perhaps a bit like the entrenchment outrage in the headlines today, it was lawful (much is in New Zealand) but it was far from proper.

(As I’ve pointed out before the actual argument National made in their letter re Orr was weak and their historical parallel was flawed, but then they were caught in a difficult position – unless Robertson heeded their concerns and looked elsewhere for a new Governor, they could be stuck with Orr as Governor, almost certainly unable to dismiss him (unless he did something particularly new and egregious in his new term) – and may have felt reluctant to outline a range of specific concerns about Orr and his stewardship in writing.)

TVNZ’s interviewer, who usually does a fairly good job, seemed to come to yesterday’s interview holding a brief for Orr. Among the lines he put to Luxon was the suggestion that he shouldn’t be too critical or Orr and the Bank because they had been the first developed country to raise their policy interest rate. This is the sort of spin the Bank itself likes to hear, and it uses a more-muted version of it at times. I don’t know how many times it has to be said but it is simply a false claim. It isn’t a matter of interpretation or nuance, it is simply false.

There are probably two main sets of groupings that are used to capture a list of developed countries or advanced economies. The first is membership of the OECD, and the second is the IMF’s “advanced economies” groupings. Neither is ideal. The OECD includes several Latin American countries (Costa Rica, Colombia, Chile, and Mexico) that are mostly much poorer and less productive than other members (I’ve often suggested they are “diversity hires”),and excludes Singapore and Taiwan. The IMF list on the other hand does not include any of the Latin American countries, but in central and eastern Europe seems to include countries if they are in the euro but not if not, even if the latter are equally productive. Since so many advanced countries are in the euro, there are really only 20 or so countries with monetary autonomy, setting their own interest rate.

On several occasions in the past on Twitter I’ve used the BIS’s monthly data on policy interest rates. Of the countries there that are on either the OECD or IMF lists, these were the first countries to raise policy interest rates in 2021.

Discount Mexico and Chile if you like and you are still left with five advanced country central banks having moved before our Reserve Bank did, all of them for countries that are either materially richer/more productive than New Zealand or (Korea, Hungary, Czech Republic) about the same. You could make further allowance for the Reserve Bank and accept that if their MPC meeting in August 2021 had been a day earlier, the OCR would first have been raised then, but they still wouldn’t have been the first to move.

There is no question but that our Reserve Bank moved earlier than the other Anglo central banks (or even the ECB) but what of it?

More generally, when individual central banks moved (early or late in calendar time) is really neither here nor there anyway. Each central bank faced different domestic situations in terms of capacity pressures, emergent inflation, and the core inflation outlook.

I’m not going to attempt to analyse the story each central bank faced last year, but I’ve shown this chart in a previous post.

On the most recent data, for the only internationally comparable measure of core inflation we readily have, New Zealand’s core inflation rate now – a year on from the first OCR increase – is nothing special, being just above that of the median OECD country. If we focus only on OECD countries with their own monetary policies (and the euro area as a single observation) we get this chart showing the increase in the core inflation rate since just prior to Covid (actual Turkey increase is far larger than the scale allows).

It isn’t one of the worst, but again it is slightly worse than the median country (and, as it happens, worse than in three of the four Anglo countries, and worse than the euro area).

This isn’t another post trying to evaluate in any detail the Bank’s absolute or relative performance, but as a general observation almost all central banks have done poorly in the last couple of years, and little about the Reserve Bank’s policies or policy outcomes stands out from the pack. Media defenders of the Governor should take note, and/or get better basic researchers.

What the post is mainly about is central bank appointments. We’ve had some dreadful ones this year – the deputy chief executive responsible for matters macroeconomic who has no background or evident expertise in the subject, and who yet is a full voting MPC member, and (see above) the reappointment of the Governor. Then there was the decision (apparently joint between the Governor, Minister and (old) Board) to keep in place the blackball prohibiting anyone with current in-depth expertise in matters macroeconomic or monetary from serving on the MPC, all as prelude to the reappointment without much scrutiny of two external MPC members whose terms were expiring.

On which note, I had another OIA request back the other day, which included the letter from the Reserve Bank Board chair to the Minister of Finance recommending those reappointments. It was perhaps even more lame than I had expected. There was no attempt to evaluate or describe the contributions Buckle and Harris had made, nothing at all about the rapidly rising (core) inflation backdrop for which they shared responsibility, no suggestion of having considered any alternative candidates (neither Buckle nor Harris are young). In fact, the strongest (only) argument for reappointment seems to have been that “the Bank is implementing a number of significant changes in governance in accordance with its new legislation”, even though almost none of the 2021 Act had anything to do with monetary policy or the MPC

That letter did, however, partly answer one question I’d had. Peter Harris – former politically-appointed adviser in Michael Cullen’s office – was reappointed for a term of only 18 months to expire on 1 October 2023, right in the middle of the likely election campaign. Why, I wondered, would Robertson have done that – ministers after all being well aware of the convention that new appointments should not be made to positions starting close to likely election dates? But it turns out it was the Board’s doing, and there is no sign they gave any thought to the fact that the end of Harris’s term was going to land in the midst of the election period. Which seems quite unnecessarily careless of them. One hopes there is no question of any new appointment being made until after the election. If National were to win, the vacancy would give them an opportunity to begin to exert some influence; one would hope they would remove the bar on expertise, and at the same time amend the MPC’s charter to make it clearer that individual members were expected to bring expertise to bear and to be individually accountable.

But the current government is quite free to make the next MPC appointment. The worst of the first batch of external MPC members was Caroline Saunders. Her term expires on 31 March 2023. The papers released at the time of those 2019 appointments make it pretty clear that she was a diversity hire. Professor Saunders may be very capable in her own field but she has no background at all in macroeconomics or monetary policy. Consistent with that, we have heard not a word from here in her (almost) four years on the MPC. She has taken the taxpayers’ dime and there is no evidence she has made any contribution at all, and has done or said nothing – no speech, no interview, no parliamentary committee appearance – to provide any basis for holding her to account, even as she shares formal responsibility for the biggest monetary policy stuff-up in decades

It would be quite unfortunate if Saunders is reappointed (but most probably it is already a fait accompli, given that no vacancies have been advertised). If there was ever a case for a token female appointment (which there wasn’t; token appointees are never desirable), the ultimate in token appointees now holds a senior executive role on the committee. More generally, in any body – public or private – fresh blood should be introduced from time to time, and yet none of the externals has been changed, and (by the rules they themselves signed up to) those members are not allowed to foster any independent subject expertise themselves in their time on the MPC (and the Bank has been doing very little serious research, so there won’t be much expertise being fostered/extended inside). From a narrowly political perspective, one might have thought it might have been in the government’s interest to have found a strong new appointee who might have a good chance of doing two future terms.

Which bring us back to Luxon. It isn’t clear that National cares very much about any of this,or will fllow through if and when it takes office (why rock the boat when you now have an office to hold and savour?). I’m not at all optimistic, but if they are more serious than they seem, here was a post outlining some of things they could look at.

Reviewing monetary policy

Michael Reddell Adrian Orr, Monetary policy, pandemic

Way back in 1990 Parliament formally handed over the general responsibility for implementing monetary policy to the Reserve Bank. The government has always had the lead in setting the objectives the Bank is required to work to, and has the power to hire and fire if the Bank doesn’t do its job adequately, but a great deal of discretion has rested with the Bank. With power is supposed to come responsibility, transparency, and accountability.

And every so often in the intervening period there have been reviews. The Bank has itself done several over the years, looking (roughly speaking) at each past business cycle and, distinctly, what role monetary policy has played. These have generally been published as articles in the Bank’s Bulletin. When I looked back, I even found Adrian Orr’s name on one of the policy review articles and mine on another. It was a good initiative by the Bank, intended as some mix of contribution to debate, offering insights that were useful to the Bank itself, and defensive cover (there has rarely been a time over those decades when some controversy or other has not swirled around the Bank and monetary policy).

There have also been a couple of (broader-ranging) independent reviews. Both had some partisan intent, but one was a more serious effort than the other. When the Labour-led government took office in 1999 they had promised an independent review, partly in reaction to their sense that we had messed up over the previous few years. A leading Swedish academic economist Lars Svensson, who had written quite a bit about inflation targeting, was commissioned to do the review (you can read the report here). And towards the end of that government’s term – monetary policy (and the exchange rate) again being in the spotlight – Parliament’s Finance and Expenditure Committee did a review.

When the monetary policy provisions of the Reserve Bank Act were overhauled a few years ago this requirement was added

It made sense to separate out this provision explicitly from that for Monetary Policy Statements (in fact, I recall arguing for such an amendment years ago) but the clause has an odd feature: MPSs (and the conduct of monetary policy itself) are the responsibility of the MPC, but these five-yearly longer-term reviews are the responsibility of “the Bank”. In the Act, the Bank’s Board is responsible for evaluating the performance of both management and the MPC, but the emphasis here does not seem to be on the Board. It seems pretty clear that this is management’s document, and of course management (mainly the Governor) dominates the MPC. Since the Board has no expertise whatever in monetary policy, it is pretty clear that the first of these reports, released last week, really was, in effect, the Governor reporting on himself.

And although plenty of people have made scathing comments about that, there isn’t anything necessarily wrong about a report of that sort. After all, it isn’t uncommon (although I always thought it odious and unfair given the evident power imbalance) for managers to ask staff to write about notes on their own performance, as part of an annual performance appraisal, before the manager adds his/her perspective. The insights an employee can offer about his or her own performance can often be quite revealing. And it isn’t as if the Bank’s own take on its performance is ever going to be the only relevant perspective (although, of course, the Governor has far more resources and information at his disposal than anyone else is going to have). The only real question is how good a job the Bank has done of its self-review and what we learn from the documents.

On which note, I remain rather sceptical about the case (National in particular is making) for an independent review specifically on the recent conduct of monetary policy. Some of those advocating such an inquiry come across as if what they have in mind is something more akin to a final court verdict on the Bank’s handling of affairs – one decisive report that resolve all the points of contention. That sort of finality is hardly ever on offer – scholars are still debating aspects of the handling of the Great Depression – and if there was ever a time when choice of reviewer would largely determine the broad thrust of the review’s conclusions this would be among them. Anyone (or group) with the expertise to do a serious review will already have put their views on record – not necessarily about the RBNZ specifically (if they were an overseas hire) but about the handling of the last few years by central banks generally. There is precedent: the Svensson review (mentioned above) was a serious effort, but the key decision was made right at the start when Michael Cullen agreed to appoint someone who was generally sympathetic to the RB rather than some other people, some of equal eminence if different backgrounds, who were less so. It would be no different this time around (with the best will in the world all round). A review might throw up a few useful points and suggestions, and would probably do no harm, but at this point the idea is mostly a substantive distraction. Conclusions about the Reserve Bank and about its stewardship are now more a matter for New Zealand expert observers and the New Zealand political process (ideally the two might engage). Ideally, we might see some New Zealand economics academics weighing in, although in matters macroeconomics most are notable mainly by their absence from the public square.

That is a somewhat longwinded introduction to some thoughts about the report the Bank came out with last week (120 pages of it, plus some comments from their overseas reviewers, and a couple of other background staff papers).

I didn’t think the report presented the Bank in a very good light at all. And that isn’t because they concluded that monetary policy could/should (they alternate between the two) have been tightened earlier. That took no insight whatever, when your primary target is keeping inflation near the middle of the target range and actual core inflation ends up miles outside the range. Blind Freddy could recognise that monetary policy should have been tightened earlier. When humans make decisions, mistakes will happen.

The rest of the conclusions of the report were mostly almost equally obvious and/or banal (eg several along the lines of “we should understand the economy better” Really?). And, of course, we had the Minister of Finance – not exactly a disinterested party – spinning the report as follows: “It is really important to note that the report does indicate that they got the big decisions right”. It should take no more than two seconds thought to realise that that is simply not true: were it so we would not now have core inflation so far outside the target range and (as the report itself does note) pretty widespread public doubts about how quickly inflation will be got down again. It would be much closer to the truth to say that the Reserve Bank – and, no doubt, many of their peers abroad – got most of the big decisions wrong. It has, after all, been the worst miss in the 32 years our Reserve Bank has been independent, and across many countries probably the worst miss in the modern era of operationally independent central banks (in most countries, after all, monetary policy in the great inflation of the 1970s was presided over by Ministers of Finance not central banks).

But there is no sense in the report at all of the scale of the mistake, no sense of contrition, and – perhaps most importantly in my view – no insight as to why those mistakes were made, and not even any sign of any curiosity about the issue. The focus is almost entirely defensive, and shows no sense of any self-critical reflection. There are no fresh analytical insights and (again) not even any effort to frame the questions that might in time lead to those insights. And no doubt that is just the way the Governor (who has repeatedly told us he had ‘no regrets’) would have liked it. And here we are reminded that this is very much the Orr Reserve Bank: the two senior managers most responsible for the review (the chief economist and his boss, the deputy chief executive responsible for monetary policy and macroeconomics) only joined the Bank this year, and so had no personal responsibility for the analysis, preparation and policy of 2020 and 2021 but still produced a report offering so little insight and so much spin. Silk, in particular, probably had no capacity to do more, but the occasional hope still lingered that perhaps Paul Conway, the new chief economist, might do better. But these were Orr’s hires, and it is widely recognised that Orr brooks no dissent, no challenge, and in his almost five years as Governor has never offered any material insight himself on monetary policy or cyclical economic developments. Even if they had no better analysis to offer – and perhaps they didn’t, so degraded does the Bank’s capabilities now seem – contrition could have taken them some way. But nothing in the report suggests they feel in their bones the shame of having delivered New Zealanders 6 per cent core inflation, with all the arbitrary unexpected wealth redistributions that go with that, let alone the inevitable economic disruption now involved in bringing inflation a long way back down again. It comes across as more like a game to them: how can we put ourselves in the least bad light possible with a mid-market not-very-demanding audience (all made more unserious as we realised that the Minister of Finance had made the decision a couple of months ago to reappoint Orr, not even waiting for the 120 pages of spin).

At this juncture, a good report would be most unlikely to have had all the answers. After all, similar questions exist in a whole bunch of other countries/central banks, and if the Reserve Bank has the biggest team of macroeconomists in New Zealand, there are many more globally (in central banks, academe, and beyond) but it doesn’t take having all the answers to recognise the questions, or the scale of the mistakes. In fact, answers usually require an openness to questions, even about your own performance, first. And there is none of that in the Bank’s report.

Thus, we get lame lines – of the sort Conway ran several times at Thursday’s press conference – that if the Bank had tightened a bit more a bit earlier it would have made only a marginal difference to annual inflation by now. And quite possibly that is so, but where is the questioning about what it would have taken – in terms of understanding the economy and the inflation process – to have kept core inflation inside the target range? What is it that they missed? (And when I say “they” of course I recognise that most everyone else, me included, also missed it and misunderstood it, but……central banks are charged by Parliaments with the job of keeping inflation at/near target, exercise huge discretion, carry all the prestige, and have big budgets for analytical purposes, so when central banks report on their performance, we should expect something much better than “well, we acted on the forecasts we had at the time and, with hindsight, those forecasts were (wildly) wrong”.) The question is why, what did they miss, and what have they learned that reduces the chances of future mistakes (including over the next year or two – if your model for how we got into this mess was so astray, why should the public have any confidence that you have the right model – understanding of the economy and inflation – for getting out of the mess? At the press conference the other day the Governor and the Board chair prattled on about being a “learning organisation” but you aren’t likely to have learned much if you never recognised the scale of the failure or shown any sign of digging deep in your thought, analysis, and willingness to engage in self-criticism. We – citizens – should have much more confidence in an organisation and chief executive will to do that sort of hard, uncomfortable, work than in one of the sort evident in last week’s report.

With hindsight one can make a pretty good case that no material monetary policy action was required at all in 2020. One might be more generous and say that by September/October 2020 with hindsight it was clear that what had been done was no longer needed. But that wasn’t the judgement the Reserve Bank came to at the time – and it is the Bank that has been tasked with getting these things right. Why? (And, of course, the same questions can be asked of other central banks and private forecasters, but the Reserve Bank is responsible for monetary policy and for inflation outcomes in this country.)

I may come back in subsequent posts to look at more detail at a number of specific aspects of the report (including a couple of genuinely interesting revelations) but at the big picture level the report does not even approach providing the sort of analysis and reflection the times and circumstances called for (in some easier times a report of this sort might have not been too bad, although you would always look for some serious research backing even then).

And if you think that I’m the only sceptic, I’d commend to you the comments from the former Deputy Governor of the Bank of Canada. On page after page – amid the politeness (and going along with distractions like the alleged role of the Russian invasion) – he highlights just how relatively weak the analysis in the report is, how many questions there still are, and a number of areas in which he thinks the Bank’s defensive spin is less than entirely convincing.

New Zealanders deserved better. That we did not get it in this report just highlights again that Orr is not really fit for the office he holds. In times like those of the last few years – with all the uncertainties – an openness to alternative perspectives, willingness to engage, willingness to self-critically reflect, and modelling a demand for analytical excellence are more important than ever.

The Spencer precedent

Michael Reddell Adrian Orr, Reserve Bank

Over the last couple of months, the National Party has been running the line that a Reserve Bank Governor should not be appointed to the normal full five-year term when Orr’s existing term expires in late March, but that rather an appointment should be made for just a year so that whichever party takes office after next year’s election can appoint a Governor of their preference. We are told (although we have not yet seen the letter) that they made this case to the Minister of Finance when, as he was required to, he came consulting on his plan to reappoint Orr.

It is a terrible idea, on multiple counts.

But what is also irksome is the idea that in making a five year appointment, for a term beginning probably at least six months prior to the election, the Minister is breaching some established convention. That is simply a nonsense claim. This clip (from Bernard Hickey’s newsletter, this one opened to everyone) has some relevant quotes

There is simply no foundation to what Luxon is saying about what happened in the past. Since the Reserve Bank was made operationally independent in 1990, there have been two cases in which a Governor’s term has expired in election year but before the scheduled election. The first was in 1993, when Don Brash’s term expired on 31 August. The 1990 election had been held on 6 November 1990, so presumptively any new term was going to start within three months of the 1993 election. As it is, and partly to allay any possible market concerns (these were still fairly early days), Don’s reappointment was made and announced very early (if memory serves correctly in late 1992). I don’t recall any particular controversy about that reappointment (although the then Prime Minister had not been a huge Brash fan), but then Brash had initially been appointed by a Labour government (and the then Labour leader and finance spokesman had both sat in the Cabinet that had appointed him).

Of the next few (re)appointments:

  • Don Brash was appointed to a third term commencing in September 1998, not an election year
  • Don Brash resigned suddenly in April 2002, about three months before the general election.  The then Deputy Governor was immediately appointed (lawfully) as acting Governor, both to run the Bank in the interim and to enable a proper search process to take place.  Recall that under New Zealand law, the Minister of Finance cannot simply appoint his or her own person as Governor, and in those days the Bank’s Board used to guard its prerogatives (right and responsibility to nominate).  The eventual appointment of Alan Bollard was not made until after the election.
  • Bollard was reappointed in 2007 (not an election year) and Wheeler was appointed in 2012 (also not an election year)

Which brings us to 2017.  In 2016 Graeme Wheeler had advised that he would not be seeking a second term (probably to the general relief of both government and opposition parties at the time).  Documents later released show that The Treasury (and the Board and minister) envisaged making a permanent new appointment some time early in 2017, well clear of the likely election date.  However, those same papers also show that when the relevant authorities (in this case, Cabinet Office) were consulted it was established that the convention now (though perhaps not in 1992/93) was that permanent appointments should not be made when the new appointment would commence very close to (within three months of) an election date.  In other words, the government could not get round the fact that Wheeler’s term expired close to the expected election date simply by making an early announcement of a permanent replacement.   And thus they more or less had to settle on the idea of an acting Governor (Grant Spencer).  Unfortunately, the then law was badly written (did not envisage the circumstances), and Graeme Wheeler (who could lawfully have been extended for six months) seemed keen to get back to commercial life ASAP, and the actual solution they landed on was almost certainly unlawful (I wrote a lot about it at the time, but here is a post that comments on the best arguments the Crown’s lawyers could make in defence).

So there is a precedent for an acting appointment (which, since the law was amended, could now be done lawfully) when the Governor’s term expired within three months of the election.  That same convention, about not making permanent appointments, isn’t just about the central bank.  But Orr’s term expires on 27 March, and the election seems likely to be at least six months after that, in a system with a three-year parliamentary term.  It simply isn’t very serious or credible to argue that the government –  otherwise still governing fully –  should be unable (or even unwilling) to appoint a permanent Governor six or more months out from an election.  You might argue, and I might have a bit of sympathy for such a view, that perhaps it would be better to give a Governor a six year term (the RBA Governor has a seven year term), so that overlaps with election years happened much less often, but the law is as it is, and I don’t recall the Opposition opposing five year terms when the reform bills were before the House.   But there is no established precedent or convention about not making permanent appointments that start that far out from a likely election.

In passing, one might note that whereas with past appointments all powers of the Reserve Bank rested with the Governor, the various reforms put in place by this government have (at least on paper) considerably diminished the extent of the Governor’s powers, and created other appointments (notably external MPC members) which (at least on paper) provide avenues to shape and influence the Bank.  I don’t want to put too much weight on this argument – I’ve spent years arguing that many of these changes in practice have been largely cosmetic – but not only could those provisions be used more aggressively by an incoming government that cared, but it would be quite legitimate for an incoming government to amend the legislation further (at the margin) to reduce the relative dominance of any particular individual serving as Governor.  Our system would be better for such changes.  (To be clear, like various other commenters, I would not support law changes designed directly to remove Orr: that way lies Erdogan type central banking.)

Whatever the law and precedent, it would also be a bad idea to be making acting appointments in circumstances like the present one.  Our whole system around the Reserve Bank –  and central banks in other advanced economies of our type –  is set up around the idea that incoming governments don’t just get to pick their central bankers as soon as it suits.  Instead, the system of operationally independent central banks has been built on (among others) the notion of technically capable, respected, non-partisan figures serving (whether as Governor or MPC members) for terms that do not align with the parliamentary term.   Consistent with that vision, New Zealand’s legislation went further than most (too far in my view) in not even allowing the Minister of Finance to choose a Governor (or MPC members), but rather requiring that the Minister only appoint people who had first been nominated by the Board of the central bank, itself appointed for staggered terms by the Minister of Finance.     Legislation was recently amended to even further reinforce this vision – of technically competent, respected, non-partisan appointees – when Labour explicitly added provisions requiring that other parties in Parliament be consulted before appointments are made (whether as Governor or Board members).  

You could mount a counter-argument that this approach is a bit wrongheaded.  After all, the legislation has also been amended recently to make it clear, that in monetary policy at least, the target the Bank works to is directly set by the government of the day.  But notwithstanding that, the central bank still has a lot of practical policy discretion, and not just around monetary policy.   Most advanced countries have made the choice that we do not want key central bank decisionmakers changing routinely when the government changes.  That still seems, on balance, prudent to me, and in their calmer moments I’d be surprised if National really disagreed.

So the big problem in the current situation is NOT that an appointment has been made for five years. That should be the norm, whether or not it is six months from an election.  The problem is specifically with the appointment (at all) of Adrian Orr.   National seems reluctant to say that (perhaps because they may well be stuck working with him) but it is the main issue.  There would be no such concern had a (hypothetical) generally highly-regarded (professionally, and among politicians), technically excellent, respected, non-partisan figure been appointed to the role.  Specifically, National (and ACT) would not be raising concerns about the term of the appointment if they had any confidence in Orr.  They do not.    One can perhaps debate whether or not they should have such confidence, but in our system respect and confidence are earned, they are not something anyone can simply be forced to adopt.    As I noted in yesterday’s post, the rank politicisation that has happened this week is not of National’s or ACT’s making, but of Robertson, in pushing ahead with an appointment –  to a long-term position, where cross-party respect etc is important for the institution and its functioning – that the main Opposition parties seem to have been quite clear in opposing.   It is not the job of Opposition parties to simply go along with whoever Robertson (and his, technically ill-equipped, board (itself, in some cases appointed over Opposition objections) determine).  All the more so when Robertson himself was the one who introduced the formal consultation requirements, seeming to establish an expectation that strong (and reasoned) objections would be taken seriously.    The responsibility was on Robertson – who holds the power to appoint or not – to respect the notion of only appointing someone who commands (even grudging) professional and personal respect.  Orr no longer qualifies on that count.  It is hard to think of any advanced country central bank Governor who will start a new term commanding so little respect, support, and confidence.  That is really bad for the institution, and the institutional arrangements.

(Having said all this it would be good if National and ACT would pro-actively release their responses to Robertson’s consultation, rather than making us wait for OIA releases. It would be helpful to see what grounds the parties objected on, and whether they actually raised substantive concerns, or just relied on ill-founded process arguments.)

UPDATE: Having been sent a copy of the National letter of 30 September, it is now clear that National did not raise any substantive concerns about Orr, and focused wholly on the non-existent “convention” about not appointing a substantive Governor even 6-7 months out from an election.

 

Reappointing Orr

Michael Reddell Adrian Orr, Monetary policy, Reserve Bank, Reserve Bank Act reforms

Yesterday’s announcement from the Minister of Finance that he was reappointing Adrian Orr as Governor of the Reserve Bank was not unexpected but was most unfortunate. I was inclined to think another commentator (can’t remember who, so as to link to) who reckoned that it may have been Robertson’s worst decision in his five years in office was pretty much on the mark.

When Orr was first appointed, emerging out of a selection process kicked off by the Reserve Bank’s Board while National had still been in office, it seemed to me it was the sort of appointment that could have gone either way. I captured some of that in the post I wrote the day after that first appointment was announced, and rereading that post last night it seemed to at least hint at many of the issues that might arise and come to render the appointment problematic at best. Some things – a good example is $9.5 billion of losses to the taxpayer – weren’t so easy to foresee.

The timing of the reappointment announcement itself was something of a kick in the face for (a) critics, and (b) any sense that the better features of the new Reserve Bank legislation were ever intended as anything more than cosmetic. The Reserve Bank is tomorrow publishing its own review (with comments from a couple of carefully selected overseas people) of monetary policy over the past five years. Adding the statutory requirement for such a review made a certain amount of sense, but if there is value in a review conducted by the agency itself of its own performance, it was only going to be in the subsequent scrutiny and dialogue, as outsiders tested the analysis and conclusions the Bank itself has reached. But never mind that says Robertson, I’ll just reappoint Adrian anyway. Perhaps the Bank has a really compelling case around its stewardship of monetary policy – and just the right mix of contrition and context etc – but we don’t know (and frankly neither does Robertson – who has no expertise in these matters, and who appointed a Reserve Bank Board -the people who formally recommend the reappointment – full of people with almost no subject expertise).

But, as I say, the reappointment was hardly a surprise.

It could have been different. I’ve seen a few people say it would have been hard to sack Orr, but I don’t think that is so at all. No one has a right to reappointment (not even a presumptive right) and Robertson could quite easily have taken Orr aside a few months ago and told him that he (Orr) would not be reappointed, allowing Orr in turn the dignity of announcing that he wouldn’t be seeking a second term and would be pursuing fresh opportunities (perhaps Mark Carney would like an offsider for his climate change crusades?) Often enough – last week’s FEC appearance was just the latest example – Orr’s heart doesn’t really seem to be in the core bits of the job.

There are many reasons why Orr should not have been reappointed. The recent inflation record is not foremost among them, although it certainly doesn’t act as any sort of mitigant (in a way that an unexpectedly superlative inflation record in a troubled and uncertain world might – hypothetically – have).

There is nothing good, admirable, or even “less bad than most” about the inflation record. This chart is from my post last week

A whole bunch of central banks made pretty similar mistakes (and the nature of floating exchange rates is that each central bank is responsible for its country’s own inflation rate). Among the Anglo countries, we are a bit worse than the UK and Canada and slightly less bad than the US and Australia. Among the small advanced inflation targeters – a group the RB sometimes identified with – we have done worse than Switzerland, Norway, and Israel, and better than Sweden and Iceland. In a couple of years (2021 and 2022) in which the world’s central bankers have – in the jargon – stuffed up badly, Orr and his MPC have been about as bad on inflation as their typical peers.

You could mount an argument – akin to Voltaire on the execution of Admiral Byng – that all the world’s monetary policymakers (at least those without a clear record of dissent – for the right reasons – on key policy calls) should be dismissed, or not reappointed when their terms end, to establish that accountability is something serious and to encourage future policymakers to do better. You take (voluntarily) responsibility for inflation outcomes, and when you fail you pay the price, or something of the sort. Inflation failures – including the massive unexpected wealth redistributions – matter.

Maybe, but it was never likely to happen, and it isn’t really clear it should. As I’ve noted here in earlier posts until well into 2021 the Reserve Bank’s forecasts weren’t very different from those of other forecasters, and I’m pretty sure that was also the case in other countries. Inflation outcomes now (year to September 2022) are the result of policy choices 12-18 months earlier. With hindsight it is clear that monetary policy should have been tightened a lot earlier and more aggressively last year, but last February or even May there was hardly anyone calling for that. Absent big policy tightenings then, it is now clear it was inevitable that core inflation would move well outside the target range. There are plenty of things to criticise the Bank for – including Orr’s repeated “I have no regrets” line – but if one wants to make a serious case for dismissing Orr for his conduct of monetary policy it is probably going to have to centre on (in)actions from say August 2021 to February 2022 (whereafter they finally stepped up the pace) but on its own – it was only six months – it would just not be enough to have got rid of the Governor (even just by non-reappointment). The limitations of knowledge and understanding are very real (and perhaps undersold by central bankers in the past), and even if Orr and the MPC chose entirely voluntarily to take the job (and all its perks and pay) those limitations simply have to be grappled with. Were New Zealand an outlier it might be different. Had the Bank run views very much at odds with private forecasters etc it might be different. But it wasn’t.

I am, however, 100 per cent convinced that Orr should not have been reappointed. I jotted down a list of 20 reasons last night, and at that I’m sure I’ve forgotten some things.

I’m not going to bore you with a comprehensive elaboration of each of them, most of which have been discussed in other posts. but here is a summary list in no particular order:

  • the extremely rapid of turnover of senior managers (in several case, first promoted by Orr and then ousted) and associated loss of experience and institutional knowledge
  • the block placed –  almost certainly at Orr’s behest –  on anyone with current and ongoing expertise in monetary policy nad macroeconomic analysis from serving as an external member of the MPC
  • the appointment as deputy chief executive responsible for macroeconomics and monetary policy (with a place on the MPC) of someone with no subject expertise or relevant background
  • $9.5 billion of losses on the LSAP – warranting a lifetime achievement award for reckless use of public resources – with almost nothing positive to show for the risk/loss  
  • the failure to ensure that the Bank was positioned for possible negative OCRs (having had a decade’s advance warning of the issue), in turn prompting the ill-considered rush to the LSAP
  • the failure to do any serious advance risk analysis on the LSAP instrument, as being applied to NZ in 2020
  • the sharp decline in the volume of research being published by the Reserve Bank, and the associated decline in research capabilities
  • the way the Funding for Lending programme, a crisis measure, has been kept functioning, pumping attractively-priced loans out to banks two years after the crisis itself had passed (and negative OCR capability had been established)
  • lack of any serious and robust cost-benefit analysis for the new capital requirements Orr imposed on banks (even as he repeatedly tells us how robust the system is at current capital levels)
  • repeatedly misleading Parliament’s Finance and Expenditure Committee (most recently, his claim last week that the war was to blame for inflation being outside the target range), in ways that cast severe doubts on his commitment to integrity and transparency
  • his refusal to ever admit a mistake about anything (notwithstanding eg the biggest inflation failure in decades) 
  • the fact that four and a half years in there has never been a serious and thoughtful speech on monetary policy and economic developments from the Governor (through one of the most turbulent times in many decades)
  • Orr’s active involvement in supporting and facilitating the appointment of Board members with clear conflicts of interest (Rodger Finlay especially, but also Byron Pepper)
  • his testiness and intolerance of disagreement/dissent/alternative views
  • his often disdainful approach to MPs
  • his polarising style, internally and externally
  • all indications are that he is much more interested in, and intellectually engaged by, things he isn’t responsible for than for the things Parliament has charged him with
  • organisational bloat (think of the 17-20 people in the Communications team or the large number of senior managers now earning more than $400000 pa)
  • the distraction of his focus on climate change, but much more so the rank dishonesty of so much of it – claims to have done modelling that doesn’t exist, attempts to suppress release of information on what little had been done, and sheer spin like last week’s flood stress test. It might be one thing for a bloated overfunded bureaucracy to do work on things it isn’t really responsible for if it were first-rate in-depth work. It hasn’t been under Orr.
  • much the same could be said of Orr’s evident passion for all things Maori –  in an organisation with a wholesale macroeconomic focus, where the same instruments apply to people of all ethnicities, religions, handedness, political affiliation or whatever.  What “analysis” they have attempted or offered has been threadbare, at times verging on the dishonest.
  • the failure to use the opportunity of an overhaul of the RB Act to establish a highly credible open and transparent MPC (instead we have a committee where Orr dominates selection, expertise is barred, and nothing at all is heard from most members)

And, no doubt, so on.  He is simply unfit to hold the office, and all indications are that he would have been so (if less visibly in some ways) had Covid, and all that followed (including inflation), never happened.   

But the crowning reason why Orr should not have been reappointed is that doing so has further politicised the position, in a most unfortunate way.

In the course of the overhaul of the Reserve Bank Act, Grant Robertson introduced a legislative requirement that before appointing someone as Governor the Minister of Finance needed to consult with other parties in Parliament (parallel provision for RB Board members).  It was a curious provision, that no one was particularly pushing for (in most countries the Minister of Finance or President can simply appoint the Governor, without even the formal interposition of something like the RB Board), but Robertson himself chose to put it in.  The clear message it looked to be sending was that these were not only very important positions but ones where there should be a certain measure of cross-party acceptance of whoever was appointed, recogising (especially in the Governor’s case) just how much power the appointee would wield.  That provision never meant that governments could not appoint someone who happened to share their general view of the world and economy, but there was a clear expectation that whoever was appointed would be sufficient to command cross-party respect for the person’s technical expertise, non-partisan nature, dispassionate judgement and so on.  Robertson simply ignored Opposition dissents on a couple of the Board appointees.  That was of second order significance, but it is really significant in the case of the Governor.  It isn’t easy to dismiss a Governor (and rightly so) so for a Minister of Finance to simply ignore the explicit unease and opposition of the two main Opposition parties in Parliament is to make a mockery of the legislation Robertson himself had put in place so recently.   The Opposition parties are being criticised in some places (eg RNZ this morning) for “politicising the position/appointment” but they seem to have been simply doing their job –  it was Parliament/Robertson who established the consultation provision –  and the consultation provisions, if they meant anything, never meant giving a blank slate for whomever the Minister wanted to offer up, no matter the widely-recognised concerns about such a nominee.   No one has a right to reappointment and when it was clear that the main Opposition parties would not support reappointment, Robertson should have taken a step back, called Adrian in and told him the reappointment could not go ahead, in the longer-term interests of the institution and the system.  If you were an Orr sympathiser, you might think that was tough, but….no one has right to reappointment, and the institution matters.

And, of course, now the position of the Governor has inevitably been put into play, with huge uncertainty as to what might happen if/when National/ACT form a government after the election next year.    (And here is where I depart from National’s stance –  I never liked the idea of a one year appointment, made well before the traditional pre-election bar on new permanent appointments.  We want able non-partisan respected figures appointed for long terms (it is the way these things work in most places), not for each incoming PM to be able to appoint his or her own Governor.)

A few months ago, anticipating that Orr would probably be reappointed, I wrote a post on what an incoming government next year could do about the Bank.    The key point to emphasise is that a new government cannot simply dismiss a Governor they don’t like (or nor should they be able to).  I saw a comment on a key political commentary site this morning noting that the process for dismissal isn’t technically challenging, which is true, but the substantive standards are quite demanding (the Governor can be dismissed only for specific statutory causes, and for (in)actions that occurred in his new term (which doesn’t start until March)).  Generally, we do not want Governors to be able to be easily dismissed (in most countries it is even harder than in New Zealand).   More to the realpolitik point, any dismissal could be challenged in the courts, and no one would (or should) want the prolonged uncertainty (political and market) such actions might entail.   Moreover, senior public figures cannot just be bought out of contracts.   

We still don’t know –  and perhaps they don’t either –  how exercised National and ACT would be about any of this were they to form a government next year, but unless Orr was himself minded to resign (as the Herald’s columnist suggests might happen) things would have to be handled carefully and indirectly (perhaps along lines in that earlier post of mine) to change the environment and the incentives around the institution.   Most of those changes should be pursued anyway, to begin to fix what has been done over the last few years    And if Orr were to be inclined not to stick around for long, perhaps an offer of appointment as High Commissioner to the Cooks Islands might smooth his way? 

Making stuff up and misleading Parliament

Michael Reddell Adrian Orr, inflation

Legislatures typically take a dim view of efforts to mislead them or their committees. This is from our own Parliament’s online “How Parliament works”

The Governor of the Reserve Bank seems just not to care, treating Parliament’s Finance and Expenditure Committee with as much contempt, and disregard for basic standards of honesty and care as some juvenile delinquent.

Yesterday the Governor and a couple of offsiders fronted up to the FEC, as they always do, following the release of the six-monthly Financial Stability Report. Were one of a particularly generous cast of mind one might almost have felt a little sorry for the Governor at times: the report was about financial stability not monetary policy, and yet most of the serious questioning was more about monetary policy, and then there was the old game of MPs attempting to get officials to say something (whether on tax, spending, immigration policy or whatever) that helps their party in its partisan jostling, even if such matters were nothing to do with the Bank’s own responsibilities. But Orr is paid a lot of money and given a lot of power, and doesn’t even make an attempt to treat elected MPs – from whose legislation flows his power and his office – with even a modicum of respect. As it was, no one forced him to answer monetary policy questions – he responded to most of them by referring MPs to their internal review of the last five years of monetary policy, to be released next week. But when he chose to answer, he had some fundamental obligation to give straight answers, not trail red herrings and other outright spin (or worse) across the path.

Orr has form. Last December, he fronted up for the Bank’s Annual Review and he and a senior offsider actively misled the committee about senior staff turnover (something that became very clear very quickly). It took a little longer, and an OIA request, to show that he had also actively misled the committee with claims that the Bank had done modelling of its own about the (supposed) climate change threat to financial stability, when in fact they’d done none.

You can watch the full hearing here, or you read an account of the relevant bits here. Orr was on the backfoot over the stewardship of monetary policy – and there is at least an arguable connection to financial stability (more so to individual financial stress) given the cycle in both interest rates and house prices, and the likely cycle in unemployment). There are some things Orr (and the MPC) can and should be held accountable for – floating exchange rates mean that what happens with inflation in New Zealand is largely a New Zealand monetary policy (passive or active) choice – and others that the central bank has never been expected to counter (the most obvious example is the price effect of GST increases, but you could think too of exogenous shocks like sudden oil price changes).

Orr’s first claim in his defence was that New Zealand has one of the “lower inflation rates in the OECD”. That is probably defensible. The ways CPIs are calculated differs across countries but on the headline numbers reported by the OECD for the year to September 2022 there were eight OECD countries with lower inflation rates than New Zealand’s 7.2 per cent (and Australia’s was almost the same at 7.3 per cent). Even if one were to treat the euro-area countries as a single unit (they all have the same monetary policy), the picture doesn’t change much. Not, of course, that we should care too much what inflation rates other countries have when we are so far from target – the exchange rate was floated 37 years ago to give us effective monetary policy independence – but when a bunch of countries have made similar mistakes (not that Orr yet concedes to regretting anything), it is better to be on the less-bad side of the pack.

But not all countries experience the same shocks the same way. Wars, rumours of war, and associated sanctions/boycotts etc have affected energy prices in particular this year. No one has ever expected inflation targeting central banks to prevent the direct price effects of immediate energy price shocks – indeed, mandates (including in NZ) have often explicitly urged central banks to “look through” such effects and focus or core measures and/or any spillover into generalised future inflation).

The CPI ex food and energy is the most commonly used measure for international comparisons of core inflation (not because it is ideal, but because it exists), and is well-suited this year when fuel and (to a lesser extent) food have been in the spotlight in the context of the Russian invasion etc. Some countries are very very heavily exposed to changes in gas prices in particular, and others (notably including New Zealand which for better or worse is not linked into a global LNG supply chain) are not. But here is how CPI ex food and energy inflation for the year to September looked (chart scale truncated – Turkey is worse than that).

New Zealand? Middle of the pack, and almost identical to the numbers for Australia and the United States (a bit higher than the UK, and a lot higher than the euro-area). This is closer to the stuff central banks individually are responsible for.

But this is really just scene-setting. Orr’s most egregious claim – and it was particularly egregious for being repeated twice perhaps 40 minutes apart – was that for New Zealand’s inflation to have been inside the target range now, the Bank would have had to have forecast the Russian invasion back in 2020.

It was just a mind-boggling claim – not that any MP on the FEC seemed to be alert enough to notice. It seemed to be implying that if we abstracted from the direct price effects of the war, inflation would otherwise be in the 1 to 3 per cent per annum target range. But here is what those data show, using the SNZ exclusions covering both fuel individually and fuel and food.

For the year to September [2021], all those exclusion measure of inflation were still in excess of 6 per cent, more than double the rate of inflation envisaged by the very top of the target range.

Oh, and when did the war start? The invasion began on 24 February. The March quarter CPI is centred on mid-February, and all those exclusion measures were already between 5.7 and 6 per cent by then. Before the war began. Now, it is certainly true that oil prices had risen in the preceding months as rumours of war mounted but (a) that wasn’t until late last year, and b) these are exclusion measures (ie excluding the direct effects of higher fuel prices). And the best indicator of domestic cyclical stress – the unemployment rate was already at 3.2 per cent in the December quarter last year (and again in March), also before the war began.

And what about more analytical measures of core inflation here in New Zealand?

For what it is worth, the highest rate of quarterly inflation on these core measures had already been recorded in the March quarter CPI, which (need I remind you) is centred on 15 February (most prices are surveyed mid-quarter), before the war began. Perhaps unsurprisingly, the worst of the (core) inflation was around the time the unemployment rate was falling to its lowest level (at a time when monetary policy was being particularly slow to act – recall that it was not until February that the OCR got back to pre-Covid levels). High core inflation – in annual terms on these measures now between 5 and 7 per cent – is a domestic phenomenon, for which monetary policy is (by default, being the last mover) responsible.

Of course, Orr knows all this (and, linking back to that parliamentary document, ought reasonably to have known it – having chosen to take the job, and accepted the $830000 salary for it). And his staff knew all this. The Governor was appearing at FEC remotely from his office, and it would have been easy for his economics staff to have slipped him a note saying “Governor, you really can’t make those claims about inflation and the war”, but (a) Orr is known to be intolerant of dissent and correction, and (b) if perhaps some brave staffer did slip him such a note, he went ahead and repeated the big and preposterous claim again later in the same appearance.

There are many many reasons why Orr should not be reappointed but simply making out stuff, that he knows – and certainly should know if he holds that job – to be simply false is not one of the least of his offences. Misleading Parliament really should matter, if we care at all about good governance any longer. On the further evidence of yesterday’s performance Orr seems not to. Just imagine if one of the institutions he regulated tried that sort of performance on him.

The $9 billion dollar man

Michael Reddell Adrian Orr, Monetary policy, pandemic

The Listener magazine this week reported the results of a caption contest they’d run for a photo of Reserve Bank Governor Adrian Orr.

I’d suggested what seemed to me a rather more apt caption.

One good thing about the Reserve Bank is that they do report their balance sheet in some detail every month, and yesterday they released the numbers for the end of August. August was not a good month for the government bond market: yields rose further and the market value of anyone’s bond holdings fell. And thus the Reserve Bank’s claim on the government, under the indemnity the Minister of Finance provided them in respect of the LSAP programme, mounted.

This is the line item from the balance sheet

A new record high at just over $9bn.

And that doesn’t seem to be quite the full extent of the losses the Governor and the MPC have caused. A while ago the Herald reported on an OIAed document from The Treasury.

I wasn’t sure quite what to make of that, but we know that from July the Bank has begun selling its bonds back to The Treasury. Over July and August they had sold back $830m of the longest-dated bonds (ie the ones on which the losses will have been largest) and presumably collected on the indemnity when the Bank realised the losses on those bonds at point of sale.

Presumably all the numbers will eventually turn up in the Crown accounts, but for now it seems safe to assume that Orr and his colleagues (facilitated by the Minister of Finance) have cost taxpayers around $9.5 billion dollars – getting on for 2.5% of New Zealand’s annual GDP (or about 7 per cent of this year’s government spending).

These are really huge losses, and to now the Governor’s defence seems to amount to little more than “trust us, we knew what we were doing”, accompanied by vague claims that he is confident that the economic benefits were “multiples” of the costs. But there is no contemporary documentation in support of the former claim (eg a proper risk analysis rigorously examined and reviewed before they launched into this huge punt with our money), and nothing at all yet in support of the latter claim.

Central banks should be (modest) profit centres for the Crown. Between their positions as monopoly issuers of zero-interest notes and coins and as residual liquidity supplier to the financial system there is never a good excuse for a central bank to lose money, and certainly not on the scale we’ve seen here (and in other countries) in the last couple of years – punting massively on an implicit view that bond yields would never go up much or for long (as they hadn’t much in the previous decade when other central banks were engaging in QE).

There are plenty of things governments waste money on, and plenty of big programmes that (rightly) command widespread support (through Covid you could think of the wage subsidy scheme). But this was just little more than a coin toss – low expected value, but with at least as high a chance of big losses as of any substantial gains. And seemingly with no accountability whatever. Orr has not apologised for the losses, nor have the other MPC members. No one has lost their job – but then this is the New Zealand public sector where hardly anyone ever does – and not a word has been heard from those charged with holding the Bank to account (the Board or the Minister of Finance).

Back when I was young the Bank ran up big (indemnified) foreign exchange losses in the 1984 devaluation episode. Searching through old papers I can’t find the precise number the Crown had to pay out, but between what I could find and my memory it may well have been of a similar order (share of GDP) as the LSAP losses. But the responsibility then rested directly with the Minister of Finance – the Bank was not operationally independent, and defending the fixed exchange rate under pressure was government policy. It was a rash policy – the Bank advised the government not to do it – and the large losses added to the obloquy heaped on Muldoon for his stewardship in his last couple of years on office. But the public got to vote Muldoon out, while there still appears to be a serious possibility that Orr – having cost New Zealanders perhaps $1800 each – will be reappointed (with just six months of his term to go if he is not going to be reappointed it will need to be announced soon to enable a proper search process for a replacement to occur). The LSAP losses may not even be the Governor’s worst failing, but no one directly responsible for that scale of taxpayer losses – on risks he simply did not have to take – should even be considered for reappointment, at least if accountability is to mean anything ever.

Of course, there have been bigger losses in New Zealand government history. I’ve just been reading John Boshier’s Power Surge on the Think Big debacle of the 1980s. As a share of GDP, total economic losses to the taxpayer from that series of projects were far greater than the LSAP losses, but I’m not sure that losing less in one punt than the worst series of discretionary public sector projects ever in New Zealand history should be any consolation or mitigation. And, for what it is worth, Boshier’s book suggests there was typically more advance risk analysis undertaken for the Think Big projects than we have yet seen evidence of for the LSAP.

I’m sure gambling appeals to some people, and I wouldn’t want to stop those minded punting on the bond market, the fx market, Bitcoin, equities or whatever. But if that is the sort of thing that takes Orr’s fancy – and it probably isn’t judging by his past financial disclosures – he could at least do it with his own money, not ours. And having rashly done it with our money, and lost heavily, have the decency to apologise.