Pretty dreadful

I’m not sure why the Governor chose to hold a press conference this morning after the MPC’s announcement.  Were he an authoritative figure, perhaps it might have been some use.  Such a figure might have been able to offer thoughtful narrative, or framing, for what is going. But this was Orr, a sadly diminished figure, inadequacies fully found out in a crisis.  And the press conference only confirmed that grim assessment.   He should be replaced.

In fact, probably the only worthwhile thing to emerge from the press conference was that Deputy Governor Geoff Bascand is clearly the adult in the room, including that he was the only one of the three MPC members speaking who was willing to call a spade a spade regarding the economic consequences of what is unfolding.  He has chief executive experience.   He’d be a superior Governor to Orr (not ideal, but –  as I noted before the appointment was even made, when Bascand confirmed that he’d applied for the job –  a safe pair of hands).

As for Orr himself, there seemed to be no contrition at all for the February MPS (the one where they moved to a tightening bias) or for all that complacency in speeches and interviews just a few days ago.  He told us we should listen to the health experts etc –  quite possibly, but we should have been able to listen, and count on to act aggressively, economic and financial experts in our Reserve Bank. Instead, we got Orr and Hawkesby last week, given cover by the rest of the MPC and the Bank’s Board.

There were odd lines.  He claimed the exchange rate was acting as a buffer, and yet (a) the fall in the exchange rate is very limited compared to the experience in typical New Zealand recession, and (b) as he was talking, at least against the USD the New Zealand was higher than it was at 7 this morning (not very surprisingly, given that the Fed cut even more than the RBNZ did, on top of an earlier large cut).

And there was the confirmation of the point I highlighted in my earlier post.  They felt they couldn’t cut the OCR below zero because not all the retail banks were  “ready”.   Strangely, no journalists challenged Orr on this.  Isn’t crisis preparedness for the system a core part of what the Bank is going as regards the financial system?  Haven’t they been talking about negative rates as a possibility for a couple of years?  Haven’t other countries had negative rates for longer than that?  There is some legitimate debate about the usefulness of negative rates, but it is a gross dereliction of the Bank’s responsibilities not to have ensured long ago that all players could manage negative rates (in their systems etc).  And, of course, no contrition for that failure either.

We even had attempts to play down the coronavirus experience in New Zealand as well (“only a few very isolated cases”) something he’d surely just have been better to have shut up about.

He claimed they’d provided details of their unconventional policies in his long speech last week, even though that speech was very light on detail, and promised a series of more detailed papers to come. No word on those today.  He gushed about the capabilites of his unconventional instruments, but seemed to have no developed mental model for the relevant transmissions mechanisms.  It wasn’t exactly confidence-inspiring.

And then there was three final points worth noting:

  • asked if he was anticipating a recession, instead of simply saying “yes”, or “yes, a very serious one” –  surely the only honest answers –  he got into a debate with the journalist, apparently hung up on the (supposed) technical definition of two quarters of GDP falling.  He was prepared to concede “a period of very weak economic activity” but when pushed on a recession he would only fall back on “I don’t know”.  Every one else does.   He did finally concede that on some of the Bank’s scenarios –  really only some? – there would be a recession in New Zealand.
  • asked about his response to suggestions that the Bank had moved “too little too late”, his initial response was “Nothing”.  He simply wouldn’t engage.  And then he tried to make a virtue of MPC’s inordinate delay, claiming –  is the man serious to even raise this? –  that acting earlier wouldn’t have stopped the virus.  Then we got rhetoric about the importance of a medium-term framework for monetary policy –  a strange claim on the morning of an emergency cut –  and the value of fuller information, as if any information will ever be enough or definitive.   He then had the gall to claim that New Zealand was now in the “best possible position”.
  • and finally, there was a suggestion in Parliament a short-time ago (early last week?) that the Bank was trying to pressure banks not to be too negative in their commentary.  It was never actually confirmed, although there is reason to believe they were told-  by the Bank –  to exercise a sense of “social responsibility” in their commentary.   That was exactly the line Orr ended his press conference with today, to all the assembled media.  From an organisation that minimised the issue for so long, that really should have been a lot more alarmed and active earlier on, it is simply an unacceptable stance (more so than ever, since powerful government agencies should be welcoming, scrutiny, alternative perspectives etc – especially in uncertain times like this –  not (ever) trying to get happy-talk coverage.

It was a sadly revealing performance, as to just how unfit for office Orr is.  And of how he and Grant Robertson, Neil Quigley, the rest of the Bank’s Board, and the rest of the MPC have let New Zealand down.

 

Game’s up

I may well have more to write about the Reserve Bank announcement this morning after the Governor’s press conference at 11am – which I hope begins with a formal apology from him and Hawkesby for their appalling complacency and minimisation of the issues as recently as a few days ago –  but these are some initial reactions.

I guess I have three key points:

First, a 50 basis point was warranted at the time of the last  MPS (and doing so would have been entirely in line with past practice of reacting to out-of-the-blue shocks) so 75 basis points now is seriously inadequate.   Everything has got a great deal worse since then including –  though not mentioned in the statement –  medium-term inflation expectations.

Second –  and this was the mindblowing bit to me –  was this extract from the minutes

Staff also advised that an OCR of 0.25 percent was currently the lower limit, given the operational readiness of the financial system for very low or negative interest rates.

This is simply inexcusable if true (which it may not be).  As just one small point, I lead a working group at the Bank in 2012 –  height of the euro crisis – which identified then the need to ensure, as a matter of urgency, that banks and the RB itself were able to operate with modestly negative interest rates.   And for years we have seen various other countries operating with negative policy rates, so if the Bank has not been taking action to ensure the system could operate, when needed with negative rates it is simply an inexcusable failure. For which, frankly, heads should roll.   Neither when they put out their Bulletin article two years ago nor in the Governor’s speech last week was there any suggestion that negative rates could not be used now.  Best surmise, they simply weren’t taking things sufficiently seriously until the last few days.

And, third, they have basically conceded that it is game over and that monetary policy has reached current limit  (which is so wholly because of their failures –  on this narrow point and, like most of their peers, dealing more decisively with the near-zero lower bound.

Note that as part of their statement they formally rule out any further changes –  including cuts –  for at least the next 12 months.  In other words, tbey rule out taking urgent action now to remedy their past failures.  Simply extraordinary.   I guess climate change and the like were taking priority for the Governor and his staff?

But the point I also wanted to focus on was this bit of the resolution.

Agree that Large Scale Asset Purchases of New Zealand government bonds would be the best additional tool to provide further monetary stimulus in the current situation – if needed.

I never got round to writing about the substance of the Governor’s seriously inadequate speech last week, but had I done so one of the points I would have made was that outside immediate financial crisis conditions –  not NZ now –  these asset purchase routes simply did not offer much.    It isn’t as if bond yields are now at the still-high levels they were in most countries in 2009 even after the OCR had been cut (even if they have been rising in the last few days as the global rush to cash has taken hold).

You might doubt my interpretation –  but you really shouldn’t as it is pretty widely shared, even if often in muted language –  but, as it happens, we have the word of one of the MPC members for it.  Again, I’d been meaning to use this in a fuller post this week.  I hadn’t seen this quote elsewhere, but in his column in Friday’s Herald Brian Fallow reported the RB Chief Economist Yuong Ha as saying, of the unconventional options,

“they give you a little more headroom, a little more more and space”

Precisely.  And “just a little more” is not what the occasion demands.

In effect, in this announcement it is a case of “one and done” –  not in sense of “we”ll be bold and not need to move again” –  sort of their justification for the 50 point cut last year –  but “we’ll move now, and then……well, we have to retire from the field and stare into the macro/monetary abyss….because we spent years just not doing our job, distracted by all sorts of pet things, always looking for rates to rise (as recently as the last MPS).

It really is inexcusable.   Personally I think there is a strong case for dismissing the Governor, and probably most of the MPC too –  including those externals we’ve never heard a word from to explain or justify their collective inaction and failure of preparedness.   I don’t suppose it will happen, but it is what often does –  and should –  happen after battlefield disasters and revealed gross failures of preparedness.   Then again, to act would be for the Minister of Finance to concede some of his responsibility –  he appointed them, he is supposed to hold their feet to the fire, hold them to account.  And only a few months ago in a letter to me he indicated how satisfied he was with the Governor’s stewardship.

I plan to have a fuller post this afternoon on some ideas for macro management now and in the months ahead.  As I’ve said in posts last week and on Twitter, now isn’t the time for stimulus per se –  new spending by the public isn’t the goal as the economies of the world deliberately de-power. The immediate focus has to be income support, the health system, and then some assurance about the framework to see us through the period –  perhaps protracted – until genuine stimulus becomes the appropriate focus.

 

 

Almost literally unbelievable

Our central bank that is.

Except that I had to believe it.  The Governor himself was being quoted again in a Stuff article and the video footage of a full interview with his deputy (on the economics and markets side) Christian Hawkesby was on interest.co.nz.

On Tuesday, as I wrote about in my post yesterday, we had the Governor telling us that monetary policy would have no more than a supporting role –  despite being the main cyclical stabilisation tool – that there would be no “knee-jerk reactions”, that we were in “a good space” and  –  perhaps most incredibly of all –  that “confidence and cashflow will win the day”.  Confidence that had tanked, cashflow that was rapidly becoming a problem for many.  It was –  or one really wished it was –  unreal.

But Orr and Hawkesby –  both statutory officeholders charged with the stabilisation role of monetary policy –  were back at it yesterday.  Clearly, the Governor’s voice is most important –  especially with no deep or authoritative figures elsewhere on the MPC –  so we’ll take his new comments first.

Not all of it was silly.  There was the standard advice to firms to talk to their banks early (I imagine that, where they still can, firms might be well advised to draw down any credit lines early too).  But then we get lines like this

Reserve Bank governor Adrian Orr has advised businesses to focus on things they can influence and banks to consider their “social licence” and play a long game to bridge the gap in activity created by the coronavirus pandemic.

“That is it all it is, just a gap,” he said.

Talk about minimisation.  If a firm takes a deep hit to its revenue for six or nine months, and has fixed commitments it can’t get out of at all, and other semi-fixed commitments, what was a viable business can quickly run through any remaining collateral and not be viable at all (the underlying business might be, but not the existing owners).  So sure it is a “gap”, but it could be a mighty big one, with quite uncertain horizons for anything like normality returning.

Most especially because the Governor –  like the Minister of Finance – gives no hint of recognising that the worst  (probably a lot worse) is yet to come.

(And what about that strange suggestion that firms should focus on what they can influence?    What they can’t, really at all, influence is what is likely to be worrying most, more so by the day.)

But the interview goes on

He said he did not believe there was a perception that the bank had been slow to respond to date.

Instead, there were benefits in the central bank getting more information about how consumer and investor behaviour was unfolding and the response of global governments, he said.

“While some talk about ‘what is your interest rate response?’, at times like this central banks have a much broader and important role which is around financial-market functioning and financial institution stability,” he said.

“There, we certainly aren’t sitting on our hands, watching, worrying and waiting.

“We are on high alert around how the financial markets are operating and our role in the provision of liquidity.”

I guess he isn’t reading much of anything –  unless he now has his media clippings selected only for their favourability to him –  if he really believes that first sentence.  Perhaps the case for an OCR cut at the MPS was borderline, but there were plenty of sceptics even then as to whether their talk was taking things seriously enough.  And I haven’t seen many people who thought has remarks on Tuesday were appropriate, responsible, timely, or whatever.  In the meantime, central banks in Australia, the US, Canada and now the UK have acted.

But it was the rest of that quote that really staggered me –  the claim that the Bank had a “much broader and more important role” in this situation around market functioning and financial institution soundness.  Again, what planet is he on?   No one, but no one, believes the coronavirus shock’s economic effects are primarily a financial stability issue.  Really severe recessions could in time generate significant credit losses, but that is well down the track (for banks of our sort).  In things to do with the Bank this is primarily a severe adverse shock to demand (almost wholly a demand shock for New Zealand so far, something neither Orr nor Hawkesby seem to grasp).  These are the guys who go on and on about their new employment-supporting mandate.  Lots of jobs are being lost right now, and will be over the coming weeks and months.   There may be other things governments can/should do, there may be other stuff other wings of the central bank need to focus on, but monetary policy is their macroeconomic business, the tool that can be deployed quickly and flexibly, and which has been in every past crisis.  But Orr and Hawkesby seem to prefer to sit on their hands and gather more information (of the gathering of information in fast-moving, exponential, crises there is no end).

Before coming back to Orr’s final comments, I add some remarks on Hawkesby’s interview.

Assistant Reserve Bank Governor Christian Hawkesby says the RBNZ’s main focus at this point of the coronavirus crisis is making sure the banking system remains strong.

Echoing comments Governor Adrian Orr made on Tuesday around confidence and cashflow being key, Hawkesby said the RBNZ is looking at how funding markets and banks’ relationships with their coronavirus-affected clients are holding up.

“That’s really our first point of call and our main focus – at least in these initial stages,” he told interest.co.nz.

Much the same themes, but how utterly irresponsible.  No sense of his responsibility as a (statutory) monetary policymaker, explicitly charged with a macrostabilisation role.  Doubly so because, as he goes on to acknowledge (and unlike, say, Italy)

“We have a well-capitalised banking system and a well-funded banking system.”

So try looking under the right lamp-post for issues that need to be addressed.

Hawkesby, like Orr on Tuesday, hosed down expectations of large, if not emergency, Official Cash Rate (OCR) cuts in the immediate future.

He said the government could move with more haste than the RBNZ, targeting those most affected by coronavirus.

He also claimed it was “early days”: early days was a month or six weeks ago, when the Bank was doing its MPS forecasts.  This is now a full-throated downturn –  where even the local banks are now talking, belatedly, of recession.

And what of that nonsense about the government being able to move faster.  Not only is it generally not true –  OCR decisions can be taken and implemented almost instantly –  but on this occasion neither party has actually done anything yet.   In  fairness to Hawkesby when I listened to the interview he seemed to be trying to make a point that sectoral issues are better targeted with sectoral policies, but that doesn’t really help him this time, as he went on to say

Hawkesby said: “What we need to think through is, to what extent is it [coronavirus] a supply-side issue around supply chains; around specific sectors being affected – in which case monetary policy can’t provide direct help.”

He said monetary policy would be useful if there is a spill-over effect and a lack of demand and confidence across the economy.

Perhaps he missed the data release on Tuesday showing that business confidence had fallen to levels last seen in 2009.  And when you are talking about the temporary collapse of one of our largest economic sectors –  overseas tourism –  you are dealing with pervasive effects that really only macro policy can do much to lean against.

It is almost as if these guys think they are running some sort of academic seminar, rather than being alert to real world developments –  here and abroad, including monetary policy responses abroad.  Whatever the explanation –  and no one seems to have a good one, they are just failing to do the basics of their job.  In none of any of that was there any mention of the idea that (at least temporarily) neutral interest rates will have plummeted –  the fall in very long-term bond yields is probably a bare-minimum estimate of how much –  and that much of the job of monetary policy is keeping actual short-term rates in line with shifts in neutral.  These guys would appear to prefer to do nothing, even as real retail interest rates are rising. (I’m sure they will move, perhaps quite a lot, as spiralling global crisis will produce a lot of reality to mug them with in the next couple of weeks.)

Oh, and as in the Governor’s remarks on Tuesday, there was nothing in either interview about the threat to inflation expectations. They are falling around the world, and in New Zealand –  seen in the bond market and in the ANZ business survey.  As I noted towards the end of yesterday’s post, it is a strange omission, because only a few months ago both Orr and Hawkesby were dead-keen on emphasising downside risks to inflation expectations and making the case for pro-active least-regrets monetary policy adjustments.  Good and sensible quotes from both of them are included in this post from late last year.    Not sure what happened to those central bankers.  The threats/risks must be much greater now.  But it all fuels a sense that these guys are just out of their depth, with no consistent mental models or sense of the world (or this event) found especially wanting by a crisis.

By contrast there was good workmanlike speech on coronavirus economic issues yesterday by Guy Debelle, Deputy Governor of the Reserve Bank of Australia, Hawkesby’s direct counterpart.  It was what serious normal central banking looks like.

But I wanted to come back to Orr’s final comment in his Stuff interview.

The coronavirus was a reminder of why policies such as the Reserve Bank’s decision to increase the capital requirements of the major banks and to ensure they could operate on a standalone basis had been pursued, Orr said.

“We try to implement them in peace time, because it is hard to implement them in war time – not that I am saying we are in war time.”   

He probably should get his lines sorted out with his deputy: you’ll recall that Hawkesby quote that, at current levels before any of the increased capital requirements take effect, we have a “well-capitalised” banking system.   Which is what the Bank’s demanding stress tests have always shown, and what numerous serious critics pointed out in the consultation process last year.

But even if we take Orr’s comment in isolation, he seems not to recognise at all that whether his announced higher capital requirements made sense in some long-run steady-state, they will have some adverse effects on the availability of credit, rates of investment etc through the transition period.  Orr confirmed that capital requirements in December and they are to be phased in over seven years.   Unfortunately, the beginning of that transition period – when bank behaviour is already being affected (and we saw this in the last credit conditions survye months ago – the next one, presumably taken this month, will be fascinating) – happens to coincide with the nastiest economic shock we’ve had in a long time.   But, at present, no bank’s capital ratios will be any higher now than they would have been if Orr had seen sense and not proceeded (so there is none of the additional buffer he is implying).   As it happens, reported capital ratios  –  though not of course actual dollar capital – would drop before long, because the change to the rules around aligning minimum risks weights for iRB banks with the standardised rules is being frontloaded.

And while no one could foresee that we’d have a severe pandemic shock this year, Orr was warned of exactly this sort of issue: in a climate with little conventional monetary policy capacity, sharply increasing capital requirements over a period when a new recession was fairly probable at some point would simply compound the real economic and economic policymaking challenges.  This was from my submission

Finally, in this section, there was no discussion at all of the macroeconomic context in which these proposals would take effect.  The proposals involved a transition over five years.  Nine years into an economic recovery, with slowing domestic growth and growing global risks there has to be a fairly significant chance that the next significant recession will occur in the next five years (i.e. during the proposed transition period).  That means a significant risk that regulatory policy would be exacerbating any downturn (through tighter credit constraints, reduced credit appetite, and potential higher pricing), in a downturn in which monetary policy is likely to be hard up against conventional limits (the Bank’s own analysis has suggested the OCR might be able to be cut only to around -0.75 per cent).  Of course, if bank balance sheets were looking shaky it would be prudent to move ahead anyway – better ten years ago, but if not then now – but nothing in the Bank’s published analysis (past FSRs, stress tests, consultation document) nor in the credit ratings of the relevant institutions suggests anything like that sort of vulnerability.  Without it, you will – with a reasonable probability – make economic management over the next few years more difficult (additional upfront potential economic costs), in exchange for the modest probability of making any real difference to (already very low) financial system risks over that period. It isn’t a tradeoff that appears to be worth making – at least not without much more supporting analysis than we have had to date.

I’ve seen no sign Orr or his colleagues ever engaged with this point.

And before passing on, don’t overlook this bit from Orr

“not that I am saying we are in war time”

Relentlessly determined to minimise just what is going on and the extremely challenging period –  of indeterminate length –  we are now entering.

But whatever should have been, the new capital requirements are what they are.

There is some discussion as to whether it might make sense to suspend implementation of the new requirements.  In the UK, the Bank of England last night released their Countercyclical Capital Buffer (an element of their capital requirements).  More generally, people are looking at the merits of some regulatory accommodation.

For now at least, I have to say I’m quite sceptical, at least in New Zealand (and I noticed Hawkesby suggested these were conversations for well down the track).  Sure, capital is there to be used as loan losses mount (which, of course, they haven’t yet).  But it is always worth remembering how important expectations are to behaviour –  for bank/bankers as much as anyone else.  So, sure, Adrian Orr could suspend the implementation of the higher requirements, but why would that materially alter the attitude of banks to taking on additional risk?  After all, the Governor tells us this is just “a gap”, but even when reality finally mugs him, the banks –  and their parents in Australia –  will know that the Governor is still sitting there waiting to resume the steady escalation in capital requirements as soon as some modicum of normality returns.   I’m not going to oppose suggestions of a temporary suspensionm but I doubt there would be much bang for the buck in doing so, at least while Orr is still Governor.

It really has been a reprehensibly bad performance so far in this crisis from the Governor, his monetary policy deputy, and the Monetary Policy Committee as a whole (all of whom must, for now, be presumed to be on board – although will the next OCR decision be the first time someone on MPC is willing to record a dissent?).  Looking to the statutue books, you might have been hoping that the chair of the Bank’s board and/or the Minister of Finance –  both responsible for the Governor and the MPC –  would be demanding something better, but I’m not holding my breath about either of them.

There are, of course, more ultimate statutory provisions.  They won’t be used.  But the case is mounting that the Governor, the Bank, Hawkesby, and (as far we can tell) the external ciphers on the MPC simply are not doing their monetary policy job.  It is an utter failure of leadership, something we are now seeing far too much of at the top levels of government as this crisis deepens.  We are paying for unserious appointments, weakening public institutions, in the quiet times.

 

 

The unseriousness and unfitness of the Governor

For months the Reserve Bank has promised us some insights on how they are thinking about options for unconventional monetary policy (for use if/when the limits of the OCR are reached).   Last week they announced that they would release yesterday a principles document and that the Governor would deliver a short speech.

In this post I don’t want to concentrate on the substance of the material on unconventional monetary policy.  It is quite troubling, especially when the limits of the OCR may well now be so close, but that will have to be the subject of another post.

In this post I want to concentrate on Orr’s comments about the immediate situation and the approach he and the MPC are taking to communication.

But first take a step back.  It might seem like an age ago but it is only four weeks since the Reserve Bank’s Monetary Policy Statement.  In that statement, and in the Governor’s press conference, the Monetary Policy Committee was really quite upbeat.  Coronavirus effects –  only around China –  would be relatively small and pass quickly.  In fact, the MPC was so upbeat they even moved to a very mild tightening bias.   There was little serious analysis of the monetary policy risks and options –  no analysis, for example, of past stark exogenous shocks and the monetary policy responses – including in the minutes of the MPC’s meeting.  As I wrote at the time

There is no sense of the sort of models members were using to think about the issue and policy responses.  There is no sense of the key arguments for and against immediate action and how and why members agreed or disagreed with each of those points.  There is no sense of how the Bank balances risks, or of what they thought the downsides might have been to immediate action.  There is no effective accountability, and there is no guidance towards the next meeting.  Consistent with that, the document has one –  large meaningless (in the face of extreme uncertainty) – central view on the coronavirus effects, but no alternative scenarios, even though this is a situation best suited to scenario based analysis.   It is, frankly, a travesty of transparency, whether or not you or I happen to agree with the final OCR decision.

In fact, the projections (as usual) had been finalised a week before the final decision –  that works fine often, but this was a very fast-moving situation.

And that was about it.  There were no subsequent speeches from the Governor or his fellow MPC members, internal or external.

Since then, of course, a great deal has happened, little of it –  at least in global terms –  for the better, whether in terms of the progress of the virus itself, business confidence, or financial markets.

And yet the Governor told us he was coming along to give a high-level speech about longer-term monetary options.   In his introduction to the written speech –  all 19 pages of it – he went so far as to claim

Any perceived monetary policy signals in this speech are thus in the eyes of the reader only and not intended by the author.

But context and tone matter a great deal and often tell us a lot.   And, in any case, it seems from various media accounts that Orr took questions at the little event he hosted to deliver the speech, and felt quite free in commenting on coronavirus and the place (or lack of it, as he saw it) for monetary policy.

That in iself, as a matter of process, was pretty appalling.    We are told by an interest.co.nz journalist that Orr did not use his speech text, but instead

Calm vibes from Orr today as he delivered a 30min speech using hand-written notes

but no one who wasn’t there –  and it was an invitation-only event – actually knows what he said, and what emphases he chose.  That is bad enough re the speech itself, but then he ran a Q&A session for which there is no public record, other than snippets from various journalists’ accounts.  On highly contentious, important, market sensitive issues that simply isn’t good enough –  and just would not happen at any serious central bank. (In fact, the Bank itself knows better. Last year they did one of these self-hosted events with (a) an open invitation, and (b) video footage of the speech and Q&As posted on their website, and on that occasion the content was pretty innocuous.)  Does the Monetary Policy Committee and the Bank’s Board –  the latter paid to hold them to account – just roll over and go along with this travesty of good process?  It appears so.

But, anyway, lets try to unpick what he said (and didn’t say) based on the fragmentary records we have.

First, the formal speech text –  which must have been carefully considered and haggled over internally (at least if there is any decent process in place at the Bank, anyone willing to challenge the Governor).   Here is the relevant section

The nature of the economic shock that authorities may be looking to mitigate will inform the choice of tools. A specific supply shock (where goods and services cannot be produced for some reason) may be better managed through fiscal support (both automatic stabilisers and/or targeted intervention), with monetary policy assisting rather than leading.

New Zealand’s current drought conditions in regions of the North Island provide an example of a supply shock. If the drought remains relatively region-specific, and/or short-lived, then monetary policy would have a very limited stabilisation role. Any resulting loss of production may be short-term, and automatic fiscal stabilisers and/or targeted government transfers and spending would be more effective at mitigating any broader economic disruption. Meanwhile, monetary policy would remain focused on any longer-term impacts on incomes and wealth, and hence inflation and employment pressures.

A similar set of considerations confronts policymakers globally at present with the spread of the Covid-19 virus. The eventual economic impact on global supply and demand will depend on the location, severity, and duration of the virus. The optimal mix of policy responses are driven by these same factors.

The severity in terms of disruption to economic activity depends on how the virus is contained and controlled, how long this will persist, and the collective response of governments, officials, consumers, and investors to these events.

The Reserve Bank’s Monetary Policy Committee will be picking through these supply and demand issues. We will need to account for international monetary and fiscal responses, financial market price changes (e.g., the exchange rate and yield curve), and domestic fiscal responses and intentions, to inform our response. We also remain in regular dialogue with the Treasury to assess how monetary and fiscal policy can be best coordinated.

We need to be considered and realistic as to how effective any potential change in the level of the OCR will be in buffering the New Zealand economy from shocks such as a lack of rainfall and the onset of a virus.

For us, these monetary policy and financial stability decisions are repeat processes as the duration and severity of events play out. We are in a sound starting position with inflation near our target mid-point, employment at its maximum sustainable level, already stimulatory monetary conditions, and a sound financial system.

Remember that this text is written knowing that the backdrop is the dramatically worsening coronavirus situation –  it isn’t 200 cases in a faraway land anymore.  He’s said nothing for weeks after an MPS that –  at very least with the benefit of hindsight –  didn’t really strike the right note.  He’ll have known the market developments since –  I’m thinking mostly of bond markets, but you can throw in equity markets and credit spreads too.  He may not have had the ANZ Business Outlook data when he finalised the text, but if he was very surprised by the data –  released an hour before the speech was given –  that would be a very poor reflection on the Governor’s comprehension of just what is going on.

So all this was very deliberate conscious drafting, clearly designed to play down, to minimise, the coronavirus economic issues and the scale of the adverse demand shock that has been unfolding for weeks now.   If a junior analyst had set it out this way, it would be one thing, but he is the Governor –  people pay a lot of attention to his words, even if they are often “cheap talk”.

You see, droughts are something the Reserve Bank has never responded to.   There isn’t even the sort of “longer-term” aspect for monetary policy he suggests –  in fact, there is really is almost no longer-term dimension to monetary policy at all;  discretionary monetary policy is designed to be about fairly short-term stabilisation.   So to frame thinking about a monetary policy response to coronavirus in the same breath as droughts, ending

We need to be considered and realistic as to how effective any potential change in the level of the OCR will be in buffering the New Zealand economy from shocks such as a lack of rainfall and the onset of a virus.

and with not a mention of the risks around inflation expectations –  which he was briefly rather good on for a month or so after last year’s unexpected 50 basis point cut –  tells you this is someone looking for excuses not to adjust the OCR, minded not to do so if he could get away with it (which he probably can’t).   A Governor (and MPC) who were seriously concerned –  who recognised, for example, that most of what we’ve seen in New Zealand so far is a big adverse demand shock –  doesn’t need to give away his hand on precisely how much the OCR might adjust, but would almost certainly phrase things differently than Orr did yesterday.  It had the feel of a speech that he might have given a month ago.  Then there might have been some excuses, but now there are none.

And then we turn to the fragmentary accounts of the actual delivered speech and the questions and answers.  The journalist from interest.co.nz reports that

He said, in a speech delivered in Wellington on Tuesday, that the RBNZ won’t have a “knee-jerk reaction” to coronavirus.

He also said monetary policy was in a “support role”, with fiscal policy (government spending) being at the “frontline”.

“Knee-jerk reaction” is one of those lines you use when you disagree with someone’s call for action, and prefer to avoid engagement on substance.  What Orr seems to think of as a “knee-jerk reaction” is (a) along the lines of the actions of the RBA and the Fed, and (b) what others would call bold and decisive leadership, or others still “just doing your job”.

As concerning is that next sentence.  It isn’t his job to decide whether monetary or fiscal policy should be emphasised.  His job is to take account of what he sees and act accordingly to contribute to stabilising the economy and supporting the eventual recovery.     If the government chooses to do something large with fiscal policy –  which there is no sign of yet –  that is certainly something for the Bank to take into account.  But as it is, no policy support –  monetary or fiscal policy –  has yet been given at all.   Sure, the Bank can’t cut the 500bps or so that is typical in a New Zealand (or even US) recession, but their job –  assigned by Parliament –  is to respond strongly to severe adverse demand shocks, and big drops in short-term neutral interest rates, to help stabilise the economy and inflation expectations.    As it is, nothing in the speech suggested any sort of strong lead from the Bank, let alone one that might very soon bring the unconventional tools into play.  It is some combination of an abdication of responsibility and of the Governor’s long-held personal political preference –  it has been backed by no analysis or research he’s produced, let alone by statute –  for a more active, bigger government, fiscal policy.

We then got more of the same in response to questions

Orr said coronavirus posed a fiscal and monetary policy challenge, “but monetary policy will remain in that support role with fiscal policy being very much the frontline activity as it is now”.

“We will be watching very carefully for what is the important monetary policy response we need to make, but we want to do that in the best and fullest information, not some knee-jerk reaction, because New Zealand doesn’t need a knee-jerk reaction.

“We’re in a good space. I’m not sure a knee-jerk reaction would be particularly useful.”

Slogans rather than analysis, again.  He’ll never have full information until it is far too late –  monetary policy has to react to what is evident now and projections of what is coming.  That is what it did in the past –  responding to 9/11, to the 2011 earthquake, even to SARs – but Orr and the Committee never engage with any of this experience or practice.

Oh, and then the final bit from that account that caught my eye was this

“Confidence and cashflow will win the day,” Orr said.

Except that business confidence is through the floor –  lowest since 2009 –  and cashflow is rapidly drying up for many.   Oh, and widespread social distancing, and all the economic costs and dislocation that entails, seems to be not far away at all.   It is as if he was on another planet, where whistling to keep your spirits up was the remedy.

(Reflecting on the Bank’s apparent indifference to the severity of what is unfolding, and its threat to medium-term inflation expectations and nearer-term employment etc, I was reminded of how badly the Bank handled the period of the Asian crisis, as we were playing with the MCI.  Many readers will be too young to really get the reference –  count yourself lucky, but I must write it up one day – but the Governor will recall. He was there too.)

And what of the Herald’s account?

There we got this added snippet following the dismissive “knee-jerk” comments

We’re in a good space.

Who knows, perhaps he just meant that government debt is low.  But there is no other way we can be thought of as “in a good space” to cope with a very sharp dislocation and loss of economic activity this year.  And perhaps he hasn’t noticed that real interest rates –  the ones people are paying/receiving –  have been rising this year.

The Herald reports commentary from an economist who was invited to attend

“He basically hosed down expectations of a sizable interest rate cut and an inter-meeting one,” Bagrie, who attended the speech, said. “He explicitly said, time is on our side.”

It demonstrably isn’t.  Does he have any conception of the exponential growth in case numbers, including in Australia with which we have a largely open border?  Has he not noticed travel bookings drying up –  still almost all a demand shock from a New Zealand perspective.  This is one of those climates where time was never on anyone’s side –  with hindsight (at least) action should have been in place weeks and weeks ago.

And a final quote

“Here in New Zealand we’re in this wonderful position where monetary policy is willing and able to do whatever matters, and fiscal policy is also in a strong and credible position [to respond].”

Except that from the Governor’s words and demonstrated behaviour –  with his Committee sitting in front of him, unwilling to say anything, apparently in support –  monetary policy is transfixed by the shock, doing nothing so far, and reluctant to do very much at all.  Without even so much as a hint of what the risks and downsides the Bank has in mind if monetary policy was used aggressively while it still can be?  I’m pretty sure there was almost no mention that one of the great things about monetary policy is that it can be quickly reversed when the need passes, and another is that it is really easy to implement, something that cannot be said for many of the fiscal schemes –  details of which we have yet to see –  that the Governor appears to so strongly favour, especially if/when the economic dislocation builds, people are sick and/or working from home, and firms and individuals across the economy are feeling the extent of the downturn, perhaps even a temporary shutdown, in the economy.

Fiscal policy isn’t the Governor’s job, although he needs to be aware of it and take it into account.  Monetary policy is –  his and the Committee, from whom we hear so little –  and he simply isn’t doing it.  It is an abdication of responsibility –  reasons uncertain –  that just confirms again his unfitness for the high office he holds.  It also raises equally serious doubts about the rest of the Committee –  I heard an extraordinary story yesterday of one external member scoffing at taking the economic effects of coronavirus seriously –  and those paid to hold them to account.

It reflects pretty poorly on the Minister of Finance too.  After all, the MPC is wholly his creation, and he has legal responsibility for the way they do (or don’t) their job.  And he is the only one in all this with any serious public accountability.

I’m going to leave you with one of the Governor’s good moments.  These words were in a speech he gave in San Francisco last year

In particular, it is now more suitable for us to take a risk-management approach. In short, this means we look to minimise our regrets. We would rather act quickly and decisively, with a risk that we are too effective, than do too little, too late, and see conditions worsen. This approach was visible in our August OCR decision when we cut the rate by 50 basis points. It was clear that providing more stimulus sooner held little risk of overshooting our objectives—whereas holding the OCR flat ran the risk of needing to provide significantly more stimulus later.

You have to wonder what about the world has changed that, in the Bank’s view, makes that sort of approach not the best way forward now –  when the downside risks are much starker and clearer than they were then.

My bottom line on the Governor is that he will probably do the right thing eventually, after toying with or trying all the alternatives.  The global situation looks set to get quite a bit worse in the days before the OCR review, and I suspect the MPC will find themselves finally mugged by reality, overwhelmed by events.  But we need, deserve, a better central bank, a better MPC, a better Governor, than this. After all, as he says, confidence matters, and it is hard for anyone to have much confidence in him, or to count on his words meaning anything from one week to the next.

UPDATE: And here were the quotes I couldn’t find quickly this morning re inflation expectations.  He was very concerned to hold them up then, but apparently much less so now when the substantive risks are so much greater.

 

Orr speaking

We’ve been hearing quite a bit from the Reserve Bank recently (in addition to the OIA disclosures of the Governor’s antics last year), just not much about monetary policy, short-medium term economic developments, or financial stability and regulation.  In a few weeks the Governor will have been in office for two years, and in that time we’ve not had a single serious and thoughtful speech from him on either financial stability/regulatory issues or on monetary policy and cyclical economic issues.   It is extraordinary, and not the sort of thing we’ve seen here in the past or in other advanced countries today.  As it happens, the new MPC members have now been in office for 11 months, and we’ve not seen or heard a word from any of the external members at all.

But what of Bank management?    If they haven’t been talking about core business (that small matter of the statutory responsibilities they are funded for), they’ve been out championing other causes, including themselves.

Last Wednesday the Governor (and accompanying senior managers) turned up at Parliament for the annual Finance and Expenditure Committee financial review hearing.  The Governor’s opening statement is here.    The only bit that immediately caught my eye was this

Amendments to the Reserve Bank of New Zealand Act, which came into effect on 1 April, gave responsibility for monetary policy decisions to the newly-established Monetary Policy Committee.

This framework has now been implemented and is working well, with six Official Cash Rate decisions by our new Monetary Policy Committee. The Summary Record of Meeting provides insights into how decisions are reached, and improves our stakeholders’ understanding of each Committee member’s contribution.

That final sentence, and particularly the second half of it, is at best spin, more accurately just a lie.  The Governor explicitly states that the Summary Record “improves our stakeholders’ understanding of each Committee member’s contribution”, when of course –  go and read them for yourself if you like –  that is simply false.  Not only does the Summary Record give no real sense of “how decisions are reached” but, by explicit choice and design (endorsed by the Minister of Finance), there is no reference at all to the views, arguments, analyses etc of any individual Committee member.  And –  did I mention this?  – none of the externals has been heard from in any other fora.  We have no idea whether they are making any contribution at all.   It is breathtaking that the Governor can so actively and deliberately –  in writing – lie to a parliamentary committee.  In isolation perhaps it is a small point, but if we can’t count on a very and powerful public official in the small and visible points, how do we trust him more generally.

The FEC appearance was also an opportunity for the Governor to bid for more resources –  a lot more resources we are told.  According to the Stuff account,  the Governor is bidding for a “30 per cent perhaps” increase in the Bank’s funding, claiming that (in respect of bank supervision)

The Reserve Bank’s existing resource was at the the low-end, if not “the lowest”, in the OECD

Which might sound more worrying/inappropriate were it not for the fact that New Zealand is among the smaller OECD countries and one of the poorer OECD countries, and also a country with a record of a sound financial system, and one dominated by banks already subject to serious supervision in another country that also has a long record with a sound financial system.

On several occasions over the years I’ve been willing to defend or even champion the case that the Reserve Bank is probably a little underfunded.  But it gets progressively harder to defend that view as the evidence mounts for how undisciplined the Bank is in the use of the resources it already case.  There was the million dollars for the Maori strategy, or the trips to international climate change meetings (and resources devoted domestically to such issues, for which the Bank has no particular responsibility) and there is the sense of a proliferation of staff in the communications/PR areas of the Bank.   I can’t yet formally verify that –  although I have lodged an OIA to get chapter and verse –  but I’m not the only person to note the range of new people/positions (on the bottom of press releases, emails or whatever) and my favourite anecdote was one a friend told a few months ago about being approached by a headhunting firm to consider applying for a job in something like “stakeholder relations” at the Bank,  a job my friend characterised as “having coffee with a lot of people, getting paid $180000 a year”.   I hope The Treasury and Grant Robertson will be having a close look at whether there is any sort of culture of ruthless prioritisation, frugality etc in how the Governor uses what he has, before offering up yet more public money.    There isn’t much sign of it.

Stuff also reports that National’s Finance spokesman Paul Goldsmith challenged Orr on his conduct

National Party finance spokesman Paul Goldsmith questioned Orr on the bank’s reaction to “criticism and debate” during a series of exchanges at the select committee, saying the Reserve Bank governor had “very significant independent powers” over the industries the bank regulated.

“From my point of view it is very important that we have open and robust discussion,” Goldsmith said.

“We wouldn’t want to have an independent governor with a glass jaw or a sensitivity to robust criticism,” he later added.

Orr’s response?

“What I won’t stand for is abuse of my team or myself,” he said.

He keeps claiming he and his team have been “abused” in some inappropriate or unacceptable way, but has not yet shown us a shred of evidence for those claims, suggesting that what is really at work is a powerful public figure who simply can’t cope with being challenged.  As one of his former staff put it last week “he could always dish it out, but could never take it”.

I hope Goldsmith won’t let the matter rest, especially if he should become Minister of Finance later this year.

Orr was back on the public stage on Friday with a speech, delivered to a business audience in Christchurch, under the title “Aiming for Great and Best at Te Putea Matua” (that being that Maori label the Governor has chosen to attach to the Bank).    The, perhaps rather odd, title refers to the Governor’s vision for the Reserve Bank “Great Team and the Best Central Bank”, the even more overblown goal than the one his predecessor had introduced, aiming to be the best small central bank in the world (when I asked, a few years later, what steps they’d take to benchmark themselves and measure whether they were getting close to the goal, the answer came back “nothing”).   Nothing wrong with aspiration and ambition of course –  although it is not clear that taxpayers would choose spend resources so heavily that a small, not very rich, country’s central bank would ever be best in the world.   The real problem is the delusional nature of the claims, the visions, which seem more about spin than substance.  Excellent central banks don’t have thin-skinned bosses, unable to keep their thin-skinnedness under control.  Excellent central banks have senior figures who make excellent thoughtful speeches. Excellent central banks are producing a steady stream of insightful research.  Excellent central banks underpin major policy initiatives with confidence-inspiring research and analysis, taking seriously alternative perspectives.

(Come to think of it, excellent central banks don’t just make stuff up when testifying to Parliament.)

We don’t have an excellent central bank (although it still has some good people); instead we have an organisation that has become little more than a platform for the Governor’s ambitions, whims, and political preferences, with little or no sense of boundaries, restraint, or the proprieties of public office.

I’m not going to waste a lot of time on a detailed review of the speech. Frankly, it is fairly dull although suffused with the Governor’s personal whims, especially around climate change (important issue and all, but really nothing whatever to do with the Reserve Bank).  But do notice just how the Governor operates.  There was this line

We have now made six Official Cash Rate (OCR) decisions – as a committee. We have managed robust discussion and come to consensus decisions. The nature of these discussions is published as a ‘Record of the Meeting’ for all to see. We also won this year’s Central Bank award for transparency in how we operate.

It is technically accurate, except that the transparency award they won was explicitly for one small element –  the (quite good) Handbook they’ve published on monetary policy –  not at all for anything about how the Monetary Policy Committee functions or how the ‘Record of the Meeting’ operates.  It is just dishonest.  It should be unworthy of –  beneath –  a major public institution in a sector where trust is supposed to be central.

A Stuff story appeared this morning about some more of the Governor’s comments.  I first assumed it must be referring to the (published) Christchurch speech, but the article says it is talking about a speech given in Auckland (perhaps he used much the same text?).  We get accounts of Orr as populist (also there in the published speech)

“I’m not here to talk to a few narrow specialists. I’m not here to talk to just the institutions we regulate.

“We are the central bank of everyone here in New Zealand, present and future, and we have been too narrow and too lax in our engagement with you all, and it is not going to happen again.”

The problem, of course, is that (a) few “specialists” actually have much confidence in him, (b) in all fields of life, we rely on “specialists” to help us evaluate and hold to account powerful public agencies (something Orr isn’t keen on at all), and (c) all that business about how his predecessors didn’t get out and talk to wider audiences is just so much nonsense, simply inconsistent with the facts.  Perhaps Orr has forgotten Don Brash’s in(famous) retail roadshows, or Graeme Wheeler’s repeated talk about how he and the Bank were going to talk to a wider range of people.   Some questionably, Alan Bollard even wrote a book (not inaccesible either) while in office.

And the article ends with an account of Orr’s answer to an audience question, which seems like quintessential undisciplined Or

Orr spoke about the importance of economic and social inclusion in response to a question from Jackie Clark, founder of The Aunties whanau support movement, who complained New Zealand was a low-wage economy.

“The owners of capital have been doing a great job over and above the owners of labour,” Orr said.

“It’s been extreme, unprecedented, over the last 40 or 50 years of that ongoing return to the owners of capital, and labour has become a global commodity, where production goes to the lowest common denominator.”

“We want low and stable inflation, but that does not mean we want low wages,” he said.
“We’ve been celebrating the fact that nominal and real wages have been growing recently.

“That’s how we roll. That’s how we have to roll, otherwise create yourself a gated community. Enjoy yourselves, but don’t leave.”

Would have sounded just great in a stump speech from Bernie Sanders, Alexandria Ocasio-Cortez –  there is at least some evidence in support of his story in the US –  or even Marama Davidson.  But (a) this is New Zealand, and (b) you are the Governor of the Reserve Bank, with quite narrow responsibilities for monetary policy (affecting only nominal variables beyond the short-term) and regulation for prudential purposes of some classes of financial institutions.  Instead, we get a rampantly partisan/ideological answer (inappropriate in itself, but when did bounds and norms bother Orr?), but one with little or no grounding in facts.

(A prudent grounded answer to the question might have been to note that distributional issues are not an issue for the Reserve Bank, but that in the longer-term only productivity growth will support a much higher wage economy.  Both statements would be accurate and uncontentious.)

Those first two sentences in Orr’s answer seemed to be about the labour share of income.  The data are summarised in a chart in this post.  In New Zealand –  it is different in some countries –  the labour share of income rose in the 1970s, fell in the 1980s and (depending on your measure –  I show three) is now just a little higher or a little lower than it was fifty years ago.    You might personally argue for some different split of the pie, but what in the New Zealand experience justifies Orr’s flamboyant off-reservation ideological rhetoric.

Or what about how wages have been rising relative to economic capacity (say, nominal GDP per hour worked, capturing productivity and terms of trade effects).  Well, as I illustrate every so often (most recently last month), this century, wage rates in New Zealand have been rising faster than GDP per hour worked.  Perhaps Orr doesn’t know that –  it certainly doesn’t suit his ideological message – but whether he knew it or not he actively misled his audience, while working on the taxpayer’s dime.

I was going to round off this post with a fairly detailed critique of a truly dreadful speech given a week or so ago by one of Orr’s principal deputies, Christian Hawkesby, the Assistant Governor responsible for economics, monetary policy and financial markets on “The Maori World View of the Reserve Bank” but with quite a bit else –  including some atrociously bad history –  thrown in, concluding with the absurd hubristic claim that the Orr/Hawkesby Reserve Bank is “putting the New Zealand back into the Reserve Bank of New Zealand”.   You’d think they were candidates at this year’s election, not senior (supposedly non-partisan, supposedly operating within the constraints of specifc statutes) statutory public officials.  But perhaps I’ll save that speech for another day, rather than risk losing the focus on the Governor who yet again reveals himself as simply unfit for the office he holds.  And yet those paid to hold him to account sit idly by.

Simply unfit

In yesterday’s Sunday Star-Times another article by their reporter Kate MacNamara shed further light on just how unsuited Adrian Orr is to be Governor of the Reserve Bank, exercising huge public policy and regulatory power still (in large chunks of the Bank’s responsibilities, often with crisis dimensions to them) as sole decisionmaker, with few/no effective checks and balances.  These disclosures should also raise serious questions about the judgement and diligence of the Board who were primarily responsible for Orr’s appointment and are primarily responsible for holding him to account, and of the Minister of Finance who formally appointed Orr, and is responsible now for both him and for the Board.

In this latest in her series of articles, MacNamara draws on the responses to one of several Official Information Act requests she had lodged late last year.  She had sought from the Bank copies of communications between the Governor and (a) the head of the financial sector body INFINZ and (b) Roger Beaumont the executive director of the Bankers’ Association (those responses are here), and copies of communications between Orr and the New Zealand Initiative think-tank, especially its chair Roger Partridge (responses here).    Her article draws mainly on the response re the New Zealand Initiative.

The context here is Orr’s (then) proposal to dramatically increase the volume of capital locally-incorporated banks would have to have to fund their existing loan books in New Zealand, disclosed in December 2018.    A wide range of commentators locally were critical of the Bank and many drew attention to the rather threadbare nature (at least initially) of the supporting material (it took three waves of releases over several months before we finally got the full extent of the Bank’s –  still-underwhelming –  case).   There had been no technical work preparing the ground, even though Orr was to be prosecutor and judge in his own case.  There was no serious cost-benefit analysis for what Orr was proposing, no serious benchmarking against capital requirements in other countries (notably Australia), no serious analysis of the nature of financial crises, and a strong sense that Orr wanted to compel us to pay for an insurance policy that simply wasn’t worth the price.    All this from an organisation where a recent careful stakeholder survey –  conducted by the New Zealand Initiative before Orr took office –  had highlighted very serious concerns about the Bank’s financial regulatory functions.    Meanwhile, Orr was already underway with his open attempts to cast anyone who disagreed with him as a “vested interest”, somehow “bought and paid for”.

Various people made public comments.  Among them was Roger Partridge, chair of the New Zealand Initiative, who had a column in NBR in early May critical of what was being proposed, and the processes used (at the time the Initiative was finalising its submission to the formal Bank consultation).    In my contact with Roger, he always seems much more interested in the substance and process of any issue.   But in a single decisionmaker model, it is a single person in focus.  [UPDATE: Here is a link to the “offending” column.]

Anyway, the Governor did not like Roger’s column at all.  Normal people who disagree might either let things wash over them (being in public life, exercising great power, not only does but should, bring scrutiny, challenge, and criticism).  Or perhaps you might even ring the author and have an amiable chat.  But not Orr.

The OIA release begins with Partridge emailing Orr after learning that Orr had rung the Executive Director of the Initiative had been “upset” by Partridge’s column.  This is a bit of a problem for the Initiative, as Orr is scheduled to speak at a private lunch for their members the next day, so Partridge offers up one of those semi-apologies (“if I crossed the line I apologise, but don’t resile from the criticisms of the policy process”), and even goes so far as to send Orr a copy of the remarks he intends to use to introduce Orr the next day (typical gush).

But that is not nearly enough for our thin-skinned Governor who replies to Partridge with a page and a half email.  All this after Orr had already talked to Hartwich both before and after a flight to Auckland they had both been on.   Just a slight loss of perspective and focus you might wonder?

And so we read (of his conversation with Hartwich)

I talked of the personal abuse I receive in this role. I also talked of the vested-interest driven articles that are prevalent and portrayed as analysis.

and

I do not accept your apology as it provides no reflection on your:
1. Stating I have a gambling problem.
2. Mocking our use of a Maori mythology to connect with a wider NZ audience – something we have been tasked by the public and stakeholders to do (I noted to Oliver this is a common thread of online abuse I receive from other purported banking/economic experts that go even further in ethnic/religious/personal comment).
3. Claiming below that you aimed to provide a robust critique of the proposal. You do not. You quote selective work of purported experts. You also pull only selected components of our submission process (which has stretched nearly 2 years).

From context, I understand that Partridge had said something along the lines that Orr was doing little more than gambling with his ill-supported capital proposal.  If so that seemed (and seems) fair to me, and would not to any reasonable person, with any sense of perspective, suggest they thought the Governor had a gambling problem.

I guess we are expected to just believe the lines about “online abuse” (and, who knows, perhaps I’m one of the people he is alluding to).

It goes on, before ending this weird way

I do not see your article as a robust critique. What I do see is ongoing character assassination, an undertone of dislike of the RBNZ, and a clear bias in economic and ethnic preference.

At the Bank we are open minded and working on behalf of all New Zealand and do so in a transparent manner.

See you tomorrow. The introduction looks fine. I will be professional and courteous towards your members.

Adrian

The person

But, of course, he is calm, open-minded, and –  apparently unlike any of his critics – only focused on the national interest.  And what to make of that “The person”?     If any upset junior staffer sent such an email to his/her boss, you might seek to get them some support and counselling.  But this was the most powerful unelected person in New Zealand, responding to a private citizen who happened to disagree with him.

(Of course, I can well understand why they didn’t do so, but in some respects it is a shame the Initiative didn’t disclose this correspondence at the time, so poorly does it reflect on a leading public official, making major policy decisions while clearly not coping.  I hope at least they referred the matter to the Minister and the chair of the Bank’s Board.)

Partridge sent another placatory email to the Governor, only to get yet another page-long missive

The behaviours displayed by your institution make it appear that it is a low chance that a well informed discussion where all parties come out better off could be ever achieved. We Remain open minded.

ending

See you later today. I will be professional and respect your members. I do not gamble.

There had been no mention of the “gambling” thing in Partridge’s email Orr was here replying to.

The rest of that OIA release is fairly uncontroversial stuff from 2018 on the release of the Initiative’s report that dealt with the Bank’s financial regulatory functions (the one the Governor claimed at the time to take seriously and welcome, although also the one he was rubbishing by late last year.)

What about the other OIAs?  It is mostly less egregious stuff.  But we have this odd example from a letter to the Executive Direction of INFINZ on 24 May 2019

For closure sake as promised, I mentioned to you at the event that I was disappointed with the process that you adopted in the preparation of a submission to our bank capital proposals. I did so as I want to be open and frank consistent with the ‘relationship charter’ we recently established with our regulated banks I read about your views first in your published op-ed and then via a newsletter you sent to INFINZ members. It was some time after that you met with RBNZ staff. The process created a perception of a predetermined outcome for the submission.

How shocking.  A private sector industry group first published its views in an op-ed and a newsletter and didn’t first talk to RB staff.      Quite who does the Governor think he is in objecting to that?

Even odder was this

In the spirit of the ‘#me too’ commentary promoted at your awards evening, I have received personal written and verbal abuse from within the industry during this consultation process. For New Zealand’s capital markets to have the ‘social license’ to operate – another theme at your event – I believe the industry’s culture needs ongoing improvement.

As a reminder to the Governor, we don’t have lese-majeste laws in New Zealand, and certainly not for central bank Governors.   And as for this weird appropriation of the “#me too”  movement – mostly about the mistreatment of women by men in positions of power over them –  to apply to criticisms of a very powerful public figure…..well, weird is just the best term for it.

It wasn’t the only time he’d tried this line.  In a column late last year, Hamish Rutherford told us he’d even used it at a parliamentary committee

me too

Being in position of power, Orr’s complaints brought forward this response from the INFINZ Executive Director

We are concerned and disappointed that you have received verbal and written abuse from within the industry during the consultation process – bullying is not acceptable and we agree that all discussions should be both professional and respectful.

Quite how anyone in the industry –  or anywhere else for that matter –  could have “bullied” the Governor (who single-handedly wields all the power that mattered on the bank capital issues) is beyond me, but I guess INFINZ didn’t want to jeopardise their ability to get the Governor as a speaker etc.

The final set of OIA responses cover the Executive Director of the Banker’s Association.

The first was a Saturday morning email to Beaumont and the chairs of the four main banks in April.     It isn’t offensive and thin-skinned as he later became, but while the submissions are still open, he is clearly trying to put pressure on them

FYI only as I am eager you understand the effort we are going to in order that the Bank is open and listening.
This was not the impression you all conveyed to me over the last couple of weeks in our individual one-to-one meetings.

Only there is nothing in the rest of the letter to give anyone any reassurance.

In late May there is a letter (presumably emailed) from Beaumont to the Governor, copied to the Minister of Finance, about the “independent experts” the Governor had selected to help make his case.    The letter isn’t aggressive in tone but noted that none of the independent experts had New Zealand specific knowledge and suggest a couple of locals they could work with.

But this sparks a petulant email back from Orr, also copied to Grant Robertson

Dear Roger,
Your letter is unsigned. Can you confirm it is legitimate please? Apologies, one must be careful.

and

I do not understand the reason you have copied the Minister of Finance in to this dialogue. Is there something specific you are looking for from the Minister’s office that I need to understand?

Minister of Finance? Well, you mean the elected person with overall responsibility for economic policy, the person who has formal responsibility for your performance etc etc?

Recall, that all the stuff covered in the material that came to light yesterday is really just another glimpse at what was apparently a pattern of quite inappropriate behaviour.    From one of Kate MacNamara’s earlier articles

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

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

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

“I’m worried about what he’s doing.”

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

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

We can only wonder what he was like inside the Bank or around his own Board table.

Does any of it matter, or is this simply the degraded state of public life we now have to get used to?  Age of Trump, age of Orr etc.

It should be utterly unacceptable, in any public figure, but perhaps especially so when that one public figure is (a) unelected, and (b) wields such huge discretionary power on far-reaching policy matters, with few/no checks and balances.   I was tempted to suggest that the individuals in receipt of these particular Orr missives are big enough to stand up for themselves, except that evidently they aren’t really –  Partridge, Hartwich, and McElwain find themselves rushing around the placate Orr.  That’s costly and uncomfortable: much easier just to pull your punches and offer less challenge or scrutiny next time the bully (for on his revealed behaviour it is him not his critics who better fits that description) wants to push through some half-baked costly idea.

The banks themselves will long since have gotten the message –  it was Orr’s predecessor who heavied the BNZ to shutdown Stephen Toplis when he wrote a critical commentary on some aspect of Wheeler’s monetary policy –  but the experience last year will only have reinforced that extreme caution.  Recall that Orr wields direct power over them in all sorts of way, visible and less so, and clearly does not cope with being challenged or criticised (no matter how many times he claims to be “open-minded”.   It is great that Kate MacNamara has kept up the scrutiny, but that will presumably mean no access: much easier for her fellow journalists to keep their heads down and not ask hard questions of the Governor and Bank (who –  news though it may be –  are not infallible).

And what about people inside the organisation?  Recall that on regulatory matters the Governor is still the sole decisionmaker, and on monetary policy he has –  in effect –  most of the clout, all of voice, and no real transparency.  It is vital that the Governor’s priors, whims, and even well-considered ideas are seriously scrutinised –  and even that the Bank sticks to its statutory roles –  but seeing the Governor treats outsiders, how are people inside the Reserve Bank likely to respond.  All but the most brave or reckless will be strongly incentivised to keep quiet, go along, join the cheerleaders etc.  In any public agency that should be grossly unacceptable, but particularly so in one as powerful as the Bank.  Orr has grossly abused his office, and looks increasingly unfit to hold it.

And if Orr gets away with it what message does it send to other thin-skinned bullies elsewhere in the upper ranks for our public sector, let alone to those who work for them.

And yet it looks as lot like Orr will get away with it.  Perhaps there was some quiet word in the hallowed halls of the Bank’s Board room, but these are the same people who selected the Governor less than two years previously. They are invested in his success, and they and their predecessors have a long track record of providing cover and defence for the Governor, not serious scrutiny and accountability on behalf of the public. This behaviour occurred in 2018/19 and there is no hint of concern in the Board’s published Annual Report.

If any of this bothered Grant Robertson, it can’t have been much.  You’ll recall that response I had late last year from Robertson, when I wrote to highlight his formal responsibilities for the egregious conduct highlighted in earlier MacNamara articles.  He then expressed his full confidence in the Board and suggested he was satisfied with the Governor too.     In the great tradition of “lets look after each other” Robertson has just appointed the Board chairman to a further two year term, even as he walked by such appalling conduct by the person he is paid to oversee.

(It is sad to reflect that much of the material covered here relates to events in May 2019.  That was the same month the then Secretary to the Treasury was also going rogue, grossly mishandling –  and then refusing to apologise for –  his handling of the “Budget leak” episode.    Doesn’t exactly instill confidence in the top tier of our leading economic agencies –  or the Minister responsible for both –  does it?)

Perhaps it is all in the past now.  Perhaps having got through the year, made his final decisions etc, Orr has returned to some sort of stable equilibrium and is operating effectively, rigorously, and deeply to provide leadership in difficult times.  Perhaps.  But even if that were so –  and that sort of Orr was not on display last Wednesday –  no one who can lose all perspective as badly as Orr clearly did last year, who simply cannot cope with serious criticism and scrutiny, simply should not hold high office here or anywhere else.  It is risky for New Zealand, it is dreadful for the reputation of the Bank, bad for the reputation of the New Zealand public sector, and reflects pretty poorly on our political leaders –  in government and Opposition –  who simply walk by, at least in public, such egregiously unacceptable conduct from such a powerful public servant (one who doesn’t even have the redeeming quality of being consistently rigorous, excellent and right to perhaps compensate in some small measure for his grossly unacceptable).

 

An unimpressive MPC

I didn’t expect to be particularly critical of the Reserve Bank after yesterday’s Monetary Policy Statement.  A journalist asked me yesterday morning what I’d say if they didn’t cut the OCR, and I noted to him that whether they cut or not, what I’d really be looking for was evidence of the Bank treating the issues in a serious way, alert to the magnitude of what was going on and the sheer uncertainty the world faces around the coronavirus.

They –  the almost a year old new Monetary Policy Committee –  did poorly on that score.  And in his press conference, I thought the Governor simply seemed out of his depth.  Much of what the Bank had to say might have seemed reasonable two weeks ago –  no doubt when the bulk of their forecasts were brought together – but the situation has been moving (deteriorating) quite rapidly since then.   They can’t update published forecasts by the day, but there was little sign in the record of yesterday’s meeting, or in the Governor’s remarks yesterday afternoon (or those of his senior staff), of anything more immediate or substantive.  The Governor seemed to attempt to cover himself by suggesting that the Bank”s line was consistent with some “whole of government” inter-agency perspective, but….that is (or should be) no cover at all, since Treasury and MBIE don’t face the same immediacy the Bank does (it had to make an OCR decision) and whatever the Ministry of Health might be able to pass along about the virus itself, it knows nothing about economic effects.  On those, the government should be able to look to the Bank for a lead.  Instead, we got something that seemed consistent with the lethargic, lagging, disengaged approach of our government (political and official) to the coronavirus situation.

Thus, remarkably, faced with one of the biggest out-of-the-blue economic disruptions we’ve seen for many years, arising directly and most immediately in one of the world’s two largest economies, we get three-quarters of the way through the press statement before there is any mention of the issue, ploughing our way through upbeat commentary including on the world economy.   Even when we do get there, the coronavirus effects are described only as an “emerging downside risk” –  for something which has already sharply reduced activity in parts of our economy.  It is the sort of language one might use for things where the effects are hard to see, not for something this visible, direct, and immediate.   And on the day when the head of the WHO –  who has often seemed to play defence for the PRC – was highlighting the scale of the global threat.  On a day when a CDC expert was on the wires noting that the only effective response is social distancing –  the more distant people stay the less economic activity there is.

The Bank loves to boast about how transparent it is. As I’ve noted, they are happy to tell us the (largely meaningless) forecasts for the OCR three years hence, but they are astonishingly secretive about their own analysis and deliberations.   Thus, we now get a “summary record” of the final MPC meeting.  Here is pretty much all we get to see about the coronavirus issue

The Committee discussed the initial assumption that the overall economic impact of the coronavirus outbreak in New Zealand will be of a short duration. The members acknowledged that some sectors were being significantly affected. They noted that their understanding of the duration and impact of the outbreak was changing quickly. The Committee discussed the monetary policy implications if the impacts of the outbreak were larger and more persistent than assumed and agreed that monetary policy had time to adjust if needed as more information became available.

….The Committee discussed alternative OCR settings and the various trade-offs involved.

There is no sense of the sort of models members were using to think about the issue and policy responses.  There is no sense of the key arguments for and against immediate action and how and why members agreed or disagreed with each of those points.  There is no sense of how the Bank balances risks, or of what they thought the downsides might have been to immediate action.  There is no effective accountability, and there is no guidance towards the next meeting.  Consistent with that, the document has one –  large meaningless (in the face of extreme uncertainty) – central view on the coronavirus effects, but no alternative scenarios, even though this is a situation best suited to scenario based analysis.   It is, frankly, a travesty of transparency, whether or not you or I happen to agree with the final OCR decision.

Consistent with that, there was no mention –  whether in the minutes or in the body of the document or in any remarks from the Governor –  of past OCR adjustments in the face of out-of-the-blue exogenous events.  Again, perhaps there are good reasons why the cuts in 2001 (after 9/11) or 2011 (after Christchurch) or –  less clearly –  around SARS in 2003 don’t offer good lessons for policy-setting now.  Presumably the MPC thought so, but they lay out no analysis or reasoning, and thus no way to check or contest (or even be convinced by) their thinking.  It really isn’t good enough.   Then again, in the press conference no journalist challenged the Governor on these omissions.

Similarly, there was no sign in any yesterday’s material or comments of having thought hard about the limitations on monetary policy (globally) as interest rates are near their effective lower bound.  All else equal, and with inflation well in check, that starting point should typically make central banks more ready to react early against clear negative demand shocks to do what can be done to minimise the risk of inflation expectations dropping away.  Perhaps again it still wouldn’t have been decisive this time –  and our Reserve Bank still has a little more leeway than many –  but to simply ignore the issue, and show no sign of having thought hard about the wider policy context, was pretty remiss.

From his tone in the press conference, it was as if the Governor really didn’t want monetary policy to have to play a part –  to do his job –  as if it was all just an unfortunate distraction from good news stories he’d been hoping to tell.   So he told one journalist that at best monetary policy would be a “bit player”: for individual sectors that is no doubt true (but then monetary policy is never about dealing with specific sectoral problems), but not really the point, since there has been a clear and significant, highly observable negative demand shocks, and a huge increase in uncertainty (often a theme of RB speeches etc over the last year).  In fact, in answer to another question the Governor was heard claiming that there was “no specific event” to consider reacting to (hundreds of millions of people locked down in China, second-largest economy in the world?) and –  worse –  then claimed that there was no need to act as we already have very low and stimulatory interest rates.  The problem with that argument is that they were just as low six weeks ago, and since then we’ve had a clear large negative demand shock.

Asked about the fact that implied long-term inflation expectations (from the government bond market) were barely above 1 per cent, the Governor took a lesson from politicians and simply refused to answer the direct question.  He then went to on to claim that the monetary policy foot was already on the accelerator, that we’ve had more positive global growth –  even as global projections are in the course of being revised down – and that if anything the question that should have been being asked was why we weren’t thinking about raising the OCR (“renormalising”).

One journalist thought to ask the Governor about the difference between the Bank’s GDP forecasts for the year ahead (2.8 per cent I think I heard) and those of various outside commentators (more like 2.0 per cent) and asked about the difference.  The Governor’s response was that of glib teenager: “0.8 per cent I think”.  Pushed a bit further, he indicated that he had no idea why the difference and (more importantly) no real interest. He claimed (fair enough) not to accountable for anyone else’s forecasts, but showed no interest in the cross-check (that used to be pretty standard around the MPC table) of understanding why the Bank is different from others, and why the Bank still thinks that is the best forecast.

There was also the line about market prices constantly adjusting and buffering……all this as the exchange rate rose the best part of 1 per cent on his announcement yesterday, rather undercutting any exchange rate buffering  of the economy that had been underway.

Oh, and then we had gung-ho political cheerleading for the government’s infrastructure spending plans.  He claimed to be “very excited” by it and rushing past any issues around “crowding out” was keen to talk up all the possibilities of “crowding in” accompanying new private sector investment etc.  No evidence, no analysis, but it probably went down well with the Labour Party.  Sadly, the Governor seems to do campaigning and cheerleading better than he does monetary policy, and there seems to be no serious and substantial figure on his team to compensate for those weaknesses (while, as far we can tell, the invisible unheard external MPC members just function as ciphers and political cover).

As an illustration of what the Bank simply seemed to be missing –  or choosing to ignore – a reader left this comment here last night

The shock from nCoV isn’t just confined to China. It’s spilling rapidly across the Asia-Pacific region…

I have just spent the past few days in Singapore and I write this on a flight to Hong Kong, which is maybe 15% occupied. Singapore is shutting down, which is worrying given its entrepôt status. Malls are emptying, as are hotels and restaurants. Traffic is thin. Companies are rolling out their business continuity plans which will further exacerbate the dislocation. This isn’t about just China, it’s region-wide.

The same reader sent me directly a photo of one of Changi airport’s main terminals at lunchtime yesterday, with this note “Changi T-3 unloading zone. Today, 12 noon. Not a soul in sight.. no cars no people..”

I noted yesterday that more or more people would be cancelling trips, business or leisure, in the face of some mix of risk aversion and sheer uncertainty.  That happened to me yesterday –  less about immediate threat than about the extreme uncertainty about the environment a few weeks hence.

And this morning we hear a local public health expert calling for our sluggish government to expand travel restrictions to people coming from various other countries (including Singapore and Hong Kong) where there is now established community outbreak. Or news of major international events in Hong Kong being cancelled. Or a major world telecoms convention in Barcelona being cancelled.

I’m not suggesting the Reserve Bank should have tried to turn itself into disease experts or even to pin their colours to a different central scenario.  But they simply don’t seem alert to the magnitude of what is already going on, including that huge rise in uncertainty, and they provided us with very little useful analysis about the way they think about monetary policy, demand shocks, risks, instrument stability etc –  nothing to give us any confidence in their stewardship.

Oh, and you’ll recall I mentioned yesterday their interesting –  and potentially positive – experiment in transparency, inviting real-time questions to the Governor during the press conference via Twitter.  As I’d noted in advance, one might well be sceptical about just which questions they would choose to answer.  Actuals were even worse than my expectations.  The Bank’s comms guy had clearly been primed not to expose the Governor to any searching questions, and only two were let through at all, essentially translated into patsy questions, allowing the Governor to wax eloquent on a couple of favoured themes.   No one forced them to adopt this particular approach to being more open.  But if they want kudos for it, they need to be seriously willing to allow real and searching questions to the Governor.