Portrait of a strongman

October 7, 2019October 7, 2019 Michael Reddell Adrian Orr, bank capital requirements, Uncategorized

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“I’m worried about what he’s doing.”

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

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

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

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

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

Another quote from the article

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

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

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

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

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

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

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

A rather well-paid Governor

September 30, 2019 Michael Reddell Adrian Orr

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

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

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

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

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

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

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

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

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

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

A strikingly poor speech from the Governor

September 27, 2019 Michael Reddell Adrian Orr, bank capital requirements, Monetary policy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Just as preposterous was this claim from the Governor

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

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

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

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

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

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

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

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

pc GDP growth.png

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

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

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

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

But what do firms know?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A good time to invest?

August 13, 2019 Michael Reddell Adrian Orr, New Zealand economic performance

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

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

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

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

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

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

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

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

bus investment RB

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

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

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

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

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

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

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

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

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

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

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

As obstructive as ever

June 11, 2019June 11, 2019 Michael Reddell Adrian Orr, OIA

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

The RBNZ is now more open and transparent.

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

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

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

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

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

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

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

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

On 11 May, I lodged the following request

nzi oia

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

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

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

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

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

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

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

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

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

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

An embattled Orr

June 7, 2019June 8, 2019 Michael Reddell Adrian Orr, bank capital requirements, Financial stabilty

Still catching up, but noticing some concerning newspaper stories about how the Governor was handling things, yesterday I finally got round to reading the Reserve Bank’s Financial Stability Report and watching the Governor’s press conference.

Of the former, probably the less said the better. It is a disappointingly lightweight effort, clearly designed to sound a bit more worried about New Zealand financial system risks – to support (belatedly) the Governor’s capital proposals – even while offering no evidence to suggest that such risks were (a) significant, or (b) worsening. There were statements of the blindingly obvious – “some” households and farms are overindebted, as if that has not always been the case – and alarmist conclusions (about the threat banks could face if lots of borrowers default) made without any reference to the Bank’s own repeated stress tests.

And then there was the press conference. I’ve seen some pretty poor performances from Governors over the years – early ones by Alan Bollard were often awkward, and as Graeme Wheeler became more embattled the defensive introvert, never comfortable with the media, took over. But this one was the worst I’ve seen, and from someone who has many talents in communications. But just not, so it is confirmed again, in coping with challenge, disagreement, or finding himself on the back foot. I doubt a senior politician would have got away with it, and it isn’t obvious why an unelected bureaucrat, uncomfortable at facing serious scrutiny, should do so.

The Governor and Deputy Governor faced several questions about the possible impact of the Bank’s capital proposals on farm lending – various commentators have suggested such borrowers will be among the hardest hit. The Bank attempted to push back claiming that any sectoral impacts were nothing to do with them, and all about banks’ own choices. But they seemed blind to the fact that banks will have more ability to pass on the additional costs of the higher capital requirements to some sectors, some borrowers, than others. And that is because of a point the Bank never addresses: their capital requirements don’t apply to all lenders.

They don’t apply to banks operating here that aren’t locally incorporated, they don’t apply to banks operating abroad in respect of loans to New Zealand entities, they don’t apply to local non-bank institutional lenders (deposit-takers, who have their own capital regime, or others), and they don’t apply to bond markets. So some borrowers (think large corporates in particular) have a variety of alternative options and others don’t. Almost inevitably the costs of the Bank’s capital proposals would bear most heavily on those with the fewest options, and farm borrowers are foremost among that group (there isn’t a big appetite from new entrants to build farm loan books, and farm lending is information-intensive and quite property-specific). The Reserve Bank’s failure to openly and honestly address these sorts of issues – none of them have been touched on in any of the consultative documents – reflects poorly on them. Whether it is because they simply never recognised the issue, or are trying to play blame games and shift responsibility etc, isn’t clear, but since the issues have been raised here (and elsewhere) for months, there is an increasingly likelihood that they know exactly what they are doing, not playing straight with the New Zealand public.

The Governor came across as embattled from start to finish – embattled at best, at times prickly, rude, and behaving in a manner quite inappropriate for a senior unelected public official exercising a great deal of discretionary power, with few formal checks and balances. BusinessDesk’s Jenny Ruth – who often asks particularly pointed questions about the exercise of the Bank’s regulatory powers, and the lack of transparency around its use of those powers – was the particular target of his ire, and at one point he tried to refuse to take further questions from her.

It isn’t always clear that the Governor hears the way he sounds: he goes out of his way to state that it is a genuine and open consultation, only to then conclude “but we are going to have more and better capital” – in other words, no true consultation at all, as he has already made up his mind on the big picture. Asked by another journalist what had changed in recent years that made further big increases in capital requirements warranted now, he fell back on spin – no substantive answer, but “not enough has changed since 2008”, which isn’t a serious answer at all, especially in view of (a) the resilience of Australasian bank loan books in 2008/09, (b) repeated stress tests since, and (c) that aggregagate debt to income ratios are little different now than they were 10 years ago. At one point, he actively misrepresented a prominent submitter’s submission.

Not all the awkward questioning was about the new capital proposals. Some was about the recently-discovered failure of ANZ to use approved models in calculating capital requirements for operational risk, in the course of which it was revealed – belatedly – that the Reserve Bank had told banks (but not the public) that it is no longer approving any changes they would like to make to their internal models. Under pressure – this is after all the Reserve Bank’s day job – the Governor moaned that the Bank hadn’t been adequately funded and that they had to prioritise. It was a shame no one asked about why the $1 million on the Governor’s Maori strategy, his tree god spin, and the endless talk about climate change – at best peripheral to the Bank’s responsibilities – is being prioritised over proper adminstration of the bank capital regime. Someone still should (after all, recently they had the money to send two staff to Paris for a climate change shindig).

The press conference deterioriated further as it got towards the end. Without specific further prompting, the Governor noted a certain frostiness in the room, and then launched off again in his own defence. The Bank was very transparent – he asserted, even though it took months to get the full capital proposal documentation out, and we still have no cost-benefit analysis – and it was very open-minded (except that, as he told us, he was closed minded on the needed for more and better capital). He went on to note that he needed to rely on facts, and he would welcome decent questionings but (and I paraphrase) “I will be short with people when I see continuous mis-statements from journalists and others with vested interests”, all while – he told us – he was trying to serve the interests of the people of New Zealand.

It should become a case-study for official agencies in how not to do things.

But it appears that Orr wasn’t finished, and didn’t go back to his office, reflect that that hadn’t gone well, listen to some sage counsel from his senior managers or Board, and re-engage in that sunny upbeat way the Governor at his best can manage much better than most.

A couple of articles in the Herald in recent days tells us some more of the story. The first was from Liam Dann, who has in the past provided a trusty outlet for the views of successive Governors, and the second was a column from Pattrick Smellie, under the heading “Bunker mentality returns to the RBNZ?”, evoking unwelcome memories of the Wheeler governorship.

Dann’s article draws from a media lunch at which Orr had apparently been speaking. There was, it appears, no hint of emollience, no suggestion of welcoming all the thoughtful work and analysis that had gone into the many submissions the Bank had received. That is what a normal person would do and say (whatever they felt privately). But not Orr. He’s all in. People either don’t understand, or they choose not to understand because – on the Governor’s telling – they are all self-interested, part of the financial sector, while he – and he alone it appears – is looking out for the future of New Zealand. If you think I’m caricaturing, read the article for yourself (I’m reluctant to excerpt extensively something behind a paywall). But here are two extracts.

Orr said he had expected the strong critical response from the banks because he was aware of “the capability and resource” within the industry to lobby for the status quo.

“It is a very, very powerful industry.”

But he said he had been surprised by the personal attacks and “the underlying venom” that had come from the broader financial sector – including bloggers, think tanks and some sections of the media.

The noble Governor – alone equipped to assess the public interest – as the Three Hundred at Thermopylae facing down the amassed hordes of bankers (and “bloggers, think tanks and some sections of the media”).

Not only is there nothing about the substance of the arguments and evidence submitters and commenters have made (at length over many months) but note the attempt to imply that anyone criticising his proposals (and the very weak process around them) was part of the “financial sector”. No doubt my views don’t count for much, but I’ve articulated numerous questions and criticisms here (and in my submission), and have never once taken a cent from the “financial sector”. My former colleague Ian Harrison has extensively critiqued the Bank’s proposals and supporting documents, and I know for a fact it was entirely a labour of love (well, voluntary and unremunerated anyway). And even if affected industries have made submissions – shouldn’t we want them to? – the onus should still be on the Governor and his staff to address issues and criticisms in a constructive way, not to engage in some sort of Trumpy politics of slur (no need to engage, because you are – great evil – banks). It actually got worse at FEC (at least according to the Smellie column): questioned about why his “independent experts” (appointed belatedly) were all from abroad, he couldn’t stick to a moderate line that (say) most New Zealand residents who knew much about the issue had already weighed in in one form or another, but had to resort to the (frankly slanderous) suggestions that any New Zealand experts “had already been ‘bought’ by the trading banks”.

In the Dann article there was further illustration of how the Governor plays politics and spin, rather than engaging on substance. We get this

Orr described the notion that the major banks “sailed through the GFC” as a popular myth that had taken hold with the general public.

In fact sailing through had involved a $133 billion overnight guarantee, an $8b direct asset purchase by the Reserve Bank to provide liquidity, a $10b wholesale underwrite and a drop of the OCR by 5.75 per cent.

I know Orr was not in the core public sector at the time (he was trading the markets at NZSF), but this is a highly misleading attempt to play distraction. First, as the Governor very well knows, the big banks did not want to participate in the retail deposit guarantee scheme (the Minister of Finance compelled them to, as a condition of the limited wholesale guarantees). Second, as the Governor equally well knows, every wholesale funding market in the world dried up for a time (and for reasons – as all the contemporary documentation makes clear – that had nothing to do with the specifics of Australasian banks). Third, it is a core role of the Reserve Bank to provide liquidity support when demand for liquidity rises. Fourth, as regards banks, all those operations were profitable for the Crown. Fifth, the scale of the OCR adjustment is totally irrelevant to questions of bank soundness or otherwise – there was a severe recession, partly domestic, partly foreign – and adjusting the OCR as it did was just the Reserve Bank doing its day job (a little slowly as it happens). And finally – and really the only point of relevance to the capital debate – bank losses (and NPLs) remained impressively moderate through that nasty recession and slow recovery. Capital was never impaired.

On my reading, even Pattrick Smellie’s column is too willing to defend Orr’s conduct – last week, and more generally. He sticks up for his use of the Bank to pursue climate change agendas that have no grounding in statute (translations of the Bank’s self-chosen Maori name signify precisely nothing), of the tree god nonsense and the costly Maori strategy (even defending Orr’s claim that criticism of him on this is somehow “racist”). And he buys into the Orr propaganda line that the Bank is “now more open and transparent” (it just isn’t so – the capital review is only the latest example, but nothing material has changed about monetary policy, we’ve had no serious speeeches from the Governor on his core responsibilities, and they play OIA games just as much as ever), but this really should worry the Board (albeit they are usually in the Governor’s pocket), The Treasury (other distractions I suppose), and the Minister of Finance.

Ebullient, rambunctious, prone to Shane Jones-ian turns of phrase, Orr is the antithesis of his prickly predecessor, Graeme Wheeler. The RBNZ is now more open and transparent.

However, Orr and members of his senior team are starting to exhibit some of the same bunker mentality as beset Wheeler,

Orr very much needs to be pulled into line, for his own sake and that of the country (as single decisionmaker he still wields huge untrammelled power). At present, he is displaying none of the qualities that we should expect to find in powerful unelected official – nothing calm, nothing judicious, nothing open and engaging, just embattled, defensive, aggressive, playing the man rather than the ball, all around troubles of his own making (poor process around radical proposals made without any robust shared analysis, all while he is prosecutor, judge, and jury in his own case).

It is a sad week for New Zealand when the heads of our two main economic agencies – The Treasury and the Reserve Bank – are so much, and so deservedly, under intense scrutiny, and when we have no idea who will even be Secretary to the Treasury – lead economic adviser to the government – three weeks from now.

Central bankers not giving speeches

May 11, 2019May 11, 2019 Michael Reddell Adrian Orr, Monetary policy

I’ve been among those who’ve drawn attention, disapprovingly, to the fact that the Governor of the Reserve Bank, now in office for more than a year, has made no on-the-record speeches about either of his main areas of policy responsibility: monetary policy and financial stability/regulation. The enabling legislation meant that until very recently he was the sole decisionmaker in both areas, and in both areas there have been significant new initiatives in the last year – a new objective, and new governance structure, for monetary policy, and far-reaching contentious proposals around bank capital.

The Governor has recently become merely primus inter pares on most aspects of monetary policy, joined by six others to form the new Monetary Policy Committee. The first OCR decision of that new committee was released on Wednesday.

On Thursday morning, the Governor appeared at Parliament’s Finance and Expenditure Committee for his regular post-MPS questioning. I was going to use the word “grilling” there, but the questioning is often pretty soft, and used to seem more attuned to soundbites for the evening news bulletins than to serious scrutiny and accountability. But this week, apparently, the Governor was asked about the criticism that he had not been delivering substantive speeches. His response apparently was to “dismiss the criticism” on the grounds that the Bank publishes Monetary Policy Statements, OCR reviews, and some descriptive material on the new governance structure.

But here’s the thing. Other countries’ central banks also publish official interest rate announcements, and the equivalents of Monetary Policy Statements (and these days, those documents are typically more in-depth and insightful than New Zealand Monetary Policy Statements).

But since the Governor took office in March 2017 there has been not a single substantive public speech from the Governor on monetary policy. There was one conference paper written by the now-departed chief economist, which must have been commissioned and substantially written before Orr took office. That was more than a year ago.

In Australia this calendar year alone the Governor has given two public speeches on economic matters firmly within the monetary policy remit of the Reserve Bank of Australia. And other senior managers have given another four such speeches.

In Canada, the Governor and senior managers have given eight to ten such speeches (depending how on classifies particular speeches).

In the UK, there appear to have been about six such speeches this year – again, on things pretty closely related to monetary policy and the state of the economy.

And in the US, just at the Board of Governors (there were numerous other speeches by regional Fed people), I counted 10 such on-the-record speeches this year.

I deliberately mention speeches both by the Governor (or US equivalent) and by senior staff or committee members, because apparently Orr went on to ask, presumably rhetorically, if all public communications needed to come from the Governor, noting that in the past there had been criticism (when?) of a Governor having too high a profile (recall that Graeme Wheeler avoided all substantive searching interviews for five years). Indeed, it doesn’t, but (a) we’ve had no speeches from any of them for more than a year now, and (b) until a few weeks ago the Governor was solely and personally accountable for monetary policy, and is still formally (ministerial determination) the spokesman for the MPC.

Playing distraction, Orr apparently went to suggest that a lot of discussion focuses on issues around things like climate change and social inclusion, asserting that the same people who criticise him for not doing speeches would criticise him for talking about such issues, and that he just couldn’t seem to win.

Of course, he knows very well that there are two quite separate lines of criticism. Many (including me) think it is inappropriate and unwise for the Governor to be talking about such topics which go well beyond his remit (as it would be, say, for the Chief Justice to be giving speeches on economic policy). But even if you were to grant that it was appropriate for the Governor to be discussing such peripheral (to the Bank) issues, you would then surely think it should be all the more reasonable to expect the Governor – and other MPC members – to be giving serious, on-the-record, speeches about the state of the economy, monetary policy and so on (not to mention financial regulation, but this post – and the FEC appearance – were about monetary policy). Things they are actually responsible for, and where they wield a great deal of power, subject to no appeal or review. It should be all the more reasonable to expect that at a time when (a) a new regime is being put in place, and (b) when the Bank has had to materially alter its policy view.

And when all their peers in other similar countries seem to give serious speeches as a matter of course. It isn’t clear why our Reserve Bank has stopped doing so.

Another of the Governor’s whims

April 30, 2019April 30, 2019 Michael Reddell Adrian Orr, Reserve Bank

I was chatting to someone yesterday about what was behind the undisciplined, highly political, way in which Reserve Bank Governor Adrian Orr has taken to the job. My interlocutor reckoned Orr might have his eye on a high place on Labour’s 2023 list (“doing a Brash”). I was a bit sceptical – he’d be about 60 and Jacinda Ardern about 43 – but then I guess this is the era where a youngish (only 72) Trump could be facing off against either Bernie Sanders (77) or Joe Biden (76). I still doubt Orr has a conscious personal party political goal in mind – and if he did, it would be highly inappropriate for him to be serving as Governor – and suspect it is mostly about revelling in being a big fish in a small pond, the opportunity to strut his personal ideological commitments using a statutorily provided (and funded) bully-pulpit to do so. By comparison, the basics of the day job must seem rather technocratic and dull – hence, no doubt, why we’ve had no public speeches about either monetary policy or financial regulation. Anyone seen any sign of developed Reserve Bank senior management thinking about, for example, handling the next serious recession – starting from an OCR of 1.75 per cent or less? Thought not. Or, for that matter, robust and honest articulations of the case for much-increased minimum bank capital ratios.

Instead we hear him on all sorts of stuff that is no part of the responsibility of the Reserve Bank. There is infrastructure, thinking long-term (in the Governor’s view he apparently does, but we don’t, think long-term enough), and lots and lots on climate change, all entirely predictably left-wing (not even interestingly left wing) in nature. Oh, and of course there is the tree god nonsense. There are only so many hours in the day, so time spent on this stuff – and time spent getting his staff to do it – is time not spent on core business. And this from an institution that claims to be underfunded.

Early last month, I wrote a post, Other People’s Money, prompted by a newspaper advertisement from the Bank for a “Cultural Capability Adviser Maori”. I noted then

So what is he up to with his “Te Ao Maori strategy…designed to build a bankwide understanding of the Maori economy”? Given his statutory responsibilities – and those in charge of public agencies are supposed to operate constrained by statute – what makes the so-called “Maori economy” any different than the “European New Zealander economy”, the “Asian economy”, the “British immigrant economy”, the “Pacific economy” and so on, for Reserve Bank purposes and policy?

The Bank’s claim is that this new understanding will “enable improved decision making…about monetary policy and financial soundness and efficiency”. Yeah right.

I lodged an Official Information Act request for material relating to the decision to create this position, including “any material covering the estimated costs and benefits of such a position”.

It took them a while – more than 20 working days – to respond but I eventually received 25 pages of material. There was, of course (this is the Reserve Bank after all), no cost-benefit analysis, and more remarkably there was no mention (explicit or implicit) of any opportunity cost of the resources devoted to the Governor’s latest whim. It is as if the Bank thought it had more or less unlimited resources and no clear need to prioritise – I guess that is what using other people’s money, in an institution with very weak external budgetary controls can come to.

The direct financial costs were outlined – almost a million dollars over three years, and a couple of hundred thousand a year thereafter (about as expensive as slushy machines for prison officers, and at least someone gets some benefit from those). A million here and a million there and pretty soon you are talking serious money.

And all this for an organisation that, of all those in the entire public sector, must have the least compelling need for a Maori strategy (for this cultural capability adviser is only one bit of the wider strategy). As a reminder, these are the key Reserve Bank functions

the Bank issues bank notes and coins. That involves purchasing them from overseas producers, and selling them to (repurchasing them from) the head offices of retail banks;
it sets monetary policy. There is one policy interest rate, one New Zealand dollar, affecting economic activity (in the short-term) and prices without distinction by race, religion, or culture. Making monetary policy happen, at a technical level, involves setting an interest rate on accounts banks hold with the Reserve Bank, and a rate at which the Reserve Bank will lend (secured) to much the same group. The target – the inflation target, conditioned on employment (a single target for all New Zealand) – is set for them by the Minister of Finance.
and it regulates/supervises banks, non-bank deposit-takers, and insurance companies, under various bits of legislation that don’t differentiate by race, religion or culture.

The Bank has chosen to put some decorative Maori motifs on the bank notes it issues, but that is about the limit of it.

Sure, there is a handful of other functions. They can intervene in the foreign exchange market (one dollar for all), and they operate a wholesale payments system (NZClear), but it doesn’t alter the picture. There is just no specific or distinctive European, Maori, Pacific, Chinese, Indian or whatever dimension to what the Bank does (or what Parliament charged it with doing). I looked up the list of institutions which are members of NZClear, and (unsurprisingly) there was not a single specifically Maori one (Swiss, German, Indian, American, British, Tongan, Fijian, Sri Lankan – those last three other central banks – and so on).

The Reserve Bank is essentially a “wholesale” institution. The actions the Bank takes affect all of us to some degree or other, and so they need to open and accountable in communicating what they are doing, but it just isn’t the sort of agency that has a direct client base (or clients with culturally specific issues relevant to its statutory responsibilities) where race, culture, ethnicity, or whatever is an important consideration. And so the million dollars – and all the uncosted staff time – is just money down the drain, advancing the Governor’s personal ideological and social whims, not the statutory responsibilities of the Bank.

There is a great deal of unsupported nonsense in the document. But it starts here

TAM 1

And here is one of the key sets of deliverables

TAM 2

Which is, itself, a grab-bag of unsupported stuff. “More assured forecasts” would, of course, be great, but from an institution whose inflation forecasts have been wrong (one-sided bias) for eight or nine years now, doing the core job more accurately seems rather more important. The documents never suggest how their better understanding of “the Maori economy” will improve the forecasts – as distinct perhaps from making the Governor feel better about them.

Notice too that reference to “the Maori economy”: not only is $50 billion rather less than one-sixth of GDP, but the $50 billion they are talking about is a collection of assets (a tiny portion of total assets of New Zealanders), and GDP is a collection of income flows. Since Maori are a significant chunk of the population, I’m sure they do make up quite a share of the economy, but most assets owned by Maori people aren’t included in that headline-grabbing number (any more than my house is in some “European New Zealander economy”).

There is a similar degree of vacuousness about the references to the financial system. It all the feel of someone making stuff up to backfill another of the Governor’s whims.

What of some other stuff. Among the responsibilities of the cultural capability adviser this was listed first

Lead development and implement an institutional language plan for the Reserve
Bank of New Zealand

You do rather get the sense, reading through the documents, that Reserve Bank staff will be under pressure to learn Maori whether they want to or not. Again, perhaps there might be merit in that if the Bank were a customer-facing body dealing with (say) troubled families in the Ureweras, but this is the (wholesale) central bank.

I don’t suppose anyone (perhaps other than the Governor, and probably not even him – he’s smarter than that) really believes the nonsense front line rhetoric about better policy. It all seems much more about these “deliverables”

TAM 3

In other words, how “woke” can we be?

It is all pretty incoherent. For a start, there is that reference to the ‘growing multicultural nature of New Zealand”, and yet this is an explicit Maori strategy, with no hint of comparable ones for Chinese cultures, Indian cultures, South African cultures, Filipino cultures, Samoan cultures…..let alone, Muslim, Christian or atheist cultures. Another $1m for each perhaps? I thought not (and nor should there be).

Perhaps all this stuff will go down well among some in the Labour Maori caucus, in the further reaches of the Green caucus, and among some of those the Governor will be distributing largesse among. Perhaps Guyon Espiner will be a bit softer next time he interviews the Governor. But I find it harder to believe that this sort of strategy is going to, in any way, enhance the Bank’s standing in middle New Zealand. And nor should it. As for staff, I suspect there will be a selection process at work (perhaps a bit like the Treasury) – capable people who care more about serious analysis and policy (actually doing the Bank’s statutory job) will select out (or not be hired) and the place will increasingly be filled with cheerleaders for the Governor’s political and social agendas.

I don’t usually like to scoff at overseas travel budgets – there is often real value in building connections and relationships – but I had to in this set of documents. $40000 for international travel for a Maori strategy, when Maori culture has no substantial home but New Zealand, seeemed, shall we say, not exactly an abstemious use of public money.

Here is a graphic for the Governor’s Maori strategy

TAM 4.png

The writing is a bit hard to read, but it is just full of earnest trendy, rather unsubstantiated, feel-good stuff. Unconscious bias holds back the Bank’s policy outputs we are told. It would be fascinating to see the evidence base for that, including (for example) why it was an issue around Maori dimensions of the economy/financial system and not, say, Chinese, Indian or Fililpino bits. Fortunately, monetary and banking policy operate indiscrimately (in the good sense of that terms) – there is, for example, precisely nothing the Bank can do that will affect long-term unemployment at all, let alone differentially affect that of Maori. It is all a political front, using your money. But – bottom right corner – no doubt the Governor and has staff will be self-actualising in a humanistic way.

(Oh, and recall that that island – pictured in the top right hand corner – isn’t even New Zealand, but Bora Bora – the Maori strategy moving the Bank towards French Polynesia!)

I could go on, but I’ll leave it to anyone interested to plough through the verbiage (“we will actively seek to operate within the virtuous circle of sustainable economic development”, or references to “Cultural Security” – did this get lost from an MCH document?) and the rather non-questions (“Do Maori use cash differently to other people groups?” – perhaps Catholics, atheists, Freemasons. Green Party supporters, or lefthanders do as well, but why would we want to spend scarce public money to find out?).

One of the points former Bank of England Deputy Governor Paul Tucker made in his book, Unelected Power, that I wrote about quite a bit last year, is that when central bankers start pursuing issues that range well beyond their narrow areas of specific responsibility, they run a real risk of undermining the willingness of the wider community to let them (fallible individuals, with limited accountability) exercise the discretionary power in their core responsibilities. Sometimes people will agree with the errant central bankers on individual issues – I often agreed with the substance of what Don Brash was saying when he strayed off-reservation, even as I thought he was very unwise to do so – but over time it leaves a growing proportion of the population uneasy about overmighty public officials using platforms and money provided by all of us to pursue personal whims, personal social and political agendas. If we can’t have a central bank that (a) sticks to its knitting, and (b) does that knitting excellently, we might as well just hand all the powers back to the politicians. We elected them and can kick them out again. We just have to put up with the Governor pursuing his whims at our expense, with very few effective constraints.

Critics of the Governor

April 18, 2019April 18, 2019 Michael Reddell Adrian Orr, bank capital requirements, Monetary policy, Uncategorized

There have been a couple of media stories this week that were less than flattering about the Governor of the Reserve Bank, Adrian Orr. I was going to say “new Governor”, but checking the calendar I see that in another month or so he will be a quarter of the way through his first term.

The first story was by Stuff’s Hamish Rutherford, and centred on the Governor’s plan to require banks to greatly increase the share of their assets funded by equity rather than debt. In the on-line version of the story, Orr is labelled “Mr Congeniality”. The story begins this way

Since Adrian Orr became Governor of the Reserve Bank of New Zealand he has built a reputation of being someone who likes to be liked.

Charming and jocular, but possibly sensitive to criticism.

But Orr is now in a battle with the bulk of New Zealand’s banking sector in a way which could see him demonised, probably with the focus on lending to farmers.

He knows it. Recent days have seen Orr on a campaign to explain itself.

I’m not sure he seems any different as Governor than he ever was before – his well-known strengths and weaknesses have continued to be on display.

I’ve written quite a lot here about the substance and process around the Bank’s capital proposals – starting with the apparent lack of consultation and coordination with APRA, through to the weaknesses of many of the arguments the Bank advances, the lack of apparent understanding of how financial crises come to occur, the grudging and gradual release of further supporting material, and (presumably partly as a result) two extensions to the deadline for submissions.

In the article Orr is quoted thus, in perhaps the understatement of the week

The consultation process, in Orr’s words “could have been tidier”.

Done properly there would have been extensive workshopping of the technical material over months before the Governor ever put his name to a specific proposal. As it is, we have a half-baked proposals, not benefiting from any prior scrutiny, and yet the same Governor who put the proposal forward is now judge and jury in his own case, with no effective rights of appeal for anyone. And there is big money involved – not just the additional capital that might need to be raised, but probable losses in economic output that will affect us all to a greater or lesser extent.

Presumably no one in the industry would go on record for Rutherford’s article. Not upsetting prickly Governors is an art the banks have sought to master (even when it involved pandering to an earlier Governor who wanted a senior bank economist censored), although presumably the banks’ submissions will be fairly forthright. (But will the public ever see those submissions?)

But some of the tone of the off-the-record concern is there in the article

Sources across several of the major banks are warning that if the bank pushes ahead with its plan it could act as a significant constraint on lending to farmers and small businesses, sectors which are as economically important as they are politically sensitive

Both sectors are considered risky and when capital requirements go up the impact will be magnified.

Why those sectors? Well, the “big end of town” (Fonterra, Air New Zealand or whoever) will have no difficulty raising debt either directly (bond market) or from banks that aren’t subject to the Reserve Bank’s capital requirements (which means every other bank in the world not operating here, as well as the parents of the locally-incorporated banks operating here). And the residential mortgage market is both pretty competitive (including from some local institutional players that are less badly hit by the Governor’s proposals than the big banks), and more open to the possibilities of securitisation (which would then avoid the capital requirements too). Idiosyncratic small and medium loans (including farm loans) aren’t, and farm loans in particular require a level of industry knowledge that newcomers won’t acquire easily (and offshore parents often won’t have).

Perhaps these effects will be large, perhaps they will be quite moderate in the end. But the point Rutherford didn’t make, but could have, is that none of this was analysed in the Bank’s consultative document. When a really major change is proposed we should surely expect a serious analysis of transitional paths (not just for the banks, but for customers and the economy) as well as the long run. But there was almost nothing, and nothing in any more depth has emerged in subsequent material that has seeped out.

It simply isn’t a good policy process, and that should concern both the Minister of Finance (and his advisers at The Treasury) and the Bank’s board. The Governor simply isn’t doing a good job on this front. If there is a compelling case for what he proposes, he hasn’t made it. And that is almost as bad – in a serious independent regulator – as not having a good case in the first place.

The second article was by the news agency Reuters. The focus in that article is Orr’s conduct of monetary policy, and particular his policy communications (which many had expected to be one of his strengths).

There are at least two strands to the article. There are criticisms of Orr for not yet having given a single substantive on-the-record speech on either of his main areas of policy responsibility (monetary policy and financial regulation). I’m among those quoted

Michael Reddell, an ex-RBNZ official who served with Orr on its monetary policy committee in the 1990s and 2000s, is critical of Orr for not giving a “substantive” speech on monetary policy in the past year.

“It would be unthinkable in Australia or the United States or even under previous governors here.”

I’ve been more and more surprised at the omission as time went on. And in respect of monetary policy it is not as if there has been much from his offsiders either. Sure, we get the rather formulaic paint-by-numbers Monetary Policy Statement every few months, but it simply isn’t the same as a thoughtful carefully-developed speech – which shows more of how the individual/institution is thinking, and the omission has been particularly significant given that we had a new Governor and a refined mandate.

Orr’s response to this criticism is reportedly that it is “thin”. Whatever that means, the fact remains that in other countries top central bankers talk, quite frequently, about their thinking in on-the-record speeches. I’ve suggested, speculatively, that perhaps he doesn’t do serious speeches on core areas of responsibility because he just isn’t that interested (saving his passion for infrastructure, climate change, diversity, and all manner of other stuff he has little or no responsibility for). I’d like to be wrong on that, but nothing in this article provides any countervailing evidence.

But the bigger criticism in the Reuters article appears to come from financial market participants, concerned that they aren’t able to read the Governor’s policy intentions well.

Many traders who spoke to Reuters in the past two weeks blame Orr for confusing the message, and some have even been critical of frequent references to legends of the indigenous Maori people in his speeches, saying they served little purpose for financial markets eager for more policy clues.
“I am extremely frustrated at the lack of communications for global market participants,” said Annette Beacher, Singapore-based macro-strategist for TD Securities.
“Since Adrian Orr has assumed the role, he’s managed to surprise the market every six weeks. We don’t hear anything from him in between policy decisions,” Beacher said, echoing similar complaints from others.
“So what do I recommend to my trading desk? I’m saying trade the data but we’re not quite sure what is going to happen at the next meeting. It’s not meant to be this way.”

Here, to be honest, I’m not sure quite what to make of the criticism (I mostly don’t hang out with international markets people). I’m sure there is a great deal of eye-rolling at the tree god nonsense that Orr continues to champion, but perhaps here the longstanding central banker in me comes out and I wonder if the offshore market people aren’t being a little precious. Markets should not need their hands held to anything like the extent some of the comments in the article suggest, and if there is a little noise in market prices as a result that isn’t necessarily a bad thing.

It seems that quite a few people the journalists talked to were grumpy about the move to an explicit easing bias at the last OCR review, I couldn’t help wondering how much of that was a disagreement with the Governor’s stance (market economists on average have been more hawkish than the Bank for years, and have been more wrong) and how much a sense that a forthcoming change hadn’t been signalled. I was bit (pleasantly) surprised myself by the move to an easing bias, but mostly because I thought the Governor wouldn’t want to launch a change of direction days before the new MPC took over. Perhaps that is one of the circumstances in which advance signalling might have been appropriate? And perhaps the two strands of concern come together here: we shouldn’t have the Governor or senior staff giving private previews to select contacts about their evolving thinking. So it has to be serious interviews or serious speeches – and, as Annette Beacher notes, we haven’t really had either.

The Bank has probably also suffered somewhat from being in transition. At the start of last year, they lost the ultimate safe pair of hands, longserving Deputy Governor Grant Spencer. A new top-team took over, and within a few months Orr was restructuring, which included demoting longserving chief economist John McDermott. He lingered for a few months before leaving entirely, but can’t have been entirely engaged. The head of financial markets was also ousted, and it was only in late March that the new recruits started to take office. As I’ve noted previously, on the monetary policy side of the Bank it is very much a case now of a Second XI at play (internals and externals) and there is now quite a challenge in getting communications onto a steady, sustainable, and functional path. The goal shouldn’t be keeping overseas economists happy, but it is perhaps telling that Reuters couldn’t find a domestic one willing to go on the record defending the Orr approach.

What of the Governor’s response to all this? I’ve already recorded his response to the concern about speeches. Here is some of the rest of what he told Reuters

In an interview with Reuters earlier on Tuesday, Orr said he wants to reach out to a wider audience than just currency traders, analysts and bloggers.

“The broad audience for this bank is the public of New Zealand. We are seen as a trusted institution but they don’t know what we do. So that is my communication challenge,” he said.

Orr also defended the Maori references in his speeches as part of the bank’s efforts to reach out to wider groups.

“Metaphors have their limits and metaphors can be over used. I get all that, but metaphors need to be introduced and created sometimes.”

I quite get that he wants to communicate to people beyond just the likes of Annette Beacher or me. But it is not much short of populism to pretend that the audience of people who do pay close attention to the Bank, and know something about it and other central banks (and can even think through the aptness or otherwise of his metaphors), don’t matter. He can try to appeal over the head of the relatively knowledgable all he likes, but I suspect he won’t find many listening. Most people have better – more interesting and important to them – things to do with their lives. As it happens, the Governor released a while ago a record of which audiences he delivered speeches to last year, and despite all the rhetoric – tree god and all – I was a bit surprised by how relatively few and conventional the audiences were. The only novelty seemed to be a lot of mention of the tree god – cue to eyes rolling from many of the audiences no doubt. How many more readers, I wonder, have the cartoon versions of the MPS and FSRs won? How many have tried twice?

There is a “retail communication” dimension to the Reserve Bank’s role – when you are driving interest rate up (or down) and affecting people’s employment prospects, business profitability etc, you have to explain yourself. Over 30 years of an independent Reserve Bank, successive Governors have done a great deal of it – Don Brash almost to the point of exhaustion, in his nationwide roadshows. But the core of the job is actually rather more “wholesale” in nature. And the Governor doesn’t seem to have been getting that right – at all re bank capital, and in some dimensions re monetary policy (I’m probably closer to his bottom line on the OCR than many other commentators). All this should be a concern for the Minister of Finance, and for the Bank’s Board.

There is still time for the Governor to right the ship – and perhaps the new MPC will end up helping – but the signs aren’t good. Only this morning, a press release emerged from the Bank championing the cause of climate change. Action may well be really important, but it just isn’t the core business – or really any business at all in a New Zealand context, with the sort of loan book New Zealand banks have – of the Reserve Bank. It is what we have an elected government for.

Sadly, we can expect to hear more from the Governor on climate change and his tree god (flawed) metaphor, and there is no sign of any contrition around the lack of serious communication from him on monetary policy or (where he is still sole decisionmaker) financial sector regulation.

The Governor’s talk

March 29, 2019March 29, 2019 Michael Reddell Adrian Orr, Reserve Bank

It was pleasant to walk along Wellington’s waterfront this morning to hear the Governor of the Reserve Bank speaking at a local function centre. Given the numbers who turned up – many of them Bank staff – they could probably have saved a few dollars by holding the event on their own premises, but, I guess, it is other people’s money.

As the Governor explicitly noted that he would “look forward to the blogs”, I should probably do my bit.

A week ago when this event was announced, I devoted a whole (short) post to the announcement of the event, including the indication that they would be filming the speech and making that footage available on the web. Doing so is a genuine step forward and I hope it becomes standard practice.

In that earlier post I noted

I have been critical of the Reserve Bank Governor for not yet having given an on-the-record speech about either of his main functions, monetary policy or financial regulation/supervision. Next week marks a year since he took up the job

Unfortunately a year has now passed and we still haven’t had a substantive on-the-record speech about either of his main functions – the sort of speech that would be standard, and quite expected, under any other Governor and in any other country.

Today’s speech was billed this way

Reserve Bank Governor Adrian Orr will talk about the future of New Zealand’s monetary policy framework …..The revised monetary policy framework comes into effect on 1 April 2019. It is an outcome of the recent Phase 1 review of the Reserve Bank Act. Adrian Orr will talk about changes to how monetary policy decisions are made in New Zealand, including greater transparency and accountability.

But there wasn’t very much about the new monetary policy framework (any aspect of it) at all. You can read the text for yourself (and on this occasion the speech delivered was recognisably similar to the published text, which is not always the case I gather).

The whole event started rather oddly, with a fairly lengthy greeting in Maori from someone whose name I didn’t catch but who had no apparent connection to the Reserve Bank. Only a small portion of whatever he said was translated, so I suspect very few attendees had any idea what he’d been saying. He did, however, take the opportunity to make a few digs in English about the Foreshore and Seabed Act – of infamous memory – including at a former Labour MP from that era who was apparently in the room. That seemed rather inappropriate in a Reserve Bank function. Not even the Governor has yet claimed Reserve Bank responsibility for the foreshore and seabed.

The Governor did, however, tell us that someone else in the room had just agreed to be a “kaumatua” to the Reserve Bank – a title apparently quite in vogue in trendy government agencies, but not having an obvious place in way Parliament set up the governance of the Reserve Bank. Isn’t all that stuff – leadership, nurturing talent, resolving disputes – among the functions of those tedious prosaic statutory roles such as Governor, Deputy Governor, and Board members? But there is, we are told, a forthcoming Bulletin article, “RBNZ’s Strategic Approach to Te Ao Maori”. That will be something to look forward to, no doubt involving more expensive and tortured efforts to explain why a macro-focused government agency, which deals with general public hardly at all, needs such a strategy and not (say) a Catholic one, a secular humanist one, a Pacific one, or an NZRFU one? For an organisation that claims to be underfunded, they certainly seem to take every opportunity to spend resources on stuff other than their core business.

The Governor keeps on doubling down with his tree god nonsense, urging us to think of the Bank as akin to Tane Mahuta, the mythological forest god. He delivered his speech flanked by two screens of this cartoonish graphic.

He claimed this myth – which has precisely nothing to do with central banking – “is” (not “was”) “central to the Maori belief system”. Those who bothered by such things might suggest it was “cultural appropriation” – although, ever deferential, he did stress that he asked permission to use the myth – but as I’ve noted in an earlier post

Pre-evangelisation, Maori had their own tree god, Tane Mahuta. As far as I can tell, not many believe any longer in this local tree god: when I looked up the 2013 Census data, there were lots of Maori recording no religion, and there were plenty of Catholics and Anglicans. But there wasn’t a category shown for tree gods, or any of the other deities (Wikipedia has a list of at least 35 of them).

As a recent commenter on another post noted

Imagine the reaction if the Bundesbank president started discussing policy in terms of Odin and Thor…. he’d get locked up…

And in addition to those references, we got the same warmed-over inaccurate nonsense the Governor has run repeatedly about the creation of the Reserve Bank ‘letting the sunshine in” on the New Zealand economy and financial system. I happen to agree that the creation of the Reserve Bank was, on balance, a good thing, but you’d not know from listening to the Governor that we’d had a stable financial system and a highly prosperous and productive economy without one.

What the speech really tended to show was a Governor with not much interest in the core business of the Bank (price stability, financial regulation, notes and coins, and a few ancillary bits and pieces). Each of those functions matter. It is important they are done well. When they are done well, most people should have little interest in the Reserve Bank.

But, so he told us, the Governor is bothered that when they went out to “the community” (no polling results or the like, but I’ll take his word for it), people said they had significant trust in the Bank, but didn’t really know what it did. But then they don’t really need to, any more than (say) I need know anything much about many of the dozens of government organisations you can find listed here (and I’m a geeky policy person, and still have no idea what, say, the Accreditation Council does). How much does the person in the street know about, say, the organisation of our judiciary, or the distinction between the New Zealand Defence Force and the Ministry of Defence. I’d struggle to even tell you what the Ministry of Housing and Urban Development does.

But it isn’t good enough for the Governor. So, on the one hand, we get cartoon versions of Monetary Policy Statements and Financial Stability Reports. And on the other, considerably more worryingly, we get attempts by an overtly left-wing Governor to tie himself and the institution he leads to a whole series of trendy left-wing causes. I’m sure he is not directly partisanly political, but his colours are firmly staked to an ideological mast, in ways that are potentially quite damaging. After all, if he wants citizens to have confidence in his organisation around its core functions, those who aren’t sympathetic to his overt left-wing agenda will be less inclined to trust him even on the core issues he has responsibility for. A new centre-right government at some point (ok, just kidding, but at least a new National one) might also be less inclined to trust him. And, in championing these causes, he creates unrealistic expectations about what central banks can actually do, and opens the Bank up to pressure in future to join in promoting some other government’s set of ideological causes.

As an example of what I mean, here is an extract from the speech.

In the world today, the dynamics of global and national economies are interacting to a greater extent and, at times, working at cross-purposes. Underlying these interactions are social and political movements driven by a desire for greater well-being, both for current and future generations.

More recently we have been confronted with the issue of climate change, and its complex and powerful economic and financial impact.

We have barely scratched the surface in understanding the intergenerational impacts of these developments.

This desire for well-being is regularly reflected in discontent along the lines of economic, gender, racial, and intergenerational inequities – to name just a few. Therefore, ensuring social inclusion as a way forward in capitalist societies is necessary.

The first of those paragraphs barely even makes sense. The rest do, but none of it has anything to do with central banks doing their jobs. If this text appeared in a speech from Grant Robertson or James Shaw it might be quite unexceptionable – it is the sort of stuff left-wing politicians say – but what is a (supposedly neutral non-partisan) Governor doing spouting off about his views as to how “capitalist societies” should move forward. Since it is what he is paid for, I’d rather hear him on the New Zealand cyclical economic situation, financial stability risks, positioning monetary policy for the next serious downturn or whatever. Intrinsically less interesting perhaps, but that is the job he and his institution are paid to do.

The Governor – particularly in his oral delivery – was claiming a much wider mandate for himself from the newly amended Reserve Bank Act. He is wrong to do so.

Even the badly-worded new Remit (replacement for the Policy Targets Agreement) makes that clear

remit

Whatever good monetary policy does – and it is only the monetary policy bits of the Act that are changed – it is “by” doing the same old stuff: leaning against cyclical fluctuations and maintaining medium-term price stability.

Here is the purpose statement from the amended Act

purpose RB

Yes, the current government’s waffly rhetoric about “wellbeing: and a “sustainable and productive economy” is enacted, but even this legislation is clear that – whatever else the rest of government does (or doesn’t) do, the Reserve Bank makes its contribution by doing (well) the same old basics: monetary policy, a focus on a sound and efficient financial system, and notes and coins.

Inclusion – gender, racial, religious, ideological, socioeconomic or whatever – just isn’t the Reserve Bank’s territory. Neither is climate change or other “social or political movements”. Some of those issues may be quite important. Most are very interesting. But if the Governor wants to pursue them perhaps he could create a blog in spare time (I wouldn’t recommend it), stand for Parliament, or put in a belated application to be the new Secretary to the Treasury. All that other stuff will either distract the Reserve Bank’s attention (and perhaps suggest it already has too many resources), and/or skew support for the Reserve Bank along ideological lines in ways that are quite unhelpful in the longer-term (the Governor talked often of “legitimacy” and that dubious left-wing concept “social licence”). The Governor talked of “our need to be a good global citizen”, but actually the New Zealand Parliament set up the Bank, and resourced it, to be a quite limited New Zealand government agency.

I could go on, but will bring this towards an end. Three final points:

The Governor did mention briefly his proposals to substantially increase bank capital requirements. Nothing much of the substance, but he claimed that the Bank is open-minded and urged people to get their submissions in. That is well and good, but it might be helpful to potential submitters – including those not from the banks, who the Governor claimed to be keen to hear from – if the Bank actually released the supporting material – for example, the Analytical Note on aspects of the economic impact that the Deputy Governor promised in his speech now more than a month ago, or the supporting information for ad hoc claims the Governor made on this issue at his MPS press conference more than six weeks ago. It is more than three months since the proposal was released, and process is looking increasingly shoddy, as if they hope to run out the clock rather than provide substantive evidence for their proposals. (Incidentally, in his delivered speech – but not in the published text – the Governor claimed that “we know” that significant bank failures cause significant damage for “all future generations”. Perhaps that is another claim he might like to substantiate. But it is probably just another one from off the top of his head.)

As I noted at the start, a former Labour MP was present. That former MP was Tim Barnett who now leads what looks like a worthy organisation called FinCap which is

a new entity driven by the public good, acting in the interests of New Zealanders seeking budgeting and financial capability advice.

Sounds worthy. The Governor seemed keen on it, and said that the Reserve Bank would be endorsing this organisation in public. Thus far, probably fine. What was much less acceptable was to hear the Governor of the Reserve Bank say that he would be “coercing banks” to support it. One hopes he wasn’t entirely serious, but when a regulator already wields a great deal of power on a wide range of fronts, they have to bend over backwards to avoid even suggesting any pressure (let alone ‘coercing’) on regulated entities to do things the regulator personally might like, but for which he or she has no statutory mandate.

Finally, the Governor ends the speech talking of how he and the Bank are going to “maximise their mandate”. I suspect he has in mind actually doing as much as possible to fulfil the mandate he has been given by Parliament, but it does sound awfully like a bureaucrat looking to expand – to the maximum- the role and scope of his bureau. That isn’t what we need. We need a pretty boring organisation getting on and doing the (important, but quite limited) basics well. At present, they are some very considerable margin away from the goal he articulates of being the “world’s best central bank” – and nothing in this speech, or the others the Governor has given (and his term is now one-fifth over already) suggests they are making any progress towards it. If anything – and as evidenced in this speech – they are drifting further away.

But they turned on a good sausage roll, it was a good chance to catch up with a few people I hadn’t seen for a while…..and it really was a nice morning for a walk.

Just a shame about the central bank that was on display.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Adrian Orr