Monetary policy, the Governor etc

In a post a couple of weeks ago I highlighted the extent to which monetary conditions appeared to have been tightening over the last few months, even as the OCR has been kept steady at 1.75 per cent.  Specifically, retail interest rates (lending and deposits) have increased, and the exchange rate has risen.  In addition, but less amenable to easy statistical representation, credit conditions have tightened, through some mix of Australian and New Zealand regulatory interventions and banks’ own reassessments of their willingness to lend.    Over this period there has been no acceleration in economic growth and inflation (whether goods or labour) hasn’t been increasing.  If anything, core measures of inflation –  already persistently below target –  have been falling away.

Yesterday the Reserve Bank released the results of the latest Survey of (business and economists’) Expectations.    The Reserve Bank has recently changed the survey, dropping a number of useful questions altogether, and missing the opportunity to plug some key gaps (eg there are no surveys in New Zealand of expected net migration).  They’ve also added some useful new questions, but for the time being are refusing to release the results of those questions –  including those around OCR expectations, house price expectations, and longer-term inflation expectations.

But one set of questions I was a little surprised that they left unchanged were those around monetary conditions.  I like the questions but it is a long time since I’ve seen anyone else write about the results.   Respondents are asked to indicate what their perception of current monetary conditions is (on a seven point scale, where four is neutral).  And then they are asked the same sort of question about expectations for the end of the following quarter and a year hence.

Broadly speaking, respondents tend to describe monetary conditions –  or at least changes in them –  as one might expect.   Here is the perception of current monetary conditions, dating back to the start of 1999 when the OCR was introduced.

mon condtions current

The peak in the series was right at the peak of the last OCR cycle, where the OCR was raised to 8.25 per cent.   Since then, although the Governor likes to describe monetary policy as extraordinarily accommodative, respondents have never thought that monetary conditions have been (or are) anywhere as easy as they were tight in 2007/08.  (When I completed the latest survey, I described current conditions as just a bit tighter than neutral.)

Note that latest observation.  Respondents reckon that monetary conditions have tightened.   The increase doesn’t look that large, and does come after a fall in the previous quarter.    But, the larger increases tend to occur either when the OCR is actually being raised, or when the Reserve Bank is talking hawkishly about the probable need for further OCR increases (thus, you can see the two big increases in 2014, when the Bank was in the midst of what it was talking of as 200 basis points of OCR increases).

But perhaps more interesting is that respondents also expect conditions to be quite a bit tighter by the end of the year, and again by the middle of next year –  and all that with no Reserve Bank encouragement at all.    And –  I would argue –  none from the underlying economic data either.

mon conditions ahead.png

The scale of the increase in the last few quarters is comparable in magnitude to the increase in 2013/14 when the Reserve Bank was talking up, and delivering, significant OCR increases.

Quite why respondents –  completing the survey in late July –  are expecting so much tighter is a bit of a puzzle.  But if it isn’t down to the Reserve Bank itself, or to the underlying economic/inflation data, perhaps it is reflecting trends respondents are observing –  the rising retail interest rates, high exchange rate and tightening credit conditions –  and that they are assuming that those things won’t reverse themselves, and may even intensify.

Personally, I think the case for somewhat easier monetary conditions is relatively clear at present: weak inflation, unemployment still above NAIRU, weak wage inflation, and a housing market that seems weaker than the toxic mix of land use restrictions and continued rapid population growth would warrant.  (To be clear, I’m not making a positive case for higher house prices inflation – though more housebuilding would be welcome –  just noting that the housing market is where, if overall conditions were about right (for the economy as a whole), we should be seeing continuing high inflation.)

Against that backdrop, I think it would be highly desirable for the Reserve Bank to make the point explicitly on Thursday that the economy has not needed, and does not now appear to need, tighter monetary conditions, and that some easing would be welcome and appropriate.    As I noted in the earlier post, I’m not sure it would really be appropriate for the Governor to cut the OCR –  given that (a) he hasn’t foreshadowed such a move, and (b) that this is his last OCR decision.    In a well-governed central bank –  such as almost every other advanced country has –  a change of Governor is less important: however influential the Governor’s views are, in the end he or she has only one vote in a largish committee.  All the other voters will still be there the next time an interest rate decision is made.

The problems here are compounded by the (a) the forthcoming election, so that no one knows what regime (what PTA) monetary policy will be being made under in future, (b) by the fact that we only have an acting Governor –  an illegal appointment at that – for the next six months, and people in acting roles are often loath to do anything they don’t strictly have to, and (c) by the lack of transparency in the Reserve Bank’s systems and processes.  When, say, Janet Yellen or Phil Lowe took up their roles as head of the respective central banks we knew a lot about how they thought about monetary policy.  Same goes for Mark Carney –  even though what we knew about him was from another country.    There is almost nothing on record as to how Grant Spencer these days thinks about monetary policy.  Even if he is to operate –  illegally –  under a (purported) PTA that is the same as at present, the PTA captures only a small amount of what is important to know: what matters as least as much is how the individual thinks about and reacts to incoming data.  With no speeches, no published minutes, no published record of the advice he has given the Governor on the OCR we know very little at all.

It is a model that badly needs fixing.  We simply shouldn’t be in a position where one person holds so much power, and hence their departure leaves such a vacuum (especially when, as will inevitably happen from time to time, such changes occur around election time).    We know that the Opposition parties are promising change –  roughly speaking in the right direction, although the details need a lot of work –  but what the National Party has in mind remains a mystery.   Treasury is refusing to release any of the versions of Iain Rennie’s report on central bank governance, claiming that the matter is under active consideration by the Minister of Finance.  That is a dodgy argument anyway –  since Rennie’s report to The Treasury is not the same as Treasury’s advice to the Minister (something I haven’t requested) –  but since they’ve had the final report for months now,  it shouldn’t be unreasonable to expect some steer from the Minister as to what his response might be.  As I’ve noted before, with the process of choosing a new Governor underway, at present neither candidates nor the Board have any real idea what a key aspect of the job might be.

The problems around “one man governance” aren’t restricted to monetary policy.   The Deputy Governor, Grant Spencer, gave a thoughtful speech the other day on “Banking Regulation: Where to from here?”.  But in a sense, the problem was in the title.  The Governor personally makes the policy decisions, and the Governor is leaving office next month.  Spencer will be minding the store –  illegally –  for a few months, and then retires early next year.  As we’ve seen in the past, the particular person who holds the role of Governor can make a big difference to the character and specific direction of regulatory policy –  LVR restrictions, for example, were (for good or ill) a legacy of Graeme Wheeler personally (and the earlier hands-off disclosure driven model, a legacy of Don Brash personally).  So in many respects it makes no more sense for Grant Spencer to be giving speeches on “where to from here” for bank regulation than it does for Steven Joyce to give such a speech on where to from here with tax policy.  In Joyce’s case, at least it is a campaign speech –  he hopes to still be in place next year, whereas Wheeler and Spencer will both be gone.  Neither they nor we know what their successors’ inclinations might be.

Again, that isn’t good enough.  We’ve personalised control of a major area of policy, when the general practice, here and abroad, is that when technocratic agencies exercise regulatory power they do so through boards that provide considerable continuity through time.  Individuals come and go, but they do so one at a time, and in a way that doesn’t dramatically change the balance of the board in the short-term.  That provides stability and predictability for both the institution itself, for those we are regulated (or indirectly but materially affected by regulation) and for those –  citizens –  with a stake in the agency.     We are well overdue for significant governance reforms to the Reserve Bank legislation.  And to say that is not to criticise the individuals –  Wheeler, or Spencer – who have to operate with the law as it stands it present, inadequate as it is.   The responsibility for the inadequate legislation  –  the iunadequacies of which have been brought into sharper relief in the last few years –  rests with ministers and with Parliament.

In closing, I do hope that when journalists get to question the Governor, and when later in the day FEC members get the same opportunity, they will not overlook the egregious and inexusable behaviour –  not sanctioned by any legislation –  by the Governor, his deputies, Geoff Bascand and Grant Spencer, and his assistant John McDermott –  in attempting to silence Stephen Toplis when they disagreed with some mix of the tone or content of his commentaries on them.     The intolerance of dissent, and the abuse of office, on display then aren’t things that can simply be let go silently by.   I’m as appalled as anyone by the lack of contrition Metiria Turei has displayed over her acknowledged past benefit fraud.  But bad as that is, abuse of high office by senior incumbents is, in many respects, a rather more serious threat.  Our elites seem to have become all too ready to do hardly even the bare minimum to call out, and expose, unacceptable behaviour by the powerful.  Here, we’ve seen no contrition, we’ve seen a Treasury advising the Minister to ignore the behavour, and a Minister of Finance –  legally responsible for the Governor –  happy to walk by on the other side, saying it is nothing to do with him.

(It was nonetheless interesting to read the BNZ’s preview pieces for this week’s MPS.  Perhaps they were just chastened by the data having not gone their way, or perhaps the heavy-handed pressure from the Governor really did work, because the tone (and spirit) of these latest commentaries is very different from what we saw –  and what so riled the Governor  –  in May.   Personally, I thought –  and think –  that the Governor’s May monetary policy stance was more appropriate than the BNZ’s, but that isn’t the point.  Our system is supposed to thrive on vigorous debate, and one isn’t supposed to lose the right to challenge the powerful just because in this case the Governor happens to regulate the organisation employing the critic.)

 

 

 

Leadership and accountability

I’d been going to write just a short post on the contrast, that I’ve been trying to make sense of over the past week, between the very public calls for the head of the Director-General of the Ministry of Health, and the near complete silence around the conduct of the Governor of the Reserve Bank.   Perhaps there are just more votes in health than in the Reserve Bank?

Chai Chuah seems to lead a not entirely well functioning ministry –  in time presumably the SSC PIF report will reveal more –  but he has little or no direct control over anything beyond his own agency.  And the latest calls for his head –  or at very least for severe reprimand –  appear to relate to errors in putting together the Budget.  The mistakes were made by people down the organisation, and while chief executives have to take responsibility for everything in their agency, it doesn’t look as though the direct mistakes were made by Chuah himself.   And even the mistake affected expected flows of money between various government agencies (the various DHBs), with little or no apparent consequences for the public.   But the Minister was openly embarrassed by the mistake.  And there has been plenty of public and media comment, and even comment from politicians –  so much so that the State Services Commissioner has (rather unconvincingly) sought to suggest public service chief executives shouldn’t be openly criticised by the Opposition.

Contrast that situation with Graeme Wheeler, Governor of the Reserve Bank.  He is an extremely powerful indepedent public servant, who makes policy himself and regulates financial institutions, with relatively few checks and balances.   Upset by comments on his policies by the BNZ’s economist, he engaged in a sustained campaign to “silence” (materially alter the tone and/or content of) a leading critic.  It wasn’t a matter of a single upset phone call, but a sustained campaign over weeks (at least) involving not just the Governor, but each of his three other most senior managers, a meeting with the BNZ chief executive, and finally (that we know of) a letter to the BNZ chief executive, urging that Stephen Toplis be censored.   The Governor, recall, is a key regulator of the BNZ’s business.

And what was the response?   Pretty muted to say the very least.  Lots of people were pretty appalled by the behaviour, but hardly anyone was willing to say so openly.  As Reuters put it in a story

To write such a letter was an unusual move for the head of an independent central bank in an advanced economy, particularly one that directly regulates banks.
The fact the letter did not cause more controversy indicated the central bank’s power, analysts said.

Whether it is really the central bank’s power that was the issue I’m not sure.  For some no doubt it was (some people directly associated with banks made that point to me).   But for many others, with no current involvement in banks, it must have been something else. Perhaps it was partly because Wheeler is leaving shortly anyway?  Perhaps an ingrained willingness to turn a blind eye to egregious conduct when it involves establishment institutions?  The sort of practical indifference that, in turn, enabled the Minister of Finance to get away with abdicating his responsibilities (for the Governor and the Bank) and breezily dismissing the issue as nothing whatever to do with him.   A silence that risks leaving the impression that such conduct –  active attempts by senior public officials to silence a prominent (and annoying) critic –  is acceptable is modern New Zealand.

Then again, look at the example set by our current head of government.

I’m not party political at all.  If any readers think they can work out who I’ll vote for they are doing better than me.  But I’m probably the sort of pro-market conservative that might in times past have been most naturally comfortable supporting National.  And I’ve always had some regard for Bill English.  He was Minister of Finance when I spent some time at The Treasury and if he wasn’t willing to be very ambitious about doing stuff, at least he seemed to recognise – and care about – many of the underlying issues.    And in this very secular age, there was also something reassuring about a conservative practising Catholic as Prime Minister.   He seemed to be a person of decency and integrity, the sort of person any Cabinet would be fortunate to have.

Which is probably why what has emerged this week is so profoundly troubling.

I don’t care greatly about Todd Barclay himself.  What bothers me is Bill English, long-serving Minister of Finance, now Prime Minister, about to seek election to a full term as Prime Minister in his own right.   They are roles in which we should be looking for leadership with integrity.  What is on display this week doesn’t look remotely like that  –  not much leadership, not much integrity.

I’m sure plenty of politicians in the past have had guilty secrets – things that were either never widely known, or never able to be reported.       Had they become known, perhaps some other political reputations would have been severely damaged.    But we are dealing with this specific episode, which has become public, and this specific election.  In the process, the standards of the man who seeks to keep leading our country seem to be laid bare pretty starkly.  Not, I hope, the standards he would sign up to in the abstract, but the way that, under pressure, he actually chose to operate.

From his comments this week it is clear that:

  • Bill English knew not just that a financial settlement had been made in the dispute that had arisen over the employment relationship between Todd Barclay and his former staffer, but that (a) part of the settlement had been funded from the National Party leaders’ fund (not a problem in itself). and (b) that the payment had been larger than usual because of the “privacy issues”
  • Bill English knew that Todd Barclay had taped some of (her end of) his employee’s phone calls (as he noted in his statement to the Police that Barclay had told him so)
  • Bill English knew there was a Police investigation into a complaint around the taping (approached by the Police, he made a statement to them),
  • Bill English knew that  –  as was public knowledge – that Todd Barclay had refused to cooperate with the Police investigation.
  • Bill English knew that when an OIA release was made on these matters, his statement to the Police (with the report of Barclay acknowledging the taping), was deliberately and consciously withheld.

If it didn’t initially occur to him, when Barclay first mentioned the matter, that taping someone else’s phone calls could be a criminal offence, the possibility must have been clear by the time he was making his statement to the Police a couple of months later.

Bill English wasn’t Prime Minister when all this was going on, but he was both Deputy Prime Minister and the former electorate MP for Clutha-Southland.  He knew all those involved in a way that, presumably, John Key didn’t.  And can anyone really doubt that, in a matter with these specifics, if Bill English had insisted to John Key on a higher standard being adopted, it would have been done?

What might a high standard of integrity have involved in this case?

I’d have thought it was as simple as this.

Once it became clear that there was a Police investigation into these matters, English (and Key) should have insisted that Barclay co-operate with the Police inquiry –  first made that insistence known privately, and then (if that failed) publicly.  There was no legal obligation on Barclay to cooperate with Police, but this is about politics and acceptable standards in public life.    Insisting on co-operation with Police isn’t an asssement of guilt, or innocence, just the sort of minimum acceptable standard we should expect in those holding high public office (in this case under the National Party banner) –  especially when you as leader or deputy know stuff (per the English statement) that, at least on the surface, looks questionable.

And if Barclay had refused?   Suspension from Caucus would presumably have been an option, followed by expulsion from Caucus if necessary.   Richard Prebble did that as leader of ACT when the Donna Awatere case arose.

English –  and Key and the National Party Board –  could also have made clear that if Barclay refused to cooperate that under no circumstances would he be a National Party candidate at the 2017 election.

And Mr English could have released his Police statement.

No doubt, well before any of this happened, Barclay would have quietly bowed to the inevitable and either resigned or cooperated with the Police investigation.    But he isn’t the issue here; the conduct of the National Party leadership (and that of Bill English in particular) is.

Might it have been uncomfortable for English and the National Party?  Quite possibly –  and over something that they had had no effective control initially.  But doing the right thing often is uncomfortable.   But it is also why we all drum into our kids that “you’d get in less trouble if you’d fronted up straight away”.    Dealt with effectively 15 months ago (a) this would largely be forgotten by now, and (b) as much of any memory would have been about the willingness of the Prime Minister and Deputy Prime Minister to act decisively to uphold standards.

Instead, none of this was done, and presumably the hope was that none of it would ever come out.  As late as Tuesday morning –  after the Newsroom story came out –  the Prime Minister was still trying to claim he didn’t know much about what had gone on.

It is pretty shameful conduct from the Prime Minister.  And pretty feeble leadership even now.  There is no sign of contrition.  There has been no apology.  Even now, Barclay is still not indicating that he will be cooperating with the Police, still not apologising.  And yet he still sits in the National caucus.    Meanwhile, media seem to find it impossible to get the President of the National Party to face the media on the issue –  even though if the Prime Minister told him otherwise he’d surely be available almost instantly.  (In fact, I heard one National Party MP on Morning Report this morning bemoaning how unfortunate it was that “internal party stuff” had become public.  It suggests they still don’t get it.  Police investigations into possible criminal conduct aren’t just “internal party stuff”. )

Where was the leadership with integrity last year?  Where is it today?

Perhaps the spin is right that the public don’t care.  Time will tell.  But I reckon we should expect, and demand, better from those who hold, or seek, high office.  In a sense, we are fortunate that so much detail emerged on this episode –  that, for example, the Police got Mr English’s text with the comment about taping.  The standards  apparent in the stuff we do see is our best predictor for how our leaders handle other difficult stuff.  On the evidence of how Bill English (and John Key) have handled this episode, from the beginning to today,  those standards look pretty deeply disquieting.

As readers will know, I have written here more than once about a tendency that has crept into this government as the years have gone, and the problems of underperformance have become more apparent, to just make stuff up.  Perhaps it is the pretence that the economy is doing wonderfully, better than most of our peers (when in fact productivity growth is non-existent, the tradables sector is in relative decline, and the unemployment rate still disconcertingly high etc), or the proposition that New Zealand came through the 2008/09 recession better than most, or the laughable (and worse) attempt to pass off extraordinarily high house prices as a “quality problem” or mark of success, it has become all too pervasive.    Frustrating as that sort of thing is, at least anyone who looks for themselves can see that it is largely made-up lines.

The lack of leadership, and attempts to keep things from the public, apparent over the Barclay affair seems to me an order of magnitude more serious.   But perhaps one sort of spin eventually corrodes in other areas the standards these people would surely once have set for themselves, and allows them to lose sight of just how unacceptable the continued failure of leadership now on display really is.  Flourishing free and open democracies need better than that.

 

Wheeler, the BNZ, and Joyce

A few days on and there has still been only scattered public comment on the systematic attempt by Graeme Wheeler and the senior management of the Reserve Bank to “silence” (materially alter the tone and content of what he writes) the BNZ’s Head of Research, Stephen Toplis, that came to light thanks to the Official Information Act and the efforts of BusinessDesk’s Paul McBeth.

(My previous post are here, here, and here.)

As I noted the other day, the letter in response to Wheeler written by the BNZ CEO Anthony Healy was quite strikingly deferential.  It wasn’t even as if Wheeler’s letter was the first Healy had heard of the issue.   In fact, Wheeler’s letter records that, having sent his Deputy and Assistant Governors out one by one to cajole Toplis, remonstrate with him, and induce repentance,

When this failed to address the situation I met with you and passed on examples of the material.

Presumably, the Governor hadn’t simply been told to go away, and get a thicker-skin, then either.

People are human, and sometimes over-react.  In the last few days I’ve remembered, and been reminded of, various past reactions by Reserve Bank Governors to criticism they didn’t like from bank economists.    In one case, a Governor took offence at criticism of his body language at a speech, and wrote to the economist’s boss to complain.  But in the decades since liberalisation I’ve never seen or heard of anything like the sort of sustained campaign to censor a leading economist that we get a glimpse of in these letters.

To what end?  Well, we don’t know what happened when the Governor and Mr Healy eventually talked again.   But in a story the other day Bloomberg reported that they did get an emailed response from Mr Healy.

In a separate emailed statement, Healy said “economists have an important role to play in providing opinions, and it’s important that they are independent and have a view which isn’t influenced by the wider organization.”

“However, we have acknowledged that from time to time, we may not get the right tone and will always take on board any feedback where our intent or message is not reflected in the language used,” he said.

So the CEO apparently has no concerns –  or at least none he is willing to be open about –  about the Reserve Bank Governor, and BNZ regulator, engaging in a sustained campaign aimed at changing what (and how) one of Mr Healy’s senior employee’s writes?

But, on the other hand, he does seem concerned to assure us that he has taken on board the Governor’s concerns, and will see to it that the product is different in future.  Perhaps they are just weasel words, but “take on board” seems rather more active than some bland observation that “we always welcome feedback”.    And I don’t think there is anyone –  whether or not they agree with what Stephen wrote –  who thinks that in the MPS preview that upset the Governor so much his “intent or message is not reflected in the language used”.   He said exactly what he thought, in a typically strident way.

So it begins to look as though Graeme Wheeler might have won (at least with the BNZ/Toplis) if not with a wider market.  In some ways, that would be even more disconcerting than the fact of the initial Wheeler-led campaign in the first place.   Time will tell, and I’m sure people will be watching Toplis’s future pieces with interest.

There was, for example, a new substantial piece out earlier this week, Capacity Constrained!  It is an interesting note, with some points to reflect on even if (like me) you aren’t that persuaded by his “hawkish” case.  But what I found striking, and a little disconcerting frankly, is that in five pages there is not a single mention of the Reserve Bank or monetary policy –  and yet, the research report is about aggregate capacity pressures and, hence, inflation risks.  The final sentence…..

But, that said, we strongly warn that businesses, householders, Government and investors alike need to better understand the capacity constraints that New Zealand currently faces and, in turn, recognise that whether or not expected inflationary pressures arise, growth is likely to moderate.

…..surely cries out to have “and the Reserve Bank” included in it?    Perhaps Toplis has just been told to lie low until the fuss passes, and then normal service can resume.  But even if that is “all” it is, it would be pretty disconcerting for Healy, his Board, and his parent, to have passed such a win to the Governor, him having exerted intense and illegitimate pressure to achieve it.

Then again, perhaps it was just an oversight, and Toplis really meant to include the Reserve Bank in his warning all along?   Perhaps.

There have been a few other comments in the last few days:

  • one prominent business person, evidently a BNZ customer, commmented here, and while carefully avoiding direct comment on the Reserve Bank, observed that “any material change of approach by Stephen or Anthony would be unfortunate for BNZ’s customers and in due course BNZ.”
  • on interest.co.nz, David Hargreaves has a very forceful and well-written piece, in which he calls for “a new Reserve Bank Governor who is thick-skinned and accepts that people will disagree with them” .    Mostly I strongly agree with Hargreaves – eg  “People in high office need to, in the colloquial vernacular, grow a pair, and accept that not everybody will agree with them. That’s what they are paid the big bucks for. ”     Having said that, he suggests that an “implied intellectual snobbery” at the Reserve Bank has got worse under Wheeler: for all his many faults, I don’t really agree with that comment (partly because I wince to remember some of the episodes I was involved in over the years in which at times we treated people who disagreed with us with absolute disdain….in public or in private….even if we didn’t try to censor them).

One line I really liked from Hargreaves was this

If you are going to take the drastic, actually, no…extraordinary… step of asking a bank that your organisation regulates to effectively censor the views of one of their (senior) employees you’ve got to be prepared for some consequences.

I’d certainly agree.  But it increasingly looks as though, in modern New Zealand, you don’t really need to be prepared for any consequences at all –  apart perhaps from a bit of criticism from the odd peripheral blogger.

Because the other person who has commented in the last couple of days is the Minister of Finance.  Again, interest.co.nz has the story.

Speaking to media Thursday, perhaps ironically at an event at the Reserve Bank museum, Joyce said he just was “not going to go into that,” He said doing so would be an “unproductive use of my time.”

“That’s a matter for the Reserve Bank Governor, as to how he conducts his communications with the banks and their economists,” Joyce said. He had not reached out to the Bank’s board on the matter.

Perhaps people were supposed to take it as something like “what are you asking me for, after all the Governor is his own man, and he has his own Board.  Really none of my business.”

Even if that were the legal position, it would be pretty disconcerting that the Minister of Finance would reveal himself, at least publicly, unbothered by such coercive conduct by a senior New Zealand public servant.   It would add to the sense that Alfred Ngaro was only slapped down because there was a political firestorm, not because the government was really uncomfortable with the sort of implied approach –  don’t criticise or else – Ngaro was enunciating.

But the legal position involves the Minister of Finance a lot more than he implied in answering those questions.  As I noted in my post the other day, the Reserve Bank Act is built on a difficult-to-maintain balance between, on the one hand, huge powers placed exclusively in the hands of the Governor, and on the other hand, a countervailing provisions that are supposed to provide a high level of accountability.  Some of that is in the form of serious scrutiny from outsiders (including banks and financial markets).  But the legal bits are about the relationship between the Board, the Minister and the Governor.

For a start, the Minister appoints the Governor (even though he can only appoint someone the Board nominates).  The Minister also appoints the Board –  gradually, as they serve staggered five year terms.    The Minister now writes annual letters of expectation to the Governor, and to the Board.  In writing directly to the Board he recognises that the main statutory role of the Board is as agent for the Minister –  and the public  –  in monitoring and evaluating the Governor’s performance.  The Board isn’t part of the Bank –  it is part of the review and assessment process, to strengthen accountability for the considerable power the Governor wields.

And not only does the Minister appoint the Governor but he can (via an Order in Council –  in other words with the consent of his Cabinet colleagues) dismiss the Governor on performance grounds.  In international central banking legislation, that is quite an unusual provision.  In most advanced countries, central bank governors can’t be dismissed for poor performance and certainly not just by the Minister of Finance. It will often take parliamentary action to remove a Governor, and even then only for defined really serious problems (imprisonment, mental or physical incapacity, corruption).  The whole point of our legislative model was that if the Governor alone was to have great power, there needed to be serious accountability.

And it is not even as if the Minister of Finance can simply hide behind the Board.  The Board certainly has clear responsibilities to monitor the Governor’s performance, and can if things get really bad recommend dismissal of the Governor.  Of course, they have a range of other possible sanctions, public and private, short of what is really a “nuclear option”.

But whereas the Minister can only appoint as Governor someone the Board recommends, he isn’t constrained that way when it comes to problems with, or concerns about, the Governor. He can recommend dismissal –  again the nuclear option, but there are other options –  without any recommendation from the Board.   Which pretty clearly suggests that he has statutory responsibilities himself for being satisfied that the Governor is doing his job, and doing it in an acceptable manner.    The Act is mostly concerned with the policy functions of the Bank, including the Policy Targets Agreement,  but the tests for the Minister include whether he is satisfied that “the Governor has not adequately discharged the responsibilities of office” or that “the Governor has been guilty of ….serious neglect of duty or misconduct”.

Using the power of your office to attempt to coerce a private institution, regulated by you, to censor one of its staff when writing critical evaluations of the Bank, and instructing your senior subordinates to actively involve themselves in such efforts, don’t look like the sort of standard –  the sort of discharge of the responsibilities of office –  that the Minister, or citizens, should reasonably expect, or tolerate.

I’m not suggesting that the Minister of Finance should fire the Governor.  But to simply pretend that the conduct of the Governor in this area is no concern of his, and not even to ask the Board for its views, looks like neglect of the Minister’s own responsibilities.  And it sends a dreadful message to citizens about the sorts of behaviour his government appears to be willing to, at very least, turn a blind eye to.

One of the obscure provisions of the Reserve Bank Act, that as far as I know no one has ever quite known what it means, is section 169.  It reads

169 Bank to exhibit sense of social responsibility

It shall be an objective of the Bank to exhibit a sense of social responsibility in exercising its powers under this Act.

That, too, is one of the Governor’s responsibilities in office (the Act makes him responsible for it all). It is hard to see how, in a free and democratic society, attempting to suppress a vocal critic, just because he happens to work for a body the Bank regulates, quite fits with that social responsibility.

As for the Bank’s Board, on the normal schedule they will have been meeting yesterday, upstairs just  a few floors above where Steven Joyce was washing his hands of the affair.  As I noted the other day, the Board members seem like decent and honourable people, and it should be a surprise if they were remotely comfortable with the Governor’s sustained attack on the BNZ and Toplis.    Then again, they have form, and mostly just seem to give cover to the Governor whatever he does (the OCR leak episode being a particularly clear example).  Perhaps some journalist should consider ringing the Board chair, Professor Neil Quigley, and asking him about the Board’s view of such behaviour.  Quite likely, he would simply refuse to comment, but that in itself would be telling.

UPDATE: There is new piece out from Oliver Hartwich, Executive Director of the New Zealand Initiative.  He notes

Central banks have a crucial role to fulfil in our economies. This role thus deserves public scrutiny and debate. Given the RBNZ’s independence, external commentary on its actions is the most effective check on its operations.

For these reasons, it is not acceptable for the governor of the RBNZ to attempt to stymie such scrutiny. With his complaints about a bank economist, the governor has overstepped his role.

The Wheeler letter

(I’ve had to spend much of the day at the Reserve Bank, in a meeting chaired by one of their Board members, attended by one Deputy Governor, and where the Governor himself just might turn up – he’s a member, but will no doubt find himself too busy on the day and send an alternate.  In the interests of that meeting –  which will be contentious enough anyway just on its own subject matter – this post is pre-scheduled to appear when I’ve got out of the building.)

On Monday, the Reserve Bank posted the full text of the Governor’s letter to BNZ CEO Anthony Healy, and of Healy’s initial reply to the Governor.  Valuable as Paul McBeth’s initial article in NBR was, it is always worth reading the full text of such documents if one can.    Some of this ground was already covered in my post on Saturday, but after a bit of comment on the letters themselves, I want to offer some other thoughts after a few days to reflect further on the issue, and the reaction to it.

First, the Governor’s letter.    What is clearer with the benefit of seeing the full letter is the extent to which it wasn’t anything like a one-off fit of pique on a bad day, but rather a culmination of a sustained campaign from the Governor and his senior management to put pressure on the BNZ to “silence” (materially alter what he was saying and how he was saying it) Stephen Toplis.  It is interesting that the letter was dated 11 May, the day of the release of the Monetary Policy Statement itself.  One might have supposed that the Governor would have had higher priorities that day, between a press conference, an FEC appearance and so on.

The first couple of paragraphs of his letter focus just on the specific Monetary Policy Statement preview that Stephen Toplis had written and published a few days earlier.

I am writing to you to draw your attention to the language used in the BNZ Markets Outlook of 8 May 2017, which appeared to bring into question the integrity of the Reserve Bank.  While I appreciate that you will not have reviewed the document in detail, I expect you would also be concerned at the nature of the language used.

As I noted in my earlier post, the Governor offers no evidence or examples to back his suggestion that the commentary concerned “questioned the integrity of the Reserve Bank”,    There was, in fact, nothing in the commentary that any reasonable reader could have read as impugning the Bank’s integrity.  Competence, diligence, or focus perhaps, but not integrity.  So the Governor was off to a poor start.   Perhaps he’d just got so worked up about Stephen Toplis over such a long period that he ending up seeing/reading stuff that just wasn’t there?

The document claims that the Bank would be negligent if it didn’t conform to the views of the BNZ economists.  Negligence is a serious accusation and implies that the Reserve Bank would not exercise reasonable care in the discharge of its responsibilities.  The document also makes other claims that the Reserve Bank would not implement monetary policy in the best interests of New Zealanders.  For example, we would not adjust our policy stance even if our analysis indicated that appropriate, if it in some way embarrassed the Reserve Bank.  To bring into question the Bank’s integrity while fundamentally misrepresenting how the Reserve Bank formulates policy is unacceptable.

To repeat, there is nothing in the document that any reasonable detached reader could take as impugning the integrity of the Bank.  There is also nothing to support the suggestion that BNZ claimed that the Reserve Bank “would not implement monetary policy in the best interests of New Zealanders” (although in fact the Bank’s statutory mandate is rather narrower than that anyway).    The commentary did suggest that the Bank would be reluctant to raise rates in May, whatever the data showed, because of how strongly they had previously adopted a fairly neutral bias.   Well, take it from me, having sat around monetary policy decision tables for decades, those conversations do actually happen in central banks.  Ask the Bank’s chief economist –  there are whole literatures on interest rate smoothing, consistent signals etc.  And, however much we sometimes like to pretend otherwise, no monetary policy decision is ever totally clear-cut, simply because no one knows the future.     What’s more, as I noted the other day, the Reserve Bank more or less did what BNZ said they needed to do –  they did show a track with (eventual) OCR increases in it.  So having made a conditional statement, that the Bank would be negligent – or remiss, or not adequately doing its job –  if an upward-sloping track wasn’t shown, they showed one.  So quite what was the Governor’s specific problem?

Perhaps Toplis could have chosen another word than “negligent”, but “negligent” is a synonym for various words for not doing a job well, and with due attention to responsibilities.  That is exactly what the Reserve Bank Act charges the Bank’s Board with assessing – it even makes brief reference to “neglect”.  The whole statutory accountability framework is built around quite personalised assessments of that sort.  If the Board can do such assessments why can’t the rest of us?

At this point, the Reserve Bank escalates the issue from a simple expression of concern to a not-very-veiled call for tighter control on Toplis, to suit the Governor’s preferences.

The Reserve Bank makes a considerable effort to explain its monetary policy processes, engage with market participants, and communicate clearly its monetary policy stance.  Given these efforts, I would have expected the BNZ economists to be more accurate and careful in their choice of words [is this a suggestion Toplis had been “negligent”?] I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by the Reserve Bank.

Quite why the Reserve Bank’s “efforts” should affect the evaluations of the Reserve Bank that the BNZ economists (or anyone else) make is a bit of a mystery.  Many people have criticised aspects of the Bank’s communications –  or policy –  over many years, rightly or wrongly.  They are free to do so.  They are also free to suggest that the Reserve Bank might not be doing its job adequately, if it did this, that or the other thing.  Only the other day, for example, I suggested that some of their regulatory interventions looked as though they might be ultra vires.

And then what is it with the suggestion of vetting and legal sign-off on market commentaries?  A preview for the Monetary Policy Statement, isn’t exactly a prospectus for a bond issue, or an official disclosure statement, with lawyers scrutinising every line to ensure statutory responsibilities are met.  It is an opinion piece, in a field where reasonable people’s views at times differ widely, and where the Reserve Bank has no privileged knowledge about what choices will prove to be right.

The next paragraph is mostly inoffensive.

I should stress that we respect the forecasts made by market analysts and play [sic] close attention to their views in our monetary policy processes.  We do not always expect to agree on outlook or policy responses, but instead seek that differences of view are reasoned and understood.

Well, fair enough I suppose, but anyone really is free to disagree with the Reserve Bank on any grounds they like.  It simply isn’t up to the Reserve Bank –  in a free society –  to decide what sort of disagreement is acceptable and what is not.      If the BNZ puts out consistently poor commentary –  in the eyes of its management and clients –  presumably there will, over time, be a diminution in the demand for that commentary.     There is a competitive market in opinion and analysis, including that on the Reserve Bank.

And then we learn that actually the pre-MPS commentary was just the last straw for the Governor.

You will recall that my fellow Governors each met separately with [withheld –  but presumably “Stephen Toplis”] to convey their concern at the personal nature of the criticism being expressed by the BNZ.  When this failed to address the situation I met with you and passed on examples of the material.  I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of the other banks.

So Grant Spencer –  head of financial stability and responsible for regulation of BNZ –  Geoff Bascand, and John McDermott each met with Toplis –  not together, but in a succession of separate meetings.  Not apparently to discuss or debate the substance of the BNZ commentaries or concerns –  many of which have, over time, been quite well justified in my view –  but to demand repentance and amendment of ways.    That is what the Governor says –  “when this failed to address the situation” , or “when the BNZ economists still refused to comment the way I wanted them to”.  And the Governor complains about a personalised tone, even though he holds a very powerful position in a system which, as he knows, puts all the Bank’s power in his hands personally.

It is all rather extraordinary –  perhaps redeemed only by the fact that the Governor actually put it in writing and thus (upsetting as it apparently is to him) eventually making it known to the public.    The BNZ’s approach has certainly been more forceful than that of most other banks,  but it simply isn’t for the Governor to tell a bank how it is allowed to review or criticise him.  Lese-majeste is an offence in Thailand, but (a) this is New Zealand, and (b) Wheeler isn’t king.   Probably no one would think it amiss if the Bank found Toplis’s tone so obnoxious that they refused to meet with him –  no one has a right to meetings with the Governor or Chief Economist –  but even then you need a thick skin in this game, and to recognise that over time scrutiny, even if not written in quite the tone you might like, has benefits (for society, and probably even for the institution).

Finally

I would like you to be aware of our serious concerns about the inappropriateness of the language used in the document and would ask that you bring it to the attention of those responsible for the editorial quality and any legal sign-off.

So twice in a single page letter, we have the heavy-handed call for censorship and references to lawyers.  It is an extraordinary demand for a public servant to make of a private business in a free society. Extraordinary, having lost all sense of perspective, and quite –  to use the Governor’s  own words –  “unacceptable” and “inappropriate”.  And the Governor works for us –  it is quite reasonable for us to hold him to account –  while the BNZ does not work for the Governor.

I’ve had various discussions with people in the last few days about quite what was going on here. I’ve had people suggesting that maybe Wheeler wasn’t really responsible, but instead it was the Bank’s Communications Department, or one of the other Governors.    Only they will know, but based on my knowledge of, and exposure to, each of those individuals that seems very unlikely.  The Comms Dept can get prickly and precious at times, but they’ll have been only too well aware of how this would backfire if it ever got out.     Graeme Wheeler is the one who has demonstrated a thin skin, a reluctance to expose himself to scrutiny, and a reluctance to engage with alternative perspectives.   I’m pretty sure this was largely Wheeler-driven –  perhaps he just got to the end of his tether as his troubled five year term finally draws to his end.  Sadly, it seems that his colleagues were too weak to either convince him that he was over-reacting, or to refuse to be an active part in his censorship efforts.  I don’t like to believe they’d have been encouraging him, but perhaps they were.

What of Healy’s response?   It is mostly a holding response, but wasn’t written until several days after the Governor’s letter was sent, so presumably his lawyers, his regulatory affairs people, his Board, and perhaps his head office in Melbourne will all have been trying to work out how best to respond.

In an ideal world, perhaps, Healy would have written back along the lines of

“Dear Governor, Thank you for your letter of 11 May.  The contents and style of our economic commentaries are matters for us to determine, not for you.  We encourage and welcome robust debate, and we would hope you do too.”

But he was writing back to the chief executive  –  and single decisionmaker – of his regulatory agency.   I should be clear that I do not read Wheeler’s letter as any sort of direct threat to BNZ itself –  comply and censor Toplis or we will withhold this or that specific regulatory approval.  Even the supine banks would probably have taken him on over anything that overt.  But the banks need Reserve Bank say-so on numerous things large and small each year (people, models, instruments etc), and they are pretty cautious about getting offside with the boss of the regulatory agency, lest other disagrements risk colouring the attitudes of the Governor when he makes regulatory decisions.

And so Healy wrote

I refer to your letter of 11 May 2017 expressing concerns about commentary in the BNZ Markets Outlook  of 8 May 2017.

I would like to acknowledge both the sentiment and concerns you have expressed in your letter and assure you that [withheld –  but presumably either “Stephen Toplis is” or “the economics team are”] treating this matter with the utmost seriousness.

We will be reviewing the contents of the BNZ Markets Outlook and the concerns expressed in your letter in detail.  Once that process is complete, I would appreciate the opportunity to have a call with you to discuss the outcomes of that review.

Please let me know if a call in the week of 29 May would be possible and I will ask my Regulatory Affairs team to arrange this.

Thank you for bringing your concerns to my attention and I look forward to hearing from you.

[UPDATE: A commenter points out that the RB doesn’t appear to have quite fully deleted the name, and what appears still be showing suggests it can’t be “Toplis”]

Pretty weak and deferential really –  and the man knows this is the regulator he is dealing with, not just someone who disagrees with the team’s commentary.  It isn’t his PA arranging the call, but his Regulatory Affairs team.

Healy, no doubt, finds himself in a difficult position.  I guess the proof of his good intentions is that Toplis is still employed, and not obviously using a different tone or analysis in his reports.  Then again, there hasn’t been another MPS since this episode.   It would be interesting to know what was said in that phone call later in May, but I suspect it would be futile for anyone to try to OIA that information.  Again, in an ideal world, BNZ would front up to the media on this attempt by the central bank to intimidate them and censor their commentary.  I  don’t suppose anyone will be holding their breath waiting for that.  But failure to front up implicitly accepts and condones this sort of conduct by the Governor, whatever they might be saying in private.

Of course, one mystery in all this is how the story got to the media.  Perhaps the BNZ themselves prompted Paul McBeth to lodge his OIA request.  If so, well done.  Presumably the Reserve Bank hierarchy didn’t want the news known, but I have heard stories that junior Reserve Bank staff were discussing the issue in Wellington bars.

In this episode, it is worth thinking briefly about the people involved.  In some respects, Stephen Toplis isn’t a person who will naturally command lots of sympathy –  highly paid economists of foreign banks, some might think, can simply fight their own battles.  And his style can be, and has been, somewhat abrasive, not just with the Reserve Bank.

And, on the other hand, Graeme Wheeler is three months from leaving office. For all the failings in his term of office –  and this is just another one –  why bother when he’ll soon be gone from public life?

It seems to me that the response on both counts is about precedents.  If powerful public officials attempt to shut down prominent economists, just think what they could do to other people.   And if Graeme Wheeler gets away with this attempt –  perhaps just having got the end of his tether –  what message does it send to other regulators, officials and politicians in our system?  Of course, others will try to keep their intimidation attempts quiet –  as no doubt Wheeler did – but if there is little downside when things do come out, they might as well just keep on exerting that improper pressure.   On this occasion it was about an almost unbelievably trivial thing –  use of the word “negligent” –  but on some occasions it will be more important things: the Muldoon attack on Len Bayliss was about serious and genuine differences of view about big picture economic policy.    Such behaviour just shouldn’t be acceptable in a free society, and the powerful need to know it.   And of course, the other reason to be concerned is that Geoff Bascand appears to have been fully involved in this, and he is widely expected to be a serious contender for Governor next year.

Very few people seem to have attempted to defend Wheeler’s behaviour –  at most a few have minimised it (“not a good look”).  But, given that fairly widespread apparent private disapproval,  what is quite disconcerting is the deafening public silence over Wheeler’s attempt to “silence” Toplis and the BNZ.    The BNZ itself hasn’t spoken out, and nor have any of the other banks or other bank economists.  I can understand how difficult it might be for some prominent individuals to take an open stand.  Then again, holding prominent positions carries with it responsibilities.  And if, say, all the banks spoke out together –  eg through the Bankers’ Association –  what could the Reserve Bank possibly do in response?

It is to the credit of Paul McBeth that he got the original OIA material and ran the story, but it was reported as straight news.   Where are other local media in deploring this attempt to limit open public debate and constrain critical review of a powerful institution?  So far, there seems to have been more interest abroad.  The story has been run on the Central Banking magazine’s website –  premier publication for central bankers, and one which has honoured the Reserve Bank in the past (central bank of the year in 2015).    I’ve spoken to one other foreign journalist who is quite stunned at the local silence (so far?) – not, it was put to me, what would have happened if an episode like this had happened in, say, the UK.

It isn’t a parliamentary sitting week, and Monday was Labour’s immigration policy day.  But not a word of protest or unease has been heard from representatives of any political party.  Of course, this isn’t a big vote-grabbing issue –  defending institutions such as freedom of speech, and the need for self-restraint by the powerful, rarely is.  Is this the worst offence in the world?  Perhaps not, but we preserve our institutions and conventions by taking a stand on even modest breaches; when people step over the mark, perhaps even without quite fully realising what they were doing.

And then of course there is the question of the Reserve Bank Board.  I know a few of the members, and they and the others look, on paper, to be people of decency who take their roles seriously.  It is difficult to believe that many of them can really be comfortable with the Governor’s attempts to intimidate the BNZ.  But if they aren’t, they have a responsibility to say so.  They don’t work for the Governor.  Their role isn’t to have the Governor’s back.  It is to act as agent for the Minister and the public, in ensuring that the Governor is doing his job, and not overstepping those marks.

Similarly, where is the Minister of Finance in all this?.  It would be a simple matter to let it be known that such behaviour is quite unacceptable in senior New Zealand public servants.  If he won’t make that clear, he leaves us wondering whether in fact the government thinks such behaviour is acceptable, or just “the way of the world” (memories of Alfred Ngaro).   That is the way the best elements of our free society are slowly but inexorably corroded.

As a final thought, I leave you with this quote

Financial markets, the business media, and other economic commentators all play a part in scrutinising and making sense of the Reserve Bank’s monetary policy choices. It is not difficult to make monetary policy choices that turn out to be wrong – indeed, in the nature of things, many will turn out to have been less than ideal. But the presence of the extensive market commentary, on every major piece of data and on OCR decisions themselves, means that if the Bank takes a position that even a significant minority of outsiders disagree with, the difference is likely to be highlighted. This not only allows for public debate and scrutiny, but also provides information that the Board themselves can (and does) use in questioning and evaluating the Governor.

It was the first thing that came up when I googled “monetary policy accountability and monitoring”.  As it happens, I wrote those words 10 year or so ago, but they are still sitting on the Reserve Bank’s website, as an official document in the “About monetary policy” section.  But after the Toplis affair, it is a little harder than it was to take it seriously as a representation of how the Reserve Bank thinks about the value of market commentary, alternative views, challenge and dissent.  If so, that would be a shame.

The Reserve Bank Act isn’t built around a philosophy of deference, but around a difficult- to-maintain balance between the huge amount of power given to the Governor, and a countervailing place for searching scrutiny –  by the Board, by the Minister, and by the public (including media and markets).    Whoever the new Governor is next year really needs to devote a lot of effort to rebuilding an open and engaging culture that welcomes, and relishes, debate and challenge.  At times, no doubt, it will be trying and frustrating, but that is how institutions in a democratic society are supposed to work.  Life for the powerful isn’t meant to be comfortable.

A BNZ economist and the powers that be

No, not Stephen Toplis.

This is a story about an earlier BNZ Chief Economist, Len Bayliss.   A commenter on my post on Graeme Wheeler’s attempt to silence Stephen Toplis reminded me of how Bayliss’s career at the BNZ ended, victim of intense pressure from the then Prime Minister and Minister of Finance, Robert Muldoon, and a pusillanimous Board and management of what was then a wholly government-owned bank.

Len Bayliss was one of New Zealand’s leading, and most prominent, economists from the 1960s to the 1980s, particularly as the BNZ’s chief economist for 15 years or so.   A few years ago I did an interview about his career with him for the newsletter of the New Zealand Association of Economists.   As he records it, that interview and some follow-up questions from me prompted him to put together a volume of documents and recollections  –  Recollections: Bank of New Zealand 1981-1992  – dealing with his ouster from the BNZ and his later term as a government-appointed director of the BNZ as it descended into crisis and near-failure in the late 1980s and early 1990s.   I’m fortunate enough to have a copy.

Bayliss and Muldoon had, at one time, worked very closely together, with Bayliss having served as a member of the Advisory Group in the Prime Minister’s Department when National returned to office at the end of 1975.  A lot of financial liberalisation went on over the following couple of years, and Bayliss appears (there are conflicting accounts, but I’ve found Bayliss’s persuasive) to have played a key role in that.

Decades on, in that interview I did with him, Bayliss could still record of Muldoon

Excellent. He was the best boss I’ve ever had. Absolutely decisive. I wrote his speech for the Mansion House dinner, the most important speech he’d made after becoming PM. I gave it to him. He said send it to Treasury and see if it’s all right with them. They wrote back wanting something changed and wrote a little memo and he just put ‘No’. And he always was very proper. He may have been tough to his political opponents but as Bernard Galvin used to say, certainly in the time I was there, it was a very happy group. He never tried to force you to do anything. In a sense, he treated you just like a public servant, as a politician should treat them. He was decisive. He would argue very intelligently. Watching him at the Cabinet Economic Committee, he really tore strips off ministers who hadn’t done their homework. And I saw him several times in debates with Noel Lough [senior Treasury official]. Noel Lough was a lovely bloke but Muldoon really won the debates.

But after Bayliss’s return to the BNZ, and as New Zealand’s economic difficulties became increasingly apparent –  with Bayliss among those openly highlighting the issues – the sentiments certainly weren’t reciprocated.

The crisis began to come to a head after Bayliss was interviewed on Radio New Zealand’s Morning Report on 14 August 1981.   After a lengthy introduction, setting the scene for a discussion of the value of the exchange rate, the presenter turned to Bayliss

Bayliss:    I think we have to do a number of things.  We have to change the exchange rate, we’ve got to get our budget deficit reduced, we’ve got to get better control of the money supply and we’ve got to replace import controls by tariffs, and we’ve got to get more competition into the economy.

Reporter: Well, you’re talking about the exchange rate. You’re talking devaluation are you?

Bayliss: That would be it, yes.

The interview went on, concluding thus

Reporter:  Well, this artificially high value of our currency has been held for many years I mean its not a recent thing. You know, why do we keep on doing it?

Bayliss:  I think the reason we keep on with it is two-fold.  First of all if you just devalue and do nothing else….you get a very short-term gain and in six months’ time the rate of inflation is worse. I think the second reason is that we’ve built up a system in New Zealand where a large number of industries and sectors and firms and so on are subsidised and naturally these people fight hard to maintain their subsidies……. The New Zealand economy has had nil rates of growth for about five years and rising levels of unemployment and this is a pretty deplorable economic performance……If we are going to improve our economic performance then we have to make some pretty dramatic changes in economic policy.

The Prime Minister was not happy at all.   That shouldn’t have surprised anyone –  who likes have their approach openly criticised?  But the Prime Minister didn’t just complain to his colleagues, thump the desk, and get on with his day.  Instead, he wrote a letter to the chairman of the Board of the BNZ.  News of this letter got out  –  it took a while –  and on 15 October there was parliamentary question about it.  Answering on behalf of the Prime Minister, Jim Bolger stated

“I wrote to the Chairman of the Bank of New Zealand on 25 August 1981 expressing concern that Mr Bayliss’s comments were not only misleading and not factually based, but that they would also have an adverse effect on our international credit.  Both the management and the Chairman of the bank have told me they regretted Mr Bayliss’s comments”

Opposition MP Stan Rodger then asked

“Can this be taken as as indication that the Government is adverse to having open debate in society within the news media on economic developments and on economic factors affecting New Zealand society?”

Bolger:  “No it most certainly cannot be taken as an indication that we do not welcome public debate on issues.  The question that was posed is whether or not the issue that was being debated was being debated factually, whether it was being debated in a manner that would not be harmful to New Zealand.  As the answer was written by the Prime Minister, it was his belief that the NZ comments would affect New Zealand’s international credit.  That is something that is of some moment.”

Another Labour MP, Michael Bassett continued

“When the Prime Minister wrote to teh Bank of New Zealand was it his intention to silence Mr Bayliss altogether, or was it simply to ensure that he debated the economy on terms that were agreeable to the Prime Minister?”

Bolger:  I cannot answer the question in the way it was posed because I do not know the precise intention of the Prime Minister when he wrote the letter. However, I am sure the Prime Minister will welcome debate on this issue or any other based on facts, not on any other basis.”

At the next meeting on the BNZ Board, (according to a contemporary file note) the Board apparently spent “considerable time discussing public statements on economic matters by the Chief Economist – in particular forthcoming speech to Hutt Chamber of Commerce”.    The chief executive informed Bayliss that “in future contents of any public statement on economy by Chief Economist should be such that they provoke no criticism whatsoever by Prime Minister.”

Bayliss responded (again, according to the file note) “impossible to make accurate, balanced and professional analysis of economy under such criteria –  a view which would be shared by all economists and many others. Board placing Chief Economist in impossible position –  best to cancel speech.”

To which the chief executive is recorded as responding “Can’t do that –  must make speech. Cancellation would damage image of BNZ and provoke public questioning of Board’s attitude. Only consideration must be BNZ’s public reputation.”

And so it went on in subsequent days.   Bayliss eventually informed that BNZ that under these conditions he would probably feel obliged to resign, and did so early the following year.   Both the Board of the BNZ and the Prime Minister disavowed any responsibility.

Bayliss includes in his collection of documents, a letter he received shortly after his resignation from John Stone, then the Secretary to the Treasury in Australia (and still vigorously contributing to the debate in Australia in his late 80s).  Stone wrote

“I learned yesterday of the announcement of your impending resignation from your present position with the Bank of New Zealand.  The reports which I saw of that development were naturally only of a general kind – the suggestion being that there had been some reaction from the political heights to the outspokennes and straight-speaking on the New Zealand economy which over recent years you have become well (and let me emphasise favourably) known.

“Whether or not there is truth in those kinds of speculation I naturally do not know. If there were I would think it is a sad reflection upon a country for which as you know I retain a considerable affection.

Indeed.

Graeme Wheeler was a junior Treasury official in late 1981. I wonder what he made of Muldoon’s attack on Bayliss?  Did he even imagine that one day he’d be writing to the BNZ to complain of another economist whose style and/or substance had offended him, as high public servant and powerful regulator?  Surely not.

 

 

An astonishing illustration of unfitness for public office

I wasn’t planning to write anything today, but I was flicking through the NBR website when I found a story that both shocks and appals me.  I suggest reading it first, before reading my take on it.

After my experiences with the Reserve Bank over the last couple of years, I thought I was beyond the possibility of being shocked by the Governor.  Clearly, naive optimist that I must really be, I was wrong.

Somehow the media got hold of a story that Graeme Wheeler had lodged an official protest with BNZ over something their head of economics, Stephen Toplis, had written.  So an Official Information Act request was lodged and the Bank has apparently responded by releasing both Wheeler’s letter to BNZ chief executive Anthony Healy and Healy’s response.  The Bank hasn’t put those documents with the other OIA releases on their website, so I have asked for a copy.

I should add that Toplis is not some close friend of mine.  I always find his commentaries stimulating, but we usually disagree on the substance of monetary policy.  In fact, when I was in the gun from the Governor last year, Toplis was sending the Bank snarky comments about me (that he no doubt didn’t expect to be published).  But no one should be treated, by a top public servant, the way he has now been treated by Graeme Wheeler.

What is Wheeler’s complaint?    Apparently, he was upset with the preview of the latest Monetary Policy Statement that Toplis had written.

Mr Wheeler, who is to step down as governor on September 26, wrote to Mr Healy on May 11, the day the MPS was released, saying a preview written by BNZ head of research Stephen Toplis called into question the Reserve Bank’s integrity by saying it would be “negligent” not to admit it had a tightening bias, expressed “through an explicit expression of rate increase(s) in its published OCR track.” 

For some context, here is what Toplis actually wrote

So why do we think the RBNZ will sit pat this week? Simply because it said it would. When it released its March OCR review, the Bank reaffirmed that not only did it expect interest rates to stay where they were for the foreseeable future but it went on to reiterate that it thought there was equal chance that the next move could be a cut as a hike. To hike this week would leave the Bank with egg splattered all over its face, a prospect it couldn’t abide.

But surely, at the very least, the Bank will be forced to admit that it now has a tightening bias? Equally, it would be negligent not to express this through an explicit expression of rate increase(s) in its published OCR track. The biggest questions should revolve around how early the Bank is prepared to poke in a first rate increase and how quickly (if at all) rates rise thereafter.

Toplis seemed to be trying to strike a middle path.   Hawks, he argued, would be foolish to think Wheeler would raise the OCR in May, whatever they thought the data showed.  And doves who might expect a flat (OCR) track forever were also likely to be mistaken.    In Toplis’s view –  given the data he had seen –  it would be “negligent” of the Bank not to show some rate increases in the published OCR track.

And, as it happens, the Bank largely agreed.  The actual OCR track released in the May MPS wasn’t  anywhere near aggressive enough for BNZ’s liking  (I agreed with the Bank this time), but it did show some increases in the OCR eventually.    Presumably they thought it would be wrong –  inconsistent with their obligations under the PTA – not to have done so.

So quite what was the Governor’s problem?

Monetary policy is one of those areas of considerable uncertainty.  Reasonable people can and will differ quite materially on what the best approach is.  But the power –  very considerable power over the way the economy develops in the short to medium term –  is vested only in the Reserve Bank.  More specifically, it is vested in a single individual, the Governor.  It is one of the unfortunate aspects of the single decisionmaker model that any criticism of the Bank’s decisions is inevitably a criticism of an individual’s actions/choices.   For a thick-skinned and self-confident individual on the receiving end, that just shouldn’t be a problem.  After all, the Governor took on the job voluntarily, knowing that he would be making key decisions in an area where (a) almost inevitably there would be mistakes (almost the nature of uncertainty) and (b) where he would subject to a lot of scrutiny from smart people, in political and economic spheres, here and abroad.  He gets paid a great deal of money (by New Zealand public sector standards)  to make the decisions and be accountable for them.   A self-confident Governor might either (a) let disagreements wash over him, or (b) pick up the phone and invite the critic in for coffee and an open exchange of views.   But Wheeler is notoriously thin-skinned –  and unwilling to engage.

Here is how NBR continued the story

Mr Wheeler’s letter describes a back story, suggesting he reached out to Mr Healy after failing to bring Mr Toplis to heel. It says Mr Wheeler’s deputy governors had individually approached someone (the name is redacted) “to convey their concern at the personal nature of the criticism being expressed by the BNZ in its written publications.”

“When this failed to address the situation I met with you and passed on examples of the material,” Wheeler wrote. “I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of other banks.”

Clearly, Wheeler’s concern was more than just the particular pre-MPS commentary.  And certainly, more than most other bank economists, Toplis is willing to quite openly disagree with the Governor and the Bank, sometimes with a vigorous style.   But there is nothing “personal” in that preview, and even if there were, the Governor personally exercises the power.

Personally, I wish there were more like Toplis willing to openly question and challenge the Bank.  The Bank –  the Governor –  after all wields huge power, not just in monetary policy but in regulatory matters, with rather little effective accountability.  Banks in particular are very reluctant to openly call out the Reserve Bank –  journalists have told me how difficult it is to get anyone to go on the record.

What bothers the Governor?   Apparently, he thinks the Reserve Bank is damaged by criticism.   It isn’t clear how or why, unless the Bank is operating in a way that leads people who read the criticism, and think about it, to conclude “yes, that’s right”.  High-performing organisation shouldn’t need to worry about criticisms,  And insular, low-performing organisations, need the criticism –  and need to be willing to learn from it.   Even more important, when it is a troubled public sector organisation,  the public need the criticised body to learn from and respond constructively to criticism by lifting its game.

Perhaps even more oddly, the Governor thinks that Toplis’s commentary is “damaging the New Zealand financial market”.  Who knows what he means by that?    There is a competitive market in commentary.   If Toplis’s criticism are wrong (on average over time) presumably that reflects badly on Toplis and the BNZ.  If they right, perhaps it reflects badly on the Governor himself, but that doesn’t harm the New Zealand markets or economy.  People having less faith in the Governor might, in principle, be a bad thing, but not if the criticisms are well-founded.  And if they aren’t well-founded, the sort of observers who matter will go elsewhere for their commentary.

Wheeler clearly doesn’t see it that way

In his letter to Mr Healy, Mr Wheeler said it was “unacceptable” to question the Reserve Bank’s integrity while “fundamentally misrepresenting” how it sets monetary policy.

“I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by BNZ.”

 

Perhaps there is something in the Governor’s concern that I’m missing, but nothing in that quote above from the MPS preview questions the Bank’s integrity.  It sets out some hypotheticals, and suggests the Reserve Bank would be not doing its job –  “negligent”  –  if it didn’t do something Toplis favoured.    But it did do it –  there were rate hikes put into the OCR forward track.  And even if the Bank has disagreed altogether –  and run with a dead flat OCR track –  the BNZ claim was “negligence”, it wasn’t a comment on integrity at all.   When people suggest the Reserve Bank isn’t running monetary policy well, that is a judgement on their competence or their diligence (or just a disagreement about the data), but it isn’t a reflection on anyone’s integrity.  It is disconcerting that the Governor doesn’t seem able to tell the difference.  Nor, apparently, were the Bank’s Deputy and Assistant Governors.

The whole thing is extraordinary.  I’ve never worked in a bank economics team, but I’ve never supposed that they had their daily or weekly economics commentaries signed off by in-house lawyers (or indeed by anyone much).   It is chilling to have the Governor of the Reserve Bank writing to the chief executive of a major bank in effect urging such tight control.   What is it, one can only wonder, that the Governor is afraid of?   And isn’t this, after all, the Governor who regularly claims that the Bank is highly accountable, partly because of the scrutiny financial market participants and commentators provide?

All this would be quite bad enough if the Reserve Bank was simply a monetary policy body.  Some central banks are.   Such central banks influence the economy and the rate of inflation, but have little or no direct regulatory influence over private financial institutions.  Access might still be valuable, but the central bank just doesn’t have that much leverage.  Nor should it.

But that isn’t the model in New Zealand.  Here, the Reserve Bank –  the Governor personally –  not only sets monetary policy, and sets prudential policy, but is also responsible for a wide range of detailed regulatory approvals that banks and financial institutions need to keep operating in this market.  Mr Healy himself will have needed the Governor’s approval to take up his current position.  So will all his direct reports.  And approval of individuals is just the least of it.   That is a huge amount of power, and all vested in one person.  In this case, it appears, an extremely thin-skinned and reactive one.

Banks are typically pretty scared of the regulator –  whether here or abroad –  and unwilling to take them on over regulatory matters.  That is bad enough.    What is worse is when the Governor of the Reserve Bank openly –  directly and through his deputies –  attempts to coerce banks to just keep quiet, to say only stuff that the Reserve Bank likes to be said.  We might expect that in Singapore, Russia, or other semi-authoritarian states.  We shouldn’t tolerate it in a free and democratic society, governed by the rule of law not the whims of powerful men, like New Zealand.   It would be bad enough from an elected politician –  and I’m sure it goes on there to some extent (we saw recently the Alfred Ngaro comments) –  but it is far far worse in an unelected, and exceptionally powerful, public servant.

As far as we can tell, the BNZ hasn’t been cowed by Wheeler’s approach.   Perhaps they just think “there he goes again, and thank goodness he’ll be gone in another three months or so”.  But even if they aren’t (this time), it is a chilling example that people in other organisations will take note of.  Some of them will be more cautious, more risk averse, and the message will go down “be careful what you say; don’t upset the central bank”.  We’ll be poorer for it.  And actually, over time, the quality of our Reserve Bank would be poorer for it to, if the extent of robust scrutiny of this powerful institution was even less than it is now.

The fault here is clearly primarily with Graeme Wheeler, who reveals himself to be manifestly unfit to hold his current high office.   But there are other people who need to take some responsibility:

  • where, for example, in all this were Grant Spencer, Geoff Bascand, and John McDermott, the deputy and assistant governors.   Wheeler has tried to tell us that that group makes all the Bank’s major decisions collectively, whatever the legal position.  The NBR article implies that they too were making calls to the BNZ to get pressure put on Toplis to alter his commentary.  Were any of them willing to stand up to Wheeler and tell him that he appeared to have lost all sense of perspective, and that if he went ahead with these actions it would only leave him and the Bank looking worse (even before this OIA, I gather the story was pretty widely known)?  If not, why not?  If not, why we would we suppose that any of them was fit to hold the office of Governor –  Spencer will be acting for six months, and Bascand is widely expected to be a leading contender for the permanent role?   Do any of them know what is, and isn’t fit behaviour for a regulator?  You would hope so given that Spencer is now Head of Financial Stability, and Bascand will assume that role in September.
  • where is the Bank’s Board in all this?  They exist to monitor the performance of the Governor, and the chair has often seen his role as a bit of a confidential sounding board for the Governor.  They were totally supine over the OCR leak last year, backing the Governor to the hilt?   Will it be different this time –  when the Annual Report comes out in a few months?  If not, how could we possibly consider that these individuals are fit to take the lead responsibility for choosing a new Governor?
  • What does the Minister of Finance make of this?   He appoints, and can dismiss, the Governor. I hope some journalists are willing to ask hard questions of the Minister, and not allow themselves to be fobbed off, about whether this sort of conduct is acceptable from a New Zealand public servant?
  • And what of the Finance and Expenditure Committee?  Are they willing to call Wheeler before them to answer openly for his conduct in this matter?  If not, what use are they to citizens?

I noticed that one commenter on the NBR article observed that if this is what Wheeler made of Toplis’s comments

“This is insane. Can you ask for Wheeler’s correspondence with Michael Reddell?”

There is no such correspondence.    The difference is that Graeme Wheeler has no leverage over me.   Stephen Toplis, by contrast, works for a bank over which the Reserve Bank has extensive regulatory clout.   It shouldn’t make a difference –  views are views and should stand or fall on their own merits –  but in Graeme Wheeler’s Reserve Bank, sadly, it appears to.  That is simply unacceptable.

He might only have three months left in office, but it is now three months too long.  The words of Oliver Cromwell to the Rump Parliament –  or Leo Amery to Neville Chamberlain in May 1940 –  come to mind

You have sat too long for any good you have been doing lately … Depart, I say; and let us have done with you. In the name of God, go!