Implications of a new government for monetary policy

Whichever way New Zealand First decides to go, we’ll have a different government than we’ve had for the last few years.   Whatever form that government takes –  coalition, confidence and supply agreements, or just sitting on the cross-benches – New Zealand First’s votes will typically be vital for passing any legislation, and whichever party leads the government will constantly be needing to consult with New Zealand First to avoid inadvertently getting offside with them.

As issues around the Reserve Bank and the exchange rate have been a significant part of Winston Peters’ stated concerns over the years (including attempts to amend the Act through a private members’ bill, and repeated references to a Singaporean style of monetary policy), it is interesting to speculate on what difference his bloc of votes in Parliament might make to these issues over the next few years.  A journalist asked for my thoughts the other day, and this post fleshes out what I said in response to those questions.

There are probably at least three –  separable – areas worth touching on (simply as regards the Bank’s monetary policy roles):

  • the specification of the target for monetary policy, whether in the Act or the Policy Targets Agreement,
  • any changes to the legislated decisionmaking and accountability provisions for monetary policy, and
  • the type of person appointed as Governor.

I find it worthwhile to recall that Winston Peters has history in this area.  In 1996, New Zealand First was campaigning vigorously on bringing about change at the Reserve Bank.  At the time, the particular concern was that in focusing on price stability (0 to 2 per cent inflation at the time) we were encouraging/causing an overvalued exchange rate.  The proposed remedy was that we should instead target inflation around the average of our main trading partners (then a bit higher than New Zealand).    What actually happened was that as part of the horse-trading for the coalition agreement with National, Don Brash agreed to an amended Policy Targets Agreement, in which the target was raised from 0 to 2 per cent annual inflation, to 0 to 3 per cent annual inflation.  Actual inflation had been averaging about 1.5 per  cent anyway, so although the change made a small difference to policy for a short period, the difference was pretty minimal.  After that, Winston Peters –  as Treasurer – displayed little real interest in monetary policy and never bothered the Bank again.

So my starting point, in thinking about New Zealand First influence on Reserve Bank matters now, is that although I’m quite sure that the concerns Peters expresses –  including around overvalued real exchange rates –  are quite real (and in many respects valid –  shared as they’ve been by people spanning the range from Graeme Wheeler to me), in the end not much about the conduct of monetary policy is likely to change at his insistence.  And that is probably as it should be –  our real exchange rate problems are not primarily grounded in monetary policy problems.

We also know that although Peters has repeatedly talked of preferring a Singaporean model of monetary policy (a guided exchange rate, without an officially-set OCR), both Steven Joyce and Grant Robertson during the campaign flatly ruled out such a change.  They were right to do so.  I’ve explained why in a post earlier this year.    Even if such a system was desirable, it isn’t workable (at all) for New Zealand unless and until the structural demand factors behind our interest rates being persistently higher than those abroad are tackled –  and that isn’t a matter for monetary policy.

And the Singaporean model is not one of an absolutely fixed exchange rate.  It is a managed regime (historically, “managed” in all sorts of ways, including direct controls and strong moral suasion).  It produces a fairly high degree of short-term stability in the basket measure of the Singapore dollar.      But it works, to the extent it does, mostly because the SGD interest rates consistent with domestic medium-term price stability in Singapore are typically a bit lower than those in other advanced countries (in turn a reflection of the large current account surpluses Singapore now runs –  national savings rates far outstripping desired domestic investment).  As the Reserve Bank paper I linked to earlier noted

“From 1990 to 2011, the average short term Singapore government borrowing rate was 1.8 percent p.a. below returns on the US Treasury bill.”

Those are big differences (materially larger than the difference between the two countries’ average inflation rates).  And they mean that Singapore dollar fixed income assets are not particularly attractive to foreign investment funds.  By contrast, New Zealand’s short-term real and nominal interest rates are almost always materially higher than those in other advanced countries.   Partly as a result, even though Singapore’s economy is now materially larger than New Zealand’s, there is less international trade in the Singapore dollar than in the New Zealand dollar.

So a Singaporean model just is not going to be launched in New Zealand any time soon.

If Peters sides with National, what then might he secure in this area?

An obvious possibility would be a change to the Policy Targets Agreement.  There has to be a new one when a Governor is appointed, and (if they think the current interim one is lawful and binding –  which I don’t) they could also seek an immediate change.  Such changes immediately upon a change of government have been the norm rather than the exception (having happened, to a greater ot lesser extent, in 1990, 1996, 1999, and 2008).

At the start of each Policy Targets Agreement it has become customary (Peters began the pattern in 1996) to have a preamble about what the government is hoping to achieve.  The current government’s preamble reads this way:

The Government’s economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective.

It would be easy enough to craft a form of words that talked about avoiding an overvalued and excessively volatile exchange rate and promoting the tradables sector of the New Zealand economy.

But it won’t make any difference –  one iota of difference –  to the way monetary policy is conducted.  It is a statement of political aspiration –  and can perhaps be sold to the base as such –  not a mandate for the Governor.

Recall too that the Policy Targets Agreements since 1999 have required the Bank, while pursuing price stability to” seek to avoid unnecessary instability in output, interest rates and the exchange rate”.  On occasion, that provision has (modestly) influenced monetary policy choices at the margin (one reason I’ve favoured removing it), at least with a Governor who was that way inclined anyway.  In principle, the exchange rate element could be singled out and given more prominence further up the document.

Winston Peters’ private members bill sought to amend the statutory goal of monetary policy (section 8 of the Act) this way (adding the bolded words)

The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of maintaining stability in the general level of prices while maintaining an exchange rate that is conducive to real export growth and job creation.

I simply cannot see the National Party agreeing to that specific formulation. I hope they wouldn’t.  It goes too far and asks the Reserve Bank to do something that is impossible (real exchange rates are real phenomena, not monetary ones).   But could they consider a formulation like this one?

The primary function of the Bank is to formulate and implement monetary policy directed to the economic objective of maintaining stability in the general level of prices while promoting the highest levels of production, trade and employment that can be achieved by monetary policy.

It is very similar to the legislative provisions introduced by the National government in 1950, in providing a greater degree of (formal) independence for the Reserve Bank and a new focus on price stability.  But in that framing the caveat “the highest levels…that can be achieved by monetary policy” is vital.   Beyond the short to medium term, monetary policy can’t do much other than maintain stable prices.

Perhaps they could find, and agree on, some clever wording.   It would be a rhetorical victory for Peters, and since rhetoric and symbolism do matter not necessarily an insignificant one.

But, so I would argue, not one that would, on its own, make any practical difference to the conduct of monetary policy.  Reflecting back on the 25 years of advice I gave to successive Governors on the appropriate OCR, I can’t think of a single occasion when the advice would have been likely to be different under this formulation than under the current wording.

What about possible governance changes –  to the formal statutory provisions around monetary policy decisionmaking?  At present, all power is vested in the Governor personally, the Governor’s appointment is largely controlled by the Bank’s Board (unlike most countries where the Minister of Finance has the main power).

I can’t imagine that the National Party would be averse to some changes in this area.  After all, Steven Joyce commissioned the Rennie review and in doing so was presumably open to at least some modest changes (perhaps legislating something like the current internal advisory committee).   But equally, it is difficult to see why New Zealand First would regard it as any sort of win to hand power to more internal technocrats.  To the extent New Zealand First favours governance changes they probably prefer a decisionmaking Board dominated by outsiders, with a strong export sector orientation.  Perhaps it isn’t a die in the ditch issue for National, but it is harder to see the two parties reaching agreement on that sort of change, even if it did produce something that looked rather like the (generally highly-regarded) Reserve Bank of Australia.

But if Peters and New Zealand First care about making a difference to the actual conduct of monetary policy over the next few years, or even to how the Bank talks about monetary policy, the key consideration is who becomes Governor.   Whatever the formal specification of the target, whatever flowery words exist around goals, the personality, instincts, “models”, and preferences of whoever is appointed Governor matters a great deal.  Partly because it is a single decisionmaker system, and partly because as chief executive the Governor (inevitably and appropriately) has a big influence on how the institution evolves, where it focuses its analytical energies and advice etc.

But the Governor selection process has been underway for months, and the Bank’s Board – all appointed by the National government –  must be getting close to delivering an initial recommendation to whoever is appointed as Minister of Finance.   No doubt the Minister of Finance would consult New Zealand First –  whether through the Cabinet appointments process, or outside it –  and the Minister can reject a Board nomination.  But the Minister can’t impose his or her own candidate, they just have to consider the next person the Board puts forward.  Since the Board were (a) appointed under the current system, and (b) have had no concerns at all about the conduct of monetary policy or the leadership of the Bank in recent years, it seems reasonable to assume they’ll be putting forward a status quo candidate (there are no known exceptional candidates).  If so, my money is on Deputy Governor Geoff Bascand who –  as I’ve written about recently –  might be a safe pair of hands, but is unlikely to be more than that, and about whom there are some concerns (especially if, as Peters appears to, one cares about the interests of bank depositors.)

In short, if National leads the next government I wouldn’t expect any material differences on the monetary policy front, even if there are some symbolic wins for New Zealand First.  Even governance reform –  which most people think desirable –  might be hard to actually deliver (the status quo will avoid any conflicts).

And what if Labour leads the next government, requiring support of the Greens and New Zealand First for legislation?

In that case, legislative reforms are more certain, but somewhat similar questions remain about what difference they might make.

Thus, the Labour Party campaigned on amending section 8 of the Act to include some sort of full employment objective.   They haven’t provided specific suggested wording, and would no doubt want official advice on that.  The Greens have endorsed that proposal and there is no obvious reason why New Zealand First would oppose it. But they might want to try to get some reference to the exchange rate or the tradables sector included, whether in the Act itself or in the Policy Targets Agreement.  The sort of wording I floated earlier in this post might provide a basis for something workable.

I’ve also previously suggested that if Labour is serious about the full employment concern, it might make sense to amend section 15 of the Act (governing monetary policy statements) to require the Bank to periodically publish its estimates of a non-inflationary unemployment rate (a NAIRU), and explain deviations of the actual unemployment rate from that (moving) estimate.  In principle, something similar could be done for the real exchange rate, but the (theoretical) grounds for doing so are rather weaker.  Perhaps the political grounds are stronger, and such a change might encourage the Bank to devote more of its research efforts to real exchange rate and economic performance issues.

But –  and I deliberately use the same words I used above –  such legislative changes are not ones that would, on their own, make any practical difference to the conduct of monetary policy.  Reflecting back on the 25 years of advice I gave to successive Governors on the appropriate OCR, I can’t think of a single occasion when the advice would have been likely to be different under this formulation than under the current wording.

The Labour Party and the Greens also campaigned on legislative reforms to the monetary policy governance model (including a decisionmaking committee with a mix of insiders and relatively expert outsiders, and the timely publication of the minutes of such a committee.)   Although those proposals would represent a step in the right direction, they are rather weak. In particular, since Labour proposed that all the committee members would be appointed by the Governor, the change would largely just cement-in the undue dominance of the Governor.    But I’d be surprised if they were wedded to those details, and it shouldn’t be too hard to reach a tri-party agreement on a decisionmaking structure for monetary policy –  probably one that put more of the appointment powers in the hands of the Minister of Finance (as elsewhere) and allowed for non-expert members (as is quite common on Crown boards –  or, indeed, in Cabinet).

So legislative change in that area –  probably quite significant change –  seems like something we could count on under a Labour-led government.

But whether it would make much difference to the actual conduct of policy over the next few years still depends considerably on who is appointed as Governor.   Not only will whoever is appointed as Governor going to be the sole decisionmaker until new legislation is passed and implemented –  which could easily be 12 to 18 months away –  but that individual will be an important part of the design of the new legislation and the sort of culture that is built (or rebuilt) at the Reserve Bank.

As I noted earlier, the appointment process for the Governor has been underway for months.  Applications closed at a time –  early July –  when few people would have given the left much chance of forming a government.  And the Board, all appointed by the current government and strong public backers of the conduct of policy in recent years, have the lead role in the appointment.   Perhaps a new Labour-led government would reject a Bascand nomination.  But even if they did so, they have no idea which name would be wheeled up next.

There are alternatives, if the parties to a left-led government actually wanted things done differently at the Bank.   First, they could insist that the Bank’s Board reopen the selection process, working within the sorts of priorities such a new government would be legislating for.  Or they could simply pass a very simple and short amending Act to give the appointment power to the Minister of Finance (which is how things work almost everywhere else).  Of course, there is still the question of who would be the right candidate, but at least they would establish alignment of vision from the start –  a reasonable aspiration, given that the Reserve Bank Governor has more influence on short-term macro outcomes than the Minister of Finance, and yet the Minister of Finance has to live with the electoral consequences.

Over time, governance changes are important as part of putting things at the Reserve Bank on a more conventional footing (relative to other central banks, and to the rest of the New Zealand public sector).   I think some legislative respecification of the statutory goal for monetary policy  –  along the lines Labour has suggested –  is probably appropriate: if nothing else, it reminds people why we do active monetary policy at all.   But on their own, those changes won’t make any material difference to the conduct of monetary policy  –  or even to the way the Bank communicates –  in the shorter-term (next couple of years) unless the right person is chosen as Governor.  Perhaps so much shouldn’t hang on one unelected individual, but in our system at present it does.

Symbols matter, but so does substance.  It will be interesting to see which turns out to matter more to a new government with New Zealand First support.

In closing, there is a long and interesting article in today’s Financial Times on some of the challenges – technical and political –  facing central bankers.  As the author notes, in many countries authorities are grappling with a mix that includes very low unemployment and little wage inflation.  In appointing a Governor for the Reserve Bank of New Zealand, it would be highly desirable to find someone who recognises, and internalises, that the challenges here are rather different.  Unlike the US, UK, or Japan (for example) New Zealand’s unemployment rate is still well above pre-recessionary levels –  when demographic factors are probably lowering the NAIRU –  and real wage inflation, while quite low in absolute terms, is running well ahead of (non-existent) productivity growth.    There are some other countries – the UK and Finland notably –  that also have non-existent productivity growth, but it is far from a universal story.  Productivity growth carries on in the US and Australia and (according to a commentary I read last night) in Japan real output per hour worked is up 8.5 per cent in the last five years (comparable number for New Zealand, zero).

Some of these issues are relevant to monetary policy (eg unemployment gaps) and some are relevant to medium-term competitiveness (wages rising ahead of productivity growth).  We should expect a Governor who can recognise the similarities between New Zealand’s experiences and those abroad, but also the significant differences, and who can talk authoritatively about what monetary policy can, and cannot, do to help.  Perhaps even, as a bonus, one who might even be able to provide some research and advice to governments on the nature of the economic issues that only governments can act to fix.

 

 

 

 

The Rennie review: still secret

Hamish Rutherford has a new story up at Stuff on the review of aspects of the governance of the Reserve Bank undertaken earlier this year by former State Services Commissioner (and former Treasury Deputy Secretary for macro matters) Iain Rennie.  The report was undertaken for Treasury, at the request of the Minister of Finance.  The final report was, we’ve been told, delivered in mid-April.

I’ve written about this a review a few times:

But still the review report has not been released, and nor is Treasury willing to release either earlier drafts of the report, or the comments made by reviewers.

Today’s article appears to be prompted by some observations from ANZ chief economist Cameron Bagrie,

Cameron Bagrie, chief economist for ANZ, said without the terms of reference he was “flying a bit blind”, but it was possible the review was headed towards recommending a model used across the Tasman, where powers are split between the Reserve Bank of Australia and the Australian Prudential Regulatory Authority (APRA).
“The consensus seems to be that the review is about monetary policy,” Bagrie said.
“I suspect it’s broader and maybe they are looking at whether we have an Australian model where they have the RBA for monetary policy, financial stability, markets, payments et al and APRA for the prudential/regulatory side.”

I’m quoted in Rutherford’s article.  As I’ve said previously, I’d be really surprised if Rennie was recommending a structural separation (along the lines of Australia).  There are all sorts of models internationally, but I haven’t heard anyone in New Zealand for some years seriously propose structural separation (I may at times have advocated such a split in the past), especially since the British government a few years brought the regulatory functions back under the same roof as monetary policy.   There are separate statutory committees for each main function, but they are all conducted out of the Bank of England.  If anything, the global trend in recent years has been to emphasise the important overlaps or crossovers between monetary policy and financial stability, if only in respect of the underlying information flows.

Although Bagrie noted that “the consensus seems to be that the review is about monetary policy”, it has surely been clear for some time that the review could not have been that narrow in scope?  After all, Steven Joyce told us in April that he asked the reviewer to look at whether the Reserve Bank should continue to be responsible for its own legislation –  an issue that is almost entirely about the Bank’s regulatory responsibilities.  And the terms of engagement document did note explicitly that

The Treasury is contracting Iain Rennie to provide a report assessing governance and decision-making at the Reserve Bank.

Nothing there suggesting monetary policy only.  And, in any case, no reviewer could really do a serious job looking only at monetary policy, given that it occurs within an institution, and both functional and (whole of) institutional governance would be likely to be affected by any decisions regarding monetary policy.  And Treasury has been known to be unhappy about the governance of the financial regulatory functions –  including the Bank’s responsibility for its own legislation –  and Rennie was contracted by The Treasury.

On which note, Rutherford includes this

Top officials within the Reserve Bank are said to believe Rennie’s report is something of a power grab by Treasury.

Michael Reddell, the former special advisor to the Reserve Bank, said even the details about the report already released , around which organisation was responsible for the central bank’s governing legislation, amounted to a power play.

Far be from me to agree with the Bank on this.  If I said there was a “power play” involved, it was simply to note that the Treasury has long been uncomfortable about governance, accountability and information flows around the financial regulation powers of the Reserve Bank.  I happen to agree with them   There is too much power vested in one individual, and in one agency.  Those powers should be trimmed, and stronger accountability established.  The Treasury should probably be made responsible as the primary advisers on the various pieces of legislation the Bank operates under.

In a post a couple of weeks ago, I referred to the Bagrie thesis, the Rennie review, and Reserve Bank reform prospects more generally, noting

On the National Party side, you’ll recall that the Minister of Finance had Treasury hire former State Services Commissioner (and former Treasury deputy secretary) Iain Rennie to provide some analysis and advice on possible changes to the governance of the Reserve Bank.  Having had drafts reviewed by various experts, the report was completed months ago, but hasn’t yet seen the light of day.  Treasury has been blocking the release of even drafts of the report, or comments on the draft by reviewers, and nothing is heard from the Minister of Finance.    Presumably Rennie didn’t conclude that everything was just fine and no changes were required.  Had he done so, there would have been no reason not to publish, and it might even have been a small piece of useful ammunition against the sorts of reforms opposition parties are campaigning on.

The interesting question is (a) how far has Rennie gone in his recommendations, and (b) whether a re-elected National government (perhaps reliant on New Zealand First –  long critical of the Reserve Bank) would implement them?   I heard the other day a hypothesis that the report isn’t being released because it calls for reform so radical that the Reserve Bank would be split in two (a monetary policy and macro agency, like the Reserve Bank of Australia, and a prudential regulatory agency (like APRA).   There are pros and cons to such a structural split, but I haven’t for a long time heard anyone here seriously propose it as an option (and particularly not since the UK government brought all those functions back under one roof).    Time will tell, but I would hope Rennie would recommend things like (ideas previously proposed here, and practices in the UK):

  • moving (in law) to committee-based decisionmaking,
  • having external members appointed directly by the Minister,
  • separate committees for monetary policy and the prudential regulatory functions,
  • a mandated greater degree of transparency, and
  • (something Joyce asked for advice on) making Treasury primarily responsible for the legislation under which the Reserve Bank operates.

As I say, time will tell.  But if National is back in office, they will presumably want to move quite quickly on appointing a permanent Governor (the Board, which is driving the process, meets again later this week), and whoever takes the role would presumably want to know what legislative arrangements they would be operating under.

It is well past time for the Rennie report, and associated documents to be released.  Doing so can’t have suited the current government, but this is an official document, paid for with taxpayers’ money.   And there can’t really be any credible grounds under the Official Information Act for withholding a months’-old consultants report to The Treasury on matters of organisation design.  In fact, in the current hiatus –  between Governors –  I would argue that there is a significant public interest in the release of the report now.

 

Reserve Bank Annual Reports

Last Friday, the Reserve Bank’s Annual Reports were published.  There were two of them, both required by law.   But most people wouldn’t know that.

There was the outgoing Governor’s own report on the Bank’s performance, the annual accounts etc.  That warranted a press release, and some modest media coverage.  But buried inside the Bank’s annual report was the, quite separate, statutory Annual Report of the Reserve Bank’s Board.    It has no separate place on the Bank’s website, it wasn’t accompanied by a press release from the chairman, although this year it did actually get passing mention in the “acting Governor”‘s press release.

The Reserve Bank Board isn’t a real board, in the sense known either in the private business sector, or in the government sector.  As the Board itself notes “the Board is a unique governance body in the public sector”.  The Board largely controls the appointment of the Governor, and has some say over the recommended dividend.  But otherwise, its powers are all supposed to be about providing a level of scrutiny and monitoring of the Bank –  and in particular the Governor personally – on behalf of the Minister of Finance and the public.  In practice, at least with a public face on, the Board tends to be emollience personified –  nothing to worry about here chaps –  that has very effectively served the interests of successive Governors.

A post about the Board’s Annual Report has become a bit of an annual ritual (2015 and 2016).  But before turning to the substance of the Board’s 2017 report, I wanted to pick up just a few points in the (now former) Governor’s report.

In his final speech as Governor (which I wrote about here), Graeme Wheeler sought to (a) tell a pretty positive story about New Zealand’s economic performance over his five years in office, and (b) claim significant credit for the Bank for that (supposed) good performance.   He returns to the theme in the Annual Report

With our own economy about to enter its ninth year of expansion, it’s useful to put a longer-term focus on New Zealand’s progress. Compared to the period 1990-2012
(i.e., the 22-year period since flexible inflation targeting was first introduced), New Zealand’s economy has experienced slightly stronger GDP growth and much faster employment growth over the last five years. Headline inflation has, however, been weaker and our current account deficit has been smaller as a share of GDP, while the unemployment rate has been around its average for the period since the mid-1990s. Labour productivity growth has been disappointing, a challenge we share with many other advanced economies. While some of these economic outcomes since 2012 lie beyond the influence of Reserve Bank policy levers, the Bank’s monetary policy has been a significant driver behind the growth in output and employment.

Setting aside the minor point that there was a double-dip recession in 2010, and thus any expansion has been running for only around seven years, there is so much wrong or misleading with these claims that it is hard to believe that a serious public figure –  a public servant not a politician –  would repeat them.

Where to begin?

Perhaps with the five years in which there has been no labour productivity growth at all.  Yes, global productivity growth is weaker than it was in the 1990s and early 2000s, but few other advanced economies have experienced anything as bad as New Zealand’s productivity record in the last five years.

Or with the fact that headline GDP growth has been reasonable only because of very rapid population growth.  Growth in real per capita GDP has been pretty poor, largely reflecting the complete absence of productivity growth.  Similarly, rapid employment growth mostly reflects rapid population growth, and unemployment has been above any reasonable estimates of a NAIRU throughout the Governor’s term.

Or with the shrinkage of the export sector as a share of GDP.

Or with house prices.

Or with the fact that, over this particular five years I’m pretty sure that the Reserve Bank was the only advanced country central bank to boldly set off on what it envisaged as a large tightening phase, only to have to (grudgingly) more than complete unwind the tightenings they actually did implement.

With no global crises, no domestic crises, no domestic concerns about conventional monetary policy exhausting its capacity (unlike many other advanced countries), Wheeler should have had a fairly easy five years.   As it is, there isn’t much credit he can claim for the Bank and its monetary policy.

It is the sort of self-serving nonsense the Bank’s Board –  if it was doing its job –  should have been calling out.   Apart from being simply wrong, it isn’t even helpful.  If the Bank had really had the huge influence on medium-term economic performance that the Governor seems to be claiming, it rather undermines the case for having so much power – so many choices-  at such a remove from elected politicians.  The normal case for an independent central bank is that such an agency will keep inflation down and won’t make much difference to economic performance at all.

But there is –  again – little sign in the Board’s Report of serious scrutiny or accountability.  Even honesty seems to be at a premium.

The Board’s Reports have certainly lengthened.  Only three years ago, the Board’s report was only two pages long.    Last year’s report was four pages long.  This year’s report is six pages long, and the first four of them are quite densely-packed text.

But apparently the Reserve Bank does no wrong, ever.  So not only is the Reserve Bank Board “a unique governance body” in the public sector, but the Reserve Bank must be a unique organisation, public or private.   One wonders if it was immaculately conceived, or acquired such perfection itself?

There is two solid pages of text on monetary policy and (as far as I can see) not a word that management would feel even slightly uncomfortable with.  No areas that the Board thinks the Bank might have put greater emphasis on, no disagreement, nothing.

There is another one and a half pages on the Bank’s regulatory functions, but again apparently nothing where the Board thought the Bank might have done better, or areas where a different emphasis might have been helpful. It could all have been written by management (and may well have been).  Management will have been particularly pleased to read this

“The Board has also observed that the Bank carefully considers the feedback it receives on regulatory initiatives, bearing in mind that regulated institutions will not always agree with the regulator’s approach and the eventual regulatory outcomes.”

No doubt, although there is little evidence open to the rest of us to suggest that the Bank pays any heed to substantive feedback in its formal consultation processes.  And one might reasonably wonder whether in a moment of introspection the Board might perhaps think that “monitored institutions will not always agree with the monitor’s approach or the eventual conclusions of the monitor”, and wonder if that description has ever characterised the Board’s Annual Reports on the bank.

And so we labour on through lots of descriptive text about the activities of the Board –  with nothing on the evaluative frameworks they use, or the external advice they draw on.  As we do, we come to the odd interesting snippet such as this

“Monitoring the Bank’s relationships is a continuous process.  During the year the Board availed itself of a number of opportunities to observe how these were operating in practice, paying particular regard to any feedback on the messaging, transparency and accountability of the Bank.”

It looks as though this sentence is supposed to be meaningful, but quite what the meaning is supposed to be isn’t clear at all.    Does it mean that perhaps they were just ever so slightly uncomfortable with the heavyhanded pressure Graeme Wheeler and his senior managers brought to bear on Stephen Toplis and the BNZ (the latter an institution the Bank regulates) when Toplis criticised the Governor’s communications, even if they can’t bring themselves to say so?    One might hope so, but if people who are paid to hold a powerful agency to account won’t even criticise, even diplomatically, such egregious abuse of office, we might wonder again what use they are to citizens.   (And I did lodge an OIA request, the results of which suggests no serious concerns in private either.)

Towards the end of the Board’s report, they write about the change of Governor.  To read this report, one wouldn’t know that the Board had been well down the track towards recruiting a new permanent Governor, oblivious to the election, when the Minister of Finance forced them to stop.  You have to wonder what they gain by the omission, when the relevant material is already public.   They explicitly note that they and Treasury sought advice from Crown Law on the approach to be followed.   Despite that advice, the purported “acting Governor” appointment still appears to be unlawful.  Remarkably, the report contains nothing on the steps the Board had already taken, before the end of 2016/17 to find a new Governor, even though that appointment is one of their principal responsibilities.

Finally, as it does every year, the Board’s Report notes the Board’s relationship to the Reserve Bank’s superannuation scheme (the Board appoints half the trustees including the chair).   This is a deeply troubled fund, grappling with some pretty serious historical errors –  including some made by the Board itself, which must approve rule changes.   I’ve written previously about the role of the Bank’s (now) deputy chief executive –  who attends all Board meetings –  in these matters.   But the Board’s Annual Report simply records the heart-warming fact that the new superannuation fund chair “kept the Board informed of the work associated with the development of a new Deed for the Trust”.  On the principle that when you things you know about are wrong, it leaves one worried about the other material that one doesn’t know in detail.  On this occasion, there was no “new deed”, but some amendments to the rules (largely) to allow the superannuation fund to comply with the new Financial Markets Conduct Act.   As part of those changes, trustees were about to left in the lurch by the Bank –  unremunerated and yet with no liability insurance.    Only threats that the new rules would not be executed (requires all trustees to sign) and a written protest to the Board helped secure a backdown.  And the more serious issues, of past rules breaches, and mistakes in past rule changes, still look set to head to the courts next year.  Millions of dollars are potentially in dispute.

As I’ve written (repeatedly) before, the Reserve Bank’s Board doesn’t really serve much of a useful function.  A thoroughgoing reform of the goverance of the Reserve Bank (including the role of the Board) is well overdue, and there are signs now that whoever forms the next government it may well happen (although I am less optimstic of that if National leads the next government as even if they favour some change, they may not favour changes New Zealand First –  or the Greens if you must –  would support).   If the Board is to retain a role as an accountability and monitoring body, it too will need a shake-up.  Independent resourcing would help, but much of what is really needed is a different mindset, in which the Board finally serves the public, not acting as guardians of the Governor.  My own preference would be for the monitoring and accoutability functions to be undertaken by a Macroeconomic Advisory Council, established formally at arms-length from the Bank, the Treasury and the Minister of Finance.

 

 

A first unlawful act?

Earlier in the week, Graeme Wheeler completed his term as Governor and left office.  Even in a week with little real news to report, his departure didn’t seem to receive any notice in the media.  Not even the Herald managed an enconium.   Surely his departure must go unlamented almost everywhere, even if, no doubt, the Bank’s Board –  supposedly guardians of the public interest, but in fact guardians of the Governor –  gave him a good dinner on the occasion of their meeting last week?

And now Grant Spencer – erstwhile deputy chief executive – purports to be in charge, as “acting Governor” until a permanent appointment can be made by the incoming Minister of Finance.  I like Grant.  He was my boss in two separate stints spread over many years, and –  in the late 80s –  was a voice of reason and moderation in an age when young hotheads didn’t always welcome such perspectives.   Now that he purports to wield so much untrammelled power –  not just monetary policy, but all the Bank’s regulatory functions –  I’m sure his management skills must also have improved further.  I like to tell the story of the two years, very early in my management career, without any structured performance feedback from him: the only way I could really be confident I must have been doing ok was through the annual pay round, but when he came to deliver that news I was on the phone, so Grant scribbled the number on a piece of paper, dropped it on my desk, and left.  But I’m sure he would be a safe pair of hands, minding the store.

Unfortunately, his purported appointment –  probably sensible in intention if Graeme Wheeler couldn’t have been persuaded to take a temporary extension – is, as I’ve been pointing out for months, probably unlawful.  (If, as a new reader, you are puzzled by that claim, you can read for yourself my thoughts on the summary of Crown Law’s legal advice on the issue.  I still have with the Ombudsman a request for (a summary of) the Reserve Bank’s own lawyer’s advice.)

And if his appointment is unlawful then so, presumably, are all the acts the Bank takes –  or purports to undertake –  under his authority over the next few months.  Including setting the OCR.

Again, that proposition might puzzle you.  Surely even if there was some question over the lawfulness of the appointment of an acting Governor in these circumstances, there would be no question of the lawfulness of the Bank’s actions?  I had a look at the legislation a few months ago.

Does it all matter?    Sometimes laws contain provisions stating that any problems in the appointment of an officeholder, or doubts about the validity of the appointment, don’t affect the validity of enforceability of the actions/decisions taken by that person.

In fact, the Reserve Bank Act has one of those provisions.    For the Board.  Under section 54(4)

The validity of any act of the Board is not affected by—

(a) any vacancy in its membership; or
(b) any defect in the appointment of a director; or
(c) the fact that any non-executive director is disqualified from appointment under section 58

But there is simply nothing comparable for the Governor.    Curiously, there is protection for the Deputy Chief Executive when exercising delegated authority from the Governor.   Under section 51 

The fact that the Deputy Chief Executive exercises any powers or functions of the Governor shall be conclusive proof of the authority to do so, and no person shall be concerned to inquire whether the occasion for doing so has arisen or has ceased.

But there is nothing like it for the Governor, or any acting Governor.  There is simply a requirement on the Board and the Minister to make a proper appointment, and to have that person in place once the previous Governor’s term ends (and presumably an expectation that Governor appointments are sufficiently high profile, and as all powers of the Bank rest with the Governor, no questions should ever arise about the authority of the Governor him or her self to make decisions.

(Again, it is perhaps worth noting that there are also no such protections in the 1964 Act – the one in place when the 1989 Act was being drafted.  The drafters presumably made conscious choices about what to add and what not to.)

If the appointment of Spencer as acting Governor is unlawful, it looks as though any actions taken by him –  or under his (purported) delegations during his term –  would also be unlawful.

Perhaps it won’t matter very much.  Few people expect the OCR to be changed in the next six months, and if so perhaps they could argue that successive OCR decisions aren’t actions but inactions –  just leaving things as Wheeler left them.

But the Reserve Bank does lots of other stuff.   They commit to commercial contracts, they deal in New Zealand in international markets.  They take enforcement actions against financial institutions that fall foul of the law, or of the Bank’s rules.  And so on.  In a crises, they (the Governor) has substantial regulatory powers.

The situation should never have been allowed to arise.  As I’ve noted for months, it was easily avoidable, with a simple temporary change to the Reserve Bank Act (which there is no obvious reason for the Opposition parties to have opposed –  either on the substance, or as regards Spencer personally, whom everyone regards as a decent and honourable person).   But now we have an unlawful appointment, and Spencer purporting to exercise the powers of (acting) Governor.

But what of the OCR press release –  which, as pure commentary, I suppose Spencer is free to issue?  It probably isn’t that sensible to make much of minor differences in wording: in some areas Spencer may just use slightly different hobbyhorse phrasing than Wheeler would have.  But no one sees it as a material departure from last Wheeler statement, even if (perhaps) the confidence in the growth outlook might be fading.  As for what it might mean for actual (or purported) OCR setting, not much.  After all, it is quite plausible that a new Minister of Finance and coalition could mean modifications to the Policy Targets Agreement almost straightaway (happened in 1993, 1996, and 1999).  And even if that doesn’t happen, Spencer won’t be there to offer his opinion by the end of March, and no one knows who the new Governor will be, or what mandate he or she will be working towards.

The growth outlook was one of the issues I touched on in my comments on the last Monetary Policy Statement.  Those comments still seem largely valid now –  the June quarter GDP numbers were flattered by big one-off boosts to services exports from the World Masters Games and the Lions tour, and yet still showed growth of only 0.8 per cent.

But perhaps my biggest puzzle is where all the forecast growth is coming from.

Over the next six quarters, the Bank projects that quarterly GDP growth will average just over 0.9 per cent. This chart shows six-quarter moving average of GDP growth (in turn, averaging the production and expenditure measures).

GDP growth qtrly

The orange dot shows the forecast for the next six quarters.  Their projections suggest that the economy will grow more rapidly over the next 18 months than it has managed on a sustained basis at any time in the current recovery.   You might not think that the difference looks large, but:

  • the Bank already recognises that monetary conditions are tighter than they were last year,
  • the Bank is forecasting a substantial reduction in the net migration inflow, and no one seriously doubts that unexpectedly rapid population growth has been the biggest single driver of headline GDP growth in recent years.  However much immigration adds to supply, it adds a lot to demand.

So why are we to expect a sustained growth acceleration from here?   Although it isn’t stated in the document, I hear that the Bank is invoking the expected fiscal stimulus (from promised measures announced in the Budget).  In isolation that might make some sense, but against the projected halving in the net migration inflow and the actual tightening in monetary conditions, it doesn’t really ring true.     If anything, the risk now has to be that over the next 18 months, headline GDP growth averages lower than we’ve seen in the last couple of years.

Whichever parties form the next government, and as I noted last week, it seems likely that government expenditure will be higher than projected.  But it is still difficult to see a growth outlook as relatively buoyant as the Bank projected –  and requires if inflation is to get back to target –  as the most likely outcome.

And the Bank –  and government –  still seem grossly underprepared for the next recession, whenever it comes.

 

Reforming the Reserve Bank?

A week from now Graeme Wheeler will be clearing his desk on his last day as Governor of the Reserve Bank.  I’ll have some more to say about his stewardship of the role, either on that last day or perhaps when the Reserve Bank’s Annual Report and the Board’s Annual Report are published –  on past practice they should be released any day now, and I suspect Wheeler will want to publish before he leaves office.

But by next Tuesday also, most of the votes in this year’s election will have been counted.  Who knows how quickly, or slowly, but we’ll be on course for the formation of a government for the next three years.  Either way, change seems likely for the Reserve Bank –  and not just the unlawful term of an “acting Governor” , and in time the appointment of a new substantive Governor.

On the National Party side, you’ll recall that the Minister of Finance had Treasury hire former State Services Commissioner (and former Treasury deputy secretary) Iain Rennie to provide some analysis and advice on possible changes to the governance of the Reserve Bank.  Having had drafts reviewed by various experts, the report was completed months ago, but hasn’t yet seen the light of day.  Treasury has been blocking the release of even drafts of the report, or comments on the draft by reviewers, and nothing is heard from the Minister of Finance.    Presumably Rennie didn’t conclude that everything was just fine and no changes were required.  Had he done so, there would have been no reason not to publish, and it might even have been a small piece of useful ammunition against the sorts of reforms opposition parties are campaigning on.

The interesting question is (a) how far has Rennie gone in his recommendations, and (b) whether a re-elected National government (perhaps reliant on New Zealand First –  long critical of the Reserve Bank) would implement them?   I heard the other day a hypothesis that the report isn’t being released because it calls for reform so radical that the Reserve Bank would be split in two (a monetary policy and macro agency, like the Reserve Bank of Australia, and a prudential regulatory agency (like APRA).   There are pros and cons to such a structural split, but I haven’t for a long time heard anyone here seriously propose it as an option (and particularly not since the UK government brought all those functions back under one roof).    Time will tell, but I would hope Rennie would recommend things like (ideas previously proposed here, and practices in the UK):

  • moving (in law) to committee-based decisionmaking,
  • having external members appointed directly by the Minister,
  • separate committees for monetary policy and the prudential regulatory functions,
  • a mandated greater degree of transparency, and
  • (something Joyce asked for advice on) making Treasury primarily responsible for the legislation under which the Reserve Bank operates.

As I say, time will tell.  But if National is back in office, they will presumably want to move quite quickly on appointing a permanent Governor (the Board, which is driving the process, meets again later this week), and whoever takes the role would presumably want to know what legislative arrangements they would be operating under.

But what if Labour leads the next government?  They will have access to the Rennie report, although I had heard that Grant Robertson was quite dismissive when that report was initially commissioned.  Perhaps more importantly, they have campaigned on some quite significant changes to the monetary policy side of the Reserve Bank, notably:

  • a statutory Monetary Policy Committee, comprising insiders and outsiders, but with all the other members appointed by the Governor himself (and a non-voting Treasury representative),
  • adding a goal of full employment to the Bank’s monetary policy objectives, and
  • requiring publication of the minutes of the Monetary Policy Committee fairly shortly after any particular interest rate decision.

I’ve written about those proposals on various occasions previously (including here and, more recently, here).  In general, I’m sympathetic, but think the governance reforms are excessively timid (and haven’t yet tackled some important issues).

Unsurprisingly, Reserve Bank reform hasn’t a big part of the election campaign. But they were a big part of Alex Tarrant’s interview with Grant Robertson last week.  In fact, Robertson’s comments in that interview are by far the fullest I’ve seen since the day the policy was released some months ago.  In summary, they only increase my unease and concerns about possible lost opportunities.

Tarrant asked first about the pool of possible people to serve on such a committee

One concern is whether we’d have the depth of talent of candidates for such an outfit not connected to the large banks or businesses.

I’ve never found that a particularly persuasive concern.  We manage to run a country with a huge number of public sector board and committees, some on very technical manners and others not.  We have a Cabinet after all.   And will fill all those posts: the appointees aren’t always exceptional, but then again neither (in this case) are the Governors.

Robertson put his response this way

Robertson reckons we do. “We’ll be looking towards people with monetary policy expertise, in academia. We know that there are people who have served boards before, who have a strength and a knowledge and an understanding of monetary policy,” he says.
“The two ideas we’ve got [for Monetary Policy] are linked, in the sense that we do want to broaden the objectives of the Bank, and so therefore we’ll be looking for people who can bring some knowledge and expertise in the wider macro economy – the way in which employment is going.

Here is, I think, one of the areas in which he is risking making a mistake.  Perhaps he could find a decent academic with professional strengths in monetary policy, but there aren’t many of them here, and it isn’t the skill-set that is really most needed.  The technical expertise will always reside primarily inside the Bank.  What they should be looking for in outsiders to serve on a Monetary Policy Committee is a range of skills, but most of all a cast of mind that will mean those externals don’t just become a front for management.  The role needs people who will ask hard questions –  some of them technical perhaps, but many no more technical than one would might expect from a good Board director.

Tarrant didn’t raise the issue of who appoints the external members.   Robertson’s announced policy had been that the Governor himself would appoint the externals, and control when/if they could speak externally.  That would be a serious mistake, and is not a model followed by any of the central banks I’m aware of.   Monetary policy is a major aspect of short-term stabilisation policy (ie economic policy), and the decisionmakers should be appointed directly by the Minister of Finance (who is, after all, the only person we voters can hold to account).   When I raised this issue with him, he expressed concern that it wouldn’t be a “good look” for him to be grabbing the appointment powers to himself.  Frankly, I disagree; it would simply be moving towards standard international practice.   As I’ve noted previously, if he wants a Labour precedent, when Tony Blair and Gordon Brown took office in 1997 they reformed the Bank of England, made it operationally independent, established a (statutory) Monetary Policy Committe, and to this day most of the members are appointed directly by the Chancellor of Exchequer.    Allowing the Governor to appoint his or her own externals (and a minority of voters at that) is a recipe for maintaining the status quo, not changing it.  (After all, the Governor already appoints a couple of external advisers to help him on monetary policy, including (somewhat inappropriately) at present the Prime Minister’s brother.)

Tarrant moves on to the proposed addition of an employment/unemployment objective for monetary policy.  We still don’t have many specifics from Labour on how they propose to operationalise this change –  a change I generally support.  Robertson has talked of getting unemployment down to 4 per cent, but the state of knowledge isn’t such that it would make sense to add a numerical target to a new Policy Targets Agreement.    We don’t know what the long-run sustainable rate of unemployment (given eg deographics, labour market institutions, welfare provisions is) but we should want the Reserve Bank to be finding out.  By “finding out” I don’t just mean doing a lot of formal research –  although that would no doubt be part of the process –  but running policy in such a way that reveals, through developments in inflation, when we’ve got unemployment as low as it can sustainably go (ie without other micro reforms).

It looks as though there is quite a bit of work still to do to get this part of the package right.  My tuppenceworth is that appointing the right person/people is probably the most important element of the proposed reorientation: you want people making these decisions who realise that the whole point of discretionary monetary policy has always been to get and keep unemployment as low as possible consistent with maintaining price stability.    And I’ve previously suggested some specific statutory amendments that would help shift the orientation of the Bank:

  • require the Bank to publish updated estimates of the long-run sustainable rate of unemployment (or the NAIRU) at least once a year in the Monetary Policy Statement,  and
  • require that in each statutorily-required Monetary Policy Statement, the Bank explain the reasons why, in its view, actual unemployment deviates (or is projected to deviate) from the NAIRU, and the steps (if any) the Bank proposes to take to close the gap.

If appointing the right people is critical, what does Robertson have to say about that?

He expresses a modicum of concern that the new [not legally binding] Policy Targets Agreement between the Minister of Finance and Grant Spencer, notionally to come into effect next week, was done without any consultation with him.  But his concern comes to not much

Robertson was concerned that he wasn’t consulted when Steven Joyce signed the Policy Targets Agreement with interim governor Grant Spencer for the six-month period following the election. As it happens, he agrees with six months of the status quo. But, “when you’re in that period, immediately before the election, I do believe that it would have been better to have had some input from the Opposition in that.”

And, actually, in normal circumstances under the current law an incoming government would inherit a Policy Targets Agreement (and a Governor) with no automatic right to change that PTA (although new Ministers often ask nicely, and Governors have usually agreed).

Robertson should have been more concerned about the permanent appointments that have been made at the Reserve Bank in recent months, by the outgoing Governor, that risk boxing in a new Governor (and a new government).    Robertson’s governance model envisages that the members of the internal Governing Committee would become voting members of the Monetary Policy Committee.  But instead of making just an acting appointment to the (Deputy Governor level) role of Head of Financial Stability –  to cover the period while the current incumbent serves as “acting Governor –  a permanent appointment has already been made.   That role was filled by shifting Deputy Governor Geoff Bascand into the role, but then a permanent appointment has also been made –  of someone with no obvious value to add to things monetary policy or prudential –  as Bascand’s successor as Head of Operations.  Surely these permanent appointments should have been left to the new Governor, especially with the prospect of legislative change in the wind whoever leads the next government?   Allowing a new CEO to apppoint his own top team, when vacancies exist around the changeover, would seem at very least a common courtesy.   And people will exercise the monetary policy votes, not algorithms, so appointing the right people matters.

Strangely, Robertson doesn’t even seem that interested in the appointment of the new Governor, which the (current government appointed) Board has had underway for months.   Applications for the job closed weeks before the Labour Party started its dramatic rise in the polls.  And yet

So, is he happy with the current set-up where the Finance Minister can veto a board recommendation, but has no other power over the process?
“I’m not proposing any change to that,” he says. “I respect the independence, it’s a very important relationship.” One reason he has been talking about Labour’s designs is to give a heads up to anyone that applies for the job about where he’s coming from.

He keeps going on about “respecting” Reserve Bank independence, but that operational independence –  the responsibility to set the OCR independently of direct political involvement –  is a totally different matter from appointing the individual who, on current law, will have by far the largest policy influence on the short-term direction of the New Zealand economy.  He/she will determine what weight the Bank gives, for example, to the proposed employment objective.  And in almost every other advanced economy, the Minister of Finance or head of government has a key role initiating the appointment of the central bank Governor.  It is the way normal countries do things (perhaps with some role for non-binding parliamentary confirmation hearings).  It is what Philip Hammond or Scott Morrison do.  It is what Barack Obama did and (okay…) what Donald Trump shortly will do.    Our law should be changed.  Perhaps require the Minister to consult the Board –  although few if any of them have expertise in public policy or economic management –  but put the power, and the responsibility, squarely with the Minister of Finance.

I’m frankly not sure why Labour is so reluctant.  They are presented with the ideal opportunity here.  When, for example, Gordon Brown reformed the Bank of England he was faced with an experienced incumbent Governor, and a very strong internal deputy –  and yet they went ahead with reforms that markedly reduced the power of the Bank, and introduced powerful externals not under the thumb of the Governor.  Here, if Labour takes office they will do with a vacancy in the role of Governor.  Changing the law regarding the appojntment wouldn’t be a slap in the face to anyone (other than perhaps the Board, who are mostly a pretty faceless and unaccountable lot).  I’ve argued that, given the vacancy, one of the first steps of a new government should be a short amending bill to put the appointment power back in the hands of the Minister.  At present, he is on track for being presented with a status quo candidate (the Board has pretty consistently defended the status quo) when Labour (and the Greens and New Zealand First) are campaigning on changing the status quo.

What makes me say that?  Well, Robertson actually.    Because in the interview he says

How about the job description for the next Governor – is he OK with that? “Yes, but, as I say, the reason we gave the speech was to make sure that people were aware that, should we be elected, this is the direction we’re going in. The job description is what it is, as it stands today.”

It is frankly incredible.  The job description –  which I wrote about here –  was decided by the Board, all of whom were appointed by the National government.  The members aren’t openly partisan, but they were people National was comfortable with (when Labour was in power, they also had competent people on the Board, but the complexion was a bit different).   And the job description is framed under the Act as it stands (and quite rightly so –  it is all the Board can do).  But Labour is campaigning on material changes to the Reserve Bank Act, to its policy responsibilities, and to the personal powers of the Governor.  Surely it would seem likely that a subtly different set of skills would be appropriate under the current Act/PTA, than under whatever Labour and its allies are proposing?   Surely, at least to some extent, different sorts of people would be interested in the role (there are, for example, some people who would be resolutely opposed to any suggestion of adding an unemployment target, and might find it very hard to work under such a regime).   Even if Labour wasn’t going to adopt my suggestion of amending the Act to take the appointment into the Minister’s hands directly, they should be thinking of sitting down with the Board as soon as they take office, outlining their plans and visions, and inviting the Board to re-open the selection process, now that potential candidates are better placed to know what might be expected of them?

I was also interested in this comment from Robertson

Grant Spencer’s 1-3% target with a 2% mid-point will remain in place over the six months post-election. “We’ve got to take some time to get ourselves in and then have the discussions we want.”

I can understand where he is coming from, but…..parliamentary terms are only three years, and what he is effectively saying here is although he wants the Bank to focus on unemployment as well as inflation he is not going to anything about it until one-sixth of his first term is already over.   It wasn’t what Ruth Richardson did in 1990, Winston Peters in 1996, or Michael Cullen in 1999.  And even if he can’t amend the Act immediately to establish the employment objective –  and getting the details right does matter –  it would be quite within his powers to seek an amendment to the Policy Targets Agreement (which, in this case is non-binding anyway) to capture those unemployment concerns straightaway.  Given Labour’s clearly stated intention to legislate in this area, it also might not be unreasonable to at least consider use of a section 12 override (although this would probably run head-on into the concerns about the legality of the Spencer term and the supposed PTA).

And, then, finally, there is the large gap in all these reform proposals.  Tarrant didn’t ask about it and Robertson has never substantively addressed it.  The Reserve Bank has huge discretionary policymaking powers, especially over banks, which are (in law) exercised personally by the Governor, with no adequate accountability framework (nothing like the Policy Targets Agreement for example).  Any exercise that opens up the governance of the Reserve Bank –  as is likely under any government emerging after the election –  has to find a solution to those issues as well.  There are questions around which powers should be with the Minister and which with the Bank, and for those exercised by the Bank whether a committee (and if so of what sort) or an individual should (in law) wield them.   There are, probably second-order, issues around whether (so-called) macro-prudential analysis and regulation should be governed differently than the day-to-day regulatory regimes applying to banks, insurers, and deposit-takers.  I gather Labour recognises that the issues exist, but has as yet not really given any thought to how to resolve the issues.  I’m sure Treasury has some advice waiting for whoever does take office.

Robertson has been at pains to stress that the core of the Reserve Bank Act was passed almost 30 years ago (and previous core Reserve Bank Acts didn’t last that long).  There are enough issues outstanding –  lots not touched on in this post –  that doing the reform well really should be quite a major piece of legislation.  That will take time, but if he wants to embed change, reorient and lift the overall performance of the institution, he really should be thinking a lot harder (than he appears to be, based on this interview) about ensuring that he acts early to ensure that any government he is a leading figure in can choose as central bank Governor someone they are confident in, both as regards the conduct of policy, and about making effective the sort of structural and cultural changes they talk of.

 

Spencer appointment still appears unlawful

Just a couple of days after the election, Graeme Wheeler’s term as Governor of the Reserve Bank expires and Wheeler will leave office.

In the normal course of events, a new appointment of a permanent Governor would long since have been made.   But as officials belatedly realised late last year, and as the Reserve Bank Board had eventually to be directed to recognise, a new permanent appointment of someone to take office in late September could not be made in the run-up to the election, without breaching the conventions that govern how the period around elections is handled.

I’d been drawing attention to the issue for 18 months or so, and had suggested that the practical solution would have been to have invited Wheeler to accept a short extension of his term, allowing whoever formed the new government after the election to make their own appointment.  We don’t know whether Wheeler wasn’t willing to consider that, or whether the Minister of Finance wasn’t, but there were no legal obstacles to such an extension.  And yet it didn’t happen.

Instead in early February, the Minister of Finance announced that he was appointing the existing Deputy Governor (and deputy chief executive) as acting Governor for six months after Wheeler’s departure.  Spencer in turn had indicated that he would not be seeking permanent appointment and would retire at the end of the acting Governor period.

There is provision in the Reserve Bank Act for an acting Governor in some circumstances.  Thus, when in 2002 Don Brash resigned in the middle of his term to enter politics, Deputy Governor Rod Carr was appointed as acting Governor for a few months.

But ever since the Spencer appointment was announced I’ve been raising questions about the legality of this appointment (I have no concerns at all about Spencer himself).   There was this post on the day the Spencer appointment was announced.   And then a later post outlining the argument in more detail.   The gist of the argument is that the wording of the Act appears to provide for an acting Governor only when a vacancy arises in the course of a Governor’s term (as happened in the Brash/Carr case), and not when a Governor’s term expires and the Minister decides, for whatever reason, not to make a permanent appointment for a time.  Not only do the words naturally lead to that interpretation, but the overall context (the way related bits of the Act are designed) suggests that that was indeed Parliament’s intention in using those words.

I lodged OIA requests with the Reserve Bank Board (responsible for recommending appointees), the Minister of Finance, and with The Treasury (principal advisers to the  Minister of Finance).   The Board’s response was both obstructive, and indicative of how badly they appear to be in breach of the Public Records Act.  But, as usual, the response from Treasury was much more helpful.   In this post, I outlined the considerable amount we learned about the process from the papers Treasury released.      But The Treasury withheld the advice they had received from Crown Law on the lawfulness of various aspects of the appointment, and there was not even any report of the Crown Law reasoning in any of the policy advice documents.

The protection of legal professional privilege is grounds for withholding documents under the Official Information Act, and is widely used by officials to keep the thrust of legal advice confidential.    But this ground for withholding, like several others, is subject to a caveat

unless, in the circumstances of the particular case, the withholding of that information is outweighed by other considerations which render it desirable, in the public interest, to make that information available.

The Ombudsman had relatively recently highlighted this provision, and on occasion had ordered the release of either the legal advice itself, or a full summary of that advice.  And so I appealed to the Ombudsman against Treasury’s decision to withhold the legal advice. I didn’t really expect to get the advice itself, but I wanted to understand the reasoning and argumentation Crown Law had provided in support of the Minister of Finance’s decision.  And since it involved an appointment to a position holding very considerable discretionary power in a number of policy areas, it seemed to me that it would be in the public interest to make at least a summary of the advice available.  After all, if there were doubts about that lawfulness of the appointment, that could undermine confidence in the Bank’s action, and its capacity (during the term of a purported acting Governor) to exercise (for example) its crisis management powers.

And, somewhat to my surprise, the system worked.  In a post at the time, in April, I lodged the appeal I noted

I suppose it will take some considerable time for the Ombudsman’s office to get to this request –  perhaps even after the acting Governor’s term has ended –  but with the possibility of reviews to the Reserve Bank Act governance provisions in the next couple of years, it would still be valuable for this advice and intepretation (in full or in summary) to be put in the public domain. This is, after all, about the appointment and accountability provisions for the most powerful unelected public office in New Zealand.

But last Friday the Ombudsman’s Office rang to inform me that after discussions between the Ombudsman and Treasury, Treasury had agreed to release a summary of the Crown Law advice.  The Ombudsman’s office assured me that, having seen all the orginal opinions themselves, it was a fair and representative summary of the advice.  Since I only ever really expected to obtain a summary of the advice, I agreed to discontinue my appeal for the full advice.  An hour or two later, the summary of the Crown Law office arrived in my email in-box.   Only five months after the original appeal was lodged, and before the (purported) acting Governor takes office.  I was impressed, and grateful that Treasury did not seek to drag the matter out longer (which they could have done).  I’m not sure why they changed stance, but perhaps they recognised that with the changeover only a couple of weeks away, there might well be further questions about the lawfulness of the appointment.  If so, it would be desirable to have the Crown case in the public domain.  Perhaps too they had noticed reports of Grant Robertson’s concerns about some of the Reserve Bank appointments this year (I’m not sure if he has concerns about lawfulness, but he might reasonably be disgruntled at not being consulted over the appointment of a very powerful public official to commence work on the third working day after the election). Spencer might be (purporting to be) acting, but in that role he would have all the discretionary policy powers of the Governor.

The document I received from The Treasury is here.

Crown Law summary advice re acting Governor Official Information Act Response – Michael Reddell (20170031)

Macroeconomists often don’t have much to do with lawyers and legal opinions.  But I’ve had more than more my share, both in various regulatory and markets role over the years, here and abroad, but also for the last nine years as a trustee of the (somewhat troubled) Reserve Bank staff superannuation scheme.   There are good lawyers and poor ones.  And even from decent lawyers there are good and persuasive opinions and poor ones too.   In just the last six weeks, I’ve read a very persuasive opinion on an issue where I was initially inclined to (and would have preferred) the opposite interpretation, and an opinion  –  the conclusion of which I was inclined to agree with –  where the reasoning left a great deal to be desired.     We’ve had cases where draft legal opinions have come back and we’ve had to point out that the lawyers have simply overlooked key considerations that seem relevant, and so on.

Ours is an adversarial legal system, where in each side of any particular case, there are lawyers arguing the interests of their clients.  Whatever the truth is –  whatever the final judicial decision is –  there is no particular reason to expect it to be captured in a single opinion from a lawyer arguing the interests of his or her client.  In this case, the Minister of Finance wanted to make an acting appointment, of Grant Spencer, and Crown Law’s advice appears (see those earlier documents linked to above) to have been sought quite late in the piece, to backfill a political and bureaucratic preference.   It is what in-house lawyers do –  and that is the role Crown Law serves.  Sometimes they will say “no you just can’t do that” but often enough they be casting around for a half-plausible interpretation to enable the client to do what they want to do anyway, perhaps especially when the risk of an actual court challenge is low.

Which is all by way of saying that I didn’t find the Crown Law reasoning persuasive.  I didn’t really expect to, but I was curious to see what arguments –  or precedents –  they would mount.    In fact, I was surprised by how thin and unconvincing their reasoning was.    I’m now more worried than ever that this major public appointment will be unlawful and, therefore, that real doubts will hang over the lawfulness of any Reserve Bank actions taken by the (purported) acting Governor during the next few months.

Crown Law notes, by reference to a couple of Supreme Court cases from last decade, that under the Interpretation Act 1999

The meaning of an enactment must be ascertained from its text and in the light of its purpose

As the Supreme Court noted,

even if the meaning of the text may appear plain in isolation of purpose that meaning should always be cross checked against purpose in order to observe the dual requirements

In this case, both the text and the purpose work in the same direction, towards the same interpretation.  And that interpretation isn’t the one Crown Law places on the relevant provisions of the Reserve Bank Act.  In fact it highlights the limitations of legal opinions when the lawyers concerned are not intimately familiar with the legislation concerned and with the policy purposes behind the relevant provisions.

Section 48 of the Reserve Bank Act allows the Minister, on the recommendation of the Board, to appoint an acting Governor

for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less

The plain meaning of the text “in isolation” is that an acting Governor can be appointed if a vacancy arises during a Governor’s term, but not if the Minister and Board simply don’t appoint an acting Governor.  After all, on 27 September there is no “remainder” of any Governor’s term, and the relevant term limit is “whichever is less”.    There is no number of days –   let alone months –  less than zero.

Ah, but, argues Crown Law, “the scheme of Part 3 of the RBNZ Act indicates that there is to be a Governor at all times”.   This assertion governs much of the rest of their advice.  If there has to be a Governor at all times and a permanent appointment hasn’t been made, a temporary (acting) appointment must be able to be made, and “whichever is less” is of no account.

Actually, I’d agree that the Act envisages there being someone with the powers of  Governor at all times.  But the Act’s wording appears to be designed so that there can be an acting Governor –  if an unexpected vacancy arises during a Governor’s term –  wielding those powers, but that in the normal course of events it is up to the Board and the Minister to get on and make a substantive appointment so that a new Governor is in place at the end of the old Governor’s term.   There is no provision, express or implied, for the Minister and Governor to evade those expectations and restrictions.  (It might, in some cases, be desirable for there to be such provisions –  for exactly a case like this, where the election date falls near the end of the outgoing Governor’s term, but there isn’t.   Laws as passed are not always written in the way that, with hindsight, we might prefer.)

The Crown Law people appear to have realised that a key aspect of the Reserve Bank Act is operational autonomy in respect of monetary policy.  But they don’t seem to have appreciated –  they certainly don’t mention –  the explicit precautions Parliament took to prevent that autonomy being eroded through the appointments process.  Thus, any new Governor must be appointed for five years.    The initial appointment cannot be shorter, even if some superb candidate turned up and was only available for four years.  Without a restriction of that sort, it will have been reasoned, the Minister and the (Minister-appointed) Board could get together and appoint someone for six months or a year at a time, rolling over those appointments if appropriate depending on the extent to which the Governor heeded the Minister’s preferences.  It simply can’t be done, under the Act as it stands.  An existing Governor (but only he) can be extended for a short period, but of course that person will already (by construction) have served at least five years in office.

Thus, for Crown Law to be correct –  in claiming that the Minister and the Board are free to appoint an acting Governor for up to six months even when there is no remaining term to complete –  they are effectively arguing that one of the key provisions of the Act –  that specific five year initial term –  can be effectively subverted by a succession of six-month acting appointments.  These are extreme illustrative examples, but my point is not that this is what was intended by the Spencer appointment, but that it is what the law must allow if Crown Law is right.  Since the plain words and the purpose of the relevant provisions of the Act take us in the opposite direction, Crown Law simply must be wrong on this point.

I have also argued previously that there is no statutory provision for the signing of a Policy Targets Agreement between the Minister and an acting Governor.   That makes sense on my interpretation of the Act because on that interpretation, there can only be an acting Governor when an existing gubernatorial term has been unexpectedly interrupted.   Thus, a Policy Targets Agreement is signed “for that person’s term of office” (section 9) before a Governor is appointed.   And when Don Brash resigned his term still had another 17 months to run, and there was already a PTA in place for that term.  Thus when the Minister appointed Rod Carr to be acting Governor for a few months of that remaining term, there were already policy targets in place for the Bank, signed by the person whose term Carr was partially completing.      There is nothing comparable from 27 September this year, since the PTA Wheeler signed with Bill English in 2012 will have expired the previous day.

Crown Law attempts to get round this by asserting –  and it is simply an assertion  –  that  acting Governor “is the Governor”.  If he is the Governor, there must be a PTA signed with him before he is appointed.   But they offer no statutory support for this proposition (acting Governor “is” Governor).  After all, the Act talks of an acting Governor having the powers and responsibilities of the Governor, but still maintains a distinction between the two titles.   If there was no distinction, there would be no need for the acting Governor statutory provisions.  But Parliament chose to make such a distinction, and must have intended something thereby.    And it seems to  have done so because of the emphasis Parliament placed on having all actual gubernatorial appointments be for five years.    There is no provision in the Act for an acting Governor to sign a PTA, because the Act clearly envisages (literal wording and policy purpose) that an acting Governor would be appointed only during the unexpired portion of a term of a substantive Governor.

Anyway, you can read the summary of the Crown Law advice yourself.  Perhaps you’ll be persuaded.  I’m not.     It would appear that (a) an unlawful appointment is about to be (or has already been) made, and thus the Reserve Bank will have no lawful head after Graeme Wheeler leaves office on 26 September, and (b) that the document Grant Spencer and Steven Joyce signed on 7 June, which purports to be a Policy Targets Agreement under section 9 of the Reserve Bank Act is, in fact, no such thing.

If so, not only will the Bank have no lawful head on 27 September, it will have no Policy Targets Agreement to guide and constrain any monetary policy actions it takes, or purports to take, over the period from them until the new permanent Governor takes office.   Even if my interpretation were finally to be shown to be wrong in law, the fact that it is a plausible interpretation –  I would argue the most natural interpretation, consistent with the provisions of the Interpretation Act –  should raise serious concerns, and leaves some doubt hanging over the ability of the Bank to act effectively over the next few months.

Quite possibly, the Bank won’t need to do much in that time.  Markets don’t expect the OCR to change, and it doesn’t seem likely that debt to income limits will be imposed either.  But circumstances can change quickly.  We might have a new government in a couple of weeks, and the Labour Party has indicated a desire to have the Bank focus on unemployment as well as inflation.  A natural step in the early days of such a new government would have been to seek a change in the PTA to make that expectation explicit, pending a subsequent change in the Act.   But what, formally, is the status of the existing document, let alone any new one Grant Robertson might seek to put in place?  Can he override (section 12) a purported PTA which isn’t a real PTA?  (In any case, shouldn’t the Opposition have been consulted about the 7 June purported PTA, given that it was an action being taken, to come into effect after the election to shape the conduct of macro policy for the first six months of any post-election government’s term).

The sad thing about this whole episode is how unnecessary it was.  First, if Graeme Wheeler had been persuaded to stay for another six months, there would be no legal uncertainty whatever.  If that couldn’t happen, a simple one-off amendment could have been made to the Reserve Bank Act to allow for this specific acting appointment, with a sunset clause such that the provision lapsed next March.  At this point, neither option is possible – Wheeler is off to take up his directorships, and Parliament doesn’t sit before 27 September.   For the time being, we –  and institutions directly regulated by the Bank –  will simply have to live with the uncertainty, hope that no difficult decisions arise before a substantive appointment is made.  And perhaps the Minister –  whoever he or she is –  might need to be prepared to legislate quickly if circumstances should turn nasty and the need for greater certainty becomes apparent (one wouldn’t want the exercise of crisis management powers being tested through the courts for years to come).

It has been pointed out to me that section 51 of the Reserve Bank Act allows the Governor to delegate any of his functions and powers to the Deputy Chief Executive and

Any such delegation, until it is revoked, shall continue in force according to its tenor, notwithstanding that the Governor who made it may have ceased to hold office.

In principle, so it might be argued, since Spencer is now the Deputy Chief Executive, the outgoing Governor could delegate all his powers to Spencer as deputy chief executive, and such a delegation would continue to be valid even though the Governor who gave the delegation has ceased to hold office.

It is an interesting idea.  But according to Board minutes released to me previously, the Board has already recognised that from 27 September the other Deputy Governor, Geoff Bascand, will be the deputy chief executive, replacing Spencer –  who presumably would not then have those powers.

It is the sort of issue that would seem to need a good lawyer’s advice.    Can a delegation remain in force not just if the Governor who gave it is no longer in office, but if there is no Governor at all (and recall that the Act puts almost all the powers of the Bank in the hands of the Governor).

It is a mess.  And a quite unnecessary one, if only the process had been better managed by the Minister of Finance, the Reserve Bank Board, and The Treasury from the start.

 

(PS.  Incidentally, were Crown Law to be correct that an acting Governor had to have a new PTA before he or she could have been appointed, Michael Cullen and Rod Carr would have been in breach of the Act in 2002.   This isn’t compelling on its own –  people do make inadvertent mistakes – but it is illustrative as to how the relevant provisions of the Act have previously been read.)

 

On a declared candidate for Governor

Last week, we had an unusual public confirmation from a senior figure who  disclosed that they had applied for the job of Governor of the Reserve Bank.

I’m pretty sure it has never happened before in New Zealand.  The current Reserve Bank Act, which gives the lead role in appointing a new Governor to the Bank’s Board, has been in place since 1990, and this is only the third time there has been a vacancy to fill (as distinct from an incumbent being reappointed).  I can’t recall either in 2002 or in 2012 that anyone publicly disclosed their candidacy –  although in both cases, it was generally assumed that the incumbent deputies (Rod Carr and Grant Spencer) had applied.      It doesn’t happen in other countries, where the Governor of the central bank is generally appointed directly by the Minister of Finance or the President, without an advertised application process.  Again, sometimes it is widely known that someone is keenly interested –  eg in the US case a few years ago Larry Summers, the former Treasury Secretary –  but formal public confirmation is rare or unknown.

But in an (otherwise mostly unremarkable) interview with interest.co.nz’s Alex Tarrant last week, Reserve Bank Head of Operations and Deputy Governor, Geoff Bascand, confirmed his application

He’s put his hat in the ring for the Governor’s job. It’s been rumoured that he’d be the front-runner among the insiders if he wanted to stand, and now he’s confirming that he is going for it.

“The Reserve Bank matters to New Zealand’s economic performance and ultimately therefore to people’s welfare, and I’d like to be part of continuing to make this an excellent and strong institution, and to lead it in a way that it would be really successful for the next five years,” Bascand says.

If he doesn’t get it, then fair play to whoever does. Bascand says he’d like stay on in the Financial Stability role he’s about to take over when Grant Spencer moves into the Acting Governor position for six months starting late-September.

It is an unusual move.  In some respects, it is to his credit –  after all, one reason people don’t usually answer such questions is that it can be embarrassing to miss out, particularly if you are (or will be by then) the incumbent deputy, and perhaps more so if everyone knows you had applied.     But then it is presumably just another part of the multi-year effort by Graeme Wheeler to promote Bascand as his sucessor.   After all, the bulk of the interview (authorised by Wheeler) was about monetary policy and making sense of inflation –  normally issues that would be handled by either the Governor, or the Assistant Governor/Chief Economist, not by the chief operating officer responsible for things like notes and coins, security and property, communications, the operation of the securities settlement system, HR and the like.

Bascand’s background, of course, is in economics.  He started at Treasury, spent quite a bit of time at the old Department of Labour, running for a time its well-regarded Labour Market Policy Group, before moving to Statistics New Zealand where he eventually spent some years as Government Statistician.   There seem to be a range of views as to quite how successful that tenure was.  A while ago someone sent me a link to a somewhat sycophantic profile written while Geoff was in office.  Then again, I’ve heard that SNZ ran into some pretty serious financial problems on his watch.

When Geoff was appointed as Head of Operations and Deputy Governor, I was pretty positive on the appointment.  In part, that was the contrast to his predecessor, but much of it was about Geoff’s own merits. Graeme had set out to appoint someone who could contribute to policy, not just keep the operations ticking over, and in Geoff he had found such a person.   I hadn’t had a lot to do with him over the years, but what I’d seen left a fairly good impression, of someone who was smart, thoughtful, and level-headed.

It was an interesting move for Bascand himself.  He stepped down from a chief executive position in an operational agency to take up a number 3 position at the Reserve Bank  My take on day 1 (as recorded in my diary the day his appointment was announced) has remained my view throughout

“No doubt he sees it as a stepping stone back to either Governor or Secretary to the Treasury, via replacing Grant [Spencer] when he goes”

The expectation at the time was that Spencer probably wouldn’t stick around for five years, but as it happens next month Basacand will indeed take up Spencer’s position as Head of Financial Stability and deputy chief executive.

I recall Bascand telling an internal forum a few years ago that he’d only had two more years at SNZ to run, and hadn’t been interested in either joining the international consultancy circuit, or in the sort of operations-focused government chief executive roles that the State Services Commissioner had discussed with him.   Even though he’d had relatively limited experience in macro, and none in the financial sector, taking a fairly senior well-remunerated position at the Reserve Bank for a few years was a move back towards “home” –  his interests in economic policy.   And one that might position him well in time to secure the glittering prizes.

I don’t have many thoughts on how well he has done his day job –  head of operations  –  at the Bank over the past four years.  They aren’t areas I pay a great deal of intention to, and are largely inwards-focused anyway.  But the new bank notes seemed to be introduced smoothly, and many people seem to like them.  So he seems to have been a competent safe pair of hands, presiding over a continuation of the status quo (including, for example, the Bank’s obstructive approach to the Official Information Act, for which Bascand had responsibility).

What has been more noticeable has been the relatively high public profile Bascand has been given by the Governor on economics-related issues, especially in the last couple of years.     Bascand’s predecessor as head of operations gave almost no speeches, and certainly none on economic policy and analytical issues (and it is not as if the Bank has moved to do more speeches in total).

And it isn’t as if they have been bad speeches.    There are things I’d disagree with in all of them  –  and I’ve noted his over-enthusiastic embrace last year of the Bank’s new labour market capacity indicator –   but that isn’t a criticism.   If anything, I’ve found Bascand’s speeches the best of those put out by the four Reserve Bank senior managers, and certainly better, on economic issues, than those of the Chief Economist.  Bascand’s speeches come closer to comparing with those of senior managers in other central banks, including the Reserve Bank of Australia.

So in a way it isn’t surprising, or inappropriate, that the outgoing Governor has been smoothing the way, allowing Bascand to raise his public profile on economic policy issues, and –  in effect –  promoting him as the next Governor.

A few months ago the Bank’s Board advertised the position of Governor.   In their “candidate profile” they listed the sort of qualities they were looking for.  I wasn’t convinced that was the right list, but here is how I see Bascand against that list of characteristics.   My scale is 1 to 5, with 5 the best possible.

Outstanding intellectual ability 3.5
Leader in the national and international financial community 2
Substantial and proven leadership skills in a high-performing entity 3.5
Proven ability to manage governance relationships 4
Sound understanding of public policy decision-making regimes 5
Ability to make decisions in the context of complex and sensitive environments 3.5
Personal style will be consistent with the national importance and gravitas of the role 4

The Board had one more quality they were looking for

The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

Personally, I suspect that is, in effect, ultra vires.  Decisions on the extent, or otherwise, of independence are matters for Parliament.    But I suspect Bascand would be a competent safe pair of hands on that count.

Overall, against this set of qualities, Bascand scores well on the “public sector” types of qualities, as he should.    We don’t know much about how he’d do as a single decisionmaker in a body with such high profile and extensive functions as the Bank (nor, in truth, do we know that for any of the possible candidates).  He is a capable analyst without, I suspect, claiming to be any sort of soaring intellect.  Where he probably scores lowest on this list of qualities is that he can’t make any serious claim to being a leader in the “national and international financial community”.   No one, I imagine, thinks of a distinctive Bascand perspective on any of the relevant issues.   Relatedly, he has no background with financial markets, banking, or financial system regulation –  at least beyond what he will have picked up sitting around the relevant committees, incidental to his day job,  in the last four years.

It is pretty clear that there is no ideal candidate to be the next Governor  (indeed, I heard at secondhand that the chair of the Board has said as much).  If so, Geoff Bascand strikes me as having the inside running if the powers that be are pretty content with things as they are, and aren’t looking for anything materially different over the next five years than they’ve had in the last five.    He is, after all, the only serious potential internal applicant, and the Board members have been able to see him every month for the last four years and take his measure.   Things probably wouldn’t run badly off the rails with Geoff in charge, and in some respects I expect he’d been a little better than Wheeler.

That is in the nature of a conditional prediction: if you think things have mostly been just fine at the Bank why go past Bascand?

But if he looks more or less suitable (given the slim alternative pickings) on the face of it, I still remain somewhat uneasy about appointing Geoff Bascand as Governor, in which position he alone would have personal legal responsibility not just for monetary policy, but for a wide range of regulatory interventions.   Some of that has been because he has been a key member of the Bank’s top-tier over the last four years, when monetary policy hasn’t been done well, and hasn’t been communicated well, and when the regulatory interventions have compounded, backed up by not particularly persuasive analysis.   I wonder if he’ll be able to demonstrate to the Board or the Minister that he was trying to influence the Governor towards better approaches?    Or even that he has learned something from those unsatisfactory experiences?

But my impression is that he is more a follower and capable implementer than a leader.   I was exchanging views a few weeks ago with another former colleague and we both noted that when Geoff first joined the Bank he’d seemed good and open, but quickly seemed to pick up the (internal) political signals and fall into line.  At a point when I was a lone internal voice on monetary policy I recall his somewhat strident objection that anyone could take a different view –  without ever making the effort to come and talk it over and understand a difference of perspective (in an area riddled with uncertainty).

Then, of course, there were episodes like the Toplis affair. Graeme Wheeler had got a bee in his bonnet about Stephen’s Toplis’s criticisms, and had all his fellow governors meet individually with Toplis to try to get him to back off.  Is that the sort of behaviour Bascand regards as acceptable from a top public servant?  And, if not, why did he simply go along –  after all, his day job didn’t involve contact with commercial bank chief economists?   Did he try to persuade the Governor to let it go?

Or the OCR leak episode.  I’m reluctant to make too much of it, because I was involved.  Then again, one collects data partly through experiences with people.   There is nothing in Geoff Bascand’s involvement in that episode, as revealed by the material the Bank had to release, that suggests someone with the sort of stature, and decency under pressure, that would mark him out from Wheeler.   Bascand was the senior manager responsible for external communications, lock-ups etc, as well as the one who commissioned the leak inquiry.

One could even think about Geoff’s speeches and interviews.  As I’ve already mentioned, I think they’ve been quite good.  But there isn’t any hint of a fresh or distinctive angle to them  (with the possible slight exception of comments around immigration in the Tarrant interview, which I would welcome).  Sure, the Governor is the sole decisionmaker, and it is his line that needs to be conveyed primarily.  But in a substantive speech a thoughtful senior adviser should be able to offer fresh insights or angles, without making trouble with the boss.  There is little sign Bascand has.

But my most sustained involvement with Geoff Bascand has been as fellow trustees of the Reserve Bank superannuation scheme over the past 4+ years.  Geoff serves as alternate for the Governor, and I’m an elected members’ representative.   Until late last year, Geoff was chair of the trustees (probably an illegal appointment, but that was an issue for those who appointed him –  the Board –  not for him personally).

Trustees of superannuation schemes –  regardless of who appointed/elected them – are required to act in the best interests of the beneficiaries of the trust, in this case, the members and pensioners.   A defined benefit superannuation scheme is a complex beast, involving huge elements of trust reposed in the trustees by members stretching over many decades (from memory, our median pensioner is now aged about 85).  The regulatory regime for superannuation schemes in New Zealand is quite limited –  something I have mixed feelings about, given my generally support for less regulation –  but there have long been statutory provisions, judicial precedents, and the obligations of the specific trust deed and rules themselves.  These days, superannuation schemes are the responsibility of the Financial Markets Authority –  a fellow regulator that Geoff Bascand will no doubt be dealing with extensively in his new role as Head of Financial Stability for the Reserve Bank (while at the same time a complaint against the trustees sits in FMA’s hands).

The Reserve Bank’s regulatory approach to banks is often characterised as being quite light-handed.  Certainly, there are few/no on-site inspections of the sort often seen in other countries.   But there are quite onerous requirements imposed on directors and managers, including various strict liability offences –  ones, that is, where people are liable whether or not they ever intended to commit an offence.  Strict liability provisions are generally repugnant, but there has been no sign of the Reserve Bank walking back its support for such provisions.  It is the standard they require of those who hold our money, or make our payments, in New Zealand registered banks.   Banks quake at the thought of breaching Reserve Bank regulatory requirements (we see it in the big buffers they run around the LVR limits).

Given this stern approach to the regulation of entities they have statutory responsibility for, you might suppose that they would consistently seek to adopt a “whiter than white” approach to the management of the long-term financial entity they themselves sponsor.  It isn’t an entity that is exactly invisible to the Bank either: successive Governors have been trustees, and when they choose not to attend one of their senior managers does so for them.  The Bank’s Board –  of which the Governor is a member –  appoints two of the trustees, and has to approve any rule changes.

Sadly, the standard the Bank –  and its senior managers –  have taken to the superannuation fund falls far short of the standard they require private financial institutions to adopt.   I won’t attempt to bore readers with details.  The worst abuses were done some decades ago.  Bascand’s involvement has been as these abuses have come to light, and how he has sought to guide the response and reaction.

Three years ago a particularly persistent retired member wrote to the trustees highlighting a series of potential problems around some rule changes in 1988 and 1991.  He suggested there was reason to doubt that one significant element of the the 1991 changes had been done lawfully at all, and that key elements of the 1988 changes (which gave the Bank power to, in effect, reduce pensions) had been done without the members’ consent that appeared to have been required by the rules, and under the relevant legislation.  Geoff’s immediate response –  as chair of a group of trustees, responsible for the fund, and working in the best interests of members –  was to write a memoradum to trustees proposing that we agree there was nothing of substance in the submission, and that we do no further investigation.

Fortunately, that did not gain agreement from fellow trustees.  I say “fortunately” because with only a little bit of follow-up work it emerged that in fact there had actually been a breach of the Superannuation Schemes Act (members had never actually been told at the time of the 1991 rule change).  Fortunately for today’s trustees, the statute of limitations had passed, but the trustees felt obliged to apologise to members for that earlier breach.

With a bit more follow-up work and some legal advice, it became clear that one element of the 1988 changes could simply never lawfully have been made (I think we are all agreed in shaking our heads in wonderment at how this happened), and another change that could lawfully have been made, nonetheless never had the member consent that clearly was required.  In fact, the Bank (and the Board) had known of some of these problems for more than 20 years and had never told members  (it was no small point –  the illegal change had meant that any surplus on wind-up could go the Bank).      That in turn has opened up issues around the validity of the consent members gave in the mid 1990s to a rule change that has been worth at least $5m to the Reserve Bank –  money it, in effect, extracted from the Fund, having apparently (and wilfully or perhaps otherwise) misled members about the alternatives.

The issue here isn’t the rights and wrongs on specific points.  It is about the cast of mind displayed by someone who will shortly be responsible for the regulation of most of our financial intermediation sector, and someone who asks to be given the huge powers Parliament places in the hands of the Governor of the Reserve Bank.    Geoff has been quite seriously engaged on the issues where the Bank’s financial interests might be threatened –  a process likely to end up in the High Court next year.  But he has never shown much sign of acting with the interests of the Fund’s members and pensioners at heart.    Despite him, rather than because of him (even though he was chair), some of the issues have continued to be pursued.    This isn’t the place to traverse the rights and wrongs of the specific issues; it is about my observation of a senior manager’s inclinations and cast of mind.   I’ve noted previously his seeming inability to recognise, and respect, the differences between his responsibilities as a Bank manager, and those as a superannuation scheme trustee –  the sort of lack of regard for boundaries that would rightly trouble the Reserve Bank if, say, it was apparent in a director of a New Zealand bank appointed by a foreign parent.

I don’t think Bascand has malevolent intent.  He is a pleasant and thoughtful person as an individual.  But he doesn’t seem to recognise his responsibilities, and rarely seems to want to dig deeper if he isn’t forced to.   Leadership is partly about asking hard questions, and insisting on rocks being turned over even if it might be inconvenient.  It is about recognising implications, and looking a bit further ahead than most.   Sadly, there doesn’t seem to have been sign of that sort of standard in the Bascand’s approch.  A few years ago a prominent person noted that the standard you walk past is the standard you accept.   The sorts of standards on display in recent years aren’t those we should be tolerating in a Reserve Bank Governor.

Then again, standards in public life in New Zealand appear to be slipping.  As I say, Bascand looks like the probable preferred status quo candidate for Governor.  But the status quo shouldn’t be nearly good enough.