Monetary policy, the Governor etc

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

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

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

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

mon condtions current

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

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

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

mon conditions ahead.png

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

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

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

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

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

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

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

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

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

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

 

 

 

Who did Iain Rennie consult?

I’ve written a couple of times about the review former State Services Commissioner Iain Rennie has been conducting, at the request of the Minister of Finance, into two aspects of the governance of the Reserve Bank:

  • whether something like the existing internal committee in which the Governor makes his OCR decisions should be formalised in legislation, and
  • whether the Reserve Bank should remain the “owner” of the various pieces of legislation (RB Act, as well as the insurance and non-bank legislation) it operates under.

An earlier OIA request from a journalist saw The Treasury refuse to release the terms of reference for the report, but they did release the terms of engagement.  I wrote about that here.    We learned from that release that the report had been delivered to Treasury in mid-April.    We also learned that

In completing the work, the author will engage with an agreed set of domestic and international experts.

and

The key deliverable is a report, which will be peer reviewed by a panel of international experts.

I was interested to know who these experts were, and lodged an OIA request with Treasury.  No doubt, they could readily have responded in a day or so, but after four weeks they did finally respond yesterday.

Anyway, this was the list of “agreed domestic and international experts”.

experts

and this was the list of reviewers

reviewers

It is a curious list in many ways.    Setting aside the SSC people, of whom I know nothing but who are presumably knowledgeable on issues of governance of New Zealand public sector institutions, not a single one of the central bank experts (first list) has any experience of, or exposure to New Zealand (let alone actually being a New Zealander).

And Rennie, with Treasury’s agreement, appears to have consulted only current serving central bankers.   No doubt several will have had useful perspectives to offer on their own central banks’ experiences.  But the world of central bankers is a fairly clubby (or collegial) one, and you would have to think it unlikely that Rennie would have heard anything from these people that would cast doubt on how the arrangements their New Zealand peers operated under were working.   And among those current central bankers only one (Poloz, the Canadian Governor) has any stature in his own right; the others appear to be “corporate bureaucrats”, able no doubt to pass on information about how things work in their own central banks, but not self-evidently qualifying as “international experts” on central bank governance etc.

One might have supposed that any number of other people (even from abroad) could have provided valuable perspectives and insights.  For example, retired Governors and former members of decisionmaking committees, who are freer to speak their mind.   Lars Svensson, the leading academic and former monetary policy board member, wrote a review of our Reserve Bank in 2001 for our then-government.   Having had extensive experience as an insider since then, and retaining an interest in New Zealand, he would have seemed like a natural person for Rennie to have consulted.    In fact, there is not one academic on the list.   Not, for example, Alan Blinder, former vice-chair of the Fed and author of academic work on decisionmaking by committee.   There are no private economists on the list.  Not, for example, Willem Buiter now chief economist of Citibank and a former academic and member of the Bank of England’s Monetary Policy Committee.  And no one from abroad with, say, a Treasury perspective, or the perspective of a Minister.  Bernie Fraser, for example, had been both Governor of the Reserve Bank of Australia, and Secretary to the (Australian) Treasury.

And not a single person from New Zealand made the expert list?  Not Arthur Grimes, who was heavily involved in the design of the current system and later chair of the Reserve Bank Board.  Not Don Brash, who was Governor under the current system for 12 years.  Not thoughtful former Board members such as (for example) Hugh Fletcher.  Not people who had been involved from a Treasury perspective (especially in the years since Rennie himself left Treasury).  And, of course, no one who has written on the issues domestically.

You might, incidentally, be wondering why people from the Bank of Canada and the Bank of Israel top the list of experts.  That is likely to be because Canada is the only other advanced country central bank with the Governor as (formally) single decisionmaker (Canada has quite old central banking legislation, and the Bank of Canada has much narrower responsibilities than our Reserve Bank).  And until relatively recently, Israel also had the Governor as a single decisionmaker, before the legislation was overhauled and a mixed committee (internals and externals) took over the monetary policy decisionmaking role.  The Israeli experience should be interesting, but again you have to wonder why Rennie didn’t consult Stan Fischer, former Governor of the Bank of Israel, and now vice-chair of the Federal Reserve.

What of the international peer reviewers?  There were three, and each will have been likely to have added something in commenting on Rennie’s draft.    But, again, there is a distinctly “let’s keep this inside the club” feel to it all.   Goodhart, for example, is a respected academic economist, and former staff member and Monetary Policy Committee member at the Bank of England.    But he is now rather elderly, and has had a very strong relationship with the Reserve Bank of New Zealand over the years –   including as guest speaker at the (rather extravagant) 50th anniversary celebrations of the Bank, and then someone used as an expert witness  by the Bank at the parliamentary select committee when the current Reserve Bank Act –  governance and all – was being legislated (rather controversially) in 1989.

Donald Kohn is pretty highly-respected in international central banking circles.  So much so that Treasury omit to note in their description that, having retired from a career at the Federal Reserve, he is now a member of the Bank of England Financial Policy Committee, so still entirely within the central banking club.  He has visited the Reserve Bank and, from memory, wrote up his experiences pretty positively.

The final reviewer is David Archer, former Assistant Governor and Head of Economics at the Reserve Bank (and sometimes mentioned on lists of potential future Governors). He now holds a senior position at the Bank for International Settlements, a body owned by central banks (including ours) which describes itself thus

The mission of the BIS is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

I worked with David closely over a long period, and he was usually pretty willing to speak his mind.  He certainly knew the Reserve Bank well –  at least in the days before financial regulation became so important, and before the Reserve Bank moved more back into the mainstream of central government as a major regulatory institution –  but you have to wonder quite how free he will have felt to offer views the Reserve Bank might be uncomfortable with – the Governor visits the BIS pretty frequently –  especially as those views will themselves presumably be discoverable in time.

So the offshore people consulted, or used as reviewers, seem as though they will have been a rather partial perspective on the issues at hand. No doubt, all provided some useful information and perspectives, but you can’t help thinking there could have been a lot more there if Rennie had sought it.  Then again, as State Services Commissioner his reputation was hardly that of someone keen on open government.  What is perhaps more troubling is that The Treasury was okay with all this.

Despite this published list, you have to wonder who else Rennie in fact consulted.  Why I do suppose there was anyone else?  Because, somewhat by chance, I also yesterday got a response from the Reserve Bank to an Official Information Act request for minutes of the Reserve Bank Board.

In the minutes of the Board meeting held on 30 March this appears

Rennie board

There follows almost three pages recording the details of the Board’s discussion with Rennie (and his supporting Treasury staff). every single word withheld (on somewhat questionable grounds).    Nothing else ever gets three pages of text in the Board minutes –  in fact, the process for appointing a new Governor is still not being minuted at all, even in this latest set of releases.

I don’t have any particular problem with Rennie consulting with the Bank’s Board.  They are likely to have some useful experiential perspectives to offer, but if the discussion covered almost three pages of minutes and –  according to Treasury –  no one else in New Zealand with any familiarity with central banking issues was consulted, it does all have the feel of an insiders’ job.  Perhaps that is what Steven Joyce wanted.  It isn’t what the situation requires.    Meanwhile, one can only hope that the report itself, along with the terms of reference, will be released before too long.

New Zealand isn’t the only country looking at these issues.  The Norwegian government just this week released an independent report they had commissioned looking at the future governance and mandate of their own central bank.  The summary report is very easy to read, and includes specific draft amendments to the law to give effect to the report’s recommendations.  Among those recommendations is a streamlined system of governance, with proposals for a monetary policy committee (40 per cent of whose members would be externals appointed by the government), and for a separate Board to which the Governor would be responsible in his role as chief executive of the Bank.    We can only hope that the completed Rennie report will be as clear and crisp.

 

 

Advertising for a Governor

I was settling in for an afternoon of watching the gripping UK election results, when someone sent me a copy of a job advert that had appeared in Australia this morning.  The advert was for the job of Governor of the Reserve Bank of New Zealand.  (It is also on the Reserve Bank’s website.)

It seems pretty extraordinary for the Reserve Bank’s Board to be proceeding with this process now.  They were just getting underway with the search late last year, seemingly oblivious to the election, when the Minister of Finance told them to stop, and to nominate someone as an acting Governor.   One of the conventions under which our system of government operates is that major appointments are not made close to an election.   As the Minister of Finance noted, in announcing the acting Governor appointment

This will give the next Government time to make a decision on the appointment of a permanent Governor for the next five year term.

Since then we’ve learned that the current government has commissioned a report on possible statutory changes to the governance of the Bank.  And the main oppositions parties have also confirmed that they favour changes, both to the governance and to the mandate of the Reserve Bank.  Who knows which side will win, and what changes they would each make if they did.

But, clearly champing at the bit, the Board is already out with its advert.  In fact, applications close on 8 July, which is a whole 10 or 11 weeks before the election.   So the people who are brave or ambitious enough to apply actually have relatively little idea what they will be applying for.  Will they be the single decisionmaker –  a key dimension of the current model/job –  or not?  And even if not, will they just be presiding over a group of people they appoint, or something more Bank of England-like.  Will they be charged with low unemployment or not?  And so on.

Of course recruitment processes take time.  But with an acting Governor appointed through to late March next year, it isn’t obvious why the Board couldn’t have put their advert out in late August, looking for applications or expressions of interest by the end of September.   At least people considering applying might have a bit more a sense of quite what the role, as one part of overall New Zealand economic and financial management, might be.

The Board holds the whip-hand in the appointment process.  The Minister of Finance can only appoint as Governor someone the Board has recommended (a candidate the Board proposes can be rejected, but then it is up to the Board to find another candidate).    That is a very unusual model.  In most advanced countries, the Governor is appointed directly by the Minister of Finance or the Cabinet.  They can take advice from anyone they like, but aren’t bound by any recommendations.  It is the way things work in Australia and the United Kingdom for example.  In the US, the President nominates, and the Senate confirms (or not).  In those countries, such mechanisms provide a high level of democratic control over an appointment which is hugely influential, over the short to medium term performance of the economy, and over the financial system.  In New Zealand, the Governor is even more powerful –  single legal decisionmaker –  but there is very little democratic control over who wields that power.   (The situation is even worse here if the government changes –  the current Board were all appointed by the current government, and on average will tend to reflect that government’s interests/preferences/biases).

And so I’ve argued that the Opposition should quite simply state that one of the first pieces of legislation they would pass would be a short amendment to the Reserve Bank Act to remove the formal role of the Board in the process of appointing a Governor.  It might be hard for them to do so –  it could look like a power grab –  but when our model is so out of line with international practice,  any competent Opposition should easily be able to make the case.  Promise to consult and take advice, for sure, but we should ensure that the elected Minister of Finance (and Cabinet) can do as their overseas peers can, and appoint as Governor someone in whom they have full confidence, not just someone the company directors appointed by the previous government wheel up.

What about substance of the Board’s advert?   No doubt a person who fitted the profile might well be a good Governor, but there is a “walk on water” feel to it.  Perhaps that isn’t uncommon with job adverts.   What are they after?

  • The ideal candidate will be a person of outstanding intellectual ability,
  • who is a leader in the national and international financial community.
  • The person will have substantial and proven organisational leadership skills in a high-performing entity,
  • a proven ability to manage governance relationships,
  • a sound understanding of public policy decision-making regimes, and
  • the ability to make decisions in the context of complex and sensitive environments.
  • Personal style will be consistent with the national importance and gravitas of the role.
  • 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.

It is hard to argue too much with any of the individual items, although if I did I might wonder about:

  • the emphasis on “outstanding intellectual ability”, but no mention at all of character or judgement.  In tough times, and crises –  a big part of what we have a Reserve Bank for –  the latter seem likely to be more important than the former.
  • they have clearly chosen to emphasise financial experience/standing rather than policy experience.  It isn’t clear why an ideal candidate for this role –  a New Zealand public policy and communications role –  really would be a “leader in the international financial community”.   That was, after all, what they thought they were getting last time.
  • The explicit comment about personal style and gravitas was interesting.   Are they suggesting that the new Governor might be more open to scrutiny and debate?  If so, that would be welcome.

I was inclined to agree with the comment made by the person who sent me the advert that it wasn’t clear that any of the various names mentioned as potential candidates really fitted this description.  Geoff Bascand, for example, would get a significant mark against him if they really want “a leader in the national and international financial community”.  There would be other marks against Adrian Orr, David Archer, Murray Sherwin.  Perhaps they are, after all, looking for an experienced banker?  One thing that is striking is that there is nothing in the profile stressing knowledge of, understanding of, or relationships in, the New Zealand economy or financial system.  That looks like quite a gap –  and I reiterate my view that an overseas appointment, of a non New Zealander, would be untenable especially while the single decisionmaker system remains.

The final item on the profile list was particularly interesting.

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.

It sparked my interest on several counts:

  • first, I’ve never seen wording like it previously in an advert for the Governor’s position,
  • second, it sounds really quite embattled as if the Board think that the Bank’s independence might soon be under threat, but
  • third, and most importantly, just how appropriate is this?  Parliament decides how independent or otherwise, in some or all areas of its responsibility, and it is the role of the Governor, and the Board for that matter, to work within the parameters that Parliament lays down. It isn’t the role of the Board to be seeking a chief executive who will advocate for a particular model of how the Bank should be run.   After all, even if everyone agreed (as most do) that the Bank should have operational independence around monetary policy, and on the detailed implementation of prudential policy, there is a lot of room in between, where views and international practices differ.   Should fx intervention be decided by the Governor?  In some countries it is, and others not.  Should regulatory policy  parameters (eg DTI limits) be set by the Governor, or the Bank, or by the Minister?  Again, practices differ, and so can reasonable people.    It is quite inappropriate for the Board to looking to employ someone to defend all the powers Parliament happens for the time being to have assigned to the Bank.
  • we should also be a little cautious about that wording “the behaviours required for ensuring the long-term sustainability of that independence”.  Not only can the Governor or the Board not “ensure” that independence at all, but a variety of different types of behaviour –  not all desirable –  can be deployed contribute to that end.  Not making life difficult for the Minister (of whichever party) is a well-known bureaucratic survival strategy. It won’t necessarily be the behaviour that would in the wider public interest.    At the (perhaps absurd) extreme –  but it is an FBI day today –  J Edgar Hoover sustained his independence for the long-term in ways that were highly unseemly and not generally regarded as in the public interest.

Perhaps they just worded the advert badly, but it does rather betray a sense of a group of people who really aren’t suited for the role they’ve been given.  They might be okay at monitoring the routine performance of the Governor.  But you shouldn’t have control of the appointment to such a very powerful position in such hands at all –  and, even while it is, they should have delayed this process rather than rushing so far ahead before the looming election.

 

UPDATE:  For future reference (since the advert will be taken down when applications close) this is the advert

Governor

Close date:     08/07/2017 08:00
Office location:  Wellington

The Reserve Bank of New Zealand (“the Bank”) is New Zealand’s central bank. It is responsible for monetary policy, promoting financial stability and issuing New Zealand’s currency. The current Governor is stepping down at the end of his term in 2017 and, accordingly, the Board is now seeking candidates to fill this vital and unique leadership role in the New Zealand economy. The Governor is appointed by the Minister of Finance on the recommendation of the Board.

The Governor is the Chief Executive of the Bank and a member of the Bank’s Board of Directors, and has the duty to ensure the Bank carries out the functions conferred on it by statutes, including The Reserve Bank of New Zealand Act 1989. 

KEY RESPONSIBILITIES

The Governor is responsible for the strategic direction of the Bank and for ensuring that strategy is consistent with the Bank’s key accountabilities in relation to: price stability, the soundness and efficiency of the financial system (including prudential regulation and oversight, supervision of banks, non-bank deposit-takers and insurance companies, and anti-money laundering), the supply of currency, and the operation of payment and settlement systems. As Chief Executive, the Governor is required to lead a high-performance culture and ensure that the Bank operates effectively and efficiently across its wide range of policy, operational and communication functions.

CANDIDATE PROFILE

The ideal candidate will be a person of outstanding intellectual ability, who is a leader in the national and international financial community. The person will have substantial and proven organisational leadership skills in a high-performing entity, a proven ability to manage governance relationships, a sound understanding of public policy decision-making regimes, and the ability to make decisions in the context of complex and sensitive environments. Personal style will be consistent with the national importance and gravitas of the role. 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.

The role is based in New Zealand’s capital city, Wellington. Remuneration is commensurate with the seniority of the role and the New Zealand public sector.

Interested candidates may phone Carrie Hobson or Stephen Leavy for a confidential discussion on +64 9 379 2224, or forward a current CV to Lina Vanifatova before 8 July 2017 at lina@hobsonleavy.com

 

 

A pseudo-PTA and other miscellania

This morning it was announced that something that purports to be a Policy Targets Agreement, to cover the conduct of monetary policy during the six months after Graeme Wheeler leaves office, had been signed between the Minister of Finance and Grant Spencer, currently the deputy chief executive of the Reserve Bank.  The Minister announced some months ago that he intended to appoint Spencer as acting Governor for six months, to get the appointment of a permanent Governor clear of the election period.

There are a number of problems with this:

  • first, the Minister has no statutory power to appoint an acting Governor, except where a Governor resigns or otherwise leaves office during an uncompleted term, and
  • second, even if it were argued, contrary to the clear sense of the legislation, that the Minister had such appointment powers, there is also no statutory provision for a Policy Targets Agreement between an acting Governor and the Minister (rather, the Act envisages that the acting Governor would run monetary policy under the PTA already signed with the substantive Governor for his/her unexpectedly foreshortened term).

You might respond that even if there is no statutory provision, there is nothing to stop the Minister and the “acting Governor” signing an agreed statement about how monetary policy would be run during the “acting Governor’s” term.  And if the acting Governor appointment was itself lawful, I would agree with you.   But the so-called Policy Targets Agreement signed yesterday explicitly states the parties believe it to be the genuine binding article, not just some informal statement of agreed intentions.

This agreement between the Minister of Finance and the Governor  of the Reserve  Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act).

The Reserve Bank’s statement stressed that there were no changes in this new (pseudo) PTA, relative to the current PTA applying during Graeme Wheeler’s term.   Unfortunately they seem to have taken that a bit too literally.  You’ll notice that in that extract (immediately above) it is referred to as an agreement between “the Governor” and the Minister.  But the Minister’s announcement in February was that Spencer would only be “acting Governor”.  Indeed, there is no way that Spencer could have been appointed as “Governor”, because any new person appointed as Governor has to be appointed for a term of five years, and any such appointment would have defeated the whole point of not making a long-term appointment in or around the election period.

It wasn’t just a slip either.  At the bottom of the document it is signed by Steven Joyce as Minister of Finance and by Grant Spencer as “Governor Designate”  (the “designate” bit matters, because real PTAs have to be agreed before the appointment is formally made).  But Spencer isn’t “Governor designate” at all, he is “acting Governor designate”.     I guess they are trying to slip him in under the provisions of section 9 (rules governing the PTAs) which refer only to the Governor, not to any acting Governors.  As I said before, the Act does not provide for acting Governors to sign proper PTAs.  So the document resembles a PTA, but it can’t in fact be one.

Does it matter?  In one sense, perhaps not.  But laws matter, and details matter, and this appointment, and the purported PTA, appear to be in breach of the law.   If nothing goes wrong and there are no legal challenges during the “acting Governor’s” term, then there probably won’t be any practical problems. But the Governor exercises a lot of powers, including in crises, and the last thing one needs in crises –  which one never foresees correctly the timing of – is uncertainty as to whether a purported Governor really has powers to do what he is trying to do.

(As I have noted previously, there are remedies, even if awkward ones.  For example, Graeme Wheeler –  as an existing Governor – could have been reappointed for six months, and a new PTA signed with him, all while he announced his intention to resign after one day.  Nothing then would prevent the Minister appointing Spencer as lawful acting Governor, operating under a fully lawful PTA.)

I have put in OIA requests with both the Bank and Treasury for the papers relevant to today’s purported PTA.

Being in a slightly flippant mood this evening, I thought I’d throw a few curiosities from the day.

First, on looking on the blog statistics page I discovered that someone had got to my blog today by searching under  “functions of weet bix to the unborn”.    Quite why anyone would be searching for anything using those words for a search at all is a beyond my understanding.   On scrolling down several pages of search results I discovered that I had once, long ago, referred to Weetbix, but not to nutrition or the unborn.

Second, the Reserve Bank might find my OIA requests annoying (they did, after all, launch a whole charging regime in response).   But other people lodge requests too.  I occasionally have a look at the ones the Bank releases.   Some are easy to answer, but distinctly strange.   A few weeks ago they responded to this one

I would like a categorical response to the question­ ” What influence does the Rothschild family exert over the reserve bank of New Zealand?

The categorical answer, of course, is none whatever, although the Bank gave the person a slightly fuller response.

It has been quite a while since I’d seen such a New Zealand-focused example of the old conspiracy theory, in which bankers –  especially perhaps Jewish bankers –  had the central banks of the world under their thumb.  It is a fascinating, if unnerving, phenomenon.  On a par, I suppose, with the whole “one world government” conspiracy stories:  I have on my shelves a book which claims that Don Brash was installed as Reserve Bank Governor by the one world government, as a safe pair of hands, as the son of someone who himself had been part of the conspiracy, as a leading figure in the World Council of Churches.

And finally, looking back at Steven Joyce’s statement on 7 February announcing that Graeme Wheeler was retiring, I noticed the Minister’s description of the Governor’s conduct

The Governor has performed his role calmly and expertly during a highly unusual period for the world economy

Calmness having been so prominently highlighted as a feature of the Governor’s stewardship, I can only assume that the story I heard a while ago on the grapevine, that the Governor had, as it were, tossed his toys out of the cot when someone wrote something the Governor disagreed with, couldn’t possibly be true.

 

 

The Rennie review

A couple of months ago we learned that the new Minister of Finance had requested Treasury to have a review done of two key aspects of the governance of the Reserve Bank:

  • whether something like the existing internal committee in which the Governor makes his OCR decisions should be formalised in legislation, and
  • whether the Reserve Bank should remain the “owner” of the various pieces of legislation (RB Act, as well as the insurance and non-bank legislation) it operates under.

Treasury, in turn, contracted Iain Rennie to conduct the review. Rennie was, until not long ago, State Services Commissioner.  And a bit earlier in his career he had been Treasury’s Deputy Secretary for macroeconomic policy, including all matters to do with the Reserve Bank.

Learning of the review, someone lodged an Official Information Act request with The Treasury, seeking (a) the terms of reference of the review, and (b) the terms on which Rennie was engaged.    Treasury’s response, dated 17 May, is here.

Somewhat strangely, the terms of reference for the review were withheld, allegedly to “maintain the constitutional conventions protecting the confidentiality of advice tendered by ministers and officials”.      Which seems strange because (a) the Minister had already talked to the media (first link above) about what the review would cover, and (b) because Rennie is neither a minister nor an official, just a consultant hired to provide some analysis and advice.  The terms of reference for that work hardly seem to amount to “advice”.   Treasury further state that the terms of reference are withheld “to enable Minister and officials to have undisturbed consideration of advice”.  I’m not clear that that is a statutory ground, and –  as importantly –  how knowledge of a consultant’s terms of reference would interfere with “undisturbed consideration of advice” is far from clear.

But Treasury did release Rennie’s terms of engagement, and some other interesting bits of information.   We learn that

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

Is this different, I wonder, than looking at the relevant statutory provisions (the implication  of the words is that the report will assess actual governance and decisionmaking, rather than the relevant laws)?  Perhaps not.  The wording might also be taken as implying that the review covers more than just decisionmaking for monetary policy.  If so, that would be welcome.

Pleasingly, Treasury seemed not just to be pushing a single option.

The analysis should outline a few alternative, coherent reform packages, and draw out the central design trade-offs, while making clear a preferred approach.

We also learn, and this did surprise me a little, that the contract period began on 7 February.  That was the day the Minister of Finance announced Grant Spencer’s appointment as acting Governor, having taken the relevant paper to Cabinet that morning.   If Rennie’s contract started from 7 February, presumably the Minister’s decision to initiate this review work had been taken some time earlier –  perhaps not long after he took office.

When he took the job, Rennie undertook to have his report completed by 31 March (in return for $60000 + GST).  In fact, the papers confirm that Rennie took longer than expected and, by mutual agreement, the final report was delivered to Treasury on 18 April.

In undertaking this contract, Rennie and Treasury agreed that

In completing the work, the author will engage with an agreed set of domestic and international experts

This seems a strange provision.  It suggests that Treasury could veto who Rennie could consult with in researching the issues and analysing the options.  It would be very interesting to know who these experts are –  perhaps especially the domestic ones.   (I’ve written extensively on the issues and wasn’t consulted –  not that I had expected to be.)  I will lodge an OIA request for that information.

Having received Rennie’s report, Treasury has a further step in the process, presumably before they pass on the report, and their own advice, to the Minister of Finance.

The key deliverable is a report, which will be peer reviewed by a panel of international experts.

Again, it would be useful –  and interesting to know –  which “international experts” they are consulting, and perhaps a little surprising that the peer review process does not appear to include people who might be expert in New Zealand public sector governance.  The Reserve Bank is,  after all, one government entity among many.

It would be good if we could get some clear answers from Treasury and the Minister of Finance as to when the final report, together with comments from the peer reviewers, might be available.   In his earlier comments, Steven Joyce told the Fairfax journalist that  “he expected Rennie to report back some time after May’s Budget”.   That was clearly somewhat misleading –  the original contract had a report back from Rennie by 31 March –  but even setting that aside, it is now after the Budget.    As this is an issue where the political parties differ –  Labour, the Greens, and (I think) New Zealand First already promising change –  it would be highly desirable to have this expert report, peer-reviewed by international experts, in the public domain as soon as possible.

In digging around, I stumbled across The Treasury’s 2001 advice to the then Minister of Finance on the recommendations of the Svensson inquiry into monetary policy and the Reserve Bank.  I’d seen it at the time, but long since forgotten it.  The principal author  of the paper was someone who is now a Treasury Deputy Secretary, but his boss –  also listed on the paper –  was one Iain Rennie, then deputy secretary responsible for matters macro.

Svensson had a number of sensible recommendations.  Until that time, the Governor had chaired the Reserve Bank Board, even though the Board’s main job was to monitor and hold the Governor to account.  That was clearly a nonsense, and Svensson recommended change.  That recommendation has been adopted and the law was changed accordingly.   But Svensson also recommended removing the Governor from the Board altogether –  it being, at very least, anomalous to have the Governor as a member of a body whose main purpose is to review his own performance (as distinct, say, from a business in which a Managing Director might be a member of the board, but in that case the Board has all the ultimate strategic decisionaming responsibilities).  The Police Commissioner, for example, isn’t involved in the governance of the IPCA.  Rennie and Treasury advised against making that change, even though they explicitly recognised what the role of the Board was.   Quite why is never made clear.

And then, perhaps more importantly, Svensson recommended that the law be changed to shift away from the single decisionmaker structure, in which all executive powers are vested in the Governor personally.  Even then, in 2001, it was an unusual model internationally.  Svensson proposed legislating to give an internal committee of senior Bank managers the formal decisionmaking powers.

Here was the response of Rennie’s wing of Treasury.

We believe the clear and strong accountability of the present structure has considerable merit.  The Governor is solely and clearly responsible for monetary policy performance and may be dismissed by the Minister in the event of inadequate performance.  While the Minister’s ability to dismiss a poorly performing Governor may be severely limited in practice, his ability to dismiss a poorly performing committee would be even more limited.

The formation of a decision-making committee would require extensive changes to the Reserve Bank Act.  The statutory responsibility for price stability that currently rests with the Governor, and the statutory relationship between the Minister and the Governor, would need to be amended to give effect to the responsibilities of the Committee.

The issues raised above suggest that the potential benefits of forming a formal internal decision-making committee are likely to be small.

Having taken such a stance then, one can only hope that in conducting his recent review, Rennie is rather more open to change than he was in 2001.   (I should add that I did not then, and do not now, think Svensson’s specific recommendation should have been adopted –  but there are other feasible approaches to adopting a collective decisionmaking model).  It is striking, for example, that in this Treasury advice there is no mention at all of how other government agencies in New Zealand are governed (hint: none involving policy setting involve single decisionmakers, with no rights of appeal).  It is also telling of how the Bank has changed –  by legislation and gubernatorial inclination –  that there is no discussion at all of how the financial regulatory powers of the Bank should be governed.  In many respects, the advice seems stuck in the 1980s –  when the Reserve Bank structure was first designed –  including with the emphasis on the ability of the Minister to sack an individual relative to a committee.  That was an important consideration in the late 1980s, but it isn’t one that has led us to have other government rule-making, policymaking, agencies governed by single (unelected) decisionmakers.

It is, of course, a little unfair to hold anyone to advice they offered sixteen years ago, and I’m not seriously attempting to.  Times and attitudes, and responsibilities, change. But it can be difficult at times for senior people to walk away from public stances on important issues that they have taken previously.   I hope that when we finally see the Rennie report, a willingness to approach the issue with a genuinely fresh set of eyes is evident.

“Whichever is less”

I’ve done a few posts over the last couple of months about the lawfulness of the Minister of Finance’s decision to appoint an acting Governor of the Reserve Bank for six months after the expiry, just a couple of days after the election,  of Graeme Wheeler’s term.  As a reminder, I had several times argued that making a substantive five year appointment, to commence just after the election would be inappropriate –  indeed, as Treasury officials advised, it would also be inconsistent with the long-established conventions that govern behaviour in the period close to a general election.  As a further reminder, I have no particular concerns about Grant Spencer; if the appointment is lawful I’m sure he will mind the store capably until a permanent appointment is made by the incoming government.

This post was written on the day the acting appointment was announced, this one following responses to my OIA requests for information relevant to the appointment, and this one from last week on an appeal to the Ombudsman, on the grounds that the public interest (including because of the extent of the powers that rests with any appointee) should lead to the release of any legal advice the Minister, the Board, and officials received on the legality of the appointment.

And there I would have left it, with perhaps a repeat post the day Spencer took office.  My main concerns were about (a) the lack of transparency about an unusual appointment (even if it is lawful), and (b) about the importance of laws being followed, even if the legally questionable appointment was, on the face of it, quite a pragmatic response to the clash of dates (election, and end of Governor’s term).   But they weren’t necessarily points of general interest.

But then a reader got in touch.  The reader wasn’t sure, reading the legislation, whether or not Spencer’s appointment looked lawful, but pointed out that the Reserve Bank Act vests all the powers of the Bank in the Governor personally.  Thus, if there were doubts about the validity of the appointment of a Governor (or in this case an acting Governor), that would appear to raise doubts about the validiity, and potential enforceability, of any actions taken by the Bank during the term of the acting Governor.  That got my attention.

After all, the Governor wields a great deal of power.  He sets the OCR, he sets much of prudential regulatory policy, he authorises enforcement actions against regulated entities, and the Bank –  under his authority –  undertakes large volumes (and values) of financial transactions in domestic and international financial markets.  All delegations to staff are delegations directly from the Governor.   And those are just the routine activities of the Bank.  But a big part of why we have a Reserve Bank is about crisis management –  whether in foreign exchange markets, the economy more generally, or some or all parts of the financial system.   Many of the crisis powers rest with the Minister of Finance.   But many of the operational bits rest with the Bank, in which, as already noted, all powers are vested in the Governor.  That is what a single decisionmaker structure means.  It was a deliberate and conscious choice by Parliament.   Of course, in any particular six month period –  the term of the acting Governor – one hopes the crisis management powers aren’t needed at all.  But crises can flare up quickly, and the last thing one wants is doubts about the powers of the Bank, or the authority of those purporting to exercise such powers, in the middle of a crisis.  Let alone legal action afterwards seeking to invalidate some or all interventions by our central bank.

So I want to go slowly and carefully through the reasons why I think

a) it is not lawful for the Minister of Finance to appoint an acting Governor when the full term of a previous Governor has expired, and

b) why any defects in the appointment of a Governor/acting Governor appear to raise serious doubts about the validity and enforceability of any actions take by the Reserve Bank during the term of any acting Governor.

And I will suggest two possible practical solutions.

The Reserve Bank Act clearly allows for an acting Governor in some circumstances.

Section 47 of the Act allows for the case where the Governor is absent or incapacitated.   If the Governor is on holiday, or indeed seriously ill, the deputy chief executive can act automatically.  But if both the Governor and the deputy chief executive are absent or incapacitated, an acting Governor must be appointed by the Minister on the recommendation of the Board.    There is no limit to the term of such an appointment, although by implication –  since it is to cover an absence of an appointed Governor –  it could last no longer than the expiry of the Governor’s own term.    This section of the Act has never been used, and is not relevant to the current appointment.

Section 48 of the Act covers a vacancy in the office of Governor.    The key bits read as follows

If the office of Governor becomes vacant, the Minister shall, on the recommendation of the Board, appoint….[a person] to act as Governor for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less.

The critical phrase here appears to be “whichever is less”.      When Don Brash resigned as Governor in April 2002, there was about sixteen months to run on his term.  The then Minister appointed Rod Carr to act as Governor.    He could be appointed for as long as six months, because there was still sixteen months to run on “the Governor’s term”.  By contrast, on 26 September this year there will be no days left on the Governor’s term.  Graeme Wheeler’s term will have expired at midnight the previous day.   So an acting Governor can only be appointed for…….. zero days, since there are no days left on “the Governor’s term”.  In other words, the Act simply does not appear to allow an acting Governor appointment along the lines of the (purported) Spencer appointment.

This is all consistent with the fact that the Act makes no provision for a Policy Targets Agreement with an acting Governor (it isn’t needed within a Governor’s term, since there is already a PTA in place), even though the PTA is central to the monetary policy parts of the Act,  and that the Act requires all new appointments of a Governor to begin with a five year term.   The Minister and the Board can’t just appoint someone for a succession of short terms –  no matter how well-intentioned the reason –  and thus compromise the effective independence of that person.

It is also, perhaps, worth noting that the previous (1964) Reserve Bank Act –  the one in place when the policy and drafting decisions on the current law were being made  –  also made no provision for the appointment of an acting Governor after the completion of a Governor’s term  (section 18 here ).  Under that legislation there could be an acting Governor only during the term of an appointed Governor (if the Governor and Deputy Governor were absent or incapacitated).  And Governors had to be appointed for five year terms.

In other words, the drafting looks conscious and deliberate.   The 1989 Act explicitly added provisions allowing for an acting Governor when the Governor resigned or died, leaving a vacancy during his term.  But the Bank’s legislation has never, in at least 50 years, allowed for an acting Governor to be appointed to commence after the end of the previous Governor’s term.  But that is what the Minister of Finance, on the recommendation of the Reserve Bank Board, purports to have done (the Minister having received no advice from the Board on the legality of such an appointment).

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.)

Perhaps some legal expert has an authoritative interpretation of these statutory provisions suggesting that

  • an appointment like that of Spencer is legal, and
  • even if there are any doubts, nonetheless there would be no basis to question the legality of the actions of the Bank during his term as “acting Governor”.

If so, surely they now owe it to us to release that advice, or even a summary of the argumentation that led the Minister to conclude that, under the existing statutory provisions, he could appoint Spencer as acting Governor.  Failure to do so appears to leave real doubt about the authority for any actions the Bank takes, or purports to take, during Spencer’s term.     It isn’t a remotely satisfactory situation for such a powerful agency, especially when –  since many routine decisions could simply be deferred –  a big part of the Bank’s responsibility is crisis management.  That uncertainty should unsettle financial market participants here and abroad, it should unsettle Parliament’s Finance and Expenditure Committee (charged with monitioring the Bank), it should unsettle entities regulated by the Bank, and –  given the pervasive reach of many of the Bank’s powers –  it should unsettle citizens more generally.  It simply isn’t a satisfactory situation.

But it is a relatively easily remediable one.    The first option would have been simply to have offered Graeme Wheeler a six month extension on his term.  There are no restrictions on the term of any reappointment of the Governor.  It is a common way to deal with difficulties –  whether logistic or political/constitutional –  in appointing a new chief executive.     Had this option been taken there would have been no doubts about the invalidity of any of the Bank’s actions during that term.   We don’t know whether the Board/Minister refused to countenance another six months of Wheeler, or whether Wheeler simply wanted to be out as sooon as possible.  Given the legislative restrictions, and the election-related constraints, neither would –  on the face of it – seem to have been a particular responsible, public-spirited stance.  Presumably the Wheeler extension option is no longer available, but if it is it should be revisited urgently.

The second option would be for Parliament to act.  With the agreement of the Opposition parties it would be easy and quick to pass a single substantive clause amendment allowing for the appointment of an acting Governor to cover the period 26 September 2017 to 25 March 2018 (the period envisaged for the Spencer acting appointment).   In this case, the acting appointment is a pragmatic solution, but done without legal authority.  So don’t rush to change the legislation permanently –  it looks likely to be back in the House next year whoever wins the election –  but the acting “appointment” itself could easily be validated. It might be a little embarrasing to do so, but it would be a one day wonder, and a small price to avoid any doubts about Bank actions during the acting Governor period.

Of course, the other way would be to appoint Spencer to a five year term as Governor, on the implied expectation that he would resign after six months.   But that is how we got into this situation in the first place.  The conventions around election periods strongly discourage making substantive appointments to powerful public offices, when the appointee would take up the position close to, or shortly after, a forthcoming election.

(This is one of those issues on which I would really like to be wrong.   But I’m increasingly uncomfortable that an error was made by the Minister of Finance and the Bank’s Board.)

Grant Robertson made my day

In an address at Victoria University at lunchtime, Labour’s finance spokesperson Grant Robertson launched his party’s monetary policy reform programme.   In an interesting move, the incoming Acting Governor, Grant Spencer, who would have to manage (for the Bank) the early stages of Robertson’s reform process if Labour leads the new government, attended, sitting very visibly in the front row.

The two main aspects of Labour’s proposal are:

  • broadening the objective from just price stability “to also include a commitment to full employment”
  • changing the decision-making structure for monetary policy, so that a committee would have legislated responsibility.  That committee would comprise four internals (including the Governor) and three external experts who would be appointed by the Governor (but in consultation with the Minister of Finance).

Labour would also require the Bank to release the minutes of the Monetary Policy Committee, including the results of any votes, within three weeks of the relevant OCR decision being announced.

I was interested to note a press release from the Greens in which they state

Labour plans to change the way we do monetary policy in New Zealand and the Green Party supports them fully. We’re now of a single mind on this.

The Greens have previously favoured the Reserve Bank Board –  whose members are mostly non-experts –  making OCR decisions, so I’m not clear if the “single mind” James Shaw refers to extends to that level of detail, or just to a shared commitment to (a) reform, and (b) a decision-making committee that would involve non-executive outsiders.

Bill Rosenberg of the CTU and I were discussants following Robertson’s address.   I wrote this morning a fuller version than I could use of my thoughts on the Labour proposal.

Reflections on Grant Robertson on the RB VUW 10 April 2017

I opened observing that when I got an outline late last week of what Robertson was going to say, I had blurted out that “Grant Robertson has just made my day”.  I’ve been arguing for governance reform for at least 15 years, and between the report the Minister of Finance has commissioned, and the shared commitment to reform of the Greens and now Labour, it looks as though change might finally happen.   There was a certain logic to the current single decision-maker system in 1989, but if it had a logic then –  in how we understood monetary policy, and the nature of the Bank’s functions –  it simply looks wrong today.  Other countries don’t do things that way.  We don’t either in other areas of public life.

What I’m most encouraged by is the commitment to involve outsiders, not just to cement-in a position for insiders.  Having said that,  I raised two main areas of concern:

  • the first is the Robertson proposal that the Governor should continue to be (in effect) appointed by the Board (in turn appointed by the current government), and that all the other voting members (inside and out) would be appointed by the Governor.  He qualifies this by noting that these appointments would be made in consultation with the Minister of Finance.    But that is a recipe that risks the Governor surrounding him or herself, deliberately or unconsciously, with people who think like the Governor, and will be reluctant to challenge the Governor too much.   The Minister might raise a few questions about a proposed appointee, but will be reluctant to second guess the Governor, and cannnot overrule him in this model.   Frankly, it is a model with a yawning democratic chasm and not a model I’m aware of being used in any other country.  It is one thing to delegate operational decisions to independent boards, but the members of those Boards should be appointed by those whom we elect –  ministers –  and whom we can toss out.
  • the second concern is that under the proposed model there would be four insiders and three outsiders.  That is the wrong way round, and most likely would be a recipe for the marginalisation of the outsiders (since the insiders have no independent status, and all work for, and have their pay etc set by the Governor, they can easily caucus and out-vote the externals).   I’d prefer two internals and three externals, all directly appointed by the Minister of Finance.

In response, Robertson noted that he was open to looking again at the ministerial appointment option.  He noted that it was awkward as putative Minister to be talking of giving himself such extensive appointment powers.  Perhaps, but that is the way most public sector boards work.  If he wants Labour precedent, Gordon Brown introduced the Bank of England statutory Monetary Policy Committee, to which the Chancellor appoints most of the members directly, and has to be consulted on the remaining two.

Robertson explained that he preferred to keep a majority of insiders because one of his priorities was to preserve the operational independence of the Bank. I was, and am, puzzled by that response. I noted to him that the RBA has a substantial majority of outsiders on its decision-making Board, and that they had operational independence.  The same goes for Sweden’s Riksbank.  I’m less optimistic about a re-think there, as Robertson also stated that he did not envisage allowing MPC members to make speeches or comments on monetary policy without the explicit prior consent of the Governor.  It seems he still has in mind an excessively Governor-dominated institution, and one in which it would be hard to ensure transparecny and the regular injection of fresh perspectives and alternative views.  If so, that would be unfortunate.

I noted some unease about his proposal that all the external appointees would be “expert”, and perhaps had that concern somewhat allayed when he stressed that in this context he did not intend “expert” to mean simply a narrow expert in specific aspects of monetary economics or the like.

My other main observation in this area is that the Labour proposal (deliberately and consciously) does not yet address the governance and decisionmaking for the Bank’s extensive financial regulatory functions.

But the most important omission seems to me to be the governance provisions for the Reserve Bank’s extensive financial stability and regulatory functions, under various different pieces of legislation.   There is no precedent anywhere for so much regulatory power to be in one person’s hands.  It wasn’t even an outcome that was consciously deliberated on by Parliament –  rather it grew up with a succession of amendments to the Act, and changes in regulatory philosophy over the years. And whereas a regulating Cabinet minister can be reshuffled or dumped whenever the Prime Minister chooses, a Governor of the Reserve Bank is secure for five years.

If individuals matter in monetary policy, even with something like the PTA, they are likely to matter hugely in the financial regulatory area, where there is nothing like the PTA to constrain or guide the Bank/Governor.  The economic impact of regulatory choices can be as large –  if less visible –  than those around monetary policy.  I really hope that Labour will be thinking hard about how to extend their governance reform ideas into the financial regulatory field.  Personally I think there should be three strands to that:

  • Removing some of the high level policy-setting power back to the Minister of Finance (so that the RB applies the rules etc and mostly doesn’t make the high level rules),
  • Move responsibility for the various pieces of legislation out of the Reserve Bank, probably to Treasury. This matter is already being touched in the Rennie review commissioned by the current Minister of Finance, and
  • Establishing a Financial Policy Committee, paralleling the Monetary Policy Committee, as the entity empowered to exercise whatever policymaking powers reside with the Reserve Bank. Again, a five-person committee (Governor, Deputy Governor, and three externals seems like a feasible solution).  The FPC would also be responsible for Financial Stability Reports.

Robertson acknowledged the deliberate omission and talked of it being “part of the conversation” moving forward.  I hope so.    This is the opportunity for a full overhaul of the governance model, not just tacking on an MPC to a model that doesn’t work that well in other areas either.

The other half of the address was about the idea of adding full employment to the goals for monetary policy.  I was (and am) much more sceptical, and nothing that was said in response to questions really clarified things much.    I get that full employment is an historical aspiration of the labour movement, and one that the Labour Party wants to make quite a lot of this year.  In many respects I applaud that.  I’m often surprised by how little outrage there is that one in 20 of our labour force, ready to start work straight away, is unemployed.  That is about two years per person over a 45 year working life.  Two years……     How many readers of this blog envisage anything like that for themselves or their kids?

But still the question is one of what the role of monetary policy is in all this, over and above what is already implied by inflation targeting (ie when core inflation is persistently  below target then even on its own current terms monetary policy hasn’t been well run, and a looser monetary policy would have brought the unemployment rate closer to the NAIRU (probably now not much above 4 per cent)).

I noted that I’m sceptical that the wording of section 8 of the RB Act is much to blame.  After all, for several years prior to the recession, our unemployment rate was not just one of the lowest in the OECD, it was also below any NAIRU estimates.  And when I checked this morning, I found that our unemployment rate this century has averaged lower than those of Australia, Canada, the US and the UK, and our legislation hasn’t changed in that times.  Robertson often cites Australia and the US.

The last few years haven’t been so good relatively speaking.  But if the legislation hasn’t changed and the (relative) outcomes have, that suggests it is the people in the institution who made a mistake –  they used the wrong mental model and were slow to recognise their error and respond to it.  Getting the right people, and a well-functioning organisation, is probably more important than tweaking section 8.

Robertson disputed my past characterisation (as “virtue signalling”) of his talk of adding a full employment objective.  But I still don’t see in what way I am wrong in that description.  It would send a single to key constituencies that Labour “feels the pain” and has an integrated commitment to advancing full employment, but what difference would it make to the Governor and his committee?  There wouldn’t be a numerical definition of full employment in the PTA, and since Robertson remains committed to the accountability framework of the Act, it is very hard to see how or why any given Governor would react much differently given a specific inflation target and a vague injunction to promote “full employment”.  A different Governor might make a difference –  hence, choose carefully –  but that sort of wording is unlikely to.

If they form a government later in the year, Labour (and the Greens) clearly will need to add some words to the PTA.  I drew the attention of those present to the 1950 amendment to the Reserve Bank Act, under which

[The Bank] shall do all such things within the limits of its powers as it deems necessary or desirable to promote and safeguard a stable internal price level and the highest degree of production, trade, and employment that can be achieved by monetary action.

I quite like it (and not just because a relative of mine was the responsible Minister of Finance).  It recognises that monetary policy doesn’t exist in a vacuum, and that people (voters and politicians) care about other stuff.  In fact we don’t pursue price stability simply for its own sake, but for a better life for New Zealanders. But note the key phrase  “the highest degree of…employment that can be achieved by monetary action”.  That might not be much, at least once the unemployment rate is back near the NAIRU.

As today’s chair –  economic historian Gary Hawke –  noted the 1950 change was largely about signalling too, and it isn’t obvous it made an awfully large difference to actual monetary policy.  But that was my point.  If you want words –  or signals – it is easy enough to craft elegant formulations that express those aspirations, and even articulate a place for monetary policy in overall economic management. It is a quite different thing to expect a central bank, however governed, with a single instrument capable only of affecting nominal variables in the longer-run, to make much material difference over time in achieving the wider –  and laudable –  government goal of full employment.

Politically, it doesn’t help at all to make that distinction.  But analytically it looks pretty clear.  Well-crafted words –  a modern version of that 1950 formulation –  would do no harm, and I’d have no real problem  with them, but they won’t make much substantive difference either. But sometimes, I guess, symbols matter quite a lot.