Last Friday the Reserve Bank Governor, Adrian Orr, gave a keynote address to the Waikato Economics Forum. This event seems to have become part of the annual economic policy calendar, with Waikato University boasting that
The forum will bring together an outstanding lineup of top economists, business leaders and public sector officials, who will share their expertise on how we can address the major challenges facing our country today.
Sold that way, you might have thought that when a really senior and powerful public official turns up for a keynote address to an assembled economically literate audience he’d have delivered some fresh and interesting insights, going rather deeper than he might to, say, a provincial Rotary Club. Doubly so when in that official’s area of policy responsibility things have proved so challenging in the last few years, when so much taxpayers’ money has been lost, and when core inflation is so far outside the target range the government has set. It was just a couple of weeks after the latest Monetary Policy Statement, so would have been a great opportunity for the Governor to expand on the issues and shed light on how, and how rigorously and insightfully, he sees things .
Instead we got “Promoting economic wellbeing: Te Pūtea Matua optimisation challenges”, a title that held out little or no hope and offered less across a sprawling 12 pages of text. Attendees must have wondered whether it had really been worth getting out of bed early enough to hear the Governor at 7:40am. As for me, I read it twice, just to be sure.
Faced with major policy failures – and the core inflation outcomes cannot really be considered anything else, no matter how many allowances might be made – there is not a single fresh or interesting insight in the entire speech, In fact, it is the sort of address one of Orr’s junior staff could easily have given, as a “functions of the Reserve Bank” talk, to a Stage 2 university economics class.
Perhaps it would be one thing if (a) little or nothing interesting was going on in the economy or with inflation, or (b) if the Governor and other members of the Monetary Policy Committee were giving speeches on monetary policy matters every couple of weeks, although one might still – given the character of the audience – have reasonably expected more, including because good and thoughtful speeches offer insights into the quality and character of decisionmakers and their advisers. As it is, a great deal is going on, a great deal that has taken the Bank (and most others) by surprise, and that is still ill-understood (eg why did almost everyone get it wrong, what did we miss, what do we learn?), and serious speeches by MPC members on things to do with monetary policy, inflation etc are – unlike the situation in most other advanced countries – very rare. As far as I can see, the last serious monetary policy speech the Governor gave was to the Waikato forum a year ago, the chief economist has not given any speeches on monetary policy or inflation (nor, perhaps mercifully, has his boss), none of the external MPC members has ever given a speech on these topics or put their names to specific views or lines of analysis/reasoning/evidence, and the Deputy Governor’s last speech on monetary policy was 18 months ago, when the Bank was barely worried about inflation at all.
It is inexcusable in people who wield so much power, perhaps for good longer term but certainly for ill in the last couple of years. And it seems to speak of some combination of the utter arrogance Orr routinely displays when he does speak, and the probable absence of any fresh or interesting analysis in the entire institution. If they had such insights, such research, such analysis, surely they’d be wanting to impress us with it? But the Bank now publishes hardly any formal research and it is rare to find even an insightful chart in an MPS. If spin seems to be the order of the day, and it so often does (see below) they aren’t even very good at generating supporting material, let alone providing any serious accountability.
There really wasn’t much interesting in this keynote address at all, but I did want to highlight just a few of the spin lines.
On the straight economics there was this
Low and stable inflation is a necessary outcome for economic wellbeing in the longer term
I’m deeply committed to the case for price stability (ideally, an even lower inflation target than we have now) but this is simply overblown nonsense, which discredits the case for low and stable inflation. A more serious Reserve Bank in years gone by might, much more reasonably, have framed the point simply as “tolerating high inflation won’t make us any richer, and will come with all sorts of distortions and costs, and in the longer term if price stability doesn’t determine whether or not we are prosperous and productive, it is still the best limited contribution monetary policy can make.
Then there was the corporate spin
Looking ahead, in striving to be exceptional in our work,
Perhaps it is good to aim to be exceptional (although few people or institutions ever are), but…..the Orr Reserve Bank, when we get speeches like this, and few of his decisionmakers ever expose themselves to any sort of serious scrutiny, and when leading from the top the Governor is reluctant to ever express regret for anything he/they might have done, or failed to do. Great institutions – especially powerful public ones – acknowledge openly and learn from their mistakes.
I’ll skip the empty waffle about climate change (“we have a key part to play”) or the political posturing about the Treaty of Waitangi (which is apparently part of a “move from being a good to a great Central Bank” – who granted them even a rating of “good?)
At the end of the speech there is a section headed “Our research programme”, where Orr asserts
Te Pūtea Matua has a long tradition of pursuing policy-relevant research and as a full service central bank our research programme covers all three strands of work we are tasked to deliver.
It used to be true that the Bank had a strong record of policy-relevant research on things around monetary policy, inflation, and the cyclical behaviour of the economy. But no more – just check out how little research they’ve published in those areas in recent years, It has (sadly) never been true that the Bank has had any sort of sustained tradition in policy-relevant research around either its mushrooming financial regulatory and stability responsibilities (in fact, there were conscious decisions by successive Governors not to invest in such research), or its cash responsibilities, and there is no sign that has changed for the better. Instead, we just get spin like this.
And then in conclusion Orr asserts that
We are a learning institution and we enjoy collaboration.
Learning institutions engage, learning institutions aren’t prickly and defensive, learning institutions don’t just make stuff up, learning institutions don’t claim to regret nothing, learning organisations – especially amid the biggest surprises/policy failures in decades – don’t give keynote addresses like this. And collaborative institutions don’t engage in the sort of defensive abuse Orr is sadly all too well known for.
Learning organisations, agencies that are exceptional in their work, great central banks, don’t just make stuff up. Orr does.
The Herald’s Jenée Tibshraeny had a nice piece yesterday on just the latest example, from the question time after Orr’s Waikato speech. He was asked a question about central bank losses from things like the LSAP bond-buying programme (about 1.03 hrs into the video of the day), specifically citing the (recently newsworthy) losses the German central bank had been recording and disclosing. Instead of responding seriously and substantively, Orr blustered, attempting to imply that these were really just accounting issues (as if good record keeping doesn’t matter), muddying the waters by getting into questions about how much central bank equity matters, and condescendingly suggesting that while such issues “hurt the brain” people need to start exercising their brain, and “calm down”. The questioner himself clearly wasn’t satisfied, and asked a follow-up, but Orr simply talked out the clock, even suggesting (astonishingly) that the BIS – a bunch of technocrats in Basle – had explained it all for the public.
There are two points people like the BIS have made that are of course true, and as general points have never really been disputed by serious commentators and observers.
First, central banks don’t exist to maximise profit. They exist (in their monetary policy functions) to deliver low and stable inflation, and
Second, central banks can in principle function perfectly well with low, zero, or even negative equity (I spent a couple of years working for one that not only had negative equity but wasn’t even able to produce a proper balance sheet for a prolonged period).
But harping on those sorts of points is simply irrelevant in the face of the huge real losses to taxpayers that central banks have sustained in the last couple of years.
In New Zealand’s case, as it happens, the negative (or impaired) equity issue doesn’t even arise, since the Bank in advance wisely sought a government indemnity for any losses the LSAP might lead to. As a technical matter they didn’t need to – they could have run through all the equity the government had given them and recorded huge negative equity. Nothing about the Bank’s ability to function would have changed one iota, but some hard questions no doubt would have been asked, and Orr reasonably enough preferred to have any blame shared.
But none of that changes the fact that the MPC’s choices around the LSAP – signed off on by the Minister of Finance, with Treasury advice – have cost taxpayers in excess of $9 billion: not “just accounting issues” but real losses. That is what happens when a government agency (central bank) does a huge asset swap, transforming much of the government’s long-term fixed rate debt into effectively floating rate debt just before short-term rates rocket upwards. Had the LSAP programme never been launched – or even if it had been halted a few weeks in once bond markets had settled down from the US-led turbulence of March 2020 – taxpayers and the Crown would be that much better off, in real purchasing power terms. And none of Orr’s spin and distraction – and none of the BIS material – ever seriously engages with those real losses. Instead they respond to points that are not those serious critics are making.
And if one happens to think the LSAP made a meaningful economic difference – as Orr still seems to claim – then that only reinforces the point, since it added to the level of stimulus that helped deliver the core inflation, miles outside the target range, that central banks are now struggling to get under control and reverse. Better not to have had the real economic losses, and of course with hindsight we know the level of monetary stimulus was too large for far too long.
(As I’ve argued in numerous posts here over the last 3 years, I don’t believe the LSAP made much meaningful difference to anything – simply added huge risk, without any serious advance risk analysis, culminating in huge losses. I was encouraged to see in Tibshraeny’s article that the former Deputy Governor, Grant Spencer – able economist and former bank treasurer – seems to have the same view
“The main benefit was that it smoothed the disruption to the bond market that occurred in April/May 2020 when there was some real volatility in the bond market and bond rates spiked up,” Spencer said.
“After that, the rest of the purchases, I would say, had very little effect on the term structure of interest rates.”
Well quite. The initial intervention may not have been necessary but could have been highly profitable on a small scale. The latter purchases made no difference to short to medium interest rates (set by the OCR and expectations about it) and little to longer-term rates. Had they wanted short rates lower, the OCR could always have been cut by another 25 basis points, at no financial risk to taxpayers.
Orr seems to have backed away somewhat from a line he gave Tibshraeny in an interview last year, where he claimed that the macro benefits of the LSAP programme were “multiples” of the losses (and the Bank’s five-year monetary policy review last year provided no serious support for such claims) preferring now just to rely on bluster, distraction, and the hope that people will eventually get tired, or confused, and forget.
Orr’s comments on Friday reminded me that I’d heard that Orr had also been trying on the handwaving “it’s just an accounting issue” at FEC after the recent Monetary Policy Statement. I hadn’t listened in at the time and finally did so this morning.
If National Party members don’t always ask very good questions on this issue, at least they show no sign yet of being willing to let it go. In doing so, they bring out Orr at his prickly, blustering, and basically dishonest, worst.
Willis asked if it was not regrettable that there had been a direct fiscal cost from the LSAP programme of about $9bn. Orr’s response was a single word: No.
Willis followed up asking if he was really saying that these losses were justified. This time, she got a three word response “Yes, I do”.
Orr went on to state that he “100% stood by” the LSAP and its losses, getting a bit more expansive and asserting/reminding the Committee that central banks could operate with negative equity – as noted above, this is pure distraction in the NZ context since the Reserve Bank’s capital was not impaired at all (although taxpayers’ “equity interest” in the NZ government was) – and explicitly going on to assert that it was “an accounting issue not an economic one”. As applied to the LSAP, that is simply false, yet another outrageous attempt to mislead Parliament.
And he wasn’t finished. Willis asked if he was saying he had no regrets at all. His response? “Those were your words”, before falling back on his regrets for things he had no responsibility for – regrets Covid, regrets Ukraine, regrets Gabrielle, even passively regrets that New Zealanders are experiencing high inflation – but no regrets for any choices he made might have actually made, not ones that costs taxpayers $9 billion, and certainly not ones that led to core inflation of about 6 per cent and likely “need for” a recession. Spinning again, he repeated the line he is fond of that if they’d tightened one quarter earlier it would have made very little difference. No doubt so, but the big mistakes – perhaps pardonable, perhaps even understandable, but big mistakes nonetheless – weren’t about one quarter, but about fundamental misjudgements in 2020 and early 2021, on things Parliament has delegated Orr and his MPC responsibility for, as supposed technical experts. And yet they refuse to take any real responsibility, falling back on attempts to distract MPs and avoiding serious engagement with anyone else.
There has been a lot of focus in the last week or so on Rob Campbell’s mistakes, for which he has rightly paid a price and no longer hold Crown appointments.
But Orr managed to lose billions – having done no advance risk analysis, having talked rather negatively on bond-buying strategies only a few months prior to Covid – and delivered us very high core inflation, core inflation reflecting largely domestic demand imbalances well under Reserve Bank monetary policy influence, refuses to engage seriously, actively and repeatedly misrepresents things and misleads Parliament, and treats those to whom he is accountable with prickly disdain and no respect whatever, and yet keeps his job, and starts a second term later this month. It is a sad reflection on how degraded New Zealand politics and policymaking has become when accountability now appears to mean so little.