A garrulous Governor

We’ve had talkative new central bank Governors previously.  Shortly after Don Brash took office people took note of the way he was commenting pretty freely on a lot of issues.  Tom Scott captured it this way.

brash 3.png

If the latest new Governor is really keen on transparency and openness on things he has responsibility for, I could readily offer a list of suggestions (well short of webcasting MPC deliberations).  He could, for example, publish (with a short lag)

  • the minutes of the Governing Committee meetings in which he makes his OCR decisions,
  • a summary of the written advice (recommendations and risks) he gets from his internal Monetary Policy Committee, and
  • the background papers generated internally in the process of deciding on his forecasts and OCR decisions.

On the latter point, I’m still engaged in an appeal to the Ombudsman to get hold of the analysis the Bank used last November in making written (but not substantiated) Monetary Policy Statement comments about the macroeconomic impacts of various of the new government’s policy initiatives.   To be clear, there was no problem with them making comments –  things like Kiwibuild should affect demand pressures and thus the near-term inflation outlook – the issue was the lack of detail, and the refusal then to release the background papers.

Perhaps the new Governor will take steps along these lines.  We have not yet seen an OCR decision on his watch, and journalists must already be relishing the first scheduled Orr press conference next month, given his readiness to comment at length on all matter of things that are no part of the responsibility of the Reserve Bank.  It is great that he is fronting up to the media –  in a way quite unknown during Graeme Wheeler’s term –  but is there anything about which he will say, if asked, “well, that isn’t really something that would be appropriate for me, as central bank Governor, to comment on”?  There has been no sign of such restraint so far.

I wrote on Friday about the Governor’s interview on Radio New Zealand.  In a comment to that post, one of my former colleagues described it as

I thought it was rather a good one – compared with many of the media beat-ups about this and that with which we seem to be currently afflicted. And refreshing to hear interesting perspectives about the need for coherent approaches to our strategic directions, and the risks associated with longer term structural adjustments in several dimensions.

As I noted in response, if you didn’t know who the interview was with, there was no particular problem with the content (reasonable people can have quite different views on the substantive issues and we benefit from debate).  Had it been an interview with think-tank person, an academic, a journalistic commentator, or even a retired Governor or Secretary to the Treasury, it might have been a welcome addition to the ongoing dialogue on important economic and social issues.

But it was the independent Governor of the central bank, banging the drum for a whole lots of causes where his words will have been music to the ears of the current government, on issues where (even if he may have some personal expertise/experience on some of them) the Reserve Bank has no responsibility, and no institutional expertise.   It would have been almost as bad if he had been taking the opposite position on those issues, or advocating a bunch of right-wing causes.  And I only say “almost as bad”, not to take a view of the merits of those issues, but simply because at least if Orr was overstepping the mark on the right-wing side, there would have been no suggestion that he was trying to butter-up the current government – championing many of their causes –  in a year when he has a lot of turf battles to fight and win.  There are all the legislative details of the Stage 1 changes to the Reserve Bank Act, and the subsequent provisions of the Charter, let alone Stage 2 where if things go badly for the Governor he could find his powers very greatly reduced –  or indeed find the regulatory/supervisory functions split out of the Reserve Bank altogether.   The decisions the government finally makes are more likely to go the Governor’s way if the government finds him useful, supportive, and generally agreeable.

I don’t suppose that there is anything dishonest in what the Governor is saying.  I presume he is quite as left-liberal (“a passion for issues such as social equality, diversity and the environment”) as his comments and journalists’ accounts of interviews suggest.  But the personal politics –  views on all manner of other issues –  of the Governor shouldn’t be relevant to his conduct in office, and shouldn’t be on display at all.  It isn’t just the Governor: the same goes for the Commissioner of Police, the Chief Justice, the Chief Electoral Officer, the Ombudsman, the Parliamentary Commissioner for the Environment, the Auditor-General, the Inspector-General of Intelligence, or whoever (let alone heads of government departments).  When the personal politics of any of these people is on display – on issues for which they have no official responsibility – it degrades the office, and diminishes the likely general respect for the office-holder (even as the groupies of one side or the other mostly welcome the support).  It also complicates the ability of the office holder to serve a government of a different stripe: Orr, for example, has a five year term, only half of which is before the next election.  It isn’t a role where the holder simply serves at the pleasure of the government of the day.

The Governor’s garrulity was on display again yesterday in a fairly short pre-recorded interview on TVNZ’s Q&A programme.  This time the topics weren’t climate change, sustainable farming, or infrastructure finance.  Instead, this interview covered capital gains taxes and the Australian banking royal commission.    Whether or not a capital gains tax is a good idea isn’t really a matter for the Reserve Bank.  It is a (highly) political choice, with various technical tax policy perspectives offering reasons why one might favour such a tax or oppose it.  As the Bank itself has previously noted, there is no evidence that whether or not one has a CGT makes much difference to the housing market or house prices.   Now, to be fair, the Governor didn’t specifically say he favoured a CGT, but at the end, having attempted to suggest that there were relevant financial stability dimensions, he observed “we need a more efficient level playing field around tax”, to which Corin Dann responded –  with no objection from the Governor – “I’ll take that as a yes”.   Perhaps he should have gone on to ask the Governor whether the “level playing field” he favoured –  with no actual responsibility for tax policy or the housing market –  included the family home in his CGT.    (Incidentally, in both the Q&A and Radio NZ interviews I heard the Governor suggest that 90 per cent of household net worth is in housing.  He is quite wrong about that.  The numbers are on his own institution’s website.)

Then there was the matter of the Australian Royal Commission into banking, and the question of whether such an inquiry was required here.  To be clear, the Australian Royal Commission was ordered by the Australian government, under intense political pressure.  It had – and has –  almost nothing to with the financial soundness of the banking system, or any of the sorts of issues the Reserve Bank of New Zealand has responsibility for in New Zealand.  It seems to be mostly about consumer protection (and abuse) issues.  So what possessed the Governor to declare that we don’t such an inquiry in New Zealand?  It isn’t his responsibility –  either formally (it is for the government to set up Royal Commission) or even covering the Bank’s policy ground (the “soundness and efficiency of the financial system’).  He went on to declare that the banking culture in New Zealand is “infinitely better than in Australia” –  one might hope so, but given that they are mostly the same banks, and several are or were until recently headed by New Zealanders, you have to wonder what evidence he has for that belief.   The substance of the issue –  abuses in the Australian banking system etc –  isn’t one I focus on, and so I don’t have a view on whether we need an inquiry or not (although the final Australian report could shed light on that).  But quite how, three weeks into the job, the Governor can express so much confidence in the Reserve Bank, the FMA, and MBIE in dealing with such issues – “all over them, every day” was the flavour –  is a bit beyond me.  Perhaps he could look into the approach to such things of his own Deputy.

There are, of course, plenty of cases where central bank Governors overstep the bounds in their comments –  it is common enough to prompt Willem Buiter to write the paper I linked to on Friday –  but few with quite the degree of abandon of our new Governor.  For his own good, and that of the institution and New Zealand public life (avoiding the politicisation of key institutions), he needs to be reined in.   In one of the Stuff profiles on the new Governor he observed

The problem was finding something which suited his temperament.

“I am certainly attracted to wanting to make a difference.”

He is also attracted situations involving drama and excitement.

“Being a ginger, I tend to run towards the fire, rather than away from the fire.

Sounds like the sort of character that would suit many roles.  It doesn’t naturally sound like a Governor of a central bank.  Central banking –  monetary policy and financial stability –  done well should be boring (and not very politically divisive).  The image I often used to use was of the fire brigades at airports.  In an ideal world, if you ever give it a thought you take comfort from knowing they are there, but you don’t expect to hear from them, and hope they are never needed to do much.  The parallel isn’t exact, but I’d argue it is closer to the ideal than a garruous Governor sounding off on every policy question some journalist happens to ask.  If he continues as he is starting, the value of his words will be greatly devalued.  And that would be a shame.

The Governor and the Minister of Finance should also give some thought to how the communications style the Governor is adopting fits with the approach to communications that the Minister announced a few weeks ago.    In that announcement, the Minister indicated that he would be legislating to establish a statutory Monetary Policy Committee, in which the Governor would have a majority of insiders, a role in appointing the outsiders, and in which

The Governor will chair the MPC and will be the sole spokesperson on its decisions.

Other MPC members are not be allowed to give speeches or interviews offering their own perspectives.

The Reserve Bank’s stance has been that if individual members were free to speak (as they are, say, in the US, UK, and Sweden) and are individually accountable for their advice and votes), it would be a “circus”  (though as Bernard Hickey points out, this example is hardly evidence of something wrong with the system).  At present, legally, the Governor is speaking only for himself –  as the sole lawful decisionmaker –  but soon, at least on monetary policy matters, he will become no more than first among equals.  Even at present, there is a real risk that the Bank’s messages on monetary policy and financial stability –  including the crucial ones about the limits of what Bank policy can do –  will be drowned in a cacaphony of comment on all manner of things, that commentators will come to assume it is normal for the Governor to comment on.  I’d welcome the open contest of ideas, and evidence of a range of views, on the appropriate path of interest rates, or how best to build monetary policy space for the next recession.  I’m not sure it would wise to have one –  let alone six – members of the MPC all offering their thoughts on climate change, the merits of a CGT, or whatever.  It is time for the Governor to stop and reset –  and for the Board and Minister to have a quiet chat, and encourage the Governor to think again.

 

Designing monetary policy committees

Last week the Reserve Bank of Australia hosted a conference on Central Bank Frameworks: Evolution or Revolution.  I wrote last week about the paper by Reserve Bank Assistant Governor John McDermott, which was given at the conference.

But when the RBA yesterday released most of the rest of the conference papers, I noticed one that really should be relevant to the current New Zealand work underway reviewing and revising the Reserve Bank Act.  Unfortunately, it isn’t a fully worked-up paper, but the slides on “Robust Design Principles for Monetary Policy Committees” have plenty of content (and no equations, for those wary of what they might offer in such contexts), and should offer food for thought for the Minister of Finance and his Treasury officials as they pull together the new legislation.  Unfortunately, as far as I can see, the proposed New Zealand model is mostly quite inconsistent with the arguments of the conference paper.

The authors of the paper/presentation have plenty of central banking experience.  Andrew Levin is now a professor at Dartmouth, but spent most of his career in research and policy roles on the staff of the Federal Reserve in Washington. And David Archer was formerly head of financial markets and then head of economics at the Reserve Bank of New Zealand, and is now head of central banking studies at the Bank for International Settlements (perhaps somewhat ironic in that David was once known internally for his advocacy –  not entirely in jest –  of staffing the Reserve Bank of New Zealand with no more than 20 people, including (if memory serves) a cook).  David was also one of the peer reviewers for Iain Rennie’s review of monetary policy governance here.

Levin and Archer set out what they are trying to achieve:

  • Formulate a set of robust design principles for monetary policy committees (MPCs), that is, the decision-making body delegated with setting the course of monetary policy. 
  • These principles are intended to mitigate the risk of severe policy errorsarising from two sources: (1) political interference and (2) excessive insularity (“group-think”).

As they note,

  • The operational independence of the MPC fundamentally rests on the degree of public confidence in the legitimacy of the institution. 
  • These considerations provide a crucial rationale for ensuring the transparency and public accountability of the MPC.

As they further note, committee-based decisionmaking for monetary policy is now standard practice around the world, but

However, the benefits of having a committee can be severely undermined by group-think:

  • homogeneity of committee members
  • consensus-based decisions
  • lack of external reviews 

In light of those considerations, the MPC should comprise a diverse group of experts who are individually accountable for their policy decisions.

I’m not totally persuaded by the “experts” line myself –  one needs lots of expert input/advice to policy, but when it comes to decisionmaking, soundness is at least as important as cleverness.  But, for now, I’m mostly telling the Archer/Levin story.

They present some material illustrating the point that legislative independence can (a) be readily taken away if the central bank oversteps badly, or  can (b) be of little effect.  In the latter camp, they include the effective subservience of the Federal Reserve to the US Administration from 1933 to 1951, but –  as they were presenting in Sydney –  they could as readily have used the example of the Reserve Bank of Australia, which had legislative independence from its creation in 1959, but no effective policy operational autonomy.  Since the RBA still operates under the same legislation, perhaps it would have been undiplomatic to the hosts to make that point?

One of their big concerns is “groupthink” –  the risk that people within an institution (MPC or more generally) will all come to see the world the same way and in the process miss something really important.  They use as an example the Federal Reserve heading into the 2008/09 crisis.

  • During 2005-06, officials at the Federal Reserve and other agencies overlooked warning signs regarding the risk of a collapse in house prices. 
  • During autumn 2007 and early 2008, Fed officials misattributed the widening of interbank spreads to liquidity factors rather than counterparty risk. 
  • The FOMC met on Tues. 16 Sept. 2008, two days after Lehman’s failure, but still did not perceive that the U.S. might be heading into a financial crisis and a severe economic downturn.

And they illustrate the point with this chart

archer levin

It is a pretty staggering failure. But, to be honest, I’m not sure it is very enlightening on the question of the best possible design and structuring of monetary policy committees.  For example, I’m not sure there is evidence that central banks with governance and decisionmaking processes more consistent with the Archer/Levin preferences did less badly, in recognising emerging issues and risks, than others.  And, in many (although not all) respects, the US system fits better with their principles and preferences than those of many other countries.

But I’m jumping ahead.  What are the principles Archer and Levin lay out?  First

The MPC should be a fully public institution whose members are accountable to elected officials and the general public.

Quite a few central banks  –  including several in the euro-area, Switzerland, South Africa, and the regional Feds in the US –  still have private shareholders.  That hasn’t been an issue here since 1936. In most countries, the private shareholders have no real influence, but in the US they do still play a role through the appointment of heads of regional Feds, who in turn sit (in rotation) on the FOMC.   That should be fixed, and may even be unlawful –  an issue Peter Conti-Brown covered in his book I wrote about here.

The second principle is

The selection of MPC members should ensure diverse perspectives and forms of expertise. 

  • Earlier studies of MPCs were mostly focused on hetereogeneouspreferences (hawks/doves) or the hetereogeneity of anecdotal information. 
  • In contrast, this principle combats group-think by appointing experts with diverse educational backgrounds and professional experiences. 
  • Geographical diversity may also be crucial for fostering & maintaining public legitimacy.

And the third is

The process of selecting MPC members should be systematic, transparent, and consistent with democratic legitimacy. 

  • The process should have “checks and balances”, i.e., multiple steps involving different sets of decision-makers. 
  • Transparency mitigates the risk of undue influence by special interests. 
  • The process should foster public confidence in the integrity of the institution.

In general I agree with this, but this is an area where the US does reasonably well, at least for the core members of the FOMC, the Fed Board of Governors.  They are nominated by the President, and subject to confirmation by the Senate, one of the most open processes anywhere.   By contrast, the proposed New Zealand system will have the Governor and the Reserve Bank Board –  neither with any direct democratic legitimacy or accountability –  driving the appointment of MPC members, with the Minister of Finance having no ability to interpose his or her own candidates.  And there is no public or parliamentary scrutiny of individual members proposed, either before taking office or afterwards.

The MPC’s size and voting rules should foster genuine engagement among members and diminish the influence of any single individual. 

  • This principle mitigates the risks of autocracy, which has pitfalls like those of group-think. 
  • Previous analysis prescribed a fairly small size as optimal for engagement (e.g., 5 members), but a somewhat larger size may be needed to encompass sufficiently diverse perspectives.

In principle, the US system does well on this score.  No one on the FOMC owes or her appointment to anyone else on the committee, and many of the members are based outside Washington.

And they propose

Terms should be staggered, non-renewable, and last longer than the political cycle, with removal only in cases of malfeasance.

The non-renewability point is about limiting the risk of inappropriate political interference.  I have some sympathy with that point –  Archer elsewhere argues for single seven year terms.  Then again, non-renewability even more severely restricts the possibility of holding MPC members to account for their contribution or performance.  For my tastes, Archer/Levin lean a bit too much on the side of protecting against political interference, and bit too little on the imperative on ensuring that the appointees actually do the job they have a mandate for.

Principle 6 is a very important one in my view, and one which our Minister of Finance appears to have totally discounted.

Each MPC member should be individually accountable to elected officials and the public. 

  • Individual accountability is crucial for mitigating the risk of group-think.
  • Such accountability should occur through MPC communications, speeches & interviews, and hearings before elected officials. 
  • To avoid cacophony, the MPC must clearly explain the rationale for its decisions as well as elucidating the range of individual views.

By contrast, our Minister of Finance has plumped for consensus as far as possible, and no individual identification of the range of views.  That conduces not just to groupthink, but to free-riding (by minority external members).   There is much stronger individual accountability in the Swedish, UK, and US systems.   That said, as the example Levin and Archer used shows, no system of governance guarantees against policy mistakes.

The MPC should be subject to periodic external reviews of its strategy and operations, but not its specific policy decisions. 

  • External reviews can be invaluable in identifying and mitigating group-think.
  • Such reviews should occur on a regular schedule rather than triggered by political motives or idiosyncratic factors. 
  • These reviews should focus on assessing past & prospective performance, not on evaluating individual policy decisions.

It would seem highly desirable to build such external reviews into the system, perhaps every five years.  They should be commissioned by the Minister and Treasury, and should complement any reviews the MPC undertakes, or commissions, of its own performance.

In addition to any statutory goals, they argue

The MPC’s medium-term policy framework should be approved or endorsed by elected officials roughly once every 5 years. 

  • This framework should provide a quantitative description of the MPC’s objectives, priorities, intermediate targets & operating procedures. 
  • The approval or endorsement of elected officials is crucial for the legitimacy and credibility of the policy framework.

In a New Zealand context, it might be desirable to have the document that replaces the Policy Targets Agreement be subject to parliamentary ratification (as the –  much less important –  Funding Agreement is).

I’m less convinced of their next principle

The MPC should formulate a systematic and transparent strategy that guides its specific policy decisions over the coming year or so.

Easy enough to write down, but hard to make it mean anything particularly specific.

And their final principle is

The MPC should regularly publish reports explaining the rationale for its specific decisions in terms of its policy framework and strategy. 

These reports should explain the rationale for the majority’s decision along with concurring and dissenting opinions that clearly convey the range of individual views.

I agree.  A good comparison is with the decisions made by higher courts, which in effect sit as a committee.   Majority and minority opinions are published, and groups of members may come together in support of a particular written opinion, rather than all penning one each.

Perhaps they were running out of time, but the last slide only has headings

Insiders & Outsiders on the MPC 

  • Full-Time vs. Part-Time 
  • Executive vs. Policymaking Roles 
  • Differential Terms of Office

Fortunately, we know from David Archer’s comments on Iain Rennie’s draft report what he thinks on the insiders vs outsiders issue.

Turning first to the balance of internals and externals. The tendency to groupthink, with the most powerful member of the group being the “seed” of the group view, is the biggest impediment to harnessing diversity. The probability of groupthink increases with the presence of hierarchy.

F. The law should restrict the proportion of executive insiders to below half, by a big enough margin that these tendencies have a chance to be offset.

Sadly, our Minister of Finance has chosen a model –  a permanent majority of insiders, the Governor having significant influence on other appointments, and no freedom to speak externally – which will entrench hierarchy, create a strong likelihood of groupthink.

And here, from Archer’s earlier comments, are his thoughts on publication of minutes, and openness about the range of views and perspectives.

Turning now to the public presentation of committee decisions, claimed improvements in policy transmission mechanisms flowing from singular official views about future policy are ephemeral. Apparent unanimity is quickly shown to be untrustworthy spin.

The essential reason is that the future is largely unknowable, and it is foolish to pretend otherwise. Consider the records of the few central banks – including the RBNZ – that publish forward policy interest rate paths. Forecast paths are almost always poor predictors of reality, even in the RBNZ case where unanimity about the outlook exists by construction. Being honest about the limited predictive powers of even highly paid specialists is likely eventually to increase their trustworthiness, at least relative to the results of repeated false marketing of ostensible consensus. With unknowable future shocks, the real predictability problem relates to how policy will react to new events. To predict that, one has to know policy preferences and the mental frameworks used to process new information (as well as forming a view on what new information might arrive). Given clear legal objectives supplemented by PTAs, the range of policy preferences in play should be constrained. The main thing then is to allow people to observe the variety of analytical frameworks being deployed. That is not helped by delaying the publication of minutes. Gains in withholding minutes are thus small, if they exist at all. At the same time, requiring members to withhold from expressing their true views in public, at least for non-trivial periods around policy decisions, may damage their ability or willingness to articulate alternative perspectives.

How can cacophony in communications be avoided without some formal constraint? One approach would be focus members’ attention on agreeing minutes that accurately reflect their individual contributions. Fairly full minutes, with attributed reasoning, can provide a better public platform for dissenters’ subsequent public utterances than can the soundbites of “managed” disclosures about policy decisions. If such minutes will be available soon, members are more likely to refrain from immediate but partial expressions of their views.

As I hope is clear, I don’t agree with everything in the Archer and Levin presentation but there is plenty of material here that really should be thought about by our Minister and Treasury officials, to a much greater extent than was evident in the papers published to date.  It isn’t too late to rethink these details, and doing so would be likely to lead to a better central bank –  better on substance, and more accountable and thus more enduringly legitimate.

As it happens, the Herald this morning has a first “interview” with the new Governor Adrian Orr.   It is a typical Herald piece as regards the Reserve Bank: giving the Governor a platform to speak, rather than showing signs of any searching or awkward questions.  I thought it was interesting for three things:

  • all the focus appeared to be on monetary policy, even though more of the Bank’s staff now work on the financial system regulatory and supervisory roles,
  • there was no mention of the scathing feedback on the Reserve Bank, regarding those same regulatory/supervisory activities, in the New Zealand Initiative report, and
  • while there was plenty of talk about broader perspectives etc, there wasn’t much (any) talk about doing the basics better.

Thus Orr talks grandly of leading the world

“We need a broader view of the what the central bank is really about. We’ve got an enormous amount of grey matter in here — that can be used more effectively,” Orr said.

“So what is global leadership in managing a small, open economy, what is global leadership in ensuring a sound financial system, what is global leadership in the delivery of the means of exchange?”

But not at all of the miles he –  and the Bank –  have to go just to catch up and come closer to doing excellently the basics Parliament has charged them with: keeping inflation near target, and supervising the financial system in a way where the analysis and regulatory actions consistently command confidence.  There was a lot of talk of “leading the world” back in the 1990s, and in some small areas, almost inadvertently, we did.  But I’m not sure it is a goal New Zealand taxpayers should be actively seeking to fund, and especially not when the domestic basics leave quite a bit to be desired.

 

(It is the school holidays, and my 11 year old daughter wants to tell people that instead of reading “all the boring stuff my Dad writes you should listen to Ed Sheeran instead”.  Personally, I’ll take Mozart or Handel over monetary policy –  let alone Ed Sheeran – any day.)

 

Scathing feedback on the Reserve Bank

Late last week the New Zealand Initiative released its report Who Guards the Guards? Regulatory Governance in New Zealand which has a particular focus on the Financial Markets Authoritiy, the Commerce Commission, and (in its financial regulatory/supervisory roles only) the Reserve Bank.  All three are important economic regulators and, if we are going to have such entities, it is important that they are well-governed, and performing excellently (with associated accountability and transparency) the roles Parliament assigned to them.

As part of putting together the report, the New Zealand Initiative undertook a survey

To assess how well our regulators are respected, we surveyed New Zealand’s 200 largest businesses by revenue, together with those members of The New Zealand Initiative not otherwise included as members of the ‘top 200’. In practical terms, this approach allowed adding a sample of New Zealand’s leading professional services firms – accountants, lawyers and investment bankers – into the pool of businesses covered by our survey.   Only one response per organisation was permitted.

And this is what the survey covered

We asked survey respondents both to:
a. rank the regulators they interact with based on their overall respect for them; and
b. rate the performance of the three regulators most important to their respective businesses against a range of KPIs.

The KPIs were based on a combination of the best practice principles identified by the Australian Productivity Commission’s Regulator Audit Framework, and from a similar survey to our own commissioned by the New Zealand Productivity Commission for its 2014 report. The questions were designed to obtain a broad view of regulatory performance, and as such did not enquire into the merits of individual regulatory decisions or the fitness-for-purpose of individual regulators.

Rather, the KPIs cover issues like commerciality, communications, consistency, predictability, accountability, and so on.

For some regulatory agencies –  there were 20+ covered –  there were lots of responses: some regulation is pretty pervasive.  For others with a very sector-specific role, including the Reserve Bank, there were only a relatively small number of responses (8) –  but it seems likely that all the major banks and some other smaller institutions will have responded.

The Initiative is clear that it is a survey of the regulated.  That is not the only, or even the most important, perspective in assessing a regulatory agency.  Regulatory agencies are supposed to work in the public interest, as defined by Parliament, and that means constraining the actions/choices of individuals and firms.  Regulation is intended to prevent people doing stuff they would otherwise choose to do, or compel them to do stuff they would otherwise not choose to do.  In other words, one should worry if a regulator is popular with those it regulates.  Indeed, one of the big risks in any regulatory system is that the regulator and the regulated form too cozy a relationship  –  in which there is some mix of regulators making life easy for the the regulated (eg coming to identify more with the interests and perspectives of the regulators) or regulators in effect working with the bigger and more connected/established of the regulated entities to make new entry and competition less easy than it should be.

The Initiative acknowledges the point to some extent

Of course, we can expect regulators to be unpopular at times with the businesses they regulate. It is, after all, their job to place boundaries on what businesses can and cannot do. But just as we expect communities to respect the police, we should also expect the regulators of commerce to have the respect of the businesses they regulate.

Personally, I’m not sure I’d go that far. I don’t expect “communities to respect the police”, but expect (well, vainly wish) the Police to earn the trust and respect of the community.  But whether or not “respect” is quite the right word, regulated entities should be able to offer some insights that are useful in evaluating regulatory institutions.  And that is perhaps particularly so when, as in this exercise, the survey covers a wide range of regulatory institutions at the same time.   If one institution scores particularly badly relative to others –  particularly others in somewhat similar fields –  it should at least provide the basis for asking some pretty hard questions about the performance of that agency, and of those responsible for it (officials, Boards, Ministers etc).

In this survey, the Reserve Bank’s financial regulatory areas scores astonishingly badly.   I first saw the results months ago when I was asked for comments on the draft report, but even with that memory in mind, rereading the Reserve Bank results (from p 60) over the weekend made pretty shocking reading.

Here is one chart from the report, comparing Reserve Bank and FMA results for the KPIs where the Reserve Bank scores worst.

partridge 1

In summary

In the ratings, the RBNZ’s overall performance across the 23 KPIs was poor. On average, just 28.6% of respondents ‘agreed’ or ‘strongly agreed’ that the RBNZ met the KPIs and 36% ‘disagreed’ or ‘strongly disagreed’. These figures compare very unfavourably with the FMA’s average scores of 60.8% and 10.3%, respectively.  They also compare unfavourably (though less so) with the Commerce Commission’s averages of 39.9% and 25.8%, respectively.

There simply isn’t much positive to say.

One of my consistent themes has been the lack of accountability of the Reserve Bank, across all its functions.  The regulated entities seem to share those concerns.

partridge 2

As part of the survey, interviews were also conducted to fill out the picture the data themselves provided.

Like the survey results, the views of interviewees were also largely [although not exclusively] negative.

The criticisms related both to the RBNZ’s capabilities and processes, and the substance of its regulatory decision-making.
In relation to process and capability, criticisms included the following issues:
a. Lack of consistency in process: One respondent noted that the internal processes of the RBNZ’s prudential supervision department, which is responsible for prudential supervision, can be ‘random’. The respondent referred to long delays between steps in a process involving regulated entities, followed by the imposition of requirements for more-or-less immediate action from them.
b. Lack of relevant financial markets expertise among staff: This was a common
theme. One respondent noted that until the 2000s, there was “regular interchange
of staff between the banks and RBNZ,” meaning RBNZ regulatory staff had firsthand finance industry expertise. But this has changed with the banks moving their head offices to Auckland and the RBNZ based in Wellington. As one respondent said, “They will always struggle to get good people [with financial markets expertise] in Wellington, especially with the banks now in Auckland… this makes interchange impossible.” Another said, “RBNZ [staff are] completely divorced from the reality of how things are done.”  More colourfully, another said, “[RBNZ] is all a little archaic… Entrenched people don’t get challenged.” Another said, “On the insurance side, the level of capability is less than with the banks. There is a potential risk to policyholder protection. RBNZ ends up just focussing on the minutiae.”
c. Lack of commerciality: This concern is allied to both the expertise issue noted above, and the materiality issue noted below. As one respondent said about the RBNZ’s ‘deafness’ to the need for a materiality threshold before a matter becomes a breach of a bank’s conditions of registration, “RBNZ says, ‘If it’s not material just disclose it’. But that’s a regulator way of thinking. They don’t understand the commercial, reputational implications.”
d. Unwillingness to consult or engage: As one respondent said, “I would call them out for not truly consulting.” Another said, “The RBNZ upholds independence to the point that it precludes constructive dialogue.” Several respondents drew a contrast with the FMA, noting that the RBNZ was happy to issue hundreds of pages of “prescriptive, black letter requirements,” but “without much or any guidance” for the banks on their application. One respondent did note, however, that the RBNZ “isn’t resourced to spend time doing this [issuing guidance].”
e. Lack of internal accountability: Several respondents perceived a lack of oversight from the most immediate past Governor, Alan Bollard, in either engaging with the banks over concerns about prudential regulation or trying to resolve them. One respondent noted, “Staff are often running around doing things without serious scrutiny from above.” Another said there is a group “with no accountability within the RBNZ… They favour form over substance and seem to enjoy exercising power.” Another commented it was “unclear how much information flowed up to the RBNZ Board,” but that if the Governor were accountable to the board for prudential regulation, then the board “could be useful in pulling up entrenched behaviour.” Another noted that the RBNZ’s  governance structure meant it did not benefit from outside perspectives: “[t]he value of diverse thinking is to challenge, so you don’t get capture by one person’s view.”

Two main criticisms were made in relation to substance:
a. Materiality thresholds: Several respondents highlighted the lack of a ‘materiality
threshold’ before RBNZ approval is needed either for:
• changes to banks’ internal risk models in the Conditions for Registration of
banks; or
• changes to functions outsourced to related parties.
One respondent noted that without a materiality threshold, the new requirement
for a compendium of outsourced functions – and for approval of any change to
outsourcing arrangements with a related entity – could lead the Australian-owned
banks to cease outsourcing functions to related entities, thereby increasing costs and
harming customers.  Several respondents noted that the lack of a materiality threshold could be attributed to a lack of trust in the banks by the RBNZ staff responsible for prudential regulatory decisions. As one respondent put it, this led the RBNZ to “insist on approving absolutely everything.”

Although this view was not shared by all banks, one respondent noted that even
APRA – long regarded as a more heavyhanded, intrusive regulator than the RBNZ
– was “now more reasonable to deal with than the RBNZ.”

b. Black letter approach: Along with the lack of a materiality threshold in the RBNZ’s
regulatory regime, several respondents commented on the RBNZ’s “black letter”
approach to interpreting its rules: “If RBNZ had two or three public policy experts
who could bring a ‘purposive approach’ to interpretation, that would be hugely positive.”   Another said, “[The RBNZ] has an overly legalistic approach which ignores the purpose of the legislation,” and that “what they’re doing undermines [public] confidence over things that are of no risk.” Several survey recipients noted that this was in stark contrast to APRA’s approach to public disclosure in Australia.

Another respondent put the concern differently, saying the problem was less
about the RBNZ’s ‘black letter’ approach to its rules, and the opaqueness of the rules,
and more about the lack of guidelines from the RBNZ explaining them, an issue the
respondent put down to a lack of resources.

There is more detail there than most readers will be interested in. I include it because the overall effect builds from the relentness of the critical comment.   I’m not even sure I agree with everything in those comments –  but they are clearly perspectives held by regulated entities –  and I suspect that reference to Alan Bollard is really intended to refer to Graeme Wheeler.  But taken as a whole, it is an astonishingly critical set of comments and survey results, that most reflect very poorly on:

  • former Governor, Graeme Wheeler,
  • former Head of Financial Stability (and Deputy Governor and “acting Governor” Grant Spencer),
  • longserving head of prudential supervision, Toby Fiennes
  • the Reserve Bank’s Board, including particularly the past and present chairs, Rod Carr (who had had a commercial and banking background) and Neil Quigley.

And given the enthusiasm of the Bank to emphasis the role of the Governing Committee in recent years, it probably isn’t a great look for the new Head of Financial Stability, and Deputy Governor, Geoff Bascand – he of no banking/markets experience, no commercial perspective, and little regulatory experience – who sat with Wheeler and Spencer on the Governing Committee over the previous four years.

One would hope that the new Governor, the new Minister, and the Treasury and the Board, are taking these results very seriously, and using them to, inter alia inform the shaping of Stage 2 of the review of the Reserve Bank Act.  I’ve not heard any journalist report that they’ve approached the Reserve Bank  –  or the Board or the Minister – for comment on the report and the Bank-specific results.   But such questions need to be asked, and if the Bank simply refuses to respond or engage that in itself would be (sadly)telling.

In the report the New Zealand Initiative authors make much of comparisons with the FMA.  In respect of the survey results, that seems largely fair.  The data are as they are.  But as I’ve noted in commenting a while ago on an op-ed Roger Partridge did foreshadowing this report, I’m not entirely convinced (nor am I fully convinced about the criticisms of the FMA’s predecessor the Securities Commission, which was asked to do a different job).

Partridge cites the Financial Markets Authority as a better model.  In many respects, the FMA is structured like a corporate: the Minister appoints (and can dismiss) part-time Board members, and the Board hires a chief executive.  But it is worth remembering that the FMA has quite limited policymaking powers: most policy is made by the Minister, whose primary advisers on those matters are MBIE.   The FMA is largely an implementation and enforcement agency.  That is a quite different assignment of powers than currently exists for the Reserve Bank’s regulatory functions (especially around banks).  Also unaddressed are the potentially serious conflict of interest issues around the FMA Board, in its decisionmaking role. More than half the Board members appear to be actively involved in financial markets type activities (directly or as advisers), and even if (as I’m sure happens) individuals recuse themselves from individual cases in which they may have direct associations) it is, nonetheless, a governance body made up largely of those with direct interests that won’t necessarily always align well with the public interest.

Reasonable people can reach different views on the performance of the FMA. I gather many people are currently quite pleased with it, although my own limited exposure –  as a superannuation fund trustee dealing with some egregious historical abuses of power and breaches of trust deeds – leaves me underwhelmed.  It is certainly a model that should be looked at in reforming Reserve Bank governance –  it is, after all, the other key financial system regulator –  but I’m less sure that it is a readily workable model for the prudential functions, even with big changes in the overall structure of the Reserve Bank, and some reassignment of powers.  It certainly couldn’t operate well if both monetary policy and the regulatory functions are left in the same institution.  It doesn’t seem to be a model followed in any other country.  And it isn’t necessary to deal with the core problem in the current system: too much power is concentrated in a single person’s hands.  In a standalone regulatory agency, I suspect an executive board –  akin to the APRA model –  is likely to be an (inevitably imperfect) better model.

Whatever the precise model chosen, significant reform is needed at the Reserve Bank.  Some of that is about organisational structure and governance –  I’ve made the case for a standalone new Prudential Regulatory Agency –  but much of it is about organisational culture, and that sort of change is harder to achieve.  I hope Adrian Orr has the mandate, and the desire, to bring about such change.  I hope Grant Robertson insists on it.

Readers will that early last year, Steven Joyce – as Minister of Finance –  had Treasury employ a consultant to review aspects of the governance of the Reserve Bank, particularly around monetary policy.  Extracting details of the review, undertaken by Iain Rennie, from The Treasury proved very difficult.  It took almost a year for the report to be released.  I’ve had various Official Information Act requests in, including for the file notes taken from the (rather limited) group of people outside The Treasury that Iain Rennie engaged with (within New Zealand it turns out that he talked to no one outside the public sector).  That one ended up with the Ombudsman.  A week or so ago I finally got an offer via the Ombudsman’s office –  Treasury would release a document summarising those meetings if I discontinued my request for the full file notes.  Somewhat reluctantly –  balancing the point of principle, against getting something now – I agreed, and last Friday Treasury released that summary to me.  For anyone interested it is here.

Rennie review Summary of discussions with External Stakeholders

There is some interesting material there, including on meetings with the Reserve Bank Board –  where he showed no sign of having grilled the Board on what it accomplishes or adds –  and with some overseas people Rennie talked to.  But what caught my eye was the record of a meeting Rennie (and Treasury) held with the Reserve Bank management (Wheeler, Spencer, McDermott and a couple of others) on 14 March last year.  At the meeting, the Bank seems to have set out to minimise any change and sell Rennie on the virtues of the current informal advisory Governing Committee.

Here are relevant bits of the record (as summarised now by Treasury)

Current Governing Committee (GC)
o The GC reflects public sector reforms, there are checks and balances, which help with accountability.
o It has become important to focus more on the Reserve Bank as an institution, rather than just on the Governor, as the Reserve Bank has taken on more and more responsibilities over time.
o Discussed different overseas models, including strengths and weaknesses of different approaches.
o The approach to decision-making and communications needed to be consistent with the Reserve Bank’s approach (e.g. must be appropriate in the context of forward guidance).

Codification of the Committee Structure
o Codification’s advantage was that it could prevent a future Governor from moving back to a single decision-maker. However, that hasn’t been a problem in Canada, and it would be difficult for a Governor to roll the current committee approach back.

Effectiveness
o The cohesion of the GC and the cooperative nature were identified as the most important factors in its success. The GC was relatively informal with collective responsibility, and that worked well.
o Discussed how the current committee operated, and some strengths and weaknesses of the approach.
o Discussed the effectiveness of different options for decision-making and communications design, such as voting and minutes (neither supported).

Some of this is almost laughable, a try-on that surely they should not have expected anyone to take very seriously (and, to Rennie’s credit, he came out with recommendations that went far further than the Bank liked, earning him soe quite critical comment from the Bank).

Take that very first bullet, the claim that the Governing Committee model “reflects public sector reforms”.  I’m not sure how.  It has no basis in statute, the members are all appointed by and accountable to the Governor, and there is no transparency, and no accountability.  The Bank has, for example, consistently refused to release any minutes of the Governing Committee –  on any topic –  if indeed, substantive minutes are even kept.

Or the fourth bullet, the suggestion that “the approach to decision-making and communications needed to be consistent with the Reserve Bank’s approach”, which is a typical bureaucrat’s attempt to reverse the proper order of things.  The Reserve Bank is a powerful public agency, created by Parliament and publically accountable (well, in principle).  The design of the governance and accountability arrangements should reflect the interests and imperatives of the principal (public and Parliament), not those of the agent (the Bank itself).  Officials work within the constraints Parliament establishes.

Or the third to last bullet, about the cohesion of the Governing Committee, collective responsibility etc.  Again, I’m sure they believed it, but on the one hand, we build public institutions to provide resilience in bad times (or bad people) not so much for good times, and on the other there is no collective responsibility –  the Governor alone has legal responsibility, and there is no documentation at all on the Governing Committee processes.  And legislating to entrench a committee in which the Governor appoints all the members, might be a recipe for cohesion, but it is also a high risk of a lack of challenge, debate and serious scrutiny.

And, finally, just to confirm that consistent opposition to anything approaching serious scrutiny, in that final bullet, the Bank reaffirms its opposition to published minutes –  something most of central banks now manage to live with, in some cases with considerable detail.

At one level, these comments no longer matter much.  Graeme Wheeler and Grant Spencer have moved on, and the new government has made decisisions on the future governance of monetary policy.  But they nonetheless highlight the sort of closed culture fostered at the Reserve Bank over the past decade or more, whether on the monetary policy side or on the regulatory side (the latter vividly illustrated in the NZI report).  Comprehensive reform is overdue.  It would make for a better Reserve Bank internally – and/or a better Prudential Regulatory Agency –  and one more consistently open to scrutiny, challenge, and debate, which in turn will reinforce the impetus towards better policy, better analysis, and better communications.

 

“12 Angry Men” and the Reserve Bank

It wasn’t me that introduced that wonderful 1957 movie to discussions about Reserve Bank governance, but them.  I’ll get back to that.

Yesterday the Bank released its first on-the-record speech of the Orr era, although it must surely have been largely written before the new Governor came on board.  Chief economist John McDermott and one of his staff had prepared a paper for a Reserve Bank of Australia conference.  The title of the paper was Inflation targeting in New Zealand: an experience in evolution.   

I’ve not typically been a fan of McDermott’s speeches (eg here) but this one reads quite well.  It is mostly a background account of how inflation targeting developed and evolved in New Zealand, culminating in some brief, and fairly innocuous, comments on  the pending changes to the Reserve Bank Act that the government has recently announced.  For anyone looking for background or longer-term context on New Zealand monetary policy in recent decades, I’d happily suggest it as a reference (in fact, I just did for one reader).

I don’t have much problem with the description of the history –  and they draw on an old article of mine on the origins of inflation targeting – and although I’d describe a few things differently I think it is mostly a fair account.  As ever, I think the Bank tends to caricature the early days of inflation targeting to some extent, suggesting that things were done fairly rigidly or mechanically when the truth is –  whatever some of the rhetoric at the time – quite the opposite.    Then again, as I reflected on the speech I realised that there is –  as far as I can work out –  no one now at the Reserve Bank who was involved at all in monetary policy for the first seven or eight years of inflation targeting.  I guess it is a quarter of a century ago now, but even so that took me a little by surprise.  The Governor, for example, first joined the Bank in mid-1997 just in time to share responsibility for one of the more embarrassing episodes of the last 30 years, the Monetary Conditions Index.  (I’ve been meaning to write up that episode, which seems to me not well-documented, and now that Orr is back at the Bank perhaps it is time to do so.)

As it happens, the Monetary Conditions Index –  when for a year or more we set things up in a way that foreseeably introduced extreme short-term volatility to interest rates –  remains the only mistake the Bank seems willing to concede over almost 30 years (“the MCI was a branch that we lopped off fairly quickly”).  Certainly nothing about the persistent failure, over seven years now, to have core inflation near the 2 per cent focal point of the inflation target –  or the attempt to aggressively tighten policy in the midst of that –  all while, on their own numbers, unemployment was above estimates of a NAIRU.

But the prompt for this post was mostly some comments McDermott made about the planned introduction of a statutory Monetary Policy Committee, finally moving away from the single decisionmaker model that has few/no parallels among other central banks and financial regulators, and none among other New Zealand public sector agencies.

This was the paragraph that caught my eye

Of course, the creation of a formal (or indeed informal) committee does not guarantee superior outcomes. How the MPC will operate in practice is also extremely important. Committees are more successful when they have processes in place that aim to minimise various human biases, such as the pressure to conform, confirmation bias, and a tendency to rely on the most recent events to a greater extent than is sometimes warranted.[24] The Bank will continue to ensure our internal processes aim to maximise the benefits that committees can provide.

The footnote 24 reads as follows

24  The movie 12 Angry Men (1957, MGM) provides an excellent demonstration of how ‘committees’ (a jury in this case) should not behave, for example publicly revealing individual priors at the start of the meeting.

Of course, I agree that simply creating a legislated committee does not guarantee superior outcomes.  Much of the time it shouldn’t make much difference at all to the setting of the OCR –  whether for good or ill (thus the former Governor wanted his internal committee enshrined in law, and since it was gung-ho for tightening in 2013/14 as advisers, it is hard to believe they’d have taken a different collective view as decisionmakers).  Committees are, in large part, about institutionalising resilience, to protect us to some extent against idiosyncratic or bad actors (in this case, a bad Governor –  but it generalises in that Prime Ministers govern in Cabinets, higher courts operate as benches of judges, and so on).   Layers of review –  eg appeal courts –  can perform much the same sort of function.  Committees can help instill confidence, perhaps especially when –  as with the higher courts –  all judges are free to record, and have published, their considered opinions.   In many of these areas –  probably including the setting of the OCR – there is no objectively right or wrong answer, only a final one (for now).

McDermott rightly notes that there can be problems that undermine the effective contribution of legislated committees.  He notes “the pressure to conform, confirmation bias, and a tendency to rely on the most recent events to a greater extent than is sometimes warranted”, but there are others, including the possibility of individual committee members free-riding.  But he makes no attempt to relate the structure of committee that the government has chosen –  which seem to largely mirror the Bank’s preferences –  to the sort of biases and risks he is concerned with.  How does the chosen structure allay those risks?

Thus, the government has chosen to adopt a model in which:

  • outsiders will always be numerically dominated by insiders,
  • the Governor –  an insider in these terms – chairs the committee and controls all the resourcing of, and paper flow to, the committee, and where
  • the Governor will have a big influence on all the appointments to the committee (several will be his own staff, appointed on his recommendation, and the others will be appointed by the Minister on the recommendation of the Bank’s Board –  but with the Bank’s Board historically having served mostly to assist the Governor).
  • and outsiders (and insiders for that matter) will be unable to articulate their individual views in public, and won’t be held individually accountable for those views (or for their contribution to the committee).

In the hands of an exceptional Governor –  one genuinely open to debate and challenge, through the worst of times –  none of that might matter.  But we don’t legislate on the presumption that men are angels.   For a typical Governor –  moderately competent, moderately defensive, moderately arrogant –  it is a recipe for something as close as possible to the status quo.   And, frankly, for typical other members: insiders won’t see much payoff in resisting a Governor with a strong view, collegiality among management will encourage caucusing and a fairly common insider view, and anyone willing to take appointment as an outside member might be readily content to settle for the prestige, and the inside view of the process, rather than supposing that they have much chance of making much difference.   There will be no cost to just going along, and in the papers the Minister raised the threat of being dismissed if an outside member does make life awkward for the Governor.

I don’t want to overstate things. But the chances of getting the real benefits of a committee on this particular topic (monetary policy) have been undermined by the choices the government has made and the Bank appears to have supported.  Bureaucratic interest appears to have trumped the public interest.

And that footnote concerned me on a number of counts.  It obviously wasn’t just a throwaway line –  having been deliberately included as a footnote in a published text, which will have gone through numerous drafts.   It is an odd example to use in many ways. For example, a jury is a one-shot game (jurors typically don’t know each other previously, they decide one case, and then may never see each other –  let alone meet for another deliberation –  again).  Monetary policy decisions, by contrast, are a repeat game: the OCR is reviewed every six weeks or so, and the same individual or group of people make the decision for years at a time.  They bring their priors, their experiences, their past mistakes to the table, and are encouraged to do so.   It is also deliberating on issues where everyone –  inside the committee and outside –  has access to the same information, and no information is inadmissible. (And where the financial markets are trading that information continuously.)

McDermott seems to take as the lesson of 12 Angry Men that members of a committee should not outline their individual initial views at the beginning of the meeting.  Perhaps that is arguable (in principle), but in the case of the jury in question the “meeting” began only after all twelve jurors had been exposed to all the evidence in court –  defence and prosecution.  In that sense, the start of the jury deliberations in the movie reminded me quite a bit of OCR Advisory Group meetings I sat on for years:  we’d have spent several days listening to presentations, asking questions, listening to the questions of others, and then the small group would retire.  And often the Governor would go round the table and invite each member in turn to outline their view.  When we wrote our formal advice to the Governor, we were all supposed to do so independently –  and not read anyone else’s until we’d sent off our own.  And when the group reconvened there was never an opportunity to seriously debate the issues, or challenge the arguments that (say) an 11:1 majority of the Governor’s advisers were using.  In some ways, it felt a lot like 12 Angry Men, except without the heroic denouement in which truth was outed, and the majority converted.

The parallels are weaker than they might look.  For a start, no one’s life is on the line (as in the movie).  Perhaps more importantly, an OCR decision made today can be, and is, revisited 6-8 weeks hence.  And if all the members aren’t necessarily expert they at least have some ongoing familiarity with the subject matter, and exposure to the views of equally capable people outside the institution, in real-time.

But the challenge remains for the Bank (and the government).  How does it propose that the new committee will overcome the tendency for the Governor’s preference –  backed by resourcing, control of pay etc for internal members, an inbuilt majority, and an appointment procedure that will encourage the appointment only of house-trained outsiders –  to go on dominating, whether the Governor’s view (or the collective inside view) is right or not.  Sometimes it will be right, but those arguments should prevail on their merits, not on institutional biases that strengthen the hand of one dominant individual and his clique, and make unlikely the prospect that a single outsider will ever be able to make the sort of difference the (heroic) 12th juror in the movie made. Of course, it is only a movie…..then again, it was the Bank that introduced the reference, not me.

Far better to institutionalise a system more explicitly designed to air, test, and challenge the full range of views:

  • all members appointed directly by the Minister of Finance,
  • a majority of the members being non-executive outsiders,
  • those outsiders having access to (a limited amount of) resources to do/commission their own analysis research,
  • individual OCR votes being recorded, and published, by name,
  • full minutes –  with views attributed on a named basis –  be kept and published (paralleling the Swedish system, and –  in a slight different way –  the way the higher courts work),
  • individual members being free to engage externally (including making speeches) articulating openly their views and questions.

In the nature of the monetary policy issues –  repeat game, same information base open to everyone, huge uncertainty –  it seems like a model better designed to get the most from a committee system, and to be consistent with commitments –  from the government –  to more open government.  Of course, the Bank –  at least under the previous management –  never really wanted more than an fig-leaf committte. Any analysis of bureaucratic incentives means that shouldn’t be a surprise.  From McDermott’s comments yesterday, it isn’t clear that anything has yet changed.  But the bureaucrats –  with interests to protect –  shouldn’t be the ones driving the reforms.

How key appointments are made

After a spate of posts in the last few days about the Reserve Bank reforms, I’d intended to change topics for a while.   But then I noticed that the new Opposition spokesperson on Finance, Amy Adams, had weighed in, expressing concerns about a couple of aspects of what the Minister of Finance had announced on Monday.

This is how interest.co.nz reported Adams’ concerns

Under the new Policy Targets Agreement (PTA), [actually, under the amended Act] a seven-member Board – with four internal Reserve Bank members and three external appointees, selected by the Minister on the recommendation from the RBNZ board – will be established.

There will be a Treasury representative who will sit on the committee as well but will not have voting rights.

Adams says the fact that Robertson is able to appoint almost half of the board “creates a live question about the degree to which that allows him to exert political influence.”

Although National supports the introduction of the MPC, she says the Reserve Bank already operates with an informal decision-making committee within the bank and that process was working well.

Adams has also taken a swipe at the fact a Treasury representative will sit on the MPC.

“They are the senior Government official, their job is to deliver on the Government’s objective,” she says.

“So, you’re effectively going to have a senior Government official that reports to the Minister and three people who are appointed by and able to be removed by the Minister, sitting in and influencing those decisions and those discussions.”

I don’t want to spend much time on the issue of having a non-voting Treasury representative as part of the new Monetary Policy Committee (MPC).  Reasonable people can differ on the merits of that, and whether there are any real benefits.  On balance, I favour the model the Minister of Finance has adopted.   But in terms of the concerns Adams raises, it is worth remembering that in Australia the Secretary to the Treasury (in a more politicised public service) is a voting member of the RBA Board, and no one questions the operational independence of the RBA.  And in a more direct parallel to the model proposed here, in the UK –  under a modern governance system established only 20 years ago  –  there is a non-voting Treasury representative at MPC meetings, and that seems to have been generally accepted to have worked well, and not to have undermined the independence of the Bank of England (although the individualist approach –  where MPC members can speak out –  probably provides an added safeguard).    It will be important to look at the specifics of the legislation on this point, and for there to be good protocols in place, but I don’t think that what has been announced to date poses particular problems.   If the Minister wants to put pressure on the Governor (now) or the Committee later on specific OCR decisions, he doesn’t need mid-senior level Treasury officials to do so.

In that interest.co.nz article, I’m quoted as suggesting that Amy Adams is “completely wrong” in her point about the appointment process.  That is for two, quite different, reasons:

  • first, Amy Adams’ comments suggest she hasn’t understood that the Minister will only be able to appoint people nominated by the Board (as is the case for the Governor now).  The Minister can reject nominees, but can never replace those names with his own people.   The Minister has no discretion.
  • second, direct and largely unfettered ministerial appointment is the way we typically do things in the New Zealand system of government, including for very sensitive positions for which the integrity and independence of the individuals is paramount.   It is also the way most key decisionmakers on monetary policy in other countries like our own are appointed.

Here is how appointments are made to various key public sector roles in New Zealand

Chief Justice Governor-General on advice of the PM
Other judges Gov-Gen on advice of Attorney-General
Police Commissioner Gov Gen on advice of the PM
Electoral Commissioners Gov Gen on advice of House of Representatives
Auditor General Gov Gen on advice of House of Reps
Ombudsmen Gov Gen on advice of House of Reps
Privacy Commissioner Gov Gen on advice of Minister of Justice
Human Rights Commissioners Gov Gen on advice of Minister of Justice
Commerce Commission Gov Gen on advice of Minister of Commerce
Parole Board Gov Gen on advice of Attorney General
Health and Disability Commissioner Gov Gen on advice of Minister of Health
Broadcasting Standards Authority Gov Gen on advice of Minister of Broadcasting
Electricity Authority Gov Gen on advice of Minister of Energy
IPCA Gov Gen on advice of House of Representatives
Takeovers Panel Gov Gen on advice of Minister of Commerce
Transport Accident Investigation Commission Gov Gen on advice of Minister of Transport
Financial Markets Authority Gov Gen on advice of Minister of Commerce

And, of course, the Governor-General is appointed by the Queen on the advice of the Prime Minister.

Every single one of these really important positions  –  with the potential to do considerable mischief as well as good –  is appointed directly by elected politicians.  It is how we get accountability –  we can toss out politicians, they are forced to take questions in Parliament etc etc.   In some cases, there might be statutory qualifications appointees have to meet –  eg lawyer of seven years standing –  but I’m not aware that in any of these key public roles the relevant Minister, or Parliament itself, is constrained to only appoint someone other people have given them as nominations.

There is no obvious reason why the key decisionmaking roles at the Reserve Bank should be any different  (and the key roles at the Bank aren’t the Board itself –  which is really just a nominating (and cheerleading) committee –  but the Governor and the members of the future Monetary Policy Committee).  These people have a great deal of effective discretion and, if they get things wrong, can cause, or materially exacerbate, recessions or booms.  The standard approach anywhere else in the New Zealand public sector would be for such appointments to be made by the Governor-General on the advice of the Minister of Finance.   We can hold the Minister accountable, but have no way of holding the Board accountable (indeed, when the new MPC is appointed most of the Board members themselves will have been appointed by the previous government).

Direct and unfettered appointment by an elected politicians is also the way for most monetary policy decisionmakers in other countries like ours.     There is a nice summary table in this Reserve Bank Bulletin article from few years back.     As just a few examples:

  • in Australia, all members of the Reserve Bank Board (the monetary policy decisionmaking body), including the Governor and Deputy Governor are appointed directly by politicians,
  • the same is true in Norway,
  • in the UK, seven of the nine MPC members are directly appointed by the Chancellor of the Exchequer (two are senior staff, appointed by the Governor),
  • ECB Governing Board members are all directly appointed by politicians
  • All members of the US Federal Reserve Board of Governors are appointed by the President, subject to Senate confirmation.  (Heads of the regional Feds –  who sit, by rotation, on the FOMC – are not, and there is some question about the constitutionality of those arrangements.)
  • All members of the Swedish monetary policy board are appointed by a parliamentary committee,
  • Bank of Japan monetary policy members are appointed by the Cabinet
  • In Israel, five of the six MPC members are appointed by the government (one by the Governor).

It would be a much more normal approach, and one that provides ongoing democratic legitimacy, for the Governor and Deputy Governor and all external members of the MPC to be appointed directly by (the Governor-General on the advice of) the Minister of Finance.  Those choices shouldn’t be restricted to those on a list delivered by faceless company directors, with no subject expertise and no democratic legitimacy or accountability (and who may well have been mostly appointed by the previous government).  If the MPC is to have more than two internals –  as the Minister proposed in his announcement on Monday – perhaps it would be reasonable for one additional internal to be appointed by the Governor, in consultation with the Minister (the Bank of England approach).     There is no obvious role –  or likely added value –  from involving the Board in the process at all.  Arguably, involving them in appointments not only lacks democratic legitimacy, but also detracts from their primary role of (on behalf of the public and the Minister) holding appointees to account.

As I’ve suggested previously, if there was still unease about the Minister appointing cronies –  though see the long list above of important positions that ministers do directly appoint to –  I’ve suggested there might be merit in requiring non-binding confirmation hearings before Parliament’s Finance and Expenditure Committee before the Minister’s appointees take up their roles.   This approach has been adopted in the UK.

As I hope I’ve shown, the model I’ve argued for –  and will continue to advocate –  is not some radical politicisation of monetary policymaking, nor even some idiosyncratic Reddell scheme.  It is the normal way we do things in New Zealand.  It is the way most democracies appoint most of their monetary policy decisionmakers. (It was also much the model advocated by one other submitter to the review.)  One might have hoped that the Opposition spokesperson on Finance, herself a former senior minister, would know that.

Then again, one might have hoped that The Treasury and the Independent Expert Advisory Panel (appointed by the Minister to assist with the review of the Reserve Bank Act) might have recognised that.

As part of Monday’s announcement, a variety of papers were (commendably) pro-actively released.  One of those papers was the report of the Independent Expert Advisory Panel.   This is their discussion of appointment processes

The Panel recommends that all MPC members are appointed by the Minister of Finance on the recommendation of the Board. This is the current process for appointing the Governor. As each committee member will hold considerable decision-making powers that impact on the wider public, the Panel considers Ministerial appointments necessary to ensure members have democratic legitimacy. Ministerial appointments are consistent with typical international practice, and the arrangement whereby the Minister appoints on the recommendation of the Board should be retained to ensure merit-based selection of external MPC members, and to limit the risk that policy decisions of the MPC are politically influenced.

They don’t seem to have recognised at all the distinction between the Minister being free to appoint whoever he or she wishes – the typical model abroad, or for other government agencies here –  and a situation where the Minister can appoint only those someone else has nominated.  The former has democratic legitimacy (even if it has other risks), while the latter provides little more than a figleaf.  And, frankly, if I were worried about political influence on decisions, I’d probably be more concerned about the Police Commissioner and judges –  see table above –  but the Panel doesn’t even engage with these parallels.  They appear to have been signed-up members (perhaps only implicitly) to the “central banks are different” school of thought, beloved of central bankers.  Central banks are just one of many important official agencies and, without compelling arguments to the contrary, should be subject to much the same appointment, governance and transparency provisions as those other agencies.  The Panel makes no effort to identify the compelling argument for such a different approach.

Then again, it appears that The Treasury was no better, and their failure is even less excusable, given their role as one of the public sector central agencies.       Treasury’s advice to the Minister of Finance on Stage 1 of the Reserve Bank Act review was released, as was the Regulatory Impact Statement that accompanied the Minister’s Cabinet paper.

In the Treasury advice there is only this

the Treasury does not support the Reserve Bank’s recommendation to have internal MPC members appointed by the Reserve Bank Board on the recommendation of the Governor. This is because it would mean decision-makers are not directly appointed by a democratically elected Minister, as is the typical practice internationally, and also because it would introduce a hierarchy into the committee, with the Governor having an explicit power over other committee members.

Treasury shows no sign at all of having recognised the distinction between the fig-leaf approach (Minister can appoint only people others have nominated) and genuine appointment by a democratically elected Minister.  The latter is the typical practice internationally.  The former is the  –  highly unusual –  model for the Reserve Bank.

Perhaps even more astonishingly –  given that the advice document no doubt had length constraints and was highlighting only points where there was disagreement with the Panel –  the Regulatory Impact Statement also shows no sign of recognising the standard New Zealand model for key appointments, or the typical central banking practice, as a serious option for consideration here.    They claim to have restricted the options they evaluate to those “the Treasury considers most appropriate”, and yet they include no discussion at all of what should really have been a default option –  appointment as most key public sector appointments are done in New Zealand, by the Governor-General on the (unfettered) advice of the Minister of Finance.  There might prove to be compelling reasons to depart in some respects from that model, but not to include it at all seems to border on the negligent.

Revisiting 1996

After the 1996 election, and as a small part of the deal whereby New Zealand First went into government with National, the Policy Targets Agreement governing monetary policy was amended.  The first section now read, adding the text I’ve underlined.

1. Price Stability Target

Consistent with section 8 of the Act and with the provisions of this agreement, the Reserve Bank shall formulate and implement monetary policy with the intention of maintaining a stable general level of prices, so that monetary policy can make its maximum contribution to sustainable economic growth, employment and development opportunities within the New Zealand economy.

Going into that election, New Zealand First had campaigned for material changes to the way monetary policy was run.  What it got was an increase in the target range (from 0 to 2 per cent, to 1 to 3 per cent) and those new words.   Inside the Bank, we never paid any attention to the words ever again.   They never came up in policy deliberations.   They were seen as some mix of political rhetoric and a statement of the obvious –  from our perspective, pursuing price stability was the best and only contribution monetary policy could make to those other worthy things.  Note that in negotiating the drafting, Don Brash even got the crucial word “sustainable” in.

In the new Policy Targets Agreement signed yesterday, this is how the equivalent paragraph reads.

1. Monetary policy objective

a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices.

b) The conduct of monetary policy will maintain a stable general level of prices, and contribute to supporting maximum sustainable employment within the economy.

All but equivalent I’d say.   Curiously enough, I didn’t see the parallel drawn in the material Treasury released (including the RIS) on the new formulation of the monetary policy objective.

To be sure, as I noted in yesterday’s post on the PTA, the new PTA does include a couple of other references to employment.  Employment is added to the list of things where the Reserve Bank Governor is supposed to seek to avoid “unnecessary instability”.  However, this is the clause the Reserve Bank has been relying on in the last few years to defend its belated and reluctant response to core inflation outcomes persistently well below the target midpoint.  And the Bank will be required to discuss, in each Monetary Policy Statement, how current OCR decisions are contributing to supporting maximum sustainable employment.   The Minister has attempted to suggest that this provision will give bite to the new employment focus.  If he really believes that, then –  despite all the time he spent on FEC  in Opposition –  he obviously hasn’t looked at all carefully at how the Reserve Bank complies with the current statutory provisions governing Monetary Policy Statements –  formulaic at best.  As I noted yesterday, it is easy to predict the formulaic language now –  brand new recruits could write the words, (and may well do so).

I’ve been a bit ambivalent about changing the statutory (or PTA) goal for monetary policy.   Active discretionary monetary policy exists for output and employment stabilisation reasons, and in principle it is worth recognising that.   Since day one of the current Reserve Bank Act, that focus has been implicit in the way Policy Targets have been constructed.  It is not a new thing.    On the other hand, there has been a suspicion that Grant Robertson was more interested in things looking a bit different –  like that wording Winston Peters had introduced in 1996 – than in things actually operating differently, and thus on occasion I’ve suggested this change was more about political positioning and “virtue-signalling” than anything else.

And that might be fine if the Reserve Bank had been doing a superlative job in the last decade, but somehow there was still debate in some quarters as to whether output/employment stabilisation was a legitimate objective at all.  But they haven’t.   Core inflation has been persistently below the target midpoint –  the focus of the PTA –  for years, and even on their own (diverse) estimates –  see their chart below – the unemployment rate was above the NAIRU for almost all the decade.

nairu x2

That combination just shouldn’t have been.    Monetary policy – again on the Bank’s own reckoning –  works much faster than that.  Instead, through some combination of forecasting mistakes and biases towards tighter policy –  recall Graeme Wheeler’s repeated hankering for “normalisation” and his actual ill-judged tightening cycle –  they allowed the economy to run below capacity for years, more people than necessary to stay unemployed for longer, and didn’t even come close to deliver inflation averaging around 2 per cent.

And yet when –  as he was on Radio New Zealand this morning – the Minister of Finance is asked what difference the new PTA (and proposed statutory amendment) will make he flounders, and won’t even refer to the experience of the last decade.    His officials seem to be as bad.  In the Regulatory Impact Statement section on the proposed new objective, here is what The Treasury had to say

The main non-monetised benefit is to ensure that monetary policy decision-makers continue to give due regard to the short term impacts of monetary policy on the real economy. This is intended to improve the wellbeing of New Zealanders by ensuring that monetary policy seeks to minimise, or does not exacerbate, periods of economic decline.

The new Governor’s comments yesterday were along similar lines –  just recognising how things are done already.

So the experience of the last decade is just fine is it?   If so, the proposed law change really must be just about political rhetoric and positioning.

To be clear, there are limits to how much any new words themselves could have changed the Reserve Bank’s approach to monetary policy.  And, as everyone recognises, in the longer-term, monetary policy can only affect nominal variables (inflation, price level, nominal GDP etc) not real ones (employment and output).   But the government –  supported by advice from The Treasury –  appears to have chosen the weakest formulation possible, with little or no effective buttressing elsewhere in the Policy Targets Agreement.   There is, for example, no requirement to publish estimates/forecasts of “maximum sustainable employment” or associated concepts such as the NAIRU, and no requirement to account, look backwards, for how monetary policy has done in effectively minimising cyclical deviations in employment/unemployment.

Individuals and organisational culture matter a lot.   Arguably they matter more, at the margins, than precise wording in documents like the PTA.    The Reserve Bank’s culture appears over the last decade to have backward-looking, constantly fighting the last war –  surprisingly strong inflation in the years running up to 2008 –  insular, and –  as has been the case for decades –  not really much interested in labour market outcomes at all.  In all that, they’ve been backed by the Reserve Bank’s Board.

Adrian Orr is a strong character, and has an incentive –  all those Stage 2 review battles to fight –  to at least sound different than his predecessor Graeme Wheeler.  Then again, he emerged through a selection process undertaken by the Board –  which was explicitly happy with what had happened in the previous decade –  and his Minister has given no indication that he is anything other than happy with the actual past conduct of monetary policy.  A pessimist would suggest that, to the extent we see change, it will be cosmetic more than substantive.  Cosmetics have their place, but substance –  avoiding repeats of situations where at the same time core inflation is well below target and unemployment is well above a NAIRU, including in the next recession – matters rather more.

It is interesting to ponder how the new Governor –  single decisionmaker for now –  will address the question of what “maximum sustainable employment” is.      I’m expecting something reasonably vacuous and circular –  “since we (again) forecast inflation getting back to target in a couple of years time, by definition – by construction of our model –  employment must be close to the sustainable maximum”.    Doing so will be easier because the employment rate has no public resonance in the way that the unemployment (or even underemployment) rates do.

But here is a chart of HLFS employment rates since the survey began in 1996.

employment rates by sex

Female employment rates have been trending upwards, as one might expect as part of social changes.   However, male employment rates (73.4 per cent) are still well below where they were in 1986 (77.2 per cent).   In plain English senses, there is little reason to suppose we are anywhere near maximum sustainable employment rates for the economy as a whole.  I’m sure the plain English sense isn’t intended, but still.

And those male employment rates aren’t just about more young people being in tertiary education –  who are, in any case, outweighed by more old people working.  Here are the three prime-age male employment rates

employment rate prime age males For all three groups, employment rates now are materially below those thirty years ago, in a more deregulated labour market.

It just reinforces my sense that in making changes they’d have been better off using unemployment rates as a reference point, and requiring the Bank to produce a richer array of labour market analysis.   The actual new wording will easily translate to nothing if that is what the Governor wants.

And, finally, almost in passing, there has been coverage of former Reserve Bank chief economist Arthur Grimes’s criticisms of the change in the monetary policy objective, in which he talked of a “disastrous route”, a “crazy target”, the potential for the changes to destabilise the economy and so on.  He went on to assert that most episodes of financial instability in the world have flowed from the the United States, and a lot of that has been caused by their dual objective system.

I’m not quite sure which episodes Arthur has in mind with that latter comment, although I assume that the 2008/09 crisis is the principal one he is thinking of.   It is perhaps worth remembering that our Reserve Bank itself has produced research suggesting that the way it was reacting to incoming data in the decade or two prior to 2008 was very similar to the way the Federal Reserve and the Reserve Bank of Australia were reacting.   That isn’t surprising. In practice, whatever the precise wording of the respective mandates, all three were functioning as flexible inflation targeters.  It hasn’t been easy to rerun the model for the last decade –  since for a prolonged period the Fed was at an effective interest rate floor.       The way the two Antipodean central banks have conducted policy have still been fairly similar and thus –  even though neither reached the effective interest rate floor –  both countries have had below-target inflation in the context of labour markets that haven’t exactly been overheating (the RBA still thinks unemployment there is above the NAIRU).

Of course, these comments are a bit of a double-edged sword.  I think Arthur Grimes is quite wrong in his suggestion that our changes are very damaging and dangerous.  On the other hand, they are also a reminder that individuals and institutional cultures (and blindspots) often matter more than precise specifications of statutory objectives.  Changing the statutory mandate here, in deliberately vague ways, won’t make any helpful difference –  other than perhaps in political marketing –  unless the new Governor is about to lead some material culture change, and bring a fresh focus on avoiding prolonged periods of unnecessarily high unemployment.

It is his first day, so only time will tell.  For now, the signs aren’t encouraging.  But perhaps there will pleasant surprises in store.

Proposed Reserve Bank Act changes – Stage 1

My previous post concentrated mostly on the new Policy Targets Agreement, which will govern monetary policy, under the current Act, for the next year or so.

In this post, I want to concentrate on the announcements made by the Minister of Finance about the first stage of his planned legislative reforms.    There is a summary graphic, and a set of questions and answers.

The proposed reforms represent a step forward.  We’ve been in the peculiar position for almost 30 years in which one individual, not even appointed directly by the Minister of Finance, made all the monetary policy decisions.  It made it easy to know who to fire –  that was the argument made for the model in the late 1980s – but it was a model that was out of step with how almost every other public agency was run and (as became increasingly apparent) with how monetary policy was run in most other countries.   In a free and democratic society, committees –  with ranges of views, and the implicit checks and balances a range of individuals provide –  should be how major public authority decisions are typically made.   It is little consolation that successive Governors drew on advisory committees to assist their decisionmaking: on the one hand, all members of those committees owed their positions to the Governor, and on the other, institutions need to be resilient to bad appointees, not just get along moderately well in normal times.   And if some advisers were happy to disagree (and Governors sometimes even welcomed a range of views), others weren’t –  I recall one Assistant Governor who told us that he saw his role on the OCR Advisory Group as being to back the Governor.

But that particular battle now appears to have been fought and won –  albeit belatedly (Treasury –  and the Green Party –  were calling for structural reform years ago).    The Labour Party campaigned on, and the government has now promised legislation to give effect to, moving to a statutory committee model.  Today’s announcement fleshes out some –  but not all –  of the details.

Here is the summary graphic

rb reform graphic

The key aspects are that

  • there will always be a majority of Reserve Bank staff,
  • there will be a minimum of two externals,
  • appointments will be made by the Minister of Finance but s/he will be able to appoint only people nominated by the Reserve Bank’s Board.

This model is a slight improvement on what the Labour Party campaigned on.  In that model, the Governor himself would have appointed all the MPC members, internal and external.  But the improvement is slight, for two reasons:

  • first, because a majority of the committee will be internal, all appointed to their executive day jobs (eg Assistant Governor, Chief Economist or whatever) by the Governor.  No Board is going to turn down the Governor’s recommendation as to which of his staff should be on the MPC.   Thus, the Governor in effect appoints the majority of the committee.  For a good Governor –  really welcoming diversity and debate –  it mightn’t be a problem.  For more average appointees, it reinforces the risk of continued groupthink and a voting bloc on the committee.  Remember that the executive members have their pay and promotion determined by the Governor,
  • second, because the Reserve Bank Board is likely to look largely to the Governor for advice on who should be the external appointees to the committee.   Recall that the Governor himself is a member of the Board –  even though its prime job is to hold him to account –  and most of the Board members have no subject expertise, no resources, and little reason not to defer to the Governor (whom they themselves appointed).  Perhaps some reasonable people will be found to serve, but it seems exceptionally unlikely that anyone awkward, or with a materially different perspective, will be allowed in the door.  In all likelihood, we’ll end up with something not much improved on the model in place for the last 17 years or so –  in which the Governor has had a couple of part-time external advisers, appointed mostly for their business connections and knowledge, rather than their perspectives on macroeconomic policy.

This simply isn’t the way public appointments should be made.   The Minister of Health appoints people directly to DHBs, the Prime Minister directly determines who will be appointed as the Commissioner of Police, ministers appoint directly members to the board of all sorts of decisionmaking crown entities (including, in the financial areas, the Financial Markets Authority), and so on.

And direct appointment by elected politicians is the way most top central bank appointments are made in other countries.   In Australia, it is true of the Governor, Deputy Governor, and all the RBA Board members. In the UK, all but two of the MPC members are directly appointed by the Chancellor, and in the US all the members of the Federal Reserve Board of Governors are appointed by the President, subject to Senate confirmation.

I hope someone asked Grant Robertson why he resisted bringing the appointment process for the Reserve Bank of New Zealand positions into the international mainstream, because I don’t understand it –  and there is nothing to justify his choice in rhe Q&A material that has been released.    Ministers may not have much subject expertise, but they have legitimacy –  they are elected, and have to front to Parliament each week.  The Reserve Bank Board members have no subject expertise, and no legitimacy –  indeed, at any one time, half will have been appointed in the previous term of government.  They might be competent behind-the-scenes professional director types, but that’s all.  And yet they are being empowered to choose who will run New Zealand macroeconomic policy.  It is a gaping democratic defict that really should have been fixed, not exacerbated.   And it is not as if the Board’s practical track record might persuade one to set aside principled objections to the process –   they’ve just been cheerleaders, more focused on having the Governor’s back, than on serving the public interest.

The appointment process is one reason why I call today’s announcement as a big win for Reserve Bank management.  Committee appointments will safely be in the hands of the Governor and his team (Board and management).

The other reason why it is a big win for Bank management is the announcements about the processes that the new Monetary Policy Committee will be expected, or required, to adopt.

Here is part 2 of the Minister’s graphic

RB graphic part 2

The idea of a charter makes sense.  Arrangements around how the new MPC should work are probably better not legislated –  although I think a requirement to publish minutes (although not the form of those minutes) should be in statute –  and thus able to evolve with experience and individuals.   Beyond that, I think the Minister has made the wrong choices when articulating what he will be looking for, largely caving to the preferences of the Bank’s management, who were horrified by the idea of open debate and a transparent recording of views and associated individualised accountability.

Several of better inflation-targeting central banks are much more open –  notably, those of the UK, the US, and Sweden.  But here is what the Minister proposes

How will the MPC take decisions?
It is expected that the MPC will aim to reach decisions by consensus. Where a consensus cannot be reached, decisions will be taken by a majority vote, with the Governor having the casting vote if necessary.

The Governor will chair the MPC and will be the sole spokesperson on its decisions.

What documents will the MPC publish?
In addition to Monetary Policy Statements, it is intended that the first Charter agreed between the Minister and the MPC will require the MPC to publish non-attributed meeting records that reflect differences of view between MPC members where they exist. It is also intended that the MPC will publish the balance of votes for any decision where a vote is required, without attributing votes to individuals. This approach will balance the need for transparency about the decision-making process with the need for clarity and coherence in communicating the MPC’s decisions.

Frankly, it seems unlikely we will ever see vote numbers.  Recall that the Governor has an internal majority on the MPC, who can – and may well –  caucus before the meeting and agree a collective view.  The externals start out in a minority,  will have already passed some sort of inoffensiveness test to get appointed, and they appear unable to articulate their views in public, so the incentive to record an anonymous dissenting vote seems pretty low.   A management-driven “consensus” seems likely to be the default option, and over time that will become the self-reinforcing norm, because the signal in one external insisting on recording a dissenting vote will be sufficiently attention-grabbing that often enough people just won’t go that far.  Far better to normalise the fact that there is –  and should be –  quite a range of views, whether about how the economy will unfold and how monetary policy should respond to the risks.   As I’ve noted before, it is not clear how the citizens of the US, the UK, or Sweden or worse off for an open and transparent process of individual responsibility and accountability, and an ongoing moderately open contest of ideas.  Bureuacrats don’t like it –  of course – but we should be designing public agencies around the interests of the public, including those scrutiny and accountability, not around the interests of the bureaucrats.  In this case again, Grant Robertson appears to have bowed to the personal interests of the officials.

There are some good aspects to what the Minister has announced:

  • as I noted in my earlier post, the move away from a Policy Targets Agreement model to a system in which the Minister sets the operational objectives, and the associated official advice is pro-actively published, is a step forward, and almost inevitable with the move to a committee.  But there are lots of operational details to be clarified, including (for example) how frequently the Minister can change such objectives (the default PTA has been for five years),
  • on-balance, the inclusion of a non-voting Treasury observer on the MPC is probably a modest step forward, but it depends how it works.  The documents suggest this person is simply there to pass on information about fiscal policy, and given the substantial time commitment the MPC role is likely to entail it could end up filled by a fairly junior Treasury person (by contrast, in Australia the Secretary to the Treasury sits on the RBA Board),
  • the Minister is moving to provide for the appointment of the Board chair and deputy chair to be made directly by him (the normal model) rather than chosen by Board members themselves.  At the margin this will help remind the Board that they work for the Minister and the public, not for the Bank.  To be fully effective, however, the Minister should also amend the Act to allow him to dismiss Board members for failing to be sufficiently vigorous in holding the Governor and MPC members to account.

But there are also lots of issues that aren’t sorted out in the announcement today and which will only become clear when the legislation emerges (or in some cases when the charter is signed).  For example:

  • what are the limits of what the new MPC will be responsible for?    The Q&A material says that “For example, the MPC will also have responsibility for strategic choices around the monetary policy tools used by the Reserve Bank”, but does this include foreign exchange intervention strategy, issues around issuing digital currency, the terms of which the Bank issues physical currency etc (all relevant to zero lower bound issues).  Then again, perhaps these things don’t matter because the Governor has a built-in majority on the MPC?
  • what can individual MPC members be fired for (given expectations of consensus decisionmaking), or will the formalised accountability model –  which never amount to much in practice –  be largely got rid of?
  • whose will the forecasts in the Monetary Policy Statement be?  At present they are, formally, the Governor’s forecasts.

And then there is the Stage 2 part of the review of the Reserve Bank Act.   The Q&A document says

Phase 2 of the Review is currently being scoped. It will focus on the Reserve Bank’s financial stability role and broader governance reform. The Panel is due to give the Minister of Finance its recommendations for the scope of Phase 2 of the Review shortly. Announcements on this will be made in the coming months. Subsequent policy work will commence in the second half of 2018.

But given the increased role for the Reserve Bank’s Board in today’s announcement, the government seems to have already decided to retain something very like the current governance model and in particular the role for the –  historically useless –  Board.  I guess there is still time to reconsider before the Stage 1 proposals are legislated, but they’d be better off splitting up the Bank, setting up a Prudential Regulatory Agency, taking appointment powers directly into the Minister’s hands (perhaps with some non-binding confirmation hearings) and getting rid of the Board altogether.

Meantime, they will be celebrating at the Reserve Bank tonight.  As far as possible, the (effective) status quo has won out, and a more open and contestable system has lost out.