Central bank independence

Bernard Hickey – fluent and passionate left-wing journalist – had a piece out the other day headed thus

hickey rbnz

with a one sentence summary

TLDR: Put simply, the sort of true independence enjoyed by the Reserve Bank of New Zealand as it pioneered inflation targeting for the last 30 years is now over, and that’s a good thing.

I found it a strange piece on a number of counts, and I say that as someone who (a) does not think financial regulatory policy (as distinct from the implementation and enforcement of that policy) should be handed over to independent agency, and (b) is probably less compelled now than most macroeconomists by the case for operational independence for monetary policy. So I’m not responding to Hickey’s piece to mount a charger in defence of central bank independence. Mostly I want to push back against what seems to me quite a mis-characterisation of the effect of the Robertson Reserve Bank reforms – those already legislated, those before the House now, and those the government has announced as forthcoming. But also about the responsibility of central banks for the tale of woe Hickey sets out to describe.

It is worth remembering that, by international standards, the Reserve Bank’s monetary policy independence – de facto and de jure – was always quite limited by international standards. Under the 1989 Act the Minister and the Governor jointly agreed the target, but every Governor largely deferred to the Minister in setting – and repeatedly changing – the objective, even if details were haggled over. And with a fairly specific target, and explicit power for the Governor to be dismissed for inadequate performance relative to the target, it was a fairly constrained (operational) independence. The accountability proved to be weaker that those involved at the start had hoped, but it could have been used more.

The monetary policy parts of the Act were overhauled in 2018. There were some good dimensions to that, including making the Minister (alone) formally responsible for setting the monetary policy targets. The Minister got to directly appoint the chair of the Bank’s (monitoring) Board. And a committee was established by statute to be responsible for monetary policy operational decisions. But setting up the MPC didn’t change the Reserve Bank’s operational independence, and if it had been set up well could even have strengthened it de facto over time. The Minister did not take to himself the power – most of his peers abroad have – to directly appoint the Governor or any of the other MPC members. As it is, the reforms barely even reduced the power of the Governor – previously the exclusive holder of the monetary policy powers – who has huge influence on who gets appointed to the MPC (three others are his staff) and who got the Minister to agree that no one with any ongoing expertise in monetary policy and related matters should be appointed as a non-executive MPC members. Oh, and got the Minister to agree that the independent MPC members should be seen and heard just as little as absolutely possible (unlike, say, peers in the UK or the USA).

Hickey cites as an example of the reduced independence the Bank’s request for an indemnity from the Minister of Finance to cover any losses on the large scale asset purchase programme the Bank launched last March. I’d put it the other way round. The Bank did not need the government’s permission to launch the LSAP programme – indeed it is one of the concerns about the Reserve Bank Act that it empowers the Bank to do things (including fx intervention and bond buying) that could cost taxpayers very heavily with no checks or effective constraint. It seemed sensible and prudent of the Bank to have sought the indemnity, partly to recognise that any losses would ultimately fall to the Crown anyway. Operational independence never (should meant) operational license, especially when (unusually) the Bank is undertaking activities posing direct financial risk to the Crown. (And I say this as someone who thinks that the LSAP programme itself was largely pointless and macroeconomically ineffectual.)

What about the other reforms? I’ve written previously about the bill before the House at present, which is mostly about the governance of the Bank. It will make no difference at all to the Bank’s monetary policy operational independence (although increases the risk that poor quality people are appointed in future to monetary policy roles). That bill transfers most of the Governor’s remaining personal powers to the Board. The Minister will appoint the Board members directly (unlike the appointment of the Governor) but even then the Minister will first be required to consult the other political parties, so it is hardly any material loss of independence for the Bank. The Minister will, in future, be required to issue a Remit for the Bank’s uses of its regulatory powers – and we really don’t know what will be in such documents – but those provisions don’t even purport to diminish the Bank’s policy-setting autonomy (notably since it is much harder, probably not sensibly possible, to pre-specify a financial stability target akin to the inflation target).

Details of the next wave of reforms were announced last week. Of particular note is the provisions around the standards that the Bank will be able to issue setting out prudential restrictions on deposit-takers, including banks. I wrote about that announcement last week. Since then more papers, including the (long) Cabinet papers and an official sets of questions and answers has been released. We do have the draft legislation yet, so things might change, but as things stand it is clear that what the government is proposing will amount to no de facto reduction in the Bank’s policymaking autonomy, and only the very slightest de jure reduction.

Why do I say this? At present, the Bank regulates banks primarily by issuing Conditions of Registration (controls on non-bank deposit-takers, mostly small, are set by regulation, which the Minister has control over). Under the new legislation is proposed that Conditions of Registration will be replaced by Standards, which will be issued (solely) by the Bank, but will be subject to the disallowance provisions that are standard for regulations via theRegulations Review Committee. In between the Act (which will specify – loosely, inevitably – objectives and principles to guide the use of the statutory powers) and the Standards, the Minister will be given the power to make regulations specifying the types of activity the Bank can set standards for. Note, however, that empowering the Bank to set standards in particular areas does not compel the Bank to do so (in practice, it is likely to be a simultaneous process)

There was initially some uncertainty about how specific the Minister could get – the more specific, the more effective power the Minister would have. But the Cabinet paper removed most of the doubt.

standards 1

Backed up in the relevant text of the official questions and answers released on The Treasury’s website.

standards 2

That isn’t very much power for the Minister at all; in effect nothing at all in respect of housing lending (since once the new Act is in force the Minister will simply have to regulate to allow a Standard on residential mortgage lending, if only to give continuing underpinning to LVR restrictions). Perhaps what it would do is allow a liberalising Minister to prevent the Bank setting specific standards for specific types of lending but……that doesn’t seem like the Labour/Robertson approach. And once a Minister has allowed the Bank to set standards for residential lending, the Minister will have no further say at all: the Bank could ban lending entirely to particular classes of borrowers, ban entirely specific types of loans, impose LVRs, impose DTI limits, perhaps impose limits of lending on waterfront properties (we know the Governor’s climate change passion). For most practical purposes it is likely to strengthen the independence of the Bank to make policy in matters that directly affect firms and households, with few/no checks and balances, and little basis for any formal accountability. Based on this government’s programme, the age of central bank policy-setting independence is being put on more secure foundations (since the old Act never really envisaged discretionary use of regulatory policy, which crept in through the back door).

Hickey argues that the introduction of LVR controls in 2013 by then-Governor Graeme Wheeler required government consent. In law, it never did. If the law allowed LVR controls – a somewhat contested point – all the power rested with the Governor personally. It may have been politically prudent for the Governor to have agreed a Memorandum of Understanding with the Minister on such tools, but he did not (strictly) have to. At best, it was a second-best reassertion of some government influence of these intrusive regulatory tools.

Now perhaps some will argue that there might be something similar in future too: the Minister might have no formal powers, but any prudent central bank might still seek some non-binding agreement with the government. But I don’t believe that. If the government had wanted any say on whether, say, DTI limits were things it was comfortable with, or what sorts of borrowers they might apply to, the prudent and sensible approach would be to provide explicitly for that in legislation. The old legislation may have grown like topsy, but this will be brand new legislation. The Minister is actively choosing to opt out and given the Bank more policy-setting independence (including formally so for non-banks) on the sorts of matter simply unsuited to be delegated to an independent agency, that faces little effective accountability (see the table from Paul Tucker’s book in last week’s post).

Whether independence should be strengthened or not, the Ardern/Robertson government has announced plans that will do exactly that, while at the same time weakening the effective accountability of the Bank (since powers will be diffused through a large board, with no transparency about the contribution of individual members).

That was a slightly longwinded response to the suggestion that actual central bank independence (monetary policy or financial regulation) is being reduced, in practice or by this goverment’s reforms. I favour a reduction in the policymaking powers of the Bank around financial regulation (the Bank should be expert advisers, and implementers/enforcers without fear or favour, not policymakers – the job we elect people to do).

What about monetary policy. Hickey reckons not only (and incorrectly so far) that monetary policy operational independence has been reduced, but that it should be reduced.

As it happens, I’m now fairly openminded on the case for monetary policy operational independence. One can mount a reasonable argument – as Paul Tucker does – for delegation to an independent agency (since a target can be specified, there is reasonable agreement on that target, there is expertise to hold the agency to account etc). But it has to be acknowledged that much of the case that was popular 30 years ago – that politicians could not be trusted to keep inflation down and would simply mess things up on an ongoing basis – is a lot weaker after a decade in which inflation has consistently (in numerous countries) undershot the targets the politicians (untrustworthy by assumption) set for the noble, expert and public-spirited central bankers.

What I’m not persuaded by is any of Hickey’s case for taking away the operational autonomy. Five or six years ago, I recall him – like me – lamenting that New Zealand monetary policymakers were doing too little to get the unemployment back down towards a NAIRU-type rate (it lingered high for years after the recession) and core inflation back up to target. But now, when core inflation is still only just getting back to target, unemployment is above any estimate of the NAIRU (notably including the Bank’s) Hickey seems to have joined the “central banks are wreaking havoc, doing too much etc etc” club.

One can debate the impact of the Bank’s LSAP programme. Personally, I doubt it has any made material useful macroeconomic contribution over the last year (good or ill – I don’t think it has done anything much to asset prices generally, and not that much even to long bond prices), and as I’ve argued previously it has mostly been about appearing active, allowing the Governor to wave his hands and say “look at all we are doing”. But even if you believe the LSAP programme has been deeply detrimental in some respect or other – Hickey seems to be among those thinking it plays a material part in the latest house price surge (mechanism unclear) – why would anyone suppose that a Minister of Finance running monetary policy last year would have done anything materially different to what the Bank actually did. After all, as Hickey tells us the Minister did sign off on the LSAP programme anyway, and a decisionmaking Minister of Finance would have been advised primarily by…..the Reserve Bank and the Treasury (and recall that the Secretary to the Treasury sits as a non-voting member of the MPC, and there has been no hint that Treasury has had a materially different view).

I think the answer is that Hickey favours a much heavier reliance on fiscal policy – even though he laments, and presents graphs about, how much additional private saving has occurred in many advanced economies in the last year, the income that is being saved mostly have resulted from….fiscal policy. Again, I think the answer is that he wants the government to be much more active in purchasing real goods and services – not just redistributing incomes. I suppose it comes close to an MMT view of the world.

But again there is little sign of anyone much – not just in New Zealand but anywhere – adopting this approach, or even central bank independence being restricted in other countries (what there is plenty sign of is central bankers getting out of their lane and into all sorts of trendy personal agendas – be it climate change (non) financial stability risks, indigenous networks or whatever.

None of this agenda seems to add up when it comes to events like those of the last 15 months. We know that monetary policy instruments can be activated, adjusted, reversed almost immediately. We know that governments are quite technically good at flinging around income support very quickly. But governments – this one foremost among them – are terrible at, for example, wisely using money to quickly get real spending (eg infrastructure) going in short order, and such projects once launched are hard to stop or to adequately control. Monetary policy is simply much much better suited to the cyclical stabilisation role.

Hickey is a big-government guy, and there are reasonable political arguments to have about the appropriate size and scope of government, but they haven’t got anything much to do with stabilisation policy – and nor should they. One doesn’t want projects stopped or started simply for cyclical purposes – brings back memories of reading of how the Reserve Bank wasn’t able to build its building for a long time because the governments of the day judged the economy overheated.

The (unstated) final part of his story seems to relate to a view that perhaps monetary policy has reached its limits. It would be a curious argument, given that much of his case seems to rest of the damage monetary policy is doing (impotent instruments tend to be irrelevant, even if deployed). He repeat this, really nice, long-term Bank of England chart

hickey 2

The centuries-long trend has been downwards, and many advanced country rates are either side of zero. But interesting as the chart genuinely is, including for questions about the real neutral interest rate (something monetary policy has little or no impact on), it tells one nothing about (a) who should be the monetary policy decisionmaker, or (b) the relative roles of fiscal and monetary policy. After all, the only reason why nominal interest rates can’t usefully go much below zero yet is because of regulatory restrictions and rules established – in much different times – by governments and central banks. Scrap the unlimited convertibility at par of deposits for bank notes – not hard to do technically – and conventional monetary policy (the OCR) immediately regains lots more degrees of freedom, able to be used – easily and less controversially – for the stabilisation role for which is it the best tool.

To end, I wouldn’t be unduly disconcerted if the government were to legislate to return to a system in which the Bank advised and the Minister decided on monetary policy matters. It might just be an additional burden for a busy minister, but it would be unlikely to do significant sustained harm (and one of the lessons of the last 30+ years is that central bankers and ministers inhabit the same environment, have many of the same ideological preferences etc) in a place like New Zealand. But to junk monetary policy as the primary cyclical stabilisation tool really would be to toss out the baby as well as the bathwater, no matter how big or active you think government tax and spending should be.

Regulating lending

The Minister of Finance yesterday announced the latest elements in the government’s overhaul of the Reserve Bank Act. As with so much of that multi-year multi-stage review it has good bits and bad bits.

I support the introduction of deposit insurance (with risk-based pricing), for second-best reasons canvassed here numerous times over the years (deposit insurance increases slightly the likelihood a big bank will be allowed to fail). I also support putting all deposit-takers under a common regulatory regime, replacing the weird halfway house we’ve had for the last decade or so where banks are under one regime and non-banks under another (with the Bank having key powers over the banks, but the Minister of Finance being responsible for key policy matters re the non-banks). So I’m not writing any more about those (well-flagged) aspects of yesterday’s announcement.

However, this –  from the Minister’s press statement –  was something of a bolt from the blue.

The reforms will also include a new process for setting lending restrictions, such as loan-to-value ratios.

“This will give the Minister of Finance a role in determining which types of lending the Reserve Bank is able to directly restrict. The Reserve Bank will then have full discretion to decide which instrument is best suited to use and how the restrictions are applied,” Grant Robertson said.

“As with other prudential requirements, lending standards policies will be subject to more general requirements such as consultation with other government agencies and the public, and the Reserve Bank needing to have regard to the Minister of Finance’s Financial Policy Remit.”

This was somewhat elaborated on in a Q&A document provided to journalists (which doesn’t seem to be on the Beehive or Treasury websites, but which one journalist sent me for my comments). The key bits are as follows (and apologies if it is a bit hard to read).

DTA standards

The first two rows there seem just fine, and indeed in some respects a significant step forward (notably treating future Reserve Bank prudential standards as secondary legislation, subject to proper parliamentary oversight and potential disallowance). They will also remove the current ambiguity around whether, for example, LVR restrictions are even a lawful use of existing legislation.

The problems – indeed, the oddity – is in the final two rows. Specifically

Cabinet has agreed that the DTA will include a requirement that the Minister of Finance can make regulations (following consultation with the Reserve Bank) defining the type of lending that lending standards may relate to. This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives.

I described this yesterday as a slightly curious step forward. It is a step forward because under the current Reserve Bank Act, applying to regulation of banks, all the policymaking powers rest exclusively with the Bank (the Governor personally at present), even though there are no clear and specific objectives, and thus little or no effective accountability. It is a really severe democratic deficit, only compounded in practice by the inadequacies of the Reserve Bank itself (see earlier posts on the weaknesses of their analysis, and the Governor’s bullying approach, around major regulatory policy initiatives).

There was an attempt some years ago to paper over this problem with the macroprudential memorandum of understanding between the Bank and the then Minister, which purported to give the Bank authority to, for example, use LVR restrictions. “Purported” because the Minister had no legal role, or authority – and could not formally stop the Bank doing what it wanted – but it may have provided some sort of political check (and without the MOU it is likely the Bank would have pressed ahead with debt to income limits).

Yesterday’s announcement appears to recognise that there was a problem, a weakness in the framework, leaving too much power in the hands of a central bank that has no mandate and no accountability. But the way the government has chosen to respond is really quite bizarre, the more so (it seems to me) the more I have reflected on it. As, frankly, are some of the other economists comments I’ve seen suggesting that this will take away the Bank’s “operational independence”.

Now, in fairness, some concerns may be allayed when the detailed legislation emerges. There are concerns that a government will be able to regulate that, say, credit to businesses they don’t like will be able to be regulated, but not that to businesses they do like, or (to take an absurd extreme) credit to National voters (or voting areas) could be restricted but not that to Labour voters. One would hope the legislation makes clear that any such regulation-making power – over which areas the Bank can impose lending standards – is subject to a clear and demanding statutory test, to ensure that such designations can be used only where there is a systemic-level threat to the financial system.

But then that is where the oddity comes in. You would expect the Reserve Bank to be (much) better positioned than ministers to determine where threats to financial stability might come from. While politicians are, in our system of government, the prime legislators and policymakers. They, after all, are the only ones we can toss out in elections, and the only ones facing day to day scrutiny and challenge in Parliament.

And yet, we are told, under this legislation the Minister of Finance will identify the risk areas (albeit “in consultation with” – but not subject to- the Bank), and then the Bank will be free to do whatever it likes in those areas. Of course, when I frame it as “the Minister of Finance will identify the risk areas”, it is also about “the Minister of Finance will identify the political no-go areas”. But that too is bizarre: the government might object to direct restrictions on lending to first-home buyers, but is unlikely to have the same objection to high capital requirements in respect of such lending – but the government can only determine the type of lending the Bank sets “standards” for, not the tools used. If there is a place for politicians in all this – and I think there is an important place – it should be about use of specific regulatory interventions (potentially very heavy-handed ones), not the identification of areas of risk.

Thus, I’ve seen no coverage of the fact that – on what we are told yesterday – in future the government will claim no right to determine whether or not debt to income limits can be imposed. That would represent a really big step back from the model the government and Reserve Bank tells us they have been using for the last decade or so. (And recall, again based on what we are told, if the government is okay with regulating housing lending – even first home owner lending – they won’t be able to (say) distinguish between LVR and DTI restrictions. That would be entirely a matter for the Bank, with no clear objectives and no effective accountability.

This is simply wrongheaded, giving official and up to date sanction to a near-unlimited potential set of regulatory interventions by an independent (and not very expert) agency. Those powers – if they are to exist at all – should rest with the Minister of Finance and Cabinet, taking advice from the Reserve Bank and Treasury.

It is also where some of the comments about “operational independence” get quite confused. As regards central banks the concept of operational independence grew up around monetary policy to distinguish the ability to adjust, say, an OCR in pursuit of a target, and the ability to set the target itself (which would be “goal autonomy”). The ECB has both goal and operational autonomy on monetary policy, but the Reserve Bank of New Zealand (like most central banks with modern legislation) has operational autonomy to pursue a target set for them by politicians. There is quite widespread support for that sort of model (even if the case is weaker than it once seemed). Not only is there a fairly clear objective and some reasonable way to assess whether or not the job is being done well, but central banks typically have quite limited (often no) direct regulatory powers as regards monetary policy: they can set their own interest rate, and can buy and sell assets (ie indirect influence), but that is about all.

By contrast, in bank (and now non-bank) regulation there is (a) no clear and specific objective, (b) no clear way of knowing whether the job is being done effectively (systemic bank failures are very rare, so there are few observations), but (c) there are few effective constraints on the direct regulatory interventions the Bank could use. It appears, for example, that they could simply ban some types of credit (provided by deposit-takers) if they so chose, or hugely impinge on household or business choices, in ways that – if done at all – should only be done by people we can hold to account. And that isn’t the Governor or the (new) Board. (As it happens, this is more or less the model – Bank advises, Ministers decides – that applies to non-bank deposit-takers, which is the reason why LVR controls don’t apply to them.)

We do want operational autonomy for the prudential regulatory agency. But that operational autonomy is about the implementation of policy powers that – at least in the broad – are set by elected policymakers. We do not want politicians interfering in how rules are applied to favour, say, one bank over another – any more than we want politicians interfering in which individuals get NZS, but the NZS policy parameters should be set by those we elect. There are grey areas (what is implementation, what is policy) but what the current government is proposing is a significant in increase in the policymaking powers of a bureaucratic agency – formally so in the case of non-banks, informally so (the prior constraint of the MOU) in respect of banks. That simply fails standard tests of good government, democratic accountability and so on – and would do even if the Reserve Bank were demonstrably an excellent agency.

I’ve written here previously about the very useful book (Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State) published a few years ago written by Sir Paul Tucker, former Deputy Governor of the Bank of England. This summary table is taken from the book.

tucker2

Giving far-reaching policymaking powers to the Reserve Bank, particularly in areas that directly impinge on firms and households, simply does not pass the test. Cabinet seems to have rightly recognised that politicians have key responsibilities and accountabilities, and yet taken a strange – and weak – approach in response.

To be clear, I do not favour any of the sorts of interventions the Bank has adopted or tried to get introduced in recent years. The prudential regulatory (system soundness and efficiency) case for LVRs or DTIs has never been compellingly made, and if I had my way the law would prohibit either the government or the Reserve Bank from imposing such restrictions (without specific new primary legislation). But if such powers are to exist, they should be exercised only by those we elect, those we can properly scrutinise, those we can toss out.

(On which note, the government is currently advertising for members of the new Reserve Bank board, to take office in July 2022, when the Board will assume all the financial regulation powers statutes give to the Bank. The formal job description is not quite this bad, but note that in the big newspaper adverts for these roles “championing diversity and inclusion” and “sound understanding of Te Ao Maori” (even “operating with intergenerational horizons”) come before any specialist expertise in the subject matter the Bank is responsible for.)

Reforming the Reserve Bank, continued

Submissions to Parliament’s Finance and Expenditure Committee on the Reserve Bank of New Zealand bill close today. This is the next stage in the ongoing overhaul of the Reserve Bank legislation, and this particular bill focuses on a new governance structure for the Bank, largely importing for monetary policy the provisions of the amending legislation passed a couple of years ago. In the process, the substantive regulatory powers that were part of the Act are being spun out, unchanged for now, into a separate piece of legislation.

There is a fair amount of sensible stuff in the bill. The single decisionmaker model, flawed and unusual for monetary policy, deeply unsuited to the regulatory functions, will finally be no more. The MPC now makes monetary policy – well at least on paper at does, perhaps it more true that MPC is the venue at which monetary policy is made – and in future the Bank’s new Board will be responsible for all the other functions of the Bank (notably all those highly contentious bank regulatory policy functions, and the application of supervisory policy to banks, non-bank deposit takers, and insurance companies). There are some small steps in the right direction on funding agreements, and a formalised responsibility for Treasury in monitoring the Bank in support of the Minister’s role in holding the Bank to account.

There are some problematic things as well. There is a worrying provision that allows someone with a conflict of interest to nonetheless act and or a vote on a matter if someone as lowly as the deputy chair of the Board thinks it is okay. There is the worrying disappearance of the “efficiency” constraints on the Bank’s interventionist enthusiasms from the statutory goals for prudential policy. And there is what I think is the wrongheaded choice to keep all the functions – really quite different functions, probably needing quite different sorts of people at the helm – in a single institution.

I made only a quite short submission focused on just two areas of the bill that I see as problematic:

  • the quite different (utterly different) governance models being established for two different, each complex, policy functions housed in the same institution, and
  • the key role the Bank’s Board – primarily responsible for corporate matters and financial regulation/supervision – will have in the appointment of key monetary policy decisionmakers, the Governor and (in particular) the external members of the Monetary Policy Committee, even though there is no reason to think the Board will have any macro expertise, or will treat it as a priority, and although they will have no effective public accountability for appointments these unelected people will control.

On the first point

The Bank has two prime functions. 

The first is the conduct of monetary policy, which is primarily the responsibility of the Monetary Policy Committee (MPC).  The MPC operates under a Remit set by the Minister, outlining more specifically the goals for monetary policy.  The Governor chairs the MPC, and although the remaining members (three internal, three external) are appointed by the Minister on the recommendation of the Board, the Governor himself has a great deal of say in those appointments, especially those of the internal members, whom the Governor appoints, remunerates, and allocates resources to (in respect of their line management functions).  That influence will be further strengthened under this bill because (rightly) the Deputy Governor will no longer be a statutory role.

The second main function is financial supervision and regulation, oversight of the financial system as a whole and prudential regulation of banks, deposit-takers, and insurance companies.  The Bank has extensive discretionary policymaking powers, especially as regards banks (the largest, by far, financial institutions in New Zealand).   This discretion exists not just as regards the application of clear policy to a specific institution’s circumstances, but as regards policy itself (notable recent examples in New Zealand have been around loan to value limits, and bank capital requirements).

This bill provides for a new Financial Policy Remit.  There is probably some merit in this innovation, although only time will tell (since we have not seen what such a Remit will look like or operate).  However, members should not be deceived by the use of the term of “Remit” for both monetary policy and financial regulatory functions.  The monetary policy remit is more or less binding on the MPC, clearly setting out a fairly widely-agreed target that is not too dissimilar to targets in a range of other advanced countries.  By contrast, section 201 makes clear that the financial policy remit is to be no more than the identification of things the Minister considers it desirable for the Bank to have regard to.       In other words, a huge amount of discretionary policymaking power is to be left with the Bank, in areas where there is no generally agreed right or wrong approach and thus little effective basis for holding the Bank to account for its exercise of those powers.    In the literature, notably for example former Bank of England Deputy Governor Sir Paul Tucker’s book Unelected Power, this lack of clarity (an unavoidable lack given our current state of knowledge) would be an argument for putting less policy-setting power in the hands of unelected officials, leaving contested policy choices to the Minister of Finance, working with expert advice from (in this case) The Treasury and the Reserve Bank.

What is striking, however, is the quite different governance model chosen for the Bank’s financial regulatory functions.  The powers of the Bank in this (and most other) areas will, in future, be vested in the Bank’s Board, and neither the Governor nor any other staff will be members of the Board.   There may be some merits in a governance model of that sort for some sorts of agencies.  In many Crown entities the chief executive is simply an employee of the Board.  That is, as I understand it, the situation at the Financial Markets Authority (albeit an agency that does not have extensive policymaking, as distinct from implementation, powers).  But it seems strangely anomalous to have two quite different governance models for two different, both prominent and complex, policy functions operating in the same institution.    And if there was a case for giving the chief executive (and fulltime experts) a stronger role in one or other of these functions, one might suppose it would be in the financial regulatory and policy side, where there is much greater ambiguity and uncertainty [including about goals, constraints, and transmission mechanisms]. 

It also seems anomalous that the monetary policy provisions have been written to make clear that the Governor is the key figure, including the prime public representative.  By contrast, for financial regulatory matters there will be a separate chair of a Board the Governor is not even a member of, and the Governor is at most an adviser to, and spokesman for, the Board.    While it is not unknown to have monetary policy and financial regulation done by different committees in the same institution (eg the UK) I’m not aware of any country that has chosen to create such gaping differences in the roles/powers of the Governor across those functions.   In one – the smaller (although more prominent) side of the Bank in future – he will be “kingpin”; in the other the Governor will have a diminished role that will only become clear with time.

Perhaps it might be a more pardonable outcome if the model has grown like topsy over a long period of times, but the two stages to the institutional reform of the Reserve Bank of New Zealand have been done as part of one process and by a single Minister of Finance.  It is not too late to step back and introduce greater alignment across the governance models used for the Bank’s two main functions.  Or to reserve more of the financial regulatory policymaking power to the Minister of Finance.

And on the second

Since 1989 the Governor has been appointed by the Minister of Finance, who may only appoint someone recommended by the Bank’s Board.  That in itself is a highly unusual model internationally. It is much more normal for the Minister of Finance (or the executive collectively) to be able appoint his/her own preferred candidate as Governor (that is, for example, the model in Australia, the UK, and – subject to Senate confirmation –  in the US).  Much the same model – Minister can appoint only people recommended by the Board –  was adopted for the other members of the Monetary Policy Committee in the 2018 amendments.

Whatever the possible merits of that model under the 1989 Act, the situation will be quite different under the provisions of this bill as drafted.  Under the 1989 model, the Board itself had few decision-making powers, none on any policy or operational matters, and its role was explicitly primarily about holding the Governor to account, and one of its key functions was the recommendation of the appointment of the Governor.  Whatever considerations influenced successive ministers in making Board appointments over the years, it was clear the Board had much the same (monitoring and accountability) responsibilities across all the functions the Bank/Governor were responsible for.   That remained more or less so under the 2018 amendments, in respect of the other MPC members.

But under this bill, the primary functions of the Board will in future be the conduct of the affairs of the Bank, other than those of the Monetary Policy Committee.  By far the largest of those functions will be financial system oversight and financial institution regulation and supervision (together with associated financial functions such as physical currency, payments systems, and the wholesale securities settlement system).    It seems likely that the bulk of the people appointed to the Board will be people with skills and background in and around financial institutions, and perhaps some people with a regulatory/corporate background.   That may be quite appropriate for the financial regulatory/oversight functions.  But macroeconomics and monetary policy is a quite different sort of role and requires a quite different set of skills, and it isn’t obvious that we (or future Ministers) can count on future Boards to have any real expertise in these matters, or any great interest (given that they will be busy doing the stuff the Board has prime responsibility for).    And when it comes to the appointment of the Governor in particular, isn’t there a serious risk that the Board will be more likely to emphasise skill sets relevant to their functions, those they see the Governor in each week/month, and not the skills necessary for the effective conduct of monetary policy?   And even if the Board members are well-motivated around monetary policy, what expertise or ability to judge are they likely to bring to the appointment/recommendation decisions.

I would strongly urge that these provisions be reviewed and amended.  In the Bill, Board members are to be appointed by the Minister but he/she will be required to consult with other political parties before making those appointments.  Why not, then, adopt, the same model for the appointment of the Governor and the appointment of other MPC members?  Doing that would not only make clear that monetary policy is not some secondary function, but would ensure that the Minister (a) has discretion to appoint people he/she is comfortable with (important since only the Minister has electoral accountability), (b) can draw on advice from The Treasury, the government’s key adviser on economic policy matters, and (c) adds a layer of reassurance (consultation with other parties) that still keeps tolerably low the risk of raw cronies being appointed to these important roles.   An alternative model to political party consultation – one I would prefer, and one used in the UK – is to provide for FEC itself to hold hearings on people being appointed to these before people can take up their appointments.  FEC would not have a formal power of veto, but the requirement for public scrutiny and the scope for hard questions also acts as an effective check in helping ensure that good quality candidates are consistently appointed.

There is really no excuse for such a dogs-breakfast. Yes, the MPC model is up and running, but has been in place for less than two years, and it would not require very large changes to bring the models applying to the two functions into greater alignment, and ensure appropriate control of appointments by the only people we – voters – can toss out; that is, the Minister of Finance.

Having the Governor’s back

When the Reserve Bank Act was passed back in 1989, decision-making power was taken away from the Bank’s Board and given to the Governor (even as, overall, the Bank gained a greater degree of autonomy). The Board was retained but in a quite different sort of role. Their new role was primarily to hold the Governor to account, on behalf of the Minister and the general public. Later reforms were made to try to strengthen (the appearance of?) that role: somewhat belatedly the Governor was to no longer chair the Board (although he remained a member of a board whose primary role was to hold him to account), and the Board was required by statute to publish an Annual Report. More recently still – in a well-overdue move – the current government amended the Act to provide that the Minister of Finance would in future appoint the Board chair, making it clearer who the Board was responsible to.

Over the years, the powers of the Bank and the range of activities it undertakes has also grown, and the policy discretion exercised by the Bank has grown well beyond what was orginally envisaged. And latterly most of the formal monetary policy powers have been handed over to a statutory Monetary Policy Committee, and the Board is now also responsible for holding them to account.

But through all these changes, one thing has been constant: the Board has never really acted to hold the Governor to account at all, and instead the Board – through numerous waves of different members and different chairs – seems to have acted as if its primary role was to have the Governor’s back, and reinforce the gubernatorial spin. (In previous posts I’ve argued that in some respects this was always likely, since (a) the Board had no independent resources (eg for external advice), (b) the Governor remained a member, (c) the secretary to the Board was for a long time a member of the Bank’s own senior management, and (d) there were no real incentives to rock the boat.)

There seems to have been a belated general acceptance that the Board is useless, and not readily able to be fixed, in its current role. In fact, the government has introduced legislation which will, if passed, scrap the current model and give the Board primary decisionmaking responsibility for most of the Bank’s non-monetary policy functions (it is a hodge-podge model, itself not likely to work that well, but that is a post for another day).

The Bank’s latest Annual Report was released last week. It didn’t get attention. The Board’s Annual Report got even less (pretty sure it was none). That is hardly surprising. The Board buries its report in the middle of management’s report, and the press release the Governor puts out never mentions that there is an independent report by an entity paid and mandated by Parliament to hold he and his colleagues to account.

As it is, had anyone read the Board’s Annual Report (start on page 6 here), they could only have come to the conclusion that the Board was determined to prove its utter uselessness and ineffectualness in any role other than covering for the Governor. It is spin and/or unquestioning acquiescence, from start to finish.

There is, for example, the nonsense inflation of the Bank’s importance:

We are pleased with the decisive actions that have been taken by the Bank to deal with the potential collapse in economic activity.

75 basis points off the OCR, and whatever lowering of near-term government bond rates the LSAP achieved, simply did not – on any serious reckoning – avert a “potential collapse in economic activity”, and could not conceivably have done so, when the shock to economic activity was primarily about things (fear of virus, policy response to virus) that monetary policy has no affect on.

Remarkably they also claim to be “pleased by the communication and transparency the Bank showed in delivering these innovative tools”.

All while making no mention of, for example, the Governor’s substantive interview last year (in the year under review) expressing a strong preference for a negative OCR as a first cab off the rank, or the public comments of one of his own senior managers in March this year playing down what anyone might reasonable expect from a bond purchase programme. Or the failure to release any research/analysis around the LSAP. Or the failure to release the detailed background papers – promised by the Governor in a speech in March – on the various unconventional instrument options. Or the weird pledge the MPC made in March not to alter the OCR for a year come what May.

And, of course, they make no mention of expressing any concern that despite (a) years of lead time, and (b) the Governor’s explicit preferences expressed last August, it only emerged quite belatedly that it was not until the end of January that the Bank took any steps to discover whether the banking system was operationally ready for a negative OCR (perhaps that is because, as they note, “well before Covid-19, we were briefed on the Bank’s preparations”, and presumably none of them asked the question either).

There is no suggestion of any unease around the policy/communications inconsistency from the MPC in the middle of last year (they could perhaps have explained it away as teething issues with the new MPC, but they seem resolutely determined to utter no cautions on anything at all sensitive).

The Board was quite as determined, it appears, to have the Governor’s back when it comes to financial stability as well. They are firmly behind the big increase in capital requirements and seem quite unbothered about concerns and questions raised, and (if anything) even less bothered about the abusive style adopted by the Governor on many occasions during the course of the consultation. Reflecting the Bank’s own lines, the Board both championed the much higher capital requirements – which had not come into effect and made little or no difference to capital levels by the end of last year – and repeat the Bank’s spin about how sound the system is/was in the face of the (large) Covid shock at the old capital levels. Taxpayers’ money is wasted on this.

Lest you thought that they never uttered a challenging word – to encourage or discourage – there is in fact one quiet dissent in the report, although presumably only allowed to get this far because the Governor himself was on board. We learn that

Policy work on the Deposit Takers Act is highly complex and significant for the Bank’s operations; the Board has expressed concern that the policy development process should be thorough and not rushed.

And that is it – and even then a comment on something not largely under the Bank’s control (Treasury and the Minister having a large say).

For the rest of the report, it is just gush. Perhaps the Board is less than enraptured with the Governor’s climate change ambitions – they just get passing mention – but they are all-in with the Maori strategy; this in an institution that operates at a wholesale, not primarily individual-member of the public facing, level:

The Board believes the incorporation of Te Ao Maori into the Bank’s work will help develop a central bank with a distinctive New Zealand approach and character.

Tree god myths and other pandering, but with not a shred of evidence for how any of this expenditure of public resources (from memory of my OIA it was $1m) will enhance macroeconomic or financial stability. But I guess when the Board chair is accused in his day job of fostering “systematic racism” (universities and all that being, in current form, a western development) he probably had to be seen to go along.

The gush continues to the end. We learn that the Governor and Deputy Governor have provided “outstanding leadership” – so much so an accountability body finds no fault at all – and the report ends having lost all touch with reality observing that the Bank is “realising the Bank’s vision to be a – Great Team, Best Central Bank.”

You might conceivably think the Bank does, on the whole, not a bad job. But there is no conceivable basis – in outputs or outcomes (or actually in inputs for that matter) – to think that the Reserve Bank is even close to being the “best central bank”. As I’ve noted previously, in a not-so-wealthy small economy it might not ever be realistic as an aim. But it could do a great deal better than it is on numerous fronts – and presumably if the decisionmakers did not agree they would not recently have decided to throw lots more taxpayers’ money at the Bank to help them do better.

Most likely, there will only be one more of these puff pieces, and by 2022 the new legislation is likely to pass and any pretence that the Board is an accountability body will pass out of law. When it finally does, of course, it will only reinforce how weak the accountability mechanisms are around this very powerful independent agency. I’m still of the view that New Zealand would benefit, slightly and at the margin, from establishing a small Macroeconomic and Finance Policy Monitoring agency, operating at arms-length from both The Treasury and the Reserve Bank.

The final thing of interest in the Bank’s own Annual Report is the higher salaries table. This is an excerpt from this year’s.

RB salaries

As I noted last year, Orr himself seemed to be getting more than the Minister had suggested when the appointment was made. And there seem to be a lot of senior colleagues – in a still not very large organisation – pulling in very high salaries. I’m not one of those who generally thinks top-tier public service salaries are too high in principle. These are probably something like fair salaries for excellence, but there is little sign of consistent excellence at the top of the Bank, particularly not from the Governor.

(Incidentally, government department chief executives earlier this year took a temporary 20 per cent pay cut in the wake of Covid. I’ve seen no hint that the Governor – exercising significant public policy powers, and better paid than most of them, and apparently thwarting a collapse in the economy – followed their lead. Perhaps some journalist might ask why.) UPDATE: Thanks to the reader who drew my attention to the footnote describing the Governor’s temporary pay cut.

The Board itself pulls in a couple of hundred thousand (in total) in fees – the largest chunk going to the chair who, one woud have thought, had a demanding day job. The Governor might be getting his money’s worth, but the public is not.

MPC appointments: prioritising sex over expertise

The lawlessness of the Board of the Reserve Bank of New Zealand never ceases to amaze me,  Just in recent years, there was clear evidence that the Board simply ignores the requirements of the Public Records Act.   There was their facilitation of what was almost certainly an unlawful appointment of an “acting Governor” in the run up to the election (decent outcome in the abstract, but unlawful nonetheless).   And, of course, they play fast and loose with the Official Information Act, apparently confident that the Ombudsman is largely toothless.  It is all the more extraordinary in that since 2013 the Bank’s Board has had a senior lawyer as a member.  I’d not paid much attention to him, not knowing anything about him, but when I finally met him last week –  where he told us he “trains judges” – it reignited my interest in just how a senior lawyer makes himself party to so much questionable –  borderline at least – conduct by a public agency.

We’ve seen a repeat of this sort of “the law doesn’t really apply to us” mentality around the release of papers relating to the appointment of the new statutory Monetary Policy Committee.  I wrote about that here.   I’d lodged requests with both the Minister of Finance and the Bank’s Board.  The Minister took a while to respond, but his responses were within timeframes allowed by law (a single extension of time, if that extension takes the deadline beyond the usual statutory 20 days).  The Board, on the other hand, extended, extended, and extended again –  quite unlawfully (Ombudsman advice makes that interpretation quite clear) –  before finally releasing some material a couple of weeks ago.      They did have a fairly junior person apologise for the delay, but that is pretty meaningless (no penalty on them –  even after I complained to the Ombudsman –  and no sense of any serious intention to amend their ways).   And yet these people – the Board –  are supposed to keep the Governor in check (and the government is now proposing to give them even more formal powers).

But this post is mostly about the substance of the MPC appointments.  There are two releases.  The Board’s response is here, and the Minister of Finance’s release is here.

Grant Robertson OIA release on MPC appointments

I know for a fact that neither release is comprehensive (including things I’ve been told privately, things alluded to in what has been released, and rather obvious omissions –  are we really supposed to believe that, eg, the Board chair did not brief the Board on his discussions with the Minister?) but what has been released does quite a lot to flesh out a picture of a process that doesn’t really seem to put anyone involved in a particularly good light.  There are even signs that the Board is taking the Public Records Act a bit more seriously than they did around the appointment of the Governor.   My earlier post on the new MPC is here: these releases answer some of the issues I raised there, mostly leaving me more concerned than I was previously.

One of my longstanding concerns about the new regime would be that it would largely replicate the dominance the Governor had in the old legislative model (where the Governor was, by law, the single decisionmaker).  Part of the reason for that concern was the statutory majority of internal members of the MPC.   All those internal members owe their day jobs to the Governor, who also decides on internal resource allocations, pay etc.  A really strong Governor might encourage diversity of perspective and challenge. There has never been any suggestion Adrian Orr is that sort of person, indeed rather the contrary.   And the external members are appointed on the Board’s recommendation, but…..the Governor himself is a member of the Board.  And instead of distancing himself from the process, and leaving recommendations to the non-executive directors, the Governor was one of the three man interview panel for the external MPC nominees.    Throw in the code of conduct the Board (Governor a member again) devised and clearly no one remotely awkward was going to get through the screening process.  (Consistent with that, in the four months since the MPC took office, not one of the externals has said a word – that might, in part, be because no media have asked them questions, but there is nothing to stop a more proactive approach.)

Consistent with all this, the Board released the set of questions they used for their interviews with potential MPC appointments.  There wasn’t much sign, from the questions, that the Board was looking for excellence (in anything), but there was certainly nothing in those questions to suggest they were looking for MPC members who robustly challenge, and offer markedly different perspectives over time to, the Governor and staff.

But it was much worse than that.  This is from a Treasury note to the Minister, released by the Minister (note that the Board itself kept this secret)

MPC 1

This is simply staggering, or should be in a country with good quality competent institutions.  And I know Treasury isn’t misinterpeting things, because I was told about this restriction some time ago by a person who was rejected on exactly these grounds –  that they might be interested and knowledgeable enough about monetary policy to be doing some research on it.   By this standard, I guess the Board and Minister (presumably aided and abetted by the Governor) would disqualify (a New Zealand) Ben Bernanke, Janet Yellen or (right now) John Williams, the head of the New York Fed and someone who –  while serving on the FOMC –  has continued to undertake research on monetary policy.   I realise that expertise is going out of the fashion at the ECB (Makhlouf, Lagarde) but their new Chief Economist –  former Irish Governor –  Philip Lane has been an active researcher and writer.  Or one could think of Andrew Haldane at the Bank of England, or….or….or.  Is it now considered a negative –  perhaps a disqualifying consideration  –  if the Reserve Bank’s chief economist was doing research on monetary policy, or does the disqualification only apply to externals, over whom the Governor has less control?  It almost beggars belief that the Minister and Board would get together and disqualify anyone with specific serious expertise in monetary policy from a new Monetary Policy Committee.   Sceptical as I was of the new committee in principle, even I was stunned when I learned of this prohibition.

(And, to be clear, I am not one of those who thinks an MPC should be stacked full of research macroeconomists –  I’d be happy to have a couple of people, of the sort who ask hard questions and have good judgement, with little or no formal economics background at all – just that such people shouldn’t be ruled out in advance.  As it is, the current MPC looks odd in that among its seven members there is not a single one who could really be considered to have a long record of depth of expertise in monetary policy and the New Zealand economy.)

So if the Board, the Governor, and the Minister weren’t looking for in-depth expertise, and weren’t looking for anyone to rock the boat, what were they looking for?   The short answer – suffusing both sets of releases – is women.     In none of the material released to me is there is any discussion about the sorts of expertise that might be sought, or how to build a committee with complementary sets of skills, but there is a great deal of unease –  particularly channelled from the Minister’s office –  about getting women selected (even to point, in some places, where there seemed to be attempts to strongly encourage the Governor to select a woman as his chief economist).  There are records of early approaches by the Board Secretary to get possible women (and Maori) candidates (and a Treasury response which points out that there really aren’t that many adequately qualified women –  not that surprising given how many women did (say) economics honours or masters programmes in New Zealand 30 years ago (in my own honours course at Victoria, the number was either one or zero out of about 15)).    As it is, despite all the huffing and puffing, they ended up with only one women on the shortlist.

There were a couple of other things that were striking.  The Board’s release records various email mentions of trying to identify candidates with legal backgrounds.  This is almost a complete mystery to me, as the MPC has no regulatory responsibilities and the legislation it operates under is pretty straightforward (and the Bank has internal and external legal advisers if things do require any clarification).  The MPC is about cyclical macroeconomics management, and communications thereon.  Someone of a particularly suspicious cast of mind might suggest that a legally-qualified MPC member would be one less knowledgeable person for the Governor to have to bother about.   I’m just genuinely puzzled.

The Board’s release also recorded various exchanges among senior Bank managers about what sort of person might be suitable as an external MPC appointee (they were looking for names to suggest to the Board).  What took me by surprise was the aversion to overseas appointees.  As regular readers know, I do not think we should have (say) a foreign Secretary to the Treasury (or a foreign Chief Justice, or a foreign Governor) but I was always among those at the Bank who saw one of the advantages of moving to a statutory MPC is that it could allow the appointment of one foreign person, bringing a slightly different expertise and perspective to New Zealand monetary policymaking.   It was never clear how feasible this would be –  distance, and relatively low New Zealand salaries being an obstacle –  but it has been tried, and appeared to work, in some other countries.

But that clearly wasn’t the view of the senior management last year.  The then Chief Economist, John McDermott (for example) is quoted as saying

“overseas members would be a logistical nightmare and what is their interest in looking after New Zealand welfare and monitoring the NZ business cycle on a continuous basis? So no from me.”

There is no sign of any of his colleagues or bosses dissenting and no reference to possible overseas appointees later in the any of the documents.  As it is, it isn’t clear how much “continuous monitoring” of the New Zealand economy the MPC members are actually doing (a recent conversation I was party to suggests not much in at least some cases).

Management also debated the issue of whether former RB staff or Board members should be considered (I suspect some might have liked to have Arthur Grimes appointed).  The consensus seems to be (reasonably enough) that there needs to enough distance for such a person to be genuinely external.  For groupies, one can try to guess which names are deleted in this paragraph

MPC 2

Disconcertingly, there are signs that management was open to have serving public servants appointed provided they didn’t currently work for agencies too close to things macro.  There should be an absolute prohibition on anyone working for a government department or Crown entity (other than as an academic) being considered for a part-time external MPC appointment in an (operationally independent) central bank.

The final point I wanted to touch on answered one of my questions from a few months ago.  Writing about the externals I noted

One area where I do have some concern is around the role of the Minister of Finance in these appointments.  In principle, I think the Minister should be relatively free to appoint his or her own preferred candidates, and should be fully accountable for those choices (including through the sort of non-binding “confirmation hearings” –  of the sort UK MPC members face – that I’ve proposed for New Zealand).  As it is, on paper the Minister has no say at all (can reject Board nominees, but nothing more).

But then I’m a bit troubled by the way in which the Board –  all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme.     They look a lot like the sort of people that a left-wing Minister of Finance –  one close to Michael Cullen –  might have ended up appointing directly.     I don’t think Peter Harris is grossly unqualifed for the role, but I am uneasy that one of the very first external appointees is a former political adviser to a former Minister of Finance of the same party as the one making the appointment.   …. (I don’t think former political advisers should be perpetually disqualified, but it might be more confidence-enhancing had they been appointed by the other party from the one for which they used to work –  thus Paul Dyer, former adviser in Bill English’s office, would probably be better qualified for the MPC roles than any of the recent external appointees.)

I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments.  I hope the answer is none.  I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board.  It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence.    So any backroom dealing is something it is then hard to hold him to account for.

The relevant provision of the Act says just this (buried in a schedule)

Appointment of internal and external members
The Minister must appoint the internal and external members on the recommendation of the Board.

It is very similar to the provision governing the appointment of the Governor.  That provision has been sold consistently as a model under which the Board puts forward a name, and the Minister can either accept or reject the person, but cannot interpose his own nominee.  If the Minister rejects the Board’s nominee, the Board has to go back and come up with another name.  The provision was explicitly intended to leave almost no discretion to the Minister.  (It isn’t a framework I approve of, but it is New Zealand law).

You will recall that in that earlier post I wondered quite how it was that the new MPC just happened to contained two obvious left-wing people, one a former political adviser in the office of a Labour Minister of Finance.  The material released to me answers that question pretty clearly.

I’d assumed that the Board had put up three names to the Minister and he had either accepted them all, or perhaps (though unlikely) had vetoed one name and the Board had then come up with another.   But that wasn’t what happened at all.  Instead, the documents disclose that the Board put up seven names to the Minister for the three external appointeee positions, not ranking or prioritising them at all, and giving the Minister complete leeway to choose any three of the seven.   Actually, they went further than that, in that the Board told the Minister that they had interviewed nine people, and listed the names of each of them, more or less inviting the Minister to suggest that if he didn’t like the seven names the Board recommended he could probably have one of the spare two (since it described all nine as “appointable”).

The documents also make clear that Caroline Saunders was the only woman on the shortlist (or certainly of the recommended seven).    Since Saunders has no background in macroeconomics or expertise in monetary policy, and given that strong focus in the documents on getting women nominees, it is unfortunately hard to avoid the suggestion that she was a “diversity hire” –  chosen for her sex rather than for the expertise she would bring to the MPC.  In the circumstances, how could the Minister not have chosen her?  One would hope it wasn’t so, but –  and this is problem with quasi-quotas –  it is impossible for us, or for her, to be confident that it wasn’t so.  Perhaps over time she will fully justify her selection on the substance, but at present there is no data either way.

Perhaps specialist lawyers will have a different interpretation, but I struggle to see how offering the Minister a list of seven – or even nine  – names and saying “choose any three” is the plain meaning and intention of the legislative text (would offering a list of 50 and saying “choose three” –  if so, the provision is gutted of any meaning and protection?).  The pool of potential MPC members really isn’t that deep in New Zealand and yet –  despite the fact that the law puts the onus on the Board –  we don’t even now know whether we have the best three external people on the MPC.  If this approach is lawful, it must be borderline at best.  (There was, for example, no sign of them adopting that approach to the internal MPC appointees –  there the Minister was given a list of two names for two vacancies, the approach envisaged in the law.)

My own preferrred model remains (the more internationally common) one in which the Minister of Finance is free to appoint whomever he or she prefers to the MPC.  I would complement that with non-binding confirmation hearings of the sort used in the UK.  Under that model, responsibility for the appointment rests clearly with the Minister of Finance, and there is scope for proper parliamentary scrutiny before people take up a powerful role.      Where this (brand new) legislation ended up is that the Minister can appoint his mates, within limits (but pretty broad limits) while pretending that the real choices were made by the Board.

In the end, after months –  not at all consistent with the spirit of the OIA let alone the letter – we did get a fair bit (by no means complete) of information offering insight on the MPC selection and appointment process.  Unfortunately that information tends to cast another shadow over the process, and suggests that the Board –  whose members have no real expertise in relevant areas –  continues to see its primary role as being to accommodate and humour the Governor and, now perhaps, to accommodate and humour the Minister, all behind closed doors.

And there is, of course, also the extraordinary secrecy as to how much these (possibly) second or third XI externals are being paid.  So much for openness and transparency.

 

 

Cavalier lawlessness

There does seem to be a growing sense among far too many public agencies that laws don’t really apply to them, only to other people.    This is particular so in respect of the Official Information Act.

A TVNZ journalist nicely illustrated this sort of contempt for the law in a tweet the other day

In similar vein, I had an experience a couple of months back in which the Police simply ignored the statutory deadline (“no later than 20 working days”).  Since they were the Police – ideally, examplars of upholding the law –  I lodged a complaint with the Ombudsman.  The Ombudsman actually dealt with the complaint reasonably promptly and I had a letter from them basically saying “we pointed this out to the Police, who accepted that they had missed the deadline”,  and “and now there is nothing more we can do”.  There are no sanctions in the Act, and not even the pretence of an apology from Police.

The Ombudsman also dealt reasonably promptly with a similar complaint about the Reserve Bank.    They had delayed and slow-walked (using the formal extension provisions in the OIA) the release of material supporting their position on the bank capital proposals –  material which, when finally released, turned out to be quite limited, and which had been given to other members of the public long before.     The extension looked to have been pure delaying tactics, deliberately obstructive, and so I complained to the Ombudsman.  And, much to my surprise, I had a letter earlier this week from a new Assistant Governor at the Bank

rb apology

That was a first.

Sadly, it doesn’t seem to be a marker of a genuine change of approach, just that they are a bit more bothered (than Police, say) of falling foul of the Ombudsman.  They tend to delay until the Ombudsman belatedly determines there is a problem, and then suddenly play nice.

In late March, the Minister of Finance announced the appointment of the members of the new Monetary Policy Committee. On 29 March (three months ago tomorrow) I lodged Official Information Act requests with the Minister of Finance and with the Reserve Bank Board (responsible for determining the names the Minister could accept or reject).   Given that, on paper at least, this was a powerful new body, it seemed not unreasonable to ask questions, including about any back channels through which (say) the Minister might have sought to get his preferred people onto the Board’s list (in most countries, the Minister of Finance can simply appoint directly the people conducting monetary policy).

Both the Minister and the Board initially extended my request.  I didn’t have much problem with that (plausibly there was quite a bit of paperwork to sift through etc) and the issue wasn’t overly urgent.   The Minister of Finance complied with the law and released a set of papers to me a few weeks ago.

Not so the Board (or the Bank handling the processing for them).  They initially extended my request to the same date as the Minister had done.  That didn’t seem unreasonable, even if the delay was quite long, and I’d envisaged there might need to be consultation between the two offices.  But deadline day arrived.  The Minister responded, and sent the requested material.  But the Reserve Bank Board (staff on their behalf) sent me an email saying they were further extending the deadline to 26 June (Wednesday this week)

“because of the consultations necessary to make a decision on the request such that a proper response to the request cannot be made within the original time period”

And so time passed. I fully expected a response on Wednesday –  it was, after all, almost three months they’d had by then.  But midnight came and went and there was nothing.

And so, having had that nice letter from the Bank’s Assistant Governor early in week, I sent her an email yesterday morning, reminding her that the extended deadline, set by the Bank itself, had passed.  I ended

I hope this further delay is pure oversight and that I will have a response very very shortly.

But no.  I didn’t actually get a reply to that email, but it clearly sparked action because much later in the day I had an email from someone down the line.

rb delay.png

Well, that’s nice isn’t it.  Not even a new deadline, just an indication.

So this is the third extension on a single request.  The first was made (well) within the orginal 20 days, the second was made on the final day of the extended period, and the third quasi-extension, well it came after the second deadline had already expired, and it looks as if it might not have made at all if I hadn’t approached the Assistant Governor.

But there is this thing called the law, under which agencies are required to operate. It is not voluntary, or just a nice idea, it is the law.   And here is what the Ombudsman’s office has to say about agencies extending request (the document is their guidance to government agencies on handling OIA requests).

Nothing in the OIA prevents multiple extensions being made, providing any extensions are made within the original 20 working day time period after receiving the request. For example, if an agency notifies the requester of a one week extension, and then later realises that a two week extension is actually necessary, a second extension may be notified as long as the original 20 working day time period has not yet passed.

You simply can’t extend a request again once the initial 20 day period has passed (in this case, that date would have been in late April).  That isn’t my reading of the Act, my opinion, it is the determination of the Ombudsman, who is responsible for enforcing the Official Information Act and holding agencies to account.  As it happens, the State Services Commission has also issued OIA guidance to agencies, and their text on extensions repeats the Ombudsman’s stance, without question or challenge.

Perhaps the Reserve Bank’s lawyers have a different interpretation (untested in the courts, the only way the Ombudsman’s view could be overturned). Or perhaps the Bank just doesn’t care.  Laws are for other people.

The Ombudsman even offers some suggestions for agencies (I guess unexpected obstacles do come up from time to time).  It is commonsense really, the sort of thing any decent public-spirited person would want to do anyway (but not apparently the Bank).

If it looks like it will not be possible to meet either the original or an extended maximum time limit, the agency should consider contacting the requester to let them know the current state of play and reasons for the delay. Requesters will appreciate being kept informed, and may be more understanding if the agency ends up in breach of the timeframe requirements.

Agencies should be aware, however, that a failure to comply with a time limit may be the subject of a complaint to the Ombudsman.

And so, in the spirit of sweating the small stuff –  how are public agencies to be held to account if we don’t make a fuss and use the avenues that are open to us? – but with a somewhat heavy heart (couldn’t they just obey the law instead?), I will be lodging another complaint with the Ombudsman later this morning.

The request was made to the Board of the Reserve Bank.  They don’t work for the Governor or the staff, rather the staff provides secretarial and adminstrative support to the Board.  Neil Quigley, vice-chancellor of Waikato University, is chair of the Board, and he and the Governor between them need to take responsibility for this lawless obstructionism.  “Culture and conduct” is one of the Bank’s trendy mantras.  It really needs to start close to home.

UPDATE: The Governor recently told an acquaintance of mine that he doesn’t read this blog, but clearly someone at the Bank does.  I finished the post, went off to clean the house, and came back to find this.

RB OIA

Again, that’s nice, and slightly better than nothing.  But, the law…….  As the law is written, and applied by the Ombudsman, the response was finally due on 11 June.

The law.

 

 

 

Lack of transparency and the MPC

The statutory Monetary Policy Committee is now responsible for monetary policy and we’ll see the first fruits of their deliberations in a couple of weeks.   It won’t just be the outsiders who are new, with two of the four internals having also taken up their jobs (in one case, joined the Bank) since the last Monetary Policy Statement.

In addition to the questions about how the Committee is going to work, what approach to policy they will take, whether the Governor remains as dominant as I fear, and whether a new era of greater policy transparency is really being ushered in, there are some other outstanding questions about the Committee.

One of them is how much the external members are getting paid.  The government simply refuses to tell us.  The same government that once promised to be the most open and transparent ever.

There was an article about this in the Herald ten days or so ago.  The government’s standard schedule of fees for appointments to public board and committees allows a maximum fee of $800 a day.  Perhaps $800 a day might, just, be reasonable for a role that involved only, say, 10 days work a year.    But the MPC jobs were advertised as involving about 50 days a year –  a fair chunk of anyone’s earnings potential –  and there are some material constraints on what other activities people on the MPC can do.   $800 a day is probably equivalent in annualised terms to around $175000 per annum.

And so, reasonably enough, the Minister of Finance sought approval to offer a higher rate to those appointed to the MPC, arguing that if more money was not on offer they might struggle to get the “right” sort of applicants.   These sorts of exceptions are made from time to time,

A spokesman for [State Services Minister] Hipkins said in 2017/18, the Government approved 43 “exceptional fee” proposals.

That number was 90 in 2016/17 and 42 in 2016/15.

The suggestion in the article is that the government may be paying up to $1500 a day to the MPC appointees

The letter also said the most comparable role within the state sector would be a member of the Commerce Commission, who earns a salary equivalent to a daily fee of $1565.

$1500 a day might be equivalent to an annualised rate of around $330000 per annum.

I don’t too much problem with that level of fee, provided the MPC members are going to do the job well, and not just become free-riders largely deferring to management.

After all, consider what the internals on the committee are getting paid.   Going by the remuneration tables in the Bank’s Annual Report, they probably get something like this:

  • Governor                                                                                    $700000
  • Deputy Governor and Head of Financial Stability,            $500000
  • Assistant Governor (Econ and Financial Markets)             $425000
  • Chief Economist                                                                         $325000

The Deputy and Assistant Governor roles are both second-tier appointments, while the Chief Economist is a third-tier role.

Of course, academics get paid less well than this (and two of the three external MPC appointees have academic backgrounds) but the private financial sector pays able economists well.

Another possible benchmark is the $447000 per annum paid to High Court judges.  We need skilled and capable people performing those roles, but there are potentially two layers of appeal above a High Court judge, and none at all above the (collective) decision of the MPC.

But if I don’t have a problem paying a reasonable price for the job, I do have a problem in not disclosing what these decisionmakers are getting paid.   You can readily see from the Annual Report what each member of the Reserve Bank Board gets paid (not that much, but then they don’t do much), and the mandatory disclosure (without names) of all salaries in excess of $100000 gives one a reasonable sense of what the senior managers involved are being paid.   But the government insists that the external members’ fees should remain confidential.  Their argument?

“This is on the basis that it could weaken the Government’s ability to negotiate fee levels by creating an environment where the exceptional fee becomes the norm.”

I don’t find that persuasive, and the secrecy is inconsistent with the sort of openness and transparency we should expect around public appointments.  Frankly, it suggests the government has its fee schedules in the wrong place, at least for substantive roles.

Perhaps the closest parallel to the external MPC members are the comparable positions in the UK.  In fact, the Minister of Finance cites them in his bid to get higher fees for the New Zealand appointees.  But the terms of conditions of UK MPC members are available for all to see.   As the Minister noted

It also noted MPC members at the Bank of England receive around $1900 in New Zealand dollars.

“Reserve Bank of New Zealand external MPC members will require similar economic and analytical skills, although their role is likely to be less public facing,” Robertson said in the letter.

If it is good enough for the UK, not always known for its public sector transparency, it should be the standard of openness we expect here.

There are also some questions around the transparency of the MPC appointment process itself.

As I noted when the appointments were made

But then I’m a bit troubled by the way in which the Board –  all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme.     They look a lot like the sort of people that a left-wing Minister of Finance –  one close to Michael Cullen –  might have ended up appointing directly……

I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments. I hope the answer is none. I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board. It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence. So any backroom dealing is something it is then hard to hold him to account for. Perhaps nothing went on, but I have lodged a series of Official Information Act requests with the Minister, Treasury, and the Board of the Bank about any contacts (written or oral) between them on this issue.

Since the Act is written in a way that encourages the public to believe that the first time the Minister would even hear of any potential MPC members would be when the nominations landed on his desk from the Board (which he could accept or reject, but not impose his own candidate), the response from the Minister of Finance to my OIA request should have been quick and simple.

Here was my request to the Minister.

I am writing to request copies of all material (written and oral) held by you or your office relating to the appointment of members of the Reserve Bank Monetary Policy Committee.  Without limiting that request, it includes a request for any information relating to any approaches made by you or on your behalf (a) encouraging specific individuals to apply, (b) encouraging the Bank’s Board to nominate or select any particular individual(s), or (c) discouraging the Bank’s Board from nominating any particular person or type of person.

In subsequent contact, it was agreed I wasn’t looking for purely adminstrative stuff (emails like “does anyone know if Bob Buckle has signed hs contract yet?”).

The request was lodged on 29 March.  I had a letter from the Minister last week extending my request to 11 June (so not just 20 working days, or even a 20 working day extension, but a bit beyond even that).  And the justification?  The claimed need to “search through a large quantity of information”.

That certainly does not suggest a Minister of Finance who had taken the sorts of hands-off approach his own brand-new legislation appeared to envisage.  In that case, there would have been nothing to find, nothing to search.  The Minister would have known there was nothing.

In principle, I’m not averse to the Minister of Finance having an active role in such appointments.  In my submission to FEC last year on the amendment bill, I argued that the Minister should have the power to appoint directly (as is typical with most other public appointments, and most other central banks roles in other countries).  The MPC is a major element in short-term economic management, and we expect to be able to hold the minister to account (we can vote against his party, but have no clout over central bankers).  Try to appoint a party hack and expect blowback in public or Parliament.   But the Minister and the Select Committee chose to reject that proposal, and to use the model –   in place for the appointment of the Governor –  in which, on paper, the Minister has no role other than to accept or reject a final recommendation.

It looks as though what we are left with is the worst of both worlds.  The Minister of Finance isn’t keeping out of the process, until the end when he says yea/nay to formal recommedations, but whatever his active involvement it is behind the scenes in ways which make it hard to hold him to account (if second XI type people, or people with strong ideological affinities to the government end up appointed, he can simply say “it was the Board that handed me these nominations”).    It seems to be neither open nor transparent.

I hope that when the Minister finally gets round to responding to the OIA request, the evidence will suggest these concerns are overstated.  But, on what we have to date, the indications aren’t promising.

Transparency was to have been a key aspect of the Reserve Bank reforms.  To date, that is looking patchy at best, around such basics as remuneration and appointment processes.  We can only hope – against hope –  for better on policy and policy communications.

 

 

The Second XI takes charge

The current government –  like its predecessor –  hasn’t done much that’s good.  Neither has done anything to even begin to deal with New Zealand’s longstanding productivity growth underperformance (for the current government, better – apparently – to pretend it doesn’t matter and talk a lot about “wellbeing” instead).

But they have made some modest reforms to the Reserve Bank, which take effect today.   After almost 30 years, the Governor is no longer the sole legal decisionmaker around monetary policy (he remains in sole charge of all the rest of what the Bank does), and a newly-created statutory Monetary Policy Committee has taken over (with surprisingly little media coverage, including no profiles of these new statutory policymakers, who will heavily shape how New Zealand handles the next recession).

Moving to a legislated committee-based system for making monetary policy decisions has been a cause of mine for almost 20 years now. It is the way almost all other major decisions in public life (and much of business and non-profit life) are made, from Cabinet on down to the local school’s board of trustees.  Earlier this decade, I greatly upset the then-Governor by even writing a limited-circulation internal discussion paper proposing such a reform, and first media coverage I had after leaving the Bank was for a revised and updated paper along similar lines.   To their considerable credit –  and I don’t credit them for much –  the Green Party had also been championing reform in this area for some time.  Labour was late to the issue –  and showed little sign of really caring much – but as the largest component of the government, reform wouldn’t have happened without them.

The new model MPC will be an improvement on what went before it. It is good to have it now clear in law that the government of the day sets the target (taking advice, consulting etc, but in the end the Minister sets the target and is accountable for it). And the final form of the new system is a little better than what the Minister of Finance was first promising (MPC members were initially to be prevented from airing their views in open at all), or than the Governor appeared to be championing (when he was reported as suggesting he didn’t want economists as external members of the MPC).

But, to a considerable extent, the reforms represent a lost opportunity.  We’ve ended up with a system designed to be dominated by the Governor, and with not much more openness and accountability than we’ve had before. In practice, it looks likely to be a system little different than the Bank operated since about 2002, when “external advisers” were first appointed to the (then) Official Cash Rate Advisory Committee.   There is little reason to suppose that the policy mistakes of the last decade (recall the enthusiastic rate hikes in 2014 and the reluctant unwinds, and nearly a decade of undershooting the inflation target) would have been avoided if this particular system had been put in place in 2009.

It looks, mostly, like cosmetic change –  cosmetics which suit both Reserve Bank management and the government, neither of whom was interested in the sort of open and accountable, disputatious at times, central banks of the sort they have in Sweden, the UK, or the United States.  It is there in the official documents –  the relentless drive for “consensus”, of which I noted recently

“Consensus” isn’t a recipe for getting the best answers, but for lowest common denominator answers that everyone can live with.  It isn’t really a recipe for a robust examination of competing arguments and analyses either –  at least unless one has exceptional people (which is always unlikely, almost by definition) –  and especially when management has (a) an inbuilt majority, and (b) control of all the research and analysis resources (and of the pen in drafting MPSs etc).

As always, there is the law and there is practice.  It will take some time for the new system to bed down.  Perhaps the published minutes will prove more revealing than currently seems likely. Perhaps MPC members –  internal and external –  will be willing to give periodic speeches and interviews outlining views different from those of the Governor.  Time will tell.  I hope it works better than I expect. But I’m not holding my breath.

The members of the new MPC was finally announced late last week.    Recall that the committee has four internal members and three external members, and hence a built-in management majority.  There is no necessity for the internal members to all vote together (if things ever come to a vote –  recall all that talk of “consensus”), but the internals (in their day jobs) all work for the Governor.   In future, the Deputy Governor will be appointed by the Minister, but only on the recommendation of the Board, who in  turn must consult the Governor (in practice, the Deputy Governor will be the Governor’s appointee).  The other internals will just be senior staff appointed to their positions in the Bank by the Governor, and hoping for pay rises, promotion, resource allocations to their areas, all in the sole gift of the Governor.  A good Governor will, of course, encourage challenge, debate, active disagreement etc etc.  Rather more average Governors –  and the typical Governor is likely to be rather more average – won’t, especially not in public fora.  So although on paper the internal members of the MPC are statutory appointees (in respect of that specific role), they are just part of the Bank’s management structure, and under the old and new law work wholly to the Governor.

And what of the three external members, who were appointed last week?   Notionally, they were appointed by the Minister of Finance –  it is his press release at the link – but in law the Minister (elected by the voters) has little or no say in who serves on the committee that, at least on paper, has the biggest say in cyclical macro management.  The Minister can only appoint people recommended by the Bank’s Board (most of whom were appointed under the previous government).  And the Board –  despite being charged in law with holding the Governor to account – works very closely with the Governor, mostly providing cover and support for the Governor. In fact, the Governor is a member of the Board.    And all the resources of the Board are provided by…..the Governor.   So we can be pretty safe in assuming that no one with whom the Governor is uncomfortable with is ever going to find their way onto the Monetary Policy Committee.        Since this is new legislation, and this feature has been pointed out repeatedly, one can only assume that is deliberate intent.

And if the Board has no independent resources, neither do the external members of the MPC.  This could become a matter of some contention over the next few years.  It did at the Bank of England after their reforms 20 years ago, although since the appointees in the UK system had more independent status (directly appointed by the Chancellor) and were “bigger beasts” with more forthright tendencies, perhaps here the externals will just go along.  They will have no independent research or analysis resources, and no ability to require specific pieces of work to be done by staff.  They will be largely dependent on their own resources, and perhaps any public commentary, while almost always being outnumbered.  It could drive really able people silly, but then actual appointees will have been selected for (probable) docility.

Which brings me to the members of the committee themselves, who haven’t yet had much/any media scrutiny.    In the title of this post, I characterised them as the Second XI.  That is a deliberate and careful phrasing.  A big school might, say, have six or even ten cricket teams, some comprised of people with no talent but a bit of enthusiasm and a desire for some exercise with their mates on a Saturday afternoon.   But on my reading this is a Second XI; people who aren’t bad, or grossly unqualified for the role, and yet who  –  individually and collectively – don’t represent a committee of the sort of stature for which we might have hoped.  That is true of both of the internal and external members.  Lee Germon captained the New Zealand Cricket team for a while, but was widely regarded as not quite up to it, not really justifying his own selection.  The new MPC, at least taken as a whole, seems a bit like that.  Other advanced countries mostly seem to do better.

I’m not someone who thinks the MPC should necessarily be dominated by economists (although the expert advice to the committee should be), but when the Governor was talking of not wanting economists at all as external members I thought he had gone too far.  Clearly others agreed, and as it happens all seven members were economists by training and education.

But of the internals, none stands out on that score. It isn’t helped by the fact that the Bank is currently without a Chief Economist, and one of the internal appointees –  Yuong Ha –  has been appointed as not much more than a placeholder (a one year term) until they manage to fill the position (it isn’t a great look that in an organisation like the Bank, where economics skills have historically been central, there wasn’t a natural successor to the former (demoted and then resigned) Chief Economist).  Perhaps in time the fulltime successor will add some real intellectual stature and gravitas to the MPC.  In the meantime, the Minister should have rejected a one-year appointment of a mid-level internal appointee: independence is partly about security of tenure, and any mid-career person appointed for one year only is going to have the boss’s views and interests in mind.

Of the other internals, for my money to Deputy Governor Geoff Bascand is probably, at this stage, the best of them.   I have plenty of disagreements with Geoff, and I wonder if there is any track record of him disagreeing robustly with his boss (whether Wheeler or Orr) on policy.  He was also one of the internal champions of the OCR tightening cycle in 2014, but he does have a track record of thoughtful speeches on some macroeconomic topics (if not really monetary policy itself).  Arguably, he is better equipped for the MPC than for his day job (Head of Financial Stability).

As for the Governor, the fact that he went for a year as sole decisionmaker on monetary policy and didn’t see fit to give us even a single on-the-record speech on monetary policy, the cylical state of the economy etc, should be telling.  His interests seem to lie elsewhere.  That might matter less if the other management appointees were real stars (after all, the Governor has a wide range of responsibilities) but they aren’t.

What of the externals?  Three economists have been appointed: Caroline Saunders, Bob Buckle, and Peter Harris.  Again, it is surprising that no media outlet (I’ve seen) has done interviews with or profiles of them.

Both Buckle and Harris are older –  Buckle is retired (and Professor Emeritus) from Victoria University, and Harris while billed as an “economic consultant” must be at least in his late 60s.   That was partly inevitable as a result of the decision to make the MPC jobs substantial (50 working days a year was the expectation), but not large enough to be even half-time, let alone fulltime.  Actual or potential conflicts or interest would rule many others who might have been interested or suitable.

The third appointee, Caroline Saunders, is also an academic (with a couple of other ministerial appointments) –  and the only one of the seven MPC members I’ve never met.  Quite how one squeezes in a 50 day part-time role with a fulltime job at Lincoln is an interesting question, but that is her problem and that of her employers.  Although she is an economist, her interests and experience don’t appear to encompass monetary policy or macroeconomics at all (her publications are here).  But I thought it might be telling that her most recent publication was as a co-author (with a couple of colleagues) of a new book on “wellbeing economics”.  As it happens, after I made some negative comments here recently about the government’s focus on wellbeing – suggesting it was a distraction from dealing with the productivity issues –  a PR firm working with the authors sent me a copy of the book. I haven’t yet read it, but as I’ve dipped in one is left with impression that Prof Saunders may be more useful to the Governor (and government?) in championing his interest in all sorts of (loosely) left-wing issues, rather than in advancing the cause of good monetary policy decisionmaking and communication.

One of the skills asked for in the advertisement last year for external MPC members was “exceptional communication skills”.    Time will tell, but my impression would be that neither Buckle nor Harris (of whom Google shows up very little in the last 15 years) would qualify on that score.  Perhaps the Board changed its mind about the skill sets?

One area where I do have some concern is around the role of the Minister of Finance in these appointments.  In principle, I think the Minister should be relatively free to appoint his or her own preferred candidates, and should be fully accountable for those choices (including through the sort of non-binding “confirmation hearings” –  of the sort UK MPC members face – that I’ve proposed for New Zealand).  As it is, on paper the Minister has no say at all (can reject Board nominees, but nothing more).

But then I’m a bit troubled by the way in which the Board –  all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme.     They look a lot like the sort of people that a left-wing Minister of Finance –  one close to Michael Cullen –  might have ended up appointing directly.     I don’t think Peter Harris is grossly unqualifed for the role, but I am uneasy that one of the very first external appointees is a former political adviser to a former Minister of Finance of the same party as the one making the appointment.   Note too that the only appointee Labour has so far made to the Reserve Bank’s Board was another former political adviser in the office of a former senior Labour minister.    He too (Chris Eichbaum) is not manifestly unqualified for the role, but I’m not sure it is entirely a good look first up. (I don’t think former political advisers should be perpetually disqualified, but it might be more confidence-enhancing had they been appointed by the other party from the one for which they used to work –  thus Paul Dyer, former adviser in Bill English’s office, would probably be better qualified for the MPC roles than any of the recent external appointees.)

I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments.  I hope the answer is none.  I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board.  It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence.    So any backroom dealing is something it is then hard to hold him to account for.    Perhaps nothing went on, but I have lodged a series of Official Information Act requests with the Minister, Treasury, and the Board of the Bank about any contacts (written or oral) between them on this issue.

In the meantime, given the role these appointees are supposed, by law, to be playing, it might be appropriate for the media to start asking them some hard questions, including around preparedness for the next serious recession, given the very real limits on how much further the Reserve Bank could cut the OCR.

(On a related matter, I saw a suggestion this morning that personnel changes at the Reserve Bank explain the Bank’s now more-dovish stance, notably the departure of longserving former chief economist John McDermott who, as this story put it, was responsible for the forecasts etc that led to bad policy calls in 2014.  But, for all their faults, the Reserve Bank’s inflation forecasts at that time were typically lower than the published forecasts of New Zealand economic forecasters, and those forecasts were embraced enthusiastically by senior management.   Among those deliberating on monetary policy at the time, Geoff Bascand – now a member of the statutory committee -seemed quite as hawkish as anyone.    There weren’t many local dissenters at all at the time –  of those with views in the public domain, this was the only one I found.  And, perhaps entirely coincidentally, the small handful of internal sceptics were dumped off the key advisory committee just as a rate-hiking cycle got underway in 2014.)

 

MPC remit and charter

The Minister of Finance and the Governor of the Reserve Bank today released the Remit and Charter for the new statutory Monetary Policy Committee, that takes effect from 1 April.  The Remit largely replaces the Policy Targets Agreement structure in place since 1990, and future remits will be set directly by the Minister of Finance, after advice from the Reserve Bank (among others) and associated public consultation.  The Charter is mostly new, governing how the MPC is supposed to operate in some key, outward-facing, dimensions. It complements various detailed statutory provisions.   Even though both documents are this time agreed between the Governor and the Minister, it is clear that the Minister has taken the lead: the press release is issued by the Minister alone, and although it is now reproduced on the Bank’s website, contains various bits of political spin.

The contents of the new Remit are in many respects pretty similar in substance to the current PTA, but there are a couple of changes worth noting.

One looks like an error.  In the Context section the Remit states that

“(the Act) requires that monetary policy promote the prosperity and wellbeing of New Zealanders”

That line took me by surprise so I went back and checked the new legislation.    The relevant provision actually states

The purpose of this Act is to promote the prosperity and well-being of New Zealanders,

Those are two different things.  The Remit –  which the Governor has voluntarily signed on to – can reasonably be read as suggesting that monetary policy should be conducted with “wellbeing” in mind.  The Act sets out statutory objectives for monetary policy (the things the MPC is supposed to pursue and take into account), simply stating that Parliament has put the legislation in place believing that the monetary policy goals (and other powers the Bank has, including regulation and supervision) will conduce to the wellbeing of New Zealanders.  The Remit shouldn’t have been worded that way.

My second observation about the Remit is more positive (and would be more positive still if the document hadn’t been released in a format in which one can’t copy and paste extracts).    It is stated that “monetary policy contributes to public welfare by reducing cyclical variations in employment and economic activity whilst maintaining price stability over the medium-term”.  I like that formulation, which is much closer to what I recommended should be the statutory goal for monetary policy.  Price stability is the constraint, economic stabilisation is the primary purpose.   Whether or not the wording is quite consistent with the actual new legislative goal is something for the MPC, and those paid to hold them to account, to work out.

What of the Charter?

My overarching unease about the MPC is that it will be dominated the Governor.  That is partly through the channel of the inbuilt management majority (and the Governor hires the other managers), and partly because of the heavy say the Governor will have in who gets appointed to the (minority) external positions.

But it is reinforced by the relentless, and explicit, drive for “consensus”.   This is from the Charter

consensus

“Consensus” isn’t a recipe for getting the best answers, but for lowest common denominator answers that everyone can live with.  It isn’t really a recipe for a robust examination of competing arguments and analyses either –  at least unless one has exceptional people (which is always unlikely, almost by definition) –  and especially when management has (a) an inbuilt majority, and (b) control of all the research and analysis resources (and of the pen in drafting MPSs etc).   The risk remain that outsiders, knowing they are inevitably outnumbered, and having ‘consensus’ waved in their faces will simply go along, free-riding.

The formal transparency model chosen is likely, at the margin, to reinforce this risk.  We are told that the record of the meeting will be published at the same time as the OCR announcement (2pm on Wednesday, following an MPC meeting that morning).  Even allowing for various preliminay meetings, the “record” of the meeting will inevitably be heavily pre-drafted by staff who work to the Governor, and the ability of outside MPC members to get any alternative perspectives included is going to be an uphill struggle.  Most central bank MPCs release minutes with something of a lag.   All that said, time will tell how it works out.

One interesting provision in the Charter was this

charter 1

charter 2

It was interesting for two reasons.  First, this provision appears to accept that significant operational decisions around monetary policy are the responsibility of the MPC.  That was not (is not, in my view) clear from the legislation.   If so, it is welcome, especially if it involves an expectation by the Minister that, for example, any future quantitative easing and similar decisions would also be a matter for MPC.  We’ll have to see.

Presumably this provision is supposed to cover the longstanding arrangements for possible foreign exchange intervention.  When I was at the Bank, the OCR Advisory Group (internal forerunner to the MPC) was the forum in which the Governor made in principle decisions on intervention, and specific timing choices etc were then dealt directly between the Governor and the Financial Markets Department.

If so, the specific provisions go much too far.   Perhaps there is a case at times for not announcing foreign exchange intervention immediately in some circumstances.  But there are no grounds for leaving the MPC to decide for itself when, if ever, specific information on intervention will be released (the implied movements in the Bank’s fx position come out more than a month later, and even then without comment of explanation).    At present, there probably is not much practical importance attaching to this point, but the system should be started as we mean to go on.  Much better to have insisted that all market intervention (size and nature, although not counterparties) should be disclosed within 10 days of such intervention.  Apart from anything else, these are big financial risks the taxpayer is (given no choice in) assuming.

My final observation on the charter offers kudos to the Minister.  There has been a great deal of talk about the need to seek consensus (which is still in the charter) and the claim had been made that this meant all MPC members should speak, if at all, with a single voice.  Bank management championed this (self-interestedly no doubt), despite the successful examples of countries like the UK, the US, and Sweden, and a year ago it seemed that they had persuaded the Minister of their view.  It was one reason why good people would probably have been deterred from applying for the external positions –  facing a built-in internal majority, and with no ability to articulate in public alternative perspectives, it wasn’t obvious that the positions offered more than sightseeing (looking at the innards of how the Bank works).  I’ve banged on about the issue for months, and I know others have also raised concerns.

And so imagine the pleasant surprise I got when I  got towards the end of the charter.

charter 3

I don’t have any particular problems with (a) or (b), although I can imagine some future disputes about what does and doesn’t contribute to the “overall effectiveness” of the monetary policy decision etc, since things that might muddy the water a bit in the short-term could easily strengthen the institution, and its accountability, in the medium term.  I also had no problem with (d) which is pretty much how Reserve Bank staff have operated for many years.

What caught my eye was (c), under which it appears that members of the MPC –  internal and external –  will be free to comment in public, expressing their own views on the economic situation, risks, and monetary policy.   On monetary policy itself, they are required to draw on official communications “as appropriate” –  and I’m sure they will, as appropriate.  But it doesn’t bind MPC members to agree with committee decision, or to endorse all the arguments the Governor himself might offer in support of the decision.  On the economy etc, they can say what they like (in substance) provided they do so politely  (as people typically do in transparent foreign central banks) and let their colleagues know in advance what they’ll be saying.  It is a material step forward relative to what we’ve been promised (although time will tell whether anyone, internal or external (and thus vetted for tameness by the Governor) ever utilises these provisions).

What is also interesting is some of the detail.  There is now an explicit written requirement that any off-the-record private remarks about monetary policy or the economic outlook have to be consistent with official MPC communications.  Presumably this also applies to the Governor (there is no suggestion it doesn’t) so if there are off-the-record expletive-laden rants at private commercial functions in future, at least they won’t be offering any insights on the economy and monetary policy.  Perhaps that Rotary Club advertising the Governor as offering candid perspectives on the New Zealand economy –  if you pay – will have to revise its plans?  More probably, the Governor probably won’t regard himself as bound by the rules.

And then there was the final sentence.  Any on-the-record remarks (occasions at which they will be made) will have to (a) notified to the public in advance, and (b) with full text on the Bank’s website in real-time.   In principle, this looks fine and sensible (although it is far from what has been practised by management up til now).  In practice, it will prevent MPC members giving interviews, and appears designed to ensure that the only communications are speeeches with written texts to which MPC members adhere closely.  But, again, there is no suggestion that these rules don’t apply to the Governor –  and his views are inevitably most market-moving.   So can we look forward to an end to off-the-record speeches from the Governor on matters of substance, and to wild departures from the prepared and published text.   After all, as the document says, MPC members shouldn’t provide, or look as though they are providing, new information to private subsets of people.     (Personally, I suspect the document goes a little too far.  It would probably be unfortunate if, say, the Governor cannot (as the document appears to suggest) give an interview to, say, Morning Report or one of the main current affairs programmes, so long as there is adequate public notification as to when and where he will be speaking.)

As I’ve said on various previous occasions, I’m pretty ambivalent about the monetary policy legislative amendments, and particularly about the MPC, which looks set to be a Governor-dominated creature, not too different in effect from what we’ve had for the last 29 years.  But credit where it is due.  There are some welcome aspects in the details of today’s announcement and I, quite honestly, hope the new system works better than I expect it to.    Who knows, the less closed nature of the rule may even help attract a better class of candidate to consider the MPC position.

For now, of course, we are still left guessing who four of the seven MPC members will be.

Looking towards the new MPC

Next week will bring the first Reserve Bank Monetary Policy Statement of the year. It will be the last –  after 29 years – prepared solely on the responsibility of a single individual, the Governor.     He gets to make one more OCR decision on his own and then on 1 April the new statutory Monetary Policy Committee –  established under legislation passed just before Christmas – takes over.   It is an apt date given that the new regime is designed to have the appearance of being a significant reform but is in fact likely to do little to reduce the undue dominance of a single unelected official, the Governor.   In this case, a Governor who after almost 11 months in office hasn’t managed to make a single on-the-record speech about what is still (for a few more weeks) his primary function, monetary policy (and the associated cyclical economic position).

The first OCR decision to be made by the new Monetary Policy Committee is not scheduled until May, but we can expect some important announcements in the next couple of weeks.

Under the amended legislation, there is a raft of new formal documents required.

The most important of them is the “remit”.   This replaces the Policy Targets Agreement framework, and is the mechanism that tells the Monetary Policy Committee what specific targets to pursue.

On an ongoing basis, the remit will be set directly by the Minister of Finance –  it won’t need to be agreed by the Governor or the MPC.   The Bank will have to provide advice about the possible content of the remit, and in providing that advice the Governor is required to (a) consult with the MPC, and (b) seek input from members of the public.

But those provisions don’t apply at all to the first remit.  Under the legislation, the remit is required to be agreed by the Governor and the Minister, with no input from either the public or the MPC members.  It is also supposed to be published within two months of the royal assent having been given to the legislation, which means it will almost certainly be published by 20 February.  (There is provision for the Minister to issue a remit directly if the Governor and Minister can’t reach agreement in that time, but that seems very unlikely –  it would be in neither side’s interest to allow it to happen, even if there were some differences between them.)  As there have been no hints suggesting, or preparing the ground for, anything else, I expect the first remit will have substantive content very similar to the existing Policy Targets Agreement signed when the Governor was appointed last year.

The second new document is the “charter”.  The charter is supposed to cover issues around transparency, accountability, and decisionmaking procedures for the MPC, and is required to include provisions around recording and publishing minutes of meetings.  On an ongoing basis, the charter is agreed between the Minister and the MPC as a whole. But the first charter –  which will set the terms for how the MPC first operates, and as the default operating model will be hard to deviate from  –  is to be implemented simply by agreement between the Governor and the Minister.  It is also supposed to be published by 20 February.  There is no public consultation, and no consultation with MPC members either –  who haven’t been appointed yet. They will, presumably, just be offered a “take it or leave it”.   We know the Minister’s predilections in this area –  highly summarised minutes only –  and the Bank’s previous biases against any sense of individual accountability or responsibility –  but it will be interesting to see how restrictively the document is worded. I’m not optimistic.

The third document is the “code of conduct” for the MPC (particularly as it will affect the external part-time members).  This is approved by the Bank’s Board, rather than the Minister.  It also has to be published by 20 February.   In fact, the Bank (the Governor) –  the only people allowed input here –  was required to prepare the code and submit it to the Board by 20 January.   I presume that what emerges will be reasonably sensible, but there was considerable work needing to be done on the draft code of conduct that was around at the time the Board was advertising for MPC candidates last year (when, as I recall it, activities like writing a blog or newsletter on matters macroeconomic would not have been a problem).

So within the next two weeks, we can expect to see that suite of documents published.  Even if they aren’t released before the Monetary Policy Statement next week, it would be reasonable to expect the Governor to be asked about them at his press conference.  After all next week MPS (whatever the talk about future monetary policy) isn’t at all binding about the future: the decisionmakers will ( in principle) be different, and so will the rules under which they will be working.   In principle, the transition to a new regime ushers in a period of some greater uncertainty about monetary policy decisions and (in particular) around monetary policy communications.

The biggest uncertainty, however, is about the membership of the Monetary Policy Committee.  You will recall that under the new legislation there is required to be a majority of internal (executive) members.  Indications have been that there will be four executive members, and three part-time non-executive members, plus the Treasury observer.   These appointments are formally made by the Minister of Finance, but he can only appoint people nominated by the Bank’s Board, and they in turn are likely to be heavily influenced by the Governor (who is a member of the Board, and the only Board member who knows anything much about monetary policy).

Even on the executive side, there is some uncertainty.  The Governor will be a member, and chair, as we can safely presume will the Deputy Governor, Geoff Bascand.   The newly appointed Assistant Governor for monetary policy and financial markets, Christian Hawkesby, seems certain to get one of the appointments (he’d hardly have taken the job without that sort of assurance), and the fourth slot is likely to be reserved for the chief economist.  The Bank is advertising that position at present, and unless there is an internal appointment it might be a stretch to even have someone in place by  1 April.   Under the new legislation, there is also a non-voting Treasury observer.  Since Gabs Makhlouf leaves office in a few months, that is additional (minor) source of uncertainty around how the MPC will function.  We wouldn’t expect the Secretary to have enough time to spare (or regard it as a priority) to take the role themselves (although in the transition Makhlouf has), but we also don’t know who will be nominated and quite what role they will play.

And what of the non-executives?  As I’ve noted before, these are positions that involve a significant commitment of time (they advertised for 50 days a year), and yet there will inevitably be quite significant constraints on what other activities such appointees can take on, and 50 days out at the Reserve Bank doesn’t fit easily with most other full-time jobs.  New Zealand government boards and committees don’t typically pay that well either.  But the biggest obstacle to getting decent people, who will be able to make an effective contribution, is the neutered nature of the role.     The non-executives will always be a minority of the committee.  They won’t, we are told, be able to give speeches or interviews about the economy or monetary policy (unlike, say, peers in the UK, US, or Sweden). They won’t, so far as we know, have any dedicated research or analysis resources –  and at one stage last year the Governor was talking about how he didn’t want economists anyway.  And if they disagree with the majority view, they won’t even able to make their case openly, and have that identified dissent (and the reasons for it) on record.      And they’ll be appointed by the Board, with key input from the Governor, and we know that the Board has long operated to protect the Governor.  There is little likelihood that anyone remotely awkward will be appointed.  The sort of people who might actually add value are unlikely to be seriously interested, given the way the system has been set up.

And they face the executive members.   They work closely together all the time.  And each of them work for and to the Governor (who also controls salaries and internal resource allocation).  In fact, both Hawkesby and the new chief economist will have been directly and personally chosen by the Governor, a Governor not known for welcoming challenge or dissent.  It would be a surprise if the internal members don’t maintain a pretty solid bloc vote almost all the time.  If they were a group of people with compelling skills in economic analysis and policy that might usually work okay (if being less than ideal), but by the standards of many overseas central banks the executive team itself looks under strength.

It is still anyone’s guess who they will find for these positions. But I did have a response the other day to an OIA request I had lodged last year about people being considered for MPC positions.  I had the first part of the response last year, about the applicants, but this latest response was about the second part of my request, about people who the Board had taken more seriously.  This is what I got from them

Your 23 October request under section 12 of the Official Information Act (the OIA) stated a willingness to split the response into two parts if timing of the process made this necessary. The Reserve Bank provided a response to the first part of your request on 20 November. In the final part of your request you sought:

. . . information on the applicants for the external MPC roles, (as advertised, applications having closed on 7 Sept 2018):

  • the number of applications taken further (not just immediately set aside as clearly unsuitable/unacceptable by the Board or its agents;
  • the proportion of those applications taken further from (a) women (as best you can tell), (b) people currently resident in New Zealand, and (c) people currently employed at a university.

In response to the information requested in the bullet points above: nine applicants have been taken to the stage of final consideration. Of the nine, two are women, all are New Zealand resident, and one is currently employed at a university.

I was interested to learn that all those at the final stage of consideration for appointment are New Zealand residents.   There has long been a reasonable argument that the Reserve Bank could benefit from having someone from overseas on the committee, especially in view of the limited pool of potential high quality, available, candidates here.  It wasn’t obvious that the role would be particularly attractive, given the institutional design (see above) and New Zealand remuneration rates.  And so it seems to have proved.

Even with the weak statutory framework, the new MPC could have been a materially useful step forward, with a Governor and Minister who were seriously committed to greater openness and accountability, and a serious contest of ideas.  But, of course, if that were Grant Robertson and Adrian Orr, we wouldn’t have the law written as it is.  My working hypothesis has long been that the Minister and Governor want to have things look a bit different without actually being materially different at all.  Perhaps they will get one good external (at least first time round), but that person will either find it frustrating, or will just settle in to being a bit player, an honorary members of the Bank’s Economics Department.  Most likely, it will end up a lot like the system in place now for almost 20 years, when there have been a couple of part-time external advisers to the (internal) Monetary Policy Committee.  Most were business people – although a couple were trained economists –  who sat through all the meetings, provided business anecdotes and perspectives (some genuinely useful) but who had little real impact, and often found it all rather frustrating.   For them, at best it was probably an interesting experience, a diversion from the day job.  Even allowing for the statutory nature of the new positions, I don’t really expect things to be much different in future.  After all, like the current advisers, these new people will be selected at the Governor’s choosing, with a strong emphasis on “all working together”, while the Governor –  a Governor known for sounding off on all manner of things – is the only public face.

There are also some other unsatisfactory aspects of the new law.  The MPC is responsible for the content of future Monetary Policy Statements, but not for the new five-yearly reviews of monetary policy –  those are the Governor’s responsibility (surely any worthwhile review would primarily be done by outsiders, commissioned by Treasury or the Minister?).  And as I’ve noted before what the Act makes the MPC responsible for is drawn very narrowly.  It will work okay while monetary policy involves OCR adjustments, but it is much less clear that the MPC will have an effective (statutorily-based) say in the deployment of any unconventional instruments that may become necessary if the OCR hits the practical lower bound.  Parliament should have given the MPC responsibility for all matters relating to monetary policy, with the MPC able to then delegate to the Governor some operational matters.    They’d have done so if this legislation were much other than a cover for something little different than the status quo, where the Governor runs the show –  somthing like prosecutor, judge, jury, and appeal court in his own case.  In an open democratic society, no one individual should have that much untrammelled power, and certainly not an unelected person.

Perhaps some of you will be thinking that none of this much matters, as the Reserve Bank has done an adequate job.  Personally, I would dispute that –  and “adequate” –  shouldn’t be the standard we look for – but more importantly, I’d argue that key government institutions should be designed to promote substantive accountability, high levels of transparency, minimising single person exposures, and promoting the contest of ideas and evidence (in areas characterised by huge uncertainty).  These reforms look like just papering over the cracks.

This is one of those issues on which I’d like to be proved wrong. Perhaps I’ll be pleasantly surprised and a succession of high quality appointments will hope make these reforms one that make a real difference. But I’m not holding my breath.

(On another matter, scrolling for various websites yesterday I found someone linking to a post I’d written back in 2017.  I wasn’t quite sure why, but then I noticed that they were actually retweeting something from a Twitter handle called croakingcassandraredux.  Someone, unknown to me, has started a Twitter account describing itself as “Michael Reddell’s alter ego”, a “public service venture” intending to give a wider audience to my material by tweeting links to various posts.   I guess readers here have already found me, and anyone who wants can sign up to get the posts by email, but if the account is any use here is the link. )