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. )

 

Don’t legislate depositor preference

The government has underway a fairly comprehensive review of the Reserve Bank Act.  The first phase –  around monetary policy –  was pretty narrow in scope, rushed, and has resulted in not very good provisions now about to be legislated by Parliament.  I was always a bit sceptical about Phase 2, partly because of the way Phase 1 was handled and partly because the Minister of Finance had never displayed any particular interest in the issues.

But, for the moment anyway, I’m willing to revise my judgement.  Earlier last month a 100 page consultative document was released, the first of three as the Treasury and the Bank (aided by a somewhat questionable, secretive, independent advisory panel) work their way through the numerous issues involved in overhauling the Reserve Bank legislation and institutional design.

Yesterday, I attended a consultative meeting at The Treasury on the issues in the current document.  It was an interesting group of people and quite a good discussion, although even 2.5 hours is barely enough to do much more than scratch the surface on the wide range of issues in the document –  everything from the role of the Board to regulatory perimeter issues (including whether banks and non-bank deposit-takers should be subject to the same regulatory regime – most people seemed to think so).  Truly keen people can spend their summer preparing written submissions (due in late January).

What was striking –  part of what leads me to provisionally revise my view –  is just how much official resource is being put into this one review.  At yesterday’s meeting there were six members of the review team, and that wasn’t all of them –  and even they only report to their masters in the Reserve Bank and Treasury, many of whom will probably engage quite extensively on the issues. And the process has at least another year to run.  Despite having long championed the cause of reforming the Reserve Bank, I couldn’t help wishing that the same level of resource was being devoted to getting to the bottom of the causes, and compelling remedies, for New Zealand’s astonishingly poor long-term productivity performance.    There is little sign The Treasury has any resources devoted to that issue, the one that has the potential to make a huge difference to the lives of all New Zealanders.

But in this post I wanted to touch on just one specific issue that came up yesterday which surprised quite a bit and worried me quite a lot.   Chapter 4 of the document is devoted to the question of “Should there be depositor protection in New Zealand?”.  Of course, to the extent it adds in value at all, prudential regulation does help the position of depositors (reducing the probability of failure, and limiting the potential chaos if a major failure happens), but New Zealand’s legislation is unusual in that there is no explicit depositor protection mandate (the legislative goals are about the financial system, not individual institutions or their creditors).  Linked to that, we are now very unusual among advanced economies in having no system of deposit insurance.

I wrote about some of these issues, in response to a journalist’s queries, when the consultative document first came out.  But my focus then was on deposit insurance, and in particular on the realpolitik case I see for instituting deposit insurance, to give us the best chance that when a bank gets into serious trouble it will be allowed to fail, and its wholesale creditors –  the ones who really should know what they are doing –  can be allowed to lose their money.   Without deposit insurance, my view is that big banks will always be bailed out.  Perhaps they will even with deposit insurance, but by separating the interests of retail creditors from others, at least political options are opened.

But in focusing on deposit insurance, one thing I hadn’t really noticed in the chapter was the idea of providing depositors with additional protection by legislating depositor preference.  Depositor claims on the assets of a bank rank ahead of those of any other creditors.   Such a provision exists in the Australian legislation –  for Australian depositors.  It was a big part of the reason why New Zealand eventually insisted that Westpac’s retail business in New Zealand be locally incorporated (ie conducted through a New Zealand subsidiary).

To the extent I’d noticed the discussion of the depositor preference option, I’d assumed it was a bit of a straw man, there for completeness perhaps.  Surely, I thought, no one would seriously suggest that New Zealand adopt such a legislative preference.   But, going by the discussion at yesterday’s meeting, it seemed I was wrong and that officials are actually seriously considering this option.   They seem to see it as a complement to a deposit insurance scheme.  I think it would be quite wrongheaded.

In my incomprehension, I asked why  –  starting with a clean sheet of paper – anyone would think legislated depositor preference was a sensible route to consider.  The response seemed to be that it would be a way of reducing the cost of deposit insurance, and increasing the credibility of a deposit insurance scheme.  Both seem weak arguments, especially in the New Zealand context.

One argument sometimes advanced against deposit insurance is that in the event of a systemic financial crisis the cost could be so overwhelming that it would either over-burden public debt, potentially triggering a fiscal crisis, or lead to governments retrospectively walking away from the insurance commitment (simply legislating to not pay out).  In fact, we know that for reasonably governed countries that practical limits on the ability to take on new public debt are not very binding at all.   And we know that New Zealand has (a) very low levels of net public debt by advanced country standards, and (b) a banking system of only moderate size (relative to GDP) by advanced country standards.    Total household deposits with all registered banks are about $175 billion.  Not all of those would be covered by a deposit insurance scheme, even one that capped cover at a relatively high $200000.

Now lets assume something really really bad happens: banks lend so badly over multiple years that when the eventual reckoning happens loan losses are so large that 30 per cent of all bank assets are written off.   This would be absolutely huge –  far far beyond anything in Reserve Bank stress test, for beyond advanced country experience for retail-oriented banks.  But one can’t rule out by assumption utter disasters.  30 per cent of bank assets is currently about $175 billion as well.  There is about $40 billion of equity to run through, and then the creditors start bearing the losses.  Household deposits are about a third of non-equity liabilities, so in this extreme scenario the deposit insurer (and residual Crown underwriter) would face bills of up to perhaps $50 billion (a generous third of $135 billion of losses to be distributed across creditors and insurers).    And remember how extreme this scenario is: it assumes every bank in the system fails, and fails dramatically (not just slightly underwater), and that every household deposit is fully covered by deposit insurance.  In this really really bad, highly implausible scenario the bill presented to the depositor insurer is equal to less than 20 per cent of GDP.

Reasonable people can, of course, differ on whether deposit insurance is a good idea at all, just better than the likely alternative (my view), or something to be eschewed at all costs.  But in no plausible world would even a commitment of 20 per cent GDP overwhelm New Zealand public finances, or cast doubt on the ability of the New Zealand government to honour its obligations.   And none of this takes into account the likelihood that any deposit insurance scheme would be set up funded by insurance levies  Levy depositors, say, 20 basis points a year and you’ll be collecting (and setting aside) $350 million a year.  As I recall it, prudential policy (bank capital requirements) are currently set with a view to expecting systemic crises no more than once in a hundred years (the Governor the other day talked of extending that to once in 200 years).    If the really really bad systemic crisis hits in year 1, the government needs to borrow more upfront (recouped over time by the annual insurance fees).  If the really really bad crisis hits in year 150, there is a large pool of money standing ready, accumulated from those same annual insurance fees.

(Of course, in any scenario in which banks have lent so badly –  and regulators regulated so poorly –  that 30 per cent of all assets are written off, the economy is likely to be performing very badly for a while, and the public finances will be under some pressure anyway.  But those problems are there regardless of the resolution method chosen.)

The other argument I heard advanced for a legislated depositor preference is that it would reduce the cost of deposit insurance.    That might look like a superficially plausible argument, but it is almost certainly wrong in any economically meaningful sense.   Sure, if your bank is funded 50/50 by retail depositors on the one hand and wholesale creditors on the other, the chances that a deposit insurance fund will ever have to pay out to the depositors of that bank, in the presence of legislative preference, is very small (roughly speaking, losses would have to exceed 50 per cent of all the assets for depositors to be exposed to loss –  and thus the deposit insurer).    But if you don’t pay for your insurance one way you will pay for it another way.   If depositors have first claim on bank assets and all other creditors are legislatively subordinated, over time depositors are likely to earn lower interest rates than otherwise (less risk to compensate for) and other creditors more).   It might be hard to show this effect in the case, say, of the big Australian banks, but then no one seriously thinks the Australian government would do anything other than bail out those banks in the event of a crisis.  But we can see the pricing on existing subordinated debt issued by banks around the world – it yields, as you would expect, more than deposits.  It is much riskier.

Of course, it is true that legislating a depositor preference largely shifts the problem from the Crown balance sheet (underwriting the deposit insurer) to those of banks and their creditors.  That might look like a smart thing to do  –  internalising the issue and all that –  but in fact it is a subterfuge: trying to meet a public policy priority (depositor protection) by forcing banks to change their entire business model.  Much better to do things in a direct and transparent way: if you want deposit insurance, charge for it directly, and allow banks to determine how they operate their businesses (funding structures etc) given the insurance levies they face, and the market opportunities.  Doing so also operates more fairly – and efficiently – across different types of banks.  Depositor preference accomplishes nothing at all  in a bank that is 100 per cent deposit-funded, and such institutions should be competing on a competitively neutral basis with other banks with different mixes of funding.

In the consultative document, and again in the discussion yesterday, officials seemed to see a model in which wholesale creditors are exposed to more risk as a “good thing”, conducive to effective market discipline.  I’m with them on that point in so far as people -especially wholesale creditors –  who lend to banks should face a real risk of losing their money.  But depositor preference in effect says that the only way non-depositors can lend to banks is through instruments on which the losses mount extremely rapidly if anything goes wrong.  There is no good case for that (even if, as some do, you think it is reasonable to require banks to issue some tranche of subordinated or convertible debt).   It is a doubly surprising argument to hear mounted in New Zealand where for years –  and especially since 2008 –  we have been repeatedly reminded of the heavy exposure of our banks to offshore wholesale funding markets.   None of those holders has to take on exposure to New Zealand or New Zealand banks.   Legislate depositor preference and what you will do is to significantly increase the risk of those funding markets, for New Zealand, freezing, and yields on secondary market instruments going sky-high, at the first sign of any trouble, or even just nervousness.    Retail runs are one issue to think about, but as we saw globally in 2008 wholesale runs can be just as real, and perhaps more threatening (and lightning fast) –  I discussed the Lehmans story here.

I hope the legislated depositor preference option is taken off the table quickly.  It has the feel of clever wheeze intended to ease the path for deposit insurance.  Much better to make the case –  and there is a sound one –  for a properly funded deposit insurance scheme on its own merits.

On a totally different subject there was a surprising article in the Herald yesterday in which a former MPI official was discussing openly concerns held in 2008/09 about the potential financial health of Fonterra.   I was involved in this work at the time, working at The Treasury, and have always been a bit surprised that there wasn’t more open analysis of the issue at the time.  Just drawing on public information, the combination of:

  • a quite highly indebted cooperative,
  • largely frozen international credit markets (not just for banks),
  • highly-indebted farmer shareholders,
  • a model in which shareholder farmers could redeem their shares in Fonterra when their production dropped,
  • a drought the previous year (reducing production) and
  • low product prices, encouraging some farmers to further reduce production, and
  • the potential for some highly-indebted farmers to be sold up by their banks

was a pretty obvious basis for some vulnerability.    Fortunately, the particular extreme combination of risks never really crystallised.   One aspect of the 2008/09 crisis that was always interesting was –  in the words of one investment bank CEO at the time –  “one of the few markets that remain open is the New Zealand corporate bond market”.  That was because it was, and always has been, primarily a retail market, different from the situation in many other countries (reflecting regulatory differences).  In early 2009 Fonterra was able to run a highly successful domestic retail bond issue.  Subsequent changes to the Fonterra capital structure mean that in future serious downturns, redemption risk is no longer a consideration.  That, however, leaves more of the (liquidity) risk on farmers themselves.