Unfit to govern?

I’m presuming Stuff’s Kate MacNamara won’t be very welcome at the Reserve Bank for quite some time.

She was the author of the double-page spread in last week’s Sunday Star-Times about the Governor (“Portrait of the Governor as a strongman” – note that is one word, not two, and the difference is quite important).  I wrote about that earlier in the week.  As a reminder of some of that article, it included this

The video of the conference remains on the Reserve Bank’s website. Some reporters said they were stunned Orr would air his anger so publicly and called it bullying.

But other observers were not surprised. Details of Lubberink’s experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank’s plan.

“There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,” said one source who’s been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn’t agree with.

“I’m worried about what he’s doing.”

The source said some companies have “withheld submissions,” for fear of being targeted by Orr.

“They’re absolutely scared of repercussions. It’s genuinely disturbing,” he said.

and this, re the Governor’s approach around the bank capital debate

In the cut and thrust of the debate, Orr’s jokey style and everyman charisma fell away. In recent months he’s dogmatically insisted the cost of his plan would be minimal and has picked personally at critics in the media, academia, and the financial services industry.

He’s been variously described as defensive, bullying, and perilously close to abusing his power.

“He’s in danger of bringing scorn on his office,” said long-time industry watcher David Tripe, professor of banking at Massey University. “I used to know him well. I no longer feel so confident.”

The Governor was reported to have refused any comment when approached for that story.

MacNamara followed her story up with a detailed piece on the Bank’s staffing and the loss of a succession of highly-qualified and experienced researchers over this year.  Names were named –  people who probably hoped never to see their  names in the general media –  and specific information was clearly provided to the journalist from insiders and people still very well-connected to the Bank’s Economics Department.  The story listed the departure of seven capable researchers who had left in the last year or so (and, at that, missed another name).  Those are large numbers.   In my time at the Bank it would have been rare to have had more than perhaps 10 researchers across the (then) Research and Modelling teams.

MacNamara’s sources were clearly keen on promoting a narrative of a hugely important and influential research function.  One might perhaps say, if only.  I have a high regard for several of the people in the list of the departed.     But the Bank’s key policy initiatives in recent years, whether in monetary policy or financial regulation, didn’t stem from, and were rarely directly supported by, good quality research generated by Bank researchers (there was some good work done, but often fairly tangential to the Bank’s immediate interests/needs).   The sources were also apparently keen on recently departed, having been effectively demoted, former chief economist John McDermott.  I have been on record as believing that Orr’s decision re McDermott was one of the better he has made, and as senior manager in charge of the research function McDermott has to take responsibility for the limited relevance of the research function over the last decade.    Even the Bank’s macroeconomic analysis was pretty underwhelming over much of that period.  All that was under previous Governors.   I’m critical of Adrian Orr for many things, but he can’t be blamed for that (whatever mix of factors played a part in the individual choices of the researchers to leave – and several of those who left were foreigners who had probably never seen their long-term future being in New Zealand).

The Bank must have been taken aback by MacNamara’s forthcoming story

A Reserve Bank spokeswoman said she could not answer quickly questions about staff departures and replacements.

She was unable to say how many staff with graduate degrees in economics or finance have departed in the last 18 months.

Neither could she tally immediately how many staff have joined in that time with similar academic credentials.

Pretty bad staff work, given that they must have known this issue was a point of vulnerability –  even the Annual Report had included a table showing high total staff turnover –  for which they should have been prepared.    Since the Bank publishes a page with details of their Economics Department research and analysis staff, it only took me a few minutes to run down the list and find several new PhD staff the Bank had hired relatively recently (albeit, by the look of it, only one with any knowledge of New Zealand).   It shouldn’t have been hard for the Bank to have got that information to the journalist.

(The article is mostly focused on the Economics Department, and although the journalist attempts to draw connections to the Bank’s poor performance around the bank capital proposals that is a bit unfair to the Governor – only rarely have Economics Department research staff had anything much to do with financial regulatory issues. Maybe it would be better if they did –  I used to argue for a broader focus (ie some actual research around the regulatory functions –  but the choice not to also long pre-dates Orr.  The absence of these particular researchers will have made little or no effective difference to how the bank capital proposals were made and marketed –  those choices were the Governor’s.

The sources who spoke to MacNamara were clearly also keen on PhD qualified staff.  The story highlights that there is no PhD held by anyone in the top-tier of the Bank (first time since 1988 I think), and repeats the contrast between the qualifications of McDermott and his replacements (new chief economist, new Assistant Governor).    Personally, I think this issue in considerably overdone.   Qualifications are not without value, of course, but research qualifications only take you so far in managing and leading a public sector policy organisation.  As I’ve pointed out, over the last 40 years the Bank has had 10 chief economists, only four of whom had PhDs, and at least on my reckoning both the best and worst of them had PhDs.   During the period when the Reserve Bank of Australia was widely-regarded as one of the best central banks in the world, it was led by people with much the same sort of academic qualifications as, say, Adrian Orr.  The presence or absence of a PhD at the top table is not what gave us a rushed, over-reaching, capital proposal with no ex ante cost-benefit analysis.  That is much more about the temperament and character of the Governor (and his right hand people who clearly weren’t willing or able to insist on something better).  In fact, the chair of the Bank’s Board not only has a PhD but is a university vice-chancellor no less, and he claims (in the recent Annual Report) that all is just fine at the Bank.

In many respects I don’t disagree with Eric Crampton’s concluding comment in the article

Eric Crampton, chief economist at the public policy think tank The New Zealand Initiative, said it mattered more in a small country like New Zealand that the Reserve Bank has internal research depth.

“There are very few academic macroeconomists and monetary theorists who pay much attention at all to New Zealand policy. There are, at most, a small handful who do.

“That means that having some of that serious firepower in the Bank matters more,” Crampton said.

Except that, in reality and in other countries, research depth inside and outside the central bank tend to be complements rather than substitutes.  And there is little point in having much of a research capability if it isn’t used to support robust policymaking and analysis. It hasn’t been for some time at the Bank, and that is mostly a reflection on a succession of senior managers and Governors (now including Orr), not on the staff involved.

The real prompt for this post was when, by chance, I noticed a statement from the Bank on its website, apparently released with no fanfare yesterday.  Here is the whole thing.

integrity.png

Get the sense Orr is feeling a bit embattled?

But instead of fronting up to, say, Kate MacNamara we get bluster and distraction (and this common confusion –  often found among senior public servants these days –  about the name of the country).

No one criticised their individual staff.  If there are criticisms to make they are of the leadership itself, mostly that of the Governor –  both because he is chief executive, and because he has a long track record of surrounding himself with people who will do his bidding and not challenge him.

See how the Governor suggests that the Bank somehow has a higher capacity for identifying what is good for New Zealand (yesterday, today and forever) than others, or even that they have a mandate to do so (they don’t).

See his claim that he holds “informed and mature conversations”, and contrast that with, for example, the rushed way they put out the bank capital proposals, the backfilling they had to do as the year went on, the refusal to engage on the substance of any concerns/challenges, the attempts to slur critics and regulated institutions alike, and those descriptions above of Orr’s “angry weekend phone calls” and the like.  This is the same Governor who has not given a single substantive speech on either of his core areas of policy responsibility in over 18 months in office.  It would be unheard of in any other other advanced democracy.

It is past time the Minister of Finance took the situation in hand. He is the one actually accountable to the public for the Reserve Bank.  He needs to be asking the Board chair and the Governor just what is going on, and why they are content for bluster to substitute for serious analysis and considered engagement –  not from staff, but from the Governor himself.   The problems at the Bank are at the top –  Board, Governor, and a weak senior management team –  not among the staff.   The Governor’s statement is an attempt at distraction, trying to suggest he is sticking up for staff (who don’t need it) when the problems start with him (and those paid to hold him to account).

Bluster shouldn’t be able to substitute for serious accountability.

 

 

 

 

 

The NZIER Economics Award: creative writing

An Eric Crampton tweet earlier this week brought the news that former Reserve Bank chief economist John McDermott had been awarded the NZIER Economics Award.

John was my boss for six years or so.  We sat across from each other and exchanged notes on all sorts of things, including our (then) young families, which has always left me a bit hesitant about writing about him.  But when you hold a high profile, influential, public position you have to be open to challenge and scrutiny.  My summary: nice guy, wrong job (notwithstanding the Yale PhD).

The NZIER award, typically offered annually, used to be a high profile, and quite lucrative, thing –  Qantas were sponsors and, from memory, there used to be a decent airfare on offer.   It has been awarded for 25 years now, and the list of past recipients is, in many respects, a moderately impressive one, at least by New Zealand standards. It isn’t clear what the selection criteria are, but winners have been drawn both from academe and from “the great and good” officeholders more generally.   There is, perhaps, a hint of the establishment looking after its own  (it isn’t obvious for example what Paula Rebstock has done for or with economics), but perhaps that isn’t very surprising from such an establishment body as the NZIER, and when the Governor of the Reserve Bank and the Secretary to the Treasury have representatives who make up two of the six person selection panel.  There are a few surprising omissions, even among establishment figures.

Since the selection criteria are unknown, it is hard to tell whether the McDermott award is really justified.  Of those who weren’t primarily academics up to when they received the award, all of them seem to have run something (Suzi Kerr founded Motu and Brian Easton was head of NZIER for a time), while McDermott only ever held a second-tier position, albeit as manager in charge of one of the larger groups of economists in the country.   He has published some research –  I recall him telling me a few years ago that some work he’d done in his youth at the IMF meant he was still the most-cited economist in New Zealand –  but most of it was a long time ago.

Having said that, the reason for this post isn’t really to question whether McDermott should have received the award, although with two of his former staff (including his successor) on the selection panel there is the risk it could be seen as something of a consolation prize, McDermott having been somewhat sidelined and demoted by Adrian Orr last year, prompting his departure from the Bank.    But if the establishment want to give each other baubles –  even as the New Zealand economy continues its long-term underperformance –  I’m not really going to quarrel much.

My problem is with the citation which seems to be an almost entirely imaginary recreation of history.  Whoever wrote it doesn’t know what they are talking about –  or, just possibly (since the Bank’s chief economist is on the committee) did but made stuff up anyway.  It starts this way

Dr John McDermott has been the foremost macro-economist in New Zealand policy circles for at least the past decade.

Perhaps, but there are slim pickings.   And one might reasonably expect the chief economist of the Reserve Bank –  in its monetary policy responsibilities, a macro institution –  to be counted thus, at least if (as in this case) successive Governors and Deputy Governors didn’t qualify.    After all, “foremost” doesn’t mean “best” or “most productive”, “most insightful” or “most challenging” but

“most prominent in rank, importance, or position”

Thus far, the award seems to be for turning up to his well-remunerated job.   But it goes on

He was Chief Economist and Assistant Governor at the Reserve Bank of New Zealand from 2007 to 2019. Over this period, John has been a beacon in ensuring that economic rigour is brought to bear on policy formulation.

I just cannot believe that anyone around the Reserve Bank over that period could say that stuff (“beacon” etc)  with a straight face.   It just wasn’t so, whether on monetary policy or in the other areas of Bank policy (where, as Assistant Governor, he sat on the key advisory committees).   On monetary policy, in particular, I’m not wanting to suggest that he was opposed to rigour or anything of the sort, but there was simply nothing very distinctive about the voice he brought to the monetary policy table, or to the analysis/advice that staff provided.  A few years ago, a former colleague noted to me that –  now outside the Bank –  he’d been digging into old Monetary Policy Statements and that what was noticeable was how mechanical they had become (this over John’s time).

On the other areas of Bank policy, John might as well not have been there.  Perhaps things changed in his last few years, but for years we both sat on key internal committees responsible for financial system oversight, macro-financial policy, and the Bank’s own balance sheet.   John might as well not have been at them –  and frequently bemoaned having to attend (some of the FSO papers were really pretty dull).  When LVRs were first in the wind, for a while he refused to believe the Governor was serious, and then was more interested in closing down any criticism or attempts to improve the supporting analysis (probably more as His Master’s Voice more than from his own preferences) than in leading the charge for rigour.    Sure, he had a busy management role in his own department………but contributions beyond that are largely imagined.

Then we get the GFC puffery

John began his senior role at the Reserve Bank of New Zealand just prior to the onset of the Global Financial Crisis. It is difficult at times such as this to draw on experience of prior crises because, by nature, crises are rare and each differs from the one before. It is at times such as this when a combination of a deep understanding of economic forces plus common sense is required. The team at the Reserve Bank, led by Dr Alan Bollard and supported by the macroeconomic expertise of John McDermott and his colleagues, ensured that the GFC impinged only marginally on New Zealand (relative to most other countries).

Um….there wasn’t a financial crisis in New Zealand, we had a fairly deep recession and a slow recovery, and on the monetary policy side the Bank –  a little belatedly –  did what it had to do, and cut the OCR dramatically.  It is what inflation targeters do.   Liquidity support measures weren’t led from the Economics Department –  former chief economist and then Deputy Governor Grant Spencer led those functions – other interventions were led from The Trasury, and if anything John’s Economics Department was slow to recognise the seriousness of what was unfolding abroad (in late 07 and early 08). John himself in mid-2008 was still more worried about rising inflation expectations.   I think Alan Bollard deserves a fair degree of recognition for that period-  but he has already received the NZIER award.

Then we get onto research

John’s contributions have shone through not just in his direct contributions to policy-making (such as during the GFC) but also through his championing of economic rigour amongst his colleagues within the department that he led at the Bank. Policy-relevant research from experienced colleagues such as Ozer Karagedikli and Christie Smith are relevant examples.

I hope Ozer won’t mind me saying so, but this is pretty extraordinary stuff as mostly he and John didn’t get on that well, and I recall plenty of management meetings with John bemoaning Ozer’s contribution (which personally I thought was pretty significant, and his departure abroad recently is a significant loss).

More generally, the Bank’s research function has constantly struggled for viability and regard from the Bank’s senior management, even though the chief economist himself had a strong interest, and past experience, in research.    John should have been able to shape the flow of research product, and shape the interests of the senior management customers, in a way that made a more secure, and central, place for good quality research, whether on macro or financial regulatory issues.    But he didn’t.

More specifically, if one looks back over the 12 years McDermott was chief economist it is hard to spot any really influential New Zealand specific research generated by the Bank.  I’m not saying there was not some good stuff done –  some overseas awards were even won – but there is no distinctive and insightful Reserve Bank take on, for example, inflation processes over the last 10 or 15 years, the conduct of monetary policy, or really anything or the sort.

And is there a single compelling insight –  whether from speeches, press conferences  comments or whatever –  that one associates with McDermott?    An Andy Haldane or Ben Broadbent he hasn’t been.

As we get towards the end of the citation, the gush only flows more freely

John’s academic credentials are undisputed. What sets him apart from many of his highly trained academic colleagues is his ability to bring those academic credentials to play in shedding light on real world problems facing central bankers and other macroeconomic policy-makers.

John has set an example to colleagues and institutions alike: top class economists can make very important contributions to real world policy-making, while good economic policy requires the input of rigorous thinking from excellent economists. John has set a very high standard over an extended period showing how this match can work for all concerned.

They are almost unrecognisable descriptions, better suited perhaps to the creative fiction department, or a volume of hagiography.

I could go on.   I think John had a degree of genuine intellectual curiousity, and he read fairly widely.  But too often –  apparently under pressure from above – he became an agent for shutting down debate or discussion (internally) rather than opening it up.   And, as I’ve noted here previously, his speeches tended towards the ponderous, rarely offering any particular insight.  If his instincts were sometimes sound –  if perhaps not when he was championing a 50 basis point OCR hike in late 2011 –  he too often found himself not shaping the organisational view but forced to parrot the gubernatorial line.

And for all the talk of insight and rigour, wasn’t John responsible for the forecasting function of the Bank that provided the underpinnings that led the Reserve Bank into two post-crisis tightening cycles, both of which had to be fairly quickly unwound?   Was there any evidence that this was going against John’s best insights or endeavours?  Not that I observed?   Even late in his term, did anyone reading Bank material have a real sense that the Bank –  with John supposed to be at the intellectual forefront –  was breaking new ground, was ahead of the pack in understanding quite what was going on with the economy?

Oh, and when it comes to shutting down debate/discussion/criticism, I was being reminded yesterday of John’s part in the Toplis affair.    You might recall that in 2017, Graeme Wheeler took offence at some critical commentary on the Bank’s monetary policy by BNZ economist Stephen Toplis.  All sorts of things bother chief executives, but in the circumstances, the role of the Bank’s chief economist (and the rest of the senior management) should have been to get the Governor to see sense, to calm down, and to recognise that debate and strongly-held differences of view are part of being in public office.  Instead, McDermott allowed himself to be actively used by Wheeler in attempts to put pressure on Toplis, both directly and through pressure on the BNZ itself, to shut him down, and get him to stop being so critical.   I’m told that McDermott’s managers were all cheering on this effort, so there is no sign that he was even a reluctant participant.  In someone who had themselves been a trading bank chief economist, it was particular disappointing and inappropriate performance.    But across his entire term, he functioned more as His Master’s Voice (really why he’d been hired –  as safe) rather than as the sort of intellectual or policy leader the NZIER citation makes out.  He wasn’t even a champion of greater openness or transparency –  and I will always remember the complaints about independent voices on Monetary Policy Committees (he had a particular aversion to Lars Svensson’s –  correct –  opposition to the premature Swedish tightenings).

If there really was a heyday for Reserve Bank research, intellectual ferment, and policy leadership it probably dates back several decades now to the time of Roderick Deane (an early recipient of the NZIER award).   The last decade wasn’t disastrous – at times there were good initiatives, at times good people –  but the legacy of McDermott’s term (whether in people, policy outcomes, policy analysis, or Bank reputation) isn’t one that looks as though it warrrants anything like the creative puffery in this citation.

The award seems like a rather sad reflection on the diminished state of the New Zealand economic policy institutions.

As for Eric, with a bit of feedback from a correspondent (not me) he has now revised his view (the last sentence of that tweet at the start of this post).

Monetary policy speeches and conferences

This week marks 17 months since Adrian Orr took office as Governor of the Reserve Bank.  In that time, there has been not one consequential on-the-record speech from the Governor on the areas of his core responsibility: monetary policy and financial regulation/stability.  It is a quite extraordinary record.  It is probably not matched by any of his predecessors for decades, if ever –  and for the most of the period prior to 1989 Governors had little formal power, and thus perhaps there were fewer expectations about scrutiny/accountability etc.  It is all the more puzzling in an individual who doesn’t seem shy of the limelight on other matters and who, if the substance is often lacking, is never short of a good turn of phrase.

The Governor currently wields great power personally, and alone, on bank regulation.  The bank capital review is proceeding, and yet we’ve had not a single speech from the Governor about this most consequential judgement that he alone will take –  nothing, for example, on his framework for thinking about the issues and risks, nothing about key uncertainties, just nothing.

On monetary policy, legal responsibility is now shared around a bit.   There are now three external (part-time) MPC members, and not a word has been heard from any of them. whether in interviews or in speeches.  There have been a couple of sets of remarks by Assistant Governor, Christian Hawkesby, but it looks as if central bankers have to leave New Zealand before they are allowed to give speeches: both sets of panel remarks were to groups of central bankers at overseas conferences.  Of the first of those, I noted

it was disappointing, to say the very least, how much political spin suffused the speech, and how lacking in analytical substance it was. 

The more recent effort was better, but still with little to suggest senior people with a really good grasp of the issues and challenges, or willing to make themselves accountable for their analysis and reasoning.

Oh, and you will recall the Bank’s apparent reluctance to engage openly on any of the issues, or work they are undertaking, around potential issues and options if the OCR reaches the effective lower bound (on current laws and technologies).

And all this while they repeatedly try to tell us how open and transparent they are.

On Friday a press release from the Reserve Bank dropped into my email inbox.    The subject line was, no doubt, designed to impress

RBNZ and IMF join efforts on the future of inflation targeting

The Reserve Bank –  constantly complaining it is short of money –  and the International Monetary Fund are, we were told, this week hosting an international conference (“delegates from around the world”).  There was LOTS of enthusiastic rhetoric.

From the Reserve Bank

While inflation targeting has had a history of success in delivering low, stable inflation and substantial macroeconomic stability over the past several decades, the last 10 years have proven to be challenging for monetary authorities.

RBNZ Assistant Governor and General Manager of Economics, Financial Markets and Banking Christian Hawkesby says: “We are now faced with stubbornly low inflation and low interest rates, driven by structural and cyclical factors. If monetary policy is to be successful for a further 30 years, we need to confront these challenges.

“This is what this conference is about — understanding the big questions about inflation targeting and considering how we need to adapt to continue being as successful as possible.”

And from the IMF

The IMF’s Director of the Office for Asia and the Pacific, Chikahisa Sumi, says that the conference is a timely event.

“New Zealand pioneered inflation targeting three decades ago. Most recently, the RBNZ has again been among the pioneers in the central bank community when revisiting its monetary policy framework.

“Discussions about these frameworks currently happen not only in advanced economies but also in many emerging market countries. This conference is happening in the right place, at the right time, and with the right participants.

“We are delighted to work closely with the Reserve Bank of New Zealand in providing this opportunity for experts from both advanced and emerging economies to share and gain cutting-edge insights about the future of monetary policy making.”

Which all sounds rather impressive, even if one couldn’t help wondering about exercises like this going on behind closed doors –  rather than, say, open speeches – as they debate things safely with those on the approved list.

And yet for all the fine rhetoric, the conference programme –  there was a link attached –  didn’t really seem to match up.   Once again, the Governor isn’t speaking.  Neither are any of the external MPC members.     There are eight quasi-academic papers being presented, only one (on a non monetary policy topic) by a relatively junior Reserve Bank researcher (who is also the only Reserve Bank discussant).   Perhaps more interestingly, despite all that talk about “confronting the big questions about inflation targeting”, not one of the eight academic papers looks as though it is likely to do anything of the sort (judging by the titles).  There are a couple of panel discussions in which the Assistant Governor and the Deputy Governor are participating, but an hour and four panellists suggests something more akin to once-over-lightly  – even if important issues might get briefly mentioned –  than in-depth scrutiny.

Remarkably, as the advanced world is now in a renewed easing phase, and the worrying scenario of going into a new downturn with little or no conventional monetary policy capacity is now an immediate issue, not a single paper at the conference looks to be addressing any of these issues, or whether (for example) differently-specified targets might have avoided the current predicament or might help emerge from it.

In sum, it looks as though they will be spending a lot of taxpayers’ money on a series of very detailed papers, looking at issues of (at best) second-order importance, while trying to spin the conference as something “cutting edge about the future of monetary policy making” when there is little sign of it being anything of the sort.  In that respect, the conference –  despite the hype –  looks like a pallid imitation of one held here five years ago that really did attempt to address at least some of the bigger-picture issues.

I was intrigued by the IMF Director’s comment

This conference is happening in the right place, at the right time, and with the right participants.

Dissidents, critics, and sceptics seem not to the “right participants”, but I have lodged an Official Information Act request with the Reserve Bank to find out who was invited and who has accepted the invitation.

For New Zealand, it is hard not to think that a more open forum, engaged with the specifics of the New Zealand economy, and the issues and options facing policymakers in New Zealand (informed, of course, by overseas experience) would have been a better, and more legitimate, use of public money.    Perhaps even a speech on monetary policy by the Governor.

 

Appointing an MPC: worse than Trump?

Interest.co.nz had a story yesterday picking up on the Official Information Act releases (from the Minister and from the Board) I wrote about the other day about the appointment of the members of the new Monetary Policy Committee.  The story focused on the weird decision to exclude from consideration “any individuals who are engaged, or who are likely to engage in future, in active research on monetary policy or macroeconomics”.     This wasn’t just a hypothetical: at least one person who could have been quite suitable for the MPC was actively turned away on these grounds.

The tweet promoting the story sums up reaction quite well

One measure of how crazy this is, is that Don Brash has been willing to comment on the record.  Whatever else he talks openly about, Don has generally been very careful not to comment much about Reserve Bank matters since leaving office as Governor, and he is the chair of a bank the Reserve Bank (prudentially) regulates.  And yet this time he has spoken out.

“One would’ve expected the members of the MPC to be experts in monetary policy, or at least macroeconomics more generally. It seems quite extraordinary to exclude people who would have that kind of expertise…

The claim has been that the issue here is about “conflicts of interest”.   Conflicts of interest were, and always will be, a real and important issue to consider in putting together an MPC.   We couldn’t, for example, have as an MPC member someone who was advising clients on monetary policy and macroeconomics, or who was actively trading financial markets themselves.  I hope all the MPC members have suitable stand-down periods written into their terms and conditions that mean that members can’t leave the MPC one day and turn up advising a bank or hedge fund on New Zealand monetary policy a very short time later.

But “conflict of interest” is one of those labels that is sometimes flung around loosely, as a weapon against people someone is trying to exclude, without sufficient calm deliberation as to the specific nature of any alleged conflict.    There is simply no conflict of interest involved in having someone on the Monetary Policy Committee who is doing, or is likely to do, active research in monetary policy or macroeconomics.  In fact, it would be highly desirable to have at least one such person on an MPC.  It isn’t a conflict so much as a natural complement.

There might, appropriately, be rules about such a person not being able to, say, sell their research findings to a hedge fund or an advisory firm.  There might, appropriately, be rules about them not trying to trade the research results (in the unlikely event that the research results were that good.  That would be no different than (see above) prohibitions on selling advice on related issues.  And any (external) member of the MPC should have no better access to –  or ability to use for research –  Reserve Bank data than any other researchers.    But actually having someone on the MPC who was thinking and writing about monetary policy and macroeconomics –  whether quantitatively or through other approaches – would normally be a plus rather than a minus.

In truth, there aren’t that many people in New Zealand who would fit the description (researching now, or likely to in the future, monetary policy or macroeconomics), but that isn’t really the point (and overseas people with such expertise should have been able to have been considered for at least one slot).  One of the old arguments against a committee was that it would be hard to fill it: harder still (with capable useful people) if you rule from the start people actively engaged in thinking and/or writing about the issues.

And it isn’t as if the management majority on the MPC is so stocked with monetary policy or macroeconomic expertise and experience that any more might simply be redundant (although diversity of view and perspective, and informed challenge, would be valuable even then).   Of the four internals, probably only the Governor has ever done anything that might reasonably be called research on monetary policy and macroeconomics, and that will have been the best part of 20 years ago.

In a comment on my earlier post someone (whom I deduce to have been a former Reserve Bank staffer) noted

A former colleague used to say that if Bernanke, Yellen, Williams, Orphanides, Bean, Forbes, Posen, Pagan or Gregory were Kiwis they would have stood no chance for a role at the RB. I started agreeing with him more.

That covers the Fed, the ECB (central bank of Cyprus), the Bank of England, and the RBA. And it isn’t even remotely an exhaustive list of the people serving on decision-making monetary policy committees in the last few decades (whether in executive or non-executive roles) who would have been excluded on the bizarre criteria the Minister and Board have cobbled together.

There is a list of all former UK MPC members here, and the sort of people Robertson, Quigley and Orr would have excluded would include (in addition to those in the quote above) (and still non-exhaustively) Charles Goodhart, Willem Buiter, Sushil Wadhwani, David Miles, Danny Blanchflower and, of course, Andy Haldane.    Lars Svensson (and a bunch of other who served at the Riksbank) would be excluded.    So too would Alan Blinder (former vice-chair of the Fed), Stan Fischer (another former vice-chair and former Governor in Israel) Ric Mishkin, Jeremy Stein and, just of the current FOMC and alternates, John Williams (president of the New York Fed) and several others.    It is simply an absurd stance.

One measure of the absurdity is that Donald Trump –  hardly a byword for trust in expertise –  hasn’t applied the same sort of standard.  One of his latest two nominees to the Board of Governors is Chris Waller, Director of Research at the St Louis Fed –  who had a new empirical article out on monetary policy just a couple of months ago.  Earlier Trump sought to nominate Professor Marvin Goodfriend, an active researcher on monetary policy issues (and often more “hardline” than the Fed).  It is the sort of standard people generally expect to be applied –  not all active researchers by any means, but nothing like the sort of Robertson-Quigley-Orr (RQO) blackball  – when it comes to the monetary policy decisionmaking body.

By the RQO logic, you wouldn’t anyway actively engaged in monetary policy research as one of the internal appointees either.  Which would be equally absurd.  Just as well, I suppose, as none of them are, but in most central banks –  with four internals on a committee –  you’d probably expect at least one would meet that standard.

What do the Minister and Bank have to say for themselves?

Here is the Minister’s take

Robertson admitted: “It was a difficult balance to strike and we certainly had conversations about where it should lie.

“The idea is that we want the person to be able to focus on the MPC work; that we’re not looking for a lot of public comment on that work.

“It’s where you draw the line between somebody’s professional working life and commenting on aspects of the economy or aspects of monetary policy that the Committee would be considering.”

Robertson didn’t accept the argument those with the skills to be on the MPC were the sorts of people highly likely to do “monetary policy” or “macroeconomic” research when their terms were up, and ruling them out would severely limit the talent pool.

Robertson said members having a good understanding of monetary policy was important, as was ensuring they have a range of backgrounds.

“Over time this will evolve. What I’m trying to say is that I actually have some sympathy with the view that we do want informed people on the committee. I think we’ve got that, but we do have to get a balance.”

(Note that there was no hint of those “conversations” was in the OIA releases from either the Minister or the Board.)

To be fair, it doesn’t sound as if this blackball was really his idea.  Perhaps he isn’t even really that keen.  But it still isn’t a very convincing response.  Being an external member of the MPC isn’t a full-time role –  it was advertised as being about 50 days a year –  so you might have supposed that someone (eg an academic) doing research in the broad area of monetary policy or macroeconomics (macro is a big field might offer a bonus –  the taxpayer gets the benefit of that work without having to pay them to do it.    And quite how doing academic (or similar) research on macro issues after they left the MPC should be disqualifying, well….tells you all you really need to know.  The aim was about excluding capable, energetic, knowledgeable people –  experts who might have made a valuable, if potentially awkward for management, contribution to a diverse committee.   And, to sheet home responsibility, I don’t suppose Robertson really cared that much but Bank management will have.

The Bank’s response was interesting.  Recommendations of MPC appointments were a matter for  the Board, chaired by Waikato University Vice-Chancellor Neil Quigley.   Quigley apparently wasn’t commenting –  rather makes my point about an unaccountable shadowy Board, in this one of their few areas of formal power –  but a Bank staffer provided this comment.

The RBNZ spokesperson likewise said: “The full seven-member monetary policy committee has a broad range of economic expertise that does include monetary policy, labour markets, macroeconomics, asset markets, financial markets, agricultural economics, international trade, fiscal issues, taxation, etc.”

(Without getting into the substance of those claims) that response simply doesn’t address the issue at all.  It is little more than stonewalling and distraction.   Part of the point about externals was to provide a counter-balance, an alternative perspective, on management.  What possible grounds could the Bank have had for such a blackball on specific research expertise and interest in monetary policy or macroeconomics?  An academic expert in wellbeing is fine apparently, but not one who is actually expert in monetary policy, macro or financial markets.   Almost beyond belief.

Almost, but not quite.  Because in all these debates over the last five or six years that presaged the move to a committee, management never ever wanted to materially dilute its influence, power and control (Wheeler wanted to set up a statutory committee that was only him and his senior staff, appointed by him).  In response to a question from Eric Crampton on my post the other day I noted

I don’t think it is really a conflict of interest issue, but more one about the “collegial” model that the Bank management largely persuaded Robertson to go along with. They don’t really want MPC members taking an independent stance, or presenting conference papers that might raise questions (no matter how indirectly). Bank management tended to have a very negative view of the role Lars Svensson played at the Riksbank, and were also influenced years ago by negative views from BOE management about the way some external MPC members played their (then) new roles. They don’t want “big beasts” – they want people who will go along or (charitably) who will quietly ask not-too-hard questions in the closed confines of the Board room.

Remember that even when the Bank favoured a move to a committee – Wheeler tried to get the legislation changed – they never wanted to diminish management influence (that was explicit in Wheeler’s proposal, but strongly suffused what they got Robertson to sign up to). There is no sign Robertson much cared, and altho Tsy was probably a positive influence at the margin, the Bank was more invested in the issues than Treasury.

That still seems about right to me.   Even though –  against the Minister’s initial stance, persuaded by the Bank  – Treasury eventually managed to get provision in the MPC rules for individual members to speak openly, it never seemed very likely those provisions would be used much if at all –  and thus we’ve heard nothing from any of the external MPC members since they were appointed.  After all, the Governor is the boss of the internals (a majority of the committee), not known for his tolerance for dissent (or competing egos), and he played a huge role in appointing the externals (one of a three man interview panel, and the one with time, resources, and knowledge at his disposal).  The prohibition from the start on anyone who knows too much, and might want to go on thinking and researching, was just one more element in the winnowing process to make sure that they secured a tame and safe team.   Buckle, Harris, and Saunders may even add a little value at times, but it will all be terribly safe, and not very demanding. Just the way management like it –  and of course, the Board has always acted as defensive cover for the Governor.  (This hypothesis may also explain how Buckle got on the MPC –  he is now retired, but has done research on macro, and even written a little about monetary policy: the OIA from the Board showed that his name was suggested by……management.)

It might be one thing –  although still pretty undesirable –  if the Bank had covered itself with glory in the conduct of monetary policy and associated economic analysis in the last decade. But that is so very far from being the case –  not only has inflation consistently undershot, but Bank speeches and research offer little that is interesting, insightful or challenging.  And there is little sign now that management is any nearer to having rebuilt an internal capability of excellence –  indeed, reports suggest the internal research capacity has been gutted.  Add in a closed and defensive culture, and the sort of challenge and contest that a couple of people actively working on monetary policy or macro could have brought to the table should have been exactly what the situation demanded.

But management won and mediocrity prevailed.  Robertson, Orr, and Quigley deserve to be the laughing stock of international central banking –  worse than Trump on this score, the only people responsible for advanced country central banking who wanted to ensure that no one with any real expertise –  who might add real value – got near monetary policy decisionmaking (even as the Bank’s own internal research capability has been gutted).¹  The Bank’s international reputation in the 1990s was always a bit overdone (better than deserved), but those who were involved then, and those who once sang the Bank’s praises then – could probably never have imagined things would quite come to this.  But bureaucrats guard their bureaucratic empires, and ministers often let them get away with that.  And so mediocrity triumphs and the opportunity to produce a good quality MPC has passed for now.  Fortunately, the prohibition on expertise isn’t in the Act, this Minister won’t last for ever, Quigley’s term ends soon, and the very future of the Board is up for grabs.  But if you don’t start off new institutions strongly, it is hard to pull them up to a better, more internationally comparable standard, at some later date.  Such a shame.  Such a lost opportunity.

  1.  Well, perhaps they and the Irish Minister of Finance.

 

Disclosing regulatory actions

I haven’t followed the CBL saga very closely at all. (Disclosure: until the end of 2014 I was a member of the Reserve Bank’s Financial System Oversight Committee, which advised the Governor on prudential policy matters, including insurance prudential supervision.  That Committee rarely dealt with individual institution issues, but nonetheless was part of the overall atmosphere around the Bank’s approach to regulatory and supervisory issues.)

But the one aspect of the CBL story I had paid attention to was the decision by the Reserve Bank in 2017 to ban CBL from telling shareholders, policyholders (actual or prospective), or other creditors of the Bank’s regulatory actions and interventions (specific directions).  It seems extraordinary to say that managers and directors of a company cannot tell their owners –  the people they actually work for – about important developments affecting their (the owners’) company.   It runs against most canons of what we understand about the importance of trust, or disclosure, and of the relationship between principals (owners) and agents (managers and directors).

I also haven’t yet read the full report the Reserve Bank commissioned on its handling of the CBL affair (and remain sceptical that a report commissioned by Bank management –  and which apparently sought no outside perspectives – was likely to be even close to a definitive assessment).  But I did turn to the short chapter 15 (from p136) on “Confidentiality and Disclosure”.

In that section, the reviewers outline the relevant parts of the legislation that the Reserve Bank was using, and was constrained by.   They refer first to Section 135 of the Insurance (Prudential Supervision) Act covers the protection of data supplied to the Reserve Bank for prudential purposes.  This provision is not actually very relevant here: it is mainly designed to ensure that the Bank –  and Bank staff –  can’t, by accident or intent, treat confidential information lightly.     And even then, the Bank itself can choose to release material in a number of circumstances, including these two

(c) the publication or disclosure of the information, data, document, or forecast is for the purposes of, or in connection with, the performance or exercise of any function or power conferred by this Act or any other enactment; or
(e) the publication or disclosure of the information, data, document, or forecast is to any person that the Bank is satisfied has a proper interest in receiving the information, data, document, or forecast; or

Section 136 also allows the Bank to approve publication.   And so stories that suggest that the Reserve Bank was not free to publish information about its concerns or its actions, under pain of potential heavy fines, are just not correct.  The reviewers themselves run this quite misleading line.

The confidentiality obligation on the Bank is an onerous one. Officers and employees of the Bank, and investigators, are liable on conviction to up to three months’ imprisonment and/or a fine up to $200,000 if they do not comply with this provision.

Rogue or cavalier employees are (rightly) at risk.  The Bank itself has considerable protections and freedom of action (again, largely rightly so).

The reviewers then turn to the (much more relevant) provisions around the disclosure of the giving of directives.  In July 2017, the Bank issued to CBL Insurance a direction covering a variety of matters, operating under section 143 of the Act.   Section 150 of the Act makes it an offence for anyone to disclose (other than to directors and advisers of the directed entity) that a direction has been given.      Again, there are substantial fines for breaches.  But, again, this provision of the Act did not constrain the Reserve Bank, because the Bank itself is free to disclose the existence of the direction, or to allow others to disclose the fact of the direction.

The Bank itself has subsequently sometimes sought to imply that really the confidentiality of the directions was CBL’s choice, arguing (factually correctly) that when in February 2018 CBL requested that the confidentiality restriction be lifted, the Bank agreed.    But that looks a lot like distraction. It is clear that, whatever the views of CBL managers and directors, in July 2017 the Reserve Bank was insistent on keeping the fact and content of the direction confidential. It acknowledged as much in a response to an OIA request from NBR in April 2018.

The Reserve Bank’s self-chosen reviewers (the one with some expertise in the field being a former Australian insurance regulator) backed the Reserve Bank’s call on this point.

It was appropriate to maintain confidentiality over these steps. Matters were at a fact-finding stage. The Bank had serious concerns that warranted action, but it had not yet gathered the relevant information, tested it with CBL, and arrived at a sufficiently informed position. Obviously public disclosure of the fact of an investigation or initial concerns that have not yet been tested would be highly damaging to the reputation of CBL and to the value of its parent.

Except that by this time matters don’t seem to have been just at the fact-finding stage.  Rather, the direction imposed specific restrictions on CBL Insurance’s business –  the sort of action the Reserve Bank never engages in lightly (and, as the rest of the report apparently elaborates, coming after several years of concerns and fact-finding).

The reviewers go on to defend the Reserve Bank, arguing

The primary reason for confidentiality is that the Bank, quite correctly, is cautious about releasing information on any licensed insurer (or licensed bank) that may affect public confidence in the licensed company until the Bank is sure of its position. The confidentiality requirement, however, creates a quandary for the boards of listed companies who have a continuous disclosure obligations under NZX rules/Corporations Act 2001 (AU) rules.

In the CBL case, the position is also confounded to some extent by the fact that CBL Insurance is a subsidiary of the listed entity, CBL Corporation, which itself is not licensed.

Given the risks to public confidence in a licensed insurer if the Bank is carrying out an investigation or otherwise querying the credentials of an insurer before anything is proven, it is entirely appropriate for the Bank to maintain confidentiality by not making any public disclosures itself and also exerting control over any potential disclosures by the insurer.

Expressed another way, it is important that the Bank retain the power to intervene at any time in the affairs of an insurer. The Bank has to be able to recognise and choose to act early on any potential risk issue that it identifies and it also has to be able to stand back, without adversely affecting public confidence in the insurer, if the potential risk is not realised.

Before concluding

The Bank’s actions in relation to confidentiality and disclosure in 2017–2018 were appropriate.

We do not consider there was any earlier occasion when it would have been appropriate for the Bank to make public disclosures.

The lack of disclosure at the time of interim liquidation can be said to have been awkward for shareholders because, with no prior disclosure by the Bank or CBL, they were deprived of information that they may well have judged to be relevant to their position as investors. Arguably it was also awkward for policyholders, but that is a secondary matter in the eyes of investors.

On that point we note that CBL Corporation issued two relevant press releases in August 2017. In the first, on 18 August 2017, it disclosed concerns by the Gibraltar FSC over Elite’s claims reserves, the Gibraltar FSC’s reference to possible inadequacy of CBL’s claims reserves, and announced a reserve adjustment. The CBL Corporation share price reacted at the time, falling some 30%, but a week later there was a second press release that promoted the company’s prospects and gave a purported explanation for the claims reserving adjustment. The share price recovered by around 10% and then remained more or less static until suspension of trading in February 2018.

It is the policyholders, however, to whom the Bank owes its responsibility, not the investors. The Bank’s essential prudential concern always must be that policyholder promises can be honoured, irrespective of the fate or views or fortunes of shareholders.

I’m not entirely persuaded, on a number of counts.  And I say that even though it is quite plausible that the way the Reserve Bank handled this specific aspect of the affair (non-disclosure) might have been in accord with common supervisory practice.

Here it is worth having a look at some of the specifics of the New Zealand act.  For example, the purpose provisions in the legislation

IPSA 1

When this legislation was being planned I argued that only the first strand should be included, and recall arguing explicitly that having “promote public confidence in the insurance sector” could, at some future date, be used to defend keeping real problems secret, in ways that might support short-term confidence, but would risk undermining long-term confidence in the sector and in the regulation/supervision of the sector.  That seems like a valid concern.  But even with that provision in the legislation, it provides no clear guidance on whether specific regulatory interventions should be kept secret, since the goal is not to protect individual firms, but with a sectoral focus.  And if one believes in the efficacy of supervision –  I tend to be sceptical –  knowing that the regulator is (a) on the ball, and (b) not hiding stuff, is most likely to support a sound and efficient sector over time, and support public confidence in the bits of the sector where such confidence is warranted.

The Act next has a long laundry list of “principles” –  no hierarchy, no weighting, no nothing (the sort of list Paul Tucker, in his book on delegated power, including to central banks, frowned on).

IPSA 2.png

But they are still worth mentioning because, contrary to what the reviewers imply, the New Zealand framework is not exclusively built around policyholder protection; indeed, even the one bullet that explicitly mentions policyholders puts the “public interest” as of equal importance.  As importantly, look down a couple of rows and you find another principle:  “the desirability of providing to the public adequate information to enable members of the public to make those decisions” (ie regarding insurance), which might argue for as much transparency as possible.  In short, you could pick any approach you like out of these purposes and principles (which makes it bad legislation from a citizen perspective –  albeit beloved by officials), and none of these specific considerations are discussed by the reviewers in considering the disclosure/confidentiality issues around CBL.  At least from the wider public perspective, that was a missed opportunity.

It is worth bearing in mind that as a society we have generally come to favour the continuous disclosure approach various stock exchanges have now adopted. Inside information is supposed to be kept to an absolute minimum, with owners being presumed to be entitled to know of any material developments affecting their companies.  Shareholders provide the capital than underpins the provision of services and markets, including those in insurance.  Continuous disclosure provisions typically have a carve-out where disclosure is prevented by law, and that is what the parent of CBL Insurance relied on in this case (that NBR OIA I linked to earlier has the text of email exchanges with CBL’s lawyers on non-disclosure to the market).   In this case, there was no automatic protection for information about the Reserve Bank’s direction –  which was highly relevant to shareholders, and others dealing with the company and its associates – since the Reserve Bank had full discretion to allow the fact of the direction to be disclosed (an option it explicitly rejected in an email dated 22 August 2018).

In this case, it may well have suited both the Reserve Bank and CBL managers/directors to keep the directions confidential, but their interests are not necessarily representative of either the public interest, or of the specific interests of the owners of CBL, or those dealing with the company. It isn’t even clear that their preferences aligned with the interests of policyholders, here or abroad: rather it is a paternalistic approach that says that the supervisor is better placed to look out for the interests of policyholders than are (actual or potential) policyholders themselves.  The evidence for that proposition seems slim –  including, in this particular case, based on what we read of the Bank’s handling of CBL over several years.

There are no easy or straightforward answers to these issues, which is why it would be valuable to have a fuller, and more open, exploration of the issues.    In principle, I believe it would be better –  including reducing the risk of the supervisory being morally liable for any later losses in a failure event –  for the default presumption to be that any use of formal direction (or similar) powers by a prudential regulator should be disclosed by that regulator, and should be subject to usual continuous disclosure provisions in the case of listed entities.     The alternative both corrodes public trust in regulatory agencies –  what are they up to that we don’t know about? –  and corrodes the trust that needs to exist, and be robustly nurtured, between managers/directors and owners and creditors of private business entities

But there are risks to adopting this approach.  The ones I’m concerned about – at least in the insurance sector –  aren’t some sort of market panic (runs on insurance companies don’t have the meaning they do for banks).  The share price of a listed entity might fall sharply –  but that seems an appropriate possibility –  and people might become more reluctant to deal with the firm (ditto, at least until after hard questions have been adequately answered).   My concern is more that disclosure might make the supervisory entity more reluctant to act when it should, and more reliant on moving into the non-legal shadows, relying on pressure and threats of direction.  Perhaps too we would risk seeing courts more actively involved as the regulated entity sought injunctions to stop a supervisor using directive powers?     Those are real risks that need debating, but they should not be conclusive arguments, especially when the alternative involves the regulator and managers/directors getting together to keep highly valuable information from shareholders (whose money is mostly at stake), policyholders, prospective policyholders, and other creditors.

My interests are really less on the specific CBL case –  although specific cases help focus attention –  than on thinking about potential problems with banks at some future date.  There are very similar powers in the Reserve Bank Act re the confidentiality of directions to banks, and the issues get even more complicated because (a) bank runs are a real issue, (b) our bank supervision legislation does not have a depositor protection focus, (c) the disclosure regime has been designed to encourage creditors to take responsibility for themselves, (d) the proposed deposit insurance regime is very limited in scale, and (e) most of our banks are subsidiaries of foreign listed entities (can the Reserve Bank enforce directions on Australian parents?).  My own prior is that the world’s banking regulators do not have such a stellar record that we should be entrusting them with such powers of coerced silence, preventing companies telling their shareholders and creditors etc that they are subject to directions from the regulatory authority.  Perhaps the best thing might be more directions, made public at the time they are given as a matter of routine, so that markets, media, and the public can learn to weigh and evaluate the significance or otherwise of the issues and risks the regulator is highlighting.

I’m sure mine is a minority position, and I’m putting the issue out there as much as anything to try to encourage some reflection and debate on the issues.  In reality, perhaps the issues are not be black and white (in general –  although each specific involves final decisions), but regulators need to demonstrate that they have earned the trust, and extensive powers, reposed in them.   And our laws, and the applications of them, should be framed against principles of open government, accountability for regulatory agencies, and a belief that –  within government and within firms –  sunlight is typically the best disinfectant.

On which note, it is now the school holidays and we are heading off to find some sunshine and warmth.  Most likely there won’t be another post here until 23 July.

 

 

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.

 

 

 

On the ANZ affair

I’m no great fan of David Hisco, perhaps even less of John Key, and hold no particular brief for the ANZ either. I don’t now, and never have, worked for commercial banks.   I’m an ANZ customer, although largely by inertia rather than enthusiastic loyalty –  I was a happy National Bank customer, uneasy about the ANZ takeover, but actually I’ve not had any bad experiences so never went to the effort of changing banks.   But even with all that, and a couple of days on from my initial one-paragraph comment, I’m still at a loss to understand (substantively) why the Hisco expenses issue is exciting so many people and generating so much coverage from so many (ok, yes I’m now adding to it).

As a reminder, the ANZ New Zealand operation is a subsidiary (there is a branch as well, but ignore that) of a large Australian bank that has been operating in New Zealand since 1840.   There aren’t many post-settlement entities that have been operating here continuously for longer than that (Anglican, Catholic, and Methodist churches, and ……?). In that time, ANZ hasn’t failed, hasn’t been bailed out by the Crown, and has provided bank services to New Zealand well enough to, these day, be the largest player in the New Zealand banking market.

As customers, I’d have thought the main two things we’d want from our banks were that (a) they didn’t lose our money (or through some TBTF mechanism get the government to bail them out, and (b) that they provided the transactions and recordkeeping services tolerably well enough.  People can moan about banks all they like, and it can be a hassle to change banks in the shorter-term, but here we are talking about a bank operating in New Zealand for 179 years and counting.   Plenty of banks and quasi-banks have come and gone from the market in that time, as customers (new generations thereof) have preferred one institution over another.    Even the fact that today’s ANZ has grown partly by takeovers (Rural Bank, Postbank, Countrywide, National Bank) doesn’t change that story very much –  the most recent of those takeovers was 15 years ago, and ANZ must have offered the best deal to the vendors (presumably believing they could add most value through the purchases).   People can badly misjudge takeovers but, decades on, ANZ is still here, strongly capitalised and profitable (it isn’t, for example, akin to RBS taking over ABN-AMRO at the end of a frenzied boom).

What else might bother people?  Well, there is always the issue as to whether banks are “excessively” profitable.  I suppose my instinctive bias here is that of an old-fashioned central banker, preferring a profitable bank to the alternative.  But even setting that to one side, I’ve always been rather sceptical of the “excessively profitable” story, partly because the balance sheets of the New Zealand subsidiaries don’t tell the full story: the profits are not just a return on balance sheet equity, but also on the implied support of the parent banks in Australia.  I’ve also tended to emphasise the relatively open regulatory regime we have here, allowing new entrants to set up and take advantage of any (allegedly) excess returns.  But even if there is less to those stories than I have allowed, the merits of such arguments –  which might argue for a more active Commerce Commission involvement –  really shouldn’t be materially affected by the question of a (now-departed) CEO’s expenses, legitimate or otherwise, properly documented and reported internally or not.

I also get that some people are bothered by the level of senior executive salaries.  To be honest, at times I’m inclined to share those concerns (at least a little), perhaps especially around people who are really only second-tier employees in big Australian banking groups.  But what of it?  It is a private business, in a market where customers have alternatives.  If I really don’t like the fact that ANZ remunerates its top managers so well, I could shift my banking to, say, TSB.  They won’t be paying their CEO and top management anything like as much as ANZ is.

And then, of course, there is a scale of this particular issue.  We are told that the amounts involved are mid tens of thousands of dollars, spread over 10 years, so perhaps $5000 a year.   In respect of a person whose total remuneration over that ten years probably averaged $2million a year.  It seems quite appropriate for the ANZ’s group chief executive to want to tidy things up, and to be uneasy about how these expenses may hav been reported internally (details of which the public haven’t been told), but why is it a matter of any public – or legitimate political –  concern.  It is a private company.   Perhaps some people might be puzzled as to quite why ANZ pushed Hisco out over what looks like quite a small matter –  the question has been asked, is there something more to it –  but again, it is a private company, and Hisco is well-equipped to look out for his own interests, including ensuring that he has had good legal advice etc.    Perhaps one might expect the Reserve Bank, as prudential regulator (and that is all), to ask the ANZ a few questions, to ensure that the expenses issue isn’t a cover for more serious problems on Hisco’s watch but assuming it isn’t –  an ANZ would be in serious trouble, including with the ASX, if they were misrepresenting that  – that is about all the legitimate regulatory/political interest I can see.

The story has been used by people on the left, including trade unions, to run a “a bank teller would never get away with it” sort of line. But even if that has some rhetorical force, it shouldn’t.  For better or worse, a bank teller –  one of thousands doing similar jobs, on standard contracts –  would simply not have found themselves in the sort of situation where there was ambiguity about what was acceptable, or what had been subject to an oral agreement.  And had they somehow done so, and been fired, they’d have had recourse to their union and to the protections of employment law.

In various articles in the last few days, I’ve seen references to the idea that the banks somehow owe New Zealand for its support (as if to justify public involvement in the Hisco-Key affair).  There have been silly references –  no doubt channelling flawed lines from our bombastic populist Governor –  that somehow the banks were bailed out by the governmment in 2008/09.  They simply weren’t.  There was no risk of any significant bank failing in New Zealand at that time, whether from the funding/liquidity side or from credit losses and insufficient capital.  It is certainly true that there were various Reserve Bank and government direct interventions during that period, but those interventions were not about “saving the banks”, as about limiting the potential damage to the economy that might have arisen otherwise (extremely risk-averse banks – in the middle of a global crisis – would have pulled in lending more aggressively etc).  And cutting the OCR was no “favour” – in downturns, market interest rates tend to fall, and the Reserve Bank’s hand on the OCR is really just meant to mimic that.   I don’t want to take this line too far –  there is some interdependence, and banks operate in a system governed by parameters the political system has set up (eg having our own currency etc) –  but the robustness of the banks in 2008/09 was a credit primarily to them, their owners/managers etc, not to the New Zealand authorities.

We’ve also heard people talking about about the case for a Royal Commission into something around banking, the call we heard last year in the context of the Australian Royal Commission.    And here there is the suggestion –  I saw it in the Herald this morning –  that somehow again the banks owe the Reserve Bank and the authorities, because the latter “went out on a limb”, or “stuck their necks out” to protect the banks.  That is simply rubbish.  Rather, the Governor of the Reserve Bank (and to a lesser extent the FMA) were playing a populist political card when they launched their inquiry last year  – in an area where, as even they acknowledged, they had no statutory powers.  After all the hullabaloo, they found basically nothing (not that surprising, given that different context in which banks operate here and in Australia, especially as regards superannuation), but it hasn’t stopped them using the issue to claim some sort of moral authority over these private banks, operating in markets where customers have choice.

But even if there had been something to the conduct/culture issues, surely those were supposed to be about public facing issues, things directly affecting customers.  Whether some small portion of David Hisco’s large expenses bill was questionable, seems –  to say it again –  like a matter for the Board and management of the ANZ, perhaps even for the staff (confidence in the integrity of your leader) but simply not a matter for government agencies at all.

I guess that among the sound and fury on this issue, there will be a range of interests and motivations.  Some will even be quite genuine and public spirited.  But it is hard not to read the coverage of the last few days and think that at least some people are playing distraction.  Banks are never likely to be that popular, perhaps especially not Australian ones (despite the fact that New Zealand benefits from having its bank part of bigger offsore groups) and they make a convenient scapegoat. Perhaps that is especially so when the old enemy of the left –  John Key –  is chair of the bank’s local board (as I’ve written here before, I happen to think it is unfortunate –  at best –  to have former politicians so quickly on such boards).    It shouldn’t have been a great week for the government –  what with the GJ Thompson affair, meningitis injections, and so on –  and it hasn’t been a great time for the Reserve Bank (all that pushback against their unsupported radical bank capital proposals) , and one is left   –  perhaps unduly cynically – thinking that in some quarters there will have been quite an interest in playing distraction by feeding a beat-up on the ANZ, for what really looks to be a rather small, albeit untidy, mostly internal affair.  For me, if they keep my money safe, do my transactions competently, and don’t rort others on any sort of systematic basis, I’ll be pretty content.

Throughout this note, I have stressed that bank customers have choices and alternatives.  Faced with overly powerful, weakly accountable, government agencies, citizens really don’t.     When Peter Hughes gives gushy speeches about Gabs Makhlouf –  the man he is supposedly investigating –  we are stuck with the clubby system.  When a Supreme Court judge thinks it is just fine to go on holiday with a senior lawyer in a case before the Supreme Court, we have few effective protections.  And when the Governor of the (monopoly) Reserve Bank never gives substantive speeches about things he is actually responsible for, plays fast and loose with the Official Information Act, claims he has no resources to properly oversee the bank capital system (internal models and all) that the Bank itself put in place, all while spending a million dollars on a Maori strategy (for a body with little or no public-facing role), devoting his time and professional energies to personal passions, be it climate change, infrastructure, or whatever, there is also nothing we can do about it.  The amounts involved –  money diverted from core functions (under budgetary pressure) to finance the Goveror’s personal causes and whims –  is probably already at least as much as the Hisco case over 10 years.  But we can’t change central banks, can’t dump our shares in the Reserve Bank.  Perhaps these issues (for some reason) excite fewer people, but when the abuses and slippages are by high government officials, they need to be taken much more seriously, precisely because exit isn’t (for us, citizens) an options.  The small(ish) stuff needs to be sweated.

On which note, I saw a piece on the ANZ affair by Auckland lawyer Catriona MacLennan, I very rarely agree with anything she writes, but her final paragraph did strike a nerve.

I have been on the board of a non-governmental organisation for three years. We are not paid a cent for our work, but I and the other board members would consider we had completely failed in our responsibilities if we let unauthorised expenditure go unchecked for nine years.

The Governor, the Bank’s Head of Financial Stability, and the (outgoing) chair of the Bank’s Board Audit Committee, might like to reflect on questions around unauthorised (operational) expenditure over at least as long a time.