Hopeless and complacent

I guess debate will rage for a long time about how well prepared and aggressive, or otherwise, governments around the world were when it became clear that the new and quite contagious coronavirus was becoming a large scale issue.  When all this is over there must a Royal Commission to investigate all aspects of the response (and lack of it).

But quite a lot about the New Zealand story (which may be little better or worse than most other advanced countries) is already clear to anyone who has kept their eyes and ears open as the situation has engulfed us.

On 23 January, the People’s Republic of China authorities locked down Wuhan, a huge city.  On 24 January our Ministry of Health issued a rather anodyne press release.  In that release, the Ministry claimed to be taking the outbreak “very seriously” (there appears to have been another statement two days earlier, but the link didn’t seem to be working this afternoon).   There was a further press release on the 27th where the words were upgraded to “extremely seriously”, but the fateful routinely-repeated line that

the likelihood of a sustained outbreak in New Zealand remains low. 

was first given to the public.   I wonder if they now regret that line, still being repeated more or less as late as last week, as the entire country is in lockdown, civil liberties shredded and economic activity slashed further.  I wonder at what point they really concluded that the risk was no longer “low”.  Just last weekend perhaps?  Or when?

It still isn’t clear quite what ‘extremely seriously’ actually meant in practice in late January. After all, there was no sign of them urging ministers to dramatically scale up either stocks of relevant equipment (in some cases, not even count how much equipment they had), add ICU beds, and their public tone remained emollient almost to the end.  Why is it that news reports only today tell us the Ministry is still trying to get its line and numbers straight?  It was, after all, just three weeks ago that the official Ministry of Health Twitter account was repeating a line that the world had more to fear from rumours, stigma etc than from the virus itself.  How anyone could have uttered, and repeated such lines, and still hold high public office, having uttered not a word of contrition, is really beyond me.  I presume that in some narrow technical sense they must have taken it seriously, perhaps even “extremely seriously”, but to what end?

Because whatever the Ministry of Health did, it clearly wasn’t adequate.   And more importantly, as the channellers of expert professional expertise on the health issues, there is no sign at all that they ever convinced either the Prime Minister and Cabinet or the heads of other major government departments to take the threat as one of utmost seriousness and urgency.  Is there on file somewhere, well hidden from the public, what I’ve described elsewhere as a “Whoop, whoop, pull up” memorandum, whether to Cabinet or other key departments heads, dated late January?  I’m pretty confident there isn’t, because nothing about the subsequent words or actions of ministers, the Prime Minister, or key government agencies suggested any such sense of urgency, a recognition of this as a major imminent threat to New Zealand, which demanded urgent action and urgent contingency plans then and there.      Were 100 of the ablest senior policy and operational people from across the public sector immediately dedicated to fulltime substantive contingency planning?  I’m pretty confident that they weren’t.

I’ve noted previously the sense of complacency, and China focus, in the transcripts of the Prime Minister’s press conferences since the start of the year (the first just after those Ministry of Health “extremely seriously” comments, and her comments don’t appear to have been out of line with those of the Minister of Health or the Director General.   And that same complacency, and China focus, was on public display in the way the economic package, announced early last week, came together.  For several weeks it appeared to be all about the specific industries hit by the China’s responses to the coronavirus, with a sense that it might take a few months or even quarters for those markets to get back to normal.  By the time they finally announced the package, reality was beginning to break over them, but even then in a barely serious way.   Faced with extreme and imminent threat, whether directly in New Zealand or, as some still hoped, in the rest of the world seriously affecting New Zealand’s economy, they used much of their bulked-up package not for temporary crisis responses but for permanently worsening the underlying fiscal position, on things that had nothing to do with the coronavirus situation (whether permanent benefit increases, or permanent business tax cuts) just as the biggest shock in at least 90 years was about to break over us.  It was breathtakingly complacent, politicised, and just did not address most of the main issues.  And that was barely 10 days ago (my contemporary comments here).

All of that could be clear up with a programme of radical transparency, pro-actively all major relevant papers from all government agencies. But I guess the government would prefer to keep us guessing; in fact going by their continuing communications approach they’d prefer to treat us, and hope we acted, as children.

But, as it happens, we already have some specifics about one particular agency that, for all its faults, puts more material in the public domain than most.  The Reserve Bank.

We first heard from them, almost in passing, on 29 January.  The Ministry of Health was, so they told us, already taking the coronavirus “extremely seriously”.  One of the Bank’s deputy chief executives gave a speech on the 29th observing –  probably added at the last minute

In recent months, coronavirus is a human tragedy that has emerged that we will need to monitor, through all three channels.  The SARS virus in the 2000s provides some potential parallels, particularly through the effects on travel and confidence.

Now I don’t really hold Christian Hawkesby to blame for not then being more concerned.  And The Treasury was making similar comments at the same time.  Neither outfits are experts in infectious diseases.  But the early comments of neither organisation betrayed any sense that the Ministry of Health was alerting any one that mattered –  public and private – to the nature of the threat, the real risk of wider spread, and the sheer scale of the disruption China was putting itself through to try to get control (although that latter point might have been something the economists would have noticed, and worried about).

There was a couple of weeks until we again heard from the Reserve Bank, in the Monetary Policy Statement on 12 February.  I won’t go through it all in detail again, but here was our central bank –  Governor and statutory Monetary Policy Committee –  in distinctly upbeat mood.  Sure, there was a small negative GDP effect immediately on account of the China closures and the New Zealand travel ban, but it would all soon be behind us. The Bank actually moved on this occasion to a more optimistic medium-term stance, actually adopting a tightening bias for the next OCR move.   Do note that the Secretary to the Treasury is a non-voting participant in the deliberations of the Monetary Policy Committee, and there is no sign in the minutes that she –  or any of the rest of them –  had been alerted to the imminent huge threat and already had in mind serious contingency planning .  It was really all backward-looking (just waiting for the China effects to pass).  If The Treasury displayed no sense of urgency, the Prime Minister displayed no sense of urgency, the Minister of Health displayed no sense of urgency or serious imminent threat, I think we can conclude none of them just missed the message.  That message was never sent.

Another two weeks on –  by now 25 February, really only a month ago, and  by then already serious epidemiologist types abroad were talking of that virus as something that would potentially affect 50 per cent of the world’s population – we heard from the Reserve Bank again.  This one was unusual, and frankly a bit puzzling.   I wrote about it here.   You see, the Bank had never really used Twitter for monetary policy messaging, and (as I noted at the time) it wasn’t really appropriate to be dropping random comments into the ether with no notice (not how serious central banks do things).  But this was the core of their tweet that day.

One of our jobs at the Bank is to forecast where we think the economy is heading. While there is still things that could trip up our prediction, we expect activity will pick up later this year, meaning more investment, more jobs & higher wages.

I saw it on my way into a meeting and expostulated along the lines of “what planet are they on?”, but later in the day offered a possible more charitable interpretation

My guess is that the tweet wasn’t really intended as monetary policy and related economic commentary at all.  My guess is the MPC wasn’t aware of it, and quite possibly the Governor was not either.   Perhaps someone down the organisation running the Twitter account just thought it would be a good idea to tell us a bit more about the Bank (“we do forecasts”).    But official communications need to be managed better than that –  an excellent central bank, best in the world, would certainly do so.

Sadly, what I’m very slowly learning is that when you think of a charitable and moderate interpretation of the Bank it is usually wrong.   I lodged an Official Information Act request asking for all material relevant to this tweet, including any reaction to it.  And the response arrived yesterday afternoon (you might think handling OIA requests is a bit of a distraction at present, but I had already indicated to them that in the circumstances I wouldn’t be bothered by any reasonable delays in replying).   They haven’t yet put the response on their website, and their response was not very complete (probably in breach of the law), but it makes clear that the absurd tweet, talking of the expected upswing in economic activity this year, was not only authorised by the Bank’s Chief Economist (a statutory appointee to the Monetary Policy Committee) personally, but that it was intended as part of a multi-week Twittter campaign advancing monetary policy messages.  It was planned that by mid-March this would be their message

We are picking the economy will get better in coming years, creating
more work and wealth for New Zealanders. But low interest rates will be
needed to support that growth for a little while yet.

Now, I need to be clear that the decision to authorise these tweets was made on 19 February, but there is no sign at all –  or else they would have to have released it –  of any rethink or revision before it went out on 25 February.

There was simply no sign of one of our major economic institutions –  these days often very well aligned with the government’s messaging –  displaying any urgency or awareness of the gathering threat whatsover.  It was just like everything we saw from the rest of government –  complacent and backward (China) focused.

And so it went on.  There was that strange speech (and questions and answers) of the Governor’s just over two weeks ago now.   We were assured we were nowhere near the need for any special monetary policy action.  That was followed quickly by further highly complacent interviews with other Bank senior managers – best characterised, as I did at the time, as almost unbelievable.   They finally buckled last Monday and cut the OCR, but still there was no hint in their statement even then, or the minutes (and recall the Secretary to the Treasury was part of that), of any serious awareness of what was about to break, of any serious pre-emptive policy, or of any serious practical contingency planning.

Perhaps by then the Reserve Bank was even worse than some parts of government.  Perhaps people near the top of the Ministry of Health, or the Minister of Finance/Prime Minister, implored Orr and his colleagues to open their eyes and get real.  But there is little or no sign of it.  After all, at the time Health was still spouting pretty upbeat lines about the risks here.

Orr went on that week to record an interview in which he described himself as really not overly worried, dismissing any possible comparisons to the depth of the Great Depression or the associated policy challenges.  That was barely 10 days ago.

And so it has still gone on.  Not just the Bank but the wider government has failed to adequately address the huge challenges facing the economy right now.  It is clear that there was no detailed planning undertaken in advance – if there had been, not only would we have seen more serious policy, actually addressing core issues, but even what has been announced –  mortgage holidays, business loan guarantees, and associated bank capital implications –  would actually have some details, not still be little more than statements of good intentions, even as they seem overwhelmed by what has hit them.

There are people around who want to believe in the notion of detailed and extensive advance planning.  People (very young ones) apparently believe in the tooth fairy too.  But all the evidence is to the contrary: they were backward looking, playing things down, perhaps simply unable to comprehend that something like this could hit – even with a full two months notice from Wuhan.  Whatever the explanation it is no excuse.   Would it have been hard to do something well?  Quite possibly, but this is the sort of stuff we really count on governments for –  they have the resources, the people, the intelligence networks etc etc, in a way that no one else does.  They could have done much more –  it is not as if no one out in the wider world was alerting us to the risks and threatss.  It would never have been enough, and wouldn’t have been perfectly fitted to the situation.  Instead, almost none of them even seemed to try.   They did nothing to front the situation with the public, indeed actively played down public concerns and presentations, and since I really don’t believe any of them consciously lied to the New Zealand public one can then only conclude that they didn’t believe it themselves, from the Prime Minister on down.    The Reserve Bank’s complacency –  nearer to the theme of this blog, and perhaps just a little better documented –  only became more egregious as time went on.

It is a simply huge failing.  Much of the stuff governments and their agencies do really doesn’t matter that much in the scheme of things.  The crisis that currently sweeps over us, sweeping away civil liberties, even Parliament, casting hundreds of thousands onto the welfare rolls and probably slashing GDP by a third or more, destroying countless businesses really does.  Our government – and probably most of their overseas peers – failed us badly, simply wasting very scarce time, whistling as they kept their spirits high, even as the boat was about to go under.  Could they have stopped it?   Who really knows now?  But they –  all of them –  Health, Treasury, Reserve Bank, ministers, and countless other agencies could, and should, have been a great deal better prepared and ready to act firmly.  They owed that to New Zealanders.  They let us down.

 

A tweet from the Reserve Bank

I was in a meeting all morning and don’t have that much time this afternoon, so I should offer a special thanks to the Reserve Bank for suggesting a topic for today’s post.  It is prompted by this tweet, which turned up in my feed just as I was about to head into my meeting

The Bank used to use Twitter for not much more than sending out links to press releases etc.   But they seem to be trying to use it more actively, with a strategy (if any) that is less than entirely clear to the outsider.   For example, a couple of weeks ago there was the invitation to us all to submit questions via Twitter for the Governor’s MPS press conference –  which went rather badly when they only took two questions that were reframed as soft platforms for the Governor to declaim on some or other favoured topic.   Yesterday, there was a puff piece telling the world that the Bank was now 43rd most favoured employer for graduates in New Zealand.  I suppose that didn’t sound too bad –  small organisation and all that –  until I clicked on the link and found that the Bank came in behind 11 other government departments and a couple of local government entities.  Oh well, thanks for letting us know I guess.

This morning’s tweet has the potential to be quite a bit more concerning, on several counts.  Most concerning is that it reads as a statement of the institution’s view –  that of the MPC? – on matters directly relevant to monetary policy, launched into the ether with no notice at all.     That is no way to do monetary policy –  or rather it was the sort of way we did monetary policy 25 years ago, before we moved to a clearer, more scheduled, more predictable system.  This might seem like only a picky inside-the-Beltway issue, but this isn’t way things should be being done.  It would be interesting to know whether the MPC were consulted, or even advised, that a statement on the economic outlook was about to be made.

More substantively concerning is the content of the comments, perhaps especially when released in the middle of one of worst financial market trading days in several years.   Look at the substance of their new text: “we expect activity will pick up later this year, meaning more investment, more jobs, and higher wages”.      The link is to their cartoon summary of the Monetary Policy Statement, released almost two weeks ago, based on forecasts finalised almost three weeks ago.    Those were forecasts based on very short and quite limited negative coronavirus effect.    Those are the forecasts today’s statement links to.    How can they possibly still be the MPC’s best view now, when a growing range of medical experts now expect the virus to go round the world, infecting (in time) perhaps 40 to 70 per cent of the world’s population, with attendant disruption and uncertainty?  At very least, the risks to the happy upbeat story must be much more serious than the MPC thought them two or three weeks ago.

My guess is that the tweet wasn’t really intended as monetary policy and related economic commentary at all.  My guess is the MPC wasn’t aware of it, and quite possibly the Governor was not either.   Perhaps someone down the organisation running the Twitter account just thought it would be a good idea to tell us a bit more about the Bank (“we do forecasts”).    But official communications need to be managed better than that –  an excellent central bank, best in the world, would certainly do so.

Excellent central banks also communicate carefully and precisely about things bearing directly on their mandate.  A reader yesterday drew my attention to (something I’d missed) the way the Reserve Bank is falling short there too.   A good example was in the cartoon summary of the latest MPS, linked to in that tweet, where I found these

target 1

target 2

It isn’t just the cartoon version either.  Here from the MPC’s minutes

The Committee agreed that recent developments were consistent with continuing to meet their inflation and employment objectives

And my assiduous reader tells me the same phrasing pops up in comments made by the Governor, and in the last few MPS rounds as well.

Can you tell me what the Reserve Bank’s employment target is?

Trick question, as there isn’t one.

The MPC and the Governor surely know this, as their Remit –  the mandate set for them by the Minister of Finance –  is reproduced at the start of each Monetary Policy Statement.  Here is the central section

The current Remit sets out a flexible inflation targeting regime, under which the MPC must set policy to:

• keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent midpoint; and

• support maximum sustainable employment, considering a broad range of labour market indicators and taking into account that maximum sustainable employment is largely determined by non-monetary factors.

There is a clear and measureable inflation target, basically the one we’ve had for almost 20 years now.

And then there is a requirement to “support” maximum sustainable employment –  which is, more or less, what monetary policy tends to do when it acts to keep inflation near the inflation target.  There simply is not an employment target, so what are the Governor and MPC doing claiming that they’ve met this non-existent target.  It might be quite reasonable for them to argue that they believe they’ve done what they can to support keeping actual employment near maximum sustainable employment –  reasonable people might differ from them on that, but the debate would then be around an explicit mandate the Bank has been given.

Perhaps to many the loose language will seem harmless.   And perhaps when we are near to full employment it does little damage, but that won’t always be the case.  Come the next serious recession, unemployment will rise a lot/employment will fall a lot.  The Bank will do what it can to lean against those changes, but it won’t be failing –  not hitting a target –  just because the unemployment rate is high, perhaps even for several years (especially if the limits of monetary policy are reached).   More generally, it creates a sense in which someone there are equally important employment and inflation targets, when the Minister of Finance –  the one responsible for setting the target –  has clearly specified otherwise.

Mostly, it is probably some mix of sloppiness and the Governor’s ongoing efforts to play the “tribune of the masses” card.    And we should expect (demand) better than that from the Governor and the MPC – especially in formal written documents, whether aimed at the “specialists” Orr affects to despise or at a wider general audience.  You do not need to be sloppy in the use of language to communicate the essence of what you are supposed to be about.   From the Bank recently we’ve had loosely-grounded factual claims, outright misrepresentations, and repeated sloppy use of language to misrepresent the Bank’s mandate.  I’m guessing it would not go at all well with the Bank’s bank supervisors if they found the banks and financial institutions they regulate operating in so loose a way.  Apart from anything else, those supervisors might reasonably ask themselves “if things are this loose in what we see –  prepared for the public face –  what are things like where we cannot see, inside the organisation”.

These might be issues the Bank’s Board and the Minister of Finance –  both charged with keeping the Governor (and MPC) in line and accountable –  might be asked about.    I imagine they would just run defence for the Bank, but you never know.   Perhaps some journalist might approach an MPC member for comment –  and if, as most likely would happen, they simply refused to comment then report that stonewalling.

 

Orr speaking

We’ve been hearing quite a bit from the Reserve Bank recently (in addition to the OIA disclosures of the Governor’s antics last year), just not much about monetary policy, short-medium term economic developments, or financial stability and regulation.  In a few weeks the Governor will have been in office for two years, and in that time we’ve not had a single serious and thoughtful speech from him on either financial stability/regulatory issues or on monetary policy and cyclical economic issues.   It is extraordinary, and not the sort of thing we’ve seen here in the past or in other advanced countries today.  As it happens, the new MPC members have now been in office for 11 months, and we’ve not seen or heard a word from any of the external members at all.

But what of Bank management?    If they haven’t been talking about core business (that small matter of the statutory responsibilities they are funded for), they’ve been out championing other causes, including themselves.

Last Wednesday the Governor (and accompanying senior managers) turned up at Parliament for the annual Finance and Expenditure Committee financial review hearing.  The Governor’s opening statement is here.    The only bit that immediately caught my eye was this

Amendments to the Reserve Bank of New Zealand Act, which came into effect on 1 April, gave responsibility for monetary policy decisions to the newly-established Monetary Policy Committee.

This framework has now been implemented and is working well, with six Official Cash Rate decisions by our new Monetary Policy Committee. The Summary Record of Meeting provides insights into how decisions are reached, and improves our stakeholders’ understanding of each Committee member’s contribution.

That final sentence, and particularly the second half of it, is at best spin, more accurately just a lie.  The Governor explicitly states that the Summary Record “improves our stakeholders’ understanding of each Committee member’s contribution”, when of course –  go and read them for yourself if you like –  that is simply false.  Not only does the Summary Record give no real sense of “how decisions are reached” but, by explicit choice and design (endorsed by the Minister of Finance), there is no reference at all to the views, arguments, analyses etc of any individual Committee member.  And –  did I mention this?  – none of the externals has been heard from in any other fora.  We have no idea whether they are making any contribution at all.   It is breathtaking that the Governor can so actively and deliberately –  in writing – lie to a parliamentary committee.  In isolation perhaps it is a small point, but if we can’t count on a very and powerful public official in the small and visible points, how do we trust him more generally.

The FEC appearance was also an opportunity for the Governor to bid for more resources –  a lot more resources we are told.  According to the Stuff account,  the Governor is bidding for a “30 per cent perhaps” increase in the Bank’s funding, claiming that (in respect of bank supervision)

The Reserve Bank’s existing resource was at the the low-end, if not “the lowest”, in the OECD

Which might sound more worrying/inappropriate were it not for the fact that New Zealand is among the smaller OECD countries and one of the poorer OECD countries, and also a country with a record of a sound financial system, and one dominated by banks already subject to serious supervision in another country that also has a long record with a sound financial system.

On several occasions over the years I’ve been willing to defend or even champion the case that the Reserve Bank is probably a little underfunded.  But it gets progressively harder to defend that view as the evidence mounts for how undisciplined the Bank is in the use of the resources it already case.  There was the million dollars for the Maori strategy, or the trips to international climate change meetings (and resources devoted domestically to such issues, for which the Bank has no particular responsibility) and there is the sense of a proliferation of staff in the communications/PR areas of the Bank.   I can’t yet formally verify that –  although I have lodged an OIA to get chapter and verse –  but I’m not the only person to note the range of new people/positions (on the bottom of press releases, emails or whatever) and my favourite anecdote was one a friend told a few months ago about being approached by a headhunting firm to consider applying for a job in something like “stakeholder relations” at the Bank,  a job my friend characterised as “having coffee with a lot of people, getting paid $180000 a year”.   I hope The Treasury and Grant Robertson will be having a close look at whether there is any sort of culture of ruthless prioritisation, frugality etc in how the Governor uses what he has, before offering up yet more public money.    There isn’t much sign of it.

Stuff also reports that National’s Finance spokesman Paul Goldsmith challenged Orr on his conduct

National Party finance spokesman Paul Goldsmith questioned Orr on the bank’s reaction to “criticism and debate” during a series of exchanges at the select committee, saying the Reserve Bank governor had “very significant independent powers” over the industries the bank regulated.

“From my point of view it is very important that we have open and robust discussion,” Goldsmith said.

“We wouldn’t want to have an independent governor with a glass jaw or a sensitivity to robust criticism,” he later added.

Orr’s response?

“What I won’t stand for is abuse of my team or myself,” he said.

He keeps claiming he and his team have been “abused” in some inappropriate or unacceptable way, but has not yet shown us a shred of evidence for those claims, suggesting that what is really at work is a powerful public figure who simply can’t cope with being challenged.  As one of his former staff put it last week “he could always dish it out, but could never take it”.

I hope Goldsmith won’t let the matter rest, especially if he should become Minister of Finance later this year.

Orr was back on the public stage on Friday with a speech, delivered to a business audience in Christchurch, under the title “Aiming for Great and Best at Te Putea Matua” (that being that Maori label the Governor has chosen to attach to the Bank).    The, perhaps rather odd, title refers to the Governor’s vision for the Reserve Bank “Great Team and the Best Central Bank”, the even more overblown goal than the one his predecessor had introduced, aiming to be the best small central bank in the world (when I asked, a few years later, what steps they’d take to benchmark themselves and measure whether they were getting close to the goal, the answer came back “nothing”).   Nothing wrong with aspiration and ambition of course –  although it is not clear that taxpayers would choose spend resources so heavily that a small, not very rich, country’s central bank would ever be best in the world.   The real problem is the delusional nature of the claims, the visions, which seem more about spin than substance.  Excellent central banks don’t have thin-skinned bosses, unable to keep their thin-skinnedness under control.  Excellent central banks have senior figures who make excellent thoughtful speeches. Excellent central banks are producing a steady stream of insightful research.  Excellent central banks underpin major policy initiatives with confidence-inspiring research and analysis, taking seriously alternative perspectives.

(Come to think of it, excellent central banks don’t just make stuff up when testifying to Parliament.)

We don’t have an excellent central bank (although it still has some good people); instead we have an organisation that has become little more than a platform for the Governor’s ambitions, whims, and political preferences, with little or no sense of boundaries, restraint, or the proprieties of public office.

I’m not going to waste a lot of time on a detailed review of the speech. Frankly, it is fairly dull although suffused with the Governor’s personal whims, especially around climate change (important issue and all, but really nothing whatever to do with the Reserve Bank).  But do notice just how the Governor operates.  There was this line

We have now made six Official Cash Rate (OCR) decisions – as a committee. We have managed robust discussion and come to consensus decisions. The nature of these discussions is published as a ‘Record of the Meeting’ for all to see. We also won this year’s Central Bank award for transparency in how we operate.

It is technically accurate, except that the transparency award they won was explicitly for one small element –  the (quite good) Handbook they’ve published on monetary policy –  not at all for anything about how the Monetary Policy Committee functions or how the ‘Record of the Meeting’ operates.  It is just dishonest.  It should be unworthy of –  beneath –  a major public institution in a sector where trust is supposed to be central.

A Stuff story appeared this morning about some more of the Governor’s comments.  I first assumed it must be referring to the (published) Christchurch speech, but the article says it is talking about a speech given in Auckland (perhaps he used much the same text?).  We get accounts of Orr as populist (also there in the published speech)

“I’m not here to talk to a few narrow specialists. I’m not here to talk to just the institutions we regulate.

“We are the central bank of everyone here in New Zealand, present and future, and we have been too narrow and too lax in our engagement with you all, and it is not going to happen again.”

The problem, of course, is that (a) few “specialists” actually have much confidence in him, (b) in all fields of life, we rely on “specialists” to help us evaluate and hold to account powerful public agencies (something Orr isn’t keen on at all), and (c) all that business about how his predecessors didn’t get out and talk to wider audiences is just so much nonsense, simply inconsistent with the facts.  Perhaps Orr has forgotten Don Brash’s in(famous) retail roadshows, or Graeme Wheeler’s repeated talk about how he and the Bank were going to talk to a wider range of people.   Some questionably, Alan Bollard even wrote a book (not inaccesible either) while in office.

And the article ends with an account of Orr’s answer to an audience question, which seems like quintessential undisciplined Or

Orr spoke about the importance of economic and social inclusion in response to a question from Jackie Clark, founder of The Aunties whanau support movement, who complained New Zealand was a low-wage economy.

“The owners of capital have been doing a great job over and above the owners of labour,” Orr said.

“It’s been extreme, unprecedented, over the last 40 or 50 years of that ongoing return to the owners of capital, and labour has become a global commodity, where production goes to the lowest common denominator.”

“We want low and stable inflation, but that does not mean we want low wages,” he said.
“We’ve been celebrating the fact that nominal and real wages have been growing recently.

“That’s how we roll. That’s how we have to roll, otherwise create yourself a gated community. Enjoy yourselves, but don’t leave.”

Would have sounded just great in a stump speech from Bernie Sanders, Alexandria Ocasio-Cortez –  there is at least some evidence in support of his story in the US –  or even Marama Davidson.  But (a) this is New Zealand, and (b) you are the Governor of the Reserve Bank, with quite narrow responsibilities for monetary policy (affecting only nominal variables beyond the short-term) and regulation for prudential purposes of some classes of financial institutions.  Instead, we get a rampantly partisan/ideological answer (inappropriate in itself, but when did bounds and norms bother Orr?), but one with little or no grounding in facts.

(A prudent grounded answer to the question might have been to note that distributional issues are not an issue for the Reserve Bank, but that in the longer-term only productivity growth will support a much higher wage economy.  Both statements would be accurate and uncontentious.)

Those first two sentences in Orr’s answer seemed to be about the labour share of income.  The data are summarised in a chart in this post.  In New Zealand –  it is different in some countries –  the labour share of income rose in the 1970s, fell in the 1980s and (depending on your measure –  I show three) is now just a little higher or a little lower than it was fifty years ago.    You might personally argue for some different split of the pie, but what in the New Zealand experience justifies Orr’s flamboyant off-reservation ideological rhetoric.

Or what about how wages have been rising relative to economic capacity (say, nominal GDP per hour worked, capturing productivity and terms of trade effects).  Well, as I illustrate every so often (most recently last month), this century, wage rates in New Zealand have been rising faster than GDP per hour worked.  Perhaps Orr doesn’t know that –  it certainly doesn’t suit his ideological message – but whether he knew it or not he actively misled his audience, while working on the taxpayer’s dime.

I was going to round off this post with a fairly detailed critique of a truly dreadful speech given a week or so ago by one of Orr’s principal deputies, Christian Hawkesby, the Assistant Governor responsible for economics, monetary policy and financial markets on “The Maori World View of the Reserve Bank” but with quite a bit else –  including some atrociously bad history –  thrown in, concluding with the absurd hubristic claim that the Orr/Hawkesby Reserve Bank is “putting the New Zealand back into the Reserve Bank of New Zealand”.   You’d think they were candidates at this year’s election, not senior (supposedly non-partisan, supposedly operating within the constraints of specifc statutes) statutory public officials.  But perhaps I’ll save that speech for another day, rather than risk losing the focus on the Governor who yet again reveals himself as simply unfit for the office he holds.  And yet those paid to hold him to account sit idly by.

Simply unfit

In yesterday’s Sunday Star-Times another article by their reporter Kate MacNamara shed further light on just how unsuited Adrian Orr is to be Governor of the Reserve Bank, exercising huge public policy and regulatory power still (in large chunks of the Bank’s responsibilities, often with crisis dimensions to them) as sole decisionmaker, with few/no effective checks and balances.  These disclosures should also raise serious questions about the judgement and diligence of the Board who were primarily responsible for Orr’s appointment and are primarily responsible for holding him to account, and of the Minister of Finance who formally appointed Orr, and is responsible now for both him and for the Board.

In this latest in her series of articles, MacNamara draws on the responses to one of several Official Information Act requests she had lodged late last year.  She had sought from the Bank copies of communications between the Governor and (a) the head of the financial sector body INFINZ and (b) Roger Beaumont the executive director of the Bankers’ Association (those responses are here), and copies of communications between Orr and the New Zealand Initiative think-tank, especially its chair Roger Partridge (responses here).    Her article draws mainly on the response re the New Zealand Initiative.

The context here is Orr’s (then) proposal to dramatically increase the volume of capital locally-incorporated banks would have to have to fund their existing loan books in New Zealand, disclosed in December 2018.    A wide range of commentators locally were critical of the Bank and many drew attention to the rather threadbare nature (at least initially) of the supporting material (it took three waves of releases over several months before we finally got the full extent of the Bank’s –  still-underwhelming –  case).   There had been no technical work preparing the ground, even though Orr was to be prosecutor and judge in his own case.  There was no serious cost-benefit analysis for what Orr was proposing, no serious benchmarking against capital requirements in other countries (notably Australia), no serious analysis of the nature of financial crises, and a strong sense that Orr wanted to compel us to pay for an insurance policy that simply wasn’t worth the price.    All this from an organisation where a recent careful stakeholder survey –  conducted by the New Zealand Initiative before Orr took office –  had highlighted very serious concerns about the Bank’s financial regulatory functions.    Meanwhile, Orr was already underway with his open attempts to cast anyone who disagreed with him as a “vested interest”, somehow “bought and paid for”.

Various people made public comments.  Among them was Roger Partridge, chair of the New Zealand Initiative, who had a column in NBR in early May critical of what was being proposed, and the processes used (at the time the Initiative was finalising its submission to the formal Bank consultation).    In my contact with Roger, he always seems much more interested in the substance and process of any issue.   But in a single decisionmaker model, it is a single person in focus.  [UPDATE: Here is a link to the “offending” column.]

Anyway, the Governor did not like Roger’s column at all.  Normal people who disagree might either let things wash over them (being in public life, exercising great power, not only does but should, bring scrutiny, challenge, and criticism).  Or perhaps you might even ring the author and have an amiable chat.  But not Orr.

The OIA release begins with Partridge emailing Orr after learning that Orr had rung the Executive Director of the Initiative had been “upset” by Partridge’s column.  This is a bit of a problem for the Initiative, as Orr is scheduled to speak at a private lunch for their members the next day, so Partridge offers up one of those semi-apologies (“if I crossed the line I apologise, but don’t resile from the criticisms of the policy process”), and even goes so far as to send Orr a copy of the remarks he intends to use to introduce Orr the next day (typical gush).

But that is not nearly enough for our thin-skinned Governor who replies to Partridge with a page and a half email.  All this after Orr had already talked to Hartwich both before and after a flight to Auckland they had both been on.   Just a slight loss of perspective and focus you might wonder?

And so we read (of his conversation with Hartwich)

I talked of the personal abuse I receive in this role. I also talked of the vested-interest driven articles that are prevalent and portrayed as analysis.

and

I do not accept your apology as it provides no reflection on your:
1. Stating I have a gambling problem.
2. Mocking our use of a Maori mythology to connect with a wider NZ audience – something we have been tasked by the public and stakeholders to do (I noted to Oliver this is a common thread of online abuse I receive from other purported banking/economic experts that go even further in ethnic/religious/personal comment).
3. Claiming below that you aimed to provide a robust critique of the proposal. You do not. You quote selective work of purported experts. You also pull only selected components of our submission process (which has stretched nearly 2 years).

From context, I understand that Partridge had said something along the lines that Orr was doing little more than gambling with his ill-supported capital proposal.  If so that seemed (and seems) fair to me, and would not to any reasonable person, with any sense of perspective, suggest they thought the Governor had a gambling problem.

I guess we are expected to just believe the lines about “online abuse” (and, who knows, perhaps I’m one of the people he is alluding to).

It goes on, before ending this weird way

I do not see your article as a robust critique. What I do see is ongoing character assassination, an undertone of dislike of the RBNZ, and a clear bias in economic and ethnic preference.

At the Bank we are open minded and working on behalf of all New Zealand and do so in a transparent manner.

See you tomorrow. The introduction looks fine. I will be professional and courteous towards your members.

Adrian

The person

But, of course, he is calm, open-minded, and –  apparently unlike any of his critics – only focused on the national interest.  And what to make of that “The person”?     If any upset junior staffer sent such an email to his/her boss, you might seek to get them some support and counselling.  But this was the most powerful unelected person in New Zealand, responding to a private citizen who happened to disagree with him.

(Of course, I can well understand why they didn’t do so, but in some respects it is a shame the Initiative didn’t disclose this correspondence at the time, so poorly does it reflect on a leading public official, making major policy decisions while clearly not coping.  I hope at least they referred the matter to the Minister and the chair of the Bank’s Board.)

Partridge sent another placatory email to the Governor, only to get yet another page-long missive

The behaviours displayed by your institution make it appear that it is a low chance that a well informed discussion where all parties come out better off could be ever achieved. We Remain open minded.

ending

See you later today. I will be professional and respect your members. I do not gamble.

There had been no mention of the “gambling” thing in Partridge’s email Orr was here replying to.

The rest of that OIA release is fairly uncontroversial stuff from 2018 on the release of the Initiative’s report that dealt with the Bank’s financial regulatory functions (the one the Governor claimed at the time to take seriously and welcome, although also the one he was rubbishing by late last year.)

What about the other OIAs?  It is mostly less egregious stuff.  But we have this odd example from a letter to the Executive Direction of INFINZ on 24 May 2019

For closure sake as promised, I mentioned to you at the event that I was disappointed with the process that you adopted in the preparation of a submission to our bank capital proposals. I did so as I want to be open and frank consistent with the ‘relationship charter’ we recently established with our regulated banks I read about your views first in your published op-ed and then via a newsletter you sent to INFINZ members. It was some time after that you met with RBNZ staff. The process created a perception of a predetermined outcome for the submission.

How shocking.  A private sector industry group first published its views in an op-ed and a newsletter and didn’t first talk to RB staff.      Quite who does the Governor think he is in objecting to that?

Even odder was this

In the spirit of the ‘#me too’ commentary promoted at your awards evening, I have received personal written and verbal abuse from within the industry during this consultation process. For New Zealand’s capital markets to have the ‘social license’ to operate – another theme at your event – I believe the industry’s culture needs ongoing improvement.

As a reminder to the Governor, we don’t have lese-majeste laws in New Zealand, and certainly not for central bank Governors.   And as for this weird appropriation of the “#me too”  movement – mostly about the mistreatment of women by men in positions of power over them –  to apply to criticisms of a very powerful public figure…..well, weird is just the best term for it.

It wasn’t the only time he’d tried this line.  In a column late last year, Hamish Rutherford told us he’d even used it at a parliamentary committee

me too

Being in position of power, Orr’s complaints brought forward this response from the INFINZ Executive Director

We are concerned and disappointed that you have received verbal and written abuse from within the industry during the consultation process – bullying is not acceptable and we agree that all discussions should be both professional and respectful.

Quite how anyone in the industry –  or anywhere else for that matter –  could have “bullied” the Governor (who single-handedly wields all the power that mattered on the bank capital issues) is beyond me, but I guess INFINZ didn’t want to jeopardise their ability to get the Governor as a speaker etc.

The final set of OIA responses cover the Executive Director of the Banker’s Association.

The first was a Saturday morning email to Beaumont and the chairs of the four main banks in April.     It isn’t offensive and thin-skinned as he later became, but while the submissions are still open, he is clearly trying to put pressure on them

FYI only as I am eager you understand the effort we are going to in order that the Bank is open and listening.
This was not the impression you all conveyed to me over the last couple of weeks in our individual one-to-one meetings.

Only there is nothing in the rest of the letter to give anyone any reassurance.

In late May there is a letter (presumably emailed) from Beaumont to the Governor, copied to the Minister of Finance, about the “independent experts” the Governor had selected to help make his case.    The letter isn’t aggressive in tone but noted that none of the independent experts had New Zealand specific knowledge and suggest a couple of locals they could work with.

But this sparks a petulant email back from Orr, also copied to Grant Robertson

Dear Roger,
Your letter is unsigned. Can you confirm it is legitimate please? Apologies, one must be careful.

and

I do not understand the reason you have copied the Minister of Finance in to this dialogue. Is there something specific you are looking for from the Minister’s office that I need to understand?

Minister of Finance? Well, you mean the elected person with overall responsibility for economic policy, the person who has formal responsibility for your performance etc etc?

Recall, that all the stuff covered in the material that came to light yesterday is really just another glimpse at what was apparently a pattern of quite inappropriate behaviour.    From one of Kate MacNamara’s earlier articles

But other observers were not surprised. Details of [Victoria banking academic Martien] 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.

We can only wonder what he was like inside the Bank or around his own Board table.

Does any of it matter, or is this simply the degraded state of public life we now have to get used to?  Age of Trump, age of Orr etc.

It should be utterly unacceptable, in any public figure, but perhaps especially so when that one public figure is (a) unelected, and (b) wields such huge discretionary power on far-reaching policy matters, with few/no checks and balances.   I was tempted to suggest that the individuals in receipt of these particular Orr missives are big enough to stand up for themselves, except that evidently they aren’t really –  Partridge, Hartwich, and McElwain find themselves rushing around the placate Orr.  That’s costly and uncomfortable: much easier just to pull your punches and offer less challenge or scrutiny next time the bully (for on his revealed behaviour it is him not his critics who better fits that description) wants to push through some half-baked costly idea.

The banks themselves will long since have gotten the message –  it was Orr’s predecessor who heavied the BNZ to shutdown Stephen Toplis when he wrote a critical commentary on some aspect of Wheeler’s monetary policy –  but the experience last year will only have reinforced that extreme caution.  Recall that Orr wields direct power over them in all sorts of way, visible and less so, and clearly does not cope with being challenged or criticised (no matter how many times he claims to be “open-minded”.   It is great that Kate MacNamara has kept up the scrutiny, but that will presumably mean no access: much easier for her fellow journalists to keep their heads down and not ask hard questions of the Governor and Bank (who –  news though it may be –  are not infallible).

And what about people inside the organisation?  Recall that on regulatory matters the Governor is still the sole decisionmaker, and on monetary policy he has –  in effect –  most of the clout, all of voice, and no real transparency.  It is vital that the Governor’s priors, whims, and even well-considered ideas are seriously scrutinised –  and even that the Bank sticks to its statutory roles –  but seeing the Governor treats outsiders, how are people inside the Reserve Bank likely to respond.  All but the most brave or reckless will be strongly incentivised to keep quiet, go along, join the cheerleaders etc.  In any public agency that should be grossly unacceptable, but particularly so in one as powerful as the Bank.  Orr has grossly abused his office, and looks increasingly unfit to hold it.

And if Orr gets away with it what message does it send to other thin-skinned bullies elsewhere in the upper ranks for our public sector, let alone to those who work for them.

And yet it looks as lot like Orr will get away with it.  Perhaps there was some quiet word in the hallowed halls of the Bank’s Board room, but these are the same people who selected the Governor less than two years previously. They are invested in his success, and they and their predecessors have a long track record of providing cover and defence for the Governor, not serious scrutiny and accountability on behalf of the public. This behaviour occurred in 2018/19 and there is no hint of concern in the Board’s published Annual Report.

If any of this bothered Grant Robertson, it can’t have been much.  You’ll recall that response I had late last year from Robertson, when I wrote to highlight his formal responsibilities for the egregious conduct highlighted in earlier MacNamara articles.  He then expressed his full confidence in the Board and suggested he was satisfied with the Governor too.     In the great tradition of “lets look after each other” Robertson has just appointed the Board chairman to a further two year term, even as he walked by such appalling conduct by the person he is paid to oversee.

(It is sad to reflect that much of the material covered here relates to events in May 2019.  That was the same month the then Secretary to the Treasury was also going rogue, grossly mishandling –  and then refusing to apologise for –  his handling of the “Budget leak” episode.    Doesn’t exactly instill confidence in the top tier of our leading economic agencies –  or the Minister responsible for both –  does it?)

Perhaps it is all in the past now.  Perhaps having got through the year, made his final decisions etc, Orr has returned to some sort of stable equilibrium and is operating effectively, rigorously, and deeply to provide leadership in difficult times.  Perhaps.  But even if that were so –  and that sort of Orr was not on display last Wednesday –  no one who can lose all perspective as badly as Orr clearly did last year, who simply cannot cope with serious criticism and scrutiny, simply should not hold high office here or anywhere else.  It is risky for New Zealand, it is dreadful for the reputation of the Bank, bad for the reputation of the New Zealand public sector, and reflects pretty poorly on our political leaders –  in government and Opposition –  who simply walk by, at least in public, such egregiously unacceptable conduct from such a powerful public servant (one who doesn’t even have the redeeming quality of being consistently rigorous, excellent and right to perhaps compensate in some small measure for his grossly unacceptable).

 

An intriguing possibility raised by the RB

I was chatting yesterday to someone about what might be in the Reserve Bank speech today on “The Global Economy and New Zealand” . I noted that whatever else the Assistant Governor might have to say we could be pretty confident that he would be repeating the line that changes in the world economy typically affect New Zealand trade – as a commodity exporter –  more through price changes (adjustments to the terms of trade) than through volume changes.  That is particularly so for dairy –  cows are still milked –  but it makes us somewhat different from economies whose external trade is heavily manufacturing in nature, often as part of multi-stage international supply chains.

Sure enough, there it was in the speech

When considering global influences on New Zealand exports, we have historically focused more on export prices than volumes.  This reflects that in the past New Zealand’s exports have been dominated by primary sector products whose production volumes are relatively insensitive to fluctuations in short-term demand.  Export prices tend to fall in tandem with the global economy—low global demand should lower prices. 

While waiting for the speech to be released I had been playing around with some numbers to illustrate the point, at least with reference to the last significant global downturn, the recession of 2008/09.   Here is a chart of the percentage change in the volume of goods exported from each OECD country from peak to trough over the 2007 to 2009 period (both peak and trough quarters differ from country to country).   Disruptions to trade finance was also a material factor in some countries during that particular period.

goods x 08

And here, by contrast, is much the same graph for the volume of services exports

services x 2008

Our services exports –  concentrated in discretionary items notably tourism and export education –  actually dropped slightly more than those of the median OECD country (as did that other commodity exporter Norway, and even Australia had a reasonably material fall in services exports).    Note how different the Japanese and New Zealand goods exports experience were but how similar the services exports outcomes.

To illustrate the price effect I’ve chosen to use the terms of trade rather than export prices.   Here is the peak to trough fall in the quarterly terms of trade for each OECD country over the 2007 to 2009 period,

TOT 08

Most of the countries with the largest falls in the terms of trade over this particular period were primarily commodity exporters.  But although our terms of trade did fall by more than the median country New Zealand’s fall was not that severe (much less so than Chile and Norway, or even Australia), and was slightly smaller than the fall Japan experienced.  (I suspect that if we could break out goods and services terms of trade separately, we might find that the services terms of trade improved (often happens, especially around tourism, when the exchange rate falls) while the goods terms of trade fell quite sharply.)

Some of these results will be idiodyncratic to the particular event, so I wouldn’t want to make too much of them, but the services chart in particular is a reminder that for some –  quiter labour-intensive – components of exports, the volume channel is just as important here as in many other advanced economies.

What of the Assistant Governor’s speech itself?    There wasn’t really that much there, and one can’t help suspecting that anything of interest was in the Q&A session afterwards, especially given the potential short-term disruptions from the coronavirus.  Recall that whereas the RBA makes available recordings of Q&A sessions after speeches by its senior managers, the Reserve Bank of New Zealand does not.  That is not very satisfactory.

I was, however, struck by a few errors and what looked like government-aligned spin.

Hawkesby asserted that 

Another development worth noting is the increasingly diverse nature of our exports, with the growing importance of our service exports and the growth in the technology sector.

Well, here is the data from the latest annual national accounts

services x annual

As a share of GDP, services exports peaked in the year to March 2003, almost 17 years ago now.  Even over the last few years, there has been a slight shrinkage.  Who knows what the Reserve Bank had in mind, but these are the official data.

Oh, and then there was the misleading statistic that will not die, because it keeps getting run out by ministers, industry advocates, journalists (who perhaps know no better), and now (apparently) the Reserve Bank.  

While our exports are still dominated by primary goods and tourism, technology is now New Zealand’s third largest export sector, with exports growing 11% to $8b 

There is a footnote on that statistic to the TIN Report.  But even the TIN people will concede, if you dig deep enough in their reports, that this simply isn’t an apples for apples comparison. It might be quite interesting to know how much New Zealand owned companies sell globally, but that is quite different matter/statistic from New Zealand exports (which are about production here, whether by foreign or domestic-owned companies).    I highlighted some of the problems in this tech story in a post a couple of years ago (when the underlying picture didn’t look flattering at all). I don’t expect the Reserve Bank to read my posts, but I do expect the Assistant Governor for economics to know what exports actually are.    As it is, his is an apples and oranges “comparison”.

In fact, if he’d wanted to give his audience a fairer picture of New Zealand the global economy he might have mentioned that overall exports as a share of GDP are weak (well below peak, well below what one might expect for a country our size) and that tradables sector output has long been similarly subdued.

And then there was the final piece of spin

Climate change is also likely to impact New Zealand’s economy in a number of ways in the future.  Growing environmental regulation of the primary sector, for example, could result in an acceleration in the diversification of our export industries.  

No doubt that final sentence is some part of the story, but it seems to rather ignore the main event: whether or not one agrees with policies the government is adopting in this area, the overall effect seems more likely to be a shrinkage in the path of primary sector production, at least relative to the counterfactual.  But I guess the Governor and the government wouldn’t have been too keen on him mentioning that.    (I’m not really suggesting he should have –  these long-term issues don’t have anything much to do with the Reserve Bank, but playing parts of the story that suit political masters wasn’t necessary either.)

But then on the final page there was another longer-term reflection that caught my eye

There are uncertainties, for example, about the future openness of international trade and labour markets.  There has been a growing geopolitical trend globally towards protectionism and lower migration.  Rising global protectionism could reduce our export opportunities and lower migration into New Zealand could dampen our growth, but might spur investments in domestic productivity.

I’m not sure that second sentence is empirically well-supported, at least as regards the migration bit.   I’m curious which countries the Assistant Governor has in mind, and noted only the other day achart highlighting the significant increase in work visas being granted in the US in recent years (and governments in other big recipient countries, notably Canada, Australia, New Zealand and Israel, don’t show much/any sign of reduced enthusiasm for immigration).  But what interested me was the final sentence and the suggestion that (structurally?) lower migration to New Zealand “might spur investments in domestic productivity”.   I think so –  it is a key element in my story, about reducing pressure on the real exchange rate, narrowing the gap between New Zealand and world real interest rates, reducing the need to focus investment (including public) simply on keeping up with population growth – but was (pleasantly) surprised to see the Reserve Bank saying so.  Intriguing, to say the least.

Perhaps unsurprisingly, there was only passing mention in the speech –  no doubt mostly finalised last week – of the coronavirus.  There was a reference to the SARS experience providing some possible parallels –  at least if the virus ends up being contained.  But it is worth remembering that the PRC is a much larger share of the global economy than it and/or Hong Kong were in 2003, that the shutdowns already seem much more extensive than happened then, and that tourism from the PRC –  almost entirely a discretionary item, much already interrupted by the PRC –  is a much more important share of the New Zealand economy than it was then.   And in 2003 SARS was one of the factors the Bank cited to justify cutting the OCR that year.

Officials in pursuit of more powers

It is a big few weeks for the Reserve Bank and, in particular, the Governor.   This week the Monetary Policy Committee is gathering for its deliberations leading to next week’s  Monetary Policy Statement.  A couple of weeks later there is the Governor’s six-monthly Financial Stability Report,  and the week after that we are told that the Governor will descend from the mountain-top and reveal his decision on bank capital.   There are at least two press conferences scheduled (MPS and FSR) and given that he has deliberately chosen to release the momentous capital decision only after the FSR press conference one has to hope that he will make himself available to explain and defend his choices (and, although he has staff, all the decisions –  and responsibility for them –  are his alone).

Meanwhile stories rumble around about the possibility that the Bank’s Board has,for once, found its voice and suggested to the Governor that he needed to change his style.  I heard yesterday another version of a story that culminated in the Governor yelling at the chair of the Board after the latter (so it was reported) suggested that aspects of the Governor’s conduct were unacceptable.   I have no way of knowing whether these stories are true, or are just wishful thinking, but given the quiescent and deferential track record of the Board over many years, it would be perhaps a little surprising if there was nothing to the stories now.

One of the other projects the Reserve Bank has underway, which attracts less attention and controversy, is that around the future of cash.  It is both an apt issue to be focusing on and, at the same time, something of an odd one.  And, remarkably, in the discussion document the Bank put out a few months ago there was no mention –  at all, as far as I can see – of the most immediately pressing issue: the limits on the ability to cut the OCR that arise because of the (near) free option people have to shift from bank deposits etc to physical cash.

The future of (physical) cash is somewhat of an odd issue to be focusing on because cash outstanding has been rising relative to GDP.    This chart is from the Bank’s discussion document

cash 1.png

It tends to exaggerate the point, by starting from the trough.  Here is a longer-term chart from a post I wrote on these issues a while ago

notes and coin

All else equal, when interest rates are very low (and inflation is low too) people are more ready than otherwise to hold on to physical cash.  Of course, quite who is actually holding the cash, and for what purpose, is a bit of a mystery, one not really addressed in either the Bank discussion document or in the poll results they published last week, framed in terms of a high preference for using electronic payments media whenever possible.

The Bank included an interesting chart in its document illustrating that although the ratio of cash to GDP is quite low in New Zealand, the rise in that ratio wasn’t out of line with what has been seen in quite a few other advanced countries.  Sweden and Norway –  where the ratios have fallen –  are outliers.

cash 3.png

There is quite a strong suggestion that in the most recent period a big part of what is holding up currency in circulation was the surge in overseas tourism, especially from China.

cash 4

Overseas tourism remains one of the areas where physical cash is much more likely to be used than in normal domestic spending.

Notwithstanding these routine and entirely legitimate uses of physical cash, it is still hard not to conclude that a large chunk of the physical cash on issue –  in excess of $1000 per man, woman, and child –  is held to facilitate illegal transactions, including tax evasion.   That was Rogoff’s view, and as I wrote about here he –  against my priors – converted me to that way of thinking.

So there would seem to be no risk of cash disappearing from the New Zealand scene any time soon.   And yet the monetary policy constraint arguments, that the Bank simply doesn’t address in its discussion document, suggest that if anything the use of Reserve Bank cash (and especially the potential use of cash) should be constrained more tightly than at present.  The Governor may repeatedly assert that unconventional monetary policy options will do just fine, but few other people would look at the international experience of the last decade without thinking that monetary policy ran into limits.  Those limits arise mostly because of the non-interest bearing nature of the cash and the near-free option of converting into physical cash if returns on other short-term securities go, and are expected to stay, materially negative.

This limit need not exist, or at very least could be greatly eased.  Abolish the $100 note, for example, and at very least you double physical storage costs of secure large cash holdings.  Abolish the $50 note and you more than double the costs again (while the ability to give your kids pocket money in cash, or to use cash at the school fair isn’t materially affected).  That was, basically, Ken Rogoff’s argument in the US (restrict central bank notes to no more than $20 bills).  I’ve argued for one of a range of more-wholesale solutions that have been proposed: put a physical limit (perhaps indexed to nominal GDP) on the volume of currency in circulation (perhaps with overrides for bank runs), and auction the right to purchase new issuance (there is no reason why newly-issued cash has to trade at par).  Do that –  perhaps even set the limit fairly generously –  and the effective lower bound, as a convertibility risk issue, is abolished at a stroke.

This is coming close to being a fairly immediate issue.  No one supposes the Reserve Bank could, on current technologies, usefully cut the OCR by 200 basis points or more in a new recession, and yet in typical New Zealand recession something more like 500 basis points has been required.

It is pretty staggering that they haven’t addressed these considerations at all in their document.  Instead, having had submissions (lots of them) on the first consultation document, they issues another consultation document (deadline for submissions tomorrow) bidding for more Reserve Bank powers over the currency system.

The currency system seems to have rubbed along tolerably well for the 85 years since Parliament gave the Reserve Bank a statutory monopoly on the issuance of bank notes  (it seemed to function just fine in the earlier decades as well: whatever the case for setting up a Reserve Bank there was never a robust case for the statutory monopoly on bank notes).

But none of that deters the Reserve Bank.  It is a rare bureaucracy that looks to shrink itself, or is averse to an expansion of its powers, and the modern Reserve Bank seems to be no exception.  This is their bid

cash 5.png

As they note, there is no need for any such powers at present.  Which really should be determinative.  It isn’t like preparing for an extreme national disaster, where it makies sense to have some precautionary powers on the books.  This is about a payments media that is gradually being used less and less (for payments) and where change is exceptionally unlikely to happen overnight.     Were there ever to be severe problems, surely Parliament could address such issues when they arose, rather than inventing new laws now –  and delegating the use to unelected, not very accountable, officials –  just on the off chance?

There should be a strong pushback against this bid for power.  Their (short) document makes no compelling case for legislative action –  and more discretionary regulatory power – now.  Indeed, as they note

There is a host of international examples where cash system participants have found different solutions to fit their unique economies.

It is what the private sector does –  innovate in response to market incentives and opportunities.  They worry –  as busy bureaucrats will –  that “no single organisation has system-wide oversight of the cash system or a formal role to support it”.   There is no such organisation for, say, the corner dairy sector either.  Nor an obvious need for one –  let alone for the government to be taking charge.  They complain that they don’t have information gathering powers over participants who aren’t banks, but offer no analysis or convincing demonstration as to why they should have such powers.

They offer no analysis either as to why the market could adequately manage issues around ATMs or other processing machines, or even for the quality of the notes retained in circulation.    Much of it seems to be made up on the fly –  so it seems, to catch the decisionmaking process around other changes to the RB Act.  Thus they talk of powers to compel banks to distribute cash, but seem to have thought through very of this bid for power for hypothetical circumstances.  This, for example, is the last substantive paragraph of the document.

How accountability would be defined under such regulation, and therefore how sanctions could be applied, warrants further consideration. Banks could be held collectively accountable for the provision of cash services, meaning that banks would share the responsibility for providing access to cash, and all banks within scope would face sanctions for each case of noncompliance. This would be a novel regulatory structure in New Zealand, but might be practically workable and might encourage greater cooperation among banks. Alternatively, each bank could be individually accountable for the provision of certain services in certain areas. However, this presents challenges around how accountability is allocated. Both options present considerable practical challenges, which will need to be investigated in consultation with relevant parties if any policy is developed.

Doesn’t exactly instill much confidence.

Many of the problems the Reserve Bank worries about (perhaps arising one day) would, in any case, largely be a reflection of the statutory monopoly on banknotes. So perhaps a better legislative route would be to look at repealing that restriction –  simple one clause amendment to the Act would do it –  and allow banks to issue their own notes.   Perhaps it is now a little late for that, but we don’t know if we keep on ruling out the opportunity for innovation.  It might be considerably cheaper for banks to issue their own notes (as they issue their own deposits) –  since they wouldn’t have to worry about returning them to a central point for value –  and, conceivably, technological innovation might even allow interest-bearing bank notes  (it is the zero interest nature of  the existing notes that creates the lower bound issue for monetary policy).

Bids for new regulatory powers are often a response to issues, problems (or possible future risks) thrown up by existing regulatory or legislative interventions.  The Bank’s latest bid for more discretionary powers seems exactly in that class of bureaucratic initiatives.   The Minister of Finance should say firmly no to this latest bid, should insist on the Bank openly addressing the effective lower bound issue, and might consider asking the Bank what public policy end –  other than higher taxes –  is served by maintaining the 85 year old monopoly on note issuance.  We got rid of most statutory monopolies a long time ago.

 

Monetary policy communications and the lack of transparency

The Reserve Bank’s Assistant Governor for monetary policy and financial markets, Christian Hawkesby, went off to Sydney earlier this week to talk to some investors about New Zealand monetary policy communications.  Hawkesby now has tenure and independence –  at least in principle – as a statutory officeholder, a member of the Monetary Policy Committee, appointed directly by the Minister of Finance.

It was perhaps telling that (a) the speech was delivered on a New Zealand public holiday, (b) the text wasn’t released for another 24 hours, and (c) we have no record of what Hawkesby actually said, including in response to questions.  That is no way to do monetary policy communications.

Perhaps while he was in Sydney Hawkesby dropped in on his peers at the Reserve Bank of Australia.   The RBA has about 45 speeches/presentations from senior managers showing on its Speeches page for 2019.   For all but three of them –  and none of those three on topics that appear market-sensitive –  there is video, audio or a Hansard transcript (several of the Governor’s appearances were to parliamentary committees).  It doesn’t seem to make any difference to the RBA whether the speeches etc are given overseas, out in the provinces in Australia, or in downtown Sydney or Melbourne: the standard they set for themselves is that when they say something, it is made generally available.    Anything else poses a risk –  actual or in appearances –  of unequal access to potentially market-moving, or just insightful, official information and perspectives.  That is just one aspect of communications on which the Reserve Bank of New Zealand falls a long way short of best practice.  There are 12 speeches from senior managers on the Reserve Bank of New Zealand’s Speeches page for 2019, and for only of them is there video footage (that a puff piece by the Governor –  which I wrote about here).

Hawkesby’s speech came in two parts.  The first was devoted to repeating longstanding Reserve Bank spin about how transparent it is, supplemented by some Orr-esque lines about how surprising the market is no bad thing (the second part was defensive play around the surprise August 50 bps OCR cut).  There were no fresh insights or arguments, which in itself was a bit disappointing from so senior a figure, relatively newly returned to the Bank  –  despite the relatively junior-sounding title, Hawkesby is, in effect (and in Wellington public service lingo) a deputy chief executive responsible for half the Bank’s core functions.  Anywhere else in the world he’d carry a Deputy Governor title.   Those are the standards his speeches should be held to.

The Reserve Bank (longstanding) main claim to being highly transparent is that it publishes a future track for the policy interest rate (the OCR) for a period two to three years ahead.  We were the first central bank to do so, in 1997.  As Hawkesby notes, despite 22 years experience, only a handful of other central banks  (four small advanced country ones) have followed our lead.  Reasonable people can debate whether publishing a forward interest rate track is the best way to do things (I’ve never been convinced myself) but when none of the world’s leading central banks have taken that path –  and all will, quite seriously, proclaim a commitment to transparency –  it probably isn’t something to put quite as much weight on as the Bank has done (through successive Governors/staff).

I’ve characterised the publication of the forward interest rate track as being highly transparent about something the Bank (now, at least formally, the MPC) knows almost nothing about.  Economic forecasting is a mug’s game, and there is little evidence that anyone can usefully forecast economic developments more than perhaps a quarter or two ahead….and yet, monetary policy works with a lag, so a medium-term OCR projections (for, say, 2.5 years ahead) implicitly requires –  to be meaningful – some intelligent view of inflation prospects perhaps four years hence.  No one can do it in a way that has any useful substantive information.

And if the Reserve Bank is pretty transparent about the stuff it knows almost nothing about –  and has to divert scarce resources to generating such tracks –  it is really quite strikingly non-transparent about the stuff it does know more about.  For example:

  • we have a Governor, clearly the most important player in the system, who has not yet given a particularly substantive speech on monetary policy, the economy, and inflation (which would otherwise offer insights on his thought processes, his mental models, his ability to process and analyse data etc),
  • we have a Chief Economist –  also a statutory appointee as member of the Monetary Policy Committee –  who has not given a speech or said a substantive word in public since he was appointed,
  • as above, the Bank isn’t particularly transparent around the speeches it does give (and especially around answers to questions),
  • we have three non-executive members of the Monetary Policy Committee from whom not a word has been heard since they were appointed.  We know nothing about how any of them think about the policy targets towards which they are working, about how economic developments are unfolding, or about the “reaction functions” they use  (and this is so even though the rules allow them to speak), and
  • the Bank is totally untransparent about the background analysis produced to support monetary policy decisionmaking.   The current government –  not naturally particularly transparent –  has adopted a practice of pro-active release of Cabinet papers, many Budget-related papers have long been pro-actively released, but ask for any background papers re monetary policy decisions –  even with quite a lag –  and the Bank will simply refuse (and, sadly, they have the ineffectual Ombudsmen –  over several appointees – wrapped around their little finger in clasping this taxpayer-funded analysis tightly to their chest).  Perhaps it is lawful, but it simply isn’t transparent.   (A few years ago, after many months of trying, I managed to get them to release background papers for an MPS from 10 years previously –  but no one supposes they would release such material from, say, two years ago.  If there is a decent argument for any confidentiality around this material, it could only credibly mounted for the period from one MPS to the next –  ie three months or so – at most.)

That isn’t good monetary policy transparency, nor is good open government (the latter not being a consideration that ever weighed much with the Bank).

Hawkesby attempts a defence of the Bank’s preferred practice, in which only the Governor speaks about monetary policy (no speeches of course, just MPS press conferences) and to the extent that underlings like Hawkesby speech they largely parrot the Governor.   This is the best he can manage

A third limitation of transparency is the noise that it can create – an example of this is how to capture the diversity of views of individual members of a committee tasked with setting interest rates.

An example of this is how to capture the diversity of views of individual members of a committee that sets interest rates. Each individual member regularly sharing their views on the economic and policy outlook can make it harder for financial markets to interpret the reaction function of the collective group. While I worked at the Bank of England, I always remember the head of communications bemoaning the cacophony of voices. More transparency around the perspectives of individual members could also create incentives for those individuals to hold on to a previously published position even as new information emerges, for fear of being seen as ‘conceding’ their position.

A paradox of these limitations is that greater transparency does not necessarily equate to increased clarity for market participants and the general public. Just because more information is available does not necessarily mean the audience will have a greater understanding of how and why central banks make decisions.

But there isn’t much there.  Of course Communications managers are keen on message discipline –  always have been, always will be –  and at the Bank of England management was long not very keen on the independence of the external MPC members anyway.  But isn’t it striking that whereas the Reserve Bank seems to believe that New Zealanders –  public, markets –  can’t cope with a diversity of views (about a highly uncertain business), the national central banks for the largest advanced economies –  the US, Japan, and the UK –  in fact do cope quite well with having MPC members explicitly voting against a majority view, or articulating a model or analytical insights a bit different from that of others on the relevant committee.   Sweden is a succesful small country example.  The ECB is a bit different –  and there are some reasons why, around minimising pressure on members to act for their own country’s national interests –  but even in the ECB there is plenty of open recognition of differences of view among the monetary policy decisionmakers.   It isn’t as if central bankers know from year to year –  often not from quarter to quarter –  what they are going to do: events happen, interpretations evolve, and particular hypotheses are openly challenged and scrutinised (including those of monetary policy decisionmakers, when we are allowed to see them).

So, no, the Reserve Bank of New Zealand really isn’t particularly transparent at all.  And the newly published minutes really represent not much of a step forward at all.

One of Hawkesby’s points is that the Bank is keen to learn from outsiders –  yes, even “bloggers”.

When private sector economists, analysts, commentators or bloggers don’t agree with our policy decisions or our projections for the economy, it can be an uncomfortable message to hear. But it is an invaluable exercise to test our assumptions and reasoning, even if we don’t agree with their conclusions, we inevitably learn something along the way and strengthen our analysis of the issues.

Good to know (although it is a bit to take seriously when we see how the Governor responds to challenge, criticism, or alternative perspectives on another of those highly complex and uncertain issues –  appropriate bank capital requirements).

But this line is really used to buttress a rather silly line the Governor has run on a few occasions about the (alleged) dangers of the markets paying too much attention to trying to guess what the Bank is up to, in turn (allegedly) reducing the information the Bank itself can get from market prices.   This is, we are told, one reason why it is just fine for the Bank to do things that take markets totally by surprise (notably, the 50 basis point OCR cut in August).

It really is a nonsense argument, even if he can find a couple of footnotes to attempt to buttress his case. In fact (and in effect) he more or less concedes later in the speech when he highlights things like falling medium to long-term inflation expectations (including from the indexed bond market –  a welcome Hawkesby innovation to have the Bank even acknowledge the indicator) that were concerning the MPC when they made their decision.  Almost certainly those indicators –  eg from 10 year bonds – would have been just as they were whether markets thought the Bank was going to cut 50 bps in one go, surprising almost everyone, or (say) spread the cuts over two 25 bps cuts.

I’m not one of those who think that monetary policy decisionmakers should always deliver on market expectations. But usually if market expectations are very wrong (not –  eg –  just 10 expected a cut, 12 expected no change) it is the fault of the monetary policy decisionmakers themselves.   In those circumstances, they add noise and volatility that is simply unnecessary and has no redeeming societal merit.

And as I noted at the time of the August MPS, the 50 point cut looked a lot like a rather rushed last minute decision, that wasn’t really supported by other the numbers (they themselves produced) or the MPS text.

And what makes it a bit more concerning is that it is pretty clear the Bank itself wasn’t intending to move by 50 basis points even a few days ago.  The projections they published yesterday were finalised on 1 August (last Thursday).   On those numbers, the projections for the OCR (quarterly average) were:

September quarter 2019    1.4 per cent

December quarter 2019     1.2 per cent

March quarter 2020            1.1 per cent

With the next OCR review in late September and the following one in md-November, those projections –  adopted by the whole MPC – clearly envisaged not getting to a 1 per cent OCR even by the end of the year.

The bulk of the Monetary Policy Statement itself is written in the same relatively relaxed style, with no hint of a change in policy approach, and thus no proper articulation of the reason for it, or (hence) for how we should think about how the Committee will react, in principle, at future OCR reviews.   The Bank has added to uncertainty around policy, not reduced it.    In a similar vein, there is a new two page Box A in the statement on “monetary policy strategy”, intended to run each quarter, which is so general as to add nothing to the state of understanding of what the MPC and the Bank are up to.

And you will look in vain for any real insight from the minutes of the MPC meeting.   We are told

The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. [a claim that demonstrably isn’t true –  see above] The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

But nothing about the considerations Committee members took into account in belatedly lurching to a 50 point OCR cut, or how they think about the conventions and signalling around using 25 point moves vs 50 point moves (when things aren’t falling apart here –  and it was the Governor yesterday who announced, oddly, of New Zealand that “the country is in a great condition”).

That wasn’t good or effective monetary policy communications.  It wasn’t a transparent insight on how the Committee is operating, the sort of reaction functions members are using, their view of MPS reviews vs the other OCR reviews.    It was –  or came across as –  a lurch (even if, like me, you thought that the OCR needed to come down quite a bit, quite quickly).

I’m going to end with two more examples of a lack of serious transparency.  Near the end of his speech Hawkesby observes

There are plenty of communication challenges ahead, especially if monetary policy in New Zealand moves into a less conventional territory, and we end up adopting new tools and approaches.

These will need to be explained clearly to both financial markets and the people of New Zealand.

No doubt, but would be an open and transparent central bank, wanting to build and maintain confidence in (a) its potential instruments, and (b) its actual decisionmakers and their advisers want to be much more open than the Reserve Bank has actually been?  Wouldn’t discussion documents outlining potential issues and options be a good idea?  Wouldn’t seminars and workshops with outside experts and market participants be a good idea?  Apart from anything else, at least in principle (as the Assistant Governor said) the Bank learns something from such engagement, challenge, and critique and in the process improves its own understanding and analysis.  It isn’t as if anyone is suggesting they pre-commit to when particularly instruments might be used, so this stuff shouldn’t really be market-sensitive, but it is quite important, potentially to us all (and was we know the Bank’s own research capability has been gutted this year).  And it isn’t as if the Bank’s background analysis on other matters –  bank capital again –  should fill us with confidence and willingness to simply “trust us, we know what we are doing”.

And on a smaller note, the next Monetary Policy Statement  and OCR decision is on 13 November.  As the Assistant Governor highlighted, inflation expectations are quite a significant influence in Bank thinking at present (rightly or otherwise).  And yet the main inflation expectations series –  the two year ahead measure in the Bank’s own survey –  isn’t scheduled for release until 12 November.   I participate in that survey.   Responses were due by midday last Tuesday (22nd). It is an electronic survey and if the results are not already in the Bank’s hands, they assuredly could be (it is pretty simple survey with fewer than 100 respondents, taking a matter of hours to compile at most).  And yet the Bank is sitting on this information until the very last minute.  By the time we get it, their decision will have been all-but-finally made, their MPS document completely written. If they were really serious about the desire to listen and learn, from markets, commentators, nay even “bloggers”, they’d have made sure the information was compiled and published quickly, allowing the Bank itself to listen to the response of outsiders in processing the significance of such important (to them) economic data.

If they were really serious…..instead, they mostly seem interested in fending off critics and keeping to themselves the stuff they know, while distracting us with their transparency about the stuff they don’t know much about at all (and where most central banks have not thought it advisable to follow the New Zealand lead).