Towards an engaging Governor

There won’t be a post here on Monday, but yesterday something caught my eye in the email inbox (and I’m not very much of a rugby fan).

This was the advisory from the Reserve Bank

Text of a speech by Head of Communications and Board Secretary, Mike Hannah, entitled “Engaging with our stakeholders to promote understanding, accountability and dialogue” will be published on the Reserve Bank website at 8:30am on Tuesday 27 June

It reminded me of an earlier piece by Hannah a couple of years ago.  It was a Bulletin  article published in May 2015 under the title Being an engaging central bank.  It didn’t seem to attract much attention at the time, although I wrote about it.  Hannah used the article as, among other things, a platform to highlight how active its engagement was and how transparent it was.  I highlighted then some of the many areas in which the Reserve Bank is well off the pace in respect of transparency, particularly around monetary policy.

When Hannah wrote his previous article things must have seemed to be going quite well for the Bank, at around the half-way mark of the Governor’s five year term.   The article presented and drew on a survey of external stakeholders about the Bank’s external engagement, that had been done in the second half of 2014.    The OCR increases were then well underway, and they and most of the people they regarded as domestic stakeholders still probably thought the Bank was doing the right thing.  The Bank used the article to talk up a more active programme of public speaking.   And just a couple of months previously Central Banking magazine had named the Reserve Bank of New Zealand as central bank of the year, citing various things to their credit including having been “the first advanced economy central bank to raise interest rates in the current cycle”.   (Oops)   Graeme Wheeler must have been feeling rather pleased.  According to the survey, most “stakeholders” were also reasonably happy with the Reserve Bank’s communication.

It will be interesting to see what Hannah has to say on Tuesday.  But it is a little surprising that he is doing such an on-the-record speech when the Governor has less than three months to run on his term.  It can’t, one would think, be outlining a new approach  – surely anything of that sort would be a matter for the new permanent Governor next year?   So we can only assume it will be an explanation and defence of the current approach.  If so, given the embattled state of the Bank it is a bit of a surprise that they leave it to a relatively junior member of the senior management group to make the case rather than, say, Hannah’s boss Deputy Governor Geoff Bascand, or indeed the Governor himself.

However they choose to engage, speeches clearly seem to have gone out of fashion again.  The Governor gave five on-the-record speeches in 2013, and seven in 2014.  Things seemed to be going well then.    But in 2015 and 2016 he gave only three on-the-record speeches each year, and in the first half of this year (ending next week) he will have given only one speech.    The pattern is pretty similar for his Deputy Chief Executive, Grant Spencer who is being appointed (questionably legally) Acting Governor for six months after Wheeler leaves.  He has also given only a single speech this year.

What is a relevant comparative benchmark?   Well, Phil Lowe, Governor of the Reserve Bank of Australia will have given six on-the-record speeches in the first half of this year.  His deputy, Guy Debelle, who is particularly active on international foreign exchange regulatory matters, will have given eleven speeches in the first half of this year.    The Reserve Bank of Australia, it will be recalled, covers a lot less ground than our central bank, not being responsible for the supervisions of banks, non-bank deposit-takers or insurance companies.    For most of the RBA senior management speeches, there is also a webcast or audio/video material, something our Reserve Bank doesn’t do.

Here are the numbers for the Governor of each of the other Anglo country central banks, and those of two other small inflation targeters.  Of those central banks, only the Bank of England has at least as wide a range of responsibilities as our central bank,

Governor speeches, first half 2017
UK 8
Ireland 8
Norway 7
USA 5
Canada 4
Sweden 2

What is striking in some of these central banks is the number, and range, of the speeches done by other senior managers.   Our central bank – smaller than most of course – will have done four on-the-record speeches in total in the first half of this year.

However the Reserve Bank engages, it isn’t through media interviews either.  The Governor now seems to give a soft interview to the Herald the day after a Monetary Policy Statement, but that seems to be it.  In almost five years he has given not a single searching interview to any media outlet.  Perhaps that is not so unusual internationally, but the Governor here wields personally an unusually large amount of power, and the Bank has been rather active (interest rates up and down, and more and more regulatory interventions) in the last few years.  Doing citizens the courtesy of a sustained interview once in a while –  an interview that is more than advertorial – would seem the least a Governor could do.  The Governor is said to be uncomfortable with the media.  In a role such as his that should really be disqualifying.

Of course, we now know that the Governor doesn’t much like criticism either.  In fact, one of the ways he engages (was that to promote “understanding”, “accountability” or “dialogue”?) is to send his senior managers out to try to whip critics into submission.  And when that doesn’t work, he sends threatening letters to the chief executive of a bank he regulates, calling for the critic concerned to be censored, to end the risk of upset to the Governor.  Perhaps Hannah will be able to offer some statistics on the frequency of “engagements” of this sort?   Perhaps he could offer some thoughts on the legitimacy of such engagements (after all, the Governor hasn’t been willing to front up in public)?  And on the effectiveness of them?  Does he judge that they have enhanced the Bank’s standing, and public/stakeholder confidence in the institution?

We also know another way the Reserve Bank was engaging, but is no longer.  Under Hannah’s stewardship the Reserve Bank was for years running lock-ups for journalists and analysts just prior to the release of MPSs and FSRs.  Unfortunately, they took that engagement so far that the procedures they used were so lax that people in the lock-ups could simply email highly confidential market sensitive stuff back to their offices (or indeed to anyone else).   That came to a crunching end when, somewhat by accident, I became aware that something of the sort seemed to have actually happened: MediaWorks staff in the lockup had been emailing things back to their office (who knows how many times before?) and on this occasion someone in their office passed the early information on to me (I was to be a guest on their show later that day).    In response, the Governor’s idea of engagement was to (a) largely whitewash MediaWorks, while (b) attacking me as irresponsible, even though I was the person who had brought to their attention what turned out to be both an actual leak and a serious weakness in their procedures.  Perhaps there will be some reflections on that sort of engagement?   Probably not though.

We’ll see what Hannah has to say on Tuesday. But in many respects it doesn’t much matter now.  The embattled Wheeler will be gone in three months, and Spencer  – probably not really the problem –  will be gone in nine.   The challenge for the new permanent Governor –  and something the Board and the Minister should be looking for in identifying potential appointees –  is to move towards much greater openness and effective open engagement.   There are so many fronts on which reform is overdue that it could make a post in itself.

So many other central banks are now so much further ahead of our central bank in this area (as well as others).  In most of them the whole institution has rather less power in the whole institution than is here concentrated in a single individual.  It is a shame, as the Reserve Bank could once reasonably have been said to be in the forefront of openness, transparency and honest engagement.  Now it is quite a laggard in this and other areas, with pre-existing institutional weaknesses reinforced by the problems of a thin-skinned insular and embattled Governor.  An engaging Governor would be a huge step forward towards a more engaging, open and accountable and central bank.  Whoever is Minister of Finance when the appointment is made should insist on it.

 

Wheeler, the BNZ, and Joyce

A few days on and there has still been only scattered public comment on the systematic attempt by Graeme Wheeler and the senior management of the Reserve Bank to “silence” (materially alter the tone and content of what he writes) the BNZ’s Head of Research, Stephen Toplis, that came to light thanks to the Official Information Act and the efforts of BusinessDesk’s Paul McBeth.

(My previous post are here, here, and here.)

As I noted the other day, the letter in response to Wheeler written by the BNZ CEO Anthony Healy was quite strikingly deferential.  It wasn’t even as if Wheeler’s letter was the first Healy had heard of the issue.   In fact, Wheeler’s letter records that, having sent his Deputy and Assistant Governors out one by one to cajole Toplis, remonstrate with him, and induce repentance,

When this failed to address the situation I met with you and passed on examples of the material.

Presumably, the Governor hadn’t simply been told to go away, and get a thicker-skin, then either.

People are human, and sometimes over-react.  In the last few days I’ve remembered, and been reminded of, various past reactions by Reserve Bank Governors to criticism they didn’t like from bank economists.    In one case, a Governor took offence at criticism of his body language at a speech, and wrote to the economist’s boss to complain.  But in the decades since liberalisation I’ve never seen or heard of anything like the sort of sustained campaign to censor a leading economist that we get a glimpse of in these letters.

To what end?  Well, we don’t know what happened when the Governor and Mr Healy eventually talked again.   But in a story the other day Bloomberg reported that they did get an emailed response from Mr Healy.

In a separate emailed statement, Healy said “economists have an important role to play in providing opinions, and it’s important that they are independent and have a view which isn’t influenced by the wider organization.”

“However, we have acknowledged that from time to time, we may not get the right tone and will always take on board any feedback where our intent or message is not reflected in the language used,” he said.

So the CEO apparently has no concerns –  or at least none he is willing to be open about –  about the Reserve Bank Governor, and BNZ regulator, engaging in a sustained campaign aimed at changing what (and how) one of Mr Healy’s senior employee’s writes?

But, on the other hand, he does seem concerned to assure us that he has taken on board the Governor’s concerns, and will see to it that the product is different in future.  Perhaps they are just weasel words, but “take on board” seems rather more active than some bland observation that “we always welcome feedback”.    And I don’t think there is anyone –  whether or not they agree with what Stephen wrote –  who thinks that in the MPS preview that upset the Governor so much his “intent or message is not reflected in the language used”.   He said exactly what he thought, in a typically strident way.

So it begins to look as though Graeme Wheeler might have won (at least with the BNZ/Toplis) if not with a wider market.  In some ways, that would be even more disconcerting than the fact of the initial Wheeler-led campaign in the first place.   Time will tell, and I’m sure people will be watching Toplis’s future pieces with interest.

There was, for example, a new substantial piece out earlier this week, Capacity Constrained!  It is an interesting note, with some points to reflect on even if (like me) you aren’t that persuaded by his “hawkish” case.  But what I found striking, and a little disconcerting frankly, is that in five pages there is not a single mention of the Reserve Bank or monetary policy –  and yet, the research report is about aggregate capacity pressures and, hence, inflation risks.  The final sentence…..

But, that said, we strongly warn that businesses, householders, Government and investors alike need to better understand the capacity constraints that New Zealand currently faces and, in turn, recognise that whether or not expected inflationary pressures arise, growth is likely to moderate.

…..surely cries out to have “and the Reserve Bank” included in it?    Perhaps Toplis has just been told to lie low until the fuss passes, and then normal service can resume.  But even if that is “all” it is, it would be pretty disconcerting for Healy, his Board, and his parent, to have passed such a win to the Governor, him having exerted intense and illegitimate pressure to achieve it.

Then again, perhaps it was just an oversight, and Toplis really meant to include the Reserve Bank in his warning all along?   Perhaps.

There have been a few other comments in the last few days:

  • one prominent business person, evidently a BNZ customer, commmented here, and while carefully avoiding direct comment on the Reserve Bank, observed that “any material change of approach by Stephen or Anthony would be unfortunate for BNZ’s customers and in due course BNZ.”
  • on interest.co.nz, David Hargreaves has a very forceful and well-written piece, in which he calls for “a new Reserve Bank Governor who is thick-skinned and accepts that people will disagree with them” .    Mostly I strongly agree with Hargreaves – eg  “People in high office need to, in the colloquial vernacular, grow a pair, and accept that not everybody will agree with them. That’s what they are paid the big bucks for. ”     Having said that, he suggests that an “implied intellectual snobbery” at the Reserve Bank has got worse under Wheeler: for all his many faults, I don’t really agree with that comment (partly because I wince to remember some of the episodes I was involved in over the years in which at times we treated people who disagreed with us with absolute disdain….in public or in private….even if we didn’t try to censor them).

One line I really liked from Hargreaves was this

If you are going to take the drastic, actually, no…extraordinary… step of asking a bank that your organisation regulates to effectively censor the views of one of their (senior) employees you’ve got to be prepared for some consequences.

I’d certainly agree.  But it increasingly looks as though, in modern New Zealand, you don’t really need to be prepared for any consequences at all –  apart perhaps from a bit of criticism from the odd peripheral blogger.

Because the other person who has commented in the last couple of days is the Minister of Finance.  Again, interest.co.nz has the story.

Speaking to media Thursday, perhaps ironically at an event at the Reserve Bank museum, Joyce said he just was “not going to go into that,” He said doing so would be an “unproductive use of my time.”

“That’s a matter for the Reserve Bank Governor, as to how he conducts his communications with the banks and their economists,” Joyce said. He had not reached out to the Bank’s board on the matter.

Perhaps people were supposed to take it as something like “what are you asking me for, after all the Governor is his own man, and he has his own Board.  Really none of my business.”

Even if that were the legal position, it would be pretty disconcerting that the Minister of Finance would reveal himself, at least publicly, unbothered by such coercive conduct by a senior New Zealand public servant.   It would add to the sense that Alfred Ngaro was only slapped down because there was a political firestorm, not because the government was really uncomfortable with the sort of implied approach –  don’t criticise or else – Ngaro was enunciating.

But the legal position involves the Minister of Finance a lot more than he implied in answering those questions.  As I noted in my post the other day, the Reserve Bank Act is built on a difficult-to-maintain balance between, on the one hand, huge powers placed exclusively in the hands of the Governor, and on the other hand, a countervailing provisions that are supposed to provide a high level of accountability.  Some of that is in the form of serious scrutiny from outsiders (including banks and financial markets).  But the legal bits are about the relationship between the Board, the Minister and the Governor.

For a start, the Minister appoints the Governor (even though he can only appoint someone the Board nominates).  The Minister also appoints the Board –  gradually, as they serve staggered five year terms.    The Minister now writes annual letters of expectation to the Governor, and to the Board.  In writing directly to the Board he recognises that the main statutory role of the Board is as agent for the Minister –  and the public  –  in monitoring and evaluating the Governor’s performance.  The Board isn’t part of the Bank –  it is part of the review and assessment process, to strengthen accountability for the considerable power the Governor wields.

And not only does the Minister appoint the Governor but he can (via an Order in Council –  in other words with the consent of his Cabinet colleagues) dismiss the Governor on performance grounds.  In international central banking legislation, that is quite an unusual provision.  In most advanced countries, central bank governors can’t be dismissed for poor performance and certainly not just by the Minister of Finance. It will often take parliamentary action to remove a Governor, and even then only for defined really serious problems (imprisonment, mental or physical incapacity, corruption).  The whole point of our legislative model was that if the Governor alone was to have great power, there needed to be serious accountability.

And it is not even as if the Minister of Finance can simply hide behind the Board.  The Board certainly has clear responsibilities to monitor the Governor’s performance, and can if things get really bad recommend dismissal of the Governor.  Of course, they have a range of other possible sanctions, public and private, short of what is really a “nuclear option”.

But whereas the Minister can only appoint as Governor someone the Board recommends, he isn’t constrained that way when it comes to problems with, or concerns about, the Governor. He can recommend dismissal –  again the nuclear option, but there are other options –  without any recommendation from the Board.   Which pretty clearly suggests that he has statutory responsibilities himself for being satisfied that the Governor is doing his job, and doing it in an acceptable manner.    The Act is mostly concerned with the policy functions of the Bank, including the Policy Targets Agreement,  but the tests for the Minister include whether he is satisfied that “the Governor has not adequately discharged the responsibilities of office” or that “the Governor has been guilty of ….serious neglect of duty or misconduct”.

Using the power of your office to attempt to coerce a private institution, regulated by you, to censor one of its staff when writing critical evaluations of the Bank, and instructing your senior subordinates to actively involve themselves in such efforts, don’t look like the sort of standard –  the sort of discharge of the responsibilities of office –  that the Minister, or citizens, should reasonably expect, or tolerate.

I’m not suggesting that the Minister of Finance should fire the Governor.  But to simply pretend that the conduct of the Governor in this area is no concern of his, and not even to ask the Board for its views, looks like neglect of the Minister’s own responsibilities.  And it sends a dreadful message to citizens about the sorts of behaviour his government appears to be willing to, at very least, turn a blind eye to.

One of the obscure provisions of the Reserve Bank Act, that as far as I know no one has ever quite known what it means, is section 169.  It reads

169 Bank to exhibit sense of social responsibility

It shall be an objective of the Bank to exhibit a sense of social responsibility in exercising its powers under this Act.

That, too, is one of the Governor’s responsibilities in office (the Act makes him responsible for it all). It is hard to see how, in a free and democratic society, attempting to suppress a vocal critic, just because he happens to work for a body the Bank regulates, quite fits with that social responsibility.

As for the Bank’s Board, on the normal schedule they will have been meeting yesterday, upstairs just  a few floors above where Steven Joyce was washing his hands of the affair.  As I noted the other day, the Board members seem like decent and honourable people, and it should be a surprise if they were remotely comfortable with the Governor’s sustained attack on the BNZ and Toplis.    Then again, they have form, and mostly just seem to give cover to the Governor whatever he does (the OCR leak episode being a particularly clear example).  Perhaps some journalist should consider ringing the Board chair, Professor Neil Quigley, and asking him about the Board’s view of such behaviour.  Quite likely, he would simply refuse to comment, but that in itself would be telling.

UPDATE: There is new piece out from Oliver Hartwich, Executive Director of the New Zealand Initiative.  He notes

Central banks have a crucial role to fulfil in our economies. This role thus deserves public scrutiny and debate. Given the RBNZ’s independence, external commentary on its actions is the most effective check on its operations.

For these reasons, it is not acceptable for the governor of the RBNZ to attempt to stymie such scrutiny. With his complaints about a bank economist, the governor has overstepped his role.

The Wheeler letter

(I’ve had to spend much of the day at the Reserve Bank, in a meeting chaired by one of their Board members, attended by one Deputy Governor, and where the Governor himself just might turn up – he’s a member, but will no doubt find himself too busy on the day and send an alternate.  In the interests of that meeting –  which will be contentious enough anyway just on its own subject matter – this post is pre-scheduled to appear when I’ve got out of the building.)

On Monday, the Reserve Bank posted the full text of the Governor’s letter to BNZ CEO Anthony Healy, and of Healy’s initial reply to the Governor.  Valuable as Paul McBeth’s initial article in NBR was, it is always worth reading the full text of such documents if one can.    Some of this ground was already covered in my post on Saturday, but after a bit of comment on the letters themselves, I want to offer some other thoughts after a few days to reflect further on the issue, and the reaction to it.

First, the Governor’s letter.    What is clearer with the benefit of seeing the full letter is the extent to which it wasn’t anything like a one-off fit of pique on a bad day, but rather a culmination of a sustained campaign from the Governor and his senior management to put pressure on the BNZ to “silence” (materially alter what he was saying and how he was saying it) Stephen Toplis.  It is interesting that the letter was dated 11 May, the day of the release of the Monetary Policy Statement itself.  One might have supposed that the Governor would have had higher priorities that day, between a press conference, an FEC appearance and so on.

The first couple of paragraphs of his letter focus just on the specific Monetary Policy Statement preview that Stephen Toplis had written and published a few days earlier.

I am writing to you to draw your attention to the language used in the BNZ Markets Outlook of 8 May 2017, which appeared to bring into question the integrity of the Reserve Bank.  While I appreciate that you will not have reviewed the document in detail, I expect you would also be concerned at the nature of the language used.

As I noted in my earlier post, the Governor offers no evidence or examples to back his suggestion that the commentary concerned “questioned the integrity of the Reserve Bank”,    There was, in fact, nothing in the commentary that any reasonable reader could have read as impugning the Bank’s integrity.  Competence, diligence, or focus perhaps, but not integrity.  So the Governor was off to a poor start.   Perhaps he’d just got so worked up about Stephen Toplis over such a long period that he ending up seeing/reading stuff that just wasn’t there?

The document claims that the Bank would be negligent if it didn’t conform to the views of the BNZ economists.  Negligence is a serious accusation and implies that the Reserve Bank would not exercise reasonable care in the discharge of its responsibilities.  The document also makes other claims that the Reserve Bank would not implement monetary policy in the best interests of New Zealanders.  For example, we would not adjust our policy stance even if our analysis indicated that appropriate, if it in some way embarrassed the Reserve Bank.  To bring into question the Bank’s integrity while fundamentally misrepresenting how the Reserve Bank formulates policy is unacceptable.

To repeat, there is nothing in the document that any reasonable detached reader could take as impugning the integrity of the Bank.  There is also nothing to support the suggestion that BNZ claimed that the Reserve Bank “would not implement monetary policy in the best interests of New Zealanders” (although in fact the Bank’s statutory mandate is rather narrower than that anyway).    The commentary did suggest that the Bank would be reluctant to raise rates in May, whatever the data showed, because of how strongly they had previously adopted a fairly neutral bias.   Well, take it from me, having sat around monetary policy decision tables for decades, those conversations do actually happen in central banks.  Ask the Bank’s chief economist –  there are whole literatures on interest rate smoothing, consistent signals etc.  And, however much we sometimes like to pretend otherwise, no monetary policy decision is ever totally clear-cut, simply because no one knows the future.     What’s more, as I noted the other day, the Reserve Bank more or less did what BNZ said they needed to do –  they did show a track with (eventual) OCR increases in it.  So having made a conditional statement, that the Bank would be negligent – or remiss, or not adequately doing its job –  if an upward-sloping track wasn’t shown, they showed one.  So quite what was the Governor’s specific problem?

Perhaps Toplis could have chosen another word than “negligent”, but “negligent” is a synonym for various words for not doing a job well, and with due attention to responsibilities.  That is exactly what the Reserve Bank Act charges the Bank’s Board with assessing – it even makes brief reference to “neglect”.  The whole statutory accountability framework is built around quite personalised assessments of that sort.  If the Board can do such assessments why can’t the rest of us?

At this point, the Reserve Bank escalates the issue from a simple expression of concern to a not-very-veiled call for tighter control on Toplis, to suit the Governor’s preferences.

The Reserve Bank makes a considerable effort to explain its monetary policy processes, engage with market participants, and communicate clearly its monetary policy stance.  Given these efforts, I would have expected the BNZ economists to be more accurate and careful in their choice of words [is this a suggestion Toplis had been “negligent”?] I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by the Reserve Bank.

Quite why the Reserve Bank’s “efforts” should affect the evaluations of the Reserve Bank that the BNZ economists (or anyone else) make is a bit of a mystery.  Many people have criticised aspects of the Bank’s communications –  or policy –  over many years, rightly or wrongly.  They are free to do so.  They are also free to suggest that the Reserve Bank might not be doing its job adequately, if it did this, that or the other thing.  Only the other day, for example, I suggested that some of their regulatory interventions looked as though they might be ultra vires.

And then what is it with the suggestion of vetting and legal sign-off on market commentaries?  A preview for the Monetary Policy Statement, isn’t exactly a prospectus for a bond issue, or an official disclosure statement, with lawyers scrutinising every line to ensure statutory responsibilities are met.  It is an opinion piece, in a field where reasonable people’s views at times differ widely, and where the Reserve Bank has no privileged knowledge about what choices will prove to be right.

The next paragraph is mostly inoffensive.

I should stress that we respect the forecasts made by market analysts and play [sic] close attention to their views in our monetary policy processes.  We do not always expect to agree on outlook or policy responses, but instead seek that differences of view are reasoned and understood.

Well, fair enough I suppose, but anyone really is free to disagree with the Reserve Bank on any grounds they like.  It simply isn’t up to the Reserve Bank –  in a free society –  to decide what sort of disagreement is acceptable and what is not.      If the BNZ puts out consistently poor commentary –  in the eyes of its management and clients –  presumably there will, over time, be a diminution in the demand for that commentary.     There is a competitive market in opinion and analysis, including that on the Reserve Bank.

And then we learn that actually the pre-MPS commentary was just the last straw for the Governor.

You will recall that my fellow Governors each met separately with [withheld –  but presumably “Stephen Toplis”] to convey their concern at the personal nature of the criticism being expressed by the BNZ.  When this failed to address the situation I met with you and passed on examples of the material.  I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of the other banks.

So Grant Spencer –  head of financial stability and responsible for regulation of BNZ –  Geoff Bascand, and John McDermott each met with Toplis –  not together, but in a succession of separate meetings.  Not apparently to discuss or debate the substance of the BNZ commentaries or concerns –  many of which have, over time, been quite well justified in my view –  but to demand repentance and amendment of ways.    That is what the Governor says –  “when this failed to address the situation” , or “when the BNZ economists still refused to comment the way I wanted them to”.  And the Governor complains about a personalised tone, even though he holds a very powerful position in a system which, as he knows, puts all the Bank’s power in his hands personally.

It is all rather extraordinary –  perhaps redeemed only by the fact that the Governor actually put it in writing and thus (upsetting as it apparently is to him) eventually making it known to the public.    The BNZ’s approach has certainly been more forceful than that of most other banks,  but it simply isn’t for the Governor to tell a bank how it is allowed to review or criticise him.  Lese-majeste is an offence in Thailand, but (a) this is New Zealand, and (b) Wheeler isn’t king.   Probably no one would think it amiss if the Bank found Toplis’s tone so obnoxious that they refused to meet with him –  no one has a right to meetings with the Governor or Chief Economist –  but even then you need a thick skin in this game, and to recognise that over time scrutiny, even if not written in quite the tone you might like, has benefits (for society, and probably even for the institution).

Finally

I would like you to be aware of our serious concerns about the inappropriateness of the language used in the document and would ask that you bring it to the attention of those responsible for the editorial quality and any legal sign-off.

So twice in a single page letter, we have the heavy-handed call for censorship and references to lawyers.  It is an extraordinary demand for a public servant to make of a private business in a free society. Extraordinary, having lost all sense of perspective, and quite –  to use the Governor’s  own words –  “unacceptable” and “inappropriate”.  And the Governor works for us –  it is quite reasonable for us to hold him to account –  while the BNZ does not work for the Governor.

I’ve had various discussions with people in the last few days about quite what was going on here. I’ve had people suggesting that maybe Wheeler wasn’t really responsible, but instead it was the Bank’s Communications Department, or one of the other Governors.    Only they will know, but based on my knowledge of, and exposure to, each of those individuals that seems very unlikely.  The Comms Dept can get prickly and precious at times, but they’ll have been only too well aware of how this would backfire if it ever got out.     Graeme Wheeler is the one who has demonstrated a thin skin, a reluctance to expose himself to scrutiny, and a reluctance to engage with alternative perspectives.   I’m pretty sure this was largely Wheeler-driven –  perhaps he just got to the end of his tether as his troubled five year term finally draws to his end.  Sadly, it seems that his colleagues were too weak to either convince him that he was over-reacting, or to refuse to be an active part in his censorship efforts.  I don’t like to believe they’d have been encouraging him, but perhaps they were.

What of Healy’s response?   It is mostly a holding response, but wasn’t written until several days after the Governor’s letter was sent, so presumably his lawyers, his regulatory affairs people, his Board, and perhaps his head office in Melbourne will all have been trying to work out how best to respond.

In an ideal world, perhaps, Healy would have written back along the lines of

“Dear Governor, Thank you for your letter of 11 May.  The contents and style of our economic commentaries are matters for us to determine, not for you.  We encourage and welcome robust debate, and we would hope you do too.”

But he was writing back to the chief executive  –  and single decisionmaker – of his regulatory agency.   I should be clear that I do not read Wheeler’s letter as any sort of direct threat to BNZ itself –  comply and censor Toplis or we will withhold this or that specific regulatory approval.  Even the supine banks would probably have taken him on over anything that overt.  But the banks need Reserve Bank say-so on numerous things large and small each year (people, models, instruments etc), and they are pretty cautious about getting offside with the boss of the regulatory agency, lest other disagrements risk colouring the attitudes of the Governor when he makes regulatory decisions.

And so Healy wrote

I refer to your letter of 11 May 2017 expressing concerns about commentary in the BNZ Markets Outlook  of 8 May 2017.

I would like to acknowledge both the sentiment and concerns you have expressed in your letter and assure you that [withheld –  but presumably either “Stephen Toplis is” or “the economics team are”] treating this matter with the utmost seriousness.

We will be reviewing the contents of the BNZ Markets Outlook and the concerns expressed in your letter in detail.  Once that process is complete, I would appreciate the opportunity to have a call with you to discuss the outcomes of that review.

Please let me know if a call in the week of 29 May would be possible and I will ask my Regulatory Affairs team to arrange this.

Thank you for bringing your concerns to my attention and I look forward to hearing from you.

[UPDATE: A commenter points out that the RB doesn’t appear to have quite fully deleted the name, and what appears still be showing suggests it can’t be “Toplis”]

Pretty weak and deferential really –  and the man knows this is the regulator he is dealing with, not just someone who disagrees with the team’s commentary.  It isn’t his PA arranging the call, but his Regulatory Affairs team.

Healy, no doubt, finds himself in a difficult position.  I guess the proof of his good intentions is that Toplis is still employed, and not obviously using a different tone or analysis in his reports.  Then again, there hasn’t been another MPS since this episode.   It would be interesting to know what was said in that phone call later in May, but I suspect it would be futile for anyone to try to OIA that information.  Again, in an ideal world, BNZ would front up to the media on this attempt by the central bank to intimidate them and censor their commentary.  I  don’t suppose anyone will be holding their breath waiting for that.  But failure to front up implicitly accepts and condones this sort of conduct by the Governor, whatever they might be saying in private.

Of course, one mystery in all this is how the story got to the media.  Perhaps the BNZ themselves prompted Paul McBeth to lodge his OIA request.  If so, well done.  Presumably the Reserve Bank hierarchy didn’t want the news known, but I have heard stories that junior Reserve Bank staff were discussing the issue in Wellington bars.

In this episode, it is worth thinking briefly about the people involved.  In some respects, Stephen Toplis isn’t a person who will naturally command lots of sympathy –  highly paid economists of foreign banks, some might think, can simply fight their own battles.  And his style can be, and has been, somewhat abrasive, not just with the Reserve Bank.

And, on the other hand, Graeme Wheeler is three months from leaving office. For all the failings in his term of office –  and this is just another one –  why bother when he’ll soon be gone from public life?

It seems to me that the response on both counts is about precedents.  If powerful public officials attempt to shut down prominent economists, just think what they could do to other people.   And if Graeme Wheeler gets away with this attempt –  perhaps just having got the end of his tether –  what message does it send to other regulators, officials and politicians in our system?  Of course, others will try to keep their intimidation attempts quiet –  as no doubt Wheeler did – but if there is little downside when things do come out, they might as well just keep on exerting that improper pressure.   On this occasion it was about an almost unbelievably trivial thing –  use of the word “negligent” –  but on some occasions it will be more important things: the Muldoon attack on Len Bayliss was about serious and genuine differences of view about big picture economic policy.    Such behaviour just shouldn’t be acceptable in a free society, and the powerful need to know it.   And of course, the other reason to be concerned is that Geoff Bascand appears to have been fully involved in this, and he is widely expected to be a serious contender for Governor next year.

Very few people seem to have attempted to defend Wheeler’s behaviour –  at most a few have minimised it (“not a good look”).  But, given that fairly widespread apparent private disapproval,  what is quite disconcerting is the deafening public silence over Wheeler’s attempt to “silence” Toplis and the BNZ.    The BNZ itself hasn’t spoken out, and nor have any of the other banks or other bank economists.  I can understand how difficult it might be for some prominent individuals to take an open stand.  Then again, holding prominent positions carries with it responsibilities.  And if, say, all the banks spoke out together –  eg through the Bankers’ Association –  what could the Reserve Bank possibly do in response?

It is to the credit of Paul McBeth that he got the original OIA material and ran the story, but it was reported as straight news.   Where are other local media in deploring this attempt to limit open public debate and constrain critical review of a powerful institution?  So far, there seems to have been more interest abroad.  The story has been run on the Central Banking magazine’s website –  premier publication for central bankers, and one which has honoured the Reserve Bank in the past (central bank of the year in 2015).    I’ve spoken to one other foreign journalist who is quite stunned at the local silence (so far?) – not, it was put to me, what would have happened if an episode like this had happened in, say, the UK.

It isn’t a parliamentary sitting week, and Monday was Labour’s immigration policy day.  But not a word of protest or unease has been heard from representatives of any political party.  Of course, this isn’t a big vote-grabbing issue –  defending institutions such as freedom of speech, and the need for self-restraint by the powerful, rarely is.  Is this the worst offence in the world?  Perhaps not, but we preserve our institutions and conventions by taking a stand on even modest breaches; when people step over the mark, perhaps even without quite fully realising what they were doing.

And then of course there is the question of the Reserve Bank Board.  I know a few of the members, and they and the others look, on paper, to be people of decency who take their roles seriously.  It is difficult to believe that many of them can really be comfortable with the Governor’s attempts to intimidate the BNZ.  But if they aren’t, they have a responsibility to say so.  They don’t work for the Governor.  Their role isn’t to have the Governor’s back.  It is to act as agent for the Minister and the public, in ensuring that the Governor is doing his job, and not overstepping those marks.

Similarly, where is the Minister of Finance in all this?.  It would be a simple matter to let it be known that such behaviour is quite unacceptable in senior New Zealand public servants.  If he won’t make that clear, he leaves us wondering whether in fact the government thinks such behaviour is acceptable, or just “the way of the world” (memories of Alfred Ngaro).   That is the way the best elements of our free society are slowly but inexorably corroded.

As a final thought, I leave you with this quote

Financial markets, the business media, and other economic commentators all play a part in scrutinising and making sense of the Reserve Bank’s monetary policy choices. It is not difficult to make monetary policy choices that turn out to be wrong – indeed, in the nature of things, many will turn out to have been less than ideal. But the presence of the extensive market commentary, on every major piece of data and on OCR decisions themselves, means that if the Bank takes a position that even a significant minority of outsiders disagree with, the difference is likely to be highlighted. This not only allows for public debate and scrutiny, but also provides information that the Board themselves can (and does) use in questioning and evaluating the Governor.

It was the first thing that came up when I googled “monetary policy accountability and monitoring”.  As it happens, I wrote those words 10 year or so ago, but they are still sitting on the Reserve Bank’s website, as an official document in the “About monetary policy” section.  But after the Toplis affair, it is a little harder than it was to take it seriously as a representation of how the Reserve Bank thinks about the value of market commentary, alternative views, challenge and dissent.  If so, that would be a shame.

The Reserve Bank Act isn’t built around a philosophy of deference, but around a difficult- to-maintain balance between the huge amount of power given to the Governor, and a countervailing place for searching scrutiny –  by the Board, by the Minister, and by the public (including media and markets).    Whoever the new Governor is next year really needs to devote a lot of effort to rebuilding an open and engaging culture that welcomes, and relishes, debate and challenge.  At times, no doubt, it will be trying and frustrating, but that is how institutions in a democratic society are supposed to work.  Life for the powerful isn’t meant to be comfortable.

A BNZ economist and the powers that be

No, not Stephen Toplis.

This is a story about an earlier BNZ Chief Economist, Len Bayliss.   A commenter on my post on Graeme Wheeler’s attempt to silence Stephen Toplis reminded me of how Bayliss’s career at the BNZ ended, victim of intense pressure from the then Prime Minister and Minister of Finance, Robert Muldoon, and a pusillanimous Board and management of what was then a wholly government-owned bank.

Len Bayliss was one of New Zealand’s leading, and most prominent, economists from the 1960s to the 1980s, particularly as the BNZ’s chief economist for 15 years or so.   A few years ago I did an interview about his career with him for the newsletter of the New Zealand Association of Economists.   As he records it, that interview and some follow-up questions from me prompted him to put together a volume of documents and recollections  –  Recollections: Bank of New Zealand 1981-1992  – dealing with his ouster from the BNZ and his later term as a government-appointed director of the BNZ as it descended into crisis and near-failure in the late 1980s and early 1990s.   I’m fortunate enough to have a copy.

Bayliss and Muldoon had, at one time, worked very closely together, with Bayliss having served as a member of the Advisory Group in the Prime Minister’s Department when National returned to office at the end of 1975.  A lot of financial liberalisation went on over the following couple of years, and Bayliss appears (there are conflicting accounts, but I’ve found Bayliss’s persuasive) to have played a key role in that.

Decades on, in that interview I did with him, Bayliss could still record of Muldoon

Excellent. He was the best boss I’ve ever had. Absolutely decisive. I wrote his speech for the Mansion House dinner, the most important speech he’d made after becoming PM. I gave it to him. He said send it to Treasury and see if it’s all right with them. They wrote back wanting something changed and wrote a little memo and he just put ‘No’. And he always was very proper. He may have been tough to his political opponents but as Bernard Galvin used to say, certainly in the time I was there, it was a very happy group. He never tried to force you to do anything. In a sense, he treated you just like a public servant, as a politician should treat them. He was decisive. He would argue very intelligently. Watching him at the Cabinet Economic Committee, he really tore strips off ministers who hadn’t done their homework. And I saw him several times in debates with Noel Lough [senior Treasury official]. Noel Lough was a lovely bloke but Muldoon really won the debates.

But after Bayliss’s return to the BNZ, and as New Zealand’s economic difficulties became increasingly apparent –  with Bayliss among those openly highlighting the issues – the sentiments certainly weren’t reciprocated.

The crisis began to come to a head after Bayliss was interviewed on Radio New Zealand’s Morning Report on 14 August 1981.   After a lengthy introduction, setting the scene for a discussion of the value of the exchange rate, the presenter turned to Bayliss

Bayliss:    I think we have to do a number of things.  We have to change the exchange rate, we’ve got to get our budget deficit reduced, we’ve got to get better control of the money supply and we’ve got to replace import controls by tariffs, and we’ve got to get more competition into the economy.

Reporter: Well, you’re talking about the exchange rate. You’re talking devaluation are you?

Bayliss: That would be it, yes.

The interview went on, concluding thus

Reporter:  Well, this artificially high value of our currency has been held for many years I mean its not a recent thing. You know, why do we keep on doing it?

Bayliss:  I think the reason we keep on with it is two-fold.  First of all if you just devalue and do nothing else….you get a very short-term gain and in six months’ time the rate of inflation is worse. I think the second reason is that we’ve built up a system in New Zealand where a large number of industries and sectors and firms and so on are subsidised and naturally these people fight hard to maintain their subsidies……. The New Zealand economy has had nil rates of growth for about five years and rising levels of unemployment and this is a pretty deplorable economic performance……If we are going to improve our economic performance then we have to make some pretty dramatic changes in economic policy.

The Prime Minister was not happy at all.   That shouldn’t have surprised anyone –  who likes have their approach openly criticised?  But the Prime Minister didn’t just complain to his colleagues, thump the desk, and get on with his day.  Instead, he wrote a letter to the chairman of the Board of the BNZ.  News of this letter got out  –  it took a while –  and on 15 October there was parliamentary question about it.  Answering on behalf of the Prime Minister, Jim Bolger stated

“I wrote to the Chairman of the Bank of New Zealand on 25 August 1981 expressing concern that Mr Bayliss’s comments were not only misleading and not factually based, but that they would also have an adverse effect on our international credit.  Both the management and the Chairman of the bank have told me they regretted Mr Bayliss’s comments”

Opposition MP Stan Rodger then asked

“Can this be taken as as indication that the Government is adverse to having open debate in society within the news media on economic developments and on economic factors affecting New Zealand society?”

Bolger:  “No it most certainly cannot be taken as an indication that we do not welcome public debate on issues.  The question that was posed is whether or not the issue that was being debated was being debated factually, whether it was being debated in a manner that would not be harmful to New Zealand.  As the answer was written by the Prime Minister, it was his belief that the NZ comments would affect New Zealand’s international credit.  That is something that is of some moment.”

Another Labour MP, Michael Bassett continued

“When the Prime Minister wrote to teh Bank of New Zealand was it his intention to silence Mr Bayliss altogether, or was it simply to ensure that he debated the economy on terms that were agreeable to the Prime Minister?”

Bolger:  I cannot answer the question in the way it was posed because I do not know the precise intention of the Prime Minister when he wrote the letter. However, I am sure the Prime Minister will welcome debate on this issue or any other based on facts, not on any other basis.”

At the next meeting on the BNZ Board, (according to a contemporary file note) the Board apparently spent “considerable time discussing public statements on economic matters by the Chief Economist – in particular forthcoming speech to Hutt Chamber of Commerce”.    The chief executive informed Bayliss that “in future contents of any public statement on economy by Chief Economist should be such that they provoke no criticism whatsoever by Prime Minister.”

Bayliss responded (again, according to the file note) “impossible to make accurate, balanced and professional analysis of economy under such criteria –  a view which would be shared by all economists and many others. Board placing Chief Economist in impossible position –  best to cancel speech.”

To which the chief executive is recorded as responding “Can’t do that –  must make speech. Cancellation would damage image of BNZ and provoke public questioning of Board’s attitude. Only consideration must be BNZ’s public reputation.”

And so it went on in subsequent days.   Bayliss eventually informed that BNZ that under these conditions he would probably feel obliged to resign, and did so early the following year.   Both the Board of the BNZ and the Prime Minister disavowed any responsibility.

Bayliss includes in his collection of documents, a letter he received shortly after his resignation from John Stone, then the Secretary to the Treasury in Australia (and still vigorously contributing to the debate in Australia in his late 80s).  Stone wrote

“I learned yesterday of the announcement of your impending resignation from your present position with the Bank of New Zealand.  The reports which I saw of that development were naturally only of a general kind – the suggestion being that there had been some reaction from the political heights to the outspokennes and straight-speaking on the New Zealand economy which over recent years you have become well (and let me emphasise favourably) known.

“Whether or not there is truth in those kinds of speculation I naturally do not know. If there were I would think it is a sad reflection upon a country for which as you know I retain a considerable affection.

Indeed.

Graeme Wheeler was a junior Treasury official in late 1981. I wonder what he made of Muldoon’s attack on Bayliss?  Did he even imagine that one day he’d be writing to the BNZ to complain of another economist whose style and/or substance had offended him, as high public servant and powerful regulator?  Surely not.

 

 

An astonishing illustration of unfitness for public office

I wasn’t planning to write anything today, but I was flicking through the NBR website when I found a story that both shocks and appals me.  I suggest reading it first, before reading my take on it.

After my experiences with the Reserve Bank over the last couple of years, I thought I was beyond the possibility of being shocked by the Governor.  Clearly, naive optimist that I must really be, I was wrong.

Somehow the media got hold of a story that Graeme Wheeler had lodged an official protest with BNZ over something their head of economics, Stephen Toplis, had written.  So an Official Information Act request was lodged and the Bank has apparently responded by releasing both Wheeler’s letter to BNZ chief executive Anthony Healy and Healy’s response.  The Bank hasn’t put those documents with the other OIA releases on their website, so I have asked for a copy.

I should add that Toplis is not some close friend of mine.  I always find his commentaries stimulating, but we usually disagree on the substance of monetary policy.  In fact, when I was in the gun from the Governor last year, Toplis was sending the Bank snarky comments about me (that he no doubt didn’t expect to be published).  But no one should be treated, by a top public servant, the way he has now been treated by Graeme Wheeler.

What is Wheeler’s complaint?    Apparently, he was upset with the preview of the latest Monetary Policy Statement that Toplis had written.

Mr Wheeler, who is to step down as governor on September 26, wrote to Mr Healy on May 11, the day the MPS was released, saying a preview written by BNZ head of research Stephen Toplis called into question the Reserve Bank’s integrity by saying it would be “negligent” not to admit it had a tightening bias, expressed “through an explicit expression of rate increase(s) in its published OCR track.” 

For some context, here is what Toplis actually wrote

So why do we think the RBNZ will sit pat this week? Simply because it said it would. When it released its March OCR review, the Bank reaffirmed that not only did it expect interest rates to stay where they were for the foreseeable future but it went on to reiterate that it thought there was equal chance that the next move could be a cut as a hike. To hike this week would leave the Bank with egg splattered all over its face, a prospect it couldn’t abide.

But surely, at the very least, the Bank will be forced to admit that it now has a tightening bias? Equally, it would be negligent not to express this through an explicit expression of rate increase(s) in its published OCR track. The biggest questions should revolve around how early the Bank is prepared to poke in a first rate increase and how quickly (if at all) rates rise thereafter.

Toplis seemed to be trying to strike a middle path.   Hawks, he argued, would be foolish to think Wheeler would raise the OCR in May, whatever they thought the data showed.  And doves who might expect a flat (OCR) track forever were also likely to be mistaken.    In Toplis’s view –  given the data he had seen –  it would be “negligent” of the Bank not to show some rate increases in the published OCR track.

And, as it happens, the Bank largely agreed.  The actual OCR track released in the May MPS wasn’t  anywhere near aggressive enough for BNZ’s liking  (I agreed with the Bank this time), but it did show some increases in the OCR eventually.    Presumably they thought it would be wrong –  inconsistent with their obligations under the PTA – not to have done so.

So quite what was the Governor’s problem?

Monetary policy is one of those areas of considerable uncertainty.  Reasonable people can and will differ quite materially on what the best approach is.  But the power –  very considerable power over the way the economy develops in the short to medium term –  is vested only in the Reserve Bank.  More specifically, it is vested in a single individual, the Governor.  It is one of the unfortunate aspects of the single decisionmaker model that any criticism of the Bank’s decisions is inevitably a criticism of an individual’s actions/choices.   For a thick-skinned and self-confident individual on the receiving end, that just shouldn’t be a problem.  After all, the Governor took on the job voluntarily, knowing that he would be making key decisions in an area where (a) almost inevitably there would be mistakes (almost the nature of uncertainty) and (b) where he would subject to a lot of scrutiny from smart people, in political and economic spheres, here and abroad.  He gets paid a great deal of money (by New Zealand public sector standards)  to make the decisions and be accountable for them.   A self-confident Governor might either (a) let disagreements wash over him, or (b) pick up the phone and invite the critic in for coffee and an open exchange of views.   But Wheeler is notoriously thin-skinned –  and unwilling to engage.

Here is how NBR continued the story

Mr Wheeler’s letter describes a back story, suggesting he reached out to Mr Healy after failing to bring Mr Toplis to heel. It says Mr Wheeler’s deputy governors had individually approached someone (the name is redacted) “to convey their concern at the personal nature of the criticism being expressed by the BNZ in its written publications.”

“When this failed to address the situation I met with you and passed on examples of the material,” Wheeler wrote. “I mentioned that the BNZ approach was damaging to the Reserve Bank and the New Zealand financial market, and the personal nature of its tone was contrary to that of other banks.”

Clearly, Wheeler’s concern was more than just the particular pre-MPS commentary.  And certainly, more than most other bank economists, Toplis is willing to quite openly disagree with the Governor and the Bank, sometimes with a vigorous style.   But there is nothing “personal” in that preview, and even if there were, the Governor personally exercises the power.

Personally, I wish there were more like Toplis willing to openly question and challenge the Bank.  The Bank –  the Governor –  after all wields huge power, not just in monetary policy but in regulatory matters, with rather little effective accountability.  Banks in particular are very reluctant to openly call out the Reserve Bank –  journalists have told me how difficult it is to get anyone to go on the record.

What bothers the Governor?   Apparently, he thinks the Reserve Bank is damaged by criticism.   It isn’t clear how or why, unless the Bank is operating in a way that leads people who read the criticism, and think about it, to conclude “yes, that’s right”.  High-performing organisation shouldn’t need to worry about criticisms,  And insular, low-performing organisations, need the criticism –  and need to be willing to learn from it.   Even more important, when it is a troubled public sector organisation,  the public need the criticised body to learn from and respond constructively to criticism by lifting its game.

Perhaps even more oddly, the Governor thinks that Toplis’s commentary is “damaging the New Zealand financial market”.  Who knows what he means by that?    There is a competitive market in commentary.   If Toplis’s criticism are wrong (on average over time) presumably that reflects badly on Toplis and the BNZ.  If they right, perhaps it reflects badly on the Governor himself, but that doesn’t harm the New Zealand markets or economy.  People having less faith in the Governor might, in principle, be a bad thing, but not if the criticisms are well-founded.  And if they aren’t well-founded, the sort of observers who matter will go elsewhere for their commentary.

Wheeler clearly doesn’t see it that way

In his letter to Mr Healy, Mr Wheeler said it was “unacceptable” to question the Reserve Bank’s integrity while “fundamentally misrepresenting” how it sets monetary policy.

“I would also expect that the editorial quality assurance process (and any legal sign-off involved) would have identified that an accusation of negligence is inappropriate in a public document distributed by BNZ.”

 

Perhaps there is something in the Governor’s concern that I’m missing, but nothing in that quote above from the MPS preview questions the Bank’s integrity.  It sets out some hypotheticals, and suggests the Reserve Bank would be not doing its job –  “negligent”  –  if it didn’t do something Toplis favoured.    But it did do it –  there were rate hikes put into the OCR forward track.  And even if the Bank has disagreed altogether –  and run with a dead flat OCR track –  the BNZ claim was “negligence”, it wasn’t a comment on integrity at all.   When people suggest the Reserve Bank isn’t running monetary policy well, that is a judgement on their competence or their diligence (or just a disagreement about the data), but it isn’t a reflection on anyone’s integrity.  It is disconcerting that the Governor doesn’t seem able to tell the difference.  Nor, apparently, were the Bank’s Deputy and Assistant Governors.

The whole thing is extraordinary.  I’ve never worked in a bank economics team, but I’ve never supposed that they had their daily or weekly economics commentaries signed off by in-house lawyers (or indeed by anyone much).   It is chilling to have the Governor of the Reserve Bank writing to the chief executive of a major bank in effect urging such tight control.   What is it, one can only wonder, that the Governor is afraid of?   And isn’t this, after all, the Governor who regularly claims that the Bank is highly accountable, partly because of the scrutiny financial market participants and commentators provide?

All this would be quite bad enough if the Reserve Bank was simply a monetary policy body.  Some central banks are.   Such central banks influence the economy and the rate of inflation, but have little or no direct regulatory influence over private financial institutions.  Access might still be valuable, but the central bank just doesn’t have that much leverage.  Nor should it.

But that isn’t the model in New Zealand.  Here, the Reserve Bank –  the Governor personally –  not only sets monetary policy, and sets prudential policy, but is also responsible for a wide range of detailed regulatory approvals that banks and financial institutions need to keep operating in this market.  Mr Healy himself will have needed the Governor’s approval to take up his current position.  So will all his direct reports.  And approval of individuals is just the least of it.   That is a huge amount of power, and all vested in one person.  In this case, it appears, an extremely thin-skinned and reactive one.

Banks are typically pretty scared of the regulator –  whether here or abroad –  and unwilling to take them on over regulatory matters.  That is bad enough.    What is worse is when the Governor of the Reserve Bank openly –  directly and through his deputies –  attempts to coerce banks to just keep quiet, to say only stuff that the Reserve Bank likes to be said.  We might expect that in Singapore, Russia, or other semi-authoritarian states.  We shouldn’t tolerate it in a free and democratic society, governed by the rule of law not the whims of powerful men, like New Zealand.   It would be bad enough from an elected politician –  and I’m sure it goes on there to some extent (we saw recently the Alfred Ngaro comments) –  but it is far far worse in an unelected, and exceptionally powerful, public servant.

As far as we can tell, the BNZ hasn’t been cowed by Wheeler’s approach.   Perhaps they just think “there he goes again, and thank goodness he’ll be gone in another three months or so”.  But even if they aren’t (this time), it is a chilling example that people in other organisations will take note of.  Some of them will be more cautious, more risk averse, and the message will go down “be careful what you say; don’t upset the central bank”.  We’ll be poorer for it.  And actually, over time, the quality of our Reserve Bank would be poorer for it to, if the extent of robust scrutiny of this powerful institution was even less than it is now.

The fault here is clearly primarily with Graeme Wheeler, who reveals himself to be manifestly unfit to hold his current high office.   But there are other people who need to take some responsibility:

  • where, for example, in all this were Grant Spencer, Geoff Bascand, and John McDermott, the deputy and assistant governors.   Wheeler has tried to tell us that that group makes all the Bank’s major decisions collectively, whatever the legal position.  The NBR article implies that they too were making calls to the BNZ to get pressure put on Toplis to alter his commentary.  Were any of them willing to stand up to Wheeler and tell him that he appeared to have lost all sense of perspective, and that if he went ahead with these actions it would only leave him and the Bank looking worse (even before this OIA, I gather the story was pretty widely known)?  If not, why not?  If not, why we would we suppose that any of them was fit to hold the office of Governor –  Spencer will be acting for six months, and Bascand is widely expected to be a leading contender for the permanent role?   Do any of them know what is, and isn’t fit behaviour for a regulator?  You would hope so given that Spencer is now Head of Financial Stability, and Bascand will assume that role in September.
  • where is the Bank’s Board in all this?  They exist to monitor the performance of the Governor, and the chair has often seen his role as a bit of a confidential sounding board for the Governor.  They were totally supine over the OCR leak last year, backing the Governor to the hilt?   Will it be different this time –  when the Annual Report comes out in a few months?  If not, how could we possibly consider that these individuals are fit to take the lead responsibility for choosing a new Governor?
  • What does the Minister of Finance make of this?   He appoints, and can dismiss, the Governor. I hope some journalists are willing to ask hard questions of the Minister, and not allow themselves to be fobbed off, about whether this sort of conduct is acceptable from a New Zealand public servant?
  • And what of the Finance and Expenditure Committee?  Are they willing to call Wheeler before them to answer openly for his conduct in this matter?  If not, what use are they to citizens?

I noticed that one commenter on the NBR article observed that if this is what Wheeler made of Toplis’s comments

“This is insane. Can you ask for Wheeler’s correspondence with Michael Reddell?”

There is no such correspondence.    The difference is that Graeme Wheeler has no leverage over me.   Stephen Toplis, by contrast, works for a bank over which the Reserve Bank has extensive regulatory clout.   It shouldn’t make a difference –  views are views and should stand or fall on their own merits –  but in Graeme Wheeler’s Reserve Bank, sadly, it appears to.  That is simply unacceptable.

He might only have three months left in office, but it is now three months too long.  The words of Oliver Cromwell to the Rump Parliament –  or Leo Amery to Neville Chamberlain in May 1940 –  come to mind

You have sat too long for any good you have been doing lately … Depart, I say; and let us have done with you. In the name of God, go!

 

 

 

Advertising for a Governor

I was settling in for an afternoon of watching the gripping UK election results, when someone sent me a copy of a job advert that had appeared in Australia this morning.  The advert was for the job of Governor of the Reserve Bank of New Zealand.  (It is also on the Reserve Bank’s website.)

It seems pretty extraordinary for the Reserve Bank’s Board to be proceeding with this process now.  They were just getting underway with the search late last year, seemingly oblivious to the election, when the Minister of Finance told them to stop, and to nominate someone as an acting Governor.   One of the conventions under which our system of government operates is that major appointments are not made close to an election.   As the Minister of Finance noted, in announcing the acting Governor appointment

This will give the next Government time to make a decision on the appointment of a permanent Governor for the next five year term.

Since then we’ve learned that the current government has commissioned a report on possible statutory changes to the governance of the Bank.  And the main oppositions parties have also confirmed that they favour changes, both to the governance and to the mandate of the Reserve Bank.  Who knows which side will win, and what changes they would each make if they did.

But, clearly champing at the bit, the Board is already out with its advert.  In fact, applications close on 8 July, which is a whole 10 or 11 weeks before the election.   So the people who are brave or ambitious enough to apply actually have relatively little idea what they will be applying for.  Will they be the single decisionmaker –  a key dimension of the current model/job –  or not?  And even if not, will they just be presiding over a group of people they appoint, or something more Bank of England-like.  Will they be charged with low unemployment or not?  And so on.

Of course recruitment processes take time.  But with an acting Governor appointed through to late March next year, it isn’t obvious why the Board couldn’t have put their advert out in late August, looking for applications or expressions of interest by the end of September.   At least people considering applying might have a bit more a sense of quite what the role, as one part of overall New Zealand economic and financial management, might be.

The Board holds the whip-hand in the appointment process.  The Minister of Finance can only appoint as Governor someone the Board has recommended (a candidate the Board proposes can be rejected, but then it is up to the Board to find another candidate).    That is a very unusual model.  In most advanced countries, the Governor is appointed directly by the Minister of Finance or the Cabinet.  They can take advice from anyone they like, but aren’t bound by any recommendations.  It is the way things work in Australia and the United Kingdom for example.  In the US, the President nominates, and the Senate confirms (or not).  In those countries, such mechanisms provide a high level of democratic control over an appointment which is hugely influential, over the short to medium term performance of the economy, and over the financial system.  In New Zealand, the Governor is even more powerful –  single legal decisionmaker –  but there is very little democratic control over who wields that power.   (The situation is even worse here if the government changes –  the current Board were all appointed by the current government, and on average will tend to reflect that government’s interests/preferences/biases).

And so I’ve argued that the Opposition should quite simply state that one of the first pieces of legislation they would pass would be a short amendment to the Reserve Bank Act to remove the formal role of the Board in the process of appointing a Governor.  It might be hard for them to do so –  it could look like a power grab –  but when our model is so out of line with international practice,  any competent Opposition should easily be able to make the case.  Promise to consult and take advice, for sure, but we should ensure that the elected Minister of Finance (and Cabinet) can do as their overseas peers can, and appoint as Governor someone in whom they have full confidence, not just someone the company directors appointed by the previous government wheel up.

What about substance of the Board’s advert?   No doubt a person who fitted the profile might well be a good Governor, but there is a “walk on water” feel to it.  Perhaps that isn’t uncommon with job adverts.   What are they after?

  • The ideal candidate will be a person of outstanding intellectual ability,
  • who is a leader in the national and international financial community.
  • The person will have substantial and proven organisational leadership skills in a high-performing entity,
  • a proven ability to manage governance relationships,
  • a sound understanding of public policy decision-making regimes, and
  • the ability to make decisions in the context of complex and sensitive environments.
  • Personal style will be consistent with the national importance and gravitas of the role.
  • The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

It is hard to argue too much with any of the individual items, although if I did I might wonder about:

  • the emphasis on “outstanding intellectual ability”, but no mention at all of character or judgement.  In tough times, and crises –  a big part of what we have a Reserve Bank for –  the latter seem likely to be more important than the former.
  • they have clearly chosen to emphasise financial experience/standing rather than policy experience.  It isn’t clear why an ideal candidate for this role –  a New Zealand public policy and communications role –  really would be a “leader in the international financial community”.   That was, after all, what they thought they were getting last time.
  • The explicit comment about personal style and gravitas was interesting.   Are they suggesting that the new Governor might be more open to scrutiny and debate?  If so, that would be welcome.

I was inclined to agree with the comment made by the person who sent me the advert that it wasn’t clear that any of the various names mentioned as potential candidates really fitted this description.  Geoff Bascand, for example, would get a significant mark against him if they really want “a leader in the national and international financial community”.  There would be other marks against Adrian Orr, David Archer, Murray Sherwin.  Perhaps they are, after all, looking for an experienced banker?  One thing that is striking is that there is nothing in the profile stressing knowledge of, understanding of, or relationships in, the New Zealand economy or financial system.  That looks like quite a gap –  and I reiterate my view that an overseas appointment, of a non New Zealander, would be untenable especially while the single decisionmaker system remains.

The final item on the profile list was particularly interesting.

The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

It sparked my interest on several counts:

  • first, I’ve never seen wording like it previously in an advert for the Governor’s position,
  • second, it sounds really quite embattled as if the Board think that the Bank’s independence might soon be under threat, but
  • third, and most importantly, just how appropriate is this?  Parliament decides how independent or otherwise, in some or all areas of its responsibility, and it is the role of the Governor, and the Board for that matter, to work within the parameters that Parliament lays down. It isn’t the role of the Board to be seeking a chief executive who will advocate for a particular model of how the Bank should be run.   After all, even if everyone agreed (as most do) that the Bank should have operational independence around monetary policy, and on the detailed implementation of prudential policy, there is a lot of room in between, where views and international practices differ.   Should fx intervention be decided by the Governor?  In some countries it is, and others not.  Should regulatory policy  parameters (eg DTI limits) be set by the Governor, or the Bank, or by the Minister?  Again, practices differ, and so can reasonable people.    It is quite inappropriate for the Board to looking to employ someone to defend all the powers Parliament happens for the time being to have assigned to the Bank.
  • we should also be a little cautious about that wording “the behaviours required for ensuring the long-term sustainability of that independence”.  Not only can the Governor or the Board not “ensure” that independence at all, but a variety of different types of behaviour –  not all desirable –  can be deployed contribute to that end.  Not making life difficult for the Minister (of whichever party) is a well-known bureaucratic survival strategy. It won’t necessarily be the behaviour that would in the wider public interest.    At the (perhaps absurd) extreme –  but it is an FBI day today –  J Edgar Hoover sustained his independence for the long-term in ways that were highly unseemly and not generally regarded as in the public interest.

Perhaps they just worded the advert badly, but it does rather betray a sense of a group of people who really aren’t suited for the role they’ve been given.  They might be okay at monitoring the routine performance of the Governor.  But you shouldn’t have control of the appointment to such a very powerful position in such hands at all –  and, even while it is, they should have delayed this process rather than rushing so far ahead before the looming election.

 

UPDATE:  For future reference (since the advert will be taken down when applications close) this is the advert

Governor

Close date:     08/07/2017 08:00
Office location:  Wellington

The Reserve Bank of New Zealand (“the Bank”) is New Zealand’s central bank. It is responsible for monetary policy, promoting financial stability and issuing New Zealand’s currency. The current Governor is stepping down at the end of his term in 2017 and, accordingly, the Board is now seeking candidates to fill this vital and unique leadership role in the New Zealand economy. The Governor is appointed by the Minister of Finance on the recommendation of the Board.

The Governor is the Chief Executive of the Bank and a member of the Bank’s Board of Directors, and has the duty to ensure the Bank carries out the functions conferred on it by statutes, including The Reserve Bank of New Zealand Act 1989. 

KEY RESPONSIBILITIES

The Governor is responsible for the strategic direction of the Bank and for ensuring that strategy is consistent with the Bank’s key accountabilities in relation to: price stability, the soundness and efficiency of the financial system (including prudential regulation and oversight, supervision of banks, non-bank deposit-takers and insurance companies, and anti-money laundering), the supply of currency, and the operation of payment and settlement systems. As Chief Executive, the Governor is required to lead a high-performance culture and ensure that the Bank operates effectively and efficiently across its wide range of policy, operational and communication functions.

CANDIDATE PROFILE

The ideal candidate will be a person of outstanding intellectual ability, who is a leader in the national and international financial community. The person will have substantial and proven organisational leadership skills in a high-performing entity, a proven ability to manage governance relationships, a sound understanding of public policy decision-making regimes, and the ability to make decisions in the context of complex and sensitive environments. Personal style will be consistent with the national importance and gravitas of the role. The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

The role is based in New Zealand’s capital city, Wellington. Remuneration is commensurate with the seniority of the role and the New Zealand public sector.

Interested candidates may phone Carrie Hobson or Stephen Leavy for a confidential discussion on +64 9 379 2224, or forward a current CV to Lina Vanifatova before 8 July 2017 at lina@hobsonleavy.com

 

 

A pseudo-PTA and other miscellania

This morning it was announced that something that purports to be a Policy Targets Agreement, to cover the conduct of monetary policy during the six months after Graeme Wheeler leaves office, had been signed between the Minister of Finance and Grant Spencer, currently the deputy chief executive of the Reserve Bank.  The Minister announced some months ago that he intended to appoint Spencer as acting Governor for six months, to get the appointment of a permanent Governor clear of the election period.

There are a number of problems with this:

  • first, the Minister has no statutory power to appoint an acting Governor, except where a Governor resigns or otherwise leaves office during an uncompleted term, and
  • second, even if it were argued, contrary to the clear sense of the legislation, that the Minister had such appointment powers, there is also no statutory provision for a Policy Targets Agreement between an acting Governor and the Minister (rather, the Act envisages that the acting Governor would run monetary policy under the PTA already signed with the substantive Governor for his/her unexpectedly foreshortened term).

You might respond that even if there is no statutory provision, there is nothing to stop the Minister and the “acting Governor” signing an agreed statement about how monetary policy would be run during the “acting Governor’s” term.  And if the acting Governor appointment was itself lawful, I would agree with you.   But the so-called Policy Targets Agreement signed yesterday explicitly states the parties believe it to be the genuine binding article, not just some informal statement of agreed intentions.

This agreement between the Minister of Finance and the Governor  of the Reserve  Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act).

The Reserve Bank’s statement stressed that there were no changes in this new (pseudo) PTA, relative to the current PTA applying during Graeme Wheeler’s term.   Unfortunately they seem to have taken that a bit too literally.  You’ll notice that in that extract (immediately above) it is referred to as an agreement between “the Governor” and the Minister.  But the Minister’s announcement in February was that Spencer would only be “acting Governor”.  Indeed, there is no way that Spencer could have been appointed as “Governor”, because any new person appointed as Governor has to be appointed for a term of five years, and any such appointment would have defeated the whole point of not making a long-term appointment in or around the election period.

It wasn’t just a slip either.  At the bottom of the document it is signed by Steven Joyce as Minister of Finance and by Grant Spencer as “Governor Designate”  (the “designate” bit matters, because real PTAs have to be agreed before the appointment is formally made).  But Spencer isn’t “Governor designate” at all, he is “acting Governor designate”.     I guess they are trying to slip him in under the provisions of section 9 (rules governing the PTAs) which refer only to the Governor, not to any acting Governors.  As I said before, the Act does not provide for acting Governors to sign proper PTAs.  So the document resembles a PTA, but it can’t in fact be one.

Does it matter?  In one sense, perhaps not.  But laws matter, and details matter, and this appointment, and the purported PTA, appear to be in breach of the law.   If nothing goes wrong and there are no legal challenges during the “acting Governor’s” term, then there probably won’t be any practical problems. But the Governor exercises a lot of powers, including in crises, and the last thing one needs in crises –  which one never foresees correctly the timing of – is uncertainty as to whether a purported Governor really has powers to do what he is trying to do.

(As I have noted previously, there are remedies, even if awkward ones.  For example, Graeme Wheeler –  as an existing Governor – could have been reappointed for six months, and a new PTA signed with him, all while he announced his intention to resign after one day.  Nothing then would prevent the Minister appointing Spencer as lawful acting Governor, operating under a fully lawful PTA.)

I have put in OIA requests with both the Bank and Treasury for the papers relevant to today’s purported PTA.

Being in a slightly flippant mood this evening, I thought I’d throw a few curiosities from the day.

First, on looking on the blog statistics page I discovered that someone had got to my blog today by searching under  “functions of weet bix to the unborn”.    Quite why anyone would be searching for anything using those words for a search at all is a beyond my understanding.   On scrolling down several pages of search results I discovered that I had once, long ago, referred to Weetbix, but not to nutrition or the unborn.

Second, the Reserve Bank might find my OIA requests annoying (they did, after all, launch a whole charging regime in response).   But other people lodge requests too.  I occasionally have a look at the ones the Bank releases.   Some are easy to answer, but distinctly strange.   A few weeks ago they responded to this one

I would like a categorical response to the question­ ” What influence does the Rothschild family exert over the reserve bank of New Zealand?

The categorical answer, of course, is none whatever, although the Bank gave the person a slightly fuller response.

It has been quite a while since I’d seen such a New Zealand-focused example of the old conspiracy theory, in which bankers –  especially perhaps Jewish bankers –  had the central banks of the world under their thumb.  It is a fascinating, if unnerving, phenomenon.  On a par, I suppose, with the whole “one world government” conspiracy stories:  I have on my shelves a book which claims that Don Brash was installed as Reserve Bank Governor by the one world government, as a safe pair of hands, as the son of someone who himself had been part of the conspiracy, as a leading figure in the World Council of Churches.

And finally, looking back at Steven Joyce’s statement on 7 February announcing that Graeme Wheeler was retiring, I noticed the Minister’s description of the Governor’s conduct

The Governor has performed his role calmly and expertly during a highly unusual period for the world economy

Calmness having been so prominently highlighted as a feature of the Governor’s stewardship, I can only assume that the story I heard a while ago on the grapevine, that the Governor had, as it were, tossed his toys out of the cot when someone wrote something the Governor disagreed with, couldn’t possibly be true.