An expert weighed in on Reserve Bank reform

I was exchanging notes last week with someone who is doing research on New Zealand economic policy, and the development of economic institutions, in the 1980s and 1990s.  In the course of that conversation he sent me a copy of interesting short paper –  presumably obtained from the national archives –  from the period when the thinking and debates that led to the Reserve Bank of New Zealand Act 1989 were underway.

Reform of the Reserve Bank had been in the wind for some time.  Loosely, the Reserve Bank tended to be keen on an independent central bank, and recognised that some accountability procedures would be part of the price of that.  On the other side of the street, the Treasury was keen on an accountable and efficient central bank.  Neither institution –  nor the key ministers at the time –  wanted the Minister of Finance to be determining day-to-day monetary policy. (Ministers determining policy adjustment had been the standard practice, by law, for decades – and it was the practice at the time in most western countries, the exceptions being Switzerland and West Germany and (more or less) the United States.)   Everyone involved wanted a much lower average inflation rate than New Zealand had had in the 1970s and 1980s.

The Treasury was heavily involved in work on reshaping the institutional form of much of what central government did.   Of particular relevance was the new state-owned enterprises (SOE) model, adopted for many/most government trading enterprises (NZ Post, for example, is still with us today).    The Reserve Bank, then as now, was a somewhat anomalous organisation and part of the – at times – acrimonious debate between the Reserve Bank and the Treasury over several years reflected the idiosyncratic nature of the institution, and differing views over what parallels or comparators were relevant.    For example, were banknotes or the retail government banking operations, or the sale of government bonds really just commercial activities really just commercial activities.  And might the (apparent) policy goals be achieved better in an organisation given more commercial incentives.

At one end of the spectrum was a proposal out of The Treasury in late 1986 to turn the Reserve Bank into an SOE (it was never quite a final Treasury proposal, but was written by a senior Treasury adviser and taken seriously as the highest levels of The Treasury.  For anyone interested, you can read more about it in Innovation and Independence, the 2006 history of the Bank (bearing in mind that that history was very much written from a Reserve Bank perspective, one of the authors not only having been an active protagonist in the late 1980s debates but at the time of writing serving as chair of the board of the Reserve Bank).

The proposals were stimulating, far-reaching (including allowing for the Reserve Bank to be declared bankrupt and statutory managers appointed) and –  in the views of probably all Reserve Bankers involved at the time (and in my view now) –  quite unrealistic, and failing to really grapple with the reasons for having a central bank at all.  I am one of those who believes that the economy and financial system could function adequately without a central bank –  although on balance I think a central bank can improve our ability to cope with severe shocks –  and in many respects the logic of the Treasury position might have been better developed into a proposal to explore whether we could do without a central bank altogether.  But they didn’t.  (Had the Bank been abolished, my position –  then and now –  is that New Zealand would fairly quickly have become a de facto part of the Australian dollar area, with monetary conditions influenced by the RBA with Australian perspectives in mind.  That is probably clearer now than it was then –  in 1986/87 only Westpac and ANZ of the larger banks were Australian owned.)

But the point of this post isn’t to rehearse all the old debates. I was overseas on secondment at the time, and only got involved in the debates (which lingered in various forms for several years, even after the Reserve Bank Act was passed) a bit later. But I was intrigued by this one particular paper I was sent last week.

The Reserve Bank has received the “Reserve Bank as SOE” proposal in November 1986.  At the time, the Reserve Bank Board was the decisionmaking body for the Bank itself (although not on monetary policy, which was in law set by the Minister).   The Board asked management to obtain independent expert analysis and advice on the Treasury ideas and for their March 1987 meeting the Board had in front of it a six page commentary from Professor Charles Goodhart.

Goodhart is one of the more significant figures in the last 50 years or so in thinking and writing about central banking.   At the time, he was Professor of Money and Banking at the London School of Economics and had previously served as Adviser to the Governor of the Bank of England.  He had relatively recently published an influential book The Evolution of Central Banks: A Natural Development? (and had been the star guest, and guest lecturer, at the Reserve Bank’s somewhat-extravagant 50th anniversary celebrations in 1984).  Goodhart was very smart and thoughtful, but well-disposed to a traditional (British) view of central banks.

A decade later, Goodhart served as one of the first members of the UK Monetary Policy Committee, after the newly-elected Labour government in 1997 gave the Bank of England operational independence in the conduct of monetary policy.  But in 1987, the Bank of England was, to a considerable extent, the executing agent for the policy choices of the Chancellor of the Exchequer –  the Chancellor being advised by both the Bank and the Treasury, and typically being closer to The Treasury (in the UK ministers have their offices in the department for which they are responsible, not something akin to the Beehive).  It is worth noting that by 1987 the UK had successfully lowered its inflation rate very substantially (the UK inflation record in the 1970s had been, if anything, worse than New Zealand’s).

It is perhaps also worth noting that when the Reserve Bank of New Zealand Bill was finally brought to Parliament in 1989, Goodhart played an important role in providing public support (including FEC testimony) for the chosen model.  Part of that involved providing an academic counterweight to the New Zealand academic (macro)economics community, most of which, at very least, sceptical of the legislation.

But that was 2.5 years later, long after the notes for the Reserve Bank Board had been written.  In those notes, Goodhart’s stance –  while useful to the Bank in countering Treasury – was very different to the legislation he later provided public endorsement to.

The first half of the paper (history and theory) is interesting, but not particularly controversial for these purposes. But the second half is about “policy conclusions”, drawing from an analysis that was generally in favour of (a) discretionary monetary policy, and (b) a central bank not influenced by profit-maximising considerations.

Here is his view on who should do what

goodhart 1

Get the Minister of Finance further away from the conduct of monetary policy and let the Reserve Bank itself decide what rate of inflation to target.  (This was more than year before “inflation targeting” itself became a thing, and was presumably just about setting a broad direction for policy –  in New Zealand at the time there was, for example, beginning to be talk about “low single figure inflation”).

I don’t suppose that idea went down overly well with his Treasury readers (including the Secretary to the Treasury who was then a member of the Board).

One of the later mythologies that developed around the Reserve Bank Act (over the years we spent a lot of time rebutting it) was that the Governor’s salary was tied to the inflation target.  It never was.    But until reading this paper I hadn’t realised where the possibility of making such a link had come from.  Here is Goodhart, talking about accountability.

goodhart 2.png

Wow.  At this stage, there was still no sense of making the Governor the single decision maker, but a leading academic writer on central banking was seriously proposing not just that the Reserve Bank should be able to set a target rate of inflation for itself, but that a range of key executives should be partly paid in the form of options that would pay off if the target was met.    He doesn’t seem to notice, for example, the distinction between a private business (operating in a market it can’t control) and a public agency able to do whatever it takes, at whatever short-run cost, to achieve a target rate of inflation.

At the time, there was still a presumption that decisionmaking at a reformed Reserve Bank would be made (ultimately) by the Board –  as, of course, responsibility in SOEs and many other Crown agencies rested with the respective boards.  The Board was largely non-executive (Governor, Deputy Governor, Secretary to the Treasury plus other members appointed by the Minister) and Goodhart moves on to discuss the issue of whether non-executives could be involved in monetary policy decisions.


good 4

Reasonable points in some respects (how to manage potential and actual conflicts has been an issue even in the recent appointment of members of the new MPC), although note that in Australia the Reserve Bank of Australia Board –  which sets monetary policy –  is very similar in composition to the way the RBNZ Board was in the 1980s.

Perhaps more interesting is about the qualms Goodhart has –  in early 1987 –  about the case for an independent Reserve Bank, in particular around the case for a more active coordination (at least in some circumstances) of fiscal and monetary policy.



Goodhart’s paper ends with this paragraph.

good8If you were generous, you could interpret the final Reserve Bank of New Zealand model as looking something like that paragraph.  Unlike the Bundesbank, the Reserve Bank of New Zealand never had the power to set any specific policy objective for itself, and there was explicit override provisions built into the legislation allowing the government to (temporarily) override the agreed (Governor and Minister) policy targets.  But this paragraph sounds a lot more like the Bank of England in the 1980s, than the case made in public for the Reserve Bank of New Zealand Act 1989 (much of which was about having as few residual powers for  Minister as was consistent with getting the legislation through the Labour Party caucus).

In fairness, the Bank asked for these comments from Professor Goodhart at relatively short notice. On the other hand, he was at the time a leading academic writer in the area, and a former senior practitioner.  And so I am still struck by the conflicting strands of thought that one finds in this short paper –  on the one hand, the idea of options to reward senior central bank staff for meeting a target they might specify themselves, and on the other a real concern about the potential disadvantages in separating fiscal policy too far from monetary policy, and thus some ambivalence about too much operational autonomy for the Reserve Bank at all.

Having said all that, in a way what struck me most about the Goodhart paper is what wasn’t there.    The UK’s disinflation experience in the 1980s had a wrenching one.  Economic historians will still debate the contribution of monetary policy to the peak of three million people unemployed, but no one seriously doubts it played a part.  At the time, there hadn’t been many economywide costs to the degree of disinflation New Zealand had so far managed –  the credit boom and stock market excesses were still in full swing-  and for a time that was to induce a degree of complacency among New Zealand advisers (I recall a meeting I was in perhaps a year or so later at which the then Deputy Secretary to the Treasury was telling the IMF about how modest he expected the costs of disinflation to be –  the head of the IMF mission politely begged to differ).

But in this paper there is no mention of output costs at all  – either those associated with getting inflation down to a much lower average level, or the short-term deviations of output from potential that would come to play such a large role in central bank thinking in subsequent decades.  Just none.  It is quite extraordinary  (and thus when Goodhart talked about tying staff pay to the inflation target, no sense of the political impossibility of giving central bankers financial bonuses for actions that would, at least temporarily, raise unemployment –  even if one could accurately and formally specify a binding target for the life of the options he proposed).

What of Reserve Bank staff ourselves?  From mid-1987 I was Manager of the Monetary Policy (analysis and advice) section at the Bank, and thus quite heavily involved in clarifying what it was we were going to target, how and when.   If memory serves, I think many of us were probably too complacent, perhaps a little blind, around the short-run issues, and tended to work on an over-simplified mental model in which once inflation was lowered to target all we really had to worry about were things like oil price shocks or GST adjustments (we didn’t explicitly – and probably not implicitly –  think much about significant positive or negative output gaps developing).

On the costs of disinflation itself, we were (on the whole) more realistic, but to some extent that depending on the individuals.  There were “battles” between what might loosely be called “the wets” and “the dries”, the former tending to emphasise the transitional costs and the latter the medium-term goal.   Some of the wets (I was mostly of the other persuasion) probably doubted that the 0 to 2 per cent inflation target, adopted in 1988, was really worth pursuing.  Perhaps what united us was a belief that a lot of other reform –  greater fiscal adjustment and more micro reform –  would reduce the costs of getting inflation sustainably down.

Some 20 years ago now I wrote a Bulletin article on the origins and early development of the inflation targeting regime.  In that article, I tried to capture some of competing models that influenced the legislative framework (a funny mix of independence –  not trusting politicians –  and accountability –  not trusting officials and having ministers hold them to account). I also reported some extracts from some of the papers we wrote (I often holding the pen) as the target came together.    From one early and somewhat ambivalent paper (and I can’t recall why shipping got so much attention that month)

Moreover, the Bank noted that “the potential improvements in living standards to be derived from more rapid and complete removal of import protection, and the deregulation of such grossly inefficient sectors as the waterfront (already under
way) and coastal shipping, far outweigh the real economic benefits of slightly faster [emphasis added] reductions in inflation”. In an early echo of what later became a dominant theme in subsequent years, the Bank argued that if price stability was to be pursued over a relatively short time horizon, everything possible needed to be done at least to try to influence expectations and wage and price-setting behaviour.

This post isn’t about having a go at Charles Goodhart, The Treasury, the Bank, or me and my colleagues who were working on some of this stuff at the time.   Mostly, it is just about history, and the sober perspective that history often provides –  things that seemed clear at the time seem less clear with the perspective of time, and some things –  that one later realises are really quite important –  that hardly get attention at all.  If it is an argument for anything, it is probably for more open and deliberative government and policy development processes, perhaps even for incremental and piecemeal (in Popper’s words) reform.   That probably never appeals to reformers –  perhaps especially not young ones  –  and perhaps there are occasions when it can’t be (practically) the chosen path, but blindspots are all too real.

As for the Reserve Bank Act 1989, if there were mistakes and weaknesses in its design (most especially the single decisionmaker model), it did probably serve New Zealand fairly well for several decades.  It was, almost certainly, superior to the Atkinson/Treasury scheme.   And yet one can also overstate the difference legislation really makes –  Australia having made a similar transition to low and stable inflation under legislation still much as it was first passed in 1959.




The Reserve Bank tries to explain wages…..or not

On Friday afternoon an email turned up from the Reserve Bank of Australia with this simple message

Draft copies of papers presented at the Reserve Bank of Australia 2019 Conference – Low Wage Growth – held from 4 to 5 April 2019 have been published on the Bank’s website.

That looked interesting, so I clicked on the link to the papers and found that the very first one was by a Reserve Bank of New Zealand author – not just a junior researcher, but someone who is now manager of their (economic) modelling team.   The paper had the title “New Zealand wage inflation post-crisis” which, of course, immediately grabbed my attention.   I’ve written quite a bit here about wages in New Zealand, including (in recent months) here and here.  My take has been that, if anything, wage growth in New Zealand has been surprisingly strong, given the weakness of productivity growth (most especially in the last five or six years).

There is some interesting material in the Reserve Bank paper, including the use of the highly-disaggregated data available from Statistics New Zealand’s IDI and LBD databases (my reservations of principle about them are here).  For example, the author looks at the possible contribution of industry concentration.  In the US context,

Recent commentary has highlighted the role that industry competition may play in suppressing wage inflation. The hypothesis is that firms in very concentrated industries can act as a monopsony buyer of labour, and therefore suppress wage inflation through their market power.


First of all, industry concentration has actually decreased in New Zealand over the past two decades (figure 11). This is in contrast to developments in the United States.

HH index

That apparent reduction in concentration surprised me a little, but it isn’t my area at all.  The author goes on to note

To account for the potential for different characteristics of workers in different industries, we have matched workers in high and low concentration industries across a range of other characteristics. Figure 12 presents the wage growth differential for matched individuals in the 2011 cohort. The figure shows that, when accounting for the different characteristics of employees across industries, those in concentrated industries tend to see slightly higher wage growth than those in more competitive industries.

Interesting, but (as they note) experimental.

But right through even that discussion, the author starts from the presumption that there is a puzzle to explain, in the form of low wage inflation.

As a reminder, this chart shows cumulative increases in New Zealand wage rates relative to cumulative growth in nominal GDP per hour worked.  A rising line suggests that, on this measure, wage rate increased faster than (loosely) the earnings capacity of the economy.

lci wages vs gdp

(Nominal) wages have been rising faster than (nominal) productivity, and there is no very obvious difference between the trend in the years running up to the 2008/09 recession and those since.

Not inconsistent with that is the labour share of total GDP, which has held up considerably more here (in the last 20 or 30 years) than in many other advanced countries.

labour share 2018

But not a shred of this appears in the Reserve Bank’s conference paper.   In fact, the thrust of the paper is such that it appears that they mostly see wage inflation and CPI inflation as the same thing, and so the paper falls back on the lines they’ve been trying to run for years as to why inflation has been so low (hint: because monetary policy was, on average, a bit tight).

This is from the Abstract

Nominal wage and consumer price inflation have been subdued in New Zealand post crisis, particularly since 2012. This paper discusses a number of candidate explanations for these muted nominal wage inflation outcomes. The most notable explanations include: a gradual absorption of spare capacity amongst New Zealand’s major trading partners; sharp declines in oil and export commodity prices in 2014/15; a significant rise in labour supply, and less inflationary pressure stemming from migration; and a change in price setting behaviour, with inflation expectations becoming more adaptive.

Basically, despite the title, it isn’t a paper about wage inflation –  which would surely focus substantially on what happened to wages given all else that had gone on in the economy – at all.

Consistent with this interpretation, I searched the document, and the word “productivity” did not appear at all, and yet in almost any possible story about longer-term wage growth, labour productivity should be one key consideration.     The author shows various charts of elements of the Bank’s forecasts they got wrong over the last decade, but again the productivity forecasts don’t appear.   Government agencies (Reserve Bank and Treasury) have done consistently badly on that score.

Carrying on with the search function, “terms of trade” didn’t appear in the paper, and nor did “investment”.

At the Governor’s speech a couple of weeks ago, a retired academic in the audience asked the Governor how the Bank was going to get away from what he (the academic) characterised as past Reserve Bank tendencies to treat wage inflation as basically the same thing as general inflation and, therefore, something to be jumped on.  The gist of the question seemed to be the (entirely reasonable) point that income shares can and do change over time, and that a changing income share (up or down) is not the same thing as inflation (or deflation).  I was a bit surprised at how the Governor answered –  he basically didn’t.  I’d thought it would be an opportunity for an expansive comment on the rich new research programme the Bank had underway, consistent with the revised mandate (and the rhetoric around it).

But this paper suggests the Bank hasn’t got far at all.  There is clearly some interesting exploratory micro-data work going on, but it appears to be of limited reach at best.  There are reasonable and interesting questions to ask about why inflation has been so low at surprisingly persistently low interest rates  (those are questions we really expect central banks to be answering).  There are important questions about why productivity growth in New Zealand has been so poor (for so long), and about why relative to that poor productivity growth wage rises in New Zealand have been quite strong (perhaps more so than in many other countries).

One can mount a reasonable case that those latter questions aren’t a prime concern of the Reserve Bank –  you can have price stability with high or low productivity growth, weak or strong labour income shares, and so on (inflation being primarily a monetary policy phenomenon).  But when you send one of your senior economists out to the public domain to speak on New Zealand wage inflation in the last decade or so, it is pretty astonishing that none of these considerations even get a mention, and instead you have a whole paper built around a misleading prior, that we should be surprised by how weak wage inflation has been.  To the extent there is a problem in New Zealand, it is more that overall economic performance has been poor, and within that underperformance, wage earners have at least held their own.

But I guess that –  whatever the facts –  isn’t a narrative the Governor would be keen on adopting.


Three totally unrelated items

Rather than clutter in-boxes with three separate shortish emails.

First, a follow-on from yesterday’s post about house prices. I noted that the absence of any real sign of falling land prices in and around our cities suggests that the (admirable) words around possible reform from the Minister of Housing are not being treated as credible. Asset markets typically incorporate expectations about future changes in factors that might affect prices in the relevant market.

I had a brief exchange in the comments to that post with Eric Crampton of the New Zealand Initiative, and I see that Eric has now set out comments along those lines in a post on his own blog.

Eric’s key point is that it is hard to short houses. That is quite true, but not (I reckon) determinative. There is no traded derivatives market (eg a futures contract on the QV index, whether nationally or regionally), and although someone who would naturally own one house can sell that house and rent for a few years, it isn’t easy or cheap to do so (actual transactions costs are non-trivial, it is often hard to get a secure long-term rentals, many people have ties to specific neighbourhoods etc). Of course, many holders in other markets are pretty passive too – you can short US equities (say) but a huge proportion of holders are either in passive index-following funds, or in funds that allow only small deviations from benchmark.

But, to get back to the land (and housing) market in New Zealand. If hardly any suburban owner-occupiers (like Eric or me) are going to sell and rent, even if we believed – as Eric seems to – that substantial reform really is coming, there are plenty of other market participants, and it is the marginal choice that will drive the price. Young people starting out can make a choice to hold off buying for a few more years (they are already renting, so have no new transactions costs). Older people looking at trading down can bring forward that move by a year or two. And probably more importantly still, marginal players often aren’t owner-occupiers (actual or potential at all).

If, as someone owning rental properties, you believe the government is really serious, and change is really coming (in fact, even if you only believe it with a 50 per cent probability), you face a high chance of a large fall in the price of your asset over the next few years. A rational response to that expectation would be to sell now – to get out while the going is still good. If you had a bought a few sections in the outer suburbs thinking you might develop them a few years from now, if you believe the government is serious and change is coming, you would want to offload your land exposure now. And – for the really serious players – if you hold pockets of land, large or small, on the periphery of major cities, and have seen the value of that land sky-rocket as population growth and regulatory scarcity rewarded you, any serious prospect of a change in regime, in which peripheral land might once again go for something like its best alternative (farming) use, would surely see you reassessing now.

None of these effects are as instantaneous as (say) the fx market’s response to a Reserve Bank OCR announcement, or even the stock market’s response to possible corporate tax cuts, but they are real and efficacious mechanisms which we should expect to see already at work if the Minister’s plans are likely to be the real deal. Sure, if his speech to the New Zealand Initiative two weeks ago changed expectations – and it certainly impressed some people, including me – we won’t yet see the results in the data (house price data is at best available monthly, and decent land price data is even harder to come by). But that won’t be a credible story as the months roll by.

Of course, in any such experiments with non-instantaneous effects, it is hard to untangle precisely what part of any price movement is due to the specific factor one is trying to isolate. But if these reforms are really the big event the Minister suggests (recall that the aim was to “flood” the urban land market), the effects should be pretty apparent pretty soon (especially with a slowing economy, easing migration, extended brightline tests, ringfencing, talk of CGTs, tighter credit conditions and so on). I remain pretty sceptical, less (as I noted yesterday) because I doubt Phil Twyford’s intentions, than because I doubt the commitment of the government as a whole (the PM in particular), or its interest in actually seeing land and house prices fall materially.

My second item related to the Reserve Bank.  Yesterday, there were two emails from the Bank.

The first was this press release

pac c banksThis from an organisation that claims it is underfunded.  “Fostering investment in green technology” simply is no part of the Reserve Bank of New Zealand’s mandate.  Nor, to be blunt, does the Reserve Bank have any obvious expertise.

Perhaps I should be encouraged to learn that the Governor is going to focus on lowering the cost of capital in New Zealand (bearing in mind that our real risk-free interest rates have long averaged the highest in the advanced world), but I don’t suppose that is what he meant.

And the second email from the Reserve Bank was this


I guess it is better than not publishing the material at all, but this new 65 page document is finally released more than 3.5 months since the consultation document, setting out the Governor’s plans, was published, and with only a month until submissions close.  I haven’t yet read it, but someone who has tells me that it still doesn’t deliver a proper cost-benefit analysis, and only promises that they will do one one day –  probably after the final decision has been taken, to provide support for whatever the Governor settles on.

This is no way to make policy on serious matters.  Meanwhile the Governor cavorts with his tree gods and dabbles in things –  green technology just the most recent example –  that are no responsibility of his.

Thirdly, and finally, why is the case of Shane Jones (Associate Minister of Transport), the Northland trucking company (owner by a donor and distant relative), the NZTA, and the prosecution, not leading all media outlets?  Why is the Prime Minister not fronting up and facing hard questions about acceptable conduct in her Cabinet?   Appearances of impropriety should not be tolerated, let alone substance.

Matthew Hooton’s tweet seemed apt

Reminding ourselves that Transparency International is itself largely government-funded.

The Governor’s talk

It was pleasant to walk along Wellington’s waterfront this morning to hear the Governor of the Reserve Bank speaking at a local function centre.  Given the numbers who turned up –  many of them Bank staff –  they could probably have saved a few dollars by holding the event on their own premises, but, I guess, it is other people’s money.

As the Governor explicitly noted that he would “look forward to the blogs”, I should probably do my bit.

A week ago when this event was announced, I devoted a whole (short) post to the announcement of the event, including the indication that they would be filming the speech and making that footage available on the web.   Doing so is a genuine step forward and I hope it becomes standard practice.

In that earlier post I noted

I have been critical of the Reserve Bank Governor for not yet having given an on-the-record speech about either of his main functions, monetary policy or financial regulation/supervision.  Next week marks a year since he took up the job

Unfortunately a year has now passed and we still haven’t had a substantive on-the-record speech about either of his main functions –  the sort of speech that would be standard, and quite expected, under any other Governor and in any other country.

Today’s speech was billed this way

Reserve Bank Governor Adrian Orr will talk about the future of New Zealand’s monetary policy framework  …..The revised monetary policy framework comes into effect on 1 April 2019. It is an outcome of the recent Phase 1 review of the Reserve Bank Act.    Adrian Orr will talk about changes to how monetary policy decisions are made in New Zealand, including greater transparency and accountability.

But there wasn’t very much about the new monetary policy framework (any aspect of it) at all.  You can read the text for yourself (and on this occasion the speech delivered was recognisably similar to the published text, which is not always the case I gather).

The whole event started rather oddly, with a fairly lengthy greeting in Maori from someone whose name I didn’t catch but who had no apparent connection to the Reserve Bank.  Only a small portion of whatever he said was translated, so I suspect very few attendees had any idea what he’d been saying.  He did, however, take the opportunity to make a few digs in English about the Foreshore and Seabed Act – of infamous memory – including at a former Labour MP from that era who was apparently in the room.  That seemed rather inappropriate in a Reserve Bank function.  Not even the Governor has yet claimed Reserve Bank responsibility for the foreshore and seabed.

The Governor did, however, tell us that someone else in the room had just agreed to be a “kaumatua” to the Reserve Bank – a title apparently quite in vogue in trendy government agencies, but not having an obvious place in way Parliament set up the governance of the Reserve Bank.  Isn’t all that stuff –  leadership, nurturing talent, resolving disputes –  among the functions of those tedious prosaic statutory roles such as Governor, Deputy Governor, and Board members?  But there is, we are told, a forthcoming Bulletin article, “RBNZ’s Strategic Approach to Te Ao Maori”.  That will be something to look forward to, no doubt involving more expensive and tortured efforts to explain why a macro-focused government agency, which deals with general public hardly at all, needs such a strategy and not (say) a Catholic one, a secular humanist one, a Pacific one, or an NZRFU one?   For an organisation that claims to be underfunded, they certainly seem to take every opportunity to spend resources on stuff other than their core business.

The Governor keeps on doubling down with his tree god nonsense, urging us to think of the Bank as akin to Tane Mahuta, the mythological forest god.   He delivered his speech flanked by two screens of this cartoonish graphic.


He claimed this myth –  which has precisely nothing to do with central banking – “is” (not “was”) “central to the Maori belief system”.    Those who bothered by such things might suggest it was “cultural appropriation” –  although, ever deferential, he did stress that he asked permission to use the myth – but as I’ve noted in an earlier post

Pre-evangelisation, Maori had their own tree god, Tane Mahuta.    As far as I can tell, not many believe any longer in this local tree god: when I looked up the 2013 Census data, there were lots of Maori recording no religion, and there were plenty of Catholics and Anglicans.  But there wasn’t a category shown for tree gods, or any of the other deities (Wikipedia has a list of at least 35 of them).

As a recent commenter on another post noted

Imagine the reaction if the Bundesbank president started discussing policy in terms of Odin and Thor…. he’d get locked up…

And in addition to those references, we got the same warmed-over inaccurate nonsense the Governor has  run repeatedly about the creation of the Reserve Bank ‘letting the sunshine in” on the New Zealand economy and financial system.  I happen to agree that the creation of the Reserve Bank was, on balance, a good thing, but you’d not know from listening to the Governor that we’d had a stable financial system and a highly prosperous and productive economy without one.

What the speech really tended to show was a Governor with not much interest in the core business of the Bank (price stability, financial regulation, notes and coins, and a few ancillary bits and pieces).    Each of those functions matter.  It is important they are done well.  When they are done well, most people should have little interest in the Reserve Bank.

But, so he told us, the Governor is bothered that when they went out to “the community” (no polling results or the like, but I’ll take his word for it), people said they had significant trust in the Bank, but didn’t really know what it did.   But then they don’t really need to, any more than (say) I need know anything much about many of the dozens of government organisations you can find listed here (and I’m a geeky policy person, and still have no idea what, say, the Accreditation Council does).  How much does the person in the street know about, say, the organisation of our judiciary, or the distinction between the New Zealand Defence Force and the Ministry of Defence.  I’d struggle to even tell you what the Ministry of Housing and Urban Development does.

But it isn’t good enough for the Governor. So, on the one hand, we get cartoon versions of Monetary Policy Statements and Financial Stability Reports.  And on the other, considerably more worryingly, we get attempts by an overtly left-wing Governor to tie himself and the institution he leads to a whole series of trendy left-wing causes.  I’m sure he is not directly partisanly political, but his colours are firmly staked to an ideological mast, in ways that are potentially quite damaging.  After all, if he wants citizens to have confidence in his organisation around its core functions, those who aren’t sympathetic to his overt left-wing agenda will be less inclined to trust him even on the core issues he has responsibility for.  A new centre-right government at some point (ok, just kidding, but at least a new National one) might also be less inclined to trust him.   And, in championing these causes, he creates unrealistic expectations about what central banks can actually do, and opens the Bank up to pressure in future to join in promoting some other government’s set of ideological causes.

As an example of what I mean, here is an extract from the speech.

In the world today, the dynamics of global and national economies are interacting to a greater extent and, at times, working at cross-purposes. Underlying these interactions are social and political movements driven by a desire for greater well-being, both for current and future generations.

More recently we have been confronted with the issue of climate change, and its complex and powerful economic and financial impact.

We have barely scratched the surface in understanding the intergenerational impacts of these developments.

This desire for well-being is regularly reflected in discontent along the lines of economic, gender, racial, and intergenerational inequities – to name just a few. Therefore, ensuring social inclusion as a way forward in capitalist societies is necessary.

The first of those paragraphs barely even makes sense.  The rest do, but none of it has anything to do with central banks doing their jobs.    If this text appeared in a speech from Grant Robertson or James Shaw it might be quite unexceptionable –  it is the sort of stuff left-wing politicians say –  but what is a (supposedly neutral non-partisan) Governor doing spouting off about his views as to how “capitalist societies” should move forward.  Since it is what he is paid for, I’d rather hear him on the New Zealand cyclical economic situation, financial stability risks, positioning monetary policy for the next serious downturn or whatever.  Intrinsically less interesting perhaps, but that is the job he and his institution are paid to do.

The Governor –  particularly in his oral delivery –  was claiming a much wider mandate for himself from the newly amended Reserve Bank Act.  He is wrong to do so.

Even the badly-worded new Remit (replacement for the Policy Targets Agreement) makes that clear


Whatever good monetary policy does –  and it is only the monetary policy bits of the Act that are changed –  it is “by” doing the same old stuff: leaning against cyclical fluctuations and maintaining medium-term price stability.

Here is the purpose statement from the amended Act

purpose RB

Yes, the current government’s waffly rhetoric about “wellbeing: and a “sustainable and productive economy” is enacted, but even this legislation is clear that –  whatever else the rest of government does (or doesn’t) do, the Reserve Bank makes its contribution by doing (well) the same old basics: monetary policy, a focus on a sound and efficient financial system, and notes and coins.

Inclusion –  gender, racial, religious, ideological, socioeconomic or whatever –  just isn’t the Reserve Bank’s territory.  Neither is climate change or other “social or political movements”.  Some of those issues may be quite important. Most are very interesting.  But if the Governor wants to pursue them perhaps he could create a blog in spare time (I wouldn’t recommend it), stand for Parliament, or put in a belated application to be the new Secretary to the Treasury.  All that other stuff will either distract the Reserve Bank’s attention (and perhaps suggest it already has too many resources), and/or skew support for the Reserve Bank along ideological lines in ways that are quite unhelpful in the longer-term (the Governor talked often of “legitimacy” and that dubious left-wing concept “social licence”).  The Governor talked of “our need to be a good global citizen”, but actually the New Zealand Parliament set up the Bank, and resourced it, to be a quite limited New Zealand government agency.

I could go on, but will bring this towards an end.   Three final points:

The Governor did mention briefly his proposals to substantially increase bank capital requirements. Nothing much of the substance, but he claimed that the Bank is open-minded and urged people to get their submissions in.  That is well and good, but it might be helpful to potential submitters –  including those not from the banks, who the Governor claimed to be keen to hear from – if the Bank actually released the supporting material –  for example, the Analytical Note on aspects of the economic impact that the Deputy Governor promised in his speech now more than a month ago, or the supporting information for ad hoc claims the Governor made on this issue at his MPS press conference more than six weeks ago.   It is more than three months since the proposal was released, and process is looking increasingly shoddy, as if they hope to run out the clock rather than provide substantive evidence for their proposals.   (Incidentally, in his delivered speech –  but not in the published text –  the Governor claimed that “we know” that significant bank failures cause significant damage for “all future generations”.  Perhaps that is another claim he might like to substantiate.  But it is probably just another one from off the top of his head.)

As I noted at the start, a former Labour MP was present.  That former MP was Tim Barnett who now leads what looks like a worthy organisation called FinCap which is

a new entity driven by the public good, acting in the interests of New Zealanders seeking budgeting and financial capability advice.

Sounds worthy. The Governor seemed keen on it, and said that the Reserve Bank would be endorsing this organisation in public.  Thus far, probably fine.  What was much less acceptable was to hear the Governor of the Reserve Bank say that he would be “coercing banks” to support it.  One hopes he wasn’t entirely serious, but when a regulator already wields a great deal of power on a wide range of fronts, they have to bend over backwards to avoid even suggesting any pressure (let alone ‘coercing’) on regulated entities to do things the regulator personally might like, but for which he or she has no statutory mandate.

Finally, the Governor ends the speech talking of how he and the Bank are going to “maximise their mandate”. I suspect he has in mind actually doing as much as possible to fulfil the mandate he has been given by Parliament, but it does sound awfully like a bureaucrat looking to expand –  to the maximum-  the role and scope of his bureau.  That isn’t what we need. We need a pretty boring organisation getting on and doing the (important, but quite limited) basics well.  At present, they are some very considerable margin away from the goal he articulates of being the “world’s best central bank” –  and nothing in this speech, or the others the Governor has given (and his term is now one-fifth over already) suggests they are making any progress towards it. If anything – and as evidenced in this speech – they are drifting further away.

But they turned on a good sausage roll, it was a good chance to catch up with a few people I hadn’t seen for a while…..and it really was a nice morning for a walk.

Just a shame about the central bank that was on display.

Kudos to the Governor

I have been critical of the Reserve Bank Governor for not yet having given an on-the-record speech about either of his main functions, monetary policy or financial regulation/supervision.  Next week marks a year since he took up the job, and 1 April is the day he loses exclusive control of monetary policy to the new MPC, which he will nonetheless chair (and effectively control).

But this invitation just turned up.  It seems to be an open invitation, so anyone interested should feel free to sign up.  I’ll certainly be there and will no doubt write about what he has to say.

orr speech

It is also commendable that the invitation indicates that the Bank will be releasing video of the Governor’s speech (and any Q&A?)  This is a well overdue step forward –  especially as this Governor is quite open about freely departing substantially from his written texts –  and, if adopted consistently, will bring the Bank into line with how things have long been done at the Reserve Bank of Australia.

Presumably, by next Friday the Minister of Finance will finally have announced the other members of the new Monetary Policy Committee.

An unserious organisation, with serious consequences

I wasn’t planning to write anything more today, but then I got an email from the Reserve Bank.

You’ll be aware that almost three months ago the Reserve Bank released a consultative document, in which the Governor proposed to massively increase the amount of equity capital banks have to have just to keep on doing the business they are doing now.

As this was, apparently, the culmination of a multi-year review (in fact, the final numbers seem to have been very much a last-minute affair) you might have supposed that a serious central bank would have all its arguments straight and evidence (or at least sustained reasoning, engaging alternative perspectives) at hand in accessible form to support all their claims.  They’d probably have anticipated all the plausible area of disagreement or challenge, and had good responses readily to hand.

Whether they supposed, for some reason, that everyone would embrace their schemes with open arms and uncritical spirit, or what, actual experience has been anything but that.  When they finally responded to OIAs and released the background papers, it turned out that one of them had only been written several weeks after the consultation paper was released.  And in his speech a couple of weeks ago, the Deputy Governor was promising that they would soon publish an Analytical Note explaining their estimates of the likely impact on interest rates (which still hasn’t seen the light of day).

At the Monetary Policy Statement in February, there was a considerable attention on the proposed capital changes.  In fact, the Bank even proactively included a box in the text (page 35).   There were various claims, some numerical and some not.  These were a couple of examples

The Bank expects that the spread of banks’ lending rates to the rates at which they borrow will settle in the range of around 20 to 40 basis points higher as a result of the proposed changes, although the exact effect is uncertain.

Higher bank capital requirements could also improve the government’s fiscal position. A higher share of bank equity funding would likely increase tax revenue from the banking sector since debt funding is tax-deductible while equity funding is not.

There were lots of questions at the Governor’s press conference as well, including his claim (not made in the text) that the Bank’s proposed new capital ratios would be “well within the range of norms” seen in other countries.

That was all very interesting, but I wanted to know a bit more, and assumed they would simply have material to hand to support their claims.  It would, you’d have thought, have been in their interests to do so –  after all, they obviously believe in what they are proposing, and would presumably want to carry us with them, supported by robust evidence and analysis.  Or so you’d have thought.

And so I lodged a fairly simple Official Information Act request, for the material supporting those claims.   That was on 13 February.  This afternoon –  the day before the last date by when a response was due – I got this letter.

OIA barclay

In which they take to themselves a whole another 20 working days.    Not because whatever they have needs to be collated or compiled, but allegedly because of “ongoing consultations”.  One can only assume that is a shorthand for “there wasn’t much, if anything, there, but give us time and we’ll see what we can drum up”.

It is both so ludicrous and so telling that I’m not going to waste the time of the Ombudsman’s office complaining.  I’ll just let it stand –  a powerful public figure makes claims in support of a far-reaching proposal on which he is prosecutor, judge, and jury –  and can’t, or won’t, produce any evidence or analysis to support his specific claims.   Sadly, it isn’t the first time.

If you want sceptical analysis and argument:

  • Ian Harrison’s substantive document, “The 30 billion dollar whim” is here, and
  • my succession of posts on unanswered questions and unconvincing analysis are here.

As for the Governor, he seems to have time to play tree gods, and for spending other people’s money on Maori cultural advice (recall, that this was going to improve the quality of monetary policy and financial regulatory policy decisions), just not for the serious stuff.

The Bank is at growing risk of becoming a profoundly unserious organisation, but one whose whims have serious consequences for the rest of us.

It isn’t good enough.  The Bank’s board is charged with protecting us from Governors not doing their job properly. It is about time they took some responsibility.

Powerful unelected public appointees

Some time in the next couple of weeks the Minister of Finance will be announcing the members of the new (statutory) Monetary Policy Committee which assumes responsibility for monetary policy on 1 April.  There will be seven of them, and only one serves ex officio (the Governor), so there will be six names to be announced.  Almost certainly, the Deputy Governor Geoff Bascand will be one of them, and the new Assistant Governor for economics and financial markets, Christian Hawkesby, will be another.   The fourth internal member is likely to be the new Chief Economist, but that position hasn’t been filled yet, so perhaps that is the source of the delay.  And then there will be the three mystery part-time external appointees.

When I said that the Minister will announce the appointments, that shouldn’t be read as suggesting the Minister will have had much say (at least if the legal process has been followed).   The appointments will all have been sorted out between the Governor and the Bank’s board –  most of whom were appointed by the previous government.  The Minister can reject nominations, but can’t impose his own candidate (although I have heard suggestions of him trying to inject names into the process).   Those were the same rules that applied when the Governor was appointed.

(In addition, of course, the outgoing Secretary to the Treasury has nominated himself to be the first Treasury observer on the Monetary Policy Committee.  It is a strange choice, both because the Secretary’s term expires very shortly (you’d have thought some continuity might be a good idea) and because any Secretary to the Treasury has perhaps 300 issues to keep on top of, and spending up to 50 days a year –  the advertised expectation for external members – as a non-voting observer at the Reserve Bank suggests an odd sense of priorities.   It looks like the sort of role one would normally expect a second or third tier person to take on.)

And thus monetary policy will be in the hands of a group of people not only themselves unelected, but appointed (in effect) by people who are not only unelected but are (a) typically faceless, known by hardly anyone, (b) lacking in much technical or policy capability and (c) largely unaccountable.   Monetary policy may not seem overly important right now – it is over two years since the OCR changed –  but it matters a great in serious downturns, and preparations for the next such downturn should be a significant issue for the Bank and the new MPC now.

And these people will take up their new statutory roles without a chance for us, or our elected representatives, to grill them, and to understand the thinking around monetary policy that they might bring to the role.  That is, of course, so even for the Governor, because although he has now been in that job for almost a year, he’s not yet given a substantive speech on monetary policy (more concerned, it appears, with tree gods and the like).

In principle, the members of Monetary Policy Committee can agree to do speeches and interviews (under quite tight constraints, but still better than the nothing the Minister first intended).  But you are very unlikely to hear any distinctive voice from the internal members of the committee (they after all, owe their pay, resources, and promotion prospects etc to the Governor).  And I’m still expecting that the external members will be chosen in part for their willingness to come quietly and not rock (as he sees it) the Governor’s boat.

How much better if, before you take up office as a policymaker –  and that is what the MPC are, exercising considerably discretion –  you had to front up at an open hearing of a parliamentary select committee and explain your qualifications for the job, your views on monetary policy and macroeconomic management, and any questions about your background, potential conflicts etc, that MPs might think relevant.    It is, of course, what happens in the United States.    There, members of the Federal Reserve Board of Governors have to win Senate confirmation.  That has some appeal, but I’m not proposing that –  the US has a quite different system of government.

But in the United Kingdom, where the statutory Monetary Policy Committee system is relatively new (about 20 years old) they have something very much like what I’m proposing.    Before taking up their appointments, new members of the MPC have to undergo a Treasury Select Committee hearing.   The Committee can’t veto the appointment, and the whole House of Commons doesn’t get a vote.  But an adverse report from the Committee can be a considerable embarrassment.  In one case in the last couple of years, someone appointed as Deputy Governor actually stepped down after the report by the select committee.  That she stepped down was probably better for the Bank of England and better for a sense of serious democratic scrutiny and accountability.  Ministers might, in the end, be able to appoint pretty much anyone, but there is another layer of open scrutiny which they –  and the nominee –  have to be prepared for.

Sceptics will cast doubt on what value our local version, the Finance and Expenditure Committee, might add in the process.  The UK Treasury Select Committee is regarded as one of the better scrutinising select committees around (in the economics and finance field), and isn’t just full of people champing at the bit to be the next Cabinet minister (our system is particularly bad at present, in that both the chair and deputy chair are already parliamentary undersecretaries, in effect part of the executive already).  Committee scrutiny of Reserve Bank MPSs and FSRs is already perfunctory and typically more focused on point-scoring and that evening’s news bulletin.  So my expectations of pre-appointment scrutiny hearings aren’t that high.  But just because MPs are often pretty useless doesn’t mean we just give up on democratic scrutiny and accountability.  Just possibly, given a new and responsible role some might see it as an opportunity to demonstrate their chops.

I hope that the Minister of Finance and his officials, in considering Phase 2 of the Reserve Bank Act review –  likely to deliver us another new policy committee –  will keep this possible innovation in mind.

It isn’t just a model for the Monetary Policy Committee though.  I reckon it should be much more seriously considered for a range of other key appointments, currently totally in the gift of ministers, where the appointee concerned will exercise huge discretionary power –  often reflecting a personal ideology, personal character – sometimes for decades.

For example, today (12 March) is Dame Sian Elias’s 70th birthday.  That means she finally has to retire as Chief Justice, after a couple of months short of twenty years in office.  The higher courts are now pretty transparent –  certainly by the standards of the Reserve Bank –  but she, and her colleagues of the Supreme Court, have exercised huge amounts of discretionary power, and there isn’t anything citizens can do about that.  (Parliament could, of course, legislate to reverse the effect of some egregious ruling.)  And for a term for which I’m not aware of any parallel in New Zealand (most other statutory appointments, from the Governor-General down, are for no more than five years).

Sian Elias is replaced as Chief Justice, on the Attorney-General’s sole choice, by Helen Winkelmann.  She is 53 and most probably will end up as Chief Justice for 17 years.   The government announced plans last year to extend the power of the Supreme Court, so as explicitly allow the courts to make declarations of inconsistency of individual peices of legislation with the New Zealand Bill of Rights Act, while mandating Parliament to reconsider and respond.  Sure, the declarations would not overturn existing legislation, but it is a further chipping away at the sovereignty of Parliament, entrusted to a committee of ex-lawyers, appointed by the Attorney-General (typically an active senior politician, usually holding other portfolios as well) and with no serious scrutiny of (say) the judicial philosophy, personal ideology, or background of the appointees (indeed, it is almost regarded as lese-majeste for anyone to raise such doubts).

And there is no point pretending that judges just “read the statute” (or the Bill of Rights) –  they interpret (shaped in part by their own background and predispositions) and thus themselves create the law.   And yet there is no prior scrutiny whatever –  rather the Attorney-General of the day sorts out his/her candidates, using whatever criteria they choose (Chris Finlayson got to appoint most of the current senior judges with no scrutiny or transparency at all).  And once appointed, neither the Chief Justice nor individual Supreme Court judges ever have to account for their approach, philosophy or whatever.   Politics (not specifically partisan politics) and ideology are almost inevitably at work in how higher court judges operate (anyone doubting this, refer to the US experience, and here we don’t even have the checked of a hallowed constitutional text.)

Attorneys-General and judges seem to like this approach (unsurprisingly).  As they put it on the courts website

From time to time it has been suggested that a more formal method for appointment of judges should be adopted but that course has not been followed. There is no suggestion that the present procedure has not served the country well.

Well, they would say that wouldn’t they.  For Supreme Courts judges (including the Chief Justice in particular) I think there is a pretty good case for (a) a fixed term appointment (say, 10 years without the right of renewal) and (b) for proper parliamentary hearings, at which nominees could be seriously grilled, before taking up any appointment.  Perhaps most of our top judges have been as good as we could get –  although one Supreme Court justice has already had to step down –  but no one should hold that much power for that long, and certainly not without serious and open scrutiny before taking up the position.

The position of Commissioner of Police is being advertised at present.  That appointment is in the gift of the Prime Minister of the day (with only as much scrutiny of the appointment as the Prime Minister chooses to give –  not much apparently in recent case of the Deputy Commissioner.  In some respects, it is less concerning that the situation of the Chief Justice – the appointment is only for three years at a time, and in the end the courts hold more power than the Commissioner.  On the other hand, when you hold a three year appointment, and want to be reappointed, there is quite an incentive not to rock the boat in ways that might make the Prime Minister look askance.  The Police have gained an, apparently well-earned, reputation for preferring to look the other way when complaints or issues involving politicians and political parties are involved.

And if you think the Commissioner of Police doesn’t really exercise much power, I’d remind you of the current incumbent’s claim last week that he alone –  not elected politicians –  had the power to decide whether or not the Police should routinely carry fire-arms.    If someone you love ends up dead at the hands of a police officer acting rashly, it won’t be much comfort if the IPCA eventually raps Police over the knuckles (and things carry on much as usual).  At a more mundane level, Police exercise discretionary power.  In effect, marijuana has been decriminalised, not by Act of Parliament, but by the choice of the Police Commissioner (you might or might not support decriminalisation, but everyone will recognise that it is a significant choice).  There are all manner of other areas where Police discretion is at work –  or could be revoked on an individualised basis.

And it isn’t as if the Commissioner has been without blemish, whether in office (think Haumaha) or prior to taking it up (that historic drink-driving conviction that only come up several years after he took office, or the eulogy at the funeral of a former police officer found to have planted evidence in a major case).  Perhaps he really is, or was, the best person for the job, but it might be more reassuring if, instead of just being appointed by John Key, he’d had to face some open hearings, including around his views on the sorts of areas where the Police might either just stop policing, or greatly step up policing.  Add in a non-renewable five or seven year term, and we’d be considerably closer to a system that balanced operational independence (in the narrow areas where that is appropriate) with democratic accountability, and a reminder that ultimately the Police are supposed to work for the people, not for the Prime Minister of the day.

I’m sure there are other positions where a similar degree of open parliamentary scrutiny would enhance confidence in the appointments made to powerful public positions, espcially roles in which the holders exercise significant discretion –  either policymaking, or in holding other officeholders to account.  I had a list of senior positions in this post, and quite a few of those (eg Human Rights Commissioners, and head of the IPCA) look like candidates for pre-appointment parliamentary hearings.   The Chief Justice and the Police Commissioner are much more fundamentally important roles than those at the Reserve Bank, but the sort of change I’m proposing would also be more unconventional for those roles.  The UK approach, for the Bank of England appointees, is already established and has proved its worth. I’d commend it to the government.