Staff turnover

Over the last couple of years I’ve commented at various times on (a) the loss of experienced research staff (b) the rapid turnover of senior managers, and (c) the bloated number of (very highly paid) new senior managers at the Reserve Bank.

I haven’t paid overly much attention to the overall staff turnover data. And it turns out that was probably just as well.

Here is a chart of annual staff turnover rates for the Bank this century. There has been a sharp increase in the last year (to June 2022).

But Simon Chapple, at Victoria University’s Institute for Governance and Policy Studies, went to the effort of digging out the same data for the Bank and a bunch of other public sector agencies, and kindly sent me a copy of his spreadsheet.

Of all the other public sector agencies, perhaps the best comparator is The Treasury. They are very different agencies but have often been bracketed together.

There is a lot more variability in the Treasury series, but (a) it has been higher or no lower than the Bank every year this century, and (b) over the last year has had an absolutely staggering 36.5 per cent turnover rate. It was bringing to mind the stories from 35 years ago when at one point (and if I recall correctly) the median length of service at The Treasury was under two years.

Here is the data for three other agencies: the (public service) Department of Prime Minister and Cabinet, the Public Service Commission (previously SSC), and Statistics New Zealand.

I suspect the DPMC figures can be discounted, as DPMC built up a huge temporary operation to co-ordinate the Covid response (including lots of comms staff for all those adverts), but in the most recent year even SNZ had slightly higher staff turnover than the Reserve Bank. (For the public service as a whole – not shown – the staff turnover rate was exactly the same as at the Reserve Bank.)

Over the last year or so, presumably two – mutually reinforcing – influences have been at work. First, the economy has been materially overheated reflected, among other places, in an extremely tight labour market. When the opportunities are good and finding new jobs is easy a given person is more likely to move in any particular year. And the second is the rather arbitrary block on wage increases for many public servants. All else equal, not only has that made moving to the private sector relatively more attractive – private sector wage increases have run well ahead of public sector ones – but has also created the readily-visible bizarre incentive that the only way many public servants can get a pay rise is to change jobs (whether to other positions in the private sector or elsewhere in the public sector), perhaps with some grade inflation thrown in (people who aren’t really senior or principal analyst material getting given those titles and salaries). Moving simply because it is the only way to get a pay rise – in a generally overheated labour market – makes sense for the individual, but almost certainly does not for the public sector as a whole.

(And here I am not entering into questions of whether public sector salaries are generally too high (or not) or the size of the public sector: issues for other people on another day.)

Zero staff turnover would generally not be desirable. When I used to pay more attention to these things at the Bank we used to be told that for established well-run professional organisations a 10-15 per cent annual turnover rate was fairly normal (perhaps coincidentally that was the rate the Bank tended to have). I find it harder to believe that 25-30 per cent annual turnover rates – as at The Treasury – is entirely healthy, no matter how much you might encourage rotation, fresh opportunities etc. But one would have to hope that the 2022 turnover rates for all these public sector agencies prove to be peaks, and that by the 2023 and (especially) 2024 annual reports, staff turnover has settled back to much more normal levels for organisations of this sort. Whatever your view of the appropriate size of government, what agencies we do need need capable and experienced staff.

The Spencer precedent

Over the last couple of months, the National Party has been running the line that a Reserve Bank Governor should not be appointed to the normal full five-year term when Orr’s existing term expires in late March, but that rather an appointment should be made for just a year so that whichever party takes office after next year’s election can appoint a Governor of their preference. We are told (although we have not yet seen the letter) that they made this case to the Minister of Finance when, as he was required to, he came consulting on his plan to reappoint Orr.

It is a terrible idea, on multiple counts.

But what is also irksome is the idea that in making a five year appointment, for a term beginning probably at least six months prior to the election, the Minister is breaching some established convention. That is simply a nonsense claim. This clip (from Bernard Hickey’s newsletter, this one opened to everyone) has some relevant quotes

There is simply no foundation to what Luxon is saying about what happened in the past. Since the Reserve Bank was made operationally independent in 1990, there have been two cases in which a Governor’s term has expired in election year but before the scheduled election. The first was in 1993, when Don Brash’s term expired on 31 August. The 1990 election had been held on 6 November 1990, so presumptively any new term was going to start within three months of the 1993 election. As it is, and partly to allay any possible market concerns (these were still fairly early days), Don’s reappointment was made and announced very early (if memory serves correctly in late 1992). I don’t recall any particular controversy about that reappointment (although the then Prime Minister had not been a huge Brash fan), but then Brash had initially been appointed by a Labour government (and the then Labour leader and finance spokesman had both sat in the Cabinet that had appointed him).

Of the next few (re)appointments:

  • Don Brash was appointed to a third term commencing in September 1998, not an election year
  • Don Brash resigned suddenly in April 2002, about three months before the general election.  The then Deputy Governor was immediately appointed (lawfully) as acting Governor, both to run the Bank in the interim and to enable a proper search process to take place.  Recall that under New Zealand law, the Minister of Finance cannot simply appoint his or her own person as Governor, and in those days the Bank’s Board used to guard its prerogatives (right and responsibility to nominate).  The eventual appointment of Alan Bollard was not made until after the election.
  • Bollard was reappointed in 2007 (not an election year) and Wheeler was appointed in 2012 (also not an election year)

Which brings us to 2017.  In 2016 Graeme Wheeler had advised that he would not be seeking a second term (probably to the general relief of both government and opposition parties at the time).  Documents later released show that The Treasury (and the Board and minister) envisaged making a permanent new appointment some time early in 2017, well clear of the likely election date.  However, those same papers also show that when the relevant authorities (in this case, Cabinet Office) were consulted it was established that the convention now (though perhaps not in 1992/93) was that permanent appointments should not be made when the new appointment would commence very close to (within three months of) an election date.  In other words, the government could not get round the fact that Wheeler’s term expired close to the expected election date simply by making an early announcement of a permanent replacement.   And thus they more or less had to settle on the idea of an acting Governor (Grant Spencer).  Unfortunately, the then law was badly written (did not envisage the circumstances), and Graeme Wheeler (who could lawfully have been extended for six months) seemed keen to get back to commercial life ASAP, and the actual solution they landed on was almost certainly unlawful (I wrote a lot about it at the time, but here is a post that comments on the best arguments the Crown’s lawyers could make in defence).

So there is a precedent for an acting appointment (which, since the law was amended, could now be done lawfully) when the Governor’s term expired within three months of the election.  That same convention, about not making permanent appointments, isn’t just about the central bank.  But Orr’s term expires on 27 March, and the election seems likely to be at least six months after that, in a system with a three-year parliamentary term.  It simply isn’t very serious or credible to argue that the government –  otherwise still governing fully –  should be unable (or even unwilling) to appoint a permanent Governor six or more months out from an election.  You might argue, and I might have a bit of sympathy for such a view, that perhaps it would be better to give a Governor a six year term (the RBA Governor has a seven year term), so that overlaps with election years happened much less often, but the law is as it is, and I don’t recall the Opposition opposing five year terms when the reform bills were before the House.   But there is no established precedent or convention about not making permanent appointments that start that far out from a likely election.

In passing, one might note that whereas with past appointments all powers of the Reserve Bank rested with the Governor, the various reforms put in place by this government have (at least on paper) considerably diminished the extent of the Governor’s powers, and created other appointments (notably external MPC members) which (at least on paper) provide avenues to shape and influence the Bank.  I don’t want to put too much weight on this argument – I’ve spent years arguing that many of these changes in practice have been largely cosmetic – but not only could those provisions be used more aggressively by an incoming government that cared, but it would be quite legitimate for an incoming government to amend the legislation further (at the margin) to reduce the relative dominance of any particular individual serving as Governor.  Our system would be better for such changes.  (To be clear, like various other commenters, I would not support law changes designed directly to remove Orr: that way lies Erdogan type central banking.)

Whatever the law and precedent, it would also be a bad idea to be making acting appointments in circumstances like the present one.  Our whole system around the Reserve Bank –  and central banks in other advanced economies of our type –  is set up around the idea that incoming governments don’t just get to pick their central bankers as soon as it suits.  Instead, the system of operationally independent central banks has been built on (among others) the notion of technically capable, respected, non-partisan figures serving (whether as Governor or MPC members) for terms that do not align with the parliamentary term.   Consistent with that vision, New Zealand’s legislation went further than most (too far in my view) in not even allowing the Minister of Finance to choose a Governor (or MPC members), but rather requiring that the Minister only appoint people who had first been nominated by the Board of the central bank, itself appointed for staggered terms by the Minister of Finance.     Legislation was recently amended to even further reinforce this vision – of technically competent, respected, non-partisan appointees – when Labour explicitly added provisions requiring that other parties in Parliament be consulted before appointments are made (whether as Governor or Board members).  

You could mount a counter-argument that this approach is a bit wrongheaded.  After all, the legislation has also been amended recently to make it clear, that in monetary policy at least, the target the Bank works to is directly set by the government of the day.  But notwithstanding that, the central bank still has a lot of practical policy discretion, and not just around monetary policy.   Most advanced countries have made the choice that we do not want key central bank decisionmakers changing routinely when the government changes.  That still seems, on balance, prudent to me, and in their calmer moments I’d be surprised if National really disagreed.

So the big problem in the current situation is NOT that an appointment has been made for five years. That should be the norm, whether or not it is six months from an election.  The problem is specifically with the appointment (at all) of Adrian Orr.   National seems reluctant to say that (perhaps because they may well be stuck working with him) but it is the main issue.  There would be no such concern had a (hypothetical) generally highly-regarded (professionally, and among politicians), technically excellent, respected, non-partisan figure been appointed to the role.  Specifically, National (and ACT) would not be raising concerns about the term of the appointment if they had any confidence in Orr.  They do not.    One can perhaps debate whether or not they should have such confidence, but in our system respect and confidence are earned, they are not something anyone can simply be forced to adopt.    As I noted in yesterday’s post, the rank politicisation that has happened this week is not of National’s or ACT’s making, but of Robertson, in pushing ahead with an appointment –  to a long-term position, where cross-party respect etc is important for the institution and its functioning – that the main Opposition parties seem to have been quite clear in opposing.   It is not the job of Opposition parties to simply go along with whoever Robertson (and his, technically ill-equipped, board (itself, in some cases appointed over Opposition objections) determine).  All the more so when Robertson himself was the one who introduced the formal consultation requirements, seeming to establish an expectation that strong (and reasoned) objections would be taken seriously.    The responsibility was on Robertson – who holds the power to appoint or not – to respect the notion of only appointing someone who commands (even grudging) professional and personal respect.  Orr no longer qualifies on that count.  It is hard to think of any advanced country central bank Governor who will start a new term commanding so little respect, support, and confidence.  That is really bad for the institution, and the institutional arrangements.

(Having said all this it would be good if National and ACT would pro-actively release their responses to Robertson’s consultation, rather than making us wait for OIA releases. It would be helpful to see what grounds the parties objected on, and whether they actually raised substantive concerns, or just relied on ill-founded process arguments.)

UPDATE: Having been sent a copy of the National letter of 30 September, it is now clear that National did not raise any substantive concerns about Orr, and focused wholly on the non-existent “convention” about not appointing a substantive Governor even 6-7 months out from an election.

 

Reappointing Orr

Yesterday’s announcement from the Minister of Finance that he was reappointing Adrian Orr as Governor of the Reserve Bank was not unexpected but was most unfortunate. I was inclined to think another commentator (can’t remember who, so as to link to) who reckoned that it may have been Robertson’s worst decision in his five years in office was pretty much on the mark.

When Orr was first appointed, emerging out of a selection process kicked off by the Reserve Bank’s Board while National had still been in office, it seemed to me it was the sort of appointment that could have gone either way. I captured some of that in the post I wrote the day after that first appointment was announced, and rereading that post last night it seemed to at least hint at many of the issues that might arise and come to render the appointment problematic at best. Some things – a good example is $9.5 billion of losses to the taxpayer – weren’t so easy to foresee.

The timing of the reappointment announcement itself was something of a kick in the face for (a) critics, and (b) any sense that the better features of the new Reserve Bank legislation were ever intended as anything more than cosmetic. The Reserve Bank is tomorrow publishing its own review (with comments from a couple of carefully selected overseas people) of monetary policy over the past five years. Adding the statutory requirement for such a review made a certain amount of sense, but if there is value in a review conducted by the agency itself of its own performance, it was only going to be in the subsequent scrutiny and dialogue, as outsiders tested the analysis and conclusions the Bank itself has reached. But never mind that says Robertson, I’ll just reappoint Adrian anyway. Perhaps the Bank has a really compelling case around its stewardship of monetary policy – and just the right mix of contrition and context etc – but we don’t know (and frankly neither does Robertson – who has no expertise in these matters, and who appointed a Reserve Bank Board -the people who formally recommend the reappointment – full of people with almost no subject expertise).

But, as I say, the reappointment was hardly a surprise.

It could have been different. I’ve seen a few people say it would have been hard to sack Orr, but I don’t think that is so at all. No one has a right to reappointment (not even a presumptive right) and Robertson could quite easily have taken Orr aside a few months ago and told him that he (Orr) would not be reappointed, allowing Orr in turn the dignity of announcing that he wouldn’t be seeking a second term and would be pursuing fresh opportunities (perhaps Mark Carney would like an offsider for his climate change crusades?) Often enough – last week’s FEC appearance was just the latest example – Orr’s heart doesn’t really seem to be in the core bits of the job.

There are many reasons why Orr should not have been reappointed. The recent inflation record is not foremost among them, although it certainly doesn’t act as any sort of mitigant (in a way that an unexpectedly superlative inflation record in a troubled and uncertain world might – hypothetically – have).

There is nothing good, admirable, or even “less bad than most” about the inflation record. This chart is from my post last week

A whole bunch of central banks made pretty similar mistakes (and the nature of floating exchange rates is that each central bank is responsible for its country’s own inflation rate). Among the Anglo countries, we are a bit worse than the UK and Canada and slightly less bad than the US and Australia. Among the small advanced inflation targeters – a group the RB sometimes identified with – we have done worse than Switzerland, Norway, and Israel, and better than Sweden and Iceland. In a couple of years (2021 and 2022) in which the world’s central bankers have – in the jargon – stuffed up badly, Orr and his MPC have been about as bad on inflation as their typical peers.

You could mount an argument – akin to Voltaire on the execution of Admiral Byng – that all the world’s monetary policymakers (at least those without a clear record of dissent – for the right reasons – on key policy calls) should be dismissed, or not reappointed when their terms end, to establish that accountability is something serious and to encourage future policymakers to do better. You take (voluntarily) responsibility for inflation outcomes, and when you fail you pay the price, or something of the sort. Inflation failures – including the massive unexpected wealth redistributions – matter.

Maybe, but it was never likely to happen, and it isn’t really clear it should. As I’ve noted here in earlier posts until well into 2021 the Reserve Bank’s forecasts weren’t very different from those of other forecasters, and I’m pretty sure that was also the case in other countries. Inflation outcomes now (year to September 2022) are the result of policy choices 12-18 months earlier. With hindsight it is clear that monetary policy should have been tightened a lot earlier and more aggressively last year, but last February or even May there was hardly anyone calling for that. Absent big policy tightenings then, it is now clear it was inevitable that core inflation would move well outside the target range. There are plenty of things to criticise the Bank for – including Orr’s repeated “I have no regrets” line – but if one wants to make a serious case for dismissing Orr for his conduct of monetary policy it is probably going to have to centre on (in)actions from say August 2021 to February 2022 (whereafter they finally stepped up the pace) but on its own – it was only six months – it would just not be enough to have got rid of the Governor (even just by non-reappointment). The limitations of knowledge and understanding are very real (and perhaps undersold by central bankers in the past), and even if Orr and the MPC chose entirely voluntarily to take the job (and all its perks and pay) those limitations simply have to be grappled with. Were New Zealand an outlier it might be different. Had the Bank run views very much at odds with private forecasters etc it might be different. But it wasn’t.

I am, however, 100 per cent convinced that Orr should not have been reappointed. I jotted down a list of 20 reasons last night, and at that I’m sure I’ve forgotten some things.

I’m not going to bore you with a comprehensive elaboration of each of them, most of which have been discussed in other posts. but here is a summary list in no particular order:

  • the extremely rapid of turnover of senior managers (in several case, first promoted by Orr and then ousted) and associated loss of experience and institutional knowledge
  • the block placed –  almost certainly at Orr’s behest –  on anyone with current and ongoing expertise in monetary policy nad macroeconomic analysis from serving as an external member of the MPC
  • the appointment as deputy chief executive responsible for macroeconomics and monetary policy (with a place on the MPC) of someone with no subject expertise or relevant background
  • $9.5 billion of losses on the LSAP – warranting a lifetime achievement award for reckless use of public resources – with almost nothing positive to show for the risk/loss  
  • the failure to ensure that the Bank was positioned for possible negative OCRs (having had a decade’s advance warning of the issue), in turn prompting the ill-considered rush to the LSAP
  • the failure to do any serious advance risk analysis on the LSAP instrument, as being applied to NZ in 2020
  • the sharp decline in the volume of research being published by the Reserve Bank, and the associated decline in research capabilities
  • the way the Funding for Lending programme, a crisis measure, has been kept functioning, pumping attractively-priced loans out to banks two years after the crisis itself had passed (and negative OCR capability had been established)
  • lack of any serious and robust cost-benefit analysis for the new capital requirements Orr imposed on banks (even as he repeatedly tells us how robust the system is at current capital levels)
  • repeatedly misleading Parliament’s Finance and Expenditure Committee (most recently, his claim last week that the war was to blame for inflation being outside the target range), in ways that cast severe doubts on his commitment to integrity and transparency
  • his refusal to ever admit a mistake about anything (notwithstanding eg the biggest inflation failure in decades) 
  • the fact that four and a half years in there has never been a serious and thoughtful speech on monetary policy and economic developments from the Governor (through one of the most turbulent times in many decades)
  • Orr’s active involvement in supporting and facilitating the appointment of Board members with clear conflicts of interest (Rodger Finlay especially, but also Byron Pepper)
  • his testiness and intolerance of disagreement/dissent/alternative views
  • his often disdainful approach to MPs
  • his polarising style, internally and externally
  • all indications are that he is much more interested in, and intellectually engaged by, things he isn’t responsible for than for the things Parliament has charged him with
  • organisational bloat (think of the 17-20 people in the Communications team or the large number of senior managers now earning more than $400000 pa)
  • the distraction of his focus on climate change, but much more so the rank dishonesty of so much of it – claims to have done modelling that doesn’t exist, attempts to suppress release of information on what little had been done, and sheer spin like last week’s flood stress test. It might be one thing for a bloated overfunded bureaucracy to do work on things it isn’t really responsible for if it were first-rate in-depth work. It hasn’t been under Orr.
  • much the same could be said of Orr’s evident passion for all things Maori –  in an organisation with a wholesale macroeconomic focus, where the same instruments apply to people of all ethnicities, religions, handedness, political affiliation or whatever.  What “analysis” they have attempted or offered has been threadbare, at times verging on the dishonest.
  • the failure to use the opportunity of an overhaul of the RB Act to establish a highly credible open and transparent MPC (instead we have a committee where Orr dominates selection, expertise is barred, and nothing at all is heard from most members)

And, no doubt, so on.  He is simply unfit to hold the office, and all indications are that he would have been so (if less visibly in some ways) had Covid, and all that followed (including inflation), never happened.   

But the crowning reason why Orr should not have been reappointed is that doing so has further politicised the position, in a most unfortunate way.

In the course of the overhaul of the Reserve Bank Act, Grant Robertson introduced a legislative requirement that before appointing someone as Governor the Minister of Finance needed to consult with other parties in Parliament (parallel provision for RB Board members).  It was a curious provision, that no one was particularly pushing for (in most countries the Minister of Finance or President can simply appoint the Governor, without even the formal interposition of something like the RB Board), but Robertson himself chose to put it in.  The clear message it looked to be sending was that these were not only very important positions but ones where there should be a certain measure of cross-party acceptance of whoever was appointed, recogising (especially in the Governor’s case) just how much power the appointee would wield.  That provision never meant that governments could not appoint someone who happened to share their general view of the world and economy, but there was a clear expectation that whoever was appointed would be sufficient to command cross-party respect for the person’s technical expertise, non-partisan nature, dispassionate judgement and so on.  Robertson simply ignored Opposition dissents on a couple of the Board appointees.  That was of second order significance, but it is really significant in the case of the Governor.  It isn’t easy to dismiss a Governor (and rightly so) so for a Minister of Finance to simply ignore the explicit unease and opposition of the two main Opposition parties in Parliament is to make a mockery of the legislation Robertson himself had put in place so recently.   The Opposition parties are being criticised in some places (eg RNZ this morning) for “politicising the position/appointment” but they seem to have been simply doing their job –  it was Parliament/Robertson who established the consultation provision –  and the consultation provisions, if they meant anything, never meant giving a blank slate for whomever the Minister wanted to offer up, no matter the widely-recognised concerns about such a nominee.   No one has a right to reappointment and when it was clear that the main Opposition parties would not support reappointment, Robertson should have taken a step back, called Adrian in and told him the reappointment could not go ahead, in the longer-term interests of the institution and the system.  If you were an Orr sympathiser, you might think that was tough, but….no one has right to reappointment, and the institution matters.

And, of course, now the position of the Governor has inevitably been put into play, with huge uncertainty as to what might happen if/when National/ACT form a government after the election next year.    (And here is where I depart from National’s stance –  I never liked the idea of a one year appointment, made well before the traditional pre-election bar on new permanent appointments.  We want able non-partisan respected figures appointed for long terms (it is the way these things work in most places), not for each incoming PM to be able to appoint his or her own Governor.)

A few months ago, anticipating that Orr would probably be reappointed, I wrote a post on what an incoming government next year could do about the Bank.    The key point to emphasise is that a new government cannot simply dismiss a Governor they don’t like (or nor should they be able to).  I saw a comment on a key political commentary site this morning noting that the process for dismissal isn’t technically challenging, which is true, but the substantive standards are quite demanding (the Governor can be dismissed only for specific statutory causes, and for (in)actions that occurred in his new term (which doesn’t start until March)).  Generally, we do not want Governors to be able to be easily dismissed (in most countries it is even harder than in New Zealand).   More to the realpolitik point, any dismissal could be challenged in the courts, and no one would (or should) want the prolonged uncertainty (political and market) such actions might entail.   Moreover, senior public figures cannot just be bought out of contracts.   

We still don’t know –  and perhaps they don’t either –  how exercised National and ACT would be about any of this were they to form a government next year, but unless Orr was himself minded to resign (as the Herald’s columnist suggests might happen) things would have to be handled carefully and indirectly (perhaps along lines in that earlier post of mine) to change the environment and the incentives around the institution.   Most of those changes should be pursued anyway, to begin to fix what has been done over the last few years    And if Orr were to be inclined not to stick around for long, perhaps an offer of appointment as High Commissioner to the Cooks Islands might smooth his way? 

Accountability document with no accountability

Decades ago when I was young Reserve Bank annual reports were – uninteresting accounts aside – mostly a bit of an essay on the economy (I got to write some of 1984’s and if I recall correctly one sentence survived to publication). Since the Bank had no independent authority over anything – power rested with the Minister of Finance – that model of Annual Report made a certain amount of sense. If there was any “accountability” involved, it was mostly about judging the fine line involved in offering some analysis without at the same time unduly upsetting the Minister of Finance. (The Bank was, at least in principle, accountable for analysis and advice offered to the Minister, but nothing much of that ever saw the light of day, the then recent innovation of the OIA notwithstanding).

These days, of course, the Reserve Bank is a power in the land, conducting monetary policy (with considerable discretion, but within the broad Remit set by the Minister of Finance), setting much of prudential regulatory policy (and implementing it all, with non-trivial discretion), and so on.

In recent years, both the size of the institution (staff numbers) and the size of the Annual Reports have both been growing rapidly.

The 2017 Annual Report was the last one pre-Orr.

But with all the people and all the pages, any serious sense of accountability and accounting for performance, seems to have diminished almost to the point of invisibility.

Over the years of this blog, I’ve written a series of posts about how the Reserve Bank Board – existing, per statute, primarily, to hold the Governor and Bank to account – had almost completely abdicated that responsibility. Twenty years ago Parliament required them to publish an Annual Report, and the hope had been that it might help, just a little, to sharpen accountability. Instead, the reports proved to be little more than show, mostly apparently designed to provide cover for management, rather than scrutiny and accountability for the public, the Minister, and MPs. Occasionally they showed signs of doing a slightly less bad job, but this year in their final report (the old Board and the old governance model were disbanded from 1 July) they slumped to new levels of quiescent inactivity. Perhaps – being about to head out the door – they no longer cared much, but since the chair (and one other member) were being carried over onto the new Board that shouldn’t have been an acceptable excuse for the contempt for the public that their silence and passivity display.

The full Annual Report is here. The Board’s report is on pages 6-9.

Over the last year, inflation has blown badly beyond the target range set for the Bank and the MPC. On the Governor’s own telling, that is so even if one focuses on the range of core measures. The deviation from target is by far the largest seen in the now 30+ year history of inflation targeting (and as a forecasting error would have been large even by the standards of earlier decades).

At the same time, the Bank’s speculative punt on the government bond market – the LSAP – turned very sour, and cumulative mark-to-market losses on the position are now in excess of $9 billion. The losses don’t fall to the Reserve Bank’s account – the government provided an indemnity upfront – but the losses (2.5% of GDP or so) were directly resulting from choices made by the Reserve Bank, the body the Board was responsible for monitoring and holding to account.

Oh, and during the year, two of the external MPC members were reappointed (by the Minister, on the recommendation of the Board). Given developments on the watch of those members (see above), you’d have hoped that some searching questions were asked, and some serious analysis and review undertaken by the Board. The Board might even have explained why they recommended one member’s renewed term should expire in the (likely) middle of next year’s election campaign.

As it is, not one of those issues was mentioned in the Board’s Annual Report. There is a full page devoted to monetary policy, and not once is inflation (or price stability, or the target band, or any cognate words) even mentioned. Just this

We learn that they looked at lots of papers, but nothing at all as to how they reached a conclusion that the MPC had adequately done its job (there might be a reasonable case to make, but they don’t even try).

The massive losses to the taxpayer get not a mention (again, perhaps there is a case to be made that – as the Governor claims – the benefits mean the costs were worth it), nor the reappointment of the external MPC members.

So no sign of scrutiny, no accountability. But if we heard nothing at all from the Board on such matters of substance, where the Bank has legal responsibilities, the Board was apparently keen to have us know of its other interests

But even then, no sign of evaluation, no sign of challenge? Not even (say) a suggestion that if there is going to a Central Bank Network for Indigenous Inclusion – the case for which is very far from obvious – perhaps the central banks of places like Iceland, Ireland, Poland, the UK, and France might be invited to join.

Reading this bumpf brought to mind this extract I spotted in a recent OIA release of Board minutes from a few months ago

So notwithstanding the limited tasks that Parliament has actually assigned to the Bank, the Board (which includes the Governor) thought it important that they shbould be free to used taxpayers’ time and money to decide their own priorities on things they have no statutory responsibility for. A platform for the interests and ideologies of management and board members (and recall that hardly any of the new and more powerful Board have any relevant expertise on subjects the Bank is actually responsible for).

Of course, it has long been easy to scoff at the old Board. Perhaps they were in an awkward position – most had little relevant expertise, they had no independent resources, and management controlled the papers they saw – but they still took the job (and the modest emoluments) without actually doing the job.

What of management who were, in effect, responsible for the remaining 150 pages of the report (of which much is the accounts)? (“In effect” since the new Board had legal responsibility, but hadn’t been around during the year under review).

The Governor never wastes an opportunity to claim that the Bank is very transparent (it is anything but) and so of course you’d suppose that in his Annual Report, in a year when monetary policy outcomes were so poor (inflation) and expensive (LSAP) there would be an extensive and nuanced treatment of the issues, making the best case no doubt for the Bank but at least engaging on the record. Well, no one who had ever watched Orr would actually expect that, but it is what one might have hoped for if accountability in the New Zealand public sector meant anything at all. It isn’t as if the Bank (or the MPC) has yet published much else serious on these issues, and the Annual Report is actually mandated by Parliament as a principal accountability document.

There are several sections where one might look for substance. This is the “year in review” bit on monetary policy (throughout the document you have fight your way through the tree gods imagery)

Under neither “key outcomes” or “key achievements” do actual inflation outcomes even get a mention.

There was this introductory section, about the environment they faced

It devotes one sentence to the biggest deviation from target in the history of NZ inflation targeting, but even then simply notes the fact.

And then right upfront there is the Governor’s own two-page statement, where this is all there is on monetary policy and inflation. You’d barely know from this that inflation was an outcome for which central banks were responsible, and that New Zealand inflation was an outcome Orr and the MPC had been responsible for.

No analysis, no reflection, no accountability.

Things aren’t much better on the LSAP losses, and the large bet on the bond market that is still open now. The losses do get a mention deep in the Financial Overview (they are a legal financial claim on the government) but there is nothing of substance in the policy sections, and they have the gall to run a “Balance Sheet Optimisation” section near the front of the report, which doesn’t even mention the scale of the bet ($50bn or so) they are continuing to take on future New Zealand bond rates.

By contrast, there are two pages on matters Maori (bear in mind that the Bank’s instruments – monetary policy and banking regulation – are whole economy ones, not differentiating between Catholics, Greens, lefthanders, stamp collectors, or….or…or Maori). And endless references to climate change. Eric Crampton did the comparison

Accountability – in the face, this time, of huge deviations from desired outcomes (whether the inflation or the losses) – is non-existent. The Bank is presumably confident it can get away with all this because there is no sign that the government cares either. Neither party is doing its job.

We’ve heard previously Orr boldly claim that he regrets nothing about the last couple of years. There is an arrogance to it that is almost breathtaking. Here, on which note I’ll stop, is the Reserve Bank Board minutetaker’s record of Orr articulating the same story to the Board itself in May

(Even that latter claim has now been overtaken by events as they now recognise that core inflation is even higher than they thought then).

No regrets…..not for the arbitrary redistributions of wealth (which is what unexpected inflation does), not for the grossly overheated labour market which itself has collapsed businesses and livelihoods, and not for the coming (and most likely) recession required to squeeze core inflation back out of the system.

Nothing.

A public inquiry isn’t necessary

A few weeks ago in a post about what a new government might do about the Reserve Bank, I noted with some concern that the National Party had been very quiet on the issue.

I noted then that the process for reappointing (or not) Orr was likely to be getting underway very soon, and that if the Opposition thought it was inappropriate for him to be reappointed they needed to be raising concerns now (helping create a climate in which it would be more difficult for the government to push ahead) and not wait until (as required by law) the Minister has to consult other parties on the person he proposes to appoint as Governor (by when there would be considerable momentum behind any particular name).

So it was interesting and encouraging to see a press release yesterday from Luxon which appeared to raise serious concerns about Orr’s stewardship of monetary policy., apparently prompted at least in part by the Wheeler-Wilkinson (WW) note out yesterday morning, which has had considerably coverage. The centrepiece was a call for an independent public inquiry

tied to the issue of whether or not Orr is reappointed thus

Count me sceptical.

There have been a couple of earlier strands to calls for inquiries. The Green Party has for some time been calling for the Finance and Expenditure Committee to inquire into the conduct of both fiscal and monetary policy over the pandemic period. They have had support in that call from both ACT and National but the Labour majority (no doubt on instructions from above) simply refuses. It seems to me a natural topic for a serious select committee to look into, and even allowing for the partisan priors of all participants, it isn’t impossible such a review could shed some light.

The second, and more recent, strand is that inquiry into the RBA that the incoming Labor government in Australia has established (terms of reference here). But this inquiry isn’t really relevant to the issue here, and while pandemic responses aren’t out of scope the focus of the inquiry seems likely to be on policy frameworks more broadly and the governance model. On the latter, the current New Zealand government has only recently legislated for new models, for monetary policy specifically and the Bank more generally. As I’ve highlighted in various posts on this blog, there are a lot of problems with the new arrangements, but this government is hardly likely to revisit its own creations so quickly. That (I hope) will be a matter for a new government one day.

Note also that the RBA review, with reviewers already appointed, has to report by March next year. The question of the (re)appointment of a Governor here has to proceed on a much faster track than that, since Orr’s term expires in late March. As I noted in my earlier post, I expect that the question of the (re)appointment will be on the Board’s agenda very shortly, with a goal (Minister, Board, Bank – and probably markets) of having everything more or less settled by Christmas. Consistent with that, I saw this in Bernard Hickey’s newsletter this morning

Finance Minister Grant Robertson immediately refused yesterday to agree to a review and said he was in discussions with the Reserve Bank’s board about the re-appointment process. 

Robertson has ruled out a review, but even if he hadn’t I don’t think it would be a particularly good use of public money to have one. Apart from anything else, it is hard to think of anyone in New Zealand who knows the territory who is not conflicted or who has not already declared their hand (often in quite strong terms).

In other comments, the Minister has pointed out that the Bank’s Board is responsible for reporting and reviewing the Bank’s performance. Of course, there he is just playing distraction since he appointed both the old and new boards (and their chairs) and knows that the Board is on record (minutes released under the OIA) as having done no serious scrutiny or evaluation of the Bank’s monetary policy performance. Nor is there any sign that the Minister has ever asked for more. And, most recently, he has appointed a new Board that is manifestly underqualified for the statutory roles of holding the Governor and MPC to account, or recommending the appointment of a future Governor. Other OIAs show that the Minister just reappointed two of the MPC members – in the midst of a really troubling period for monetary policy – with no serious attempt to evaluate their performance at all.

In addition, The Treasury is now formally charged with a role monitoring the Bank’s performance. It is hard to be optimistic that will deliver much (the institutions are typically too close) but there is no sign Robertson has any serious interest in enhanced scrutiny or analysis. (In addition, of course, Treasury is more than a little compromised by their closeness to the Bank – including the Secretary as non-voting MPC member – and the advice they provided at the time, including recommending the Minister enable the LSAP programme.)

Finally, it is true that the Reserve Bank is working on its own evaluation of its handling of policy over recent years. We can expect this to largely be a self-serving self-congratulatory piece being done by staff (not even by the MPC) but even so when they eventually publish it it will still provide a basis for discussion and critique. The Bank tells us it has taken some independent overseas advice, but if that sounds reassuring it probably shouldn’t: they haven’t told us who they have sought advice from, and it is hardly a novel insight to suggest that the choice of overseas person is quite likely to be influenced by what the Governor already knows of that person’s views. One can always find a sympathetic commenter.

The real reason I don’t think an independent inquiry is warranted is that we already know pretty much all there is usefully to know. Defenders of the Bank/Governor will interpret the set of data one way, and others will contest a range of alternative interpretations. It is, and should be, a process of contest and debate. And the issues relevant to the question of whether Orr should be reappointed by not even close to limited to those around the pandemic response (in fact, I would argue that these later points should not be given too much weight at all). We know about things like:

  • Orr’s bullying style,
  • his lack of receptiveness to scrutiny, challenge, and criticism (most evident in the bank capital review process),
  • the high rate of turnover of staff, particularly senior staff,
  • the top-heavy management structure he has put in place, in which very few have much evident subject expertise (eg the deputy chief executive responsible for macroeconomics, monetary policy and markets, who has no background in economics at all),
  • the really big increase in the size of the Bank (with no material change in responsibilities), in many cases in non-core areas (notably the very large communications staff),
  • the distracted focus and politicisation of the Bank as Orr has pursued his climate change, indigenous network, tree god, and similar interests, for which he has no statutory responsibilities,
  • the absence of serious speeches from the Governor shedding light on his thinking or analytical frameworks around areas of his core responsibility,
  • the degrading of the Bank’s research and analysis capabilities (despite the massive increase in total staff) that has seen very few serious research papers published in recent years,
  • the insular monolith the Governor has helped create in the MPC, where outsiders with relevant ongoing expertise are banned from being appointed to the Committee, and challenge and dissent (let alone public accountability) appears to be actively discouraged.

All these speak of someone not fit for the job, someone who isn’t even that interested in developing a world-class small central bank or doing the core functions of the Bank excellently.   We don’t need an inquiry for any of that.

What of the pandemic response?    Perhaps there is case that could be made that any time core inflation gets so far outside the target range, the Governor and most of the MPC should lose their jobs almost automatically.   Such a regime might be better than one in which leading central bankers (globally) rarely pay much (if any) personal price for their mistakes, no matter what cost they impose on the public in the process.  $8 billion plus in losses on the LSAP speculative punt (with not even any evidence of a robust risk analysis before launching the scheme) isn’t nothing, and neither is the recession likely to be required for getting core inflation back down again.  They are serious failures.  Honourable people responsible might well choose to resign, or not seek reappointment.  They took the job, and the pay and prestige, and accept that there is a price to be paid when things go badly, if only to encourage others.

But what makes me hesitant is that these choices were not made in a vacuum.  Others, with incentives to get things right, had views at much the same time as the Orr-led Reserve Bank was making its call, and the middle-ground of expert opinion at the time was not, I assert, wildly different to the policy choices Orr and the MPC (and their peers abroad) were making.  I take seriously the idea that when central banks are targeting inflation, their forecasts matter hugely (given the lags, perhaps almost as importantly as outcomes).   At the times the Reserve Bank was making key choices, their forecasts –  which I will treat as their honest best effort –  either showed (core) inflation undershooting the target range (the case for most of 2020), or staying in the range based on policies similar to those they adopted.

I would accept that there was a good case for not reappointing Orr (and the MPC) if:

  • New Zealand’s Reserve Bank was the only one to have made the same mistake (thus, they ignored relevant perspectives from peers), and/or
  • the Reserve Bank’s forecasts and policy actions at the time they were made were seriously out of step (in what proved to be the wrong direction) with those of most serious observers, forecasters, commentators, and/or market prices

But as far as I can see that was not the case, on either count.   Sure, there were always people critical of some or other aspect of what the Bank was doing (I was an early critic/sceptic of the LSAP policy, although did not anticipate how large the losses they would run might be), and (of yesterday’s authors) Bryce Wilkinson was among them.  But often, at least I would argue, those who disagreed with some or other aspect of what the Bank was doing may have been right for the wrong reasons, and right analysis counts in making judgements about key policymakers.

People will, reasonably enough, point out that there are several advanced countries that have not seen the extent of the rise in core inflation New Zealand (and most others) have.  Thus, they suggest, there was wisdom our Reserve Bank could have followed and did not.  I’m not convinced.  The countries that have not seen much of a rise in inflation seem mostly to have been those that were already at the effective lower bound in early 2020.  They did not materially ease monetary policy because they could not.  It is unknowable at this point what they would have done if they’d had the capacity (and New Zealand and Australia and the US did have that capacity –  starting with policy rates still materially above zero).

It isn’t a common position for me to be defending the Bank, and in many respects I don’t (to me, there is a strong case for not reappointing Orr on things it is quite appropriate to directly hold him to account for –  his choices, his information).   But there is an element of the last 2.5 years that may have been simply unknowable with any great conviction or certainty.   Sadly, no one I’m aware of was (18 months ago) forecasting that New Zealand would soon see record low unemployment (similar outcomes in many other countries).  With hindsight, perhaps they should have, but it was an idiosyncratic shock –  pandemics, lockdowns, virus and policy uncertainty –  for which we (and central banks) had no real precedents.    I’m still happy to argue that the LSAP should have been stopped in the second half of 2020 when it was clear the world wasn’t ending, but….at the time the Bank still had very low inflation forecasts (and if others differed, no one I’m aware of differed to a huge extent).  I’m quite content to argue that the Bank –  and peers abroad –  should have started raising the OCR earlier and more aggressively last year but……given the lags it isn’t likely that any credible tightening started mid last year, even done at some pace, would have made a lot of difference to the inflation we have seen in the latest June quarter numbers (but would have brought it down sooner and faster). But again, who was openly calling for tightenings last May or June (for myself, the May MPC was the first time in almost a decade I’d been more “hawkish” than the Bank, but I wasn’t then calling for immediate OCR increases). 

Perhaps societies need scapegoats, but it isn’t self-evidently obvious that a reasonable human set of central bankers at the RBNZ would have been likely to have done better than Orr did in that particular set of circumstances.  The Bank is wrong to allow the suggestion to continue that they moved earlier by international standards (they were nearer the median of OECD central banks), but they were a bit earlier than the Anglo central banks we often default to comparing against.

Perhaps I’m just playing devil’s advocate here, but I don’t think so.  There is a real point about the limitations of human knowledge, and of what we might realistically expect from a typical (not exceptional –  you’ll rarely find them) central banker.    And a quickfire inquiry wouldn’t really help resolve that one.

It is encouraging that National is beginning to get down off the fence again (after Luxon initially shut down Bridges saying National had no confidence in Orr late last year).    But they probably need more confidence in their convictions (assuming they have found some) and be willing to back a case that the Governor should not be reappointed, and the external MPC members should be replaced as their terms expire.   Much of what Orr has done, and failed to do, has been done with the apparent approval, or even endorsement of the Minister of Finance (who thus shares some responsibility).  But in the end, Robertson has the choice to jettison Orr if he becomes a liability for the government.  An honourable Governor would probably walk away, expressing his regrets for the outcomes he has presided over.  So far, (per past select committee appearances and yesterday’s statement) Orr appears to regret nothing about policy, even with hindsight, and if he has regrets at all it is the empty and meaningless regret that Covid itself has intruded.

I regret that the Committee – and society at large – has been confronted with the COVID-19 pandemic, and other recent events that have caused food and energy price spikes. 

We should regret that Robertson appointed a Governor who has done so poorly, who has cost New Zealanders so much, and regret that Robertson has gone along with the Governor in barring the appointment of an open and excellent MPC, following that up with the appointment of a weak and inadequate board.

What might be done about the Reserve Bank

(And other economics agencies of government, but the Reserve Bank should be the highest priority given the extent of the decline and the substantive importance/powers of the institution.)

On Friday my post focused on the (severe) limitations of the members of the new Reserve Bank Board. Together, they look as though they would be a well-qualified (perhaps a touch over-qualified) group for the board of trustees at a high-decile high school……but this is the central bank and prudential regulator.

I had a couple of responses suggesting that, if anything, I was pulling my punches, understating the severity of the situation, when it came to the Reserve Bank. One person, who preferred to remain nameless (having high level associations with entities the Bank regulates), indicated that I was free to use their comments provided it was without attribution. These were the comments:

The situation is parlous: inept, multi-focussed but wrong focus, terrible judgement, appalling hires, complete absence of appropriate governance, woeful expertise, [backside]-covering of the regulator rather than interaction. I have zero confidence in their leadership, judgement, processes, balance of hires, and particularly governance governance which has been enabling of dross.  

I guess the Governor could, in response, point to the recent NZ Initiative survey (of the regulated) suggesting the Bank’s standing among that community had improved in recent year (it was never clear to me why, other than the decision to move one key individual who had had significant responsibility for prudential policy).

So views will differ, and if – based mostly on what we all see – my views are a bit less harsh than those of some, it seems clear to me that there is a significant problem, and that with the new Board appointments the situation is worsening. The entire new governance and decisionmaking structure – overhauled over several years – is now in place with an MPC where serious expertise is explicitly a disqualifying factor for appointment as an external member (the people who are supposed to represent a check on management), and a Board where in practice serious subject matter expertise (financial stability and regulation or macro) also seems to have been treated by the minister as a disqualifying factor. And all this with a senior management team that is inexperienced (3 of the 4 internal members) or in the case of the Governor mediocre on a good day and more interested in other things (“patently inadequate” for the job was the stronger description of my commenter). Oh, and a Minister of Finance who doesn’t seem to have much interest in building excellent institutions or achieving excellent policy outcomes, who falls short of the standard citizens should be entitled to expect.

What we don’t know is how the National Party Opposition see things. They are their partner now lead in the polls and seem to have a pretty good chance of forming a government after the next election. Since Simon Bridges late last year, just after becoming the Finance spokesperson, said that National would not back reappointing Orr and was shut down within hours by his new leader, we’ve heard nothing much at all from National. You get the sense that the Governor is not exactly their cup of tea, but what (if anything) do they propose to do and say. They (and the other parties) were required to be consulted on the Board appointments. But whether they were happy, or pushed back vigorously, we have heard not a word from the new Finance spokesperson. Silence risks counting as (perhaps resigned) assent.

The Governor’s current five-year term expires in late March next year (ie less than 9 months from now). The process for filling the slot is likely to be getting underway very soon, and it would surprise me if the government (and the Bank) did not want to have everything resolved before Christmas. Under the Act, the Minister can turn down any candidate the Board nominates, but the Minister cannot impose his or her own candidate – ultimately whoever is appointed must be nominated by the Board. There is, of course, nothing to stop the Minister telling the Board in advance that he would not accept a nomination of a particular person or class of persons. In practical terms, there is also nothing to stop the Minister telling the Board who he might like them to nominate – although with a capable and independent Board that approach would risk backfiring.

Most RB-watchers treat the reappointment of Orr as pretty much a foregone conclusion (assuming the Governor has not found greener pastures in which to labour). At present, I agree. But that is partly because of the silence where one might have hoped there was an effective political Opposition. If National is content to resign itself to another five years of Orr – using his platform as head of a technocratic non-partisan institution to champion personal left-wing causes, operating with his bullying and divisive style, presiding over a sharp downgrading of the Bank’s research and analysis capability, losing billions of dollars for the taxpayer and then (together with the surge in core inflation) brushing it all off with a “I have no regrets” – they should just keep right on as they are.

But if they aren’t content, they should be saying so, forcefully and often, now. If Labour really insists on reappointing Orr, there is not much formally that can be done to stop it – a brand-new board, selected in part by Orr, is simply not going to decline to recommend reappointment. The only chance of him not being reappointed (assuming he still wants the job) is for Labour (Robertson) to decide it isn’t worth it for Labour to continue to back Orr. We should hope for Governors who are broadly acceptable across the spectrum (not necessarily the ideal candidate for the other side, but broadly tolerable nonetheless) – after all, they wield a great deal of power, can’t easily be dismissed, and Labour itself inserted the new clause in the law requiring the Minister to consult other political parties in Parliament before appointing a person as Governor. “Consult” does not mean “obtain consent or support”, but in a context like this it should mean “take seriously very strong opposition, especially from a range of parties, or perhaps from the largest other party”. It was, after all, Labour that just introduced the provision. But waiting until December to privately express concern is a pathway towards just being ignored – by then the reappointment process would have a lot of momentum behind it already. Now is the time to start speaking out, carefully but forcefully. If they care.

In the New Zealand system, most official appointees have fixed terms and cannot simply be dismissed and replaced immediately by a new government. Mostly, that is a good thing. The position of Governor of the Reserve Bank is one of those positions. So, it seems, are appointees to the MPC and the Board.

Each of these individuals or classes of people can be replaced at any time, but only “for (just) cause”, and what counts as “just cause” is defined in the Act. In the case of the Governor

The provisions around removal the Governor from office seem more tightly drawn than they were under the previous legislation (which may have something to do with the formal responsibility for many things the Bank does having been shifted to the Board).

Much as I am critical of a lot of what has happened at the Bank during Orr’s tenure, none of it (individually or collectively) adds up to enough to represent a credible basis for removing him. Are $8bn of LSAP losses dreadful and without excuse? Sure, but it was the Minister of Finance who agreed to the policy and the risks. Is it bad that inflation is at about 7 per cent? Sure. Could the Bank have prevented core inflation getting above 4 per cent? Most probably, and I think there should be searching criticism of the Bank’s failure, and lack of transparency/accountability. But it just isn’t enough to sack a Governor mid-term, especially when (a) so many other countries are seeing something similar, and (b) the median market economist/commentator wasn’t much better when it mattered (last year). One might reasonably lament the decline in the analytical and research output, some poor appointments and massive losses of senior staff. One might lament the diversion of focus onto non-central banking things like the tree gods and climate change. But no one is ever going to sack an incumbent Governor mid-term over such failings (and the Minister often seems to have welcomed the diffusion of effort), bearing in mind the risk of being judicially reviewed, and the attendant lengthy period of (market) uncertainty. It just won’t happen (and probably shouldn’t).

Which is why, if National were to be seriously bothered about Orr they need to be speaking out now and focusing on the looming reappointment.

Fortunately, even if reappointment is the key, there are other levers for promoting change. The Monetary Policy Committee’s Remit can be altered (and, no doubt, the forthcoming financial policy one), including to take out the woolly and irrelevant (to monetary policy) references to sustainable and low carbon economies. National is proposing to delete the employment limb of the target (on this, I agree with the Governor, that the amendment adding it hasn’t made more than cosmetic difference, and nor would reversing it). Ministerial letters of expectations aren’t binding, but they are one more lever, and a new government could make clear from the start that it expects the Bank to focus on its core responsibilities, expects a lift in the quality and range of research outputs etc. The Minister could also amend the rules around the MPC to, for example, require individual votes and reasons for those votes to be disclosed, and to create an expectation that individual MPC members could be expected to make speeches, give interviews, front FEC, and generally be accountable for their view. Small legislative changes to move the responsibility for MPC appointments purely to the Minister (not mediated by the Board) would also be a step in the right direction, weakening what is now a heavy degree of gubernatorial control over monetary policy and the committee.

And then there are the appointees themselves. By the time a possible National government takes office, Orr may be just 6-8 months into a second five year term. But quite a few of the new Board members have been appointed for terms that expire in mid-2025. A new government should begin looking early for high quality people, with strong subject expertise, to replace them. And what of the MPC? There are three external members. One has a term that expires next April, and will have either been reappointed or replaced by the current government. But one member – Peter Harris, who has had close Labour Party associations – has an extended term expiring next October. That should be a date that disqualifies a permanent appointment being made prior to the election (it still puzzles me why Labour chose that date – he could easily have been extended for 2 years rather than 18 months). And the final member has a term expiring in April 2025. It should be made clear to all involved that there will no longer be a bar on appointing people of demonstrated ongoing excellence and capability in macroeconomics and monetary policy, and that the Minister would have a strong preference to appoint at least one such person at the earliest opportunity.

And then there is the budget. The Bank is an unusual government agency, in that it is not funded by annual appropriations (in the way many important – with aspects of independence – agencies are) but through a five-yearly funding agreement, governing how much of its own earnings can be used as operational spending. There are a number of flaws in this procedure but it is what it is, for now at least.

The Bank was given a massive increase in funding in the agreement approved in 2020. But one of the interesting (broadly incentive-compatible) aspects of the arrangement is that permitted spending is specficied in nominal terms for five years. Above target or unexpectedly high inflation makes nasty inroads on the Bank’s real capacity to spend. As wages and salaries rise faster than originally allowed for, that bite is likely to be coming on soon. Moreover, although the agreement wasn’t signed until late Feb 2020, by the time a possible new government takes office (say next November) the Bank will be very conscious that the next round of negotiations will be looming before too long. The final year covered by the current funding agreement is 2024/25, but if you were the Bank (management and Board) you would be wanting some clear signals from the Crown fairly early as to how much the Bank might have available to spend in the following five years. An early signal (say by the time of the 2024 government Budget) from an incoming Minister of Finance that s/he was minded to materially reduce real Reserve Bank spending in the future funding agreement would affect choices the Bank was making from them. National seems to be struggling to identify expenditure savings, and while the Reserve Bank is not that big in the scheme of things, it is much bigger and more expensive that it was five years ago, and ripe for trimming down. The basic functions of the Bank haven’t changed, but the size of Orr’s empire has blown out. It should be pulled back. Ideally, the legislation should be amended to allow the Minister to better specify what money is spent on, but it should be made clear to the Governor and the Board that the Minister expects a ruthless focus on core functions (not, eg, a proliferation of comms or climate change people). The office of Governor might be much less appealing to someone like Orr if he was compelled to manage in that way. That, on this scenario, would not be a bad thing.

And all this without even touching on those mind-numbing documents like the Statement of Intent. The Minister can require a new Statement of Intent at any time, and the Bank must take seriously (“consider”) the Minister’s comments on a draft.

All this is by way of saying that while, if National cares about the Bank, it should focus now on building a climate where it is not worthwhile for Labour to stick by Orr (or where if they do it just looks like a poor and partisan appointment), there are plenty of avenues open to a new Minister to put pressure on to constrain the Governor’s behaviour, his dominance of the MPC process, his empire, his focus, his style and so on. But a new Minister has to want change, and be prepared to follow through consistently.

Finally on the Bank, it is fair to note that it is one thing to argue that Orr should not be reappointed, but quite another to identify an excellent potential replacement. There are no immediately obvious potential nominees of the stature required to begin credibly rebuilding the institution (Bank and MPC). That itself is a poor reflection on the way the Bank has been run for at least the last decade (contrast say the RBA or the Bank of Canada), and perhaps symptomatic of wider weaknesses now at the upper levels of the New Zealand public sector more generally. But just because there is no obvious single name now, isn’t a reason to stick with such a poor incumbent (and if there isn’t an obvious replacement, I can think of several who could, at least as part of a new team, do the job, and we should at least be open to the possibility of a foreign Governor (even if such an appointment might be less easy than it sounds)).

This post has been focused on the Reserve Bank. But there are other agencies a new Minister of Finance will have to pay attention to. There is little point expecting different outcomes if you leave the same people (and sorts of people) in place (and there is a wider question there about what sort of person a new government will replace Peter Hughes, the Public Service Commissioner) with in mid 2024). But the open question still is whether National really cares much about different outcomes, or is primarily interested just in gaining and holding office. Voters might like some idea of the answer.

All his boasted pomp and show

The Reserve Bank Governor appears to have been communing with his tree gods again, and last week released a speech he’d delivered online to an overseas audience headed “Why we embraced Te Ao Maori”. It isn’t clear quite how many people were in the audience for this commercial event run by the Central Banking (private business) publications group, but I’m guessing not many. The stream Orr spoke in featured just him, a panel discussion on how “digital finance can drive women’s inclusion”, and a presentation on “how can central banks put climate change at the core of the governance agenda”. While it was called the “governance stream”, a better label might be the woke feel-good stream, far removed from the purposes for which legislatures set up central banks.

In many ways, the smaller the overseas audience the better, and I guess his main target audience was probably domestic anyway. He claims to be keen on the concept of “social licence” (personally, I prefer parliamentary mandates, deliberately adhered to and closely monitored) and no such “licence” flows from second or third tier central bankers abroad.

There are several things that are striking about the speech. Sadly, depth, profundity or insight are not among them.

Orr has now been Governor for just over four years (his current term expires in March). In his time as Governor he has given 23 on-the-record speeches (fewer as time has gone on)

The speeches have been on all manner of topics – although very rarely on the Bank’s core responsibility, monetary policy and inflation, a gap that has become more telling over the last year or so. Unfortunately, coming from an immensely powerful public official, it is hard to think of any that are memorable for the valuable perspectives they shed on the Reserve Bank’s core policy responsibilities or its understanding of, and insights on, the macroeconomy and the financial system. His Te Ao Maori speech is no exception, and is probably worse than average. From a central bank Governor.

In the speech, we get several pages of a quite-politicised black-armband take on what might loosely be called “history”. Perhaps it will appeal to elements on the left-liberal electorate in New Zealand (eg the editors and staff on the Dominion-Post). I’m not going to try to unpick it – it simply has nothing to do with central banking or the Governor’s responsibilities – although suffice to say that if one wanted to traverse history in a couple of pages, one could equally choose quite different points to emphasise. In essence, we have the Governor using his official platform to (again) champion his personal politics. That is – always is, no matter the Governor, no matter their politics – inappropriate, and simply corrodes the confidence that should exist that the Reserve Bank is a disinterested player serving in a non-partisan way the narrow specific responsibilities Parliament has given it independence over.

The speech burbles on. The audience is reminded of the tasks Parliament has given the Bank to do

But this is immediately followed by this sentimental bumpf

But – and rightly – “environmental sustainability, social cohesion and cultural conclusion” (whatever their possible merits) are no part of the job of the Reserve Bank. Parliament identifies the Bank’s role and powers, not the Governor. And all this somehow assumes – but never attempts to demonstrate – that some (“a”) Maori worldview is better for these purposes that either some other “Maori worldview” or any other “worldview” on offer. As for the “long-term”, a key part of what the Reserve Bank is responsible for is monetary policy, where they are supposed to focus on cyclical management, not some “long term” for which they have neither mandate nor powers.

Get right through the speech and you’ll still have no idea what the Orr take on “a” Maori worldview is. Thus, we get spin like this

Except that, go and check out the Bank’s Statement of Intent from 2017, the year before Orr took office, and the values (those three i words) were exactly the same. All they’ve done is add some Maori translations on the front. If anything, it seems more like a Wellington public-sector worldview (“sprinkle around some Maori words and then get on with the day job”), but Orr seems to sincerely believe……something (just not clear what).

Then we get the repeat of the “Reserve Bank as tree god” myth. The less said about it the better (and I’ve written plenty before, eg here). But even if it had merits as a story-telling device, it is substance-free.

We get claims about “the Maori economy”. Orr cites again a study the Bank paid BERL to do, the uselessness of which was perhaps best summarised by the report’s author at a public seminar at The Treasury last year, of which I wrote briefly at the time

Even the speaker noted that “the Maori economy” is not a “separate, distinct, and clearly identifiable segment” of the New Zealand economy

The last few pages of the speech purport to tell readers about their Maori strategy. There are apparently three strands. First, is culture

To which I suppose one might respond variously (to taste), “well, that’s nice”, “what about other world views?” and “wasn’t that last paragraph rather suggestive of the public sector worldview above – scatter some words and get on”.

Then “partnering”

There is more of that, but none of it seems to have anything to do with the Bank’s statutory goals, it is more about officials using public money to pursue personal political objectives. Incidentally, it also isn’t obvious how any of it reflects “a Maori worldview”. I’d think it was quite a strange if the Reserve Bank were to delete “Maori” from all these references and replace, say, Catholics (another historic minority in Anglo-oriented New Zealand).

The final section is headed “Policy Development” and you might think you were about to get to the meat of the issue – here finally we would learn how “a” “Maori worldview” distinctively influences monetary policy, banking regulation, insurance regulation, payment system architecture, the provision of cash etc. The section is a bit long to repeat in full, but you can check the speech for yourself: there is just nothing there, of any relevance to the Bank’s core functions. Nothing. No doubt, for example, there are some real issues – and real cultural tensions – around questions of the ability to use Maori customary land as collateral, but none of it has anything to do with anything the Reserve Bank is responsible for. And nothing in the text suggestions any implications of this vaunted ill-defined Maori world view for the things the Bank is supposed to be responsible or accountable for. And still one would be left wondering why, if there were such implications, Orr’s personal and idiosyncratic take on “a Maori worldview” would take precedence over other worldviews, or (indeed) the norms of central banking across the world.

It is a little hard to make out quite what is going on and why. A cynic might suggest it was all just some sort of public service “brownwash”, designed to impress (say) the Labour Party’s Maori caucus and/or the editors and staff at Stuff. But it must be more than that. They seem sincere, about something or other. Recent minutes of the Bank’s Board meetings released under the OIA show that all these meetings now begin with a “karakia”, a prayer or ritual incantation. It isn’t clear which deities or spirits these incantations are addressed to, or whether atheists, Christian or Muslim Board members get to conscientiously object to addressing the spirits favoured by Messrs Orr and Quigley (the Board chair). But whoever they address, these meetings happen behind closed doors, only rarely given visibility through OIAs, so I guess we have to grant them some element of sincerity, about something or other.

But it seems to be about championing personal ideological agendas, visions of New Zealand perhaps, not policy that this policy agency is responsible for, all done using public funds, public time. And would be no more appropriate if some zealous Catholic-sympathising Governor were touting the importance of “a” Catholic worldview to this public institution, even if – as with the Governor and his “Maori worldview” – it made no difference to anything of substance at all. There is pomp and show, but nothing of substance that makes any discernible difference to how well or badly the Bank and the Governor do the job Parliament has assigned them.

Go through the Bank’s Monetary Policy Statements and the minutes of the MPC meetings. They might be (well, are) fairly poor quality by international standards, but there is nothing distinctively Maori, or reflective of “a Maori worldview” about them. Do the same for the FSRs, or Orr’s aggressive push a few years ago to raise bank capital requirements. Read the recent consultative document on the future monetary policy Remit, and there is nothing. Read – as I did – six months of Board minutes recently released under the OIA, and there is no intersection between issues of policy substance and anything about “a Maori worldview”.

The Bank has lost the taxpayer $8.4 billion so far (mark to market) on its LSAP position.

The Bank has published hardly any serious research in recent years

The Bank and the Minister got together to ban well-qualified people from being external MPC members

Speeches with any depth or authority on things the Bank is responsible for are notable by their absence.

We have the worst inflation outcomes for several decades

And we’ve learned that Orr, Quigley and Robertson got together and appointed to the incoming RB Board – working closely now on Bank matters – someone who is chair of a company that majority owns a significant New Zealand bank.

The Bank has been losing capable staff at an almost incredible rate, and now seems to have very few people with institutional experience and expertise in core policy areas

There is one failure or weakness after another. But there is no sign any of it has to do with Orr’s (non-Maori) passion for “a Maori worldview”; it is simply on him. His choices, his failures (his powers – the MPC is designed for him to dominate, and until 30 June all the other powers of the Bank rest solely with him personally). If the alternative stuff (climate change, alternative worldviews, incantations to tree gods) has any relevance, it is as a symptom of his unseriousness and unfitness for the job – distractions and shiny baubles when there was a day job to do, one that has recently presented the biggest substantive challenges in decades.

Shortly after the speech was delivered, another former Reserve Banker Geof Mortlock, who these days mostly does consultancy on bank regulation issues abroad, wrote to the Minister of Finance and the chairman of the Reserve Bank Board (copied widely) to lament the speech and urge Robertson and Quigley to act.

I agree with most of the thrust of what Geof has to say, and with his permission I have reproduced the full text below.

But asking Robertson and Quigley to sort out Orr is to miss the point that they are his enablers and authorisers. A serious government would not reappoint Orr. A serious Opposition would be hammering the inadequacies of the Governor’s performance and conduct on so many fronts. In unserious public New Zealand, reappointment is no doubt Orr’s for the asking.

Letter from Geof Mortlock to Grant Robertson and Neil Quigley

Dear Mr Quigley, Mr Robertson,

I am writing to you, copied to others, to express deep concern at the increasingly political role that the Reserve Bank governor is performing and the risk this presents to the credibility, professionalism and independence of the Reserve Bank. The most recent example of this is the speech Mr Orr gave to the Central Banking Global Summer Meetings 2022, entitled “Why we embraced Te Ao Maori“, published on 13 June this year.

As the title of the speech suggests, almost its entire focus is on matters Maori, including a potted (and far from accurate) history of the colonial development of New Zealand and its impact on Maori. It places heavy emphasis on Maori culture and language, and the supposed righting of wrongs of the past. In this speech, Orr continues his favourite theme of portraying the Reserve Bank as the Tane Mahuta of the financial landscape. This metaphor has received more public focus from Orr in the last two years or so than have the core functions for which he has responsibility (as can be seen from the few serious speeches he has given on core Reserve Bank functions, in contrast to the frequent commentary he makes on his eccentric and misleading Tane Mahuta metaphor).

For many, the continued prominent references to Tane Mahuta have become a source of considerable embarrassment given that the metaphor is wildly misleading and is of no relevance to the role of the Reserve Bank. For most observers of central bank issues, the metaphor of the Reserve Bank being Tane Mahuta fails completely to explain its role in the economy; rather, it confuses and misrepresents the Reserve Bank’s responsibilities in the economy and financial system. It is merely a politicisation of the Reserve Bank by a governor who, for his own reasons (whatever they might be), wants to use the platform he has to promote his narrative on Maori culture, language and symbolism. 

If one wants to draw on the Tane Mahuta metaphor, I would argue that the Reserve Bank, as the ‘great tree god’ is actually casting far too much shade on the New Zealand financial ‘garden’ and inhibiting its growth and development through poorly designed and costed regulatory interventions (micro and macroprudential), excessive capital ratios on banks (which will contribute to a recession in 2023 in all probability), poorly designed financial crisis management arrangements, and a lack of analytical depth in its supervision role. Its excessive and unjustified asset purchase program is costing the taxpayer billions of wasted dollars and has fueled the fires of inflation. In other words, the great Tane Mahuta of the financial landscape is too often creating more problems than it solves, to the detriment of our financial ‘garden’. Some serious pruning of the tree is needed to resolve this, starting at the very top of the canopy. We might then see more sunlight play upon the ‘financial garden’ below, to the betterment of us all.

There is nothing of substance in Orr’s speech on the core functions of the Reserve Bank, such as monetary policy, promotion of financial stability, supervision of banks and insurers, oversight of the payment system, and management of the currency and foreign exchange reserves. Indeed, these core functions are treated by Orr as merely incidental distractions in this speech; it is all about the narrative he wants to promote on Maori culture, language, the Maori economy, and co-governance (based on a biased and contestable interpretation of the Treaty of Waitangi).

I imagine that the audience at this conference of central bankers would have been perplexed and bemused at this speech. They would have questioned its relevance to the core issues of the conference, such as the current global inflation surge, the threat that rising interest rates pose for highly leveraged countries, corporates and households, the risk of financial instability arising from asset quality deterioration, and the longer term threats to financial stability posed by climate change and fintech. These are all issues on which Orr could have contributed from a New Zealand perspective. They are all key, pressing issues that central banks globally and wider financial audiences are increasingly concerned about. Instead, Mr Orr dances with the forest fairies and devotes his entire speech (as shallow, sadly, as it was in analytical quality) on issues of zero relevance to the key challenges being faced by central banks, financial systems and the real economy in New Zealand and globally.

I have no problem with ministers and other politicians in the relevant portfolios discussing, in a thoughtful and well-researched way, the issues of Maori economic and social welfare, Maori language, and the vexed (and important) issue of co-governance. In particular, the issue of co-governance warrants particular attention, as it has huge implications for all New Zealanders. It needs to be considered in the light of wider constitutional issues and governance structures for public policy. But these issues are not within the mandate of the Reserve Bank. They have nothing to do with the Reserve Bank’s functional responsibilities. Moreover, they are political issues of a contentious nature. They need to be handled with care and by those who have a mandate to address them – i.e. elected politicians and the like. The governor of the central bank has no mandate and no expertise to justify his public commentary on such matters or his attempt at transforming the Reserve Bank into a ‘Maori-fied’ institution.

No previous governor of the Reserve Bank has waded into political waters in the way that Orr has done. Indeed, globally, central bank governors are known for their scrupulous attempts to stay clear of political issues and of matters that lie outside the central bank mandate. They do so for good reason, because central banks need to remain independent, impartial, non-political and focused on their mandate if they are to be professional, effective and credible. Sadly, under Orr’s leadership (if that is what we generously call it), these vital principles have been severely compromised. This is to the detriment of the effectiveness and credibility of the Reserve Bank.

What is needed – now more than ever – is a Reserve Bank that is focused solely on its core functions. It needs to be far more transparent and accountable than it has been to date in relation to a number of key issues, including:

–  why the Reserve Bank embarked on such a large and expensive asset purchase program, and the damage it has arguably done in exacerbating asset price inflation and overall inflationary pressures, and taxpayer costs;

–  why it is not embarking on an unwinding of the asset purchase program in ways that reduce the excessive level of bank exchange settlement account balances, and which might therefore help to reduce inflationary pressures;

–  why the Reserve Bank took so long to initiate the tightening of monetary policy when it was evident from the data and inflation expectations surveys that inflation was well under way in New Zealand;

–  how the Reserve Bank will seek to balance price stability and employment in the short to medium term as we move to a disinflationary cycle of monetary policy, and what this says about the oddly framed monetary policy mandate for the Reserve Bank put in place by Mr Robertson;

–  assessing the extent to which the dramatic (and unjustified) increase in bank capital ratios may exacerbate the risk of a hard landing for the NZ economy in 2023, and why they do not look at realigning bank capital ratios to those prevailing in other comparable countries;

–  assessing the efficacy and costs/benefits of macroprudential policy, with a view to reducing the regulatory distortions that arise from some of these policy instruments (including competitive non-neutrality vis a vis banks versus non-banks, and distorted impacts on residential lending and house prices);

–  strengthening the effectiveness of bank and insurance supervision by more closely aligning supervisory arrangements to the international standard (the Basel Core Principles) and international norms.  The current supervisory capacity in the Reserve Bank falls well short of the standards of supervision in Australia and other comparable countries.

These are just a few of the many issues that require more attention, transparency and accountability than they are receiving. We have a governor who has failed to adequately address these matters, a Reserve Bank Board that has been compliant, overly passive and non-challenging, and a Minister of Finance who appears to be asleep at the wheel when it comes to scrutinising the performance of the Reserve Bank. We also have a Treasury that has been inadequately resourced to monitor and scrutinise the performance of the Reserve Bank or to undertake meaningful assessments of cost/benefit analyses drafted by the Reserve Bank and other government agencies.

It is high time that these fundamental deficiencies in the quality of the governance and management of the Reserve Bank were addressed.  The Board needs to step up and perform the role expected of it in exercising close scrutiny of the Reserve Bank’s performance across all its functions. It needs directors with the intellectual substance, independence and courage to do the job. There needs to be a robust set of performance metrics for the Reserve Bank monitored closely by Treasury. There should be periodic independent performance audits of the Reserve Bank conducted by persons appointed by the Minister of Finance on the recommendation of Treasury. And the Minister of Finance needs to sharpen his attention to all of these matters so as to ensure that New Zealand has a first rate, professional and credible central bank, rather than the C grade one we currently have. I would also urge Opposition parties to increase their scrutiny of the Minister, Reserve Bank Board, and Reserve Bank management in all of these areas. We need to see a much sharper performance by the FEC on all of these matters.

I hope this email helps to draw attention to these important issues. The views expressed in this email are shared by many, many New Zealanders.  They are shared by staff in the central bank, former central bank staff, foreign central bankers (with whom I interact on a regular basis), the financial sector, and financial analysts and commentators.

I urge you, Mr Quigley and Mr Robertson, to take note of the points raised in this email and to act on them.

Regards

Geof Mortlock

International Financial Sector Consultant

Former central banker (New Zealand) and financial sector regulator (Australia)

Consultant to the IMF and World Bank

“Frankly simply daft”

I wasn’t going to write anything here today, but I couldn’t let the final question and answer from this morning’s Finance and Expenditure Committee hearing on the Monetary Policy Statement go without record and comment.

Simon Bridges, National’s FInance spokesman, asked the Governor whether the current prohibition – agreed between the Governor, the Board and the Minister – on any (external) MPC member having any active, engaged (present or future) analytical/research interest in monetary policy was not “frankly simply daft”, and did it not “ruin the ability to have thought diversity”.

He might well have added, but time was short, “and without precedent anywhere else in the advanced world” (or quite probably in most of the less-advanced world). Ben Bernanke would be disqualified, Lars Svensson would be out, and one could run a very long list of the sort of people who’ve served with distinction on the MPCs of other countries, whom Orr, Quigley and Robertson bar as a matter of determined policy.

Labour chairman Duncan Webb attempted, somewhat half-heartedly, to stop the question being asked, suggesting that it wasn’t really relevant to this Monetary Policy Statement (as if that was not also the case with several other questions, notably those from government MPs).

But in the end, the Governor did answer. He claimed first it was a matter of “legislation and government”. What he might have meant was not clear, but here is what the legislation says. The Minister makes the appointments, but can only appoint people the Board recommends, and the Board has to consult the Governor on those recommendations. These types of people are (rightly) disqualified.

People with a strong ongoing, and possible future, analytical/research interest in macroeconomics or monetary policy are not. That ban – the blackball – is pure Orr/Quigley/Robertson in concert. And none of them has ever mounted a substantive defence of this extraordinary ban, a ban without precedent.

But then Orr went on to end with a claim that the Monetary Policy Committee has a “very high level of expertise in monetary policy”.

It is worth distinguishing here between the external (non-executive) members – to whom the formal ban applies – and the executive (and majority) members.

There are three non-executive members:

  • Professor Caroline Saunders, who knows quite a bit about international trade but even her RB bio does not suggest knows anything in particular about monetary policy,
  • Peter Harris, former adviser in Michael Cullen’s office and former chief economist at the CTU. His RB bio also lays no claim to any particular background or expertise in monetary policy, and
  • Professor Bob Buckle. Buckle is a retired academic, who also worked in The Treasury for several years. He has something of a background in macroeconomic matters, but his focus tended to be more on tax and fiscal issues. Buckle is not self-evidently unsuited for the role – although he has long tended to be a “don’t rock the boat” establishment figure – but has no particular track record on monetary policy, let alone “high level expertise”. And he has, presumably, signed on to the understanding that he will never again do any writing or research on matters associated with monetary policy or macroeconomics (that is part of the ban).

Hardly a “very high level of expertise”.

Then, of course, there are the executive members, to whom the formal ban does not apply:

I’m not going to dispute that either the Governor or the Deputy Governor has some relevant qualifications and experience (although the deputy governor’s day job is now financial regulation and supervision), but neither is what most people would call a high-level expert. That needn’t be a criticism – the central bank is more than monetary policy – but you might hope for high level expertise (even “a very high level of expertise”) somewhere on the MPC. As it happens, neither Orr nor Hawkesby has even given a serious and thoughtful speech on monetary policy in their time on the MPC.

There was, for yesterday’s decision, the outgoing chief economist Yuong Ha. But he is leaving, with no other job to go to, and in his three years on the MPC gave not a single speech, delivered not a single paper, on matters monetary or economic.

The new appointee is Karen Silk. She has been a general manager at Westpac for some years, and will have senior management responsibility for financial markets where, just possibly, her skills might be a match. But her qualifications are in marketing and accounting, and she has no work experience relevant to being a monetary policymaker, or the senior executive responsible for those functions. Hard to imagine that morale among the Bank’s remaining economists did not dip quite a bit further when her appointment was announced. It is as if they wanted to go above and beyond and apply the ban to executives too,

It is now more than three months since it was announced that Yuong Ha was leaving, and the Bank has still not been able to fill the role – a job that would once have been one of the best jobs in New Zealand for a macroeconomist with policy interests. Perhaps they will appoint the person who will be filling the vacancy on an acting basis, but we don’t know.

There are some competent people on the MPC, and as I’ve written previously I don’t believe all 7 need to be (or even should be) research economists, but there is really no one there now who – by any reasonable global standards – could be described as offering a “very high level of expertise in monetary policy”.

That isn’t good enough – and the problems are especially evident with recent macro and inflation developments – but it is a choice, by Orr, Quigley and (above all) Robertson. So I hope MPs and journalists keep asking about what possible justification there can be for this extraordinary ban on some of the potentially most talented people who might otherwise be appointed to the Committee.

Misleading?

Back in mid-December, the Reserve Bank fronted up to Parliament’s Finance and Expenditure Committee for the Annual Review hearing on the Bank. I wrote about it here. You may recall that this was the appearance where (a) the Bank (unsuccessfully) tried to kept secret before the hearing the loss of another couple of senior managers, and (b) seemed to mislead the Committee on just how many of their senior managers had gone or were going. In the wake of it, the Governor forced the early departure of his deputy Geoff Bascand a couple of weeks before he was due to leave anyway, over unauthorised contact with the media [CORRECTION: “shared information to a third party”] (most likely over those two new senior management departures).

But towards the end of the hearing (about 50 minutes in here) there was a brief exchange on matters climate change, with an unusually clear and unconditional answer from the Governor. Here was my December account

The study by the Federal Reserve Bank of New York is here, and a Wall St Journal write-up is here. Here is the abstract

Which seems plausible and not very surprising. But it is just one working paper, on one aspect, and I’m not here to praise or critique the paper. My interest is in the Reserve Bank, and Orr’s response. “Yes”, he said, they certainly had done modelling of their own.

This is the Bank’s own climate change page. Even now, two months on, the only thing they are showing under Research Papers is this (their own words) preliminary analysis of some of the issues, dated July 2018 a few months after Orr had taken office. This was from the summary of that paper

So, I lodged an OIA request that day asking for copies of the modelling the Governor has been referring to, and of any write-ups of it. One might have supposed they would be keen to air it, but it still took them until 10 February to respond. They say they intend to put it on their website eventually, but it still isn’t on either the climate change or OIA responses page. So the full document is here

Climate change modelling OIA response from RBNZ Feb 2022

The first part of the response is a long (three page) letter, obviously attempting to provide some framing for what does (and particularly does not) follow.  Their Senior Adviser, Government and Industry Relations assures me that 

The RBNZ’s view is that there are significant climate-related risks for the New Zealand economy and financial system. This means that we consider that sectors of New Zealand’s economy will be at risk of being affected by physical risks, such as drought, flooding and sea level rise, and transition risks, such as international and national changes in policy/regulation, trade, investment and consumer preference. We consider that it is inevitable that policies and conditions will change in response to this global challenge, and that New Zealand’s economy will be affected and changed by these global and national changes. New Zealand banks and their international counterparts have set up teams to monitor and understand these risks and to respond as necessary.

While we are certain that there will be changes in the economy and financial system resulting from climate change and actions to mitigate climate change, the degree to which risks apply to financial stability will depend on a number of factors including how risks are understood and managed. New Zealand banks and their international counterparts have set up teams to monitor and understand these risks and to respond as necessary. 

At which point, I’m drumming my fingers and going “yes, so you say, but my question was about the modelling the Governor assured Parliament had been done”.

There then followed a 15 page memorandum, dated 13 October 2021, to one of the Bank’s internal committees on “Prioritisation of climate-related risks for financial stability analysis”. It is mildly interesting

So it seems that they intend to do some work, but haven’t done anything very serious yet. This is their own summary

and

The only thing the Bank itself seemed to have done was this

The rest of the OIA release consisted of 15 pages of a Powerpoint presentation (from July 2021) on that dairy scenario, reporting work undertaken jointly with MPI (the Ministry for Primary Industries). Much of the presentation is withheld, and we really learn nothing from it beyond what is in that extract just above. None of this appears to have been independently reviewed, none of it has been published, and the Bank’s own description (see quote above) is that there is “very little” New Zealand research on the (possible) threat to the financial system. All we have is a statement of the fairly blindingly obvious: a serious drought out of the blue (as 2013 was) combined with low dairy prices – an unusual combination given that earlier Bank research found that New Zealand droughts tended to boost global dairy prices, but not impossible – would result in some losses to banks’ dairy loan books. And? It sheds no light at all on risks to the New Zealand economy and financial system as a whole, and especially not from climate change – a multi-decade process.

To be clear, I don’t think the Reserve Bank should be spending lots of scarce taxpayers’ money (well, not scarce to them given how lavish their funding now is) on modelling climate change risks, at least not without a great deal more serious robust international analysis suggesting that there was a substantive issue/risk emerging. But it is the Reserve Bank that holds forth on the issue, asserting the existence of a threat….and, it appears, it has done almost no work itself, in a New Zealand context, to support its handwaving.

For anyone interested in reading further, I can recommend a couple of pieces by Ian Harrison – who would no doubt have been heavily involved in this sort of stuff were he still at the Bank. The first, from October 2021, is on Climate Change and Risks to Financial Stability more generally. The second, from January this year,

Did the Governor actively mislead Parliament with his answer in December?   At very best, it looks borderline.  As is clear, from the OIA release and the Bank’s own papers, what little semi-formal work has been done to date sheds very little light of anything of interest, despite repeated claims by the Bank and the Governor about alleged “significant” financial system risks. 

A deteriorating institution

I write a lot here about issues around the Reserve Bank. Some of those issues are quite obscure or abstract, and I know some readers find some of those posts/arguments a bit of a challenge to grasp.

But yesterday we had as straightforward an example as (I hope) we are ever likely to find.

Inflation is very much in focus at present. Measure of inflation expectations get more attention than usual. There is a variety of measures, both surveys (in New Zealand mostly conducted for the Reserve Bank and by ANZ) and market prices. The Reserve Bank has been surveying households for 27 years, with a fairly consistent (although expanded on a couple of occasions) range of questions. At the Bank there was always a degree of scepticism about the survey – household respondents always seemed (eg) to expect inflation to be quite a lot higher than it actually was – but it was one more piece in the jigsaw, and if one couldn’t put much weight on the absolute responses, changes over time did seem to line with what households might be supposed to be feeling/fearing.

Of the questions, probably the one least hard for households to answer seemed to be the fairly simple one

No numbers needed, just something directional. We have 27 years of data.

The latest results of the survey came out yesterday. The Bank puts out a little write-up and posts the data in a spreadsheet on their website. Yesterday, the write-up didn’t mention this question at all, but the spreadsheet suggested that a net 95.7% of respondents expected inflation to increase over the next 12 months. That seemed like it should be a little troubling, given how high the inflation rate already is.

Except that……it turned out that the Reserve Bank had changed the question, without telling anyone, without marking a series break or anything. The new question is

And that is a totally different question. The old question is about whether inflation will increase or decrease, while the new one is about whether there will be inflation or deflation. At almost any time in the 88 year history of the Bank it would not be newsworthy if 95.7 per cent of people expected there to be inflation. There almost always is.

It isn’t necessarily a silly question in its own right (on rare occasions there are deflation “scares”) but (a) it is a much less useful question most of the time than the question that had been asked and answered for 27 years, and (b) you can’t just present the answers to one questions as much the same thing as the answer to the other. Especially when not telling users of the data.

It was real amateur-hour stuff. Now, in fairness to the Bank, there is a detailed account of the changed questions on the website, but when there was no hint that question had changed there was no motive to go on a detective hunt to find it.

The Bank tells us they have had a 38 per cent increase in the number of senior management positions in the last year, with no increase in the things they are responsible for, and they can’t even get fairly basic things like this right. They’ve destroyed the single most useful question in the survey, and right at the time when every shred of information on attitudes to inflation should be precious. And then seemed barely even to be aware of what they’d done – presenting the answers to two quite different questions as if they were in fact very much the same.

There were a few people yesterday suggesting it was some nefarious plot to reduce access to awkward data at an difficult time. I don’t believe that for a moment – although for wider peace of mind I have lodged an OIA request to confirm (and to find out whether, for example, MPC members even knew of the change). This was a stuff-up pure and simple, which management and senior management (for which the Governor is accountable) should never have allowed to happen. High functioning organisations don’t make stuff-ups like this.

Which is a convenient lead in to an article published this morning.

About five weeks ago Stuff’s business editor asked if I’d like to write a column for them on the Reserve Bank under Adrian Orr. I did so (a few days later) and the final version appeared this morning. I only had 800 words, and there was a lot of ground one could have covered, so much of the story has to be very compressed (and quite a few problem areas left out altogether). You can read the final Stuff version here, or the text I originally wrote is below. Were I writing it now rather than a month ago, I would put more weight on the inflation story – core inflation now having blasted through the top of the target range – but I wanted to distinguish between forecasting mistakes (which are somewhat inevitable, and the best central banks will make them) and things that are much more directly within the control of the Governor, the Board, and the Minister of Finance.

Alarming Decline

By Michael Reddell

Over the four years Adrian Orr has been Reserve Bank Governor, this powerful institution, once highly-regarded internationally but already on the slide under his predecessor, has been spiralling downwards.  The failings have been increasingly evident over the last couple of years.  Here I can touch briefly on only a few of the growing number of concerns.

One can’t criticise the Reserve Bank too much for running monetary policy based on an outlook for inflation and the economy that, even if wrong, was shared by most other forecasters. Until late 2020 the general view of the economic consequences of the Covid disruptions had been quite bleak. Notably, inflation was widely expected to be very low for several years.  The Bank got that wrong, and so inflation (even the core measures) has been a lot higher than expected.  If they were going to err – after 10 years of inflation undershooting the target – it may have been the less-bad mistake to have made.  But they have been slow to reverse themselves – the OCR today is still lower than it was two years ago – and slower to explain.

The Bank is much more culpable for the straightforward lack of preparedness and robust planning.  Orr had been quite open, pre-Covid, that he wasn’t keen on big bond-buying programmes, and if necessary preferred to use negative interest rates.  But when Covid hit it turned out that the Reserve Bank had done nothing to ensure that commercial bank systems could cope with a negative OCR.  They couldn’t.  So instead, as if keen to be seen to be doing something, the Bank lurched into buying more than $50 billion of government bonds.  Buying assets at the top of the market is hugely risky and rarely makes much sense, but the Bank kept on buying well into 2021.  As interest rates rise, bond prices fall. The accumulated losses to the taxpayer are now around $5 billion ($1000 per person, simply gone).  And yet the Bank has never published its background analysis or risk assessment, it offers up no robust evidence that anything of any sustained value was accomplished, and the Governor refuses to even engage on the huge losses.

What of the new Monetary Policy Committee itself?  From the start the Governor and the Minister agreed that anyone with current expertise in monetary policy issues would be excluded from the Committee.  For the minority of outside appointments, a willingness to go along quietly seems to have been more important than expertise or independence of thought.  Meanwhile, staff (Orr and three others who owe their jobs to him) make up a majority of the Committee.  Minutes of the Committee are published but deliberately disclose little of substance, there is no individual accountability, and four of the seven MPC members have not given even a single published speech in the almost three years the Committee has been operating.  Speeches given by the senior managers rarely if ever reach the standard expected in most other advanced countries.  Meanwhile, the in-house research capability which should help underpin policy and communications has been gutted.

And then there is the constant churn of senior managers.  In some cases, people who were first promoted by Orr have since been restructured out by him.  In just the last few months, the departures have been announced – not one of them to another job – of four of the five most senior people in the Reserve Bank’s core policy areas: the Deputy Governor, the chief economist, and the two department heads responsible for financial regulation and bank supervision.   It isn’t a sign of an institution in fine good health. 

And all this has unfolded even as total staff numbers have blown out, supported by the bloated budget the government has given the Governor.   Orr often seems more interested in things he has no legal responsibility for than in the handful of (sometimes dull but) important things Parliament has specifically charged the Bank with.  Perhaps worse, he has a reputation for being thin-skinned: not interested in genuine diversity of views or at all tolerant of dissent, internally or externally.  One might just tolerate that in a commanding figure of proven intellectual depth, judgement, and operational excellence, but Orr has exemplified none of those qualities.

How to sum things up?  Lack of preparedness, lack of rigour and intellectual depth, lack of viewpoint diversity, lack of accountability, lack of transparency, lack of management depth, lack of open engagement, and lack of institutional memory.  It is quite a list.  The Governor is primarily responsible for this dismal record of a degraded institution but it is the Minister of Finance who is responsible for the Governor.

This really is a matter of ministerial responsibility.

Finally, earlier in the week I wrote a post here about expertise and the Monetary Policy Committee in which, among other things, I lamented again the absurd policy adopted three years ago by Adrian Orr, the Bank’s Board, and the Minister of Finance, excluding from consideration for (external) MPC positions anyone with any ongoing systematic interest in macroeconomics or monetary policy. This morning Jenee Tibshraeny of interest.co.nz had a new article focused on that restriction. She has comments from various economists, the only one sort of defending it one who was adviser in Robertson’s office at the time the restriction – one without parallel in any other advanced country central bank – was put on, but had also asked Robertson and the Bank (Orr or Quigley or both?) whether the same restriction would be applied to filling the upcoming vacancies.

It should be incredible, literally unbelievable, if we had not seen so much from Robertson and Orr over recent years careless of the reputation, capability or outcomes of the Bank. As it is, it is just depressingly awful. One hopes – probably idly – that the Opposition political parties might think it an issue worth addressing. After all, not only are qualified people with an ongoing analytical etc interest in monetary policy excluded from the external MPC positions, but the latest appointment to an internal position (by Orr, Quigley and his board, and Robertson in concert) suggests the bias against actual expertise and knowledge might now be being extended to encompass executive roles.