Appointing an MPC: worse than Trump?

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

The tweet promoting the story sums up reaction quite well

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is the Minister’s take

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Disclosing regulatory actions

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

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

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

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

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

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

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

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

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

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

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

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

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

The reviewers go on to defend the Reserve Bank, arguing

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

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

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

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

Before concluding

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

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

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

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

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

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

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

IPSA 1

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

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

IPSA 2.png

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

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

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

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

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

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

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

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

 

 

Cavalier lawlessness

There does seem to be a growing sense among far too many public agencies that laws don’t really apply to them, only to other people.    This is particular so in respect of the Official Information Act.

A TVNZ journalist nicely illustrated this sort of contempt for the law in a tweet the other day

In similar vein, I had an experience a couple of months back in which the Police simply ignored the statutory deadline (“no later than 20 working days”).  Since they were the Police – ideally, examplars of upholding the law –  I lodged a complaint with the Ombudsman.  The Ombudsman actually dealt with the complaint reasonably promptly and I had a letter from them basically saying “we pointed this out to the Police, who accepted that they had missed the deadline”,  and “and now there is nothing more we can do”.  There are no sanctions in the Act, and not even the pretence of an apology from Police.

The Ombudsman also dealt reasonably promptly with a similar complaint about the Reserve Bank.    They had delayed and slow-walked (using the formal extension provisions in the OIA) the release of material supporting their position on the bank capital proposals –  material which, when finally released, turned out to be quite limited, and which had been given to other members of the public long before.     The extension looked to have been pure delaying tactics, deliberately obstructive, and so I complained to the Ombudsman.  And, much to my surprise, I had a letter earlier this week from a new Assistant Governor at the Bank

rb apology

That was a first.

Sadly, it doesn’t seem to be a marker of a genuine change of approach, just that they are a bit more bothered (than Police, say) of falling foul of the Ombudsman.  They tend to delay until the Ombudsman belatedly determines there is a problem, and then suddenly play nice.

In late March, the Minister of Finance announced the appointment of the members of the new Monetary Policy Committee. On 29 March (three months ago tomorrow) I lodged Official Information Act requests with the Minister of Finance and with the Reserve Bank Board (responsible for determining the names the Minister could accept or reject).   Given that, on paper at least, this was a powerful new body, it seemed not unreasonable to ask questions, including about any back channels through which (say) the Minister might have sought to get his preferred people onto the Board’s list (in most countries, the Minister of Finance can simply appoint directly the people conducting monetary policy).

Both the Minister and the Board initially extended my request.  I didn’t have much problem with that (plausibly there was quite a bit of paperwork to sift through etc) and the issue wasn’t overly urgent.   The Minister of Finance complied with the law and released a set of papers to me a few weeks ago.

Not so the Board (or the Bank handling the processing for them).  They initially extended my request to the same date as the Minister had done.  That didn’t seem unreasonable, even if the delay was quite long, and I’d envisaged there might need to be consultation between the two offices.  But deadline day arrived.  The Minister responded, and sent the requested material.  But the Reserve Bank Board (staff on their behalf) sent me an email saying they were further extending the deadline to 26 June (Wednesday this week)

“because of the consultations necessary to make a decision on the request such that a proper response to the request cannot be made within the original time period”

And so time passed. I fully expected a response on Wednesday –  it was, after all, almost three months they’d had by then.  But midnight came and went and there was nothing.

And so, having had that nice letter from the Bank’s Assistant Governor early in week, I sent her an email yesterday morning, reminding her that the extended deadline, set by the Bank itself, had passed.  I ended

I hope this further delay is pure oversight and that I will have a response very very shortly.

But no.  I didn’t actually get a reply to that email, but it clearly sparked action because much later in the day I had an email from someone down the line.

rb delay.png

Well, that’s nice isn’t it.  Not even a new deadline, just an indication.

So this is the third extension on a single request.  The first was made (well) within the orginal 20 days, the second was made on the final day of the extended period, and the third quasi-extension, well it came after the second deadline had already expired, and it looks as if it might not have made at all if I hadn’t approached the Assistant Governor.

But there is this thing called the law, under which agencies are required to operate. It is not voluntary, or just a nice idea, it is the law.   And here is what the Ombudsman’s office has to say about agencies extending request (the document is their guidance to government agencies on handling OIA requests).

Nothing in the OIA prevents multiple extensions being made, providing any extensions are made within the original 20 working day time period after receiving the request. For example, if an agency notifies the requester of a one week extension, and then later realises that a two week extension is actually necessary, a second extension may be notified as long as the original 20 working day time period has not yet passed.

You simply can’t extend a request again once the initial 20 day period has passed (in this case, that date would have been in late April).  That isn’t my reading of the Act, my opinion, it is the determination of the Ombudsman, who is responsible for enforcing the Official Information Act and holding agencies to account.  As it happens, the State Services Commission has also issued OIA guidance to agencies, and their text on extensions repeats the Ombudsman’s stance, without question or challenge.

Perhaps the Reserve Bank’s lawyers have a different interpretation (untested in the courts, the only way the Ombudsman’s view could be overturned). Or perhaps the Bank just doesn’t care.  Laws are for other people.

The Ombudsman even offers some suggestions for agencies (I guess unexpected obstacles do come up from time to time).  It is commonsense really, the sort of thing any decent public-spirited person would want to do anyway (but not apparently the Bank).

If it looks like it will not be possible to meet either the original or an extended maximum time limit, the agency should consider contacting the requester to let them know the current state of play and reasons for the delay. Requesters will appreciate being kept informed, and may be more understanding if the agency ends up in breach of the timeframe requirements.

Agencies should be aware, however, that a failure to comply with a time limit may be the subject of a complaint to the Ombudsman.

And so, in the spirit of sweating the small stuff –  how are public agencies to be held to account if we don’t make a fuss and use the avenues that are open to us? – but with a somewhat heavy heart (couldn’t they just obey the law instead?), I will be lodging another complaint with the Ombudsman later this morning.

The request was made to the Board of the Reserve Bank.  They don’t work for the Governor or the staff, rather the staff provides secretarial and adminstrative support to the Board.  Neil Quigley, vice-chancellor of Waikato University, is chair of the Board, and he and the Governor between them need to take responsibility for this lawless obstructionism.  “Culture and conduct” is one of the Bank’s trendy mantras.  It really needs to start close to home.

UPDATE: The Governor recently told an acquaintance of mine that he doesn’t read this blog, but clearly someone at the Bank does.  I finished the post, went off to clean the house, and came back to find this.

RB OIA

Again, that’s nice, and slightly better than nothing.  But, the law…….  As the law is written, and applied by the Ombudsman, the response was finally due on 11 June.

The law.

 

 

 

On the ANZ affair

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A NZ central banker speaks

Next week Adrian Orr will have completed the first quarter of his five year term as Governor of the Reserve Bank.    In that time, he has given no substantive on-the-record speeches on either of his main areas of policy responsibility: monetary policy, or financial stability/supervision/regulation.     That would be highly unusual at any time, but these haven’t been normal settled periods.  On the monetary policy front, the statutory goal of monetary policy has been changed for the first time in 30 years, and the governance structure has also changed, all that amid a backdrop in which the Bank has had to once again change its policy stance, from looking towards OCR increases (in Orr’s first MPS, the interest rate track started rising from about now) towards cutting the OCR yet again.   And on the financial regulatory front, the Governor has proposed what appears to be the largest and most costly discretionary regulatory intervention (the bank capital proposals) since governors were first given prudential regulatory powers.  And the Governor wields all those regulatory powers personally; unlike monetary policy now, decisions aren’t the shared responsibility of a committee.  So it might have been reasonable to have expected several serious speeches from the Governor –  who is, after all, often lauded for his communications skills.

As one benchmark, the Reserve Bank of Australia’s 2019 speeches page already has 23 entries, including four substantive speeches from the Governor.    And the Reserve Bank of New Zealand?    Three speeches this year to date, only one from the Governor, and that was not a substantive contribution on either monetary policy or financial stability.   For the record, the RBA has a narrower range of responsibilities than the Reserve Bank of New Zealand.

But there was a recent speech –  given in Japan –  from one of his deputies, Assistant Governor and General Manager of Economics, Financial Markets and Banking, Christian Hawkesby.   Hawkesby recently rejoined the Bank after stints at the Bank of England and then in the local funds management sector.  He is a direct report to the Governor, and if he doesn’t have the official title of Deputy Governor (for some strange reason –  Wellington government agencies typically being awash with multiple people carrying ‘deputy’ titles), he is the most senior person below the Governor on the monetary policy side of the Bank.  He is a full voting member of the Monetary Policy Committee, so in additional to his staff appointment he is now a statutory officeholder.  His counterparts are people like (Deputy Governors) Guy Debelle at the RBA or Ben Broadbent at the Bank of England.   He is an able and amiable guy, and when he speaks we should be able to expect something pretty substantial and authoritative.   And in his first public speech, on the monetary policy legislative changes, we can be sure he isn’t saying anything the Governor would be unhappy with.

And so it was disappointing, to say the very least, how much political spin suffused the speech, and how lacking in analytical substance it was.  Recall that this wasn’t a speech to (say) a provincial Rotary Club, but to a Bank of Japan conference of economists and central bankers.

The Reserve Bank’s press release for the speech was, however, presumably aimed squarely at New Zealand audiences.    It is full of spin as well.

It begins

The Reserve Bank has significantly changed the way it makes monetary policy decisions, keeping itself in step with public expectations.

There are two problems with this.  The first is that, until rather recently, the Bank was telling us regularly and repeatedly, that the statutory changes (goal and governance) weren’t that significant at all, and really only wrote into legislation the way the Bank has been doing things for a long time (and perhaps built resilience against rare very bad Governors).   Hawkesby’s predecessor told us (and his audience) that when he ventured offshore for a speech last April (after Orr had taken office).

And the second is that the implication is that the Reserve Bank itself made these changes. It didn’t.  Parliament did, at the initiative of an elected government.    The difference isn’t trivial, because the entire press release continues in this vein, suggesting that the Reserve Bank is a principal, not an agent mandated by Parliament for very specific purposes.   Thus

“We maintain our legitimacy as an institution by serving the public interest and fulfilling our social obligations. Keeping our ‘social licence’ to operate depends on maintaining the public’s trust that we are improving wellbeing,” Mr Hawkesby said.

Nowhere does the Act charge the Bank with identifying what is in the “public interest”, or with “social obligations”.  Rather it gives specific responsibilities and powers to the Bank, subject to numerous other laws, and expects the law to be followed.  Parliament might make wise choices, daft choices, or some mix of the two, but the Bank’s job is to follow the law (and, perhaps, to offer advice to Ministers on how the law should be worded).  Oh, and “wellbeing” does now appear in the Act, but not as goal for the Bank to pursue directly but rather as the expected outcome (together with “prosperity” – never mentioned) of the Bank exercising its specific powers for the specific purposes outlined in statute.

The spin continues

“Thirty years ago New Zealand was prepared to accept a single expert – the Governor – making decisions about how to fight inflation. People now expect to see how and why decisions are made, expect that decision makers reflect wider society, and that current issues and concerns are factored into the decision making. By meeting these expectations, we can improve public trust in the legitimacy of the Reserve Bank’s work,” he said.

This is, frankly, pretty bizarre.  For a start, the old Act never required the appointment of an “expert” (and none of those who held office under that legislation really were monetary policy experts).  But, more importantly, as the Bank told us for the previous 30 years –  and as documents at the time the Act was introduced make clear  –  the focus of the earlier legislation was squarely on transparency and accountability.    (I happen to think the new legislation is an improvement, but not on the “how and why decisions are made” front.)

And then we get the burble about “decision makers reflect wider society”.   I’m not sure quite how a committee of seven middle-aged economists  –  and if these things matter to you, not one Maori –  quite meet that criterion, but perhaps one day the Bank will explain.

But what worried me more was the claim that “people” (who, specifically?) “expect…that current issues and concerns are factored into the decision making”.    Personally, I hope that all decisionmakers in all statutory bodies exercise their powers under the law, taking into account factors they are supposed to consider, and not bringing extraneous personal agendas to the table, hijacking public office as a platform for personal political causes.

I largely agree with the next paragraph

Mr Hawkesby outlined the new committee process that the Reserve Bank uses for deciding the official cash rate, noting that diversity among decision makers improves the pool of knowledge, insures against extreme views, and reduces groupthink.

(which is why I was championing a committee model, including outsiders, when the Reserve Bank was – until quite recently – opposed).  But this is what Hawkesby – and presumably Orr –  think we need a monetary policy committee for

“This diversity is needed to confront issues such as climate, technological, and other structural and social changes,” he said.

If you think –  as I do – that climate change is, at most, of peripheral relevance to the Bank’s financial stability functions, it is of no real relevance at all to monetary policy at all.  One could say much the same of “social changes” (what did he have in mind?) or even “technological changes”.  Now, to be sure, there is an old line of argument that the Reserve Bank needs to be aware of anything that might materially alter neutral interest rates or the neutral unemployment rate, but even to the extent that is so, the issues and challenges are no different than they have ever been –  in fact, the issues the Bank currently has to be aware of (around monetary policy) are almost certainly much less broad in scope than those it faced 30 years ago, when the Act came into force, in the midst of successive waves of extensive waves of micro reform.

The press release ends with this piece of politics.

He also said that collaboration with government can be undertaken in a way that maintains the Reserve Bank’s political independence while working on the broader objective of improving wellbeing.

It is simply not the Reserve Bank’s job to range more broadly, assisting the government with its partisan agendas, even if the individuals involved happen to be left-wing themselves.  To repeat, the Act is very clear that the Bank does not have an all-embracing goal of pursuing “wellbeing”, but is specifically charged with using its monetary policy powers to achieve and maintain price stability and “support” maximum sustainable employment.

The body of the speech –  with much more space for qualification –  is no better, and is arguably worse.  There are ahistorical claims (notably, that the previous Act brought down inflation from “around 20 per cent” –  inflation was about 5 per cent when the law was enacted).    And the nonsense suggestion that only now do people realise that low inflation is not an “end it itself”.

And never once do you see any reference (even politely) to the fact that the law was amended by Parliament as the outcome of a political process –  notably, a Minister of Finance who, in Opposition, needed some product differentiation (both from his National opponents, and from the ideological enemies formerly in his own party –  the reformers of the late 80s) but who always seemed more interested in cosmetics than in substance.  In fact, one never even sees the point the Minister often made –  and which Hawkesby’s audience of central bankers must have been well aware – that the recent legislative changes just bring the New Zealand legislation a bit closer to the (very longstanding) legislation in the US and Australia.    Instead we get this vacuity

Our policy framework changed because times are changing. For the Reserve Bank to maintain its credibility and relevance, we must change too.

And there is the incoherence of championing the record of the last 30 years, all while claiming that “a sole decisionmaker or uniform committee cannot possibly hope to possess the broad range of insights necessary to consider these issues” (climate change and social change again).    And the seeming blind spot about the utterly crucial nature of what a committee can bring…..and yet at the same time, the bank capital proposals rely wholly on a decision by one individual, the same individual championing the change.

There is questionable stuff throughout the speech, but this one near the end caught my eye,

There is emerging consensus that coordination is necessary for an optimal response of broader macroeconomic policy.16 For central banks, operational independence does not have to mean operational isolation. Rather, collaboration with government can be done in a way that builds and reinforces the social licence to operate, by showing a willingness to work with other partners to do whatever is necessary to achieve the broader objective—improving public wellbeing.

More politics, more wellbeing spin, but it was that footnote that I lighted on, apparently supporting the surprising claims of an “emerging consensus the coordination is necessary” for macro policy. I was intrigued and wondered what I’d missed.  When I looked more closely, the reference was to a short recent comment by economic historian Barry Eichengreen and it wasn’t an argument for more coordination at all.  Instead, it simply observed that in many countries monetary policy appeared to have more or less reached its limits and thus that fiscal policy might be much more important in future.

But nominal interest rates can’t be forced much below zero. And monetary policymakers, for their part, seem unable to push inflation above 1-2% in order to drive down real interest rates. Investment demand therefore tends to fall short of saving, creating a risk of chronic underemployment.

In this case, the argument for additional deficit spending to supplement deficient private spending is stronger, because there is less risk of crowding out productive private investment. This does not mean that the scope for running deficits is unlimited, because at some point safe government debt could be re-rated as risky, causing interest rates to rise. That said, these arguments lead to a straightforward conclusion: in the future, we will have to rely more on fiscal policy and less on monetary policy to achieve stable and equitable growth.

You might or might not agree with Eichengreen, but you simply cannot read him –  as Hawkesby attempted to represent him –  as making a case for more coordination of policy.  If anything, it is more a case for the growing irrelevance of central banks (a claim one can agree with or not).   It was either careless or dishonest to present it otherwise. I prefer to believe careless, but the Bank should be better than that.

And who knows what Hawkesby’s expert audience made of the final couple of paragraphs of the speech

And it is not enough to grudgingly adapt. In order to maintain credibility, central banks must embrace change and prove to the public that they are capable of delivering on their objectives. To remain credible is to remain relevant. Central banks should keep their eyes open, and be ready to change tack. Our destination—a world with improved wellbeing for our citizens—may not change, but the best route for getting there may.

We must adapt. We must continue to improve the wellbeing of our citizens. We must remain credible.

Rhetorical burble that was really a substance-free zone.

Speeches by good (economics) deputy governors of advanced country central banks –  eg Debelle and Broadbent, and their Canadian counterparts, or some of the economist heads of regional US Federal Reserves –  are often well-worth reading.  They typically contain and reflect serious economic analysis, and help create confidence in the robustness and depth of the institution itself.  Sadly, this first speech by Hawkesby fells well short of that standard –  and the gap is the more noticeable given the stature of the audience he was speaking to.   Credibility does matter, but if they are to be taken seriously the MPC (Orr, Hawkesby and the rest) will need to be making rather more serious and substantive –  occasional –  speeches than what was on offer this time round.

One can mount an argument that in the last year or two the Reserve Bank of New Zealand’s actual monetary policy calls have been a bit better than those of the Reserve Bank of Australia, but without a sense of a robust underpinning –  serious sustained analysis, and articulation of that reasoning, and of how they understand the economy –  we can’t have any confidence in the robustness of the institution, or that better calls have been any more than dumb luck.

 

 

 

Two charts

Reading the papers yesterday for a forthcoming meeting, and as “reward” for getting to page 200 (or thereabouts), my eye lit upon (a version of) this chart.  Here I’m showing quarterly data.

bond yields nz and jap.png

It was a salutary reminder of the days –  must have been around 1998 –  when JGB yields first fell materially below 2 per cent.  I was responsible for the Reserve Bank’s markets monitoring unit at the time, so we paid a fair amount of attention to this stuff.  One of my young staff and I spent hours discussing the possible opportunities for shorting JGBs.  After all, everyone “knew” that long-term bond yields couldn’t stay that low for very wrong.    Fortunately we never put the trade on, but in the intervening 20 years I’m sure many people have at various times.  The 10 year Japanese government bond yield today is -0.05 per cent.

It was a New Zealand based outfit –  Melville Jessup Weaver – that did the chart I saw, but here is a version with Australia added.

bond yields aus

And, as a reminder, Australia and (even more so) New Zealand have long had the highest real interest rates in the advanced world.

The point of the chart in the article I was reading was to make the point that further, perhaps quite material, falls in New Zealand bond yields are not impossible.  It isn’t even as if Japanese bond yields are that much of an outlier: German 10 year bond yields are also slightly negative (and Germany has had one of the strongest performing advanced economies in the last decade or so).

What could take New Zealand bond yields much lower?   Well, I’ve argued for years now that the biggest single factor explaining why New Zealand real interest rates are so much than those in other advanced countries is our policy-driven rapid rate of population growth: savings rates are modest, and resource demands for a rising population are large, and high real interest rates (and a persistently high real exchange rate) reconcile those two ex ante pressures.  Cut the non-citizen immigration target as I’ve recommended and I would expect to see considerable convergence.  That would be good for our productivity and business investment prospects.

And, of course, the other (much less favourable) scenario is the next serious economic recession.   Simply cutting the OCR to (say) -0.75 per cent (about as low as people think it could feasibly go) wouldn’t of itself immediately result in near-zero bond yields –  indeed, as was the case in 2008/09 globally, aggressive policy rate cuts help create an expectation that rates won’t be low for long. It was a couple of years after the 08/09 recession before markets really started pricing the idea that low short-term rates might hang around.  But whereas in 2008/09 most central banks could cut policy rates by 500 basis points, if the next recession happens in the next couple of years most advanced country central banks won’t have even 200 basis points of conventional policy space (the Fed a little more, and most in Europe much much less).  And markets will recognise that limitation quite quickly, and begin to price conventional government bonds accordingly.   Even in New Zealand (or Australia) conventional nominal bond yields could quite easily go to 50 basis points or less.

As I noted yesterday, the Governor keeps on with his cavalier tone that there is nothing to worry about and the Bank has lots of potential tools –  the sort of exceptional stuff all sorts of other countries did after the last recession when they reached their effective lower bounds on nominal interest rates.   Sentiment at the BIS in Basle might be a bit different –  they aren’t responsible to any voters, or for any excess capacity/unemployment –  but I doubt there would be any policymaker in any advanced country who could look back on the last decade with equanimity, and not wish they’d had the tools available to lower the unemployment rate faster.  After all, almost nowhere was rising inflation an inevitable constraint.  New Zealand is better placed than some countries, in having a floating exchange rate, but (for example) the UK had one of those too.

The second chart I noticed in the last day or so was this one from the Reserve Bank’s Monetary Policy Statement.

job finding

I’m not entirely sure how they derive this measure –  there must be a research paper online somewhere, which I will try to track down –  but it is cited as evidence that “employment is near its maximum sustainable level”.    The text focuses on the rising trend last year, but in making that comment the authors of the Monetary Policy Statement (for which the whole MPC is presumably responsible), the authors appear to have ignored the rest of the chart.   After all, on this measure less than half the ground lost during the last recession has been recovered (and that incredibly slowly) and –  even allowing for the fact that the peak of the last boom was unsustainable –  the current value of the indicator is still not back to where it was in 2002 or 2003, when nobody (at least as I recall it) would have thought of labour as fully employed.

There does seem to be something of a tension in the Bank’s analysis and official rhetoric.  If labour is really fully-employed (in that weird statutory formulation “maximum sustainable employment”) as they have been saying for the last year –  through upside and downside OCR biases –  why are they cutting the OCR?  More plausibly, a lower OCR would allow the economy to run a bit more strongly, unemployment a bit lower (and, per the chart, people who lose jobs finding a new one more quickly), with the not inconsiderable bonus (given the statutory mandate) of a higher inflation rate.

On which note, one hears that the Reserve Bank’s research function has been  substantially gutted, with several recent resignations in recent months from among their best-regarded and most productive researchers (and the manager of the team left this week and is reportedly not being replaced).    The Bank’s research function once played a very influential part in policy and related thinking, but that is going back decades now.   Even with a Chief Economist who himself had a strong research background, the research team never quite found a sustained and valuable niche in recent years, even as some individual researchers have generated some interesting papers, often on topics of little direct relevance to New Zealand.  One of the most notable gaps is that the Bank has become increasingly focused on financial stability and financial regulation, and yet little or no serious research has been published in those areas of responsibility (a senior management choice).  That weakness has been evident in the recent consultation document(s) on bank capital.

One can always question the marginal value of any individual research paper, but we should be seriously concerned if the Reserve Bank under the new wave of management is further degrading the emphasis on high quality and rigorous analysis.  Apart from anything else, a good grounding in research has often been the path through which major long-term contributors to the Bank have emerged, including former chief economists (and roles more eminent still) Arthur Grimes and Grant Spencer.   I see that the Governor is delivering an (off the record) talk at the New Zealand Initiative today: perhaps someone there might like to ask just what is going on, and what place the Governor sees for a research function in a strongly-performing advanced country central bank.  Not even he, surely, can count on Tane Mahuta for all the answers.

 

Another of the Governor’s whims

I was chatting to someone yesterday about what was behind the undisciplined, highly political, way in which Reserve Bank Governor Adrian Orr has taken to the job.  My interlocutor reckoned Orr might have his eye on a high place on Labour’s 2023 list (“doing a Brash”).  I was a bit sceptical –  he’d be about 60 and Jacinda Ardern about 43 –  but then I guess this is the era where a youngish (only 72) Trump could be facing off against either Bernie Sanders (77) or Joe Biden (76).   I still doubt Orr has a conscious personal party political goal in mind –  and if he did, it would be highly inappropriate for him to be serving as Governor –  and suspect it is mostly about revelling in being a big fish in a small pond, the opportunity to strut his personal ideological commitments using a statutorily provided (and funded) bully-pulpit to do so.    By comparison, the basics of the day job must seem rather technocratic and dull –  hence, no doubt, why we’ve had no public speeches about either monetary policy or financial regulation.   Anyone seen any sign of developed Reserve Bank senior management thinking about, for example, handling the next serious recession –  starting from an OCR of 1.75 per cent or less?  Thought not.   Or, for that matter, robust and honest articulations of the case for much-increased minimum bank capital ratios.

Instead we hear him on all sorts of stuff that is no part of the responsibility of the Reserve Bank.  There is infrastructure, thinking long-term (in the Governor’s view he apparently does, but we don’t, think long-term enough), and lots and lots on climate change, all entirely predictably left-wing (not even interestingly left wing) in nature.  Oh, and of course there is the tree god nonsense.   There are only so many hours in the day, so time spent on this stuff – and time spent getting his staff to do it –  is time not spent on core business.  And this from an institution that claims to be underfunded.

Early last month, I wrote a post, Other People’s Money,  prompted by a newspaper advertisement from the Bank for a “Cultural Capability Adviser Maori”.   I noted then

So what is he up to with his “Te Ao Maori strategy…designed to build a bankwide understanding of the Maori economy”?  Given his statutory responsibilities –  and those in charge of public agencies are supposed to operate constrained by statute – what makes the so-called “Maori economy” any different than the “European New Zealander economy”, the “Asian economy”, the “British immigrant economy”, the “Pacific economy” and so on, for Reserve Bank purposes and policy?

The Bank’s claim is that this new understanding will “enable improved decision making…about monetary policy and financial soundness and efficiency”.   Yeah right.

I lodged an Official Information Act request for material relating to the decision to create this position, including “any material covering the estimated costs and benefits of such a position”.

It took them a while –  more than 20 working days –  to respond but I eventually received 25 pages of material.    There was, of course (this is the Reserve Bank after all), no cost-benefit analysis, and more remarkably there was no mention (explicit or implicit) of any opportunity cost of the resources devoted to the Governor’s latest whim.  It is as if the Bank thought it had more or less unlimited resources and no clear need to prioritise –  I guess that is what using other people’s money, in an institution with very weak external budgetary controls can come to.

The direct financial costs were outlined –  almost a million dollars over three years, and a couple of hundred thousand a year thereafter (about as expensive as slushy machines for prison officers, and at least someone gets some benefit from those).  A million here and a million there and pretty soon you are talking serious money.

And all this for an organisation that, of all those in the entire public sector, must have the least compelling need for a Maori strategy (for this cultural capability adviser is only one bit of the wider strategy).   As a reminder, these are the key Reserve Bank functions

  • the Bank issues bank notes and coins.  That involves purchasing them from overseas producers, and selling them to (repurchasing them from) the head offices of retail banks;
  • it sets monetary policy.  There is one policy interest rate, one New Zealand dollar, affecting economic activity (in the short-term) and prices without distinction by race, religion, or culture.  Making monetary policy happen, at a technical level, involves setting an interest rate on accounts banks hold with the Reserve Bank, and a rate at which the Reserve Bank will lend (secured) to much the same group.  The target – the inflation target, conditioned on employment (a single target for all New Zealand) – is set for them by the Minister of Finance.
  • and it regulates/supervises banks, non-bank deposit-takers, and insurance companies, under various bits of legislation that don’t differentiate by race, religion or culture.

The Bank has chosen to put some decorative Maori motifs on the bank notes it issues, but that is about the limit of it.

Sure, there is a handful of other functions.  They can intervene in the foreign exchange market (one dollar for all), and they operate a wholesale payments system (NZClear), but it doesn’t  alter the picture.  There is just no specific or distinctive European, Maori, Pacific, Chinese, Indian or whatever dimension to what the Bank does (or what Parliament charged it with doing).  I looked up the list of institutions which are members of NZClear, and (unsurprisingly) there was not a single specifically Maori one  (Swiss, German, Indian, American, British, Tongan, Fijian, Sri Lankan  –  those last three other central banks –  and so on).

The Reserve Bank is essentially a “wholesale” institution.  The actions the Bank takes affect all of us to some degree or other, and so they need to open and accountable in communicating what they are doing, but it just isn’t the sort of agency that has a direct client base (or clients with culturally specific issues relevant to its statutory responsibilities) where race, culture, ethnicity, or whatever is an important consideration.  And so the million dollars –  and all the uncosted staff time –  is just money down the drain, advancing the Governor’s personal ideological and social whims, not the statutory responsibilities of the Bank.

There is a great deal of unsupported nonsense in the document.  But it starts here

TAM 1

And here is one of the key sets of deliverables

TAM 2

Which is, itself, a grab-bag of unsupported stuff.   “More assured forecasts” would, of course, be great, but from an institution whose inflation forecasts have been wrong (one-sided bias) for eight or nine years now, doing the core job more accurately seems rather more important.  The documents never suggest how their better understanding of “the Maori economy” will improve the forecasts –  as distinct perhaps from making the Governor feel better about them.

Notice too that reference to “the Maori economy”: not only is $50 billion rather less than one-sixth of GDP, but the $50 billion they are talking about is a collection of assets (a tiny portion of total assets of New Zealanders), and GDP is a collection of income flows.   Since Maori are a significant chunk of the population, I’m sure they do make up quite a share of the economy, but most assets owned by Maori people aren’t included in that headline-grabbing number (any more than my house is in some “European New Zealander economy”).

There is a similar degree of vacuousness about the references to the financial system.  It all the feel of someone making stuff up to backfill another of the Governor’s whims.

What of some other stuff. Among the responsibilities of the cultural capability adviser this was listed first

Lead development and implement an institutional language plan for the Reserve
Bank of New Zealand

You do rather get the sense, reading through the documents, that Reserve Bank staff will be under pressure to learn Maori whether they want to or not.  Again, perhaps there might be merit in that if the Bank were a customer-facing body dealing with (say) troubled families in the Ureweras, but this is the (wholesale) central bank.

I don’t suppose anyone (perhaps other than the Governor, and probably not even him –  he’s smarter than that) really believes the nonsense front line rhetoric about better policy.   It all seems much more about these “deliverables”

TAM 3

In other words, how “woke” can we be?

It is all pretty incoherent.  For a start, there is that reference to the ‘growing multicultural nature of New Zealand”, and yet this is an explicit Maori strategy, with no hint of comparable ones for Chinese cultures, Indian cultures, South African cultures, Filipino cultures, Samoan cultures…..let alone, Muslim, Christian or atheist cultures.     Another $1m for each perhaps? I thought not (and nor should there be).

Perhaps all this stuff will go down well among some in the Labour Maori caucus, in the further reaches of the Green caucus, and among some of those the Governor will be distributing largesse among.  Perhaps Guyon Espiner will be a bit softer next time he interviews the Governor.  But I find it harder to believe that this sort of strategy is going to, in any way, enhance the Bank’s standing in middle New Zealand.  And nor should it.   As for staff, I suspect there will be a selection process at work (perhaps a bit like the Treasury) – capable people who care more about serious analysis and policy (actually doing the Bank’s statutory job) will select out (or not be hired) and the place will increasingly be filled with cheerleaders for the Governor’s political and social agendas.

I don’t usually like to scoff at overseas travel budgets – there is often real value in building connections and relationships –  but I had to in this set of documents.  $40000 for international travel for a Maori strategy, when Maori culture has no substantial home but New Zealand, seeemed, shall we say, not exactly an abstemious use of public money.

Here is a graphic for the Governor’s Maori strategy

TAM 4.png

The writing is a bit hard to read, but it is just full of earnest trendy, rather unsubstantiated, feel-good stuff.  Unconscious bias holds back the Bank’s policy outputs we are told.  It would be fascinating to see the evidence base for that, including (for example) why it was an issue around Maori dimensions of the economy/financial system and not, say, Chinese, Indian or Fililpino bits.   Fortunately, monetary and banking policy operate  indiscrimately (in the good sense of that terms) –  there is, for example, precisely nothing the Bank can do that will affect long-term unemployment at all, let alone differentially affect that of Maori.  It is all a political front, using your money.   But –  bottom right corner –  no doubt the Governor and has staff will be self-actualising in a humanistic way.

(Oh, and recall that that island –  pictured in the top right hand corner –  isn’t even New Zealand, but Bora Bora –  the Maori strategy moving the Bank towards French Polynesia!)

I could go on, but I’ll leave it to anyone interested to plough through the verbiage (“we will actively seek to operate within the virtuous circle of sustainable economic development”, or references to “Cultural Security” – did this get lost from an MCH document?) and the rather non-questions (“Do Maori use cash differently to other people groups?” –  perhaps Catholics, atheists, Freemasons. Green Party supporters, or lefthanders do as well, but why would we want to spend scarce public money to find out?).

One of the points former Bank of England Deputy Governor Paul Tucker made in his book, Unelected Power, that I wrote about quite a bit last year, is that when central bankers start pursuing issues that range well beyond their narrow areas of specific responsibility, they run a real risk of undermining the willingness of the wider community to let them (fallible individuals, with limited accountability) exercise the discretionary power in their core responsibilities.  Sometimes people will agree with the errant central bankers on individual issues –  I often agreed with the substance of what Don Brash was saying when he strayed off-reservation, even as I thought he was very unwise to do so –  but over time it leaves a growing proportion of the population uneasy about overmighty public officials using platforms and money provided by all of us to pursue personal whims, personal social and political agendas.      If we can’t have a central bank that (a) sticks to its knitting, and (b) does that knitting excellently, we might as well just hand all the powers back to the politicians.  We elected them and can kick them out again.  We just have to put up with the Governor pursuing his whims at our expense, with very few effective constraints.