An unserious organisation, with serious consequences

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

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

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

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

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

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

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

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

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

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

OIA barclay

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

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

If you want sceptical analysis and argument:

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

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

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

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

Powerful unelected public appointees

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other people’s money

Our taxes –  explicit or otherwise – pay for the whims and initiatives of politicians and public servants.  One might like to think that these people would spend our money at least as abstemiously as they would spend their own –  rather more so, one might hope, since they know they’ve taken it from us coercively.   For those given to personal extravagance we might hope they’d be particularly conscious of the need to avoid taking the same approach with other people’s money.

But the incentives are all wrong aren’t they?  It is not their own money, so why would they be anywhere near as careful with it as they would with their own?

At least politicians are in the public spotlight (even if the OIA still doesn’t apply to MPs), visible in their local communities.  Ministers face possible questions in the House each week, and all politicians face the threat of loss of office, perhaps loss of job altogether.   Elections do something to sharpen the focus of accountability.

And Cabinet ministers are accountable for government departments,  themselves funded by annual parliamentary appropriation, a cornerstone of the protections for citizens built into our system.

There are no such protections when it comes to the Reserve Bank.    All spending (and other management) decisions are made by one unelected official, not even directly appointed by a minister.  The Governor is, notionally, overseen by the Bank’s Board, but historically they’ve seen their primary role as championing the Governor, not protecting the interests of citizens.  And there are no annual appropriations.  By law, the Bank can spend whenever it likes – and, after all, it “prints” the stuff (electronic and physical).  The law provides for a (voluntary) five-year funding agreement, and if such an agreement is signed it is subject to ratification in Parliament.  But the Bank discloses the same level of detail about its plan for spending over the following five years as, say, the SIS does.  And, unlike the SIS, not even that one line number is binding.   It is, of course, all but impossible to get rid of the Governor.  In other words, little or no effective accountability around their stewardship of our money.

In recent decades, the Bank has tended to be a relatively abstemious place, partly reflecting the influence and example of Don Brash.   Arguably, in some areas, it even overshot a little.  But the culture of excess seems to be creeping back in: not so much gold-plating working conditions or salaries, but other sorts of waste.  Take this advertisement from the Dominion-Post this morning.

RB maori advert

Perhaps there are dozens, even hundreds, of such positions around the myriad of public sector agencies.  In some cases, it probably even makes sense for such positions to exist.

But this is the Reserve Bank.  It does three main jobs, none of which ever involve dealing directly with the general public; Maori, European, Chinese, Mexican or whatever:

  • 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 activiity (in the short-term) and prices without distinction by race 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 or culture.

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).

But the new Governor –  49 weeks in and still no substantive speeches about things he is actually responsive for –  is clearly enamoured of things Maori.  A fine thing no doubt for him personally. But here he is running a major public agency, using public money.

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.

Monetary policy operates in much the same way whatever the colour of skin, or  culture, of the agent.  Bank notes are as useful to us all.  And financial sector regulation isn’t going to be –  or shouldn’t be –  any different.  Perhaps we’ll have a Presbyterian cultural competency adviser next, or a Catholic culture one?

It all has the feel of personal virtue-signalling at your expense and mine; the Governor pursuing his political or other personal aspirations, rather than being a position a high-performing Reserve Bank actually needs.

Anyway, you can read the rest of the advert for yourself, including noting that this isn’t just one position.  This “cultural capability advisor” is to work with the “Project Manager (Te Ao Maori strategy)” already in place.

Arguably, this specific position is less ridiculous than the whole “Reserve Bank as tree god” nonsense the Governor continues to expound, complete with the island vision, that just happened to be represented in his glossy pamphlet by the rather expensive foreign resort of Bora Bora.

RB island

But if it is less ridiculous, it is even more wasteful – annual salaries for experienced “cultural facilitators” won’t come cheap.   The present value cost of this initiative is at least $1 million (I’ve lodged an OIA request for the relevant background papers and costings).

Just a week or two ago, the Deputy Governor claimed that the Bank needed more resources to do properly its financial regulation role (I even expressed some mild sympathy for that position).  Not on the evidence of this advert, which suggests a very curious sense of priorities.

But if they do have that sort of money floating around, it might be considerably more productive –  and more attuned to their statutory responsibilities –  to, for example, conduct and publish some serious research and analysis around their aggressive bid to require banks to have much more capital funding, or to respond to some of the critiques that Ian Harrison posed in his paper earlier this week.   Serious money is at stake in what they propose –  billions of dollars.   But that isn’t the Governor’s money, or the Bank’s.  It was –  or would have been –  your money and mine.  Only the Bank proposes to, on its own numbers, obliterate –  billions of dollars of future income we’ll just never have, in pursuit of an exaggerated uncertain saving decades hence, not grounded in serious analysis.

But no doubt the Governor will be welcome at all those “powhiri, whakatau, wananga, hui and other engagements”.

It is nonsensical virtue-signalling, without substance.  And at your expense, not the Governor’s.

Unelected officials wielding too much power

The Governor of the Reserve Bank is currently consulting on his own proposal that would markedly increase the share of their balance sheets New Zealand registered and incorporated banks have to fund from equity.     Whatever the possible merits of this proposal –  saving some possible, but highly uncertain, costs in several decades’ time – it is an expensive proposition.   From the economy’s perspective, if his deputy is to be believed, we’ll all be poorer (level of annual GDP permanently lower) by about 0.25 per cent.  In present value terms, that is a cost in the range of $15 to $20 billion.    As for the owners of the banks themselves, they will have to stump up billions in new capital just to keep doing the business they are doing now.  Among other options, the Deputy Governor cavalierly observes, they could simply sell off part or all of their business (which seems to be one of the possible outcomes the Governor would quite like –  with no statutory authoritiy – to see).

All on a whim, supported by flimsy analysis at best.  And with few or no protections for citizens or for the owners of the directly affected private businesses.  Government in a free society shouldn’t be done this way.   And mostly it isn’t.   Mostly there are a lot more checks and balances.   But not when it comes to the Governor of the Reserve Bank exercising his extensive regulatory powers over banks.

Typically, if a bureaucrat has a bright idea about a new rule or law, he or she first has to persuade the bosses of their own agency.    Even if they are persuaded, the boss then has to persuade the relevant minister.  The minister might have to persuade his or her Cabinet colleagues (at which point other relevant government agencies will have input to the Cabinet paper).  And Cabinet may even need to persuade Parliament, a process which involves select committee submissions (which are public), deliberations and reports back, sometimes through a committee chaired by an opposition party MP.   Even if it is the minister who has the bright idea –  and ministers are actually elected, and can be tossed out again (either by the PM instantly or at the next election) –  it will still typically have to go through much the same sort of process –  referred to the relevant agency/department for advice, and so on as above.    Heads of agencies/departments don’t set out to gratuitously upset ministers, but they do have an degree of independent status and authority and can, and sometimes do, offer free and frank advice on a minister’s bright ideas.

Contrast that with what happens when the Reserve Bank has a bright idea around the regulation of banks (“hey, how about we double the amount of capital banks have to have?”).  If there are any formal checks and balances, they are about process only.  I’m sure staff still come up with ideas –  good ones and daft ones –  and not all of them are accepted by management.

But if an idea comes from the Governor, or is once accepted by the Governor, things quickly become all-but-unstoppable.   After all, all the power (around the regulation of banks) rests with the Governor personally.     Someone who wasn’t elected, and wasn’t even directly appointed by someone who was elected –  rather he was chosen by half a dozen faceless company director types who themselves have no accountability and little or no subject expertise.     All the executive power with in the Bank also rests with the Governor personally (not necessarily a problem in itself, except in conjunction with that extensive policymaking power).   If we blessed with a highly competent saint as Governor –  of equable temper, open mind, encouraging dissent etc etc –  none of this might matter much.    But such people will be (exceedingly) rare: we need to build institutional arrangements around the crooked timber of humanity; people with all their flaws, biases etc.   Few of us are as ready to acknowledge the weaknesses in cases we are advancing, championing, as might objectively be warranted.  That is human nature, not something to specific to central bank governors.  It becomes harder to change our minds the more we’ve nailed our personal colours to the mast.   Everyone recognises that, which is why most serious decisions involve multi-stage processes, appeal or review rights etc.  In the criminal system, you can’t be prosecutor, judge, jury, and appellate court in the same case –  even in places like the PRC, in the deference vice pays to virtue, they observe the form of distinctions like this, although not the substance.

And yet that is exactly how the bank capital proposals are handled.    It is not even as if there was any socialisation of the ideas, testing of the argumentation, with interested and/or expert parties in advance of the Governor’s proposal being announced.  Instead, with little or no preparation of the ground, the person who will be the final decisionmaker launched his radical proposal.   Understandably, he and staff now champion that proposal in public fora (interviews, speeches etc).  But how then do we suppose that the Governor will be able to bring the requisite degree of objectivity and detachment to the submissions that come in.       No doubt, he will do enough to get through the legal hoop of “having regard to” the material in the submissions, but that is much much too weak a standard when he is prosecuting a case in which he will also be judge.  Imagine a criminal case in which the prosecutor was also judge (and there were no substantive appeal rights): the prosecutor/judge might swear black and blue that they would take seriously defence evidence/arguments, but no one –  no one –  would regard that as a credible or appropriate model.   It isn’t either when it comes to multi-billion dollar regulatory decisions.

The problems are compounded when the people most directly affected by the Governor’s regulatory whims have to keep on his good side because the Governor wields a great deal of discretion around other things that matter to individual banks (approval of models, approval of instrument, approval of individuals).  That has typically left banks very reluctant to say anything much in public about what the Governor might be proposing, no matter how potentially costly or troublesome those proposals might be.  From their own perspective, that might be the best course open to them.  It isn’t a pathway to good policymaking, or robust decisionmaking around bank regulatory matters.

There is no need for things to be done this way.   A more-normal process would involve major policy decisions being made by the Minister of Finance, or preferably Cabinet.  The Minister would want to take expert advice from the Reserve Bank and from the Treasury, and it might even open to those agencies to champion their preferences in a consultative document.   But when unelected people are championing change, they shouldn’t also be the ones making final decisions, with no appeal or review rights.  (All the more so in a structure like the current Reserve Bank one in which all power rests with a single individual –  a highly unconventional, inappropriate, governance structure for major regulatory powers.)

The specific issues are totally unrelated, but I had much the same thoughts –  too much power resting with unelected unaccountable bureaucrats –  when I listened to the Police Commissioner on Morning Report yesterday asserting his absolute right to decide whether or not Police routinely carry guns.   (This is the same Police Commissioner who thought it appropriate to give the eulogy, praising the man’s integrity, at the funeral of a former policeman found to have planted evidence.)  The mantra of “operational independence” was chanted, in ways reminiscent of the Reserve Bank.

I’m not clear whether the Polce Commissioner really has the power he claims (although successive ministers seem to have been willing to defer to that view), but when I looked up the Policing Act it contained a high-level distinction between matters for the minister and matters for the Commissioner that seemed appropriate.

police

The items under 16(2) seem like exactly the sort of areas we don’t ministers involved in: the Minister of Police should never be able to tell Police to arrest, or not arrest, a friend or enemy  (any more than the Minister of Finance should be able to tell the Governor to go easy on bank x and hard on bank y, where cronies might be involved) or interfere in individual personnel decisions

But applying the law to all people without fear, favour or political interference is very different than a general policy question as to whether, say, Police should routinely carry guns.  That is the sort of choice (including about what sort of society we want to be, what risks we will accept, or not) that only elected politicians – directly accountable to us –  should be making.    The incentives are all wrong otherwise.  I’m strongly opposed to routinely arming Police, but I’m even more opposed to letting the Police Commissioner get away with assertions that it is a decision for him alone to make.  If that really is the law, it should be changed.    No matter how much Police Commissioners like to tell you they serve the public, historically they (and probably any bureaucracy) will tend to serve its own interests more.  Thus, I noticed an article in which the southern police commander, asked what kept him awake at night, replied that it was safety of his officers.  That is natural, and not even necessarily inappropriate (and health and safety laws apply to Police management too) but against that has to be weighed other interests – for example, the rights of law-abiding citizens not to live in fear of Police, the rights of innocent people not to be deprived of life by a Police officer acting rashly (it happens) and so on.  It is simply unreasonable and inappropriate to allow Police themselves to make such policy decisions.

Democracy isn’t perfect by any means, just less bad than the alternatives.  And one of those alternatives involves delegating a great deal of power to unelected unaccountable bureaucrats.   When big policy decisions –  whether about capital structures of banks, or routinely arming the Police force –  are involved, only those who are elected –  and thus able to be unelected – should be making the decisions.  And when officials are championing any particular cause, they shouldn’t be the ones making the final decisions, the more so when there are no appeal rights.  Too often, of course, it suits politicians to opt out –  not just here, it has been a huge problem in the US Congress for decades –  but if they aren’t willing to make and defend hard decisions themselves perhaps they should consider another occupation.   We want and need experts for (a) advice, and (b) implementation.  But the big choices should be made only be those whom we elect, and can toss out again.   Neither Adrian Orr nor Mike Bush has got themselves elected.

 

 

The apostle of the tree god

There wasn’t going to be a post today but then someone sent me the link to a super-soft interview the Herald’s Liam Dann had done with Reserve Bank Governor Adrian Orr.   Had the Bank’s own PR consultants been scripting the interview it would scarcely have been softer (in fact, they might have advised a couple of serious questions to give the resulting interview a bit of credibility).

Orr will by next week have been in office for 11 months, wielding vast amounts of policymaking power singlehandedly, and yet we’ve still not had a single speech on either of his main areas of responsibility; monetary policy, and the regulation of much of the financial system.  But there is still time to play the tree god line (that’s the Herald headline: “Orr embraces the forest god”).

I’ve written about this silliness before.  Extracts

The latest example was the release on Monday of a rather curious 36 page document called The Journey of Te Putea Matua: our Tane Mahuta.   Te Putea Matua is the Maori name the Reserve Bank of New Zealand has taken upon itself (such being the way these days with public sector agencies).  It isn’t clear who “our” is in this context, although it seems the Governor  – himself with no apparent Maori ancestry – wants us New Zealanders to identify with some Maori tree god that –  data suggest –  no one believes in, and to think of the Reserve Bank as akin to a localised tree god.  Frankly, it seems weird.  These days, most New Zealanders don’t claim allegiance to any deity, but of those of us who do most –  Christian, Muslim, or Jewish, of European, Maori or any other ancestry – choose to worship a God with rather more all-encompassing claims.

But the Governor seems dead keen on championing Maori belief systems from centuries past.    In an official document of our central bank we read

A core pillar of the evolving Māori belief system is a tale of the earth mother (Papatūānuku) and the sky father (Ranginui) who needed separating to allow the
sun to shine in. Tāne Mahuta – the god of the forest and birds – managed this task after some false starts and help from his family. The sunlight allowed life to flourish in Tāne Mahuta’s garden.

This quote appears twice in the document.

All very interesting perhaps in some cultural studies course, but what does it have to do with macroeconomic management or financial stability?  Well, according to the Governor (in a radio interview on this yesterday) before there was a Reserve Bank “darkness was on our economy”.  The Reserve Bank was the god of the forest, and let the sun shine in.  Perhaps it is just my own culture, but the imagery that sprang to mind was that of people who walked in darkness having seen a great light.   But imagine the uproar if a Governor had been using Judeo-Christian imagery in an official publication.

On the same page we read

Many of these birds feature on the NZ dollar money including the kereru, kaka, and kiwi – core to our belief system and survival.

I’m a bit lost again as to who “our” is here.  I’m pretty sure I’m like most New Zealanders; I never saw a bird as “core” to my “belief system”.  Perhaps the Governor does, although if so we might worry about the quality of his judgements in other areas.

As I say, it is an odd document.  There are pages and pages that have nothing whatever to do with monetary policy or the financial system.  Some of it is even quite interesting, but why are we spending scarce taxpayers’ money recounting stories of New Zealand general history?  …. There is questionable history,….highly questionable and tendentious economic history, and overall a tone (perhaps comforting to today’s liberal political elite) that seems embarrassed by the European settlement of New Zealand.     There is lots on the difficulties and injustices that some Maori faced, and little or nothing on the advantages that western institutions and society brought.  Reasonable people might debate that balance, but it isn’t clear what the central bank –  paid to do monetary policy and financial stability –  is doing weighing in on the matter.

As I noted earlier, in a radio interview yesterday the Governor claimed that prior to the creation of the Reserve Bank ‘darkness was on our economy’, that the Reserve Bank had let the sunshine in, and that Australia and the UK had somehow turned their backs on us at the point the Bank was created.   In fact, here it is – Reserve Bank as tree god –  in the document itself.

The Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the economy.

I think there was a plausible case for the creation of a central bank here, but to listen to or read the Governor you’d have no idea that New Zealand without a Reserve Bank had been among the handful of most prosperous countries in the world.  Here from the publication, writing about the period before the Reserve Bank was created

The infrastructure funding was further hindered by the banks being foreign-owned (British and Australian) and issuing private currency. Credit growth in New Zealand was driven by the economic performance of these foreign economies, unrelated
to the demands of New Zealand. Subsequent recessions in Britain and Australia slowed lending in New Zealand when it was most needed.

Very little of this stands much scrutiny.  You’d have no idea from reading that material that the New Zealand government had made heavy and persistent use of international capital markets, such that by 1929 it –  like its Australian peers –  had among the very highest public debt to GDP ratios (and NIIP ratios) ever recorded in an advanced country.  You’d have no idea that New Zealand was among the most prosperous countries around (like Australia and the United States, neither of which had had central banks in the decades prior to World War One).   You’d have no idea that the economic fortunes of New Zealand, trading heavily with the UK, might reasonably be expected to be affected by the economic fortunes of the UK –  terms of trade and all that.   Or that economic cycles in New Zealand and Australia were naturally quite highly correlated (common shocks and all that).  And of course –  with all the Governor’s talk about how we could “print our own money” – within five years of the creation of the Reserve Bank, itself after recovery from the Great Depression was well underway, that we’d not unrelatedly run into a foreign exchange crisis that led to the imposition of highly inefficient controls that plagued us (administered by the evil twin of the tree god?) for decades.  Or even that persistent inflation dates from the creation of the Reserve Bank

One can’t cover everything in a glossy pamphlet, even one that seems to purport to be aimed at adults (including Reserve Bank staff according to the Governor), but there isn’t much excuse for this sort of misleading and one-dimensional argumentation, aka propaganda.

The propaganda face of the document becomes clearer in the second half.   Among the issues the government’s review of the Reserve Bank Act is looking at is whether the prudential and regulatory functions of the Bank should be split out into a new standalone agency, a New Zealand Prudential Regulatory Authority.  …. There are arguments to be made on both sides of the issue, but you wouldn’t know it from reading about the Governor’s vision of the Bank as a Maori tree god, where one and indivisible seems to be the watchword.      Everything is about “synergies”, and nothing about weaknesses or risks, nothing about how other countries do things, nothing about the full range of criteria one might want to consider in devising, and holding to account,  regulatory institutions for New Zealand.

I don’t have any problem with officials, including from affected agencies, offering careful balanced and rigorous advice on the pros and cons of structural separation. But that is a choice ultimately for ministers and for Parliament.  And among the relevant considerations are issues of accountability and governance.  Neither word appears in Governor’s propaganda piece.   But then tree gods probably aren’t known for accountability.  New Zealand government regulatory institutions should be.   If ministers and Parliament decide to opt for structural separation, I wonder how the Governor will revise his document –  his tree god having been split in two.

Among the tree god’s claims about financial regulation and what the Bank brings to bear was this breathtaking assertion, prominently displayed at the head of a page (p27).

The Reserve Bank is highly incentivised to ‘get it right’ when it comes to prudential regulation. We have a lot at risk

It is an extraordinary claim, that could be made only be someone wilfully blind –  or choosing to ignore –  decades of serious analysis of government failure, and the institutional incentives that face regulators, regulatory agencies, and their masters.

There is nothing on the rest of that page to back the tree god’s claim.   On any reasonable and hardheaded analysis, the Reserve Bank has very weak incentives to “get it right”, or even to know –  and be able to tell us –  what “get it right” might mean.   When banks fail, neither the Reserve Bank Governor nor any of the tree god’s staff have any money at stake (at least in their professional capacity, and as I recall things, Reserve Bank staff – rightly –  aren’t allowed to own shares in banks).  It is all but impossible to get rid of a Reserve Bank Governor, and it is even harder to get rid of staff (for bad policy or bad supervision).  Most senior figures in central bank and regulatory agencies of countries that ran into financial crises 10 years ago, stayed on or in time moved on to comfortable, honoured (a peerage in Mervyn King’s case) retirements, or better-remunerated positions in the private sector.

And when the Reserve Bank uses its powers in ways that reduce the efficiency of the financial system, or stopping willing borrowers and willing lenders writing mortgage contracts, where are incentives on the Reserve Bank to “get things right”.  There are no personal consequences –  the Governor and his senior staff either won’t have, or would have no problem getting, mortgages.  The previous Governor got to exercise the bee in his bonnet about housing crises, and to play politics, with no supporting analysis and no effective accountability.    The current head of the tree god opines that lenders and borrowers can’t be trusted –  but tree gods apparently can –  but when challenged produced no analysis to support his claim.  That sort of system creates incentives for sure, but they aren’t to “get it right”.

End of extracts.  2019 here again.

The Governor was at it again in the interview, including running his bizarre version of economic history in which “sunshine” was let in upon the New Zealand economy in 1934  (there was also the surprising claim that the banks had chosen to graft themselves into the Reserve Bank, apparently oblivious to the fact that the main banks have been around New Zealand a lot longer than the Reserve Bank).

The Governor claims his metaphor is wildly popular –  except among “two bloggers” apparently (although I could give him a rather longer list of sceptics) –  and I’m sure it is in some quarters. It probably sounds cool, accessible, relevant and so on. But metaphors can be used for good and for ill, and the Governor attempting to have us all think of the Bank as akin to a tree god doesn’t serve the public interest well at all, even if it happens to suit his personal campaigns.

There were plenty more questionable claims made by the Governor is the course of the interview.  Some of them literally invite questions –  they might be true, or they might not, we just don’t know.  For example, the Governor claims that his proposed new capital requirements will be “in the pack” by international standards, but they’ve not yet shown any evidence to support this claim (especially once one takes account of their irrational distaste for cheaper Tier 2 capital, and for the high minimum overall risk weights they are planning to impose).  It should be a simple matter to put the evidence and analysis out there for scrutiny, but instead apparently we are simply supposed to trust this apostle of the tree god.

Then there was the claim –  made in the consulative document but not supported with one shred of serious analysis or evidence –  that the Bank’s proposed capital requirements will make the economy not only safer but also more efficient.  I’ve shown this chart previously

something for all

In today’s interview he explicitly asserted that New Zealand –  and all other advanced economies –  are to the “south-west” of that green dot.     Perhaps he’s right, but you’d think there would be some support offered for these “free lunch” claims.  It isn’t in the consultative document, it wasn’t in the Governor’s interview.  Perhaps  (at last) it will be in the Deputy Governor’s speech next week?

The interview ended with a super-soft invitation to the Governor to campaign for more taxpayer’s money, more staff, and more financial resources.   Perhaps there is a case for more  (actually I suspect there is).   But the idea that we should put more of our scarce money in his hands isn’t as persuasive as it should be when we get repeated doses of this tree god silliness, attempts at playing politics, repeated bold claims that just aren’t supported (complete with assertions that people who disagree him haven’t read his documents –  the problem is, they have), diversions onto all manner of things that just aren’t his responsibility, and a lack of serious –  as opposed to superficial –  transparency and accountability.

UPDATE: The interview and accompanying article might have been incredibly soft, but in many respects the sub-editors of the hard-copy Herald say it all with their headline on the front page of Saturday’s business section: “How Maori myth is guiding the Reserve Bank”.    Were it so –  and even I don’t think it really is –  it would explain a lot about the policy and comms mis-steps……

And as a commenter overnight observed

It shows how bad things have gotten in New Zealand – not so much that he makes these examples but because no one else even thinks to challenge it. Imagine the reaction if the Bundesbank president started discussing policy in terms of Odin and Thor…. he’d get locked up…

 

KiwiBuild: the Reserve Bank and crowding out

Last week, in association with the Monetary Policy Statement, the Reserve Bank published a short separate paper outlining how it was treating KiwiBuild for forecasting and monetary policy purposes.   The bottom line was

The Bank has assumed that half to three quarters of what KiwiBuild contributes to residential investment will be offset by crowding out of other private investment over the forecast horizon.

It isn’t that different an assumption than they have been making since the current government first took office.   This was what they wrote in the November 2017 Monetary Policy Statement

The Government has announced an intention to build 100,000 houses in the next decade…..our working assumption is that around half of the proposed increase will be offset by a reduction in private sector activity.

But, of course, then they refused to show us their workings or give us any supporting analysis.

I made brief reference to the new paper in my post last week on the MPS.  My main point then was to commend the Bank for publishing the separate paper, but in passing I noted.

(As it happens I remain rather sceptical of the assumption that KiwiBuild is going to be a significant net addition to total residential investment over the next decade.  Why would it, when the main issues in the housing market are land prices and, to a lesser extent, construction costs, and it isn’t obvious how KiwiBuild deals with either of them?  If it proves to be a net addition, it will probably be because it is a subsidy scheme for the favoured –  lucky – few.)

Today I went to spend a bit of time elaborating on that argument, and unpicking some of economic arguments in the Bank’s paper.

(Note that although the Bank’s paper has been reported as making difficulties for the government – and perhaps it has – in fact some of it is written as if it were a publication from the government.  It (repeatedly) talks of KiwiBuild houses as affordable, with no quote marks around that description/claim let alone any analysis of what affordability might really mean.  And there is the heartwarming talk of how it designed to “increase home ownership among New Zealanders”.)

The most puzzling aspect of the paper is that the Bank focuses wholly (but only partially) on one possible channel for crowding out and totally ignores another.

Their focus is on capacity constraints in the construction sector.   The claim is that there just isn’t enough labour, and that if the Crown insists on building 10000 additional houses each year it just won’t be possible, as there won’t be the workers.   That doesn’t seem a particularly compelling argument to me, at least over a multi-year horizon.

Over the past year, the national accounts records constructions (residential, non-residential, and other) of almost $40 billion in New Zealand.  Add on top of that (this is all hypothetical) say $2-2.5 billion of KiwiBuild spending a year (the government provision was $2 billion, and the Bank is assuming  –  after crowding out two-thirds –  a net total addition of $2.5 billion over three years) and it would represent an increase from the current level of not much more than 5 per cent.   And, sure, the construction workforce in New Zealand is quite large at present (240000 employed, in the HLFS) –  thus, the Bank argues it can’t really increase further –  but it looks to have been about the same size in Ireland at the peak of their construction boom, when their population was 10-15 per cent less than ours is now.    People change jobs, people postpone retirement, people put off going to Australia (as examples) if the price is right, if the good opportunities are there.  And, although the Bank’s analysis doesn’t mention it,  Australian residential construction activity is now tailing off quite sharply so – again, if the price is right –  you might expect some Australian builders, or expat New Zealanders, to try their luck back here.

I mentioned price a couple of times in that paragraph.    The Reserve Bank’s document doesn’t do so at all (aside from a couple of references to price caps on KiwiBuild houses).  Prices are signals and rationing devices.  You’d have thought the Bank’s economists would think to mention them.  In fact, prices (changes therein) are typically how crowding out works (eg in a fully-employed economy an increase in government spending will tend to boost demand, but will drive up interest rates and the exchange rate –  prices –  crowding out other activity and leaving the overall level of economic activity little changed.    But the fact that the multiplier might be zero doesn’t mean a central bank could just ignore a government that talked of a big increase in spending in a fully-employed economy.  Part of the crowding-out process arises from the monetary policy response (otherwise, it would happen through inflation).

And so the oddity of the Bank’s crowding-out analysis is that it seems to (a) focus on resource availability, and yet (b) simply assumes that the crowding out occurs without any associated price signals or inflation pressures.  Markets tend not to work that way.

At least in the abstract you would have thought the Bank would have wanted to treat the entire KiwiBuild programme as an exogenous boost to demand (whether or not they think it will actually happen their standard operating procedure is –  prudently so –  to assume that government policy is as stated), and then trace through the mechanisms whereby any crowding out occurs.  In this case, for example, one might perhaps expect to see higher wages, higher construction costs (a direct component in the CPI), and perhaps even a higher OCR (than otherwise) as part of the freeing-up/crowding-out process.   The bottom line still might have been the equivalent of half to three quarters of other investment crowded out. But how you get there matters.  If it is a resource constraint story, you can’t simply assume resource constraints have no price consequences.  But, as they’ve told the story, the Reserve Bank seems to have.

Of course, “capacity constraints” is a politically convenient story.  It links to government rhetoric on skills, for example, and even (fallaciously) to the government’s enthusiasm for immigration.  And it channels an implicit story –  never backed with evidence –  that there is some unexploited wedge out there in which, given current laws and regulation, construction material costs, and bureaucratic practices, new houses (including land) can be built more cheaply than current house (including land) prices.  It is only “capacity” –  or just possibly finance –  that holds us back.  I doubt any serious analyst really believes such a story.  There is also an implied story about homelessness –  as if there would be 300000 not housed at all (or grossly inadequately housed) if the government didn’t initiate 100000 new dwellings, “affordable” or otherwise.  Again, that just isn’t plausible.

So, although I do want to run a “crowding out” story, it is a quite different one than the Reserve Bank is spruiking.  On my story, there could be as many builders and associated tradesmen and labourers as you like –  resources flowing easily, with high elasticities, into building as required, with barely any change in prices –  and over any reasonable horizon (say, five to ten years) a credible government announcement that it will build 100000 more houses will, to a first approximation, reduce the construction of other houses by 100000 over that period.    It almost has to be that way because:

  • announcing that as a government you are going to build lots of houses doesn’t change land use law or land availability.  It is what it is –  whether in Auckland or elsewhere.  Everyone recognises that (artificially regulated) land scarcity is a huge component in the high cost of New Zealand houses.   Other government policy measures may yet act on the land use issues, but this is a debate about KiwiBuild, in the existing regulatory system,
  • announcing that you are going to build lots of houses isn’t likely to materially alter the price of building materials in New Zealand, and
  • it isn’t going to materially alter regulatory approval timeframes and related things that (for example) affect financing costs.

In other words the marginal supply price of a new residential property –  like for like in its features –  doesn’t change.    Fix those things and there will be more effective demand for houses from the existing (and projected) population: building activity could really step for quite a while (and some of those capacity constraint and resource pricing issues could be relevant for a few years).    But if you don’t change any of those things –  and KiwiBuild doesn’t materially change any of them –  you’ll end up with no more houses, unless (and only to the extent) that the government-sponsored construction doesn’t cover true costs, and effectively offers a subsidised entry to the market for the favoured few.  Even then, the effect will mostly be to drive out more private construction, but there might still – at least for a time –  be a net increase in the housing stock.

Rational owners of developable land (whether on the fringes or where there is scope for intensification) and potential developers will either know all this consciously, or discover it as they explore the economics of projects they have in mind. KiwiBuild isn’t like (say) a large scale government motorway expansion scheme, when the government has a monopoly on motorway supply.  If the government is determined to build more houses under its badge, there would then (prospectively) be more competition and the expected profits margins and the ability of the private developer to get the returns he or she hoped for will be undermined.  There aren’t super-profits in this business, and if projects no longer look as profitable, many just won’t proceed.   It isn’t as if the government can gear up housebuilding faster than they can either wind back their projects, or look to get their projects branded KiwiBuild, or their land and resources used for KiwiBuild.

To be sure, all this is highly-stylised.  Champions of KiwiBuild will tell me that the programme will build a specific type of house that the market isn’t building.  And perhaps that is even true, but there is plenty of substitutability within the housing market.  And my focus is primarily on the entire life of the planned KiwiBuild programme, whereas the Reserve Bank is (rightly) focused on the next two to three years, the period relevant to today’s monetary policy and related economic forecasts.   So I’m not suggesting one should automatically assume full crowding out without any further thought but rather that (a) capacity constraints are unlikely to be the main consideration (and in any case usually involve price/wage adjustments to make them happen) and (b) full crowding out is probably a reasonable starting point for analysts, who should then justify any deviations they believe it is warranted to assume.

Perhaps the designers and champions of KiwiBuild really believed it would boost home-ownership (as the Reserve Bank claims) or boost overall housing supply. It has always had more of the feel of something with a strong sense of “we need to be seen doing something” and “doesn’t the memory of nice M J Savage bring warm fuzzies memories/feelings to mind”.  Charitably, the official policy position of the Labour Party suggested they were actually going to fix the land market – in which case KiwiBuild would just have been an unnecessary (in economic terms) inefficiency.  Sadly, a few weeks short of halfway through the government’s term very little or nothing has been done on things that might make a real difference –  actually render decent housing affordable again –  while KiwiBuild has become a politically troublesome distraction.

See, not so hard after all

Back in November 2017, just after the government took office, the Reserve Bank in its Monetary Policy Statement identified various assumptions they had made about the impact of various of the new government’s policies.  Some of these assumptions made quite a difference to the outlook, but no analysis or reasoning was presented to give us any confidence in the assumptions they were (reasonably or unreasonably) making. One of those new policies was KiwiBuild.

Seeing as the Bank is a powerful public agency, it seemed only reasonable to request copies of any analysis undertaken as part of arriving at the assumptions policymakers were using.   The Bank refused and many many months later the Ombudsman backed them up (if ever there was a case for an overhaul of the Official Information Act, this was a good example).  The Ombudsman did point out that he had to rule as at the date the request had been made.  So, a year having passed, I again requested this material.  The Bank again refused (and I haven’t yet gotten round to appealing to the Ombudsman).     Quarter after quarter the Monetary Policy Statements talk about KiwiBuild, but we’ve never seen any supporting analysis.   A state secret apparently.

Until yesterday that is.  In the latest Monetary Policy Statement there was the usual discussion of KiwiBuild –  potentially a big influence on one of the most highly-cylical parts of the whole economy –  but there was also a footnote pointing readers to an obscure corner of the Bank’s website, and a special background note on KiwiBuild, and the assumptions the Bank is making.  All released simultaneous with the statement itself.   See, it just wasn’t that hard.  And has the sky fallen?

(As it happens I remain rather sceptical of the assumption that KiwiBuild is going to be a significant net addition to total residential investment over the next decade.  Why would it, when the main issues in the housing market are land prices and, to a lesser extent, construction costs, and it isn’t obvious how KiwiBuild deals with either of them?  If it proves to be a net addition, it will probably be because it is a subsidy scheme for the favoured –  lucky – few.)

As for the overall tone of the monetary policy conclusions to the statement, count me sceptical.  At one level it is almost always true that the next OCR move could be up or down –  and in that sense most forecasting (especially that a couple of years ahead) is futile: useless and pointless.   But for the Governor to suggest that the risks now are really even balanced, even at some relatively near-term horizon, seems to suggest he is  falling into the same trap that beguiled the Bank for much of the last decade; the belief that somewhere, just around the corner, inflation pressures are finally going to build sufficiently that they will need to raise the OCR.   We’ve come through a cyclical recovery, the reconstruction after a series of highly-destructive earthquakes, strong terms of trade, and a huge unexpected population surge, and none of it has been enough to really support higher interest rates. The OCR now is lower than it was at the end of the last recession, and still core inflation struggles to get anywhere 2 per cent.    There is no lift in imported inflation, no significant new surges in domestic demand in view, and as the Bank notes business investment is pretty subdued.  Instead actual GDP growth has been easing, population growth is easing, employment growth is easing, confidence is pretty subdued, the heat in the housing market (for now at least) is easing.  Oh, and several of the major components of the world economy –  China and the euro-area  –  are weakening, and the Australian economy (important to New Zealand through a host of channels) also appears to be easing, centred in one of the most cyclically-variable parts of the economy, construction.   It was surprising to see no richness or depth to any of the international discussion –  and to see the Bank buying into the highly dubious line that any slowing in China is mostly about the “trade war”.   Few other observers seem to see it that way.

From a starting point with inflation still below target midpoint after all these years, it would seem much more reasonable to suppose that if there is an OCR adjustment in the next year or so, it is (much) more likely to be a cut than an increase.      Time will tell, including about how long the 1.5 per cent lift in the exchange rate will last.

Commendably, the Bank is now talking openly about many other economies have limited capacity to respond to a future serious downturn.  That is welcome acknowledgement, but it would count for more if the Bank were taking seriously the real (if slightly less binding) constraints New Zealand will also face in the next future serious downturn.

A couple of other things in the document caught my eye.  One was this chart

NAIRU 2019

The Bank seems to be trying to tell us that it really has no idea whether the unemployment was above or below the NAIRU at any time in the last 17 years.  I don’t suppose in practice they operate that way, but when they present a chart like this it is a bit hard to take seriously the other bits of their economic analysis.

The other specific was some rather upbeat comments on productivity performance in recent years, which has led the Bank to the view that they now to expect no acceleration in productivity growth in the years ahead.  The Governor always seems to err on the (politically convenient) upbeat side.  I’m not sure quite how the Bank derives their productivity measure –  I’m guessing as some sort of per person employed measure –  but as a reminder to readers here is the chart of real GDP per hour worked, the standard measure of labour productivity.  To deal, to some extent, with the noise in the individual series, I use both measures of quarterly GDP and both (HLFS and QES) measures of hours.

real GDP phw dec 18

There has been no labour productivity growth for the last three or four years, and little for the last six or seven.  I wouldn’t be surprised if the Bank is right to expect no acceleration (on current policies), but if we keep on with near-zero labour productivity growth it is a rather bleak prospect for New Zealanders.

A great deal of the press conference was taken up with questions –  generally not very sympathetic –  about the Governor’s proposals to increase substantially capital requirements for banks.   In the course of the press conference he and Geoff Bascand made some reasonable points –  including about the merits of putting the big 4 banks and the smaller banks on a more equal footing in calculating requirements – and at least fronted up on the other questions.  It is just a shame this was being done reactively now, rather than pro-actively when the proposals were first released in December.

I remain rather sceptical of the Bank’s case –  in which everything is a win-win, in which the economy is safer, more prosperous, and even with lower interest rates.  If you doubt that I’m characterising their bold claims correctly, this is the stylised diagram that leads the consultative document.

something for allIt is a free lunch they are claiming to offer.  I suspect few will be convinced.

In the course of the press conference, the Governor asserted that the Bank’s proposals will, if implemented, mean that future capital ratio requirements would be “well within the range of norms” seen in other countries.  I found that a surprising claim, and there is nothing –  not a word – in the consultative document to back it up.  If true, it would be material in thinking about the appropriateness of the Bank’s proposals.  But where is the evidence (granting that this is something that can’t be answered in a ten second Google search)?  I’ve lodged an Official Information Act request for the analysis the Governor is using to support his claim.  It would, surely, be in his interests to have such analysis out there.

Also at the press conference, there was the hardy perennial claim that inflation expectations are “well-anchored” at 2 per cent, and everyone believes that monetary policy is just fine.  As my hardy perennial response, here are inflation breakevens from the government bond (indexed and conventional) market.  The last observation is today’s data.

IIB breakevens feb 19

People with money at stake don’t seem to believe you Governor.  Last time things got this low a series of OCR cuts only helped, at least partially, rectify the position.

And, finally, who does the Bank suppose gets any value at all from the cartoon version of the statement?  For example

cartoon

Is the Monetary Policy Statement now a set text in intermediate school?  If the kids are especially naughty do they have to read it twice?   Even your average MP, sitting on the Finance and Expenditure Committee and supposedly holding the Bank to account, has to be able to cope with a little more than that.  I’m not expecting much of the new statutory MPC, but perhaps they could prevail on the Governor to drop the cartoons and simply write in reasonably accessible English?

Later this morning we get the Remit (PTA replacement) and Charter for the new Monetary Policy Committee.  I’m sure I’ll have some thoughts about them tomorrow.