Reserve Bank

Towards a better-governed Reserve Bank

Michael Reddell Governance, Reserve Bank

Yesterday saw comments on Reserve Bank governance from a couple of senior politicians.

The Green Party’s new finance spokesperson, Julie Anne Genter, put out a press release yesterday arguing that

The Reserve Bank made the right decision today to cut the OCR – effectively reversing the mistaken OCR increases in 2014 – but concentrating this power in just one person isn’t the right way to make good decisions,” Green Party finance spokesperson Julie Anne Genter said.

“We’d like to see the Reserve Bank’s decision-making power broadened to more than just one person – decision making by a panel of experts from across the economy would be in line with what happens in other OECD countries.

“Over-forecast inflation has kept interest rates higher than they should have been in recent years, which has cost the economy jobs

I happen to think she is right.  We don’t change the governance model to produce a different OCR decision on any particular day, but as one part of securing a better, more transparent, more resilient central bank.  There are no guarantees, but such a central bank is less likely to make mistakes like last year’s monetary policy –  recall that this is the only central bank in the world that has twice started tightening and then had to reverse itself.  Other countries don’t run things the New Zealand way, and we don’t run other areas of government this way either.  The case for change is pretty clear, and multi-dimensional.

I was interested in one aspect of her statement.  The Greens have previously favoured making the Reserve Bank’s Board the decision-making body for the Bank (which would parallel the approach in Australia), and have at times talked of ensuring that there are representatives of industry, employees etc on the Board.

But in this statement she calls for a “a panel of experts from across the economy”, which appears to suggest something rather more technocratic  (and, hence, perhaps more aligned with a majority of OECD countries, which often have decision-making committees with a majority of at least semi-expert members).  I’m not sure if they intended to convey a change of approach –  perhaps she just want to sound more internationally conventional –  but the change of tone is interesting.

Genter followed up her press release with an oral question in the House yesterday afternoon (number 9), asking the Minister of Finance if he still had confidence in the Reserve Bank following yesterday’s decision, using it as a hook to ask a series of supplementaries about governance (in one of which she repeated the point about a “panel of experts from across the economy”).  The questioning didn’t go overly well for her.  That was partly because the Minister of Finance was away, and Steven Joyce answered for him.  But it was also because she allowed some serious questions about governance to be tied too closely to a specific OCR decision, which allowed Joyce to bat her away with comments along the lines that he didn’t agree there had been a mistake, and we didn’t want politicians second-guessing individual OCR decisions.

Nonetheless, the responses that she received were still interesting.

First, there was a slightly backhanded compliment

Hon STEVEN JOYCE : The suggestion that the member makes, of having a panel of people making the decision, is, I have to say, not the silliest suggestion in monetary policy we have heard from the Greens over the years, and many countries—

and

Julie Anne Genter : Does he agree with Treasury’s advice to him that “The current single decision-maker approach poses risks”, and that “on balance, we think there would be benefits to moving towards a monetary policy committee in the future.”; if not, why not?

Hon STEVEN JOYCE : I am, of course, aware of that policy advice. But it is important to note that the New Zealand system has served us very well, I think, over the last 26-odd years. Yes, you could have a change at some point, but, again, I think that if you wanted to do it, and it is not a proposal that we are at all considering at this point, but if it was something that you wanted to do, you would have to do it for the right reasons and not because you disagreed.

and

Julie Anne Genter : Is the Minister aware that no other OECD country with a central bank gives so much legal power to a single official?

Hon STEVEN JOYCE : As I said previously, I am aware of that. Actually, as I said to the member in one of my earlier answers—this is on behalf of the Minister of Finance—actually, there is a range of ways in which that is done internationally. But the basis on which you would change that is not on the basis that a number of members of Parliament think that the Reserve Bank Governor had made the wrong or unnecessary decision in a previous year, which the member asserted in one of her previous questions.

Julie Anne Genter : Given that the only independent review of New Zealand’s monetary policy framework since the 1989 Act was put in place recommended changing the law in regard to bank governance, and that no other OECD country with a central bank gives so much power to a single individual, will his Government consider updating the law?

Hon STEVEN JOYCE : I thought I had answered that previously, but the answer is no, we have no plans to do so at this stage.

Not once did the Minister defend the basic elements of the current governance structure.  He defended operational independence for the Bank (which Genter didn’t seem to be questioning), he claimed that the system had served us well for 26 years, but there was no principled defence of allowing so much legal power to a single individual.  And he didn’t even rule out change, just noting at the end of the questions that the current government “have no plans to do so at this stage”.

I’ve been a bit puzzled as to why the current government has been resistant to change.  The independent review undertake for the previous government recommended legislative change (and the range of things the Governor is personally deciding has widened materially since then), the Treasury favoured change[1], they found that many market economists favoured change.  And most of the Opposition parties appear to have favoured change –  Labour seems to have come and gone on the issue, but is hardly likely to be a robust supporter of giving so much power to one official.  And, of course, we have good reason to believe – although he is now highly secretive about it –  that Graeme Wheeler favours change.

Among those favouring change, there will be a variety of different motivations and a variety of different alternative models in view.  I sketched out my preferred model here, but I know able people with different perspectives on the details of a new model.

I suspect that the Minister of Finance has little time for the Governor’s preferred model, of legislating to entrench a system in which Reserve Bank senior staff alone get to make the decisions.  Michael Cullen certainly didn’t like that specific option when Lars Svensson recommended it.  And this isn’t just an issue of monetary policy, and there are likely to be quite some differences  –  including with Treasury  – around the Bank’s prudential powers.  But the reluctance to open up the issue is still a bit of a puzzle.  Graeme Wheeler’s poor stewardship of the office of Governor is strengthening the case for change, but these are decisions that really should be made independent of the personalities, and of the foibles of the individuals involved.  That was why the Treasury advice in 2012 was appropriate –  ie flagging the issue with the Minister before it was apparent who would be nominated as the next Governor.

Perhaps the Minister of Finance worries that opening up the issue now would:

  • Be seen as political interference in current monetary policy
  • Be seen as a vote of no-confidence in the current Governor
  • Be seen as a win for Opposition parties, and particularly the Greens.

I hope none of those is the explanation for inaction, but I don’t really understand what is.  It seems most unlikely to be a strong in-principle preference for a model that gives unprecedented amounts of power to a single unelected official (or else presumably Steven Joyce would have run those lines)

Good legislation takes time. Graeme Wheeler will soon start the last two years of his term.  Now is the time for the Minister to open up the issue.  Perhaps he could ask Treasury to prepare a consultative document on the issues and options and put it out for several months of submissions and discussions.  That could allow legislation to be drafted next year, and to be in place so that the new Governor, taking office in late September 2017, would take office knowing that it was on the basis of the new model, while allowing Graeme Wheeler to see out his term on the arrangements that he was appointed on.  There is nothing sacrosanct about those arrangements –  Parliament makes the rules and can change them –  but the timing would now work quite well.  Moreover, since revitalising the Reserve Bank, and making it more rigorous, open, and resilient, will probably require a quite different sort of person, the change of Governor would be a good time for a new law to take effect.

There probably aren’t many votes in Reserve Bank reform, but good governance reforms, bringing our Reserve Bank more into line with international practice and the way other government agencies in New Zealand are run, would be one part of a good legacy for a long-serving Minister of Finance.

[1] I don’t know where Treasury now stands on the issue but have lodged an OIA for copies of any work they have been doing on the issue.

Some thoughts on the Monetary Policy Statement

Michael Reddell Monetary policy, Reserve Bank

What to write about the Monetary Policy Statement?

The Governor continues to deny that any mistakes were made last year. I’m not sure why. As I’ve said before, perhaps the first OCR increases were defensible (certainly lots of onshore economists thought so), but to keep on hiking and then take a year to start cutting, quite grudgingly, even as core inflation stayed very low, was just indefensible. The Governor and his staff are human, so they will make mistakes. They should acknowledge this one and then move on. Unfortunately the continuing reluctance to admit any mistake, perhaps even to themselves, is colouring how they are running policy now. The OCR is still higher than it was at the start of last year – the only OECD country of which that is true – even as inflation expectations have fallen further. What is it about a situation of rising unemployment, near-zero per capita GDP growth, and well-below-target inflation makes them think we’ve needed higher real interest rates?

I was disappointed, if not overly surprised, by the questioning of the Governor at the press conference this morning. Here are a couple of questions I think we should expect the Governor to provide straight answers to:

  • Governor, the Reserve Bank – like its peers abroad – has been telling us for years that core inflation is just about to pick up, and it hasn’t. If anything, it has kept drifting down, and with the unemployment rate still rising it is likely to fall further. In the very first paragraph of your Annual Report last year you once again told us that inflation was heading back to the midpoint. Again it hasn’t done so. . How have you corrected for this persistent bias, and why should we (or the public) have any more confidence in your inflation outlook now?
  • Governor, given the Bank’s persistent forecasting bias – shared, of course, by local market economists – why not adopt a strategy that aims to get core inflation to something nearer 3 per cent. Given the (unintentional) biases you’ve shown to date, that might give us a good chance of actually getting core inflation up to 2 per cent.  If inflation really looked to be rising strongly – to something well above 2 per cent – surely you have plenty of time to correct when you actually see the material increases in inflation?.

There was, as far as I could see, no particular basis in the document for a belief that core inflation is about to head back towards 2 per cent. Indeed, there is almost an attempt to sweep those awkward measures under the carpet, and to focus instead on headline inflation. Yes, headline inflation will probably pick up to some extent, and perhaps it will even creep over 1 per cent early next year. The evidence for that proposition isn’t great, and the Bank’s own past published research has cast doubt on it. Some tradables prices will no doubt rise – some already have – but exchange rates fall for a reason and are often accompanied by falling non-tradables inflation.  It is those core or domestic components of inflation that really matter, and there was nothing in the Governor’s July speech or in this document to think the downside surprises have come to an end. Indeed, the Bank acknowledges that non-tradables inflation is likely to fall further (partly for one-off reasons), and as they are projecting the unemployment rate to carry on rising it would be surprising if their favoured core inflation measure did not fall further.

I’ve gone on quite a bit over the last few months about the apparent indifference to the unemployed. No one thinks that a 5.9 per cent unemployment rate is New Zealand’s NAIRU, the rate has been rising for several quarters already, and the Reserve Bank is now forecasting that the unemployment rate will rise even more. There is, conveniently, no chart of the unemployment rate in this MPS, but the tables at the back show them forecasting an unemployment rate up to 6.1 per cent next March, and only back down to 5.9 per cent a year later in March 2017. The unemployment rate was only 6.2 per cent in March 2010, just after the 2008/09 recession ended.  Seven years on they expect no material inroads will have been made on the unemployment rate.

That March 2017 unemployment rate of 6.1 per cent is well within the sort of window that monetary policy can do something about. But the Governor is doing next to nothing more about it (these unemployment forecasts are after taking account of today’s cut and one more OCR cut). Lest I upset some economists, I should be clear that I’m not suggesting that monetary policy has very much impact on the longer-term average unemployment rate, but it has a considerable influence on fluctuations around the normal or natural level (itself determined by some mix of regulation, demographics, and so on). If core inflation was already 2 per cent and clearly rising, higher short-term unemployment might be an unavoidable price of keeping inflation in check. But core inflation is now 1.3 per cent, and probably falling. There is really no excuse for the OCR still to be so high. This is one of those times when there is no nasty trade-off: looser monetary policy would raise inflation (which we need, to get back to target) and lower the unemployment rate. Targeting house price inflation in Auckland isn’t part of the Reserve Bank’s mandate.

I don’t really understand why this high unemployment rate doesn’t seem to bother more people. I don’t hear market economists talking about it, or business journalists. I don’t hear business lobby groups doing so. The libertarian economist Bryan Caplan wrote a nice piece a couple of years ago about the grave evil of unemployment, and the way that people on the right tended not to take the problem seriously. But curiously, I also don’t hear the political Opposition talking much, or with much intensity, about unemployment.

And, as I’ve noted before, I really wonder what the Governor says to the unemployed people when he runs into them? How does he justify the Bank having run monetary policy in ways that delivered years of above-trend unemployment, scarring permanently the prospects for some of the people concerned. Mistakes happen, but the minimally decent thing to do is to acknowledge them and apologise. And how does he justify not adopting a more aggressive policy now, a stance that might get more of the unemployed back to work sooner?  The Chief Economist gave us a little lecture about the neutral interest rate having fallen 3 basis points a quarter for the last decade, but whatever neutral is –  and no one knows –  there is no sign that keeping medium-term trend inflation near 2 per cent requires an OCR as high as it is now.

I was encouraged by one aspect of the Governor’s press conference. He seems to be becoming slowly more uneasy about the situation in China. In answer to one question he uttered the dreaded d word – deflation, observing that if there was a substantial depreciation of the yuan that would export deflation around the world. He actually sounded worried. Given that almost every emerging market currency has depreciated markedly against the USD in the last 12 months or so, and that the Chinese are rapidly running through their foreign reserves, he probably should be worried. But if he is worried, he should be doing some preparation, focusing on keeping inflation expectations up, and on removing the obstacle that the near-zero lower bound poses for monetary policy. We still have some way to go to get to zero, but that space is steadily diminishing, and if the Bank’s Statement of Intent is any guide, he is doing nothing pre-emptive about managing the risk.

I wonder how the Bank’s Board and the Minister of Finance feel about this Monetary Policy Statement. Is the Minister yet asking for advice from the Board and/or Treasury on just what is going on?

The Governor on goverance

Michael Reddell Governance, Reserve Bank

I will have some thoughts on the Monetary Policy Statement itself later, but I wanted to comment briefly on the answer Graeme Wheeler gave to a question at the press conference.

Jenny Ruth from NBR asked him whether he thought the governance model for the Reserve Bank should be changed.  He simply never answered the question.

Instead, he gave a fairly long description of the current system, although only as it applies to quarterly Monetary Policy Statement decisions.  He suggested that people were misunderstanding the current system, but as he described it, it is all very well known.   The process starts with several days of meetings with lots of staff in attendance.  Then a Monetary Policy Committee, apparently now with 12 members including the two external participants, offers advice on the appropriate OCR decision.  The Governor now makes his final decision on the OCR in a meeting of the Governing Committee (himself, his two deputy governors and the assistant governor).  He added that for the last decade there has not been an occasion when the Governor made an OCR decision that went against the advice of the majority of his advisers.    That is no doubt true (I was on the relevant committee for most of the time), although there were several episodes in earlier years when the Governor went against the majority of his advisers (and on at least one of those occasions was right to do so).

But Graeme Wheeler deliberately avoids addressing the issues that those calling for change have made:

  • There is no other advanced country central bank or financial regulatory agency that gives so much legal power to a single official.
  • There is no other autonomous public agency in New Zealand which gives so much legal power to a single individual.
  • The only independent review of New Zealand’s monetary policy framework since the 1989 Act was put in place recommended changing the law (as it happens, to something like the Governor’s de facto model).
  • The issues are really about risk –  not about, say, the current stance of monetary (or prudential policy).  We need regimes that cope with mediocre governors, not just good ones.
  • All the advisers owe their appointments, and in most cases their pay and promotion prospects to the Governor.  That alters their incentives to disagree with the Governor, at least in respect of Governors –  like the current one –  who do not welcome debate or dissenting opinions).

The issue has never been one around whether, in normal circumstances, a Governor would take decisions his staff disagreed with, but about institutionalising a regime that encouraged challenge, debate, and openness to a range of perspectives, not just those of the Reserve Bank’s staff.

In his reply to Jenny Ruth, the Governor mentioned the speech on governance he gave in 2013.  I mentioned that a couple of weeks ago.

In 2013 he gave a speech in which he informed the public that he had decided to make decisions in the forum of a Governing Committee –  himself and his three deputy/assistant governors.  He retained the legal powers and responsibilities, but he envisaged working formally in that committee model.   In his speech, he spoke quite favourably of central banks where decisions are the responsibility of executive committees.  And there was no first principles defence of a single decision-maker model.

So it is pretty clear that the Governor favoured legislative change, and along the lines of an internal executive body (which also happen to be much the same lines as Lars Svensson recommended in that review 15 years ago).  He has also made some rather rash comments to staff about his views on the rather different governance ideas of some particular political parties.

Why is he not willing to come out and say that he favours legislative change, even if only to cement the de facto position? It could be argued that such law changes are matters for politicians not central bankers themselves, but the Governor hasn’t been shy of, eg, offering his support for tax changes and other matters rather further from his patch.

As it happens, it isn’t clear that anyone is now strongly defending the current law, which still vests all the legal powers in a hands of a single individual.   But for the Governor to openly favour change would open up debate to a wider range of governance options, and more searching scrutiny of the Governor’s powers outside monetary policy.  And he isn’t keen on debate.

We know that the Reserve Bank has been doing work on the matter. Only recently they refused to release any of it to me, including on the implausible, surely spurious, ground of potential damage to the “substantial economic interests of New Zealand”.  This is, sadly, par for the course when it comes to our highly non-transparent central bank.  It doesn’t publish its economic model, it doesn’t publish submissions on its regulatory changes, it won’t publish work it has been doing on governance reform,  it doesn’t publish minutes of the Governing Committee meetings on policy issues, and it won’t publish the background papers to its Monetary Policy Statements. 

It is past time for change.

Does the law prohibit the Reserve Bank releasing submissions?

Michael Reddell Financial stability, Reserve Bank

After my post earlier this afternoon someone mentioned the possibility of getting copies of the submissions on the investor finance restrictions under the OIA.  You might have thought so too.  At the time submissions closed, I did.  But no.

A few weeks ago I posted briefly about the response I had received from the Reserve Bank to my request for copies of each of the submissions they had received on the (then) proposed investor finance restrictions.

The Bank refused my request,  arguing that it would be met by the then-forthcoming “summary of submissions” which they would prepare.   Moreover they argued that while the OIA obliges the Bank to provide documents in the form sought by the requester, there was an exception if to do so would “impair efficient administration” or “be contrary to any legal duty of the …organisation in respect of the document”.

The Bank argues that it would “impair efficient administration” to provide me copies of the documents, with appropriate redactions, and that providing a summary of the submissions will fulfil its statutory requirements.  That is clearly not so.   I requested copies of all the submissions, which includes the ability to look at them individually.  When it produces summaries of submissions the Bank attempts to distill themes or representative arguments, on which it then comments.  If it were providing summaries of each of the submissions individually, I might be content, but a self-selected summary across a whole range of submissions is simply no substitute.   As I have pointed out previously, the contrast with submissions to select committees of Parliament is striking. The submissions on the legislation relating to offshore buyers’ and tax numbers are on the website in full.    Submitters include some of the same people who submitted on the Governor’s proposals ( eg one bank, and the Bankers’ Association).

And, as I noted this afternoon, the actual response to submissions that the Bank released did not contain, even remotely, a representative sense of the nature of the issues raised in my own submission (the only one I have a copy of).

In its response to my OIA request the Reserve Bank also noted that “much of the information contained in the submissions that you requested must be withheld in order to comply with the confidentiality provisions of section 105 of the Reserve Bank of New Zealand Act”.  And it seems that this provision is probably at the heart of the issue.

What does it say?  Here are the key provisions

105 Confidentiality of information

  • (1) This section applies to—
    • (a) information, data, and forecasts supplied or disclosed to, or obtained by,—
      • (i) the Bank:
      • (ii) a person appointed under section 99(2)(b), section 101, or section 119—
      • under, or for the purposes of, or in connection with the exercise of powers conferred by, this Part:
    • (b) information and data derived from or based upon information, data, and forecasts referred to in paragraph (a):
    • (c) information relating to the exercise, or possible exercise, of the powers conferred by this Part.
    • 2) Information, data, and forecasts to which this section applies shall not be published or disclosed by the Bank, any officer or employee of the Bank, or a person appointed under section 99(2)(b), section 101, or section 119, except—
    • (a) with the consent of the person to whom the information relates:
    • (b) to the extent that the information is available to the public under any Act, other than the Official Information Act 1982, or is otherwise publicly available information:
    • (c) in statistical or summary form arranged in such a manner as to prevent any information published or disclosed from being identified by any person as relating to any particular person:
    • (d) for the purposes of, or in connection with, the exercise of powers conferred by this Part:
    • (e) in connection with any proceedings for an offence against this Act:
    • (f) to any central bank, authority, or body in any other country which exercises functions corresponding to or similar to those conferred on the Bank under this Part for the purposes of the exercise by that central bank, authority, or body of those functions.
There are lots of words, but if public submissions on proposed new regulatory controls could be considered as “information, data and forecasts” supplied to the Bank then it would appear, under 105(2)(c), that the Bank cannot release any information about individual submissions, except in summary form. Even when policies, like the LVR restrictions, are to be applied generally (as distinct from supervisory intervention that might affect only one banks) we cannot know the substance of the submissions made on those proposed restrictions.

This seems like a travesty of democracy. Submissions –  on major new public policy initiatives – can be disclosed to foreign central banks or supervisors, but not to the New Zealand public. Any views banks or members of the public might submit to the Reserve Bank on monetary policy would typically be discoverable under the OIA, but those on prudential matters are apparently not. And this is so, even though for monetary policy there is a relatively specific objective for which the Governor can be held to account, while there is nothing remotely specific about how the statutory objectives for prudential policy should be measured.

Probably no one has any real problem with keeping confidential some private information about individual businesses.  But opinions and material supplied as part of a law-making process, which is what these consultative processes are, should be a quite different matter.  Submissions to Parliament’s select committees are published, and yet select committees are not even the final decision-maker on anything.  On proposed new statutes the whole House has a final vote, and on proposals that came initially from a Minister and Cabinet.  By contrast, when (unelected) Graeme Wheeler makes laws  –  having proposed them himself  – citizens are apparently not entitled to see the evidence, and submissions, he receives before making these decisions.

Like so much about the Reserve Bank Act, it is past time to reform these provisions.  Good access to official information is vital if we are to ensure that such a powerful institution is to be robustly accountable.  At present, there is far too little effective accountability and scrutiny.  A system in which the Governor can tell us as much, or as little, and then with his own slant, on the submissions he receives should be seen as simply unacceptable.  In this case, quite a simple amendment to the Reserve Bank Act would rectify the situation, making explicit that submissions on proposed changes to conditions of registration, or any other restrictions that affect all institutions, are not covered by the section 105 exemption, and should routinely be published on the Reserve Bank’s website.

Of course, if anyone else wants to request copies of the submissions, the Bank should presumably respond immediately declining their request and explaining why.  Unless they want to reconsider and change their interpretation of section 105, any delay would itself be a breach of the Official Information Act.

Constitutional monarchs of economic policy

Michael Reddell Reserve Bank

I don’t subscribe to the NBR but in their newsletter this morning I noticed one of the odder description of the role of Governor of the Reserve Bank I’ve ever seen.

 Paid content  •  Rob Hosking
RBNZ: Wheeler to cut, to advise, to encourage, and to warn
Mon 07 Sep

Central bank governors are kind of the constitutional monarchs of economic policy.

No monarch in New Zealand’s history has had anything like the power that Graeme Wheeler has (or that his two predecessors  had).  And unlike the powers and responsibilities of the monarch (or Governor General) the powers of the Governor have been increasing not diminishing.

The monarch has a handful of reserve powers, and other than that has only the responsibility to do good, to be seen, and to do as her ministers tell her.    As Bagehot put it 150 years ago, she has a right to advise, encourage, and warn ministers, but in private. It is not clear that there are any material cases in New Zealand’s history in which the monarch, or Governor General, has had any material influence on the choices made by governments and ministers.  And that is probably as it should be (he says as an instinctive monarchist).

Compare that to the position of the Governor of the Reserve Bank.  Like the Queen (or Governor General) he also holds a position established by Parliament, and is an unelected holder of that office.  He is not required to act on advice, and in fact the main argument for our current governance structure was to focus accountability –  the Governor, ultimately, can blame no one but himself for any mistakes that he makes.  We don’t hold the monarch, or the Governor General, responsible for whatever bad bits of legislation they sign over the years.

And what does the Governor get to decide:

  • He sets the short-term interest rate for New Zealand, and can do so in ways where, if he makes mistakes, we end up with inappropriately large booms or persistently high unemployment and recessions.
  • He gets to decide who can and can’t borrow money from our banks
  • He gets to decide the designs of the only lawful bank notes in the country
  • He has (legally unfettered) capacity to commit taxpayers’ money to speculate in foreign exchange or other financial markets.
  • He gets to decide who can operate as a bank, or non-bank deposit-taker, or insurer, in New Zealand.
  • And so on.

Oh, and he has some statutory duties that might be compared to “advise, encourage, warn”

Section 10 of the Reserve Bank Act says

10 Formulation and implementation of monetary policy

  • In formulating and implementing monetary policy the Bank shall—
    • (a) have regard to the efficiency and soundness of the financial system:
    • (b) consult with, and give advice to, the Government and such persons or organisations as the Bank considers can assist it to achieve and maintain the economic objective of monetary policy.

And section 33 says

33 Policy advice
• (1) On request by the Minister, the Bank must provide advice to the Minister on any matter specified in the request that is connected with the functions of the Bank.
(2) A request may not be made under subsection (1) that may limit the Bank in exercising its primary function in section 8.
(3) The Bank may also provide advice to the Minister, at any time, on any matters or subjects within the responsibility of the Bank.

Central bank Governors also prone to lecturing the public on how we should behave. Such advice is mostly harmless – since we can ignore it – and ineffective, although if done badly (as it often is, here and abroad – by Graeme Wheeler, Don Brash, or Alan Greenspan) it risks damaging the standing of the institution.

Some people will be quite happy with the powers the Governor of the Reserve Bank. But don’t pretend his powers are remotely comparable to those of the modern monarch.

Both the monarch and Governor of the Reserve Bank are unelected creatures of Parliament. One now has almost no power, and one has huge powers. It is the Governor’s powers that look anomalous in modern times. Reforms are needed, to markedly reduce the powers of the Reserve Bank as a whole, and to largely eliminate the ability of the Governor to make key policy decisions on his own. Few Governors in other countries have ever had as much power as Graeme Wheeler does.  No modern monarchs do.

A tale of two regulators

Michael Reddell APRA, Financial stability, Reserve Bank

Earlier this week two banking regulators gave speeches about housing.  Both  began the same way –  one noting that housing is a “hot topic of dinner conversation” and the other that it is “not unusual…for the topic of conversation over a meal – be it a dinner table with friends, or a barbeque in the backyard –  to turn to the subject of real estate”.

The first speech was by Grant Spencer, Deputy Governor (with responsibility for financial stability functions) of the Reserve Bank of New Zealand.  The second was by Wayne Byres, Chairman of the Australia Prudential Regulatory Authority (APRA).  The speeches are really like chalk and cheese –  very different and the differences largely reflect positively on APRA.

I’ve already touched on a few points from Spencer’s speech, mainly around the tension between the encouraging results of last year’s demanding stress tests and the Reserve Bank’s increasingly intrusive and expensive lending restrictions.  In that post, I also passed on an observation someone had made to me that Spencer’s speech had a very strong macroeconomist’s flavour to it, with little sense that he, or the Bank, had much feel for the credit standards being applied by the banks.  At one level, that isn’t surprising: Spencer (and most of his senior colleagues) has a background in macroeconomics.  But Grant Spencer has now been responsible for financial stability and regulatory functions for eight years, and spent the best part of a decade in fairly senior positions in the ANZ.

Byres, by contrast, appears to have been a bank supervisor/regulator for most of his career.  And it shows.   He knows that banks get into trouble when they make bad loans (and banking systems get into trouble when enough banks make enough bad loans).  At one level that is a truism, but it seems to drive Byres, at least on the evidence of this speech, is to focus on the quality of the loans banks are making, and the standards banks (management and Boards) are applying in advancing credit

Byres articulates APRA’s goal as “to preserve the resilience of the banking system”, rather similar to the Reserve Bank’s statutory goal to “promote the maintenance of a sound and efficient financial system”.  And that seems to be his focus: to ensure that banks have enough good quality capital to withstand shocks when they come, and focus on monitoring the quality of banks’ lending behaviour to help (a) ensure those capital buffers are large enough, and (b) reduce the risk of a large number of loans turning very bad.

Rightly, in my view, he does not seem to see it as APRA’s role to stabilise house prices, nationally or in any particular city/region.  Other stuff happens, and it is the responsibility of the banking supervisor/regulator to ensure that the banking system can cope if things go wrong.  Stress tests are one component of that –  and Byres gave a good speech on them late last year.

Here is Byres on what drives the housing market

Any discussion on housing market conditions these days typically starts – and sometimes ends – with housing prices. It’s clear that Australian housing prices are high. On common metrics such as pricesto-incomes or prices-to-rents Australian housing prices are at the higher end of the spectrum, measured either historically or internationally. There are many reasons proffered for why this is: a strongly growing population, geographic and regulatory constraints on supply, the impact of lower inflationary expectations and financial deregulation, and taxation arrangements all feature prominently in explanations of the level of Australian housing prices.

He doesn’t seem to see it as APRA’s role to praise (or damn) aspects of government policy, or to lecture others (based on no underlying research or analysis) on what needs to be done.  He just accepts that there are active debates on many of these issues and, whatever the cause, Australian house prices are high.  That might become an issue for a banking regulator, and to know that one needs to understand the quality of the loan books (individually, and across the system as a whole) and the capital banks have.

Contrast that with Grant Spencer’s speech, written as if the Reserve Bank were a pre-eminent source of wisdom on wider housing market issues, impatient that mere politicians have been slow to get with the Bank’s preferred programme.  Tax changes are “essential”, “much more rapid progress” is needed in improving housing supply, and so on.  And all the time, other areas of policy, which might be inconvenient to the current government (eg the role of new first home buyer subsidies, active immigration programmes) are passed over in silence.  The issue is not whether Spencer is correct in any of his individual observations –  on some I think he is right, and in others probably not –  but that he cites no evidence or research for his views, and that such advocacy on highly controversial political issues, is just not the role of a banking regulator (or a central bank).   “Tax” appears a lot more often in Spencer’s speech than phrases such as “lending standards”, “loan quality”, “origination standards” or the like  (as far I can see, those phrases don’t appear at all).

Byres appears to know better.  He concentrates on banking; on what banks do, and on the regulatory role of APRA.  Doing banking regulation well is not always easy.  No doubt plenty of supervisors in the United States, Ireland and the United Kingdom thought they were doing a fine job in the years running up to 2008.  It turned out not to be so.  Lending standards will, of course, often look rather better before a crisis, or even a recession, than they do in the wake of such events.  But if we are going to have official prudential supervisors –  and for better or worse we do  – we need people with enough knowledge of the industry to ask the hard questions, and sceptically sift and weigh the evidence.  As Byers notes (if only we heard this line more often from our Reserve Bank).

“lower credit quality portfolios may not necessarily be worrisome if the strategy is a conscious one, the additional risk is appropriately priced and managed, and adequate capital is held.  That is really what much of our work has been designed to test”

And much of the rest of his speech is devoting to talking through what evidence there is on these points.  It is what one might expect from a bank supervisor.

He observes that there is no evidence in Australia that investor loans have been riskier than owner-occupier mortgage loans, while noting the need to be cautious about extrapolating that experience into a more stressful scenario.  Our Reserve Bank does not even seem to have gathered the data on the New Zealand experience, including in the last few years in which some regions have had material falls in nominal house prices.

Byers steps through data on third-party originated loans, interest-only loans, high LVR loans (interestingly, he focuses on loans with LVRs greater than 90 per cent, not (say) the above 70 per cent loans the Reserve Bank is about to control in Auckland), and loans approved outside standard loan parameters.  I’m not sure I saw anything specific about pricing.  But I came away from the speech with a sense of better understanding the market, but also with a sense of a supervisory agency that knew, and could talk judiciously, about what was going on.

The impression I took from Grant Spencer’s speech was rather different.  There was very little about indicators of risk arising from the behavioural choices of banks.  We’ve seen no evidence advanced that credit standards have been deteriorating (eg specifically in the Auckland investor property finance market), let alone that any such deterioration was not appropriately matched by pricing, and capital, that covers the risks.     There might be problems looming, but the Reserve Bank just does not set out the evidence, even though it has rushed in with a succession of heavy-handed policy interventions.  There is a sense of an institution flailing around, citing this statistic and that, but without a coherent and well-grounded analysis of the issues and risks to the banking system.

There are limitations to Byres’s brief speech.  He is no more inclined that the Reserve Bank to acknowledge that supervisors and regulators get things wrong.  And perhaps he is light on the sort of big- picture macro-oriented, internationally-informed analysis of systemic risks.  But when the Reserve Bank tries to offer this latter perspective it does not do it well.  As far as I’m aware no country has ever run into a systemic banking crisis when credit has been rising no faster the nominal GDP (and perhaps especially when nominal GDP itself has been growing slowly by historical standards). But you won’t learn that from any Reserve Bank document, even though that is the current New Zealand (and Australian) situation.  You also won’t get any sort of systematic analysis, or even a summary distillation of such analysis, on the similarities and differences between what has been going on in New Zealand in recent years and, on the one hand, what happened in the crisis countries, and on the other hand, what happened in countries that avoided crises.  Grant Spencer and Graeme Wheeler repeatedly invoke Ireland and the United States, but no serious observer thinks developments in New Zealand remotely parallel the specifics of those two (quite different) country experiences.

There has been a tendency in some quarters to lionise APRA –  I’ve been in meetings where it has been lauded as the world’s best bank supervisor.  I’m not in that camp.  Apart from anything else, the minimum risk weights the Reserve Bank has insisted on for housing loans have been more conservative than those required in Australia, and APRA is only now catching up.  And I’m also not convinced by arguments that we should out-source our bank supervision and regulation to APRA – ultimately much about bank supervision is about crisis management, and in crises managing national interests matters a lot.   But for the time being, APRA presents a much more credible and convincing face to the world, conveying a calm and balanced sense that they understand banking and banking risk, than does the regulatory/supervisory side of the Reserve Bank of New Zealand.  New Zealand deserves better than that.

Perhaps it is another dimension for the Reserve Bank Board to assess in its forthcoming Annual Report?

Looking forward to a robust assessment of the Reserve Bank’s performance?

Michael Reddell Governance, Reserve Bank

The Children’s Commissioner has today released its first annual State of Care report.  The Commissioner is not required to publish such a report, but he is required as follows:

13 Functions in relation to Children, Young Persons, and Their Families Act 1989

  • (1) The Commissioner has the following functions in relation to the Children, Young Persons, and Their Families Act 1989:
    • (a) to investigate any decision or recommendation made, or any act done or omitted, under that Act in respect of any child or young person in that child’s or young person’s personal capacity:
    • (b) to monitor and assess—
      • (i) the policies and practices of the department; and
      • (ii) the policies and practices of any other person, body, or organisation that relate to the performance or exercise by the person, body, or organisation of a function, duty, or power under that Act or regulations made under that Act:
    • (c) to encourage the development, within the department, of policies and services that are designed to promote the welfare of children and young persons:
    • (d) on the Commissioner’s own initiative or at the request of the Minister, to advise the Minister on any matter that relates to the administration of that Act or regulations made under that Act:

The State of Care report is to be is “an annual summary from our independent monitoring of Child, Youth and Family’s policies, practices and services”. The report is 60 pages long , and it appears to ask some pretty serious and searching questions. It has certainly resulted in considerable media coverage this morning.

The Reserve Bank’s Board will, if last year’s schedule holds, just have finalised their Annual Report for the year ending June 2015. Last year’s report was signed by the Board on 26 August 2014.

The Reserve Bank Act lays down the responsibilities of the Board. They aren’t the same as those of the Children’s Commissioner as regard CYF, but the Board acts primarily as the agent of the Minister of Finance and the public to hold the Reserve Bank Governor to account.  They must report to the Minister if the Governor isn’t performing, and may recommend dismissal.

For the last decade or so, the Board has had to publish an Annual Report

The Board must prepare, for each financial year, a report setting out the Board’s assessment of the matters referred to in section 53(1).

And section 53(1) reads as follows

53 Duties of Board
• (1) Subject to this Act, the Board of the Bank shall—
• (a) keep under constant review the performance of the Bank in carrying out—
• (i) its primary function; and
• (ii) its functions relating to promoting the maintenance of a sound and efficient financial system; and
• (iii) its other functions under this Act or any other enactment:
• (b) keep under constant review the performance of the Governor in discharging the responsibilities of that office:
• (c) keep under constant review the performance of the Governor in ensuring that the Bank achieves the policy targets agreed to with the Minister under section 9 or section 12(7)(b):
• (d) determine whether policy statements made pursuant to section 15 are consistent with the Bank’s primary function and the policy targets agreed to with the Minister under section 9 or section 12(7)(b):
• (e) keep under constant review the use of the Bank’s resources.

Last year’s Board Annual Report (pages 6 and 7) was totally anodyne. It was the first report since former Acting (and Deputy) Governor, Rod Carr took over as chair. The report was less two pages long and is almost totally descriptive (and still manages to contain a relatively minor, but telling, factual error, which I have recently drawn to their attention). The Board’s report comes bound in the middle of the Bank’s own Annual Report.

The contrast with the Children’s Commissioner’s report is striking. I think it sheds some light on the weakness of this area of the governance/accountability of the Reserve Bank. The office of the Children’s Commissioner isn’t heavily resourced, but it has resources of its own. By contrast, the Reserve Bank’s Board has no independent financial or staff resources – indeed, its Secretary is one of the senior managers of the Bank. The Board meets on Bank premises – in “the Board room”, although of course the room is primarily used for a range of day-to-day management and policy meetings. For a Board whose primary responsibility is about holding the Governor and Bank to account (ie a very different role from a corporate or even Crown entity board), it is curious (and inappropriate) that the Governor is a member of the Board itself. In the years since the Governor ceased being chair, both subsequent chairs have been former senior managers of the Bank.   Reading past Annual Reports it sometimes seems that the Board sees part of its role as being to help the Governor spread the good news and explain the choices the Governor is making.

It simply isn’t a recipe for being able to maintain appropriate distance from the Governor, to enable critical evaluation and commentary to take place. However good the individuals are – and there are able people on the Board – the structure is set up in ways that make it unlikely that they will be willing or able to stand up to a Governor (at least to one who has any ability at all to manage his relationships with Board members). The Governor has resources, profile, and spends all day on this stuff. Board members gather for a few hours a month, and consider papers submitted and prepared by staff (who all work for the Governor).

This year’s Annual Report might perhaps cover, in some depth, issues such as:
• The way that core inflation has now been well below the middle of the target range for some years
• The significant policy mistake that was made last year, in raising the OCR repeatedly and only very belatedly beginning to slowly cut it again.
• The poor quality of the Bank’s research, analysis and argumentation around the housing market, and around the new investor finance restrictions in particular.
• The obstructive and non-transparent approach the Bank has taken, including with respect to compliance with the Official Information Act

What is about the Governor’s performance, and stewardship of resources, that has led to these outcomes? And what steps are being taken to avoid a repetition?  Many outsiders might have a view, but the Board has unique access to the inner workings of the Bank, and the ability to grill management.

A report of two pages, effectively stating that they have lots of meetings, see lots of papers, and generally think the Governor does a good job, doesn’t really cut it. I’m not a huge fan of the Children’s Commissioner, but in this area he seems to have shown a way that the Reserve Bank’s Board might think about following. It is important to have external review of CYF – children in their care are very vulnerable. But when a single unelected official has as much clout as the Governor of our central bank does – having a huge impact on the short-term performance of the economy, and the numbers of people unemployed, speculating with a huge balance sheet, and with the seemingly arbitrary ability to decide who banks can and can’t legally lend money to, it is also very important that we have serious and substantive evaluative monitoring and reporting on the Governor’s conduct. When he makes mistakes – and he’s human so he will – we pay the price.  The Board is charged with doing that assessment, and we should expect to see evidence of it.

I don’t expect we’ll get what I’m looking for. The system needs far-reaching institutional reform. But even under the current law, the Board could offer us much more evidence of critical scrutiny than we’ve been seeing so far. 60 pages might be a little too much, at least annually, but 10 pages of serious reporting and evaluation, published separately from management’s reports, might be a start. If the Board hasn’t engaged substantively with the sorts of issues I’ve outlined above, the annual report isn’t due until 30 September, so perhaps they should pull what they‘ve done already back from the printers and start again.

Reforming govenance: a totally secretive Reserve Bank

Michael Reddell Governance, OIA, Reserve Bank

As readers will know, I have for some time been making the case that it is past time to reform the governance of the Reserve Bank.  The Bank’s governance model –  a single unelected decision-maker for a wide range of functions – is out of step with how other countries run these functions, and with how other autonomous New Zealand government agencies are run.  There was some logic to why it was set up that way 25 years ago, which I set out here. But whatever the logic in 1989, it is a model that is not really fit for purpose now, especially given the much wider range of functions the Reserve Bank is now undertaking.

This isn’t a particularly controversial statement.  A couple of years ago, the Treasury recommended to the Minister of Finance that work be undertaken towards changing the governance model.  Many market economists have supported change, and the independent review of monetary policy commissioned by the previous government 15 years ago recommended change.  The Green Party has for several years argued for change, and the Labour Party seems to have toyed with proposing change.

Decisions around legislative governance structures are matters for the Minister of Finance and Parliament.  The Governor has to work within whatever legislative framework is established.  But the Governor himself knows that the existing legislative isn’t ideal.  Shortly after he arrived at the Reserve Bank, I gave him a copy of an earlier paper I had written setting out the background to the current model, and making the case for change.  In response he noted that it had helped inform his thinking on the issues.    In 2013 he gave a speech in which he informed the public that he had decided to make decisions in the forum of a Governing Committee –  himself and his three deputy/assistant governors.  He retained the legal powers and responsibilities, but he envisaged working formally in that committee model.   In his speech, he spoke quite favourably of central banks where decisions are the responsibility of executive committees.  And there was no first principles defence of a single decision-maker model.

So it is pretty clear that the Governor favoured legislative change, and along the lines of an internal executive body (which also happen to be much the same lines as Lars Svensson recommended in that review 15 years ago).  He has also made some rather rash comments to staff about his views on the rather different governance ideas of some particular political parties.

I put in a request for copies of the work that had been done on governance issues over the last two years or so.   This was what I requested

Copies of any papers done by the Reserve Bank on statutory governance issues in the last two years (i.e.: since 1 July 2013).  To be specific, I am requesting:

  • any papers (draft or otherwise) provided to Treasury or the Minister of Finance on these issues;
  • any papers provided to the Governor or the Governing Committee on these issues
  • any internal working or discussion papers on governance issues;
  • any file notes or other records of discussions on these issues between the Governor, and the Secretary to the Treasury and/or the Minister of Finance.

Getting a reply from the Bank took almost two months (the statutory norm is no more than 20 working days), and when it finally came it was surprisingly bald.  Taking almost two months to release almost nothing might be look deliberately obstructive.

They released most of one paper, which is largely about how so-called “macro-prudential” issues are dealt with in other countries.  (Anyone interested can find a copy here)

For the rest, here was the response

The Reserve Bank also holds other information that falls within the scope of your request but which is being withheld from release under the provisions of the Act noted below. 

Reasons that information is being withheld:

  • 9(2)(d) to protect the substantial economic interests of New Zealand.
  • 9(2)(g)(i) to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between or to Ministers of the Crown or members of an organisation or officers and employees of any department or organisation in the course of their duty.
  • 9(2)(f)(iv) – to maintain the constitutional conventions for the time being which protect the confidentiality of advice tendered by Ministers of the Crown and officials.
  • 9(2)(h) – to maintain legal professional privilege.
  • 18(d) – the information is or will soon be publicly available.

At least this now confirms publicly that there has been a work programme underway.   Given that it took two months to reply, it appears to have been something quite substantive, including professional legal advice (and in an earlier holding reply they told me that they had 9786 (no doubt rather coarsely filtered) documents to consider).  And it wasn’t just internal Reserve Bank workings –  it will have got as far the Minister (note the third bullet), and will have involved extensive discussions with Treasury at a variety of levels.

This reply is simply extraordinary.  It is one thing to withhold bits of a particular paper on specific statutory grounds, but I cannot see what grounds they can possibly have for withholding (for example) even the titles of the papers covered by my request.  And the notion that disclosure of  background work on possible governance reform could harm the “substantial economic interests of New Zealand” is just laughable.  Perhaps the Governor is rather exaggerating the importance and impact of the Bank’s governance arrangements?

I was interested in the final item on their list of excuses.  Wanting to be reasonable before highlighting this response, I asked the Bank a couple of days ago when anything would be “soon publicly available”.  Perhaps they do have a speech forthcoming, or a treatment of the issue in the forthcoming Annual Report?  But they have not even replied to my email.

If the Official Information Act really provides protection for every single one of the papers covered by my request, including the titles of those papers, the Act is even more toothless than most had realised.  In fact, I suspect that this is a case of instititutional arrogance and over-reach by the Governor, who doesn’t really seem to regard himself as accountable to the public.  Perhaps the Governor is embarrassed, or frustrated, that the Minister of Finance or Treasury were not convinced by his particular arguments?  Perhaps he had staff simply look at one option, and ruled out of court any serious consideration of the wide range of options used internationally and elsewhere in the New Zealand public sector to govern powerful public agencies?  Whatever the explanation, he doesn’t want us to know.

If the work on statutory governance reforms has been completed, there is no obvious good reason for withholding the material that was done.   The statutory purposes of the Official Information Act are as follows:

The purposes of this Act are, consistently with the principle of the Executive Government’s responsibility to Parliament,—

(a)  to increase progressively the availability of official information to the people of New Zealand in order—

(i) to enable their more effective participation in the making and administration of laws and policies; and

(ii) to promote the accountability of Ministers of the Crown and officials,—

and thereby to enhance respect for the law and to promote the good government of New Zealand:

Reform of the governance of the Reserve Bank is a long-running issue, and not obviously one of those issues that needs to be worked on in total secrecy.  Indeed, any work the Reserve Bank has done could help inform an ongoing discussion about the best possible options for the future.   And all this material has been generated at the expense of the taxpayer.  It is official information, and there is a public interest in its release.  And even if work is still going on, the case for such total secrecy seems very hard to make.

Plenty of free and frank material is released under the Official Information Act.  As an example, not long ago, The Treasury released some pretty critical comments on the Reserve Bank investor finance restrictions. What makes the Reserve Bank different?   The Treasury has also released its 2012 advice on reforming Reserve Bank governance.  What about the Reserve Bank makes it so special that it believes the same law does not apply to it –  that every single piece of paper anyone in the Bank has done on statutory governance reform must be totally withheld?

As I’ve said previously, the Reserve Bank is much less transparent than it likes to make out.  This is just another example.  We’ll see whether the Ombudsman agrees with their interpretation of the Act.  Whether or not she does, this decision by the Governor is not the hallmark of an open and accountable public institution, committed to scrutiny and debate and to improving policy and institutions through the contest of ideas.

On a somewhat selective account of policy measures affecting the housing market

Michael Reddell Housing, Reserve Bank

In the somewhat party-political and evidence-light press release on housing the Reserve Bank has just released…

“Much more rapid progress in producing new housing is needed in order to get on top of this issue. Tax policy is also an important driver, and we welcome the changes announced in the 2015 Budget, including the two year bright-line test, the proposed non-resident withholding tax and the requirement for tax numbers to be provided by house purchasers.”

…it is perhaps not too surprising that, once again, there is no reference to the enhanced first-home buyer subsidies announced, as it happens, a year ago today, as the centrepiece of the Prime Minister’s launch of the National Party election campaign.   We know quite a lot about first home buyer subsidies.  In the presence of supply constraints, all they do is bid up the price of houses (house plus land).  Other countries have tried them (Australia closest to home).  They don’t raise home ownership rates or do any socially useful thing.  And, if the subsidies don’t last for ever (which they often don’t, especially in real terms –  for example, Sir Robert Muldoon had a short-lived one of these subsidies late in his term), they simply increase the risk of a nastier correction in house prices later.  Those corrections are what the Governor, and his deputy, often tell us they are worried about.

You might think it would be inappropriate for an unelected central bank to be commenting on party election promises, even when they become legislated government policy.  And I would have some considerable sympathy with that position.  But the same surely goes for other aspects of tax policy, regulatory policy, government data collection policy and so on (eg the list in the press release), all of which are contentious in some circles or other.  Oh, and was there any mention of the role of immigration policy –  the bit directly controlled by central government?

Today’s papers report on the take-up of the enhanced subsidies. Fortunately, perhaps, Auckland prices are already too high for many potential Auckland buyers to bid prices higher.  But elsewhere, in Tauranga, for example, where people worry about the spillover from the Auckland boom, those who’ve used that subsidy will have bid prices up just a little faster than otherwise.  But no mention of it from the Reserve Bank?

In getting so involved with regulatory matters, that go well beyond its areas of responsibility, the Reserve Bank is playing a dangerous game.   There is a strong, but not unarguable, case for central bank autonomy on monetary policy, but the case is much harder to sustain when the unelected Governor is weighing in, with words and actions, to decide who should and shouldn’t get credit, what general regulatory interventions make sense, and which he thinks don’t.  And when it stays quiet on really bad policy that drives house prices higher, but helped generate some useful headlines in the middle of an election campaign,

The Governor –  and his deputy –  would be well-advised to stick to their knitting.  Get inflation back to around the middle of the target range and keep it there (it would make a change), and focus on indirect instruments (capital requirements) to promote the continued soundness and efficiency of the financial system.  And leave the rest to the political debate, and decisions made by those whom we can hold to account.

Wheeler and his critics

Michael Reddell Governance, Monetary policy, Reserve Bank

The print issue of today’s NBR has a double-page feature on “Wheeler and his critics”. It includes – with a few transcription errors – the heart of an interview I did with Rob Hosking in early July.

There are few broad issues touched on in the article:

The first is monetary policy. Hosking correctly points out that market economists’ forecasts of inflation have been even less accurate than those of the Reserve Bank. That doesn’t reflect well on the market economists, who in 2013 and 2014 were also often even more “hawkish” on policy than Graeme Wheeler has been. The same results are reflected in the survey results of the NZIER’s Shadow Board.

Being less wrong than market economists is convenient defensive cover for the Reserve Bank. During the 2003-2007 boom, we used the argument on the other side. We (the Bank) let inflation drift too far up, and tightened too slowly. But, on average, the markets (pricing and economists) were more dovish – constant looking for the first easing.

And if the Governor has to make mistakes – and inevitably every central bank will from time to time – it is better to be in good company than out on his own. But only one agency – in New Zealand, one individual – is charged by law with keeping inflation near target. And the Governor has been given a lot of public resources to do the analysis and research to support his policy decisions.  In this cycle, our Reserve Bank wasn’t doing that well in 2013 – core inflation was below the target midpoint (although 2013 outcomes were largely a result of Alan Bollard’s choices). But then they tightened policy – at a time when no other advanced country central bank was doing so – and kept on tightening. And core inflation just kept edging lower (and unemployment began to rise again). They were bad calls – increasingly clearly so with hindsight – and should be acknowledged as such, by the Governor – and by those paid to hold him to account, the Bank’s Board, and the Minister.

So I’m not one of those arguing that the Governor has put too much focus on inflation. Instead, he seems to have put far too little focus on actually keeping the medium-term trend in inflation on target. And that focus on the 2 per cent midpoint was one that Graeme Wheeler and Bill English added to the PTA less than three years ago.  He seems to have been distracted by Auckland house prices – a serious issues, for political leaders –  and by beliefs about what “normal” interest rates should be.

The second issue is around governance, and particularly the decision-making structures Parliament set up for the (rather different) Bank back in 1989. I get the sense that no one is really now defending the current system, which has no counterpart anywhere else in the advanced world. A single unelected individual is responsible for all the Bank’s analysis, and for all its decisions – not just on monetary policy, but on banking supervision, insurance supervision, note and coin designs, housing finance regulation, foreign exchange intervention, and so on. No other country does it that way. No other New Zealand public agency I’m aware of does it that way. The Greens have been raising concerns (and do so again in this NBR article), the Treasury has been suggesting changes, market economists have favoured change. In this article, now-independent economist Shamubeel Eaqub calls for change. And, of course, I’ve argued that it is past time for change. Actually, I suspect Graeme Wheeler favours change – although his preferences as to how are likely to be different from those of most others. This is not an ideological issue. It is common-sense one where reform is needed to bring the governance structures up to date. There are important discussions to be had about precisely what alternative model to adopt. I’ve made the case for something like the model the British government has recently adopted for the Bank of England, but there are reasonable arguments for other possible solutions. Unfortunately, the obstacle to reform now is the current government. I’m not quite sure why.

The third issue is around LVR controls. Shamubeel worries that active Reserve Bank involvement in housing finance restrictions invites, over time, a more direct political involvement in future Bank decisions, perhaps including around monetary policy. I think that is a risk. My points about LVR restrictions are twofold.  These are really the sorts of decisions that should be made by politicians, if anyone is to make them. Direct controls of that sort, that impinge of so many people’s finances and businesses aren’t the sort of thing unelected officials should be deciding, But, in a sense, that is a decision Parliament needs to make, to take back (and then take) responsibility for such decisions.

But perhaps more importantly, the Bank – the Governor – has still not made a compelling case that the soundness of the New Zealand financial system requires such controls. They have not made a clear and convincing public case that investment housing lending is riskier than owner-occupier lending. More importantly, even if such lending is a bit riskier, there is no sign that lending is growing rapidly, or that even very major falls in house prices and rises in unemployment would threaten the health of New Zealand banks. The Reserve Bank did the stress tests, not me – and they seem to be very demanding tests. My response to their consultative document is here. In the meantime, they are now hiding behind provisions of the Official Information Act, and highly questionable provisions of the Reserve Bank Act, to keep from the public the submissions people have made on the proposals.   Here are the submissions on some of the government’s housing initiatives. But where are the submissions on the Governor’s planned direct controls? The provisions the Bank rests on to keep them secret were never designed to shelter public submissions on major new macroeconomic policy initiatives. I’ll come back to this issue next week.

The interview reports a few areas where I have been critical of the Governor. In particular, I noted that he seemed very reluctant to engage in serious or robust debate on any of the policy or analytical issues.  That was certainly the case internally, but I think it is true externally as well. Various people have made the point to me that the Governor seems uncomfortable with the media, or with the sort of scrutiny that inevitably should go with the sort of power he wields. I’m not sure that we’ve yet seen a serious and searching interview about his proposed new LVR restrictions, or about his conduct of monetary policy over the last 18 months or so. (Incidentally, I’m reported as calling the Governor “Action Man” – in fact, the credit for that description, emphasising action rather than analysis and reflection, belongs to one of the Governor’s own current direct reports.)

Finally, Rob Hosking highlights the issue of possible comparisons between the Governor and the late former Minister of Finance, Sir Robert Muldoon. As I noted, I did not make such a comparison, and I don’t think it would be helpful to do so. There is a sense in New Zealand debates that the first person to invoke Muldoon comparisons loses. And Sir Robert was Minister through some of the most difficult years New Zealand faced, and his record in response was a mix of the good and the rather less good.

But through the post-war decades, we had an extraordinary piece on legislation on the books, the Economic Stabilisation Act. It was introduced by a Labour government, and used and abused by both Labour and National governments over the decades. It gave ministers the power to impose wide-ranging economic controls (in Geoffrey Palmer’s words) “without resort to Parliament in ways that were unique in the western world”.  It was finally repealed by the Labour government in 1987.

But it is worth noting that these decisions had to be made by a committee (the Governor General by Order in Council) and perhaps more importantly had to be made by people with an initial electoral mandate to hold office: Cabinet ministers are elected MPs, and can be tossed out again.

By contrast, Parliament just a few years later (in the original 1989 Reserve Bank Act and subsequent amendments) passed legislation allowing an unelected official to single-handedly (not even by Order in Council) impose far-reaching controls on almost any aspect relating to banking, which has potentially pervasive influences on whole classes of economic activity. The scope is, of course, nowhere near as wide as the powers under the Economic Stabilisation Act, but there are even fewer checks and balances, in an age that typically puts much greater weight on openness and transparency.

Graeme Wheeler is not responsible for having passed the Reserve Bank Act. That was Parliament’s choice. But the Governor has choices about whether, and how, he deploys those powers.   Without a much stronger case, establishing the serious prospect of a threat to the soundness of the financial system, simply banning people from using banks to finance their residential rental businesses, when the initial exposure would exceed 70 per cent, seems unwise, and a step too far. Several serious people have argued to me that the Governor’s proposals are ultra vires. I’m not a lawyer, and issues of that sort can really only be resolved in the courts.   But when banks are willing to lend, and customers are willing to borrow, and there is no evidence of any serious deterioration in credit standards, we should be wary about the prospect of a single public servant telling them they just can’t.