(Lack of) transparency at the Orr Reserve Bank

Since I have to spend a large chunk of the day at the Reserve Bank –  among other things, checking out how serious the Governor is about customer focus and about remediation when customers have problems (among the things he claims the right to demand from banks and insurers) in the case of the superannuation fund the Bank (=Governor) sponsors –  it seemed fitting to have a brief post focused on a Reserve Bank issue.

Long-term readers will recall that the previous Governor was notoriously secretive, except when it suited him.   Among the things he always refused to release were any minutes of any meetings of the Governing Committee (him and his two or three most senior staff).  The Governing Committee had been set up by Graeme Wheeler, and was sold to the world as the forum in which major decisions were made –  whether monetary policy, regulatory policy or whatever.   You might suppose that the records of such meetings would be of considerable public interest, and it is common internationally for the minutes of the meetings of any body responsible for monetary policy to be published, with a (typically) quite short lag.  But Graeme Wheeler seemed to think there was no legitimate case for such material to be released –  his model was that he should be obliged to tell us only what he wanted to tell us, how he wanted to tell it, and when he wanted to tell it.  That isn’t how the Official Information Act works, but that consideration never seemed to much bother the then-Governor.

But that was then.  Wheeler has left, bearing his CNZM, and we have a new Governor.  He talks a good talk about communicating more or better with outside audiences.  We’ve even had cartoons to help illustrate official documents, and at one press conference I think the assembled journalists were greeted in four languages.

So he seeks to build an impression of a more open Governor –  including by his (ill-judged)  willingness to talk freely about all manner of things that aren’t his responsibility.  And almost simultaneously with the Governor taking office, the Minister of Finance announced reforms he plans to legislate later in the year.  Under those (inadequate) reform proposals, there will be a statutory committee to make monetary policy decisions and –  fulfilling a Labour Party campaign pledge –  the minutes of the meetings of that new Monetary Policy Committee are to be published.  I’m sure that, if the Minister sticks to plan, they will be fairly anodyne minutes, but the indication has been that the minutes will outline any differences of view (even while not putting names to views or votes).  It will be a step forward when it happens.

And so, going into last month’s Monetary Policy Statement I noted that the new Governor could perhaps show his seriousness about being different from his predecessor, and get ahead of the forthcoming legislative provisions, by beginning to publish now the minutes of the Governing Committee (for meetings relevant to that MPS).   Ideally, as I noted, he would also pledge to publish the background papers for each MPS with a suitable lag (perhaps six weeks).

Nothing was forthcoming with the release of the Monetary Policy Statement –  just the cartoons, multi-lingual greetings (and a document itself that seemed to go down well with market economists).  So I lodged a request for the minutes of the Governing Committee meetings relating to the May MPS.

And last week I got my response.

…the Reserve Bank is withholding the information for the following reasons, and under the following provisions, of the Official Information Act (the OIA):

  • section 9(2)(d) – to avoid prejudice to the substantial economic interests of New Zealand; and
  • section 9(2)(g)(i) – to maintain the effective conduct of public affairs through the free and frank expression of opinions by or between officers and employees of the Reserve Bank in the course of their duty.

As advised previously, the Reserve Bank recognises the tension between disclosure and confidentiality and has considered your request in light of that tension. Public disclosure, in summary form, is essentially what happens with monetary policy decisions in a carefully considered media release and the full text of the Monetary Policy Statement. The process of deciding what to publish in these documents recognises and balances the tension between disclosure and confidentiality.

In other words, exactly the same approach adopted by the secretive and defensive Graeme Wheeler, and nothing is released at all.  Thus:

  • the date of the meeting,
  • the place the meeting was held,
  • the attendees at the meeting,
  • confirmation of the minutes of the previous meeting,
  • any subheadings outlining the nature of material discussed at the meeting,
  • and the final OCR (itself already published in the MPS)

all, in the Governor’s view, had to be withheld to protect the “substantial economic interests of New Zealand” or to protect “free and frank expression”.  I wonder if the Governor was worried there might one day be a debate about what day of the week it was.    The claim is so absurd it is hard to believe that serious people –  required to operate according to the principles of the Official Information Act –  could make the claim.  But the Governor does.

I can barely imagine a circumstance in which disclosure of material in such minutes could undermine the “substantial economic interests of New Zealand” (NB these aren’t the same as the “economic interests” of the Bank), especially when released several weeks after the MPS to which the discussion relates.  We aren’t talking about imminent bank failures here.  But perhaps there are such circumstances, in which case specific deletions  could be made and justified under this subsection.  Officials make such specific deletions every day (although not commonly, I gather, under this particular provision of the OIA).

The same goes for “free and frank”.  In the (extremely unlikely event) that the minutes ever recorded that the Deputy Governor (say) thought the Governor’s ideas about the OCR were barking mad, there might be a case for withholding that particular detail.  But no official writes minutes like that.    And recall that the Minister of Finance has already committed to the publication of minutes of the MPC a few months hence, once the legislation is in place.  Differences of view are supposed to be highlighted (even if not attributed by name).  It will be a small step forward, and the Minister has already decided that “free and frank” isn’t a good reason to withhold such material.

But the Governor clearly disagrees.  Perhaps he just wants to enjoy his last few months as the single decisionmaker.   But then –  it suiting him to do so –  he has already told us that all his advisers were unanimous last month that the OCR shouldn’t be changed.  So what can he possibly have to hide in those Governing Committee minutes?  The short answer is likely to be “nothing at all”, but he has quickly imbibed the traditional Reserve Bank resistance to Official Information Act scrutiny.

It is not a good sign.  I’ve been concerned that the reforms the Minister announced will be too weak to make any material difference, and suspicious that they will allow a Governor so inclined to dominate the new committee, suppressing debate and the serious examination of alternative interpretations or policy approaches.  Since Orr has never been one to encourage challenge or debate, that seemed a quite real and specific risk.  Which is why I thought I’d test the waters.  Had the Governor agreed to the release of MPS Governing Committee minutes (even with odd specific deletion) I’d have lauded him, and revised up my probabilities on his governorship, and the new MPC, proceeding well.

By simply refusing to release anything, it looks as though he has once again confirmed some of the fears people held (mostly quietly) about his appointment.  If so, that is a shame.   And however many languages he greets journalists in, however many cartoons he adds, serious scrutiny of powerful independent public agencies –  particularly as at present when all power is vested in one individual –  requires access to official information that won’t always suit the Governor.  Minutes of his policy committees are a good example, one most other Governors in advanced countries have come to live with, or even champion.

I’ve appealed this decision to the Ombudsman –  I might have a response by the end of next year –  but in a sense the point has already been made.  When it comes to things he is responsible for, Adrian Orr is no more open and transparent than his predecessor, who set the benchmark in quite the wrong places.  A government committed to more-open government (as the current one says it is) would have a quiet word to the Bank’s Board, and to the Governor, encouraging the Bank to think again.

Towards a more open central bank

Earlier in the week I wrote a post making the case for reform of the Reserve Bank to be done in such in a way that encourages a much more open central bank, at least in its monetary policy dimensions (there are similar, but different, issues around the other areas of the Bank’s responsibilities).     That post was prompted by the public efforts of the “acting Governor” and his deputy (and acknowledged candidate to be the new Governor) to push back against (a) external members on a new statutory Monetary Policy Committee, and particularly (b) to resist any suggestion of any greater transparency around monetary policy.   As I illustrated in that post, what these officials dislike are systems that work well, and have become established, in places as diverse as the United Kingdom, Sweden, and the United States.  There is no obvious reason why such an approach could not work well in New Zealand.  And it is not as if the Reserve Bank’s reputation now stands so high that no sane person can envisage any possible room for improvement.

I gather that Spencer and Bascand have since given other interviews restating again their opposition to reforms along these lines.  Whatever their views, it is astonishing that they are carrying on this campaign in public –  even as Bascand has been privately making his case to be the next Governor.  They are bureaucrats, who are paid to operate under the laws, and governance arrangements, that Parliament – acting on behalf of the people –  establishes.  Good statutory provisions governing powerful public agencies involve striking a balance between, on the one hand, drawing on technical expertise, and on the other hand, protecting the interests of citizens against over-mighty bureaucrats advancing their personal interests and/or the interests of their bureau.    Openness and transparency are among those protections.  It is perhaps telling that Bank officials are keen on openness when it allows them to advance their views on this issue –  to protect their patch –  but not when it might prove awkward for them.   Graeme Wheeler was much the same  –  last year willing to go public to tell us that for one controversial OCR decision every single one of his advisers had supported him, but then willing to fight all the way to the Ombudsman to prevent citizens seeing comparable numbers for other decisions (even ones well in the past).  The only principle that seems to guide them on such matters is patch protection and self-interest, precisely the things we need protection against (and the sorts of things that motivated the Official Information Act 35 years ago).

In the purpose provisions of the Official Information Act, the very first item is this

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

  • to enable their more effective participation in the making and administration of laws and policies; and
  • 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

It is a mindset that has never taken hold at the Reserve Bank.    And thus it was encouraging that in the Speech from the Throne the other day there was an explicit commitment to “improving transparency” around monetary policy.

But after my post the other day, someone got in touch to point out that I’d left out one argument for a more open (monetary policy) central bank.  This correspondent noted that they would have

….added another argument for the value of individual responsibility of committee members: Central banks should stop pretending that the future is knowable, and the economy well understood. Monolithic representation of THE Bank view perpetuates that dangerous myth.

I agree entirely.  To have left it out the other day was an oversight, but it was also something implicit in many of the other arguments and international experiences.

Getting monetary policy roughly right –  the best than anyone can hope for –  is a process of discovery, iteration, revision and so on.  It isn’t a case of one wise person, or even a handful of wise bureaucrats, consulting the secret oracle, and revealing truth to the peasants.   Members of a monetary policy committee –  or the Governor under current NZ law –  get to make the final decision on the OCR, but they know no more about how the economy works, or what might happen next, than any number of other observers.  Indeed, of the four members of Wheeler’s advisory Governing Committe, only one could be considered pretty much fulltime focused on monetary policy (the chief economist).  Of course, they have more analytical resources at their command –  but, in fact, those are our resources, paid for by taxpayers.

When it suits them, the Bank will –  correctly –  emphasise just how much uncertainty there is about the appropriate monetary policy, and how the economy and inflation might unfold in future.  But, if so, what do they have to be afraid of from a much greater degree of openness?

I went back and listened again to the relevant bits of Thursday’s press conference.  Governor-aspirant Geoff Bascand was quite explicit that he thought people needed to focus on the issues that “the Bank” had set out in its Monetary Policy Statement, on “the risks ‘the Bank’ was considering”, on “the substance”.  Bascand didn’t want people focusing on the other issues, or divergences of views, and so on.

It is the same old mindset: we know “the truth”, we know which issues are important and which aren’t, we know how best to balance risks, and so on. And “we” can’t possibly risk letting people know that there might, at times, be genuine differences of view among able people at the Reserve Bank.   But what evidence do they have for such claims?  Either of the degree of knowledge they (implicitly) claim for themselves. or for the level of risk they claim explicitly to worry about.    Instead, life is just easier for bureaucrats if we maintain the secrecy, and continue to channel a monolithic view –  monolithic this time, monolithic next time, monolithic the time after, even though each of those monolithic views may be quite different from each other.

It would bore readers to run through the evidence for how often the Governor’s monolithic view has been wrong (or central banks in other countries have been wrong).  Sometimes one could count him culpable. At other times, things just turned different than most people –  inside or outside the Bank –  reasonably thought likely.  That is the nature of the beast: things are highly uncertain and nothing is gained, no one’s interests (probably not even those of really capable bureaucrats) are advanced by keeping on pretending otherwise.  The evidence to the contrary is there almost every time any central bank sits down and deliberates on monetary policy.  Mostly, it seems as of Spencer, Bascand, and McDermott have settled in a comfortable rut.  It may suit them, but that isn’t a good argument in institutional design.

I noted the other day the Supreme Court offers a good counter-example.   Final appellate decisions are, in some ways, quite like OCR decisions.  They aren’t necessarily “the truth”, but they are final.   Smart lawyers make sophisticated arguments on either side of any particular case.  Smart judges often enough disagree among themselves.  Some decisions end up being made by a 5:0 vote, but many are 3:2 decisions, and the Chief Justice can easily be in a minority.    Court hearings are, typically, open, and decisions – in the affirmative, and dissenting –  are typically published.    Only an idealist would pretend that the decision is “truth” –  the only possible, or sensible, way of reading the facts and relevant statutes.  But that particular panel of judges –  chosen for their character and expertise –  gets to make the final decision.

It isn’t clear why monetary policy should be so different.  It is even more provisional since, although each OCR decision is final, the panel is back every couple of months looking at an only slightly different set of facts, but sometimes reading them in quite different ways.  I’m not suggesting –  at the ludicrous extreme –  broadcasting meetings of a Monetary Policy Committee, but I can see no possible harm – to the public, or to a well-managed Reserve Bank – from shifting to a culture of much more radical openness, suited to the specifics of monetary policy.   Why shouldn’t the relevant background papers be published, even with a bit of a lag?  Doing so would not only gives stakeholders more a sense of the quality of the staff analysis, it would allow outsiders to point to things staff might (being human) have missed.    Why shouldn’t dissenting opinions, carefully crafted, be included in the minutes (much as the appellate judges do)?  And why shouldn’t members of the MPC –  each independent statutory appointees, and accountable as such –  be giving thoughtful speeches, or interviews, outlining how they see the issues around monetary policy, in ways that invite input from outsiders.  Capable people –  the only sort who should hold these roles –  need have nothing to fear from the contest of ideas.  From such exchanges, from such scrutiny, usually better decisions –  still imperfect –  will emerge.  And the public will have a better sense of the limits of what they can expect from any agency in an area so (inevitably) riddled with uncertainty.

Openness can be messy.  There will be mis-steps at times.  But that is nature of a free and open society.    Choreographed uniformity of view should be left to Xi Jinping.  I noticed a day or so ago that Robert Kaplan, head of Dallas Fed, was on the wires observing

“History has shown that normally when we have a substantial overshoot the Fed ultimately needs to take actions to play catch-up,” Kaplan said in an interview with the Financial Times.

Kaplan said he was actively considering “appropriate next steps” when asked if he was willing to consider a rate rise at the upcoming Fed meeting, FT reported.

I’m sure there are plenty of people around the Fed who will disagree with Kaplan’s particular perspective.  But the question for old-school bureaucrats like Spencer and Bascand is what possible harm, to the conduct of monetary policy or the interests of the American people, is done by such openness?  I can’t see any.  I hope the Minister of Finance –  helped by the forthcoming Independent Expert Advisory Panel –  will draw the same sort of conclusion, and ensure that the new legislation is crafted, and key appointments are made, accordingly.

One difference between a transparent central bank and the Reserve Bank

The Reserve Bank constantly tries to convince us of how transparent it is.  As Deputy Governor, Geoff Bascand, put it in his first on-the-record speech

The Reserve Bank is deeply committed to transparency – of policy objectives, policy proposals, economic reasoning, and of our understanding of the economy, and of course of our policy actions and intent. Clear communication and strong public understanding make our policy actions more effective.

We are working to enhance the openness and effectiveness of our communications

Just recently, the Bank even had the gall to argue that its new charging regime for official information requests would support this; it “helps the bank fulfil the OIA in making valuable information publically available”.

I’ve illustrated on numerous occasions just how relatively un-transparent the Bank now is, whether in respect of monetary policy, financial regulation, or indeed its own corporate and governance activities.  In some ways and some areas the Bank has got worse, while in others it has just not kept up with best practice –  whether in other government agencies (especially those exercising regulatory functions), or in international central banking.

This won’t be a lengthy post.  It was prompted by reading a recent blog post by Dan Thornton, a former senior researcher at the Federal Reserve Bank of St Louis (and a very stimulating visitor to the Reserve Bank).    One of the features of the Federal Reserve system is that minutes of the FOMC meetings are released, and in addition full transcripts of those meetings (whether in person, or by conference call) are released five years after end of the relevant year.  You can see all the 2010 material the Federal Reserve has released here,  all readily accessible and nicely laid out.

Researchers and commentators use this stuff.  Here is the link to the post I was reading.  Thornton looks at one aspect of March 2009 FOMC meeting, a discussion around the wording of the statement that would be released.    For anyone interested, here is the heart of his discussion.


My point is not to take one side or other of the debate at the FOMC, but simply to illustrate the sort of openness that exists in the US, even with a lag, and contrast it with the situation in New Zealand.   It took me months last year to get the Reserve Bank to release the background papers to a ten year old Monetary Policy Statement – and I didn’t even bother asking for the minutes of the meetings, or the written advice to the Governor on the OCR, or any records of debate over the press release (all of which is official information, with a statutory presumption in favour of release).  Even that didn’t prompt a change in regular practice –  and if someone asked again now, for 10 year old papers, they would no doubt face a substantial charge.   Citizens and researchers, and even MPs, have no insights into the Reserve Bank’s processes or internal debates, beyond what (very little) the Governor chooses to publish in the MPS.  And the level of transparency around other Bank activities is even worse.  

The Federal Reserve isn’t perfect by any means –  and has fought transparency around, eg, its lending activities during the crisis –  but the contrast with the Reserve Bank of New Zealand is striking.

Monetary policy transparency US style

I opened the Wall Street Journal website this morning and noticed a prominent piece of advocacy (and here) , making the case for not increasing the Federal funds rate target yet. Plenty of market and other commentators openly run either side of that argument. But this column was from Narayana Kocherlakota, President of the Minneapolis Fed, and rotating member of (and permanent participant in) the Federal Open Market Committee, which takes monetary policy decisions in the US.

This is no, “on the one hand, on the other hand” treatment, but an article that begins with the rather bold statement

I’m often asked by members of the public about the biggest danger facing the economy. My answer is that monetary policy itself poses the biggest danger.

In his view, raising interest rates in the near-term would “create profound economic risks for the US economy”.

I happen to mostly agree with Kocherlakota’s conclusion –  since core inflation remains very low, and there is little or no sign of a quick return to the target rate –  but that isn’t my point.  I drew attention to the article because of the refreshing contrast  it represents to the way in which monetary policy deliberations and debates occur in New Zealand (and, to a lesser extent, in most other advanced countries).

I’ve highlighted previously that the Reserve Bank of New Zealand is just not that transparent about monetary policy.  Their formal model remains under wraps, written advice to the Governor on OCR decisions is kept secret, and no minutes of the Monetary Policy Committee or the Governing Committee are published.  The Bank was recently forced to release background papers for an OCR decision and Monetary Policy Statement from 10 years ago, but experience suggests they would fight very hard to avoid releasing rather more recent papers.  And that is even though all this material is official information, generated at the cost of your taxes and mine.

But one of the key features of forecast-based discretionary monetary policy (what the Fed, and the Reserve Bank and most other central banks try to practice) is how little any of us knows with any certainty.  Reasonable people can reach quite different views, not just on the outlook but on where the economy and inflation pressures are right now.  Reasonable people can also differ on how the Policy Targets Agreement should be best interpreted and applied.   And views inside central banks are typically no more monolithic –  if perhaps equally prone to herd behaviour –  than views outside.

So what is gained by maintaining the secrecy?  In some areas of public life there might be a real need for temporary secrecy.  Shaping negotiating positions, and identifying bottom lines, in trade negotiations might be an example.  But monetary policy deliberations aren’t like that.  The reputation of the Federal Reserve system doesn’t suffer because Kocherlakota runs a dovish line right now, or James Bullard runs a hawkish line. If anything, the reputation of the system is enhanced, because people can see able people grappling with the range of issues and evidence that need to feed into monetary policy decisions, and can test and evaluate the arguments those people are making.

Of course, it is much easier to adopt such a model in the US system, where FOMC members are independently appointed, and are not dependent on Fed system chair for pay or resources or the like.  It would be much harder to do in the New Zealand system at present, where all those who have a formal say in the system are senior staff, appointed by and accountable to the Governor.  But that only goes to highlight the weakness of our system, and why it would not be appropriate, when Parliament reforms the Reserve Bank Act, to simply give all decision-making powers to a group of senior managers and insiders.  Monetary policy issues like those we –  and the US, and most other countries face –  need robust and searching debate, and especially in a small country much of the expertise is tied up inside government institutions.  We need to create a culture that can encourage debate, and can live with differences of perspective.   I’m not suggesting that all debate should take place in public, but that there is a place for those actively involved in the decisionmaking process to participate openly in debate on these important issues, as happens in the United States or Sweden (and to a lesser extent in the UK)

Even now, if, for example, Deputy Governor Geoff Bascand opposes OCR cuts, we –  and not just the Governor –  should hear his case. Perhaps, with hindsight such an argument might prove right, or perhaps not.   In the nature of these things, no one is ever going to have the answer right all the time, and so in a collective decision-making model, of the sort other countries have, we should be holding participants to account not so much for any particular call, but for the quality and tone of the arguments and judgements each participant brings to the table.   Under the current system, perhaps a start might be made by publishing the written OCR advice the Governor gets prior to each OCR decision, and the minutes of the Governing Committee, when – straight after the MPS –  that information goes to the Bank’s Board.  But that is no more than a start: we need to move towards a system where an independent committee makes monetary policy decisions.  Under such a model, the Governor and staff would still have a crucial role, but their primary role would be advising the decision-makers.

In the next few days I want to come back to the much more severe problems of lack of transparency around the regulatory and supervisory functions of the Reserve Bank.