Threadbare analysis and ideological causes

Michael Reddell Uncategorized

Last week a group calling themselves the Sustainable Finance Forum –  itself a creation of the self-selected left-wing environmental/political lobby group The Aotearoa Circle –  published an interim report.   The report is 70 pages long, but don’t let that deter you as there really isn’t much there.

Of course, this is not just any lobby group.  On the board of the Aotearoa Circle, for example, sits Vicky Robertson, chief executive of the Ministry for the Environment, and supposedly an apolitical public servant, advising ministers of whichever political stripe.  Oh well, never mind those old conventions…..   And one of the two co-chairs of the Sustainable Finance Forum is Matt Whineray, chief executive of the New Zealand Superannuation Fund, and supposedly an apolitical public servant charged with managing a large pool of taxpayers’ money from one government to the next.   Somewhat surprisingly (but welcome) the Reserve Bank Governor isn’t a full participant in this body –  although we’ve been left in no doubt of his ideological/political colours –  but the Bank (together with the FMA and the Ministry for the Environment itself) is described as an observer.

Of course, the participants aren’t all (or even mostly) public servants.   Woke left-wingery isn’t confined to the public sector and the second co-chair is a senior manager at Westpac, a bank which goes out of its way to advertise its enthusiasm for all such modern “worthy causes”.  There is a “technical working group” of 33 people and probably 85 per cent of them are employed in the private sector (it does seem rather a large technical working group for a report with only about 50 pages of text).

What there isn’t is much substance or much rigour.  There are dozens and dozens of grab-bag factoids –  some real, some not –  but little context.   There is no sense, for example, that these people have any real understanding of how our current levels of prosperity were achieved.  Perhaps more concerningly, given their breathless enthusiasm for stuff to be done, is that they demonstrate no awareness of the limitations of knowledge, the pervasiveness of uncertainty, or of the well-demonstrated capacity for governments to get things badly wrong.  There isn’t much sign either that they have read any economics beyond Kate Raworth.  And there is no sign either that they’ve engaged with Chesterton’s fence

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

Perhaps the zealots are right and the end of the world is nigh, all that we have known must be up-ended etc, but it would be more reassuring if they showed signs of actually understanding why things are as they are.

The bottom line goal seems to “the transition to a sustainable economy” and yet this goal is simply not defined.   Since these peope are from the financial sector, they talk a lot about a “sustainable financial sector”.   In the media coverage of the report there was some coverage to the factoid that 95 per cent of respondents believed that the current financial system was not sustainable.  I was one of the people interviewed as part of the project and I was one of the 5 per cent –  partly perhaps because I was taken aback by the question: what on earth did “a sustainable financial system” actually mean?    As the financial system didn’t seem likely to fall over (even the Reserve Bank used to tell us that before the Governor when chasing capital whims), it had been with us in much the same form for a long time, and had proved adaptable as market demands and regulatory structures changed, it seemed a pretty obvious answer to me.   But clearly I wasn’t part of the inner sanctum, because in the report itself defines “a sustainable financial system” rather idiosyncratically as one that serves the ends favoured by the authors:

The aim of the project is to produce a Roadmap for Action on how to shift New Zealand to a sustainable financial system – from one which focuses primarily on (often shortterm) financial wealth creation, to one that supports long-term social, environmental, and economic wellbeing and prosperity for all  New Zealanders, protecting natural resources for future generations.

Strangely, there is no mention of the fact that –  relatively poor as New Zealand’s performance has been –  material living standards here are hugely higher than they were 100, let alone 200, years ago, and for most people the day-to-day experience of pollution is also much less serious than it was 100 years ago.  Technology, innovation, and finance have all contributed to those outcomes.   There is lots and lots of talk in the report about Maori perspectives and ways of thinking –  a better economic model we were told, one with no externalities apparently……. – but no apparent recognition –  or concern –  that Maori systems and worldviews (pre Western contact) had not exactly been tending towards the sort of high material living standards, and functioning financial system, that we take for granted today.

None of which is to be cavalier about where we stand now.  There are outstanding issues around water, for example. But it isn’t obvious what role the financial system has to play there –  regulatory issues around pricing, definition of property rights, access etc provide the backdrop against which borrowers/investors raise funds and other provide them.    And, of course, there is a climate change, but if anything is characterised by uncertainty it has to be that area.  One of the bugbears of the SFF (and the Reserve Bank Governor) is the (alleged) short-termism of the financial system, but they never seem to grapple –  including in this report –  with the fact that a relatively short-term approach is a prudent response to the risks created by uncertainty.

Pretty much every left-wing cause of the decade gets reference in the report.  Inequality is a big one for them, but with no substantial analysis one is left with the impression that it is mostly for effect, and mood affiliation.   Early in the report there was a referenced claim, for example, that  “New Zealand’s income inequality gap has impacted GDP by more than 15%”, but when I looked up the reference it was to a North and South article which itself claimed –  without a citation –  that

OECD researchers have suggested our gap has hobbled GDP by more than 15 percentage points in recent decades, largely because of disadvantaged families bailing out of education.

Well, perhaps….but since OECD statistics also show that New Zealand employee skill levels are among the very highest in the OECD it seems unlikely.  Oh, and returns to education in New Zealand appear to be quite low.  And what it had to be with a “sustainable financial system” wasn’t clear at all.  Being, apparently, a bunch of lefties they want a “comprehensive response to inequality” but what they mean, or what (if anything) it has to do with the financial system is left totally unspecified.   It was the feelings that mattered apparently.   They do claim the “current financial system” is contributing to “growing inequality”, but make no effort to justify either limb of that claim.

We got similarly feeble references to the so-called “gender pay gap”.  There was a whole page on modern slavery and labour exploitation, some of which was interesting, some of which was fair, but none of which had any discernible relevance to the New Zealand financial system.  Hard to disagree, I suppose, with the banner quote on that page that “a financial system cannot be sustainable if it undermines the basic human rights we all hold dear” but even if true –  and I’m thinking of exceptions as I type –  it isn’t overly helpful or offer any great insight on how the financial sector should adjust/evolve.

At the very front of the document the Aotearoa Circle told us about their vision which includes

They aim to achieve this by reversing the decline of our natural resources.

Which also seems pretty incoherent. I get the impression they have waterways in mind –  which is fair enough I suppose, within limits (the benchmark can’t be say pre-1000AD conditions) –  but natural resources include coal, gold, oil and gas, timber, ironsands and so on.  Did they not notice?   Are they proposing to put the coal back in the mountains –  the same coal burned in the process of generating the living standards we have now, and the potential to move towards newer (cleaner) technologies?    It is a small point in a way, but it is the sort of thing that is likely undermine any good a report of this sort might do among those who aren’t uncritical “true believers” to start with.

There is all the talk about rising sea levels and what this might mean.  That partly involves using scary numbers about the value of affected buildings, but without any reference to the twin facts that (a) the dates they are quoting are mostly many decades away, and (b) existing structures depreciate.   And then, of course, there is the talk about access to finance and insurance.  Which are real issues no doubt, but they don’t unfold overnight –  they are some of the better-foreshadowed risks companies have ever faced –  and no reason (identified in the report) why existing market participants (and perhaps new entrants) can’t/won’t respond and adjust, in response to their own incentives, as they’ve always done.     Same goes for wider climate change issues: the report claims ‘financial markets in New Zealand..are still largely misaligned with climate change and other sustainability imperatives”, but they offer no evidence for this –  not a shred.

These people also have a bunch of other ideological causes.  They appear to champion the Living Wage as a policy response to New Zealand’s poor productivity.  Not only is that incoherent, but there is no obvious connection to the financial system (“sustainable” or otherwise)     They rightly lament the high cost of housing –  although never point out that were these government-driven distortions ever to be reversed and the market able to function well that housing finance would be a much much smaller part of bank balance sheets in future.  Oh, and they are dead keen on Australia’s compulsory private superannuation system –  but I guess we should mostly just put that down to (consciously or unconsciously) pure self-interest (it is a great system for financial industry service providers, while our own retirement income system generates very low rates of elderly poverty with a pretty modest fiscal burden).

And we get the best part of a full page on the Reserve Bank/FMA crusade around bank culture and conduct, all of which skated over the fact that when those agencies reported back (on their largely ultra vires activities) the bottom line was that there was little evidence of any sustained problems.  But I guess that wasn’t the narrative these left-wing crusaders wanted to channel.

Buried amid the blather there are probably a few sensible paragraphs on a few specific regulatory issues, but what might be valuable is largely lost amid the rhetoric, and the rhetoric itself is of much-diminished value because there is so little hard-headed substance.  We know for example that the Orr/Whineray NZSF could get away with making a big active punt on climate change, and so mask the punt that we can never properly hold them to account for it.  But that is the weakly-accountable government for you.  Most investors, most savers, want more than idle calls for the financial system to work for the “good of society”, however ill-defined that may be.    All manner of chancers and opportunists  (public and private sector) will tell you their project, their plan is “the one”.  The challenge of anyone –  especially anyone investing other people’s money –  is to be able to recognise the good from the bad, manage the risks etc.  And none of that is easy.  None of us knows what the economy will look like 30 years hence, let alone this time next century.  Not even Whineray and Silk.

There is an opportunity to submit on the interim report (link here). I’m not sure I’ll even bother.  It is so bad (and so ideological) they’d really be better off ripping up the report and starting from scratch with a much more hard-headed approach to thinking through the issues and challenges, constraints and opportunities, including demonstrating a thorough understanding of the strengths and weaknesses of the current system   But I guess that wouldn’t suit their mates in the Labour and Green parties, for whom reports like this help provide cover, even when largely devoid of substance, insight, or sustained robust argument.

 

Officials in pursuit of more powers

Michael Reddell Cash, Reserve Bank, zero lower bound

It is a big few weeks for the Reserve Bank and, in particular, the Governor.   This week the Monetary Policy Committee is gathering for its deliberations leading to next week’s  Monetary Policy Statement.  A couple of weeks later there is the Governor’s six-monthly Financial Stability Report,  and the week after that we are told that the Governor will descend from the mountain-top and reveal his decision on bank capital.   There are at least two press conferences scheduled (MPS and FSR) and given that he has deliberately chosen to release the momentous capital decision only after the FSR press conference one has to hope that he will make himself available to explain and defend his choices (and, although he has staff, all the decisions –  and responsibility for them –  are his alone).

Meanwhile stories rumble around about the possibility that the Bank’s Board has,for once, found its voice and suggested to the Governor that he needed to change his style.  I heard yesterday another version of a story that culminated in the Governor yelling at the chair of the Board after the latter (so it was reported) suggested that aspects of the Governor’s conduct were unacceptable.   I have no way of knowing whether these stories are true, or are just wishful thinking, but given the quiescent and deferential track record of the Board over many years, it would be perhaps a little surprising if there was nothing to the stories now.

One of the other projects the Reserve Bank has underway, which attracts less attention and controversy, is that around the future of cash.  It is both an apt issue to be focusing on and, at the same time, something of an odd one.  And, remarkably, in the discussion document the Bank put out a few months ago there was no mention –  at all, as far as I can see – of the most immediately pressing issue: the limits on the ability to cut the OCR that arise because of the (near) free option people have to shift from bank deposits etc to physical cash.

The future of (physical) cash is somewhat of an odd issue to be focusing on because cash outstanding has been rising relative to GDP.    This chart is from the Bank’s discussion document

cash 1.png

It tends to exaggerate the point, by starting from the trough.  Here is a longer-term chart from a post I wrote on these issues a while ago

notes and coin

All else equal, when interest rates are very low (and inflation is low too) people are more ready than otherwise to hold on to physical cash.  Of course, quite who is actually holding the cash, and for what purpose, is a bit of a mystery, one not really addressed in either the Bank discussion document or in the poll results they published last week, framed in terms of a high preference for using electronic payments media whenever possible.

The Bank included an interesting chart in its document illustrating that although the ratio of cash to GDP is quite low in New Zealand, the rise in that ratio wasn’t out of line with what has been seen in quite a few other advanced countries.  Sweden and Norway –  where the ratios have fallen –  are outliers.

cash 3.png

There is quite a strong suggestion that in the most recent period a big part of what is holding up currency in circulation was the surge in overseas tourism, especially from China.

cash 4

Overseas tourism remains one of the areas where physical cash is much more likely to be used than in normal domestic spending.

Notwithstanding these routine and entirely legitimate uses of physical cash, it is still hard not to conclude that a large chunk of the physical cash on issue –  in excess of $1000 per man, woman, and child –  is held to facilitate illegal transactions, including tax evasion.   That was Rogoff’s view, and as I wrote about here he –  against my priors – converted me to that way of thinking.

So there would seem to be no risk of cash disappearing from the New Zealand scene any time soon.   And yet the monetary policy constraint arguments, that the Bank simply doesn’t address in its discussion document, suggest that if anything the use of Reserve Bank cash (and especially the potential use of cash) should be constrained more tightly than at present.  The Governor may repeatedly assert that unconventional monetary policy options will do just fine, but few other people would look at the international experience of the last decade without thinking that monetary policy ran into limits.  Those limits arise mostly because of the non-interest bearing nature of the cash and the near-free option of converting into physical cash if returns on other short-term securities go, and are expected to stay, materially negative.

This limit need not exist, or at very least could be greatly eased.  Abolish the $100 note, for example, and at very least you double physical storage costs of secure large cash holdings.  Abolish the $50 note and you more than double the costs again (while the ability to give your kids pocket money in cash, or to use cash at the school fair isn’t materially affected).  That was, basically, Ken Rogoff’s argument in the US (restrict central bank notes to no more than $20 bills).  I’ve argued for one of a range of more-wholesale solutions that have been proposed: put a physical limit (perhaps indexed to nominal GDP) on the volume of currency in circulation (perhaps with overrides for bank runs), and auction the right to purchase new issuance (there is no reason why newly-issued cash has to trade at par).  Do that –  perhaps even set the limit fairly generously –  and the effective lower bound, as a convertibility risk issue, is abolished at a stroke.

This is coming close to being a fairly immediate issue.  No one supposes the Reserve Bank could, on current technologies, usefully cut the OCR by 200 basis points or more in a new recession, and yet in typical New Zealand recession something more like 500 basis points has been required.

It is pretty staggering that they haven’t addressed these considerations at all in their document.  Instead, having had submissions (lots of them) on the first consultation document, they issues another consultation document (deadline for submissions tomorrow) bidding for more Reserve Bank powers over the currency system.

The currency system seems to have rubbed along tolerably well for the 85 years since Parliament gave the Reserve Bank a statutory monopoly on the issuance of bank notes  (it seemed to function just fine in the earlier decades as well: whatever the case for setting up a Reserve Bank there was never a robust case for the statutory monopoly on bank notes).

But none of that deters the Reserve Bank.  It is a rare bureaucracy that looks to shrink itself, or is averse to an expansion of its powers, and the modern Reserve Bank seems to be no exception.  This is their bid

cash 5.png

As they note, there is no need for any such powers at present.  Which really should be determinative.  It isn’t like preparing for an extreme national disaster, where it makies sense to have some precautionary powers on the books.  This is about a payments media that is gradually being used less and less (for payments) and where change is exceptionally unlikely to happen overnight.     Were there ever to be severe problems, surely Parliament could address such issues when they arose, rather than inventing new laws now –  and delegating the use to unelected, not very accountable, officials –  just on the off chance?

There should be a strong pushback against this bid for power.  Their (short) document makes no compelling case for legislative action –  and more discretionary regulatory power – now.  Indeed, as they note

There is a host of international examples where cash system participants have found different solutions to fit their unique economies.

It is what the private sector does –  innovate in response to market incentives and opportunities.  They worry –  as busy bureaucrats will –  that “no single organisation has system-wide oversight of the cash system or a formal role to support it”.   There is no such organisation for, say, the corner dairy sector either.  Nor an obvious need for one –  let alone for the government to be taking charge.  They complain that they don’t have information gathering powers over participants who aren’t banks, but offer no analysis or convincing demonstration as to why they should have such powers.

They offer no analysis either as to why the market could adequately manage issues around ATMs or other processing machines, or even for the quality of the notes retained in circulation.    Much of it seems to be made up on the fly –  so it seems, to catch the decisionmaking process around other changes to the RB Act.  Thus they talk of powers to compel banks to distribute cash, but seem to have thought through very of this bid for power for hypothetical circumstances.  This, for example, is the last substantive paragraph of the document.

How accountability would be defined under such regulation, and therefore how sanctions could be applied, warrants further consideration. Banks could be held collectively accountable for the provision of cash services, meaning that banks would share the responsibility for providing access to cash, and all banks within scope would face sanctions for each case of noncompliance. This would be a novel regulatory structure in New Zealand, but might be practically workable and might encourage greater cooperation among banks. Alternatively, each bank could be individually accountable for the provision of certain services in certain areas. However, this presents challenges around how accountability is allocated. Both options present considerable practical challenges, which will need to be investigated in consultation with relevant parties if any policy is developed.

Doesn’t exactly instill much confidence.

Many of the problems the Reserve Bank worries about (perhaps arising one day) would, in any case, largely be a reflection of the statutory monopoly on banknotes. So perhaps a better legislative route would be to look at repealing that restriction –  simple one clause amendment to the Act would do it –  and allow banks to issue their own notes.   Perhaps it is now a little late for that, but we don’t know if we keep on ruling out the opportunity for innovation.  It might be considerably cheaper for banks to issue their own notes (as they issue their own deposits) –  since they wouldn’t have to worry about returning them to a central point for value –  and, conceivably, technological innovation might even allow interest-bearing bank notes  (it is the zero interest nature of  the existing notes that creates the lower bound issue for monetary policy).

Bids for new regulatory powers are often a response to issues, problems (or possible future risks) thrown up by existing regulatory or legislative interventions.  The Bank’s latest bid for more discretionary powers seems exactly in that class of bureaucratic initiatives.   The Minister of Finance should say firmly no to this latest bid, should insist on the Bank openly addressing the effective lower bound issue, and might consider asking the Bank what public policy end –  other than higher taxes –  is served by maintaining the 85 year old monopoly on note issuance.  We got rid of most statutory monopolies a long time ago.

 

2019 vs 1969

Michael Reddell Uncategorized

I was listening to a thoughtful podcast discussion yesterday between one of my favourite US commentators, Jonah Goldberg, and Marian Tupy of the Cato Institute (where he a responsible for the Human Progress website)    This morning I read a column by economist Noah Smith along very similar lines.   The bottom line: life just gets better and better (the podcast discussion was more wide-ranging, across history and across countries, and somewhat more reflective, while Smith’s –  much shorter – piece was comparing life in the US in the 1950s and now).

I’ve read numerous books and articles along similar lines: as just two examples, Steven Pinker’s Enlightenment Now and Matt Ridley’s  The Rational Optimist. I’ve even run some of these arguments myself in a New Zealand context, illustrating just how different material living standards are now relative to those 100 years ago.

You won’t get any disagreement from me to the proposition that a market-oriented economy is the best mechanism known to man –  although its innards, which bits matter most, still have elements of mystery –  for generating material prosperity.  You also won’t get any disagreement from me that some times/places in human history have been better than others (on almost any aspect conceivable).  Then again, there have been times and places worse –  sometimes materially so – than those that went before.   Any society in the midst of a civil war is almost inevitably in a particulary undesirable situation.   1970s Cambodia was almost certainly worse than, say, the colonial era, 1940s Germany worse than most times in German history (notwithstanding the fruits of material progress), and so on.

Material gains –  whether things, life expectancies, or whatever –  aren’t everything but they aren’t nothing either.   Even abstracting from the war going on at the time, I was sympathetic to the proposition that no amount of money would make any modern American change places with John D Rockefeller 100 years earlier (except of course that some things of value have no price). I don’t even suppose there are too many takers for 1969 Czechoslovakia (Tupy is of Slovak ancestry) over today’s Czech Republic or Slovakia (not even all those US millenials who answered a recent survey suggesting they had a favourable view of communism).

But some choices –  not ones actually open to us, of course, but thought experiments –  are much less clear-cut.   I got to reflecting on life in New Zealand 50 years ago and that now.

At a material level, even as a woeful underperformer on the productivity front (although yesterday’s release from SNZ suggests they may have found another 1-2 per cent of productivity –  level, not growth rate), real GDP per capita or per hour worked are significantly higher than they were 50 years ago.  But to what end is less clear.

Fifty years ago I lived in Kawerau, which was probably as prosperous a town, if new and a little raw, as could be found in the country –  fruit of the Think Big project of the 1950s.  (From all I’ve seen and read, life in Kawerau today is probably worse than it was then.)  But that isn’t really my comparison.   We didn’t have a great deal –  my father had just taken up a role as pastor of the local Baptist church –  but two of my uncles were partners, apparently reasonable successful, in professional practices in central Christchurch (one law, one accounting).   And if I contrast the lives they, and aunts and cousins, had then with the life my family lives now –  I was a well-paid public servant for decades, my wife now is a well-paid senior public servant –  it is hard to spot the nature of the substantial gains (which isn’t a complaint at all).  That is probably even more true if I contemplate the prospects for my children, given what successive governments have done to the housing market.

Perhaps it is something about my/our tastes, and I’m certainly not suggesting the average material standard of living is worse than it was, just that the gains don’t count for that much with me (unlike, say, the gains in the 50 or 100 years prior to that) –  mostly nice-to-haves rather than things which have me celebrating leaps and bounds in human progress.  Are the cars fancier?  Well, yes of course, but I’m not one of those who greatly values cars.  Is the internet nice to have?  Well, of course (and I’d not be writing this without it), but in what ways would we be substantially poorer without it (it offers an improvement on weekly news magazines and newspapers, but not that much of one most of the time)?  Mightn’t most parents prefer a world in which schools weren’t pervaded by smartphones and their distractions.   There is immense choice of eating out options I guess, but frankly I like to cook, as did my mother.  Again, perhaps it is a matter of tastes.   But the proposition of the evangelists of “progress” is that even the material gains are self-evident and (at least by implication) substantial.  I’m not disputing there are gains, but how much weight one might put on them is another matter.  For materialists, I guess quite a lot, unless diminishing marginal utility sets in for them as well.

(This isn’t, of course, an original point, and is –  among other things –  something of a variation of the story US economist Robert Gordon tells, in suggesting that the real lifestlye-improving gains happened decades ago.)

Perhaps the gains in life expectancy for those born seem less arguable.  And I’m certainly not going to dispute that they are real.  But it brings us closer to the deeper questions about the purpose of life. And about which lives.  And what life.

As compared to 1969, New Zealand now legalises –  and has the taxpayer fund –  13000+ abortions a year, and this ability to have one’s own child put to death is deemed by our leaders some sort of basic human right, a matter of “health”.

As compared to 1969, our society grapples with disconcertingly high suicide rates, especially among some of our young people.

And, as compared to 1969, our system is on the brink of legalising assisted suicide.

In some parts of other Western societies, even adult life expectancies are falling, fruit of some mix of drugs, isolation, despair or whatever.

And for any Christian –  and Christianity has shaped the culture from which the bulk of our population comes for perhaps 1500 years –  this earthly life is just the foretaste, the preparation, for eternal life with God.  That doesn’t make life on earth unimportant –  far from it –  but creates a different perspective on the value one might attach to a few more years here.    Societies in which there is nothing more are also ones in which it is much harder to envisage a cause, a choice, worth dying for.

Why else might one legitimately be underwhelmed by what has become of the country since, say, 1969? I could list:

  • the rise of welfarism,
  • the normalisation of birth outside marriage,
  • the abandonment of any societal recognition of the importance of marriage as a bedrock institution of society.
  • the coarsening of our culture (each Saturday I’m still astonished that the Herald runs a column celebrating what were once vices, in some traditions even “deadly sins”,
  • easy and extensive access to pornography (flip side of the advantages of the internet), that degrades all those involved,
  • the normalisation –  nay celebration – of the vice of homosexual practice,
  • the current transgender mania,
  • the loss of any sense of a unifying day of rest.

And, at the heart of it, the decline in Christian faith and observance (there were never “golden days”, but everyone recognises the difference between then and now.  Every society has a “religion” of sorts –  the taboos and understanding by which societies operate and people interact –  and I find almost nothing appealing about modern New Zealand’s provisional replacements for Christianity.

I could go on and add that in 1969 our main political parties and their leaders were pretty clear about the nature of Communism and the evil represented by the regimes in the Soviet Union and the People’s Republic of China.  The Soviet Union has, mercifully, gone, but the evil represented by the PRC/CCP is as real as ever, and more threatening to us, since our “elites” have abandoned all sense of right and wrong where the PRC is concerned, pursuing (it seems) only money, whether through trade or party donations.

And there is the increasing power of the state, enabled by technology.  Surveillance, and coercive, states aren’t just a threat in China.

And so on and so forth.

Are there alternative perspectives?  Well, of course.  Perhaps as many as there are “religions” or world views.   Some will regard where we’ve got to in the last 50 years as a giant step forward.  For all the material and (often double-edged) technological advantages, personally I’d exchange 2019 New Zealand for 1969 New Zealand.  It isn’t a choice or an option, but to me what we’ve gained is small compensation –  not even really directly comparable –  to what we’ve lost.

Credit conditions

Michael Reddell bank capital requirements, Monetary policy

Back in mid-2009, just as the first glimmers of recovery  from the severe recession were emerging, the Reserve Bank launched a credit conditions survey (of lending institutions).  It was a sensible enough initiative but, to be honest, I never paid much attention to it.  We knew conditions had got very tight during the recession and (at least in my remaining time at the Bank) the data weren’t that interesting –  of course credit conditions were easier than they’d been in the midst of that financial scare, and when there were changes shown they were for pretty obvious reasons (eg access to housing credit was reported as tightening when the Governor imposed LVR restrictions).   Also, the number of institutions covered was quite small, and one had to worry that results could be affected by who happened to fill out the form in a particular institution on a particular occasion (plus, when reporting to your prudential regulator incentives aren’t entirely straightforward).

There is a series of questions about:

  • observed loan demand (by class of loan),
  • expected loan demand,
  • observed credit availability,
  • expected credit availability, and (since early last year)
  • a series of factors potentially affecting the availability of credit.

That makes for lots of series.  I’m less interested in the demand side, which is largely going to reflect stuff we see captured in other data (eg housing turnover, business surveys etc).  But demand for new business loans does seem to have fallen away somewhat in recent years.

But what about the supply side?

Here is observed credit availability over the last six months (the survey is six monthly) for the four business sectors (there was no particular change in availability to households).

credit 1

And here is what respondents expect (presumably from a position of knowledge, responsible for something around overall credit within their own institution).

credit 2.png

Yes, there is some idiosyncratic variability in the response at times, but in the ten year history of the series we’ve seen nothing like the tightening in expected conditions observed in the last few quarters, now across all the business classes (there is little movement on the mortgage and personal household lending categories).

It isn’t easy to know quite how much weight to put on these responses –  for a start, with only one incomplete cycle of observations, we have little idea of “normal” variability as economic conditions turn down.  But as the recent downturn is larger than the post-2009 upturn (coming off a pretty savage tightening in conditions) it doesn’t have the look of something that should be quickly glossed over.   It looks to represent a potentially quite material tightening in monetary and financial conditions.

The other question they have about actual credit availability might also tend to confirm that unease.  Respondents are asked about how credit availability is now compared to the past three years (I guess to smooth through idiosyncratic influences on the past six months).  Here are the responses for the business sector loans (household was directly and materially affected by the waxing and waning of LVR restrictions, a policy intervention).

credit 3.png

Again interesting that there had been little movement re SMEs, but for the other three business categories the scores are getting back towards levels we saw just after the last recession.

Early last year the Reserve Bank did a welcome extension to the survey and started asking respondents about the influence of various specific factors that could reasonably influence credit availability.  Here are answers.

credit 4

Cost of funds hasn’t been an issue in changing credit availability (nor would you really expect it to be –  should affect price rather than availability), and neither has competitive pressure, but look at those four striking negative yellow bars.    Risk appetite among the lenders, risk capacity, and (distinctively) regulatory changes have all worked to (apparently materially) tightened credit conditions.

Sadly, here we reach the limits of the survey. It would be fascinating to be able to disentangle quite what is going on.  There is a quite plausible story that all three of the other negative yellow bars are primarily a reflection of the fourth, regulatory change (presumably the Governor’s capital whims).  Perhaps it isn’t so, and there are independent reassessments of risk and willingness to bear risk going on in head offices, whether here or in Australia, but whatever the precise combination of factors it is pretty likely that regulation is already weighing fairly heavily on credit availability in New Zealand. (I only qualify that claim a little because banks perhaps have an incentive to play up the issue, knowing that the Governor is about to make his final capital decisions, but I doubt that is more than a marginal factor here, given the small number of respondents and the ability of the Bank to query each).

You may recall the consultation document the Bank published almost a year ago on the Governor’s proposals to greatly increase capital requirements for locally-incorporated lenders.  You may not recall the discusssion of these sorts of effects, let alone the apparent differential sectoral effects.  That isn’t the fault of your memory.  There just was no discussion of those issues in the document.  Which seemed odd at the time, and even more extraordinary now.  It will be interesting to see how the Governor responds to these data in his two scheduled press conferences in the next few weeks (MPS and FSR).

While these data are clearly of some relevance to the bank capital debate, my main interest in them was in the more immediate issues around the appropriate stance of monetary policy and the setting of the OCR.   There appears to have been quite a sharp change in market sentiment/pricing and the views of some market economists this week on the chances of the Bank cutting the OCR on 13 November (the reasons for that change still aren’t fully clear, and one is left wondering if the Bank has been signalling –  by accident or design –  some change in its own view).

My interest is much less in what the Bank will do in the short-term, but in what they should do (which should, of course, make my commentary of interest to the Bank, given the Assistant Governor’s speech the other day, but…..).  “Will” and “should” eventually tend to converge, but it can take some considerable time for them to do so.

But if we grant that this credit conditions data is material the MPC did not have when they did their August forecasts, or made their slightly panicked last minute decision on a 50 basis point cut, and did not even have at the last OCR review, it really should be  colouring the projections they finalise next week (even if the variable might not feature in their formal models).  Add in own-activity business survey data that has shown no signs of rebounding since August, inflation expectations that have either fallen further (surveys) or remained very low (inflation bond breakevens), and a core inflation rate that remains consistently materially below the (focal) midpoint of the inflation target, the case for not cutting the OCR in November seems weak at best.  There isn’t another review opportunity until February, the world situation (if not one of sentiment spiralling downwards) seems no stronger substantively, and for a committee that was sufficiently rattled to do a 50 point cut only three months ago –  and not to have seen anything much improve since then –  to do nothing now would only further muddy the communications waters, leaving people even less clear about how the MPC thinks, or that there is a consistent and disciplined process at work, secreted away from the public/market spotlight.

(Bearing in mind that there is still some material local data to be released before 13 November) the risks around a further OCR cut in November at present look quite asymmetric.  As we drift closer to the next recession, and to the limits of conventional monetary policy, the very best thing that could possibly happen would be positive surprises on core inflation, spilling over into somewhat higher inflation expectations.  People are no longer convinced inflation will settle at 2 per cent or above. It would be better, for almost everyone (certainly for the management of the next downturn) if they were.   When credit conditions appear to be tightening quite materially –  and that even before the final decisions are announced –  getting that sort of outcome will be made harder than necessary if the Bank ends up setting on its hands, confusing messaging, all for what?  So that the Governor can get some perverse psychic satisfaction from surprising people again?   Unpredictability is not a desirable feature of public policy.

 

Monetary policy communications and the lack of transparency

Michael Reddell Monetary policy, Reserve Bank, Uncategorized

The Reserve Bank’s Assistant Governor for monetary policy and financial markets, Christian Hawkesby, went off to Sydney earlier this week to talk to some investors about New Zealand monetary policy communications.  Hawkesby now has tenure and independence –  at least in principle – as a statutory officeholder, a member of the Monetary Policy Committee, appointed directly by the Minister of Finance.

It was perhaps telling that (a) the speech was delivered on a New Zealand public holiday, (b) the text wasn’t released for another 24 hours, and (c) we have no record of what Hawkesby actually said, including in response to questions.  That is no way to do monetary policy communications.

Perhaps while he was in Sydney Hawkesby dropped in on his peers at the Reserve Bank of Australia.   The RBA has about 45 speeches/presentations from senior managers showing on its Speeches page for 2019.   For all but three of them –  and none of those three on topics that appear market-sensitive –  there is video, audio or a Hansard transcript (several of the Governor’s appearances were to parliamentary committees).  It doesn’t seem to make any difference to the RBA whether the speeches etc are given overseas, out in the provinces in Australia, or in downtown Sydney or Melbourne: the standard they set for themselves is that when they say something, it is made generally available.    Anything else poses a risk –  actual or in appearances –  of unequal access to potentially market-moving, or just insightful, official information and perspectives.  That is just one aspect of communications on which the Reserve Bank of New Zealand falls a long way short of best practice.  There are 12 speeches from senior managers on the Reserve Bank of New Zealand’s Speeches page for 2019, and for only of them is there video footage (that a puff piece by the Governor –  which I wrote about here).

Hawkesby’s speech came in two parts.  The first was devoted to repeating longstanding Reserve Bank spin about how transparent it is, supplemented by some Orr-esque lines about how surprising the market is no bad thing (the second part was defensive play around the surprise August 50 bps OCR cut).  There were no fresh insights or arguments, which in itself was a bit disappointing from so senior a figure, relatively newly returned to the Bank  –  despite the relatively junior-sounding title, Hawkesby is, in effect (and in Wellington public service lingo) a deputy chief executive responsible for half the Bank’s core functions.  Anywhere else in the world he’d carry a Deputy Governor title.   Those are the standards his speeches should be held to.

The Reserve Bank (longstanding) main claim to being highly transparent is that it publishes a future track for the policy interest rate (the OCR) for a period two to three years ahead.  We were the first central bank to do so, in 1997.  As Hawkesby notes, despite 22 years experience, only a handful of other central banks  (four small advanced country ones) have followed our lead.  Reasonable people can debate whether publishing a forward interest rate track is the best way to do things (I’ve never been convinced myself) but when none of the world’s leading central banks have taken that path –  and all will, quite seriously, proclaim a commitment to transparency –  it probably isn’t something to put quite as much weight on as the Bank has done (through successive Governors/staff).

I’ve characterised the publication of the forward interest rate track as being highly transparent about something the Bank (now, at least formally, the MPC) knows almost nothing about.  Economic forecasting is a mug’s game, and there is little evidence that anyone can usefully forecast economic developments more than perhaps a quarter or two ahead….and yet, monetary policy works with a lag, so a medium-term OCR projections (for, say, 2.5 years ahead) implicitly requires –  to be meaningful – some intelligent view of inflation prospects perhaps four years hence.  No one can do it in a way that has any useful substantive information.

And if the Reserve Bank is pretty transparent about the stuff it knows almost nothing about –  and has to divert scarce resources to generating such tracks –  it is really quite strikingly non-transparent about the stuff it does know more about.  For example:

  • we have a Governor, clearly the most important player in the system, who has not yet given a particularly substantive speech on monetary policy, the economy, and inflation (which would otherwise offer insights on his thought processes, his mental models, his ability to process and analyse data etc),
  • we have a Chief Economist –  also a statutory appointee as member of the Monetary Policy Committee –  who has not given a speech or said a substantive word in public since he was appointed,
  • as above, the Bank isn’t particularly transparent around the speeches it does give (and especially around answers to questions),
  • we have three non-executive members of the Monetary Policy Committee from whom not a word has been heard since they were appointed.  We know nothing about how any of them think about the policy targets towards which they are working, about how economic developments are unfolding, or about the “reaction functions” they use  (and this is so even though the rules allow them to speak), and
  • the Bank is totally untransparent about the background analysis produced to support monetary policy decisionmaking.   The current government –  not naturally particularly transparent –  has adopted a practice of pro-active release of Cabinet papers, many Budget-related papers have long been pro-actively released, but ask for any background papers re monetary policy decisions –  even with quite a lag –  and the Bank will simply refuse (and, sadly, they have the ineffectual Ombudsmen –  over several appointees – wrapped around their little finger in clasping this taxpayer-funded analysis tightly to their chest).  Perhaps it is lawful, but it simply isn’t transparent.   (A few years ago, after many months of trying, I managed to get them to release background papers for an MPS from 10 years previously –  but no one supposes they would release such material from, say, two years ago.  If there is a decent argument for any confidentiality around this material, it could only credibly mounted for the period from one MPS to the next –  ie three months or so – at most.)

That isn’t good monetary policy transparency, nor is good open government (the latter not being a consideration that ever weighed much with the Bank).

Hawkesby attempts a defence of the Bank’s preferred practice, in which only the Governor speaks about monetary policy (no speeches of course, just MPS press conferences) and to the extent that underlings like Hawkesby speech they largely parrot the Governor.   This is the best he can manage

A third limitation of transparency is the noise that it can create – an example of this is how to capture the diversity of views of individual members of a committee tasked with setting interest rates.

An example of this is how to capture the diversity of views of individual members of a committee that sets interest rates. Each individual member regularly sharing their views on the economic and policy outlook can make it harder for financial markets to interpret the reaction function of the collective group. While I worked at the Bank of England, I always remember the head of communications bemoaning the cacophony of voices. More transparency around the perspectives of individual members could also create incentives for those individuals to hold on to a previously published position even as new information emerges, for fear of being seen as ‘conceding’ their position.

A paradox of these limitations is that greater transparency does not necessarily equate to increased clarity for market participants and the general public. Just because more information is available does not necessarily mean the audience will have a greater understanding of how and why central banks make decisions.

But there isn’t much there.  Of course Communications managers are keen on message discipline –  always have been, always will be –  and at the Bank of England management was long not very keen on the independence of the external MPC members anyway.  But isn’t it striking that whereas the Reserve Bank seems to believe that New Zealanders –  public, markets –  can’t cope with a diversity of views (about a highly uncertain business), the national central banks for the largest advanced economies –  the US, Japan, and the UK –  in fact do cope quite well with having MPC members explicitly voting against a majority view, or articulating a model or analytical insights a bit different from that of others on the relevant committee.   Sweden is a succesful small country example.  The ECB is a bit different –  and there are some reasons why, around minimising pressure on members to act for their own country’s national interests –  but even in the ECB there is plenty of open recognition of differences of view among the monetary policy decisionmakers.   It isn’t as if central bankers know from year to year –  often not from quarter to quarter –  what they are going to do: events happen, interpretations evolve, and particular hypotheses are openly challenged and scrutinised (including those of monetary policy decisionmakers, when we are allowed to see them).

So, no, the Reserve Bank of New Zealand really isn’t particularly transparent at all.  And the newly published minutes really represent not much of a step forward at all.

One of Hawkesby’s points is that the Bank is keen to learn from outsiders –  yes, even “bloggers”.

When private sector economists, analysts, commentators or bloggers don’t agree with our policy decisions or our projections for the economy, it can be an uncomfortable message to hear. But it is an invaluable exercise to test our assumptions and reasoning, even if we don’t agree with their conclusions, we inevitably learn something along the way and strengthen our analysis of the issues.

Good to know (although it is a bit to take seriously when we see how the Governor responds to challenge, criticism, or alternative perspectives on another of those highly complex and uncertain issues –  appropriate bank capital requirements).

But this line is really used to buttress a rather silly line the Governor has run on a few occasions about the (alleged) dangers of the markets paying too much attention to trying to guess what the Bank is up to, in turn (allegedly) reducing the information the Bank itself can get from market prices.   This is, we are told, one reason why it is just fine for the Bank to do things that take markets totally by surprise (notably, the 50 basis point OCR cut in August).

It really is a nonsense argument, even if he can find a couple of footnotes to attempt to buttress his case. In fact (and in effect) he more or less concedes later in the speech when he highlights things like falling medium to long-term inflation expectations (including from the indexed bond market –  a welcome Hawkesby innovation to have the Bank even acknowledge the indicator) that were concerning the MPC when they made their decision.  Almost certainly those indicators –  eg from 10 year bonds – would have been just as they were whether markets thought the Bank was going to cut 50 bps in one go, surprising almost everyone, or (say) spread the cuts over two 25 bps cuts.

I’m not one of those who think that monetary policy decisionmakers should always deliver on market expectations. But usually if market expectations are very wrong (not –  eg –  just 10 expected a cut, 12 expected no change) it is the fault of the monetary policy decisionmakers themselves.   In those circumstances, they add noise and volatility that is simply unnecessary and has no redeeming societal merit.

And as I noted at the time of the August MPS, the 50 point cut looked a lot like a rather rushed last minute decision, that wasn’t really supported by other the numbers (they themselves produced) or the MPS text.

And what makes it a bit more concerning is that it is pretty clear the Bank itself wasn’t intending to move by 50 basis points even a few days ago.  The projections they published yesterday were finalised on 1 August (last Thursday).   On those numbers, the projections for the OCR (quarterly average) were:

September quarter 2019    1.4 per cent

December quarter 2019     1.2 per cent

March quarter 2020            1.1 per cent

With the next OCR review in late September and the following one in md-November, those projections –  adopted by the whole MPC – clearly envisaged not getting to a 1 per cent OCR even by the end of the year.

The bulk of the Monetary Policy Statement itself is written in the same relatively relaxed style, with no hint of a change in policy approach, and thus no proper articulation of the reason for it, or (hence) for how we should think about how the Committee will react, in principle, at future OCR reviews.   The Bank has added to uncertainty around policy, not reduced it.    In a similar vein, there is a new two page Box A in the statement on “monetary policy strategy”, intended to run each quarter, which is so general as to add nothing to the state of understanding of what the MPC and the Bank are up to.

And you will look in vain for any real insight from the minutes of the MPC meeting.   We are told

The members debated the relative benefits of reducing the OCR by 25 basis points and communicating an easing bias, versus reducing the OCR by 50 basis points now. The Committee noted both options were consistent with the forward path in the projections. [a claim that demonstrably isn’t true –  see above] The Committee reached a consensus to cut the OCR by 50 basis points to 1.0 percent. They agreed that the larger initial monetary stimulus would best ensure the Committee continues to meet its inflation and employment objectives.

But nothing about the considerations Committee members took into account in belatedly lurching to a 50 point OCR cut, or how they think about the conventions and signalling around using 25 point moves vs 50 point moves (when things aren’t falling apart here –  and it was the Governor yesterday who announced, oddly, of New Zealand that “the country is in a great condition”).

That wasn’t good or effective monetary policy communications.  It wasn’t a transparent insight on how the Committee is operating, the sort of reaction functions members are using, their view of MPS reviews vs the other OCR reviews.    It was –  or came across as –  a lurch (even if, like me, you thought that the OCR needed to come down quite a bit, quite quickly).

I’m going to end with two more examples of a lack of serious transparency.  Near the end of his speech Hawkesby observes

There are plenty of communication challenges ahead, especially if monetary policy in New Zealand moves into a less conventional territory, and we end up adopting new tools and approaches.

These will need to be explained clearly to both financial markets and the people of New Zealand.

No doubt, but would be an open and transparent central bank, wanting to build and maintain confidence in (a) its potential instruments, and (b) its actual decisionmakers and their advisers want to be much more open than the Reserve Bank has actually been?  Wouldn’t discussion documents outlining potential issues and options be a good idea?  Wouldn’t seminars and workshops with outside experts and market participants be a good idea?  Apart from anything else, at least in principle (as the Assistant Governor said) the Bank learns something from such engagement, challenge, and critique and in the process improves its own understanding and analysis.  It isn’t as if anyone is suggesting they pre-commit to when particularly instruments might be used, so this stuff shouldn’t really be market-sensitive, but it is quite important, potentially to us all (and was we know the Bank’s own research capability has been gutted this year).  And it isn’t as if the Bank’s background analysis on other matters –  bank capital again –  should fill us with confidence and willingness to simply “trust us, we know what we are doing”.

And on a smaller note, the next Monetary Policy Statement  and OCR decision is on 13 November.  As the Assistant Governor highlighted, inflation expectations are quite a significant influence in Bank thinking at present (rightly or otherwise).  And yet the main inflation expectations series –  the two year ahead measure in the Bank’s own survey –  isn’t scheduled for release until 12 November.   I participate in that survey.   Responses were due by midday last Tuesday (22nd). It is an electronic survey and if the results are not already in the Bank’s hands, they assuredly could be (it is pretty simple survey with fewer than 100 respondents, taking a matter of hours to compile at most).  And yet the Bank is sitting on this information until the very last minute.  By the time we get it, their decision will have been all-but-finally made, their MPS document completely written. If they were really serious about the desire to listen and learn, from markets, commentators, nay even “bloggers”, they’d have made sure the information was compiled and published quickly, allowing the Bank itself to listen to the response of outsiders in processing the significance of such important (to them) economic data.

If they were really serious…..instead, they mostly seem interested in fending off critics and keeping to themselves the stuff they know, while distracting us with their transparency about the stuff they don’t know much about at all (and where most central banks have not thought it advisable to follow the New Zealand lead).

 

 

Lighthouses warn people away from the rocks

Michael Reddell New Zealand economic performance, NZ politics

In a few weeks time Christians will begin to mark the season of Advent.  One of the texts often read in liturgies in that season is from the prophet Isaiah.

The people walking in darkness have seen a great light; on those living in the land of deep darkness a light has dawned.

At The Treasury yesterday, a visiting academic proposed such a vision for New Zealand’s place in the world, as the Pharos state.

Bernard Cadogan is a New Zealander now living in Oxford.  According to his bio

Dr Bernard Cadogan has his doctorate from Oxford University on Empire Studies and constitutional theory. He served Hon Bill English (1996-1999, 2005-8), the National Party Opposition (1999-2003), Hon Trevor Mallard (2003-5). He lives at Oxford UK with his wife and three children.

He was also, apparently, a foreign affairs adviser to Bill English in the latter’s brief stint as Prime Minister and has been a consultant to The Treasury on various occasions and issues.  He is formidably well-read, very fluent, often stimulating….and yet, so it seems to me, much better on history than on contemporary politics/policy, and really rather at sea when it comes to economics and economic policy.

I thought I’d written about his previous, extraordinary, Treasury guest lecture in 2016, given just a week after the Brexit referendum (a topic on which he had been providing consultancy services to Treasury), but it seems I never got round to it.    My notes record talk of “pogroms by ballot box”, of an EU that is “virulently alive” while there is “something dead in the British Isles”, comparisons with the Glorious Revolution of 1688, a summary remark along the lines of “darkness won: the fog has rolled back in”, the Brexiteers as “sons and daughters of the counter-enlightenment”, depriving young people of “a second European homeland so that some might have a Narnia”, and so on.   As it happens, the text of that earlier address is still on Treasury’s website –  which enables me to quote in its full “glory” this quote, only the gist of which I’d managed to jot down at the time.

Irrational romantic nationalism and the archaic narratives of historians and of the nationalist culture industry have prevailed over rational economic argument. Grub Street and Grub Street politicians from “Spectator-land”,  with the prose skills of another era, have worsted the experts and the technocrats, and rendered nugatory the best quantitative techniques.

You get the sense that Dr Cadogan wasn’t very keen on Brexit.

In yesterday’s address there was none of that tone at all.  It was quite a remarkable transformation, especially when Brexit still hasn’t happened –  if I heard correctly that might have something to do with consultancy services Cadogan is now offering to parts of the UK government.  But it seemed to be there by counterpoint, in his theme that in this troubled and turbulent world

Throughout his talk Dr Cadogan uses the image of the great lighthouse of Alexandria to represent New Zealand’s personality in global affairs, as a source of hope and comfort to countries and peoples sailing turbulent waters.

It was bringing to mind more of Isaiah

40 Comfort ye, comfort ye my people, saith your God.

2 Speak ye comfortably to Jerusalem, and cry unto her, that her warfare is accomplished, that her iniquity is pardoned: for she hath received of the Lord‘s hand double for all her sins.

3 The voice of him that crieth in the wilderness, Prepare ye the way of the Lord, make straight in the desert a highway for our God.

4 Every valley shall be exalted, and every mountain and hill shall be made low: and the crooked shall be made straight, and the rough places plain:

It was, and is, more than a bit of a mystery as to why anyone much –  at least in the advanced world –  should look to New Zealand for anything, let alone “hope and comfort”.  Cadogan never did address that point, apart from some quick passing reference to questions he gets abroad –  presumably from people within his own ideological bubble – about “how does New Zealand do it?”.  “It” here also never being defined, but I presume it had something to do with the popular adulation, in a few quarters abroad, for our current Prime Minister (shorn of any actual policy programme).

The lecture began with a painting by Nicholas Poussin in which the (small) servant Cedalion guides the giant Orion towards the sun, and healing.  Small nations may, Dr Cadogan asserts, have special powers –  at least if they can avoid getting stomped on by giants.   And New Zealand….oh New Zealand,

  • that radical democracy (the “most radical”)
  • exemplary in so many respects
  • admired for our democracy, values, responsibility, human rights, decency
  • a successful market economy,
  • excellent institutions,
  • where the Treaty of Waitangi combines utopianism and justice,
  • and where there is no hatred, no contempt, no ideologues (he seemed particular exercised here about some UK former junior minister, now ennobled as Lord Freud).

(He claimed that Henry Kissinger had once said that law was New Zealand’s greatest gift to civilisation. I’m not sure if someone was getting confused with Solon, or even Coke or, say, Blackstone.)

We, in Cadogan’s view, have a story to tell the world, we could be a “moral realist” “force multiplier” to the world.

There have been times in our past when a good number of serious people abroad have looked to New Zealand as some sort of exemplar.  Like them or not, the reforms of the Liberal governments in the 1890s attracted many visitors and attempts to explain the New Zealand story over the next couple of decades.  Probably not entirely unrelatedly, New Zealand was also among the handful of most prosperous places on earth.

There was a somewhat similar effect in the wake of the reforms of the late 80s and early 1990s.  Like them or not, they were adopted with energy, verve, vigour, rigour and with some genuine innovation. By this time, people –  here and abroad –  knew that New Zealand had fallen well behind (economically, and in terms of what a strongly performing economy could offer) and the reforms were some sort of beacon of hope, that would put New Zealand back on a high-performing path.  You still find the occasional residue of that sort of sentiment –  although mostly from people who haven’t looked at any data for the last 25 years.     In that period there was, at least among some on the left, some admiration for the New Zealand ban on nuclear ships –  some genuinely hoping that it would show the way to other countries (typically it didn’t).

But quite what are we to suppose that people –  elsewhere in the advanced world – should look to us now and admire or envy?  I’m at a loss.  A questioner in yesterday’s seminar pointed to the disgrace that is our housing market, the rise of homelessness etc.  I’d, of course, frame the issue more broadly, and highlight our continued relative economic decline.  In 1900, you might have missed great art and architecture, museums etc if you came to New Zealand, but at least average incomes would be as high as on offer anywhere.  Now, you face distance, a pretty thin representation of the best of our civilisation, and you get to be materially less well-off than you’d be in most other advanced countries.   Are we “leading the way” on climate change, or any other left-wing causes?  Not that I’d noticed.   No doubt there are niche areas where New Zealand people are well-regarded (one hears it re trade negotiations, but then again why not unilateral free trade?) and few people are ever likely to express much angst about New Zealand (a threat to no one).  But a light to the world?  Really?  Who is looking?  Who cares?  Where, for that matter, are these “values” Cadogan talks of –  none that are admirable on display re the PRC (and for a lecture supposedly on geopolitics, there was almost no mention of China).

Another questioner noted that for all Cadogan’s praise of our democracy, actually there were few checks on the executive, great concentrations of power, and little effective accountability.  It more or less stumbles on, but to what end?  And how resilient would it prove to be if really put under pressure?  The questioner might have added specific points about how weak the media generally is, the limited range and poor quality of much of the public debate, the weak role academics and think-tanks play here, and the degradation of the capability of the upper reaches of the public service.

Yet another sceptical questioner –  Prof Girol Karacaoglu from Victoria University –  noted that for all Cadogan’s talk about New Zealand exceptionalism, he (Karacaoglu) was reminded of a line from a book he’d read –  John Gould’s  The Rake’s Progress – soon after coming to New Zealand 40 years ago, suggesting that things in New Zealand both good and bad tended to follow, perhaps 15 years behind, trends from abroad.

Are there valid points in what Cadogan was saying?   Yes, although some probably don’t carry much substance.  Are we a great power or a small player?  A small player.  Ever was and probably ever will be.  Do small countries survive the rise and fall of great powers?  By and large, yes.   And are there areas in which it is more likely that we can learn from other small countries –  and perhaps work effectively with them – than from very large countries?  No doubt.

Cadogan urges a peripatetic “colloquy” of small countries –  he listed Norway, Sweden, Finland, Denmark, Netherlands, Portugal, Switzerland, Ireland, Australia and Canada (the latter two far from small) and “perhaps” Uruguay.  This grouping could, he suggested, learn from each other.   It is hardly a new idea, and of course in many areas of policy there are just such groupings (eg a “small inflation targeters” grouping of central banks).     But it wasn’t really obvious what New Zealand had to offer or –  at least on some key issues –  learn.    Our strategic position is very different from almost all these countries.  Which is a variant on the point that our geography is very different –  incredibly remote –  and there are few/no relevant national comparators (and not very encouraging subnational ones) when one contemplate the implications of that remoteness.    Perhaps Uruguay fits the bill, but for all its relative success in the last decade or so, it remains materially poorer and less productive –  with less of a record of political or economic stability – than New Zealand.

Cadogan seemed very taken with Ireland –  he’s an Irish citizen too apparently – but showed no sign of appreciating that for all of Ireland’s exaggerated GDP per capita, once you look at the bit of economic activity benefiting the Irish people, Ireland’s story (prosperity) is nothing out of the ordinary: it is a fairly prosperous (but not first rank) European economy, and if there are lessons for New Zealand they are mostly about what we can’t do (not being a short distance from hundreds of millions of other very prosperous people).

There was upbeat talk about what a difference a New Zealand Nokia –  a big brand signifying New Zealand –  might make: Cadogan saw such a brand as a “sports lifestyle” one that would “walk through the walls that ideology imposes”.  Perhaps, but isn’t this just wishful thinking?   A bit like the talk, inspired by mention of the top Swiss universities, of what a difference it might make if New Zealand had two really good universities, one in sciences and one in humanities.  And yet, starting relatively poor and very distant, there was no hint of how this alternative world might come to be.

There are plenty of places in the world worse than New Zealand. But the notion of the world –  advanced world –  looking to New Zealand as some sort of lead, exemplar or guiding light seems little more than ludicrous in our current diminished state.    If anything, we might be a bit of an embarrassment –  the nice little country, that did so many reforms, and yet look at them now, still drifting  ever so slightly further behind, without even a political system or civil society to insist on something better, to set a different course.  And so remote that we don’t ever matter much to most of the rest of the world.  Sure, we don’t have Donald Trump –  but, fortunately, neither does anyone else.     But we have a (former?) CCP member, former member of the PRC military intelligence system in Parliament (chairing a Select Committee no less), and no one in the establishment here says a word –  at least in the US there is disquiet, and more, about Trump.

Lighthouses –  grand or otherwise –  warn sailors off rocks.  I noticed in the NZ History Twitter feed that yesterday was the anniversary of a dreadful maritime disaster here in 1894 (one of the two or three worst days, per capita, for the peacetime loss of New Zealanders in history) –  no mention of a lighthouse in the write-up.  If New Zealand is any sort of lighthouse to the world –  on these rocks pointed at the heart of Antarctica –  it is perhaps in the form of the salutary lesson: don’t do as we did, don’t end diminished as we now are.

Fluent and stimulating as Cadogan can be, it might also be a bit more encouraging if our Treasury itself showed signs of leading the way towards a much better-performing economy.  Perhaps we never again can lead the world –  as we were doing 100 years ago –  but whether it is economic policy, housing, or just the quality of our diminished government institutions themselves, we have to be able to do better than we are now.

 

Two years on

Michael Reddell labour party, New Zealand economic performance, Uncategorized

The weekend newspapers had several articles highlighting the second anniversary of the New Zealand First choice that led to the creation of the current government.  There was, for example, the double-page spread  in the Herald devoted to a not-at-all-searching interview with the Prime Minister and the Minister of Finance.  And there was another double-page article in the Dominion-Post looking at the government’s performance under a range of policy headings.  Since the government’s term is now two-thirds over –  likely to be in full campaign mode (say) nine months from now –  it seems not unreasonable to take a look at performance.

The Stuff political stuff divided up nine policy areas between them and wrote short reviews of the government’s performance in each of them.  On my reading, they tended towards a generous assessment.  All governments do stuff –  sometimes even just things in the works under a previous government – and where this government has done most (education notably) there isn’t a huge amount of evidence that there were real problems that needed fixing, or that their fixes were dealing with whatever real problems there were.

Take housing, for example, where the Stuff journalists summarise thus

Two years into the Government’s term, housing is far from Labour’s strong point, but it is not an area of total failure.

So house prices are still rising, rents are still rising (even in a low-interest rate world in which provision of rental housing could/should have been cheaper than ever) and there has been no legislation to free-up urban land markets, or to compel local authorities to operate a more liberal approach.   Set against that, a foreign buyers’ ban was largely irrelevant, and there is little reason to suppose that building a lot more state houses will increase the overall effective supply of housing (certainly won’t deal with the land issues).  For what was declared to be a “crisis” –  I’ll just settle for disgrace –  what has been done, or accomplished, is astonishingly little.  And it isn’t as if markets are pricing in better outcomes in future either.

But what really caught my eye was that there was no discussion of the government’s economic policy performance.  One might reasonably grant them a pass mark on fiscal stewardship –  but on anything beyond that the best reason why Stuff might have chosen to overlook this key area of policy is that there just isn’t much there at all.

Back when they were in Opposition we would, occasionally, here about the lack of any decent productivity growth, talk about growing export sectors, and so on.  Even today, the mantra of a “productive and sustainable” economy gets rolled out from time to time…..but with almost nothing to back it.

Actual productivity growth still languishes – running at no more than 0.5 per cent per annum, slower than in most other OECD countries. (It is fair to note here that there could be material revisions to a large number of macro series over the next couple of months, consequent on the census (and subsequent creative efforts) results, but there is no obvious reason to anticipate material improvements.)

There is no sign that the external orientation of the economy has strengthened (eg exports and imports as a share of GDP). no sign of robust business investment, and of course we all know that business confidence results are in the doldrums.  Interest rates have had to be cut further and the real exchange rate remains pretty high.

And what response has government policy made?   The government seems to have made quite a fuss about the new research and development tax credit. But they’ve produced no sustained analysis illustrating why this will make a great difference – and no sustained either looking at why firms didn’t regard higher rates of R&D spending here as offering attractive risk-adjusted returns.  And that really is about it.

And on the other hand, we have the government sitting idly by while the Reserve Bank Governor pursues his whim of making credit less readily available and more expensive, a halt to most new road-building even as the population continues to increase rapidly (and not, even, say, a congestion-pricing regime that might help reconcile the two), a ban on most oil and gas exploration, looming new regulatory restrictions around water.  Oh, and immigration policy –  for which there is no evidence of systematic economywide gains, in a country where (fixed) natural resources underpin prosperity –  is, if anything, becoming more liberal.

The government keeps telling us it has a plan.  I wrote here at the start of the year about an economics speech the Prime Minister gave, concluding

If there is any sign of a plan, it isn’t one that is going to do anything to lift our economic performance, in the short or longer-term.   All indications are that the Prime Minister doesn’t care. 

And then last month the government released something they did call an “Economic Plan” – in fact a thirty year one.  Notwithstanding all the glossy pictures and long lists of points, it sank without a trace, barely even reported at the time, even with a supporting op-ed from the Prime Minister herself (my take was here).

Once upon a time, I wondered (perhaps naively) if perhaps they –  upper reaches of the Labour Party – really did care.  They should.  After all, it is their traditional voters –  the poorer people, the working classes, the younger –  who suffer most from the decades-long failure of successive governments to improve New Zealand’s woefully poor productivity performance.    But all the evidence from their time in office is that any care is superficial at best.  Sure, they’d probably welcome a much better performing economy if it suddenly dawned fresh and shiny.  But they seem to have no real ideas, no compelling narrative, for how to markedly re-orient our economic performance, and they is no apparent interest in finding answers, or ensuring that our economic policy and analytical institutions are delivering them serious advice, grounded in the actual experience of New Zealand, on policy approaches that might really make a difference.

It is an utter abdication of responsibility.  No one made them run for office, no one forces them to stay in office, but when they take office they have responsibilities for the future prosperity of New Zealanders that they show no sign of taking at all seriously.

An academic economist left this comment on one of my weekend posts

With this in mind, I must confess that I always threaten to fail my Otago students if they don’t migrate to Austalia, because it shows they haven’t learnt anything from me; but the university doesn’t allow me to deliver on the threat. Still, most would be financially better off if they took this advice, and migrated to a place where better firms are located, and sought jobs there.

Sadly true.  And what a sad commentary on decades of policy failure here: Labour ministers currently hold all the key portfolios (Prime Minister, Minister of Financem Minister of Economic Development) and it is their failure now.

 

Falling population shares: a highly-productive big city

Michael Reddell Housing, Population, Productivity, UK

Writing about Wales the other day I included this chart

wales 1

The comparable chart for Scotland is even more stark (16 per cent of the Great Britain population in 1801 and just over 8 per cent now).

But what really caught my eye when pulling together the numbers was this chart.

london 19.png

I guess part of my brain knew that greater London’s population had fallen for several decades, but that bit never quite connected with the bits thinking about world cities, agglomeration and so on and so forth.  London is one of the great world cities, a key financial centre in an age when capital is more mobile than it was for decades after the war.  There is no other really great city in the UK, the UK’s population hasn’t increased that rapidly by New World standards, and yet the share of the UK population resident in greater London is less now than it was for decades prior to World War Two (true even using the orange dot –  for which there is no time series – the estimate of the population of the (defined by contiguity of population rather than local authority boundaries) of the greater London urban area.

(As it happens, on checking one finds that the New York metropolitan area population is also lower now, as a percentage of the total US population, than it was several decades ago – I could only see data back to 1950.  But the US is different  –  there are multiple very large cities and the spread of air-conditioning greatly affected the liveability of many of those places.)

As you may recall from Saturday’s post, estimated GDP per capita in London is 188 per cent of that of the EU as a whole (and about 180 per cent of the UK as a whole).  The only other (Eurostat-defined) region that comes even close to London is (close to London) “Berkshire, Buckinghamshire, and Oxfordshire” (at 151 per cent of EU as a whole).

These have the feel of places where if more people were able to live there more people would be better off.  The whole of the UK might even be better off on average (a larger proportion of the population able to do more highly-productive jobs), even if the London premium over the rest of the country narrowed somewhat.

And yet, of course, as everyone knows London house prices are really expensive –  price to income ratios similar to those in Auckland (with incomes higher), typically for small houses and small sections.  You can tell similar stories about San Francisco/San Jose or New York (where GDP per capita are well above those of the US as a whole).   Rigged housing and land markets really seem to have visible consequences in pricing people out of working in highly productive cities.

Where the story is much less compelling is in Auckland (or Sydney or Melbourne). I wish it were otherwise –  I’m a strong supporter of land use liberalisation –  but

(a) on the one hand, the populations of those cities (urban areas) have actually increased very substantially as a share of national population (especially Auckland: 8.5 per cent of the population in 1901, and about 33.5 per cent now), and

(b) in none of the Australasian cities do the estimates for GDP per capita show up with any very substantial margin over the rest of the country (see, by contrast, London above).  People who just don’t earn that much (or produce that much) have found a way to live in those cities anyway.

Fixing the New Zealand urban housing markets is, or should be, a matter of dealing to one of the grosser injustices in our economic system, but it is far from obvious that there is a compelling case in issues around productivity and wider economic performance.  If anything, there are probably already more people in Auckland – and perhaps Sydney/Melbourne –  that there really are highly-productive opportunities that are either waiting for them now or would spring up were housing once again as affordable as it should be.

 

Rygbi

Michael Reddell Australia, Immigration, New Zealand economic performance, UK

My 12 year old daughter has been teaching herself Welsh –  a recent birthday present was a good Welsh-English dictionary – we’ve recently been watching a rather bleak Welsh detective series together, and this year she has also become (unlike her father) a bit of a rugby (“rygbi” in Welsh apparently) fanatic so I promised her that if Wales made the World Cup semi-finals I’d do a Welsh-themed post.  That’s economics rather than rugby though.

One of the themes of much modern economics literature is things about cities, location, agglomeration, distance and so on.  According to Eurostat data, London has the one of the very highest GDPs per capita of any region in the EU¹.  The two largest cities in Wales –  Cardiff and Swansea –  are each less than 200 miles from London.  And yet estimated GDP per capita in Wales is only about 40 per cent of that in London and 75 per cent of that in the EU as a whole (71 per cent of the UK as a whole).  Productivity in Wales (GDP per hour worked) might be about that of New Zealand.

And yet Wales has much the same policy regime as London.  Much the same regulatory environment, same income, consumption, and company tax rates, same currency (and interest rates and banks), same external trade regime, same national government (and as I understand it the Welsh regional administration doesn’t have control of very much), and the same immigration regime.  Most of the people are native English speakers (even many of those who also speak Welsh).

Huge populations are free to move to Wales.  There are 66 million people in the UK who face no regulatory obstacles to doing so.  They could set up firms in Wales.  So –  for the moment –  could people in most of the EU, and all legal migrants to the United Kingdom (with no particular ties to any other UK region) could move to Wales.  It isn’t open borders but in practical terms it is much closer to it than almost any sovereign state.

And yet……by and large they don’t.  The population of Wales today is only 50 per cent larger than it was in 1900 and only about 5 per cent of the population is born outside the British Isles.  Here is the share of Wales in the total population of the Great Britain.

wales 1

Wales used to have things going for it: plenty of room for sheep (wool and meat were two of our big exports to the urban population of the UK), the world’s largest slate industry,  and coal (lots of it) and the associated iron and steel (the latter booming from the start of the 20th century) industries.

But not, it appears, very much at all these days.   There is some tourism, some electricity exports (to the rest of Britain) and, of course, a variety of other industries.  It all generates tolerable living standards. albeit supported by significant inward fiscal transfers.  Unemployment is low, and (by New Zealand or London standards) house prices are fairly low –  Swansea (second biggest city) has median house prices around $350000.  But people in the rest of the UK, migrants to the UK, and –  importantly – actual/potential entrepreneurs don’t seem to find it terribly attractive.  Perhaps it would be different if it were an independent country –  the Irish company tax regime is apparently eyed up by some. But as it isn’t, one gets a cleaner read on the pure economic geography effects.

It is interesting to wonder what might have happened to Wales if it were an independent country and, all else equal, had had control of its own immigration policy.  What if they’d adopted a Canadian or New Zealand immigration policy –  or something even more liberal –  20 years ago?   Since there are plenty of places in the world much poorer than Wales (or New Zealand), and Wales itself is a small place, presumably they’d have had no trouble attracting people –  at least modestly qualified people from places poorer, or less safe, again: China, India, South Africa, the Philippines (to name just four significant source countries for New Zealand).   Even if many of the migrants initially saw Wales as backdoor entry to England, if New Zealand’s experience is anything to go by (become a citizen here and you can immediately move to much wealthier Australia) most wouldn’t.  Presumably the Welsh building sector would have been a lot bigger, but it isn’t obvious that many more outward-oriented businesses would have chosen Cardiff or Swansea over London or Paris or Amsterdam, even with the rest of Europe more or less on the doorstep.

Tasmania is another interesting example.  Like Wales, it shares essentially the same  policy regime (taxes, currency, external trade, most regulation) with the sovereign country it is a part of, in this case Australia.  There is unrestricted mobility for people within Australia, and external migrants –  including those from New Zealand –  can as readily settle in Tasmania as anywhere else in Australia. Hobart always looks like a really nice place.

Oh, and the population share of the total country is also small.  But the fall in the population share has been much sharper than for Wales.

wales 2

People –  and firms –  could choose to go to Tasmania but, by and large, they choose not to.  It is, after all, quite a way from Melbourne, and you can neither drive nor take a fairly-speedy train.   And unlike Wales, Tasmania is close to nothing else: Cardiff is much to closer to Dublin, Paris, Brussels, Amsterdam or even Frankfurt than Hobart is to Adelaide or Sydney.  Perhaps even more than Wales, the economic opportunities seem to be mostly in the natural resources (and no big new developments there in recent decades) and a few niche industries that might be there because the founder happens to like living there.   GDP per capita in Tasmania is just under 80 per cent of the whole of Australia average.

One could also do an interesting thought experiment as to what might have happened if Tasmania had been an independent country and had its own immigration policy.  Even had they just adopted the same policy as Australia did, almost certainly their population today would be materially larger than it now is (Tasmania now has three times the population it had in 1900, while Australia as a whole has more like seven times the 1900 population).  Being even smaller than Wales they’d have had no trouble attracting people.   But –  even more so than for Wales –  you are left wondering how many more outward-oriented businesses would have chosen to stay based in little Tasmania (few enough outward-oriented businesses are based in even the big Australian cities).

Are there lessons for New Zealand.  Our population has increased almost sixfold since 1900. In that time, we’ve fallen from (roughly) the highest GDP per capita anywhere to somewhere badly trailing the OECD field –  and maintaining even that standing only by work long hours per capita.

wales 3

It looks great to the strain of “big New Zealand” thought that has been around since Vogel at least.  But to what end, for New Zealanders?

Think of one last thought experiment.  What say we’d agreed a completely common immigration policy with Australia and held that in place for the last few decades?  More or less exactly the same number of people would probably have come to Australasia in total, but what do we supposed would have been the split between Australia and New Zealand.   It seems only reasonable to assume that a much larger proportion would have gone to Australia (than did).  After all, even those who went to Australia had a choice of Tasmania if they wanted cooler climes and a slightly slower pace –  but, to a very large extent they didn’t.  And we know what New Zealanders themselves –  who had ties to this physical places –  were choosing over the last 50 years, as hundreds of thousands left for the other side of Tasman.

And had that happened –  and perhaps New Zealand’s population was 3 million not almost 5 million –  is it likely that any fewer market-driven outward-oriented businesses would be based here than are today.   The land, the water, the minerals and the scenery would all still be there.  And how much else is there?

As a best guess, if by some exogenous policy intervention there had been another two million people –  of moderate skills etc – put in Wales, or another half million in Tasmania, it is difficult to have any confidence that average real incomes in either place would be any larger than they are now.  Most probably, they’d be worse off –  as say, the residents of Taihape probably would be if some exogenous intervention put another 5000 people there.  Having put an extra couple of million people in New Zealand – more remote than Tasmania, much more remote than Wales –  and not seen the outward-oriented industries, based on anything other than natural resources growing – we might reasonably assume we (New Zealanders) are poorer as a result.

Smart people are almost always a prerequisite to high incomes, but globally the top tier of incomes seems to focused on industries located in or near big cities, near big population concentrations, or on (finite) natural resources.   You can earn a very standard of living from finite natural resources –  it is the edge Norway has over the rest of Europe – but it looks pretty insane to confuse the two types of economies (when you have no realistic hope of transitioning from one to the other) and spread natural resource based wealth much more thinly by using policy to actively encourage rapid population growth.

From a narrow economic perspective –  and it isn’t of course, the only one the matters – the best thing for people from a lagging economic performance area is to leave.  It is what people did from Taihape or Invercargill, from Ireland for many decades, and (more recently and on a really large scale) what people did from New Zealand as a whole.   Governments can mess up that picture. In a way the Welsh are fortunate to have a rugby team but not an immigration policy, at least had they had the misfortune to have had policymakers like New Zealand’s.

 

  1.  Technically Luxembourg tops the table, but since a very large chunk of Luxembourg’s workforce doesn’t live there the numbers aren’t particularly meaningful (sensible comparisons need to take account of all the  – typical modest-earning –  support services populations need/use where they live).

Productivity (lack of it) and other things

Michael Reddell Australia, bank capital requirements, New Zealand economic performance, Productivity

When I was writing some comments last week on Reserve Bank Deputy Governor Geoff Bascand’s speech in Australia I was playing round with some comparative data and stumbled on this chart.

nzau 1

Over the entire period (since 1991) real GDP per capita has grown at exactly the same rate in Australia and New Zealand.   And I haven’t even cherrypicked the starting point: my chart starts when the SNZ quarterly GDP per capita series starts.

Of course, even in 1991 we were materially less well off than Australians, but should we take some comfort from having kept pace over now almost 30 years?  I’d say not.

Here’s why.   Look at the employment rates in the two countries

nzau2

You might be among those who think the more employment the better but (a) working is a cost (an input) to the employee and (b) wouldn’t it have been much preferable, even if you think higher employment rates are some great thing, for it to have resulted in more growth in average per capita income than in the country where employment rates didn’t increase as much?   Australia’s unemployment rate is a bit higher than ours, and that is a mark against them, but it is only a small part of the difference in the employment rates.

And here is a chart that is perhaps even more stark.

NZau3

Across the whole population, the average Australian is now working 5 per cent more hours than in 1991, while the average New Zealander is working 22 per cent more hours.

And yet the bottom line, growth in average real output per capita, is the same.

The difference is productivity – or, more specifically, in our case the lack of anywhere near enough productivity growth.

I’ve got other things on today, so that is it for original content.  But earlier this morning I was rereading my submission to the Reserve Bank consultation on the Governor’s plans to require large increases in bank capital.   There wasn’t anything in it I would now resile from.  I also skimmed through former colleague, and expert in bank capital modelling, Ian Harrison’s papers (here and here) and I doubt he would resile from anything in there.

But what remains striking is how little engagement there has been from the Governor on his proposals.    He has only given four on-the-record speeches this year, not one of which has involved a serious sustained attempt to make his case, let alone engage with alternative perspectives.  The only attempts I’ve seen to respond to alternative perspectives seem to simply involve suggesting that anyone who disagrees with him is somehow bought and paid for, and therefore their views aren’t worthy of serious notice or scrutiny.

At one level, it shouldn’t be surprising, given Orr’s personality and intolerance of challenge or disagreement –  and the fact that, formally at least, he doesn’t have to convince anyone but himself (since he is prosecutor, judge, and jury in his own case, and there are no rights of appeal). But as matter of good governance, in a democratic society, it reflects very poorly on him, on his handpicked senior managers, and on the Bank’s Board and Minister of Finance who are paid to hold the Governor to account but in fact act as if there role is to simply get out of the way and let the Governor get on with it, poor as the process and substance have been, poor as Governor’s conduct increasingly seems to have been.

And so I’ll leave you with some of the unanswered points from my submission

An unbiased observer, looking at the New Zealand economy and financial system, would struggle to find a case for higher minimum capital ratios.   Among the factors such an observer might consider would be:

• The fact that the New Zealand financial system has not experienced a systemic financial crisis for more than hundred years (and to the extent it approximated one in the late 1980s, that was in the idiosyncratic circumstances of an extensive and fast financial liberalisation which left neither market participants nor regulators particularly well-equipped),

• Our major banks – the only ones that might pose any serious economywide risks – come from a country with very much the same historical record as New Zealand,

• Despite very rapid credit growth in the years prior to 2008 (increases in the credit to GDP ratios among the larger in the advanced world, spread across housing, farm, and other business/property lending), and a severe recession in 2008/09 and afterwards, the banking system emerged with low loan losses,

• Since then, banks have not only increased their actual capital ratios (and been required to calculate farm risk-weighted assets more stringently) but have also substantially improved their funding and liquidity positions (under some mix of regulatory and market pressure).

• Over the decade, bank credit growth (relative to GDP) has been pretty subdued and there has been little or no evidence (in, for example, Reserve Bank FSRs) of any serious degradation of lending standards.

• The balance sheets of the large banks remain relatively simple, and there has been no sign (per FSRs) of the sort of financial innovation that might raise significant doubts about the adequacy of existing models.

• In terms of the wider policy environment, government fiscal policy remains very strong, we continue to have a freely-floating exchange rate, and there has been neither legislation nor judicial rulings that will have materially impaired the ability of banks to realise collateral.

• And the Open Bank Resolution option for bank resolution has been more firmly established in the official toolkit (note that if OBR were fully credible then, in the absence of deposit insurance, there would be little case for regulatory minimum capital requirements at all).

• And repeated stress tests –  over a period when the regulator had no incentive to skew the tests to show favourable results –  suggested that even if exposed to extremely severe adverse macro shocks, and associated large price adjustments for houses, farms, and commercial property, not only would no bank fail, but no bank would even drop below current minimum capital requirements.

• Consistent with this experience – also observed in Australia, the home jurisdiction of the parents of our major banks – the major banks operating here continue to have strong credit ratings (consistent with a very low probability of default), and the ratings of the parent banks are even higher.

• There has been no change in the ownership structure of our major banks, or in the implied willingness of the Australian authorities to support the (systemically significant) parents of the New Zealand banks were they ever to get into difficulty.

Add into the mix indications that New Zealand banks CET1 ratios, if calculated on a properly comparable basis, would already be among the highest in the advanced world –  in a macro environment with more scope for stabilisation (floating exchange rate, strong fiscal position, little unhedged foreign currency lending) than in many advanced countries –  and there would be a fairly strong prima facie case for leaving things much as they are.

But the Reserve Bank’s consultative document – and associated material, including speeches and interviews – engages substantively with almost none of this context.

And

It is grossly unsatisfactory that throughout months of consultation the Bank has made no effort to illustrate how its proposals for minimum CET1 ratios and the associated floors around the calculation of risk-weighted assets, compare with those planned by APRA for the Australian banks.

Such an exercise should have been relatively straightforward, especially if the Reserve Bank had done what most New Zealanders might reasonably have expected, and worked closely together with APRA in formulating its proposals.  Of course, New Zealand is a sovereign nation and the Reserve Bank (regrettably) has final decision-making powers in New Zealand but:

• APRA has a considerably deeper pool of expertise, including at the top of the organisation, than the Reserve Bank of New Zealand,

• The nature of the risks in the two economies and markets is quite similar (including similar legal institutions, and similar housing markets),

• If anything there is a case for thinking that APRA minima would be ceilings below which New Zealand requirements for our large banks should be set (since we have the benefit of strong parent banks, and well-regarded supervisor of those banks, whereas the parents  – and parents’ supervisors – themselves are on their own, and we have also chosen to have the OBR as a frontline resolution option),

• For the institutions that might pose potential systemic issues in New Zealand, any substantial increase in capital requirements can reasonably be seen as an attempt to grab group capital for New Zealand.  Why not work these things out together?

The onus should, surely, be on the Reserve Bank of New Zealand to demonstrate – make the case in detail – why the New Zealand subsidiaries of Australian banks should be subject to more onerous capital requirements than the parents, and banking groups as a whole, are subject to.  But not once has the Reserve Bank attempted to make that case.

I ended

New Zealanders deserve better than they have had in the poor process and weak substance that together made up this consultation.

To which one can only add that the repeated reports  –  some of things in public, others less so –  of the way the Governor has handled himself, his own conduct, through this episode are deeply disquieting.  There is little sign of the sort of character and temperament we should expect from a senior public servant exercise so much barely-trammelled power.  The Minister of Finance may declare that he has full confidence in the Governor.  The public should not, and if the Minister continues to sit on the sidelines doing nothing but expressing full confidence that should probably raise more questions about the Minister himself.

Meanwhile, one wonders what our new Australian Secretary to the Treasury makes of her first encounters with national policymaking and advice.