Reopening parent visas

October 14, 2019 Michael Reddell Immigration

Last week the government announced the reopening applications for parent residence visas.

For a couple of decades, parent visas made up a pretty large chunk – around 10 per cent – of total residence visas issued. From 1997/98 to 2015/16, 75000 parent visas were issued. These were, almost certainly, all people who could not have obtained residence under the more-demanding skills-based segments of the immigration programme. Most probably, given the overall target/guidance for the number of residence approvals to be issued, issuing parent visas lowered the average quality of those given residence. Perhaps the effect wasn’t large – since the marginal approvals under the skilled streams often weren’t that skilled at all – but the direction of effect was pretty clear.

Parent visas weren’t the only such questionable streams, although it was the largest. Over the same period, for example, almost 20000 people got residence under “sibling and adult child” provisions.

All this in an immigration programme that was avowedly primarily about the potential economic gains to New Zealanders. Of course, the programme has never been all about economics – there are refugees for example, a strand almost entirely about humanitarianism – but the rhetoric of successive governments has been that the focus is economic benefit (and given how poor our productivity record, don’t we need better outcomes). And it has never been obvious how the parent visa (and related family strands) help on that count.

Late in their term, the previous government suspended the parent visa programme and MBIE data suggests there have been very few approvals since then. But no one had been sure what the future regime would be. Now we are.

The positive aspect of the announcement last week is that there will only be 1000 places per annum. By contrast, under the previous rules often in excess of 4000 parent residence visas were being granted each year (although there is an uncapped – but more demanding – parent retirement residence visa on top of that).

Perhaps, then, one shouldn’t be unduly bothered about the new system. But if we are going to have an economics-focused immigration system, operating on a very scale by global standards, we should be aiming to get the very best from it. And it is hard to see how the parent visa policy fits that bill.

The fiscal dimensions of the equation are perhaps most obvious. Sure, these new parent visa residents won’t be eligible for New Zealand Superannuation straightaway. But the median age of people getting parent visas used to be about 60, and you only need to live here for 10 years to get full NZS. Average remaining life expectancy at age 60 in New Zealand is almost another 25 years. If these new residents work and pay income tax at all, very few are likely to even come close to making a fiscal contribution approximating the NZS cost. From some countries, any NZS entitlements have to be offset against pensions from home countries, but not all significant source countries have such systems. Perhaps as importantly, new residents are entitled to full access to the public health system. No doubt you have to pass a medical test to get your parent visa, but as for natives so for immigrants, health expenses tend to be materially higher in the last few years of life than in, say, your 20s or 30s. Health spending is a large and rising share of government spending and, over time, GDP. There are reasonable arguments – also open to some debate – that migration generally may be fiscally positive. For these elderly migrants it is almost inevitably not so.

The government doesn’t even try to pretend otherwise – although it certainly does nothing to highlight, or limit, the fiscal cost (eg greatly extending the residency requirement for full NZS). Instead, their argument for parent visas is a convoluted quasi-economic one. According to the Minister

As part of its work to ensure businesses can get the skilled workers they need, the Coalition Government is re-opening and re-setting the Parent Category visa programme, Immigration Minister Iain Lees-Galloway says.

The move will:

support skilled migrants who help fill New Zealand’s skills gaps by providing a pathway for their parents to join them

….

Help New Zealand businesses find the skilled labour they need

Further strengthen the economy by helping businesses thrive.

You can probably ignore the pure spin in the last line (the economy not being strong, businesses as a whole not thriving, productivity growth being atrocious etc).

As for the rest, recall that the average skill level of the “skilled migrants” just isn’t very high at all (all those retail and cafe managers, aged care workers and so on). But also that the Minister and his department have never been able to produce remotely conclusive empirical evidence of the economic benefits of migration, and if we can only atract the people Lees-Galloway thinks “we need” by also taking on a big fiscal impost (see above) the gains must have been pretty thin and insubstantial to start with. Especially when every non-working migrant (ie probably most of the parent visa arrivals) will add to the demand for labour (derived demand from their consumption) without adding to the supply of it.

There has been some criticism that the new income threshold sponsors (the adult children) will have to meet mean that parent visas will be an option only for “the rich”. And there are some anomalies there, including the fact that a couple in which both are working part-time are treated much more onerously than a single fulltime income earner, but in the end if you are going to offer only a few places, they need to be rationed somehow, and given the likely financial cost to the taxpayer, it makes some sense to focus on the migrants who are actually earning a fair amount (although a household income of $159000 across two earners – while well above median – is hardly “rich). If there are any encouragement effects for really able younger migrants, they are going to be greatly attentuated if parent visas were handed out by lottery.

parent visa

All that said, the new rules look rather weak, and look as though they will reward those who are prepared to game the system, pushing the boundaries (perhaps beyond breaking point)) and/or who have the capacity to rearrange their declared income across time. Work in a salaried position in a government department or big corporate and you probably have few options, but for others I’m sure smart accountants and lawyers will soon be advising on how to game the system. As you’ll see above, the sponsors do need a reasonably high income, but they only need it until the parent gets their visa, and then only for two of the three years previously. I guess that is supposed to allow for natural variability in eg business income, but it means you only have to find some way of inflating your declared income for a couple of years and your parent can get in, with no ongoing support or minimum income requirements.

I guess parent visas issue looks and feels a lot different to people (like me) whose parents and grandparents were all born in New Zealand than they do to people who’ve migrated, including to couples where a native New Zealander married someone abroad and settled here. I can even see how someone who migrated here at 25 when their parents were 45 might not have given much thought then to how a widowed parent abroad might cope at age 80. But the bit I really don’t get, at all, is why there should be any presumption that if you migrate to another country, leaving home and family, that should in short order (and you only need to have been resident here for three years to sponsor a parent) create some expectation that if aged parents have issues they should be able to come here, rather than that you return home. Migration – especially that to New Zealand (where the overall productivity gains are so questionable) – has always mostly benefited the migrant. We are doing them a favour much more than they, by coming, have done us a favour. But if you have family responsibilities at home, go back and meet them. Don’t expect the New Zealand taxpayer to support those who’ve never been a part of us, coming only at the end of life.

It would be different if any parent visas were provided only to those with guarantees of income and health support, and thus a rock-solid assurances that these individuals would not be a financial burden on the New Zealand taxpayer. I’d have no particular problem with an uncapped scheme of that sort – and the existing uncapped scheme doesn’t have those protections, especially as regards health spending. But it would require, say, evidence that an annuity had been purchased from a rock solid provider, and that rock-solid provision had been made for the purchase of lifelong comprehensive health insurance. The number of people who could meet that sort of standard would be really small (especially with real interest rates at record low levels). But in a sense that just demonstrates the difficulty of justifying parent visas on any reasonable economic test.

Perhaps there is a grounds for a weaker compassionate standard, but make that subject to a 20 year residence/citizenship test for the sponsoring child. But if you’ve been here for only three years, or haven’t bothered to become a citizen, if your parent needs you, go to them (we could even hold open the child’s residence visa for, say, five years while they did). I saw a a somewhat gung-ho columnist in the Dominion-Post on Saturday championing parent visas on the grounds that

Their children have become economically valuable New Zealanders. They deserve to have an avenue that responds to family need.

But in many cases (a) the children have not become New Zealanders, and (b) the evidence for the economic benefit to New Zealanders from migration is thin, at best. When and if, as a relatively new migrant, family needs you, go to them. They are your responsibility, not ours. It is a bit like the argument that it somehow isn’t fair that kids grow up without their grandparents – not only can grandparents visit relatively easily (in most cases), but surely you should have thought about that before leaving home and hearth, and grandparents, and settling in the most remote corner of the earth.

As I say, at 1000 visas a year this isn’t the biggest issue there is around temporary or permanent migration policy. But that doesn’t mean it shouldn’t be scrutinised and challenged. If we are to be serious about lifting overal productivity, we need a hard-headed approach to policy, and one that prioritises the interests of New Zealanders.

(On another matter, I see that Stuff’s Kate MacNamara has returned to the fray with another column on the problem that is Adrian Orr. As I have to spend this afternoon in a meeting with the Deputy Governor and a Board member, I will save my comments on the article and the issues it raises until later.)

Unfit to govern?

October 12, 2019October 12, 2019 Michael Reddell Adrian Orr, Reserve Bank

I’m presuming Stuff’s Kate MacNamara won’t be very welcome at the Reserve Bank for quite some time.

She was the author of the double-page spread in last week’s Sunday Star-Times about the Governor (“Portrait of the Governor as a strongman” – note that is one word, not two, and the difference is quite important). I wrote about that earlier in the week. As a reminder of some of that article, it included this

The video of the conference remains on the Reserve Bank’s website. Some reporters said they were stunned Orr would air his anger so publicly and called it bullying.

But other observers were not surprised. Details of Lubberink’s experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank’s plan.

“There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,” said one source who’s been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn’t agree with.

“I’m worried about what he’s doing.”

The source said some companies have “withheld submissions,” for fear of being targeted by Orr.

“They’re absolutely scared of repercussions. It’s genuinely disturbing,” he said.

and this, re the Governor’s approach around the bank capital debate

In the cut and thrust of the debate, Orr’s jokey style and everyman charisma fell away. In recent months he’s dogmatically insisted the cost of his plan would be minimal and has picked personally at critics in the media, academia, and the financial services industry.

He’s been variously described as defensive, bullying, and perilously close to abusing his power.

“He’s in danger of bringing scorn on his office,” said long-time industry watcher David Tripe, professor of banking at Massey University. “I used to know him well. I no longer feel so confident.”

The Governor was reported to have refused any comment when approached for that story.

MacNamara followed her story up with a detailed piece on the Bank’s staffing and the loss of a succession of highly-qualified and experienced researchers over this year. Names were named – people who probably hoped never to see their names in the general media – and specific information was clearly provided to the journalist from insiders and people still very well-connected to the Bank’s Economics Department. The story listed the departure of seven capable researchers who had left in the last year or so (and, at that, missed another name). Those are large numbers. In my time at the Bank it would have been rare to have had more than perhaps 10 researchers across the (then) Research and Modelling teams.

MacNamara’s sources were clearly keen on promoting a narrative of a hugely important and influential research function. One might perhaps say, if only. I have a high regard for several of the people in the list of the departed. But the Bank’s key policy initiatives in recent years, whether in monetary policy or financial regulation, didn’t stem from, and were rarely directly supported by, good quality research generated by Bank researchers (there was some good work done, but often fairly tangential to the Bank’s immediate interests/needs). The sources were also apparently keen on recently departed, having been effectively demoted, former chief economist John McDermott. I have been on record as believing that Orr’s decision re McDermott was one of the better he has made, and as senior manager in charge of the research function McDermott has to take responsibility for the limited relevance of the research function over the last decade. Even the Bank’s macroeconomic analysis was pretty underwhelming over much of that period. All that was under previous Governors. I’m critical of Adrian Orr for many things, but he can’t be blamed for that (whatever mix of factors played a part in the individual choices of the researchers to leave – and several of those who left were foreigners who had probably never seen their long-term future being in New Zealand).

The Bank must have been taken aback by MacNamara’s forthcoming story

A Reserve Bank spokeswoman said she could not answer quickly questions about staff departures and replacements.

She was unable to say how many staff with graduate degrees in economics or finance have departed in the last 18 months.

Neither could she tally immediately how many staff have joined in that time with similar academic credentials.

Pretty bad staff work, given that they must have known this issue was a point of vulnerability – even the Annual Report had included a table showing high total staff turnover – for which they should have been prepared. Since the Bank publishes a page with details of their Economics Department research and analysis staff, it only took me a few minutes to run down the list and find several new PhD staff the Bank had hired relatively recently (albeit, by the look of it, only one with any knowledge of New Zealand). It shouldn’t have been hard for the Bank to have got that information to the journalist.

(The article is mostly focused on the Economics Department, and although the journalist attempts to draw connections to the Bank’s poor performance around the bank capital proposals that is a bit unfair to the Governor – only rarely have Economics Department research staff had anything much to do with financial regulatory issues. Maybe it would be better if they did – I used to argue for a broader focus (ie some actual research around the regulatory functions – but the choice not to also long pre-dates Orr. The absence of these particular researchers will have made little or no effective difference to how the bank capital proposals were made and marketed – those choices were the Governor’s.

The sources who spoke to MacNamara were clearly also keen on PhD qualified staff. The story highlights that there is no PhD held by anyone in the top-tier of the Bank (first time since 1988 I think), and repeats the contrast between the qualifications of McDermott and his replacements (new chief economist, new Assistant Governor). Personally, I think this issue in considerably overdone. Qualifications are not without value, of course, but research qualifications only take you so far in managing and leading a public sector policy organisation. As I’ve pointed out, over the last 40 years the Bank has had 10 chief economists, only four of whom had PhDs, and at least on my reckoning both the best and worst of them had PhDs. During the period when the Reserve Bank of Australia was widely-regarded as one of the best central banks in the world, it was led by people with much the same sort of academic qualifications as, say, Adrian Orr. The presence or absence of a PhD at the top table is not what gave us a rushed, over-reaching, capital proposal with no ex ante cost-benefit analysis. That is much more about the temperament and character of the Governor (and his right hand people who clearly weren’t willing or able to insist on something better). In fact, the chair of the Bank’s Board not only has a PhD but is a university vice-chancellor no less, and he claims (in the recent Annual Report) that all is just fine at the Bank.

In many respects I don’t disagree with Eric Crampton’s concluding comment in the article

Eric Crampton, chief economist at the public policy think tank The New Zealand Initiative, said it mattered more in a small country like New Zealand that the Reserve Bank has internal research depth.

“There are very few academic macroeconomists and monetary theorists who pay much attention at all to New Zealand policy. There are, at most, a small handful who do.

“That means that having some of that serious firepower in the Bank matters more,” Crampton said.

Except that, in reality and in other countries, research depth inside and outside the central bank tend to be complements rather than substitutes. And there is little point in having much of a research capability if it isn’t used to support robust policymaking and analysis. It hasn’t been for some time at the Bank, and that is mostly a reflection on a succession of senior managers and Governors (now including Orr), not on the staff involved.

The real prompt for this post was when, by chance, I noticed a statement from the Bank on its website, apparently released with no fanfare yesterday. Here is the whole thing.

Get the sense Orr is feeling a bit embattled?

But instead of fronting up to, say, Kate MacNamara we get bluster and distraction (and this common confusion – often found among senior public servants these days – about the name of the country).

No one criticised their individual staff. If there are criticisms to make they are of the leadership itself, mostly that of the Governor – both because he is chief executive, and because he has a long track record of surrounding himself with people who will do his bidding and not challenge him.

See how the Governor suggests that the Bank somehow has a higher capacity for identifying what is good for New Zealand (yesterday, today and forever) than others, or even that they have a mandate to do so (they don’t).

See his claim that he holds “informed and mature conversations”, and contrast that with, for example, the rushed way they put out the bank capital proposals, the backfilling they had to do as the year went on, the refusal to engage on the substance of any concerns/challenges, the attempts to slur critics and regulated institutions alike, and those descriptions above of Orr’s “angry weekend phone calls” and the like. This is the same Governor who has not given a single substantive speech on either of his core areas of policy responsibility in over 18 months in office. It would be unheard of in any other other advanced democracy.

It is past time the Minister of Finance took the situation in hand. He is the one actually accountable to the public for the Reserve Bank. He needs to be asking the Board chair and the Governor just what is going on, and why they are content for bluster to substitute for serious analysis and considered engagement – not from staff, but from the Governor himself. The problems at the Bank are at the top – Board, Governor, and a weak senior management team – not among the staff. The Governor’s statement is an attempt at distraction, trying to suggest he is sticking up for staff (who don’t need it) when the problems start with him (and those paid to hold him to account).

Bluster shouldn’t be able to substitute for serious accountability.

Fiscal thoughts

October 11, 2019 Michael Reddell Fiscal policy

I was flicking through the annual fiscal numbers released earlier this week and really only a couple of things caught my eye.

The first was welfare spending. Here is the long-term chart from The Treasury’s data showing annual spending as a share of GDP back to 1972.

soc security 1

The big trends – up to around 1992, down since – are pretty striking. So too is the fact that we now spend almost twice the share of GDP on welfare as we did in 1972 (by contrast, education spending as a share of GDP was exactly the same in 1972 as in 2019).

But what mostly caught my eye was that last observation – quite a substantial tick up from 9.0 per cent in the year to June 2018 to 9.6 per cent in the year to June 2019. Welfare spending does go up some years – and has done even in face of the declining trend since the early 1990s – but it usually does so when the economy isn’t doing well and the unemployment rate is rising.

soc security 2

The three previous episodes in which welfare spending rose as a share of GDP (late 80s to 1992, late 90s, and over the last recession) were also episodes in which the unemployment rate was rising. You’d expect that sort of relationship; not only will there be more people on the unemployment benefit (whatever they call it these days) but people on other benefits will also find it harder to get off and into work.

By contrast, in the latest year, welfare spending rose (considerably) as a share of GDP even though the average unemployment rate fell quite a bit during that year.

Despite that fall in the official unemployment rate, the number of people getting a benefit as a jobseeker increased a lot. jobseeker support

There has been no suggestion from the government that they don’t believe the HLFS and really the unemployment was rising over their first full year in offfice.

The new government has chosen to spend a lot more money on (certain classes of) welfare beneficiaries. And, thus, to many the increase will probably look like a “good thing”. Count me rather more sceptical. I think there are some categories of welfare recipients who are poorly treated by the system and to whom society should be rather more generous. But, for example, the Accommodation Supplement is now costing well over $1 billion dollars per annum (0.3 to 0.4 per cent of GDP) and yet with better government choices, rents should have fallen a lot in real terms and decent housing been cheaper than ever. And the cost (per cent of GDP) of NZS keeps rising even year, with unchanged parameters even as life expectancies increase. (In the longer-term, a stronger cultural emphasis on marriage might even reduce the number – 60000 – of solo parents receiving benefits.) Perhaps our culture and society are so far gone that we can’t readily get back to 1972 when “only” 5.6 per cent of GDP was being spent on welfare – in a pretty comprehensive welfare system – but it isn’t obvious why we couldn’t be both humane and firm without heading back towards spending 10 per cent of GDP on welfare.

The other series that caught my eye was that for the “core Crown residual cash” balance. It doesn’t get a lot of attention, although a sage Treasury official once encouraged me to pay more attention to it than is perhaps customary.

resid cash

It isn’t a perfect indicator either – anything can be gamed – but it is a reminder that the government isn’t exactly awash with cash. In fact, on this measure there was a modest deficit (0.2 per cent of GDP) last year. This year’s Budget projected the deficit to widen a bit further in 2019/20. In itself, that is nothing to be alarmed about, but it is a rather different situation than we were in in, say, 1999 or the period from 2005 to 2007.

One can mount an argument – which I’m sympathetic to – that this balance probably should run in modest deficit in normal times, at least while we continue with our bipartisan immigration policy insanity, that generates such rates of population growth. With a strongly population population, you would expect cash outflows associated with capital expenditure to be quite high, without jeopardising fiscal health. Modest residual cash deficits will be consistent over time with modest levels of public debt as a share of GDP. Some support that, although I’m more persuaded by the case for something more like what we have now – general government net financial liabilities of basically zero per cent of GDP (our governments try to hide this by using net debt measures that exclude the big pool of financial assets managed by the New Zealand Superannuation Fund).

I remain somewhat ambivalent at best about the case for larger deficits and/or higher government spending. Of course, were I a died-in-the-wool Labour (or Greens) voter I might wonder why my left-wing government was really only spending about as much (per cent of GDP) as the previous National government. But setting that to one side, the terms of trade have been high and we can’t count on them staying up indefinitely. I’m sceptical that the unemployment rate is yet at or below the NAIRU, but if a recession were to hit in the next few years, it would mean quite a loss of revenue at least temporarily. And the evidence that governments are spending wisely, at the margin, on either capital or current proposals is already pretty slim. I can see a case for increased health spending, for example, but wasted spending such as fees-free for tertiary education, doing nothing about the NZS age of eligibility (or years residence required to receive it), or the PGF don’t convince me that there is any pressing case for materially higher spending in total, as distinct from a more rigorous reprioritisation. Waste is waste.

And on the revenue side, the tax rates facing businesses (especially foreign investors) looking to invest in New Zealand are among the highest in the OECD.

Of course, the limits of conventional monetary policy are approaching. I’m not persuaded by, on the one hand, some local banks suggesting there is no point taking the OCR below about 0.25 per cent – I reckon there is a full percentage point usefully on offer beyond that – or, on the other hand by international reports from central banks (including from the BIS/CGFS this week) sounding complacent about (eg) asset purchases can do, but there is action central banks and governments can take to give themselves more monetary policy leeway, making the effective lower bound on nominal interest rates materially less constraining. It is a mystery to me why they show no sign of taking that option seriously.

On the fiscal front, I am somewhat attracted to the notion of a temporary reduction in GST as a stabilising instrument in a recession. The Herald’s Brian Fallow has recently been championing this idea, and it was argued for here a decade or more ago as a potential tool by prominent UK/Dutch economist Willem Buiter. The UK actually did it in the last recession. GST cuts can be implemented pretty quickly, and directly affect both the absolute price of consumption now, and the relative price (making consumption more attractive now relative to the future). It isn’t a foolproof instrument – they don’t exist – but I was a little surprised to learn that Grant Robertson appeared not to regard it as an option worth his officials exploring. I guess IRD would hate the idea, but that isn’t good grounds to ignore it as a potential fiscal option.

Rents should have been falling

October 10, 2019October 10, 2019 Michael Reddell Housing

Statistics New Zealand this morning released its monthly residential rentals series. I don’t usually pay any attention to these data but since I’d been thinking about the very low level of real interest rates, I decided to take a quick look for once.

The series goes back to November 2006. They have both stock and flow-based measures, the latter being available on a regional basis. Nominal rents have risen by about 50 per cent since 2006, and these are the changes in real (CPI-adjusted) rentals on each of these measures over that period.

rents

Something like a 15-20 per cent increase (depending whether you prefer the stock or flow measure) over 13 years might not seem too bad. That’s a rate of increase of about 1 per cent per annum.

But that really is the wrong way to look at the issue. After all, renting a house/flat involves paying for the use of a long-lived asset. And the key influence that should influence any change in the supply price of such assets is changes in the cost of finance, returns to alternative uses of money etc.

In November 2006 the real 10 year government bond rates was about 3.25 per cent (roughly so whether one uses the one indexed bond then on issue or takes a nominal bond yield and subtracts surveyed medium-term inflation expectations). The real 10 year bond rate is now about 0.15 per cent. What about the risk premium? The Treasury guidance to government agencies suggests using an equity risk premium of 7 per cent. One could play around with different estimates, and with assumptions about how much diversification housing might add to a portfolio. But it doesn’t seem unreasonable to work with a rough estimate that the required rate of return should have fallen by perhaps a third since 2006. All else equal, in a well-functioning market, we might reasonably have expected to have seen a significant fall in real rentals over that period.

Of course the standard counter is “oh but falling interest rates raise the price of fixed assets”. Often enough that isn’t even true for assets in genuinely fixed supply – since long-term real interest rates rise and fall for reasons that often have something to do with the expected future returns in the wider economy – but even to the extent it is true, in a well-functioning housing market the only component of a “house plus land” bundle that is in genuinely fixed supply is unimproved land itself. The supply of anything else can be augmented, and in a well-functioning market almost without effective limit.

In a free market, in a country with as much land and as few people as New Zealand, most unimproved land isn’t very valuable at all. Just suppose it was worth $50000 a hectare (and actual New Zealand farmland traded at a median of just under $25000 a hectare most recently) and that you could get 7 houses to a hectare (a decent sized section and the associated roads and footpaths), the value of the unimproved land under a standalone house would be worth less than $10000. As something like a perpetuity, the lower interest rates might have raised that value by a third, an amount that – relative to New Zealand median residential prices – is really almost lost in the rounding.

The substantial reduction in real interest rates shouldn’t dramatically affect the supply price of new building. Raw materials prices – timber, cement, fittings etc – should not be affected. Nor, really, should the price of labour: perhaps interest rates are low partly because productivity growth is low but, broadly speaking, any such weakness will be matched over time by lower growth in real wages. If anything, there is an in-principle argument that much lower interest rates may have lowered the supply price of new developments, because there is often quite a lag between acquiring land for development and being able to put the finished product on the market (inevitable market delays and regulatory delays), Lower interest rates mean lower costs of financing those lags.

In a well-functioning market it might not have been unreasonable to have expected, say, no change in nominal rents nationwide over the 13 years, not a 50 per cent increase.

But, of course, we don’t have a well-functioning market at all. We have one consistently and systematically rigged against competition and development by local councils and their central government enablers. There is no scarcity of unimproved land in New Zealand. But councils – councillors and staff planners – combine to create an artificial scarcity of developable land, such that in the face of one of the largest falls in real interest rates in history, to unprecedentedly low levels, rental housing is not abundant and cheap (as readily reproducible longlived assets should be in this climate) but scarce and expensive. Utter government failure if ever I saw one.

Bits of both arms of government occasionally talk a good game about freeing up land supply, but it is central government that is currently consulting on making less peripheral land available. It is a senior member of the Labour Party council – a Wellington city councillor – who when she rang me on a canvassing call a few weeks ago offered the unprompted observation (when I asked about fixing housing) that she didn’t want any more of that “sprawl” – this in a city with abundant, if often undulating, land. In many cases, their vision is to have us packed in like sardines – more “efficient” like that, supposedly – and they feed that personal preference, or sense of inevitability, by making land so expensive that many people feel they no longer have that historic New World option of space – in cities that, by global standards, remain pretty small.

When people complain about rents, and particularly the plight of people at the bottom with few choices but to rent, they need to sheet home responsibility to our governors – central and local. Perhaps a future National government would be different, but they too talked a good talk when they were last in Opposition and did nothing then. There isn’t yet much reason to think they’d be different next time.

Whatever the other risks, downsides, and complications of exceptionally low interest rates, the market has delivered a climate in which the real cost of decent housing should never have been cheaper. It takes governments – central and local, left and right ( in this area a distinction without a difference as they all enable planners) – to have produced rising real rents in a decade like this.

Expecting low inflation, and interest rates

October 9, 2019October 10, 2019 Michael Reddell Interest rates, Monetary policy

The Reserve Bank Governor has been heard in recent months expressing concern about the possibility that inflation expectations – what people think will happen, which in turn can influence how they act – will drift lower. It might seem like a rather abstract concern, but there are real world consequences. If everyone used to expect inflation would be 5 per cent and now expect it to be 2 per cent then, all else equal, nominal interest rates will have to be set 3 percentage points lower than previously just to get the same degree of monetary policy bite/stimulus. All else equal, if inflation expectations – the ones that genuine reflect behaviour – are falling then real interest rates are rising.

Lower inflation expectations has been the trend in New Zealand for more than a decade now. The Reserve Bank surveys households and perceptions of the current inflation rate and expectations of the future inflation rate are both quite a lot lower than they were prior to the last recession. Term deposit rates are now perhaps 500 basis points lower than they were in 2007, but in real terms that reduction is perhaps no more than 300 to 350 basis points. On the more-widely quoted survey the Bank does of somewhat-more-expert observers, medium-term inflation expectations are also about a full percentage point less than they were in 2007. In those days we took as pretty normal inflation of around 2.5 per cent. No one – try some introspection on yourself – thinks of that as a normal New Zealand inflation rate now.

Some of that reduction in inflation expectations hasn’t been unwelcome. The Reserve Bank had tended to be rather too accommodating of inflation in in the top half of the target range (some mix of forecasting mistakes and a cast of mind that wasn’t too bothered) and the range itself had been pulled up a couple of times by governments. Expectations – of the sort that shape behaviour – genuinely centred on the target midpoint, 2 per cent inflation, would be a “good thing”. More recently, across the range of surveys, expectations look to have been drifting down again. With nominal interest rates already so low, that isn’t a good thing. For example, when one thinks of the extent of Reserve Bank OCR cuts this year, the moves look quite large : 75 basis points.

But here are the three retail interest rate series the Reserve Bank publishes, showing the changes since the end of last year (and December last year wasn’t some abnormal month, but roughly where rates had been all last year).

SME new overdraft rate -37 basis points

New residential first mortgage rate -59 basis points

Six month term deposit rate -47 basis points

Deduct say 15 or 20 points more for a decline in inflation expectations and you really aren’t looking at much of a decline in real short-term interest rates (facing firms and households) at all. By contrast, a 20 year indexed government bond rate (ie a very long term real interest rate) – set freely in the market – has fallen by about 120 basis points.

What is striking about the Reserve Bank’s treatment of inflation expectations is that they hardly ever – change the Governor, change the chief economist and still they choose to ignore it – refer to the market-based indicator of implied inflation expectations from the market for government bonds. There are all sort of quibbles people can mount about the numbers, but the fact remains that it is the only market-based measure, reflecting actual choices and dollars, not just answers to a survey question.

Here are latest inflation breakevens for New Zealand: the gap between the 10 year nominal government bond rate and a 10 year real government bond rate (linearly interpolated from the yields on 2025 and 2030 inflation-indexed government bond rates). The last observation is the chart is yesterday’s data.

breakevens 0ct 19

It is old news that the last time these “breakevens” or implied inflation expectations were last at 2 per cent almost six year ago. Not since then have financial markets been trading as if they believe the Reserve Bank will do its job over the coming 10 years. This measure of expectations fell away sharply over 2014 to mid 2016, when the Bank was messing things up – tightening when no tightening was necessary and then being grudging in their cuts (as Wheeler became ever more defensive). There was something of a rebound, but it hasn’t lasted and since the end of last year the breakevens have been dropping away again. Right now, markets are trading as if the average inflation rate over the next ten years could be as low as 0.87 per cent. The OCR cuts this year have not been enough to stabilise, let alone reverse, the series.

Some of the patterns are global. Here is the comparable US series

US breakevens oct 19

But the levels are national. If current US breakevens should be uncomfortable for the Fed, at around 1.5 per cent they should be nothing like as troubling as the 0.9 per cent we have in New Zealand. And, for once, going into any serious downturn our central bank has less conventional monetary policy leeway than the Fed does.

Throw in the slope of the yield curve – this chart from a few weeks ago, in which each time this variable has been at current levels it has been followed by a recession – and there is a pretty good case for the Reserve Bank doing more than it has done.

nz yield curve 2.png

Inflation expectations have already been falling. Given how little conventional policy room most central banks have – and the distinct limits of unconventional policies – if there were to be a recession (here and/or abroad), few people then would rationally expect monetary policy to do its usual work. A rational response would be for inflation expectations to fall away quite a bit further, driving real interest rates up (all else equal) at a time when the capacity for further nominal interest rate cuts is all but gone (unless/until governments finally do something about the effective lower bound). That really would be a bad outcome.

In putting together this post, my eye was drawn to the array of current nominal New Zealand interest rates – for any term at all now less than 1 per cent. Here are some comparisons across a range of dates (12 years ago was in the months prior to the last recession – and for anyone interested 30 years ago all the rates were in double figures).

		Conventional government bonds
	90 day bill	1 year	2 year	5 year	10 year
22 years ago	7.63	7.33	6.75	6.61	6.59
20 years ago	5.00	5.55	6.14	6.78	7.06
12 years ago	8.75	7.04	6.98	6.70	6.28
10 years ago	2.77		4.15	4.91	5.56
Five years ago	3.68	3.50		3.98	4.06
Current	1.04	0.78	0.69	0.76	0.99

Perhaps what is easy to lose sight of is that the steepest fall in New Zealand long-term actual and expected interest rates wasn’t in the wake of the last recession, but in the last five years (when our political parties squabbled over an allegedly healthy economy).

Whatever the Governor claims, these extraordinarily low interest rates are not normal by any standard, recent or historical. And yet, at very least, they are necessary and unavoidable, in response to all else – public and private – going on in national and international economies.

A day for celebration

October 8, 2019October 10, 2019 Michael Reddell NZ history

I reckon today should have been a public holiday, to mark 250 years – quarter of a millennium – since these remote islands had opened to the world. That is something to celebrate.

Maori had, of course, been here for perhaps 500 years prior to the arrival of Lt James Cook and Endeavour. But it seems that they’d then become cut off from the rest of the world, with little or no evidence of any ongoing contact with anything or anyone beyond these shores. Material living standards were low. Abel Tasman had come by a bit of the coast 137 years earlier, but after the killing of several of his crew, he didn’t land and soon went away again initiating no ongoing contact (although his discoveries did give rise to the name “New Zealand” – in Dutch – shortly thereafter).

But after Cook, and the other European explorers around these shores at much the same time, the path to openness was pretty much set. Cook mapped the island, and he himself led two more voyages that included New Zealand as a stopover. His ships were engaged in trade, albeit to a limited extent (resupplying his own vessels). And after Cook’s later voyages it was less than 20 years – shortly after the first British settlement in New South Wales (another coast Cook mapped) – before the first sealing party and the first whalers arrived. Another decade on and those trades were getting into full swing.

Cook himself seems to have been an almost entirely admirable figure – one of the greats. Last night I finished reading J C Beaglehole’s great (1973) The Life of Captain James Cook, and came away both better informed and with a high regard for Cook. That doesn’t mean he was perfect. Human beings aren’t. But perfection is a pretty useless standard against which to assess any of us, past or present.

But if Cook was admirable, on so many counts, and if the mandate to which he worked was both humane and judicious, yet it is also true that Cook was hardly himself a decisive figure in New Zealand history. If he hadn’t been sent to observe the transit of Venus from Tahiti, with a mandate to explore onwards, some other European – de Surville’s party – would have been the first to land here at about the same time. And if that had happened, it still probably wouldn’t have changed the 19th century destiny of New Zealand (as British acquisition and colony of settlement) – that was about much bigger forces than one person. But nonetheless Cook’s landing is, and should be, a powerful symbol – and should be celebrated as such – of the process – essentially a technological one – whereby these islands were opened to the world.

Was that in itself wholly a “good thing”? Perhaps there are downsides, slight as they may be, and costs to almost any human endeavour and advance. But lets suppose a thought experiment – and it can only be that, so utterly detached from reality as it is – in which, somehow, New Zealand had remained totally cut from off from the world for another 250 years: no trade, no technology, no ideas, no nothing to or from the rest of the planet. Then it seems reasonable to assume Maori life today would be much as it was then – extremely poor in material terms, low life expectancy, no metals. Quite possibly, given Malthusian limits absent newer technologies, the population would be less than the number of people who identify as Maori today, whether here or abroad. And one could throw in cannibalism and slavery to the mix.

The difference from that sort of society is what opening to the world meant. It is about as stark a difference as they come. That there are gains from trade – broadly defined – is one of the most securely established maxims of our world (probably even the North Koreans would trade more if they could). The opening of New Zealand was always going to happen – given developments in technology elsewhere in the world – but it was a good thing that it did happen, especially perhaps coming just at time – the Industrial Revolution – when the possibilities would start to be so great. (And if we argue, in part, from revealed preference, we see few or no New Zealanders – Maori ancestry or not – choosing to revert to a pre-1769 style/substance of life.)

Now, opening to world is not at all the same thing as becoming a colony of settlement, and especially not one in which at one point Maori had been reduced to only about 5 per cent of the total population. All manner of islands in the Pacific, being opened to the world at much the same time, sometimes by Cook himself, which were never extensively settled by outsiders. On the other hand, all the temperate climate lands of the Antarctic Rim – Australia, New Zealand, Chile, Uruguay, Argentina and (more ambigiuously) South Africa were. It is what happens when there are hugely asymmetric technological advances – indigenous people were numerous enough nor sufficiently technologically advanced (the two not being entirely unrelated) to resist the influx, even if they had consistently wished to do so. In New Zealand’s case, at least, it is far from clear they (taken collectively) did, even at the time.

In material terms at least, it looks like a good trade. All sorts of places were in the Pacific were opened to the world in the late 18th and early 19th centuries, but here are some representative numbers for real GDP per capita, in PPP terms, for some of these countries/territories.

Pacific

Notice any patterns? The people in the countries towards the left of the chart have gained somewhat from an opening to the world, but the really prosperous parts of the region are – to put it bluntly – those where the institutions and cultures of highly-productive economies were imported pretty comprehensively (in the forms of peoples, not just laws) and came to dominate and shape how those countries/territories operate and produce. Cultures matter. The differences aren’t as stark for, say, life expectancies – a benefit from opening that all these societies have had – but those of, say, Samoa and Vanuatu are still perhaps 10 years less than those of New Zealand and Australia. And we could go through the things that people here – or in Australia or Hawaii – have which typical people in the Pacific territories that weren’t heavily settled simply don’t. And don’t give me climate or remoteness stories – many of these places are a bit less remote than New Zealand, and Singapore (and even Malaysia now) prosper in equatorial climes.

Now, of course, these New Zealand numbers are aggregates averaged across the entire population. And we know that those self-identifying as Maori tend, on average, to do less well than, say, the European population. But no one supposes that New Zealand Maori do less well materially than the typical person in Samoa, Tonga or Vanuatu. There are substantial economic/material benefits to the physical presence of a large European population in New Zealand, and it is most unlikely that average Maori GDP per capita would be anything like it actually is had large scale European settlement been avoided.

Curiously, where one might now mount an argument is that the descendants of the European settlers haven’t gained from the trade. For a long time, New Zealand (and Australia) were among the very richest countries in the world. But these days, New Zealand in particular in poorer than the UK. I think it is quite conceivable that – much as I like New Zealand, sitting here looking out on Cook Strait – people like me might have been better off had New Zealand never been opened to the world. But I can’t hold that against my ancestors, or Captain Cook and his peers – since countries largely make their own prosperity and I’ve been running a decade now a story about how the New Zealand establishment – itself dominated by European New Zealanders – has been systematically, though no doubt unintentionally – corroding the economic fortunes and prospects of all New Zealanders. But there is a long way to go before New Zealand would be anywhere near as poor as, say, Samoa.

Of course, important as material things are, as significant as gains in life expectancy probably should be thought of as, they aren’t the only thing that matters to people. I’ve written here previously about how I could understand a degree of Maori ambivalance about large scale immigration, even allowing for the fact that (almost?) every self-identified Maori today is descended from both non-Maori and Maori ancestors. Perhaps in some that really would outweigh the huge economic gains, but I rather doubt it – isn’t the evidence of Samoa that a really large proportion of the population would come to New Zealand (where they are outnumbered, in a different culture, by both Maori and other non-Maori) if they could? And since I’m a Christian I’ll count it an unalloyed “good thing” that the gospel came to New Zealand. That didn’t depend on immigration – see those numerous Pacific islands where the church is often stronger than it is in New Zealand – but it was a real, and voluntary choice. Not many Maori worship tree gods – they leave that to the Irish/Cook Islands Reserve Bank Governor – and for those declaring a religion, Christianity is the religion of choice.

There are no perfect human societies or human systems or human beings. But that shouldn’t stop us celebrating our past, our heritage, our culture – the things that, by opening to the world, made this country, for all its faults and failings and relative economic decline in recent decades, one of the more prosperous and safe countries on earth.

But our politicians seem embarrassed by our heritage, our origins. The Prime Minister eschews events in Gisborne today, fleeing back to Auckland and burbling – very on-message – about “commemorations”, but never celebration. The Opposition leader is, as far as I could see, invisible and unheard. As for our major newspapers, the Dominion-Post didn’t have even a mention of Cook in the paper today (there was a not-wholly-bad article yesterday) and in the Herald you have to get to page 12, and even then the article seem embarrassed by our heritage, rather than embracing and celebrating it. Weirdly, there was more coverage a few months ago of the 50th anniversary of the moon landings – by another country – than now of the opening to the world that made modern New Zealand possible.

As for me, somewhere around the house I still have the set of commemorative stamps I bought in 1969, when the powers that be weren’t so embarrassed by their heritage, and found on the bookshelves yesterday the Herald’s 1969 60 page publication “With Captain Cook in New Zealand”, which I guess my parents must have bought me then. Glancing through it seems both informative and fair, unashamed.

cook

Portrait of a strongman

October 7, 2019October 7, 2019 Michael Reddell Adrian Orr, bank capital requirements, Uncategorized

It didn’t seem like the best weekend for Reserve Bank Governor Adrian Orr.

First, there was Radio New Zealand’s Insight documentary on the Governor’s bank capital plans, and other possible new regulatory burdens. I was impressed with the huge amount of time and energy that was put into the programme, although inevitably there are limitations in what a programme designed for a mainstream Sunday morning audience can deal with. In some ways, the best public service now would be if Radio New Zealand and/or the Reserve Bank agreed to release the full interview Guyon Espiner did with the Governor – we were told it was an hour long, but no more than five minutes would have been used in the programme (I presume this was par for the course on Espiner’s background work, as I did an interview with him that went for perhaps 40+ minutes).

In commenting on the substance of the programme one then has to be a bit careful. The selection of quotes and the framing is Espiner’s (and I did notice a couple of small errors) and although he is a responsible senior journalist, the way he presented material isn’t necessarily the way the Governor himself might have chosen to. Then again, the Governor has plenty of communications media open to him and after 18 months in the job still hasn’t given a speech about financial regulation topics, for which he personally has huge personal policy freedom.

But as RNZ presented the Governor’s arguments, they were less than impressive. They seemed to be playing distraction more than engaging with what should be the core issues. Not once, at least according to my notes, did he engage on the possible costs and distortions his proposals would introduce (whatever the possible benefits). Not once, for example, did he engage with how comparable his proposals are to the regime that will apply in Australia to the respective banking groups (hint, Orr’s are much more onerous).

Instead, we got irrelevancies. The Governor decreed that banks were earning too much money in New Zealand. Not only that, in his tree god and garden imagery, the (Australian) banks were “darkening the garden”, such that the market was not as competitive as it should be. Perhaps there is something to those arguments, but they are simply not the Governor’s job and should be irrelevant considerations in proposing to exercise regulatory powers under the Reserve Bank Act (directed to promoting the soundness and efficiency of the financial system). We have a Commerce Act, there are powers now for the Minister of Commerce or the Commerce Commission to initiate a market study. But that has nothing at all to do with the Reserve Bank, the prudential regulator, not the competition authority.

Orr came a little closer to his own ground, and to respectable arguments, when he suggested that existing capital (and leverage) ratios were just too low, and thus that banks were “too risky”. That might have been a touch more persuasive if, for example, he’d engaged with the standalone credit ratings of the banks operating here, or talked about the differences between a strongly-diversified big bank and an individual borrower (instead he tried to imply that the risks, and hence appropriate capital, were much the same). There was the rather weak claim that “at times” housing crises have led to banking crises, but no attempt to unpack that claim, or to engage with the repeated stress tests his own institutions has done this decade. Let alone, to consider the experiences of banking system like our own (or Australia’s or Canada’s or Norway’s) that with floating exchange rates and governments out of the housing finance market have proved resilient over many decades.

Instead we got another attempt at distraction, suggesting that the New Zealand experience in 2008/09 was really rather a close-run thing. He knows it wasn’t so. He knows that the issues the New Zealand banks (and their parents) faced in 2008/09 were about liquidity, not about credit quality or loan losses. There had been a degree of complacency among the banks about liquidity in the 00s – I recall one discussion with the head of risk at a major bank in about 2006 who simply could not conceive of a world in which funding liquidity markets would dry up almost completely. But liquidity is a different issue than loan losses – which were modest in a fairly deep recession after a period of very rapid credit growth – and even the liquidity/funding issues New Zealand banks faced never threatened to bring any of them down. And the Bank addressed the funding/liquidity issues almost a decade ago, with much more stringent policy requirements. And risk-weighted capital ratios are already higher than they were going into the last recession – partly under regulatory pressure, partly market pressure – a recession when (to repeat) the loan losses were pretty modest and not at all threatening.

Then we had more rhetoric about how the Bank was not going to “keep falsely subsidising bank businesses”, although the nature of any such “subsidy” was never clear given (a) the resilience of banks to the Reserve Bank’s own stress tests, and (b) the central place the Bank has long argued OBR should have in handling any bank failures in New Zealand. But it probably sounded good. And then he fell back on attempts to exaggerate the costs of financial crises, with talk of “generations of lost employment opportunities”, mental health failures, and vague allusions to various “challenges” of the world right now – the Brexit, Trump duo again I suppose – being down to insufficient bank capital. Evidence and sustained argumentation would help – if not on a short radio programme then, for example, in speeches and robust consultative documents and – perish the thought – upfront cost/benefit analyses (as distinct from the ex post one they might eventually show us).

There was some discussion of dairy lending. As the Governor fairly noted there had been some fairly aggressive and unwise lending to that sector over the last 15 years (in the early part of that period the impression was that the offshore parents had little real idea of what the subsidiaries were doing in that sector). Dairy farm economics doesn’t look as it once did, for various market and (actual/proposed) regulatory reasons, so no doubt there isn’t the same bank risk appetite there once was. But it is quite unconvincing for the Governor to try to pretend his capital proposals won’t exacerbate pressures in that sector, or in other sectors where specific hard-to-extract and manage knowledge/experience is key to good lending. Big corporates, for example, who can simply turn to banks not affected by the Governor’s proposal (overseas-based banks, and even the parents of the NZ locally-incorporated banks). I doubt credit supply will be too adversely affected for residential mortgage finance either. But for other sectors, including dairy, who does the Governor expect to step into the gap? Wasn’t he talking (see above) about insufficient competition? Won’t these proposals weaken that competition, especially as all the locally-owned banks are themselves capital constrained?

The Governor also tried to claim that the Bank’s existing capital rules had somehow “caused” the banks to run into problems on dairy lending, citing differences in risk weights used by various banks for apparently similar lending. Even to the extent there is an issue there, it is worth remembering that (a) by far the biggest increases in dairy lending occurred (last decade) before the advanced models approach came into effect, and (b) good banks get things wrong from time to time, and none of the actual or stress-tested dairy losses pose any threat to systemic stability. The Governor’s numbers tell him so. We want banks to lose money from time to time – were they not doing so the Governor (on another day, another trope) would probably be complaining about them taking insufficient risk, holding back opportunities etc.

And then, of course, there was the cavalier line I wrote about on Friday: the Governor in essence telling the banks that if they don’t like his rules (and him as prosecutor, judge and jury in his own case) they can just take their money and go. I wrote about this irresponsible line on Friday.

Perhaps we should see his talk – all it appears to be at present – about banning people from serving on both the boards of parent and New Zealand subsidiary at the same time, as all part of that same mentality of suspicion of Australian banks. The Governor shows little or no sign of appreciating the value New Zealand, and New Zealanders, get from having banks that are part of much larger banking groups, from a country with a track record of a stable and well-managed banking system. He talks a lot about the standalone capacity of New Zealand subsidiaries in a crisis, but very little about the benefits of integrated banking operations in more normal circumstances (ie at least 99 per cent of the time). He seems to be hankering for the Australian banks to sell down their shareholding in the New Zealand subsidiaries – acting as, in effect, an agent for NZX and the New Zealand funds management industry – while showing no sign of recognising that a more arms-length New Zealand operation might also be one less well-placed to receive parental support if something ever does go wrong.

All in all, I just wasn’t persuaded that Orr was even trying to make a serious sustained analytical case for the specific policy he is pursuing. Playing distraction seemed to be more the style. (Perhaps I’m wrong and the tape of the full interview would no doubt tell us more.) That, after all, is the problem with the regime: at least formally, under the law, having dreamed up this proposal all by himself, the only person he actually has to convince of its merits is….himself (final decisionmaker).

Oh, and I almost forgot to mention Auckland University economics professor Robert MacCulloch’s comments. He highlighted the “sheer lack of raw intellectual firepower” at the Bank, and claimed that neither the Board nor the senior management were really up to the job. I probably wouldn’t have put it quite that strongly – there are still able people but in the Board’s case they seem to have no interest in doing anything other than covering for the Governor, and in the staff’s case, personal self-protection – with a Governor who does not welcome challenge – is a deterrent to people speaking up even if they have (a) stayed on, and (b) disagreed. The Bank has lost a lot of good people this year, for various reasons, but few would have had much involvement in the bank capital issues. MacCulloch’s other comments resonated more strongly with me: there is no history of extreme fragility in the New Zealand banking system (“rather the opposite in 2008”) and that the Governor’s style is undermining confidende in the Reserve Bank, at home and abroad.

Of course, only a few geeks would try to unpick the Insight programme.

But the Sunday Star Times did us a public service with a big double-page article on the Governor that was distinctly less than flattering. The online version ran under the title “Portrait of the Governor as a strongman”. I’d encourage you to read the article. Several critics were actually willing to go on the record – not, of course, ones from among the banks (the “strongman” has a lot of power over them).

Here is an extract, starting with reference to the heavyhanded stance Orr took with veteran and highly capable journalist Jenny Ruth at a recent press conference

The video of the conference remains on the Reserve Bank’s website. Some reporters said they were stunned Orr would air his anger so publicly and called it bullying.

But other observers were not surprised. Details of Lubberink’s experience were already circulating in Wellington and industry sources say they match a pattern of hectoring by Orr of those who question the Reserve Bank’s plan.

“There is a pattern of [Orr] publicly belittling and berating people who disagree with him, at conferences, on the sidelines of financial industry events,” said one source who’s been involved in making submissions to the Reserve Bank on the capital proposal.

There have also been angry weekend phone calls made by Orr to submitters he doesn’t agree with.

“I’m worried about what he’s doing.”

The source said some companies have “withheld submissions,” for fear of being targeted by Orr.

“They’re absolutely scared of repercussions. It’s genuinely disturbing,” he said.

(Orr told someone recently he didn’t read what I write – his perfect liberty of course – so I guess I’m safe from the “angry weekend phone calls”.)

Sadly, one can’t really say it is shocking. It is, more or less, what one might have come to expect. But it is appalling, and a far cry from the sort of standard the public has a right to expect from such a powerful public servant. Wielding so much power singlehandedly, with few checks and balances, we need someone with a judicious and calm temperament, happy to engage openly and non-defensively, and so on. Instead we have Adrian Orr.

The article reports that Orr refused to be interviewed. But perhaps the bigger question is why the journalist responsible – for a very useful and courageous article – showed no sign of having sought comment from Neil Quigley, the chair of the Bank’s Board who is paid to hold the Governor to account. And there was no sign either of having sought comment from Grant Robertson, the person who actually has the power to dismiss the Governor and whom – as voters – we might expect to be visible when concerns like these are raised. (And if the Minister of Finance isn’t visible, why isn’t the Prime Minister insisting that her Minister do his job?) The behaviour as reported should be unacceptable in a democratic society governed by the rule of law and conventions of acceptable conduct.

Another quote from the article

In the cut and thrust of the debate, Orr’s jokey style and everyman charisma fell away. In recent months he’s dogmatically insisted the cost of his plan would be minimal and has picked personally at critics in the media, academia, and the financial services industry.

He’s been variously described as defensive, bullying, and perilously close to abusing his power.

“He’s in danger of bringing scorn on his office,” said long-time industry watcher David Tripe, professor of banking at Massey University. “I used to know him well. I no longer feel so confident.”

I was exchanging notes last week with someone about comparisons between Graeme Wheeler and Adrian Orr. The SST article reports insiders claiming that Wheeler had not been keen on the idea of big increases in capital requirements for locally-incorporated banks. If so, that is to his credit.

Not much else was. I’m not going to repeat his failings, but recall just how unpopular he had become with key stakeholders by late in his term (the survey the New Zealand Initiative undertook). By the end, his departure was almost universally welcomed, and must almost have been a relief to him too, as someone never at all comfortable in the public spotlight.

Orr is more a polarising figure, in that he does still have some supporters, but they must be getting quite uncomfortable with his style, even if they are sympathetic on substance. But a rerun of that NZI survey would be unlikely to show up the Bank in a good light. The more time goes on the more unsuited Orr appears to be for the office to which the Bank’s Board and the Minister of Finance appointed him. He degrades the standing of the Bank here and abroad, as well as eroding its internal analytical capability and whatever spirit of robust internal debate was left after Wheeler, and undermines confidence in the institution’s ability to manage real threats. It is rather sad to watch, but perhaps only a slightly more extreme example of the sustained degradation of policy capability and leadership in New Zealand public life and public sector this century.

I hear on RNZ this morning the Governor was quoted as pushing back – I think mainly against MacCulloch – suggesting that criticisms were “narrow nitpicking”. But there is a long list of sceptics, and of reasoned critical submissions on what is proposing, and how he is doing it. For anyone interested, here was my formal submission.

Revisiting some RB history

October 5, 2019October 5, 2019 Michael Reddell bank capital requirements, New Zealand economic history, Uncategorized

One of Stuff’s political correspondents, Henry Cooke, had a column in this morning’s Dominion-Post about Adrian Orr and the power he wields, single-handedly, around banking regulation.

The column starts with some comparisons with some other senior public servants

Think Police Commissioner Mike Bush, former Treasury boss Gabriel Makhlouf, or State Services Commissioner Peter Hughes. These three have had more influence over the way this country is run than all but the most powerful MPs.

Yet that trio can technically be called to heel by their ministers, even if doing so will probably result in a serious headache for the minister in question. Not so for Reserve Bank governor Adrian Orr, whose independence is enshrined in law.

Not probably company most would want to be numbered with. A Police Commissioner who gave a eulogy at the funeral of a former policeman widely accepted as having planted evidence in a murder case, who seems to be counted on not to make trouble for whichever party is in power, and who is only too happy for the NZ Police to cosy up to, and assist, the PRC security forces. A now-departed Treasury Secretary who presided over the decline of his own institution, and then flitted the country refusing to accept any serious responsbility for his own conduct over the “budget hack” affair. And so on. Whatever influence these people might have – not much I’d have thought in the case of the Police Commissioner – they have no policymaking powers themselves.

By contrast, when it comes to banking regulation, the Reserve Bank Governor enjoys a great deal of formal power, with little accountability and no rights of appeal against his policy decisions. They are powers which should be reined in, by MPs and ministers, and which while they exist need to be used with the utmost judiciousness and care. Under Orr, it is more like a bull in a china shop, pursuing personal whims, perhaps political agendas, all supported by not very much robust analysis at all. I’ve written about all that previously and am not going to repeat it today.

Cooke notes the suggestion by Paul Goldsmith that the Governor should have fewer policymaking powers, with big policy calls in banking regulation being made by ministers and MPs, as big policy calls in most other areas of public life are. But then follows a strange end to his article, which is the point of this post.

Goldsmith knows all about how the Reserve Bank can set off real political fires. He wrote the book about the last Reserve Bank governor to step so seriously into the fray: Don Brash. Way way back in 1990 the then-Labour government’s election-year Budget was utterly blunted when Brash decided to immediately hike interest rates in response. Brash was drawn into the bitter debate between David Lange and his own finance minister, and the whole thing was extremely public.

We are nowhere near that level of chaos yet. But things sure are starting to get interesting.

I guess it is what comes of middle age, but the events of 1990 still seem to me not much further back than yesterday (not “way way back”), but I suppose the typical journalist is young. Even so, it isn’t hard to have checked that the Prime Minister in question was Geoffrey Palmer (and, unless I’ve missed something, the Goldsmith book doesn’t seem to deal with the episode in question at all).

And there are a few things to bear in mind as institutional context to that episode:

the Reserve Bank had received statutory operational independence only a few months earlier, under legislation initiated by the government in question (4th Labour government,
under that legislation, the Bank was responsible for pursuing an inflation target, primarily set by the government but formalised in a Policy Targets Agreement between the Governor and the Minister. That agreement had been signed as recently as March 1990 and required as to get to price stability (0 to 2 per cent annual inflation) by the end of 1992,
at the time, the Labour government was miles behind in the polls, in an FPP electorial system, and generally expected to be thrashed in the polls later that year (I see in my diary that in the week in question I observed that “the only question seems to be whether Labour will hold St Albans and Christchurch Central”, two of Labour’s safer seats, held by Minister and PM respectively,
while National had supported the Reserve Bank Act (a) it was promising to push the target date further out (to 1993) and (b) that was with the Richardson camp dominant, but there was a fear that a less “hardline” strand within the caucus might prove dominant (eg, as it was thought at the time, the popular Winston Peters and Bill Birch),
the reform programme had already ripped apart Labour, the economy was in the midst of a difficult adjustment, and privately even someone as mainstream as the Minister of Finance was saying privately (in a meeting with officials), “we all know that if we don’t get to 0 to 2 per cent, we’ll just change the target”.

All of which could be summed up in the idea that there was not yet a great deal of credibility attached to the notion that inflation was actually going to be securely lowered into a 0 to 2 per cent range. People, including markets, were searching for signals and signs that might buttress or undermine confidence. And yet it was the Bank’s job – mandated by Parliament and the Minister – to deliver that price stability outcome, and to do so at least transitional economic cost.

So what happened? On 24 July 1990 the government brought down a Budget that was treated by financial markets as something of an election giveaway. Under the rules at the time, they posted a surplus, but only by including what was in effect a large expected asset sale proceeds as revenue, and significant deficits were again forecast in the out-years. It was widely viewed as a reversal of direction after five years of sustained fiscal consolidation. There were a number of measures in the Budget (reductions in government price/fees/excises) which would have the effect of lowering the headline inflation rate for one year, but those weren’t really the focus of either the Reserve Bank or the financial markets.

Bond yields rose in response, and as market participants reflected a bit further the exchange rate fell. It was that move, rather than the Budget itself, that prompted a reaction from the Reserve Bank. Until the exchange rate fell, we had planned only a mild passing comment – about the importance of ongoing fiscal discipline – in the next Monetary Policy Statement.

At that time, we did not set an official interest rate (the OCR wasn’t a thing until 1999). And the conventional view, not just at the Bank, was that exchange rate changes had a big short-term effect on domestic prices (whereas these days the short-term effects are roughly a 1 per cent change in the CPI for a 10 per cent change in the exchange rate, in those days empiricial estimates suggested anything up to a 4.6 per cent change in the CPI for a 10 per cent change in the exchange rate). And so, roughly speaking, we ran policy with (unpublished) ranges in which the TWI could fluctuate, which were reset each quarter in light of the inflation outlook and changes in economic data. If the exchange rate looked to move through the bottom of the range, we made a statement (‘open mouth operations’) and usually the statement itself was sufficient for interest rates and the exchange rate to adjust (the latter back into the range).

On Tuesday 31 July – thus a week after the Budget – the exchange rate had fallen throught the bottom of our indicative range, and the Governor agreed to tighten monetary policy (it was a decision made a bit more easily than usual because all three of the more dovish senior officials were all away that week, but it was entirely in line with our standard operating framework). We knew it wasn’t going to be popular – I noted in my diary that evening the question of whether it would spark a confrontation with the government – but the point of an operationally independent central bank was to be willing to be unpopular, especially in the run-up to elections. There was a bit of a sense that it would not look good for the case for operational autonomy if we did nothing when first market doubts arose. (Some years later David Caygill confirmed to me that the government had not expected any adverse reaction.)

We made an initial statement the following morning, which pushed interest rates up but didn’t do much to the exchange rate. The statement was well-received by market economists (“who seemed surprised that we had the backbone – an NBR article this morning openly suggested that we want to back away”) and the Opposition finance people “who are impressed with the explicitness and clarity of the statement” (they had been criticising us for oblique communications), and even the media coverage wasn’t bad. The Minister of Finance was not terribly supportive, but the Prime Minister was overseas.

On the following day, we were pondering whether we needed to make another statement – to get the exchange rate back within the range. Those with a particularly good memory may recall that this was also the day (2 August) Iraq invaded Kuwait, which pushed oil prices sharply upwards. At the time – although we weren’t knee-jerk reacting to oil prices – our stance would have been that first round oil price effects were to be looked through, but that much higher oil prices would create risks of higher inflation expectations and a spillover into holding underlying or core inflation above target.

And so we made another statement the following morning. For a time that day we thought we’d completely botched things because there were wire service reports that Iraq had gone on to invade Saudi Arabia too, but of course that was soon proved false. Interest rates rose quite a bit, and the exchange rate also edged higher. Banks began raising mortgage rates prompting the Minister of Finance to come out with rather silly comments (“presumably under Palmer’s orders”) about the banks being mean and out to get the government. With the Prime Minister’s return both he and the Minister were out with further critical comments – recall that they were less than three months out from an election thrashing . The comments were aimed especially at the banks, while noting that there was nothing the government could do (monetary policy operational decisions having been handed to the Bank).

It wasn’t as if the Bank itself was totally blinkered and doctrinaire during this period. In the days following this episode we discussed ourselves at senior levels whether we should consider recommending pushing back the target date (to, say, 1993) but on balance decided not to do so just yet.

That specific controversy died down pretty quickly, and to my mind remains an example of the system working as it was supposed to. We were doing our job, and the government was doing its (setting fiscal policy, having initially set the inflation target itself). I haven’t checked with Don Brash but I’ve never heard a suggestion that the framework, the target, or Don’s position was then in jeopardy. In fact, a month or so later, Don was upsetting the Opposition by making himself somewhat party to the “Growth Agreement” the government and the unions reached – in our terms, what that amount to was simply restating that if inflation pressures (this time wages) were lower then all else equal monetary policy would be able to be easier and interest rates (and the exchange rate) lower.

With the benefit of hindsight one can argue about whether the Bank’s monetary policy tightening was really necessary. In some respects, the market reaction post-Budget was a confidence shock and demand might have been expected to weaken anyway. Moreover, actual exchange rate passthroughs were to prove weaker in future than had been the case in the past. With better analysis might we have realised that sooner? Perhaps. But as I noted, the Bank’s reaction was wholly consistent with the Policy Targets Agreement, signed only a few months earlier, and with our best understanding then of how the economy worked, in the midst of a highly contentious and uncertain disinflation, and was supported by the bulk of private market economists.

I’m not sure where Henry Cooke got his story, but it just wasn’t “chaos” then, and to the extent there was any, it wasn’t Bank-initiated.

In fact, that episode wasn’t even close to the toughest political challenges for the Bank. Only a few months later, National was in power and Jim Bolger in particular was very unhappy with some of the choices the Bank was making. Goldsmith records Ruth Richardson warning Brash, as she was about to leave for an overseas trip, not to “make waves” as his “best friend at court” wouldn’t be around to provide cover. That angst went on for months, and even culminated in pressure on the Bank from senior Treasury officials to ease monetary policy specifically to assist Richardson’s own political position. (I am less confident that we handled 1991 that well, even on the sort of information we should have used at the time).

And then, of course, a decade later there was Don Brash’s infamous Knowledge Wave conference speech – given rather against the advice of various of his closer advisers – which, whatever its substantive merits, did involve stepping well outside his statutory role, and greatly irritated the then Prime Minister, in turn poisoning the prospects for any internal candidate succeeding Brash when he left for politics in 2002.

The point of this post is really twofold. I quite like delving into the monetary policy history, much of which isn’t that well or readily accessibly documented. But I was also keen to differentiate that episode from the current controversy around Orr. In 1990 the government set the mandate – and was free to change it at any time – and we were simply doing our best to implement that mandate, in a climate of huge political and economic uncertainty.

By contrast, when Adrian Orr is proposing banning people from serving on the boards of bank parents and subs or – much more radically – proposes that he should more or less double how much capital locally-incorporated banks would need, he isn’t following some clear and specific mandate set by Parliament or the Minister, against which he can readily be held to account. He is pursuing a personal whim. His stated goal – reducing the risks to the soundness of the financial system – is certainly an authorised statutory goal, but there is no professional consensus on what level of risk is appropriate, or what policy steps might deliver that level of risks, or what costs might be imposed in the transition or the steady-state. And there are no effective rights of appeal, no override powers, to his one-man exercise of his personal preferences. That simply isn’t appropriate. With superlative supporting analysis, and a long and open period of real consultation – before the Governor nailed his colours to the mast, as prosecutor in the case he himself will judge – it might be one thing (still not ideal). What we’ve actually had in the past year falls far short of that sort of standard. It is a much more serious situation – including because there are no self-correcting mechanisms (eg inflation falling below target, telling the Bank it has things a bit tight – than a one-week flurry around a modest monetary policy adjustment implemented in pursuit of a goal the government itself had explicitly set.

The Minister of Finance and the Board do not have formal override powers. But they could, and should, be using the leverage they have to insist on a much more compelling case being made for any actual policy adjustment (and not for that case to be published only after the decision itself has been made). Cooke’s article quoted a submission suggesting annual GDP costs of up to $1.8 billion a year, but the Governor’s own deputy has quite openly suggested that the policy will cost the economy $750 million a year. For gains – in a sound and well-managed banking system – that are far from evident, in an economy where tightening credit conditions, even just in a transition, are about the last thing that is needed.

Orr on bank capital

October 4, 2019October 5, 2019 Michael Reddell bank capital requirements

I’ll no doubt have more to say about Radio New Zealand’s Insight documentary on the Reserve Bank Governor’s proposed bank capital reforms after the full programme has run, but Morning Report this morning ran a fairly lengthy piece on the issue, including meaty quotes from the Governor (and some from me and from the former Secretary to the Treasury, Graham Scott, who was involved in the Bankers’ Association submissions on the Governor’s “proposal”). Even what I heard of that RNZ story was pretty extraordinary in several areas.

First, as if to confirm that the “proposal” wasn’t a serious consultation, the Governor confirmed that capital requirements will be rising, no question about that. Perhaps he is genuine that he hasn’t quite decided whether he thinks his own proposal is perfect in all its details – I was pleased RNZ got in my line that he is prosecutor, judge and jury in his own case, with no effective right of appeal – but there was little sign he is interested in alternative perspectives, arguments, or evidence. And thus remains true to form.

Perhaps more extraordinary – given his specific statutory role, not a constraint that ever seems to bother him – was the assertion that Australian banks make “too much money” in New Zealand. I suppose as a citizen he is entitled to his prejudice, but as Governor of the Reserve Bank how much private businesses make is really none of his business. His job is prudential regulator – ie safety and soundness of the system – not about competition, rates of return or the like. We have, or could have, competition law and associated institutions to deal with those issues. For all the Governor’s talk about super-profits, if it were really true you’d have to wonder why bank assets in New Zealand weren’t growing very rapidly, and new entrants flocking in, credit abundant to anyone who asks, to take advantage of this extraordinarily profitable corner of the world. And in feeding the angst in some circles about Australian bank profits, perhaps he might point out that if his proposals are adopted it is likely that total profits earned by Australian banks in New Zealand will rise, not fall (rates of return are likely to fall a bit, but there will be a lot more capital in the banks – unless the Governor’s proposal really backfires).

On which note, it was extraordinary to hear the Governor suggest that if the Australian banks didn’t like his new regime, well they could just take their money and go elsewhere. He wasn’t going to be bothered. This about banks that in some cases have been here, steadily, almost as long as modern New Zealand has. This from as Governor whose own consultation document never seriously discussed transitions or adjustment paths (in aggregate or specific sectors) to his proposed much higher capital ratios. The Bank has all year tended to be pretty dismissive of any suggestions that the availability of credit might be adversely affected, and they’ve still provided no supporting analysis. Nine months ago when they launched the Governor’s radical scheme, they thought the economy didn’t look too bad. Since then they’ve had to cut the OCR by 75 points, with more cuts to come (on almost everyone’s reckoning) even before allowing for any effects of these capital proposals. Perhaps then a rash Governor could afford to be cavalier about bank capital, but it borders on the outright irresponsible for him to take that stance now – with so little conventional monetary policy leeway left, in a world looking more difficult almost by the day. Reduced credit availability, to the extent it happens, will only exacerbate any downturn, and the effects are likely to be concentrated in those sectors least readily able to tap alternative credit (hint: not big corporates, not household mortgages, but eg farms and small businesses). But, of course, thanks to the government’s indifference there are no effective checks and balances on the Governor following his whim, in some sort of Orr-tarchy.

And finally on this topic for today, there was the line the Governor ran about how he had to do this to end the practice of the public subsidising banks. He went on to suggest that we forget too easily all the banking failures and near-misses. But with no a shred of evidence – in any of his documents – to support any of this. The New Zealand banking system has gone for 125 years without any serious crisis, except for the one 30 years when the ensnaring complex of extensive regulation was pulled away quickly and neither banks, borrowers, nor central bankers really knew what they were doing. The Australian banking system is the same. The Canadian banking system even more so. The Governor’s own stress tests have repeatedly supported the view – taken by the Bank over many years, supported by the IMF – that the New Zealand banking system is strong and well-capitalised. The Governor likes to play on 2008, muddying the water with talk of near-crises here: he should know very well that there were no major credit losses here, and the (real) liquidity issues were global in nature, and would not have been one jot different if banks had had twice the (then untroubling) level of capital they had.

It is a worry that so much power is held by one individual. It should be concerning even if we had the most thoughtful, considered, consultative, and judicious person in the role. In fact, we have Adrian Orr, to whom none of those descriptions can reasonably be applied. And there seems to be a vacuum where there should be a government taking leadership responsibility (in fact, one can imagine Shane Jones – “consulting the Cabinet Manual” on his holiday – cheering Orr on).

Big policy choices should be for politicians: that is their job

October 3, 2019October 3, 2019 Michael Reddell Uncategorized

A post this morning doing something rare: praising National, or more particularly their finance spokesman Paul Goldsmith.

There was an article on Stuff yesterday, and in the Dominion-Post this morning, in which Goldsmith is quoted as suggesting that politicians should set policy. In this particular case, National is proposing that the Governor of the Reserve Bank – unelected, and in effect appointed by other unelected people – should not get to set regulatory policy around banks all by himself, but that politicians – in this case the Minister of Finance – should do so.

The article begins in a rather overwrought style

National Party Finance Spokesperson Paul Goldsmith wants to shake-up banking, by ripping a scab that hasn’t been touched for 30 years.

Goldsmith has called into question the independence of the Reserve Bank, responsible for setting interest rates and regulating banking.

But read on a bit and, of course, you find that National isn’t proposing any changes to the operational autonomy the Bank’s Monetary Policy Committee enjoys in adjusting the OCR to meet the target set for them by the Minister of Finance.

What they are talking about is regulatory policy around banks, where – for the time being – the Governor enjoys a huge degree of freedom of action, with hardly any checks and balances, to set policy as he personally chooses. Yes, the legislative foundations for that model are 30 years old but (a) when the legislation was passed, no one really envisaged much active banking regulatory policy at all (the Bank was a reluctant player and governments weren’t keen) and (b) the legislation has seen grown like topsy, with little real scrutiny, in effect allowing one bureaucrat – almost totally unaccountable – to undertake huge regulatory interventions on little more than his/her own whim. Successive waves of LVR restrictions were done like that, and now the Governor’s proposals to hugely increase capital requirements for locally-incorporated banks are just done on the same whim.

Who elected him? one might reasonably ask. The answer, of course, is no one.

And thus Goldsmith

Goldsmith thinks the Government should have a say as well.

“It defies belief that the Crown, represented by the Government of the day, shouldn’t have a significant say in determining that risk tolerance,” said.

This is because ultimately, the Government is going to be on the hook if there’s a banking crisis that leads to a bail out.

Which is right, but doesn’t really go far enough. Even if there were no risk of bank bailouts – say we could count on the Bank’s OBR model being used by governments in a crisis – these still aren’t choices that should be left to unelected officials. Very few areas of policy are, and rightly so. We live in a democracy, and one of the key features of a democratic system is, or should be, that big and controversial choices should be made by people whom we’ve elected and can hold to account, can eject if necessary.

We might want independent people to apply the law – whether as judges ruling on disputes, or officials applying laws impartially as between people (or firms) – but people we’ve elected should make the rules, in Parliament itself as far as possible.

We also want capable, judicious, and (one hopes) expert advisers to ministers. We don’t expect our ministers or MPs to be technical subject experts – sometimes it can help if they are, but generally temperament and the willingness to ask awkward, even seemingly silly, questions is rather more important. That and a set of values and predispositions that have been subjected to an electoral test.

Our tax system is an excellent example of the paradigm. Taxes are, almost with exception, set by Parliament, and Ministers introduce legislation to establish or vary provisions of the tax system. There are all manner of expert advisers – not just in Treasury and the IRD but also working groups, professional firms, and independent academics and commentators – who may have influence, but do not set policy. And then IRD administers the system, without fear or favour, without political involvement or interference. It isn’t that different in a host of other policy areas: welfare policy is set by ministers and Parliament, advised and lobbied by experts and others, and applied without fear or favour (Minister’s relatives aren’t supposed to be treated more favourably) by MSD. It is a pretty standard operating model.

But not when it comes to some key areas of the Reserve Bank’s powers. That really should be changed, and if Paul Goldsmith’s comments are a indication the National Party to do so when next they are in office, I can only commend them. We want banking regulatory rules applied to individual banks without fear, favour or political interference (no favours for a minister’s pet bank, or one owned by his/her cronies) but the high level rules should be set by those we elect/eject. It is already the way things are for non-bank deposit takers, where – in newer legislation – most of the policy-setting powers are reserved to ministers, just not for the institutions that really matter – banks. Thus, LVR restrictions were applied to banks, on the then-Governor’s whim (no serious supporting analysis) but not to other deposit-taking institutions because the Governor did not have to power to impose such controls himself.

No doubt the Governor would hate the idea of taking away some of his power. International agencies like the IMF probably wouldn’t be too keen either, but the IMF has little interest in democracy, accountability, or good government (only narrow specialised interests in, eg, banks) whereas New Zealand citizens and political parties do, or should.

And none of what I’m saying here is really radical. I’ve written previously about Unelected Power, the excellent book published last year by former Bank of England Deputy Governor, Paul Tucker, which deals with many of these questions – what powers should be delegated, on what conditions, in what circumstances, to unelected decisionmakers. He reaches wider than just central banks and financial regulatory agencies, but what he has to say is of great relevance there.

There may, for example, still be a good case for delegating operational decisions around monetary policy to an independent committee – it is, for example, relatively easier than in many areas to pre-specify a goal and later to hold the decisionmakers to account. But neither of those criteria apply when thinking about big financial regulatory policy choices, including those New Zealand is facing at present around the orders of magnitude for bank capital.

We cannot meaningfully articulate an objective for independent policymakers to work to, in a way that is usefully constraining, and we cannot tell afterwards whether they have done a decent job (the Bank claims to be limited crises to no more than 1 in 200 years – in other words, no meaningful policy evaluation, even if our political system – eg parliamentary committees – had the resources to do serious evaluation). There is no professional consensus on the best approach to tackling, or even thinking about, the issues. And there is also no very obvious problem with the Minister of Finance setting policy in this area – you’ll hear all manner of lines about time-inconsistency etc, but any such concerns are really no different than those in huge numbers of other policy areas where we rightly reserve major policy powers to those we elect. And it isn’t as if these are just minor details at the far periphery of policy, impinging on almost no one. They are naturally the stuff of politics.

On the specifics of the bank capital issue, from the article again

He [Goldsmith] said the Government should “have a view on the proposals” and Finance Minister Grant Robertson “should be assuring himself that they stack up”.

The Government has remained fiercely neutral throughout the saga

The utter silence from the Minister of Finance looks a lot like a simple abdication of any responsibility. Sure, under current law, the final decision is solely a matter for the Governor. That could have been changed, relatively simply (the government was amending the Reserve Bank Act only last year). But even within the current law, the Minister has leverage if he wants to use it. He appoints the Bank’s Board – and specifically the Board chair. He writes letters of expectation to the Govenor and the Board. He has the opportunity to commment on the Bank’s draft Statement of Intent and the Bank must have regard to his input. There are lots of outcomes the Governor might prefer in the current RB Act review that the Minister could agree to, or not. And, in a legislative provision that has never really been tested, the Minister may direct the Bank to have regard (a phrase which has legal meaning) to a government policy relating to one of the Bank’s functions. The Minister can’t issue a directive to prevent the Bank setting capital ratios at a specific number it doesn’t like, but it could (for example) make clear its view that the banking system is sound and stable, that additional barriers to access to credit would be unwelcome, with plenty of contextual material around that. And the Minister has the power of legitimacy – he is elected, he has a political mandate, he has accountability, none of which the Governor has. Oh, and he has his own expert advisers in The Treasury.

“Fiercely neutral” looks a lot like copping out, hiding behind the parapets rather than taking any leadership, any responsibility.

I don’t know what specifics National has in mind for the legislation (and perhaps they don’t yet either). There are some difficult boundary issues, as to what matters count as big policy questions, or irreversible interventions (like a decision to put a bank in statutory management) that should be reserved to ministers, and which powers should be assigned to independent officials. Those boundaries can and should be contested. But a call as big as the one the Governor proposes to make, deciding on his own prosecution case, is one that simply shouldn’t be his to make.

(None of this, of course, should be read as suggesting that we do not need expert advisers in many policy areas. It might indeed be normal and appropriate for an expert Reserve Bank – or an expert Treasury – to take the lead in advising on the key technical dimensions of big picture banking regulatory policy. But policymaking – here as elsewhere – will be better, and more legitimate, when the expert advisers, champions of change (or even opponents of it), aren’t the same people making the final decision. In our system of government, prosecutors don’t make the determinative judgements. That’s more in the PRC style.)

On which note, my regard for Paul Goldsmith would be a little less tinged with ambivalence if he were to show some moral leadership and stop sharing an Auckland office with Jian Yang, the former PLA intelligence official, former CCP member, active cheerleader (just this week) for all the evil of the PRC, a country abused under the thumb of his former party. Unless, of course, Goldsmith too wants to champions tens of millions dead, relative economic failure, and a pretty all-pervasive theft of freedom. He seems a decent bloke and it is hard to believe he would really champion such evil. But he does by the people/person he chooses to stand, and sit, with,

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective