The Reserve Bank of New Zealand is one of the relatively few central banks in the world where the government is not free, when a vacancy arises, to appoint a person they have confidence in as Governor. One can mount a reasonable – although not entirely compelling – case that it should be very hard to dismiss a Governor (or perhaps even an MPC member), and it typically is. But the governorship of the central bank is a very major and influential role – affecting, when mistakes are made, all of us adversely, including perhaps the government’s own electoral fortunes. Against that backdrop our system is extraordinary: the government can only appoint as Governor someone nominated by the board of the Reserve Bank, a board which (a) has no electoral mandate or accountability, b) at least in the New Zealand experience will often have little or no subject expertise, and c) may well have been (this time is, but it was also so when Orr was first appointed) largely appointed by the government’s predecessors, reflecting their particular whims and patronage priorities. Nicola Willis – or Grant Robertson – might not be any sort of macroeconomist, but they are (were) accountable to the voters. Neil Quigley, Rodger Findlay, Jeremy Banks (all of whom have had questions raised about them) and the rest have neither expertise nor accountability.
Now, it is true that the Minister of Finance can reject a board nomination, but she cannot impose her own candidate. In reality the government can send messages to the board about what they don’t want (Helen Clark was apparently pretty clear she didn’t want to be served up with the name of a Brash clone – anyone who’d been part of the Brash RB), but those views carry no formal legal weight, and a Board could simply assert itself and insist on serving up only names it preferred. The government doesn’t get any say in what sort of person is nominated – no say, for example, in the job description or personal qualities sort. It is a stark contrast to the position re heads of government departments – who usually have no significant policy decision-making power – where the government can specify what they are looking for and can in the end simply appoint their own person. The same goes for members of the MPC – supposedly really powerful positions and yet the Minister can only appoint people the underqualified board (which has no routine responsibility for monetary policy, and thus no expertise) serves up. And here it is important to remember that the Reserve Bank isn’t just the monetary policy maker, but has key policymaking roles in a wide range of banking and financial regulation, stuff for which ministers are usually responsible. These legislative provisions should be changed, so that the Minister/Cabinet can appoint their own person – stick in some boilerplate expertise criteria, and perhaps offer the Board the chance to make suggestions, allow the FEC a scrutiny hearing before the person took up the job – and be accountable for that appointment. It would be an entirely normal model internationally.
The issue at present is compounded by the fact that the names to be recommended as the new Governor will come forward from the same Board (largely) that recommended Orr’s reappointment in 2022 (and with the same Board chair as was responsible for the initial appointment in 2017). No one outside government knows what possessed Nicola Willis to reappoint Quigley – who has a terrible record of his own, in blocking expertise when the MPC was first set up, openly misrepresenting the history later, and in covering for Orr almost throughout – but he is about the last person who should be playing a decisive role in choosing a successor. A minister who really cared about the future of the institution and its policies etc would insist that Quigley left now too, appointing a new chair to lead the search to replace Orr.
My next suggestion is that policymaking powers around banking (and insurance etc) prudential regulation should be removed from the Reserve Bank itself and handed back to the Minister of Finance. There is a decent case for having OCR setting being done by an independent body, and a fairly compelling one for having the application of prudential policy and oversight to particular institutions be done by an independent body. But even in respect of monetary policy, the inflation target is now set unambiguously by the Minister of Finance alone (previously used to be an agreement with the Governor), and pretty all other important policymaking regulatory power in our system of government rests with ministers – the people we can throw out. There is a lot of controversy around at present about aspects of the Bank’s prudential policy choices. I agree strongly with some of them, disagree with others, and generally am not convinced that the specifics matter quite as much as some of the critics claim (and I think on that I may be closer to Orr). But the people who should be making these policy calls are ministers. We elect them. We toss them out. Of course, they need expert advisers – so this isn’t a call to diminish Reserve Bank capability (in fact it probably needs strengthening – check how few research papers (0) they’ve published in the last decade on regulatory policy and financial stability matters), but to have a clearer stronger separation between policymaking and implementation (and, given the inflation target, what the MPC does is – influential – implementation).
I’ve also noted here before that there is a decent case for a structural separation of the Reserve Bank. When the Bank was first made independent it was basically a monetary policy agency with a few vestigial regulatory/supervisory staff. These days (even amid the general bloat) far more of the staff are on the regulatory side, and there are two significantly different (expertise and culture) prime roles. Even the sort of expertise one might need/want in a chief executive should be materially different: monetary policy is primarily a macroeconomic role, with some operational responsibility (markets, currency etc), while the supervisory side is a regulatory function pure and simple. Splitting out the regulatory functions into a New Zealand Prudential Regulatory Agency would parallel the Australian model; a system which has substantive matters, but also where alignment makes some sense when the biggest systemic risks etc here relate to Australian-owned banks. (If multiplication of government agencies was a concern, the FMA could be wound into a single financial regulatory body.)
Those changes can’t generally be made overnight (they all require legislation), but as a direction they have a lot to commend them, and I’d urge the Minister of Finance to take time in the next few weeks to reflect on the sort of direction she wants, before the momentum of the existing model takes hold. It is a busy time for her – the Budget will be more pressing – but medium-term choices matter too and this is her opportunity to stamp her mark on a better set of central banking arrangements.
One thing that doesn’t take legislation would be an overhaul of the Monetary Policy Committee’s charter, and particularly the culture around it. Setting up a Monetary Policy Committee was a good call by Grant Robertson – by the time it was done everyone agreed we needed to move away from the single decisionmaker model – but the specific path chosen was a fairly unproductive dead end. We had externals (three at a time) appointed – in one case solely (as OIA papers reveal) for her sex rather than expertise in the field – and then we never heard from them or saw any evidence that they made even a modicum of difference, even as they collected their not-inconsiderable fee and rounded out their CVs. This government has taken some steps to improve the quality of the externals – although they also extended again the term of an 80 year old member who was there through the worst of the costly policy mistakes on 2020 to 2022 – but there is still no sign of them making any difference in style or substance, and not the slightest accountability for their views. Much better to have a much more open system – as in the UK, US, or Sweden for example – where MPC members are open about, and accountable for, their views. Historically the Bank’s management – even before Orr- hated the idea, but in the real world everyone knows there is huge uncertainty and that processes are likely to benefit from open exploration of ideas, contest of views, and actual accountability. The Supreme Court manages to have dissenting opinions published. There is no reason why our MPC should not. And require members to front up to FEC from time to time, including in (non-binding) hearings before these powerful individuals take up their appointments. Good monetary policy is not an infallible text handed from heaven but, inevitably and appropriately, a process of discovery and challenge, in which everyone – or at least MPC members who are up to the job – would benefit from greater openness.
What of yesterday?
It is all highly unsatisfactory. We had brief press releases from the Bank and from the Minister but no real answers. We are told there were no active conduct concerns – although there probably should have been, when deliberately misleading Parliament has happened time and again, and just recently – and yet the Governor just disappeared with no notice on the eve of the big research conference, to mark 35 years of inflation targeting that he was talking up only a week or two ago, (I also know that one major media outlet had an in-depth interview with Orr scheduled for Friday – they’d asked for some suggestions for questions). And with not a word of explanation. If you simply think your job is done and it is time to move on, the typical – and responsible – way is to give several months of notice, enabling a smooth search for a replacement. He could easily have announced something next week, after the conference, and left after the next Monetary Policy Statement in May.
Instead, it is pretty clear that there has been some sort of “throw your toys out of the cot and storm off” sort of event, which (further) diminishes his standing and that of the Bank (but particularly the Board and its chair). It all must have happened so quickly that we now have this fiction that Orr is on leave for the rest of the month (the provisions in the Act require a temporary Governor to be appointed by the Minister only on the recommendation of the Board, and probably Orr just didn’t leave them time). After several hours of uncertainty, the Board chair finally decided to hold a press conference, which he didn’t seem to handle particularly well and (I’m told – I only have a transcript – in the end he too stormed off) we still aren’t much the wiser. It will, I suppose, provide much topic for conversation among the research geeks at the conference today and tomorrow (quite what visitors Ben Bernanke and Catherine Mann – BoE MPC member – will make of it all is anyone’s guess).
I guess it is probably true that Orr can’t be forced to explain himself, although since he is still a public employee until 31 March I’m not sure why considerable pressure could not be applied. But even if he won’t talk the answers so far from either Willis or Quigley really aren’t adequate. You don’t just storm off from an $800000 a year job you’ve held for seven years, having made many evident policy mistakes and misjudgments, as well as operating with a style that lacked gravitas or decorum etc, with not a word. Or decent and honourable people, fit to hold high public office don’t.
The suggestion seems to be that budgetary pressures – the Minister wanting to cut the Bank’s next five-year funding agreement are at the heart of it (and a careful read of the Reserve Bank statement hints at that). I had heard a story – apparently well-sourced – that the Bank had actually been bidding for a material increase in its funding, on top of the extraordinary increases of the last five years, but whether that is true or not the Minister does seem to have signalled coming cuts, and Orr has long been known more for his empire-building capabilities than for his focus on lean and efficient use of public money, But every public sector chief executive in Wellington has had to deal with budgetary restraint and, so far as we can tell, not one of them has tossed his/her toys and stormed off. It isn’t as if the Bank had been relentlessly and exclusively focused on its core business, with not a penny to be spared the poor taxpayer. In any case, from what comments have been let out it seems that final future budget decisions had not even been made yet, so surely it can’t be the whole story.
Comments by Quigley suggests that perhaps Orr was getting to the end of his tether, and some one or more recent things made him snap, reacting perhaps more than a normal person would do faced with the ups and downs of public sector life. It seems highly likely the budget stuff, and the desire to keep pursuing whims, was part of it, but it can hardly have been all. I don’t suppose he felt any great compunction about misleading Parliament so egregiously again…..but he should. And all this time – having stormed off with no adequate explanation – Quigley declares that he still had confidence in Orr. Surely yesterday confirms again that both of them, in their different ways, were unfit for office.
Oh, and for those puzzled by it, the title of this post refers to the latest estimate of the losses to the taxpayer from the Bank’s rash punting in the government bond market in 2020 and 2021. $11 billion dollar in losses. Three and a bit Dunedin hospitals or several frigates or…..all options lost to us from this recklessness, undertaken to no useful end, and a loss which Orr endlessly tried to play down (suggesting it was all to our benefit after all), and which not one of his MPC members – one now temporarily acting as Governor – even either dissented on or gave straight and honest contrite answers about. It has been 43 years since a Reserve Bank Governor was appointed from within. That is an indictment on the way the place has been run. Successful organisations tend to promote from within. Orr (and Quigley) do not leave a successful organisation, but one of yes-men and women. The place needs a fresh broom to sweep clean. One hopes the government cares enough to ensure it happens.
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
Now, it is true that the Minister of Finance can reject a board nomination, but she cannot impose her own candidate. In reality the government can send messages to the board about what they don’t want (Helen Clark was apparently pretty clear she didn’t want to be served up with the name of a Brash clone – anyone who’d been part of the Brash RB), but those views carry no formal legal weight, and a Board could simply assert itself and insist on serving up only names it preferred. The government doesn’t get any say in what sort of person is nominated – no say, for example, in the job description or personal qualities sort. It is a stark contrast to the position re heads of government departments – who usually have no significant policy decision-making power – where the government can specify what they are looking for and can in the end simply appoint their own person. The same goes for members of the MPC – supposedly really powerful positions and yet the Minister can only appoint people the underqualified board (which has no routine responsibility for monetary policy, and thus no expertise) serves up. And here it is important to remember that the Reserve Bank isn’t just the monetary policy maker, but has key policymaking roles in a wide range of banking and financial regulation, stuff for which ministers are usually responsible. These legislative provisions should be changed, so that the Minister/Cabinet can appoint their own person – stick in some boilerplate expertise criteria, and perhaps offer the Board the chance to make suggestions, allow the FEC a scrutiny hearing before the person took up the job – and be accountable for that appointment. It would be an entirely normal model internationally.
The issue at present is compounded by the fact that the names to be recommended as the new Governor will come forward from the same Board (largely) that recommended Orr’s reappointment in 2022 (and with the same Board chair as was responsible for the initial appointment in 2017). No one outside government knows what possessed Nicola Willis to reappoint Quigley – who has a terrible record of his own, in blocking expertise when the MPC was first set up, openly misrepresenting the history later, and in covering for Orr almost throughout – but he is about the last person who should be playing a decisive role in choosing a successor. A minister who really cared about the future of the institution and its policies etc would insist that Quigley left now too, appointing a new chair to lead the search to replace Orr.
My next suggestion is that policymaking powers around banking (and insurance etc) prudential regulation should be removed from the Reserve Bank itself and handed back to the Minister of Finance. There is a decent case for having OCR setting being done by an independent body, and a fairly compelling one for having the application of prudential policy and oversight to particular institutions be done by an independent body. But even in respect of monetary policy, the inflation target is now set unambiguously by the Minister of Finance alone (previously used to be an agreement with the Governor), and pretty all other important policymaking regulatory power in our system of government rests with ministers – the people we can throw out. There is a lot of controversy around at present about aspects of the Bank’s prudential policy choices. I agree strongly with some of them, disagree with others, and generally am not convinced that the specifics matter quite as much as some of the critics claim (and I think on that I may be closer to Orr). But the people who should be making these policy calls are ministers. We elect them. We toss them out. Of course, they need expert advisers – so this isn’t a call to diminish Reserve Bank capability (in fact it probably needs strengthening – check how few research papers (0) they’ve published in the last decade on regulatory policy and financial stability matters), but to have a clearer stronger separation between policymaking and implementation (and, given the inflation target, what the MPC does is – influential – implementation).
I’ve also noted here before that there is a decent case for a structural separation of the Reserve Bank. When the Bank was first made independent it was basically a monetary policy agency with a few vestigial regulatory/supervisory staff. These days (even amid the general bloat) far more of the staff are on the regulatory side, and there are two significantly different (expertise and culture) prime roles. Even the sort of expertise one might need/want in a chief executive should be materially different: monetary policy is primarily a macroeconomic role, with some operational responsibility (markets, currency etc), while the supervisory side is a regulatory function pure and simple. Splitting out the regulatory functions into a New Zealand Prudential Regulatory Agency would parallel the Australian model; a system which has substantive matters, but also where alignment makes some sense when the biggest systemic risks etc here relate to Australian-owned banks. (If multiplication of government agencies was a concern, the FMA could be wound into a single financial regulatory body.)
Those changes can’t generally be made overnight (they all require legislation), but as a direction they have a lot to commend them, and I’d urge the Minister of Finance to take time in the next few weeks to reflect on the sort of direction she wants, before the momentum of the existing model takes hold. It is a busy time for her – the Budget will be more pressing – but medium-term choices matter too and this is her opportunity to stamp her mark on a better set of central banking arrangements.
One thing that doesn’t take legislation would be an overhaul of the Monetary Policy Committee’s charter, and particularly the culture around it. Setting up a Monetary Policy Committee was a good call by Grant Robertson – by the time it was done everyone agreed we needed to move away from the single decisionmaker model – but the specific path chosen was a fairly unproductive dead end. We had externals (three at a time) appointed – in one case solely (as OIA papers reveal) for her sex rather than expertise in the field – and then we never heard from them or saw any evidence that they made even a modicum of difference, even as they collected their not-inconsiderable fee and rounded out their CVs. This government has taken some steps to improve the quality of the externals – although they also extended again the term of an 80 year old member who was there through the worst of the costly policy mistakes on 2020 to 2022 – but there is still no sign of them making any difference in style or substance, and not the slightest accountability for their views. Much better to have a much more open system – as in the UK, US, or Sweden for example – where MPC members are open about, and accountable for, their views. Historically the Bank’s management – even before Orr- hated the idea, but in the real world everyone knows there is huge uncertainty and that processes are likely to benefit from open exploration of ideas, contest of views, and actual accountability. The Supreme Court manages to have dissenting opinions published. There is no reason why our MPC should not. And require members to front up to FEC from time to time, including in (non-binding) hearings before these powerful individuals take up their appointments. Good monetary policy is not an infallible text handed from heaven but, inevitably and appropriately, a process of discovery and challenge, in which everyone – or at least MPC members who are up to the job – would benefit from greater openness.
What of yesterday?
It is all highly unsatisfactory. We had brief press releases from the Bank and from the Minister but no real answers. We are told there were no active conduct concerns – although there probably should have been, when deliberately misleading Parliament has happened time and again, and just recently – and yet the Governor just disappeared with no notice on the eve of the big research conference, to mark 35 years of inflation targeting that he was talking up only a week or two ago, (I also know that one major media outlet had an in-depth interview with Orr scheduled for Friday – they’d asked for some suggestions for questions). And with not a word of explanation. If you simply think your job is done and it is time to move on, the typical – and responsible – way is to give several months of notice, enabling a smooth search for a replacement. He could easily have announced something next week, after the conference, and left after the next Monetary Policy Statement in May.
Instead, it is pretty clear that there has been some sort of “throw your toys out of the cot and storm off” sort of event, which (further) diminishes his standing and that of the Bank (but particularly the Board and its chair). It all must have happened so quickly that we now have this fiction that Orr is on leave for the rest of the month (the provisions in the Act require a temporary Governor to be appointed by the Minister only on the recommendation of the Board, and probably Orr just didn’t leave them time). After several hours of uncertainty, the Board chair finally decided to hold a press conference, which he didn’t seem to handle particularly well and (I’m told – I only have a transcript – in the end he too stormed off) we still aren’t much the wiser. It will, I suppose, provide much topic for conversation among the research geeks at the conference today and tomorrow (quite what visitors Ben Bernanke and Catherine Mann – BoE MPC member – will make of it all is anyone’s guess).
I guess it is probably true that Orr can’t be forced to explain himself, although since he is still a public employee until 31 March I’m not sure why considerable pressure could not be applied. But even if he won’t talk the answers so far from either Willis or Quigley really aren’t adequate. You don’t just storm off from an $800000 a year job you’ve held for seven years, having made many evident policy mistakes and misjudgments, as well as operating with a style that lacked gravitas or decorum etc, with not a word. Or decent and honourable people, fit to hold high public office don’t.
The suggestion seems to be that budgetary pressures – the Minister wanting to cut the Bank’s next five-year funding agreement are at the heart of it (and a careful read of the Reserve Bank statement hints at that). I had heard a story – apparently well-sourced – that the Bank had actually been bidding for a material increase in its funding, on top of the extraordinary increases of the last five years, but whether that is true or not the Minister does seem to have signalled coming cuts, and Orr has long been known more for his empire-building capabilities than for his focus on lean and efficient use of public money, But every public sector chief executive in Wellington has had to deal with budgetary restraint and, so far as we can tell, not one of them has tossed his/her toys and stormed off. It isn’t as if the Bank had been relentlessly and exclusively focused on its core business, with not a penny to be spared the poor taxpayer. In any case, from what comments have been let out it seems that final future budget decisions had not even been made yet, so surely it can’t be the whole story.
Comments by Quigley suggests that perhaps Orr was getting to the end of his tether, and some one or more recent things made him snap, reacting perhaps more than a normal person would do faced with the ups and downs of public sector life. It seems highly likely the budget stuff, and the desire to keep pursuing whims, was part of it, but it can hardly have been all. I don’t suppose he felt any great compunction about misleading Parliament so egregiously again…..but he should. And all this time – having stormed off with no adequate explanation – Quigley declares that he still had confidence in Orr. Surely yesterday confirms again that both of them, in their different ways, were unfit for office.
Oh, and for those puzzled by it, the title of this post refers to the latest estimate of the losses to the taxpayer from the Bank’s rash punting in the government bond market in 2020 and 2021. $11 billion dollar in losses. Three and a bit Dunedin hospitals or several frigates or…..all options lost to us from this recklessness, undertaken to no useful end, and a loss which Orr endlessly tried to play down (suggesting it was all to our benefit after all), and which not one of his MPC members – one now temporarily acting as Governor – even either dissented on or gave straight and honest contrite answers about. It has been 43 years since a Reserve Bank Governor was appointed from within. That is an indictment on the way the place has been run. Successful organisations tend to promote from within. Orr (and Quigley) do not leave a successful organisation, but one of yes-men and women. The place needs a fresh broom to sweep clean. One hopes the government cares enough to ensure it happens.
Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.
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