We are awaiting the results of the first part of the review of the Reserve Bank.
There is a case to be made that the Reserve Bank should be eradicated.
Clutch your pearls, but the stage was set yesterday by Ministers Little and Parker about greater oversight by the courts of laws with Bill of Rights implications: breaking down the lichen-covered basalt walls of Wellington’s institutional islands. After a decade,we get to finally ask some of the hard questions about our structures.
There have been hints that there will be a set of mild reforms to better frame its targets – perhaps making them more complex. But it’s time to test those old walls hard.
We have been blaming Prime Minister Robert Muldoon in his dual role as Prime Minister and Minister of Finance and essentially running the foreign exchange reserves, inflation levels, and wage levels from a single gearstick held tightly inside his pudgy fist. Like a Baba Yaga nightmare, we blame his interventionism for replacing all direct political oversight of such policies with specialists that have nearly zero citizen oversight.
Yet in New Zealand, the result of the 1990s reforms of the public sector is a massive set of quasi-government entities and agencies who have very little Ministerial oversight, poorly influenced by letters of expectation that offer minor shunts to Statements of Intent, which in turn guide Boards, who in turn guide executive action, maybe. Each instrumental removal is a decrease in oversight to a power of 10. That is to say, almost no political influence at all. It is designed that way.
It is pretty weird to propose something so bold in Wellington terms when inflation has been negligible for a decade, headline GDP (if not productivity) is solid, headline unemployment is trending well under 5%, and government since 1999 has sustained and expanded a pretty extraordinary social compact.
What’s the problem then?
A massive political problem is the revolt against the European Union and against Washington by good old voters is a real sense that far too much of the actual decisions are made by unregulated elites who answer to nothing. The related problem is a long term depoliticisation of the public sector. Fewer and fewer of the public sector answer to actual people. They are protected by Boards. We need public sector specialists, whether you call them elites or not. We also need them to be answerable to the people we elect.
The other problem is long term debt. It remains New Zealand’s highest economic risk. With interest rates so low for so long, it is natural for private mortgage debt to go through the roof. That’s at the feet of Reserve Bank settings.
The final problem is the push-the-RB-off-a-cliff test: since global inflation has been so low after 2007, what difference would there really be if they didn’t exist?
The banking system needs more public and political pressure in order to make us a financially safer society, but it is getting less pressure instead.
But let us step back for a minute, lest I appear too mean to the New Zealand Reserve Bank.
The current battle in the developed world is in three fields: trade, climate, and security policy. Yet monetary policy is the one that snaps governments in half. Populist leaders now rise to power doing nothing more than denouncing central bankers and challenging the legitimacy of the current monetary order. As Donald Trump said on the campaign trail “And we have a Fed that’s doing political things. This Janet Yellen of the Fed. The Fed is doing political – by keeping rates at this level.” Just love his syntax.
In responding to this challenge, it is tempting to point to central banks’ independence from politics as a defense against the dangers posed by erratic leaders. Yet that would be a risky move. It turns out that decades of appeals to technocratic exceptionalism—the idea that monetary policy should be shielded from democratic oversight—have had costs. Indeed, this exceptionalism can lead to the very politicisation of monetary policy that it seeks to avoid.
Central banks play a paradoxical role in today’s developed democracies. Their work is highly technical, yet the consequences of their actions are inevitably political, producing big winners and losers. They wield great power in democratic societies, and yet they are unelected—because of the fear that politicians tend to push up inflation to appease their bases unless interest rate policy is insulated from democratic pressures. But we haven’t seen that in a strong sense since the 1980s.
The underlying tensions in central banks’ technocratic exceptionalism became particularly evident in the aftermath of the 2008 global financial crisis. In recent years, the banks’ entire mission has become unclear: for decades, they have been focused on fighting inflation, yet since the 2007-08 crisis there has been no inflation to worry about despite massive central bank interventions. In fact, the opposite fear—this time, of deflation—has driven extraordinarily loose policies and a great deal of experimentation, ranging from massive bailouts to quantitative easing and ultra-low (even negative) interest rates.
It’s time to make the staff of the Reserve Bank mere public servants, inside a simply dedicated Treasury unit, along with its many other units. Treasury continues its tradition of resolute and fearless advice no matter who is in government, and of course actually drafts the instrument with the highest impact upon us as an economy and as a society: the budget. Why not start thinking about monetary and fiscal policy as a whole thing? Why not integrate our banking regulator into Treasury? It’s time to smack the old institutional walls of the RB very hard.
The new RB Governor Adrian Orr, after such astoundingly good management of the NZSuperfund, will be well up for this kind of conversation across the whole of our remaining economic and monetary levers.
It is well time to do a real root-and-branch review of the existence of the New Zealand Reserve Bank. Bring back direct Ministerial control, and trust the people again.