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Insights 18: 27 May 2022
The Australian: Oliver Hartwich on NZ's revolution in central banking
New Report: Reassessing the Regulators - The good, the bad and the Commerce Commission
Newsroom: Eric Crampton on why MfE's proposed container deposit doesn't add up

How central banking lost its way
Dr Oliver Hartwich | Executive Director |
Three bits of news from the world of finance and central banking this week:
  • The Reserve Bank increased the cash rate by 50 basis points.
  • A HSBC manager in Britain has been suspended for criticising climate-based financial regulations at a conference.
  • And in Switzerland, the Neue Zürcher Zeitung (NZZ) newspaper claimed that central banks worldwide have gone “woke”.
These stories fit well together. Each of them is part of the global puzzle explaining why many economies suffer from inflation today – and why many central banks seem unable to restore price stability.

Let’s start at home and talk about the RBNZ. It lifted its Official Cash Rate to 2 percent – the highest it has been since 2016.

Still, with consumer price inflation running at 6.9 percent, real interest rates on bonds and mortgages remain negative. We are probably a long way from an OCR to beat the inflation monster.

Why are we in this mess? And how did the rest of the world get there, too?

The story of the fired banker provides a hint. At a conference organised by the Financial Times, HSBC head of responsible investing Stuart Kirk delivered a speech titled “Why investors need not worry about climate risk.”

To be clear, Kirk did not question climate change. He did not doubt the science, nor did he call for inaction.

However, Kirk pointed out that economic growth allows countries to deal with the negative effects of climate change. He also accused central banks and regulators of spending too much time on regulations related to climate change while neglecting their core tasks relating to financial stability.

In the wake of the unavoidable Twitter storm, and probably to save its relationship with regulators, HSBC suspended Kirk. Never mind the bank had previously approved his speech.

Yet Kirk’s analysis rings true. This week, Switzerland’s leading broadsheet NZZ ran a damning essay under the headline “High inflation is the result of recklessness and ignorance.”

“Monetary policy became “woke””, the piece said. “What was forgotten was that the central banks did not have the necessary tools for their new responsibilities, be it in social, climate or financial policy. They took on tasks that they could not fulfil and forgot the task for which they had been founded.”

Stability is the task for which central banks were established. But by becoming involved in social, indigenous or environmental policy areas, central banks lost sight of it.

Which brings us straight back to the RBNZ.

Picking off poorly performing regulators
Roger Partridge | Chairman |
The GFC had many casualties. In New Zealand, one was the former Securities Commission. A 2009 independent review of the Commission’s role in the collapse of the finance company sector signed the regulator’s death warrant.

Out of the Securities Commission’s ashes rose the Financial Markets Authority. Its modern ‘board governance’ arrangements separated the chair and CEO functions that had been combined in the former Securities Commission’s ‘chair’ role. The review identified benefits from “the checks and balances that accompany a split between governance and management.”

Nearly a decade after the Securities Commission’s demise, research from The New Zealand Initiative reveals strong evidence for a similar governance makeover at the Commerce Commission.

Reassessing the regulators: The Good, the Bad and the Commerce Commission derives its findings from an in-depth survey of New Zealand’s top 200 companies. The new study follows up on the Initiative’s 2018 report, Who Guards the Guards? Regulatory Governance in New Zealand.

As in 2018, the survey tracked 23 key performance indicators for 24 regulatory agencies. The KPIs ranged from consistency of decision-making to accountability and learning from mistakes.

The survey reveals a worrying decline in regulatory performance generally. More troublingly, of the three “all of economy” regulators – the FMA, the Reserve Bank of New Zealand and the Commerce Commission – the survey reveals the latter regulator to be a basket case.

On average, only 29.9% of survey respondents agreed that the Commerce Commission met the KPIs, while 38.5% disagreed. These results are in stark contrast to the ratings for the Financial Markets Authority. 58.5% of respondents agreed the FMA met the KPIs. Only 20.2% disagreed.

The FMA’s results have also deteriorated since the Initiative’s previous survey. But the lack of respect for the Commerce Commission is a damning indictment of one of New Zealand’s most important regulators.

Conversely, the survey revealed a dramatic improvement in the RBNZ’s performance as prudential regulator. This improvement follows the focus brought to the RBNZ’s governance from both the Initiative’s 2018 reportwhich revealed serious shortcomings in the RBNZ’s performanceand the Government’s subsequent three-year RBNZ review. As with the Securities Commission makeover, the RBNZ review culminated in legislation reforming the RBNZ’s governance arrangements as the Initiative recommended in its 2018 report.

In addition to providing grounds for reforming the Commerce Commission, the report recommends strengthening external monitoring of key regulatory agencies and improving the robustness and transparency of regulatory appointment processes.

Regulatory performance matters. Targeting the worst-performing regulators is a good place to start.

Read Reassessing the regulators: The Good, the Bad and the Commerce Commission here

“Grant Robertson” defends Budget 2022
Dr Bryce Wilkinson | Senior Fellow |
Fevered with Covid and isolated in a Te Anau motel, I imagined the following interview.

Q: Finance Ministers traditionally urge people to be prudent – not to borrow to invest in shares. Instead, use savings to reduce mortgage or credit card debt. What is your take on that Grant?
  1. Absolutely, the right advice. To borrow to invest in risky assets is gambling. Add tax to the equation and it makes even less sense.  Thanks to our extremely astute government, rental income is taxable, but borrowing costs are not. We want landlords to sell their houses to first home buyers. Our tax system helps.
Q: Quite so, but before we divert to rental housing, how does the government justify borrowing to invest in the New Zealand Super Fund? On the Treasury’s figures total Crown borrowings in June 2022 will be 55% of GDP and the NZSF’s financial assets will be 17.0% of GDP. Is that not doing exactly what you have just advised the general public not to do?
  1. Ah, Bryce, you do not understand that government is different. It is astute. When a private person or business borrows and loses, it feels the pain. When government gambles and loses, it sends you the bill. Borrow and be happy, that is good government.
Q. Very well. Let’s come back to rental housing. So you want to see less private rental housing. But how does that help people who need to rent? Families on the list for state housing have reportedly quadrupled to reach a record high of 25,887. Also, the media is telling us that New Zealand is running out of motels to house the homeless.
  1. Thank you for asking. That is where our state house build programme comes in. Labour plans to provide more than 18,000 additional homes by 2024. Those 25,887 families are in good hands.
Q. Despite these problems, Budget 2022 pays $350 over three months to each of more than two million people. Why is this additional $700 million tax burden a good thing?
  1. Of course, it is a good thing. People don’t realise that we are spending their money. We call it investing in wellbeing.
Q. Well, if $350 is good why would $700 not be better?
  1. My dear boy, of course it would be better. But it would be fiscally irresponsible, and we can’t have that can we?

On The Record

Initiative Activities:   
  • Report: Reassessing the Regulators: The good, the bad and the Commerce Commission by Roger Partridge
  • Podcast: Roger Partridge explains the findings from his new report ‘Reassessing the Regulators
  • Submission: Submission: Transforming Recycling - Container Return Scheme by Eric Crampton
All Things Considered
  • Video of the week: Stuart Kirk, HSBC Why investors need not worry about climate risk
  • The evolving amount of money the RBNZ has lost from its bond purchases and can claim back from the Treasury
  • The FDA vs. cost-benefit analysis
  • One of the best ways to improve social equality is to teach every child to read.
  • The pro-science Green Party declares that nuclear is sustainable energy and demands streamlined consenting for small modular reactors.
Copyright © 2024 The New Zealand Initiative, All Rights Reserved

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