By Roger J Kerr
Whenever I am reviewing the appropriateness of a treasury management policy document for a corporate client I always put a large red line through any management decision-making structure that incorporates a treasury committee.
In reviewing how the Reserve Bank of New Zealand reaches decisions on monetary policy the authorities in Wellington should also put a similar line through any suggestion that committees make better decisions than individual management functions having the direct responsibility and accountability for being on the spike.
A RBNZ study has confirmed that most western central banks do not entrust monetary policy / interest rate decisions to committees with external members (which is the model favoured by the Green and Labour political parties).
My point being that I would not entrust decision-making responsibility to any committee no matter what its composition.
Committees by their very nature do not make good decisions, responsibility is obfuscated, accountability is not sheeted home and if consensus is not achieved they wait to the next committee meeting to discuss the issue again.
A robust governance/management structure in the fast moving world of business and financial markets beats school committees any day when it comes to outcomes.
The New Zealand model of having the monetary policy responsibility firmly on the Governor’s shoulders with adherence to the Policy Targets Agreement set by the Minister of Finance has worked very well over the years.
So what is the strong reason to change it?
Of course the Governor now takes counsel from his senior management team in reaching monetary policy decisions, just as any Chief Executive does in managing a business.
The Chief Executive is ultimately responsible to the Board of Directors for performance.
The Board’s role is to appoint/fire the Chief Executive, set policies, ensure compliance and oversee strategic direction.
Changing the monetary policy responsibility on to the appointed Board of the Reserve Bank, as the Greens are suggesting, raises all sorts of new risks.
The Board may well be more representative of the wider economy than the RBNZ management team; however you would question whether such lay folk have sufficient understanding/experience of global financial markets, the NZ economy and our banking transmission systems to take on the responsibility of our monetary policy decision making.
Right now the RBNZ Board consists of a University Chancellor (and former RBNZ deputy Governor), a University professor, a banking/securities lawyer, a venture capitalist living in the US, a professional director/accountant, an ex fund manager and a consulting research economist - all very capable people, however not at all representative of the wider NZ economy which is dependent on big primary industries, construction / property / manufacturing industries, agriculture commodity prices and the exchange rate.
The problem with the Greens’ model is that you end up with politically motivated or single-agenda type appointments to the Board that runs the risk of monetary policy being pushed in dangerous directions.
We are far better off having a RBNZ Board centred on governance and holding the Governor to account for performance and firing him/her if they fall short and breach the PTA on too many occasions without good reason.
Having the Board itself making the OCR interest rate calls is a recipe for disaster as the “management on the spike” accountability is lost.
To be fair all the major central banks around the world operate monetary policy by committee (e.g. US Federal Reserve, ECB, RBA, BoE) with only the Bank of Canada having the same regime as us with the power entrusted solely with the Governor.
The RBNZ are reviewing the sole decision-maker role, however “not as a matter of urgency” would get agreement from my side.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
9 Comments
To be fair all the major central banks around the world operate monetary policy by committee (e.g. US Federal Reserve, ECB, RBA, BoE) with only the Bank of Canada having the same regime as us with the power entrusted solely with the Governor.
I think you've answered your own question. They nearly all have broader targets than just inflation. Ours in any case has missed its target for the last year, with no apparent consequences.
As it happens I don't mind Mr Wheeler, and he seems willing to verbally stand up to John Key's all consuming power, although the practice has been a little underwhelming.
An inhouse committee may be overbureaucratic in a small economy like NZ, so some robust outsiders would seem to me add to the mix. I recall Hugh Fletcher, on leaving the Board of the RBNZ, expressing real frustration at capital flows and monetary policy. It begged the question what he had done on the Board, and what if any influence he had.
you end up with politically motivated or single-agenda type appointments to the Board that runs the risk of monetary policy being pushed in dangerous directions.
The entire current model is politically motivated. The inflation target is politically motivated, the basket of goods and services both included and all those exculded is politically motivated . Economics used to be called Political Economics for a good reason. Politics is everywhere. The act of pretending that economics is somehow above politics and therefore rational is of course political in nature. It leads to TINA thinking.
The RB pretends that it was responsoble for China wages impacting on the price of everything. And ignoring the massive increase in the money supply and subsequent inflation through our banking system and into property- where it has leaked out all over the place.
you end up with politically motivated or single-agenda type appointments to the Board that runs the risk of monetary policy being pushed in dangerous directions.
The entire current model is politically motivated. The inflation target is politically motivated, the basket of goods and services both included and all those exculded is politically motivated . Economics used to be called Political Economics for a good reason. Politics is everywhere. The act of pretending that economics is somehow above politics and therefore rational is of course political in nature. It leads to TINA thinking.
The RB pretends that it was responsoble for China wages impacting on the price of everything. And ignoring the massive increase in the money supply and subsequent inflation through our banking system and into property- where it has leaked out all over the place.
Without boring you with all the authorities: -
Kerr is basically correct, although I wouldn't be so doctrinaire with the red pen:-
(a) In conditions where there is crisis or otherwise a driving imperative to arrive at a decision, the Committee or Consensus decision is the preferred methodology.
(b) In other words in circmstances where a decision to act is essential, otherwise
(c) In conditions where there is no crisis or pressure or desperate imperative then the RBNZ single responsibility model is the preferred method.
Mind you Kerr's frequent use of the word "accountability" seems to be at odds with the RBNZ reality.
icon,
I normally value your opinions, but wonder if you have your a) and b) confused.
In my experience a crisis needing an urgent decision is the only time when consulting sufficiently widely to get a considered decision can be a luxury you cannot afford.
In other times leaving decisions in the hands of an all powerful person leave you subject to a matrix of competence/incompetence; power hungry versus benevolent; self serving vs broad church. In the case of the Reserve Bank Governor, who clearly has to sustain considerable pressure from the Minister of Finance, and separately the Prime Minister; you only need one of those three to be either incompetent or self serving or populist for significant monetary/economic decisions to be faulty.
I have my own views as to what mix we currently have. I would prefer a committee, albeit with a clear and transparent decision process that cannot leave an impasse; and with a significant casting vote with the Reserve Bank Head.
I thought hard and long about the advisibility of that post and whether I could stay inside my usual self imposed 2 paragraphs. It's to do with whether the individual (CEO) is task oriented, or people oriented, and the polarisation of views. The two often have extreme polar-opposite views as to solutions. In crises, one of them has to capitulate, and tests have found they both have to capitulate away from their polar views and towards the middle ground in order to move. The results of those tests have found that the capitulated middle or "consensus" ground where they can at least agree is usually more correct than the two polar decisions. It is only the imposition of the "time limit" that allows the individual to accept self-capitulation.
Research shows that groups make riskier - or more radical? - decisions than individuals. Thats relative of course. Not always. Presumably it's because of 'groupthink' where the internal factors and relationships have a greater value than the external infomation. And also the accountabilities.
In deciding how to structure it you need to think what the task involves. if ithere is a need to gather broad information, then groups and committees are good.
if the task is around risky decisions.then an individual is more likely to make conservative decisions. (only more likely of course. Not always)
Makes me wonder for example about Parole Boards. Risk decisions and information gathered for them. But probably set up as Board to spread any negative fallout. Otherwise who would do it.
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