Afternoon roundup

Minor notes on the closing of the browser tabs:

• Andre Brett asks good questions about Auckland rail. Don't agree with some of the conclusions, but they're good questions. 
• The Onion's Amicus Brief in favour of parody is excellent.
• The tertiary education union is going on strike, seeking an 8% cost of living increase. Perhaps a bit difficult for the universities to avoid declining real wages for staff when tuition fee increases were capped at 1.7% for the year and international students might still be trying to figure out how to get visas. 
• There are way fewer nuclear warheads now than there were in the late 1980s. Dropped from over 60,000 to about 10,000. It's still a lot, and Russia has about half of them. 
• Charlie Gates interviews perennial Christchurch local government candidate, and eccentric, Tubby Hansen. 
• Stefanie Stantcheva explains how to run surveys, if you want to create identifying variation. 
• Oooh, yeah. That'll matter. Productivity measures can be upward-biased if some of the labour cost has shifted onto customers: pumping own fuel, supermarket self check-outs. It has to be more efficient than having paid staff do it, or else it wouldn't be done, but the full labour cost of producing the output includes the customer's time. 
• Dileepa Fonseca wishes we had more ghost houses. It would mean there is a surplus of houses, rather than a desperate shortage. He is absolutely correct. It's on the back of a report finally showing that there really aren't that many of them.
• John Cochrane reminds central banks that there are risks out there other than climate change. 
• British power companies are pelletising wood from old-growth forests for use in power generation. I don't know whether the economics would stack up for shipping pine pellets from NZ, but we might wind up seeing more of that kind of power generation here. 
• "What made JASON possible was the convergence of two factors: a competent research community willing to strictly act as advisors, and political officials who wanted that advice to be truthful rather than convenient." When elite physicists advised Washington.
• Inflate grades or get fired at NYU. 
• Oliver Hartwich reminds us that, unlike Truss, Thatcher started by balancing the budget. 
• Jonathan Milne on problems at Ports of Auckland. 
• Between ownership and rangatiratanga: Thomas Cranmer on the Three Waters reforms

A politicised central bank

Politik this morning reports that the Reserve Bank Governor has lost the support of the National and ACT Parties. Or, at least, they would not be keen on his being reappointed.

Now that Simon Bridges is National’s finance spokesperson, the future of Reserve Bank Governor Adrian Orr will be an issue.

Orr’s contract as Governor expires in March 2023, outside the three months prior to an election when Governments normally defer significant appointments.

But with the election expected in September that year, a move in March to reappoint him would be bound to be an election-year issue.

If the decision were to be left to ACT and National, Orr would go. Both ACT Leader David Seymour and Bridges confirmed that on a podcast last week, and Bridges has confirmed again to POLITIK that was his position.

But at the same time, Bridges has to be careful.

The Bank is supposed to be independent, and one of National’s criticisms of Orr is that he has allowed it to become a little less so under Labour and Finance Minister Grant Robertson.

And this is why Reserve Bank Governors ought to stick to monetary policy and why prudential regulation colonising other policy areas far outside of their proper domain without any evidential basis is risky.

Last week, we hosted John Cochrane to talk about central bank independence and the problems they can get themselves into. 

The video is here:

    

My column in our Insights newsletter summed it up:

PRUDENTIAL CLIMATE RESERVATIONS

Central bank independence matters.

The grand bargain struck between governments and their central banks, coming out of the turmoil of the 1970s, and led by New Zealand in the late 1980s, was simple.

Governments stopped meddling in monetary policy. Central banks were given operational independence to pursue low and stable inflation. It was a difficult bargain for governments who preferred to avoid interest rate hikes as elections loomed.

That independence required Banks stay within limited bounds.

Monetary policy and prudential bank regulation are powerful tools with economy-wide consequences. They need to be used only toward the core ends of central banking: low and stable inflation, and the stability of the financial system.

Straying to pursue other objectives, regardless of whether they match the goals of the government of the day, is dangerous.

On Thursday, the Initiative hosted a webinar with John Cochrane – one of the world’s leading experts working at the intersection of macroeconomics and monetary policy and financial regulation. That he has a stronger record of published work in this area than the entirety of the Reserve Bank of New Zealand is a safe bet. Whether he has three times the work in the area might depend on how you weigh pages in different journals.

John has been increasingly critical of worldwide moves by reserve banks to consider climate change as a risk to financial stability. While it is very clear that temperatures are rising and that sea levels will rise with them, with obvious consequences for storms and beachfront properties, evidence of risks to the financial system is wanting.

Not everything that is a globally consequential risk is also a risk to the financial system. Systemic financial risk requires a particular kind of fragility. And the financial system, here and abroad, simply appears to be robust to the kinds of shocks that climate change will bring.

Indeed, earlier this month, the Federal Reserve Bank of New York published work showing that storms increase, rather than reduce, bank profits. People take out loans for rebuilding. Storms are bad, but they are not a risk to the financial system.

Using prudential regulation to address political concerns takes the regulator’s eye off the ball. More substantial risks can be missed. But, more importantly, doing so politicises their operations, putting their independence at risk.

And that may yet be the biggest systematic risk of them all.

Shortly after the webinar, one of the RBNZ's board members decided to weigh in. Draw your own conclusions about the adequacy and rigor of governance at the Bank. 

Just some of ⁦@nzinitiative⁩ ‘members’. Full list is on website (credit for transparency). Not really ‘mum and dad’ level organisations. pic.twitter.com/1802cf8A0s

— Chris Eichbaum (@ChrisEichbaum) December 2, 2021

Cochrane on Reserve Banks

John Cochrane will be joining us at the Initiative for a webinar tomorrow. The topic: What central banks should and shouldn't do. 

We've been increasingly concerned by the Reserve Bank of New Zealand focusing on a rather wide range of policy areas far from their remits in monetary policy and prudential bank regulation. 

The case for incorporating climate change into prudential regulation looks particularly weak; the Bank simply hasn't any evidence of systematic risk to the banking system from either rising sea levels or carbon price risk that might justify its expeditions into climate regulation. There's plenty of evidence that sea levels will rise and that carbon prices will as well. But that doesn't in itself make a case for the Bank's getting involved. 

Central bank independence in the matters properly in its jurisdiction matters. But the deal has been that Banks get necessary independence, with a quid pro quo that they don't abuse that independence to stray into areas that are really Parliament's concern. 

John Cochrane has been looking at similar issues in Europe, and at the Federal Reserve. 

And I'll be very keen to hear what he has to say about it. 

The blurb for the event, along with Zoom links and Slido links for questions, is below. Note that times are New Zealand time. Not Pacific Time. 

Webinar tomorrow with John H. Cochrane: What central banks should and shouldn't do

Central bank independence in monetary policy was hard fought and desperately needed. The deal was simple. Central government would stay out of a Reserve Bank’s way as it dealt with monetary policy, and the Bank would not abuse its independence in pursuing other agendas.

That deal is fraying badly, if it has not fundamentally broken. If central bank independence in monetary policy is lost as consequence, rebuilding the institutions will be costly.

Join us for an insightful webinar with John H. Cochrane, Senior Fellow at Stanford University's Hoover Institution.

Event details:
Time: 11.00am – 12.00pm
Date: Thursday, 2 December
Registration: Please register for this event via Zoom.

We encourage you to ask questions you have through Slido.
The access code for our event is: #024262

About the speaker:
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution. He is also a research associate of the National Bureau of Economic Research and an adjunct scholar of the CATO Institute.

Before joining Hoover, Cochrane was a Professor of Finance at the University of Chicago’s Booth School of Business, and earlier at its Economics Department. Cochrane earned a bachelor’s degree in physics at MIT and his PhD in economics at the University of California at Berkeley. He was a junior staff economist on the Council of Economic Advisers (1982–83).

Cochrane’s recent publications include the book Asset Pricing and articles on dynamics in stock and bond markets, the volatility of exchange rates, the term structure of interest rates, the returns to venture capital, liquidity premiums in stock prices, the relation between stock prices and business cycles, and option pricing when investors can’t perfectly hedge. His monetary economics publications include articles on the relationship between deficits and inflation, the effects of monetary policy, and the fiscal theory of the price level.

Cochrane frequently contributes editorial opinion essays to the Wall Street Journal, Bloomberg.com, and other publications. He maintains the Grumpy Economist blog.

If you wanted to hear John range more broadly, his conversation with Tyler is here. We'll be keeping to a narrower remit. 

Sovereign Debt

John Cochrane's 2012 Condliffe Memorial Lecture at Canterbury.

"Sovereign Debt -" the 2012 John Condliffe Lecture from John Fountain on Vimeo.

I wasn't able to attend as I was home sick most of this week. So I'm grateful that John Fountain put this together. John Cochrane has been an excellent visitor at the Department; his seminar on Friday was superb. I knew a lot about finance that just wasn't so, or was so 15 years ago and ain't any longer. I thank John for fixing that.