Reserve Bank to the Rescue

The crew worked extremely hard to keep the good ship New Zealand afloat.

Listener: 18 September, 2010.

Keywords: Governance; Macroeconomics & Money; Political Economy & History;

When Alan Bollard transferred from the position of secretary of the Treasury to that of the governor of the Reserve Bank, a good friend announced it was “more pay for less stress”. Any big operation has its stresses, and the governor also has the onerous task of setting the interest rates every few months, with the media hype that surrounds this. But all Bollard’s nine predecessors would have agreed: compared with their job, being secretary of the Treasury is pretty grim.

And then there is the once-in-a-lifetime global financial crisis. As related in Crisis, the book Bollard has written with Sarah Gaitanos, the stress levels on the governor and his team rocketed. The book has the modest purpose of telling the story of the past two years.

One thing it doesn’t mention is that when Bollard took the job, he began tightening up the financial surveillance of the trading banks. (Oversight of financial companies, whose record has been far more calamitous, was not the Reserve Bank’s responsibility.) As a result of this behind-the-scenes work and that of his predecessors, the New Zealand banking system weathered the storm well. What the book details is that although the ship may have been reasonably sound, its crew had to work extremely hard to keep it afloat.

So much so that the average New Zealander may well think it was all easy-peasy. Only a few of the commentators guessed the challenge was greater. The clues were small apparently technical changes that kept the payments system functioning, without overexposing the Reserve Bank (and hence the New Zealand Government) to possible liquidity problems. I had thought the main reason for many of the changes was to give the market confidence, but it turns out the backups often had to be used, although not with danger to the public purse.

So nowadays the Reserve Bank has an “open book” on its foreign-exchange dealings that could affect the value of the New Zealand dollar. Bollard mentions that each morning he checks how much the Reserve Bank has won or lost because of overnight currency fluctuations. A mistake could mean an enormous cost to the taxpayer. So far the bank has stayed ahead on its money-market trading, but inevitably one day it will make a loss.

One of the book’s interesting insights is how Bollard, the first secretary of the Treasury to become governor, was very concerned that the Reserve Bank’s actions did not expose taxpayers to unnecessary risks.

Bollard says all the material in the book is available under Official Information Act – although it also contains much personal detail, showing that behind the scenes there is a very human story. Discretion means that some bits of the official story cannot be told, especially the close involvement of the Treasury. The phrase used around town is that the two institutions were “joined at the hip”.

Whereas the book ends, the crisis has not – or rather the international monetary crisis is morphing into a long recession, in which there will be employment and production crises. New Zealand will be unable to avoid the consequences, and the Reserve Bank will remain under pressure managing the economy. Any successor book, probably written by an outsider, will be not as exciting as this one. It will be more about the complicated and tedious economic debates, and policy changes that only half work.

Those who founded the Reserve Bank after the Great Depression expected another global financial crisis, although they would have been surprised it took so long to occur. They would have had no idea of this one’s intricacies or how complicated resolving it would be. However, if they were alive today, they would be pleased at how well their institution performed, and would judge its staff good and faithful servants of New Zealand. But they would certainly be surprised how explicit the book has been about the events – or that it was published at all.

Meanwhile, readers will be delighted with the book’s honesty and transparency. It is a damned good read.