No Minister

Orrsomely Shite

with 8 comments

I knew Adrian Orr slightly at Waikato University where he had a reputation for loving the Chunder Mile and doing funny, crazy things like ploughing an old motorbike into one of the varsity duck ponds during some midnight drunken madness. He was an outsized character.

I had no idea what degree he’d done so was a bit surprised when he turned up running the NZ Super Fund (Cullen Fund) and even more surprised when he got appointed to be the Governor of the Reserve Bank given his lack of qualifications for either job, especially compared to previous Reserve Bank Governors.

He’s been a disaster, although that’s been aided by a spendthrift Labour government. But aside from inflation getting away on him, there’s also the news that he’s now the $9 billion dollar man – $9 billion in losses that is. Michael Reddell at Croaking Cassandra has the story:

August was not a good month for the government bond market: yields rose further and the market value of anyone’s bond holdings fell. And thus the Reserve Bank’s claim on the government, under the indemnity the Minister of Finance provided them in respect of the LSAP programme, mounted.

Presumably all the numbers will eventually turn up in the Crown accounts, but for now it seems safe to assume that Orr and his colleagues (facilitated by the Minister of Finance) have cost taxpayers around $9.5 billion dollars – getting on for 2.5% of New Zealand’s annual GDP (or about 7 per cent of this year’s government spending).

Basically what happened was that back in early 2020 there were the usual worries about liquidity in the economy because of all the businesses being shut down by the government with their lockdown policy. It’s what happens in a typical recession and what happened big time during the GFC (Global Financial Crisis) of 2008-2009 – except those situations happened because of internal changes in the private sector, even if government policy has a hand in them (which it especially did in leading up to the GFC).

Global government bond markets were in a mess in April 2020 – a reflection of primarily US-sourced extreme illiquidity and the flight to cash (at the time stock markets were falling very sharply too). The interest rates on Government bonds were rising (even as policy rates had been cut). There were worries that private banks and investors would not be able to or would be unwilling to buy these bonds.

So the Reserve Bank decided that even more pump-priming of the economy was needed and to that effect they created the LSAP programme (Large Scale Asset Purchase) in March 2020. They would buy up to $30 billion of government bonds – and their bet was that inflation (and hence interest rates) would stay low, just as they had after the GFC, despite massive amounts of credit creation by central banks back then (the infamous Quantitative Easing (QE) approach). In fact the US Federal Reserve back in 2011 even called one of their efforts the same name, although QE is the better known name and it purchased a lot more than just government bonds.

In the late 2010’s central banks began to offload those bonds from their books, selling them back into the market and they didn’t lose money because inflation and interest rates remained as low as when the bonds had been issued. Private banks were happy to buy them as a good investment.

But not this time. As inflation and interest rates have risen so have bond yields (because otherwise they don’t sell), and so those old bonds with their low yields don’t look so hot as an investment and thus have to be sold at a discount or not at all. This sort of thing happens in bond markets all the time and old bond holders lose when it does.

Central banks should be (modest) profit centres for the Crown. Between their positions as monopoly issuers of zero-interest notes and coins and as residual liquidity supplier to the financial system there is never a good excuse for a central bank to lose money, and certainly not on the scale we’ve seen here (and in other countries) in the last couple of years – punting massively on an implicit view that bond yields would never go up much or for long (as they hadn’t much in the previous decade when other central banks were engaging in QE).

If you’re wondering why this matters this time it’s because there was an indemnity clause put into the LSAP that would allow the RB to call on the government to replace its losses. The RB has to pay much higher interest payments to the private sector on the vastly increased settlement cash liability relative to the yields on the bonds. It amounts to about $1800 per person in NZ – and that’s money that won’t be spent on things like education and healthcare.

And as Riddell points out there was never much upside to the programme in the first place – although Orr is now trying to argue that there was, but as has become usual with the RB, has no quantifiable argument to back up that assertion:

As it is, the 10 page note does not even provide a serious attempt at a rigorous framework for evaluating costs, benefits, and risks – there is more handwaving, and attempts to blur any analysis, than serious reasoning.

Did the RB really think NZ yields would stay at 4% or more while US, UK, Europe. Canada, and Australia all fell to 0.50% or under? The LSAP really was not needed – and Orr may well be re-appointed in the next few months.

Written by Tom Hunter

September 16, 2022 at 5:11 pm

8 Responses

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  1. You do note that this $9Bn loss is not a reserve bank loss, but payable by the taxpayers as the government guranteed any losses. This is the real story and one that will never get aired by the mainstream media.
    That is not to say that Orr is not the worst RB governor we have had, and unfortunate that this lines up with the worst PM.

    Kevin McMenamin

    September 17, 2022 at 7:05 am

  2. Not lightly suggested but Orr, Robertson, Parker and that woman I decline to name will not fare well in history, who ever writes it.


    September 17, 2022 at 11:54 am

    • It will be written in Mandarin, GD, because western Civilization is committing suicide


      September 17, 2022 at 12:17 pm

      • Pfffft….. As I have written before, often, I’m not unaware of the West’s problems and regularly get stuck into them.

        But this constant drumbeat of the rising power of The East – meaning China – looks and smells exactly like what I saw and heard and read about Japan in the late 80’s and even the early 90’s.

        China has got problems – BIG problems…
        China is importing Western illiberal ideas

        China and its problems

        China cracks down on its successful companies

        And always remember, China is Asshole:

        Tom Hunter

        September 17, 2022 at 12:55 pm

      • Pfffft….. An old video of an Aussie pressing a mike into a Chinese man’s face so he can yell “China is arsehole” does not meet the criteria of a debate within the intellectual realm

        One thing most who blog and comment here agree on is that the current trajectory of our part of the world does not look too auspicious…

        … and that “the community” least likely to find itself on the wrong side of the law and most likely to be engaged in useful economic activity such as growing cauliflowers (have you see the price of them recently?) are people of East Asian descent


        September 17, 2022 at 4:11 pm

      • I see you are still at it Andrei. I see your mate Grofaz Putin didn’t have it all his own way in Samarkand.
        Seems Xi and Modi are not very impressed with Russia’s “military might”.

        Old Curmudgeon

        September 17, 2022 at 9:45 pm

  3. Seems Xi and Modi are not very impressed with Russia’s “military might”.

    And in related news the Pope has given birth to a two headed calf.

    Once again you reduce the issues of the day to who has the ability to inflict the greatest violence, ironic really given NATO’s humiliating retreat from Kabul in recent days – all that military might helpless in the face of determined tribesmen from Central Asia

    But in reality we are in the early stages of a self inflicted major economic collapse.

    Some of this you know, obviously, the nonsensical green agenda which has led to poor decision making in the energy sector and inflated energy prices with the correlated reduction in economic activity

    The loss of confidence in the West and the mediocrity of Western leadership, as evinced in this post.

    When you look at the people attending the SCO, they know where they are going and they are confident and self assured , while the Western leadership are floundering and compounding the errors that are crushing the future of the people they are responsible for


    September 18, 2022 at 6:29 am

  4. OH FFS:

    ‘Reserve Bank governor Adrian Orr says the bank will be increasing the number of conversations it has about climate change over the coming year.’

    Great. Let’s talk about something the Reserve Bank did not create and over which it has no control.

    Unlike inflation.

    Tom Hunter

    September 21, 2022 at 1:15 pm

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