The central banker and the forest god
How Maori myth is guiding the Reserve Bank
“Iwould say, to some people, it’s gone down like a cup of cold sick,” says Reserve Bank governor Adrian Orr. He’s talking about the response to his reset of the central bank’s vision — using the story of Ta¯ne Mahuta.
“I’ve read articles where they say we’ve called ourselves a god. No we haven’t. We’re saying this institution plays a role where you can have the analogy of Ta¯ne Mahuta, pushing Papatu¯a¯nuku and Rangi apart — the mother earth and sky — and letting sunshine into the NZ economy.”
A poetic metaphor, using a popular piece of Ma¯ori mythology, seems an odd thing to have to defend in New Zealand in 2019 — but here we are.
The hallowed nature of central banking is such that Orr’s populist style was always going to ruffle a few feathers or, in keeping with the metaphor, shake a few branches.
It can seem simplistic. But that’s the point. Orr’s message isn’t tailored for economists or the financial commentators who pore over the fine print of every Reserve Bank statement.
That alone is a radical departure for a Reserve Bank governor.
It has prompted at least one critic to suggest Orr is styling himself as a rockstar central banker.
He’d rather be a rapper, he jokes. But the general response has been good, he says — “other than the two bloggers who get upset”.
“I can say with iwi and wider New Zealand it’s going really well . . . people got it straight away.”
Orr has a passion for demystifying economics for people. He is sceptical of those who would seek to keep the workings of the Reserve Bank wrapped up in arcane language.
“Too much is taken for granted,” he says. “Especially, from the Reserve bank itself. The central bank and monetary policy is actually a means to an end. It’s not an end in itself.”
When he started the job last year, he did some eye-opening market research that indicated the vast majority of people didn’t know what the Reserve Bank was or what it did.
That kind of lack of understanding about how money works can’t be good for a society, he argues.
It isn’t that difficult, says Orr, rattling off a lightning-paced beginner’s guide.
“Money is created. The central bank is given the monopoly right to print money.
“Our main task is to make sure that money is useful and that it maintains a store of value and people are prepared to swap it for goods and services, and hold onto it for a length of time . . . so inflation stays low and stable.”
Orr is quick to acknowledge there are plenty of layers of complexity which need to be worked through by the economists and specialists.
But beneath all the mystique and intrigue is “something as simple as: can we print a note that people have confidence to put in their pocket?”
As an economist for 30 years, Orr has worked for the OECD, NZ Treasury and headed research teams at Westpac and the National Bank. He does know the big words and when to use them.
So why Ta¯ne Mahuta? And what does it all mean?
In Ma¯ori mythology, Ranginui and Papatu¯a¯nuku — sky father and earth mother — were bound in an embrace so tight that all the world was dark.
Their children made several attempts to separate them and eventually the forest god Ta¯ne was successful — lying on his back and pushing up with his legs to let the sunshine in.
“The sunshine came in 1934 with the establishment of Te Pu¯tea Matua, the Reserve Bank of New Zealand,” says Orr. “Where we have our own currency and start setting our own credit and money growth related to Aotearoa New Zealand, rather than how Australia or the UK were doing it.”
Just to be clear, Orr says “we are talking about the mythology, not the actual tree — although we have been working with the hapu Te Roroa and they are magnificent. We went up with my colleague Ngarangi [RBNZ communications adviser Ngarangi Haerewa] and we sat under the tree and they gave us full rights to use this ko¯rero.”
In Orr’s analogy, the roots of Ta¯ne Mahuta are our legislation.
That’s an area with a lot of change going on, he notes. The Government has just implemented phase one of a full review of the Reserve Bank Act. Phase two is underway.
“The sap is the money that is circulating through the veins of the tree and there’s a lot of challenges there around what is the future of money, cryptofinance. What is the future of physical vs electronic money? I like to use it. I’ve got a vested interest. I print that stuff.”
The veins carrying the sap are the payment and settlement system.
“We are refreshing the whole infrastructure of the bank,” Orr says. “You’ll only know that we do this job when we get it wrong. We are banking the banks and we’re banking New Zealand with the rest of the world, doing that in real time and that is a challenge.”
The branches are the financial institutions.
“The big banks — if one of those branches should fall, Ta¯ne Mahuta’s garden is destroyed. So we say: are you good for this? Are you grafted on sufficiently? Are you behaving well?
“They are privileged and honoured to be using our money and our economy — they have to be strong and safe and those branches need to be able to stay on the tree.
“Some of the branches are small and they will fall . . . we’ve seen that,” says Orr, but that can be fixed up without too much damage to the wider economy.
“But those big banks. We’ve seen globally, society suffers terribly if those banks fail. This is why we’re looking at conduct, culture and proposing better quality capital and more capital to strengthen those branches.”
At this point Orr’s metaphor strays into one of the most contentious areas for the Reserve Bank right now.
As well as following Australia’s lead with a review of conduct and culture (in partnership with the Financial Markets Authority) the Reserve Bank wants to raise the amount of capital banks are required to hold.
The goal is to make them more resilient to shocks, but there has been push-back from the industry, which says interest rates will rise and costs will be passed on to consumers. It’s still early days, says Orr. “I would say I’ve seen too many knee-jerk reactions. We’re 18 months into a process and we’re waiting for the banks to come back.” He interrupts himself there. “No, sorry, we’re waiting for everyone to come back. Because it’s society we’re asking. It’s society’s risk preference that we need to calibrate the framework. Not the risk preference of the banks.
“Bankers know that their risk preference is bigger than what works for an economy because they can privatise their earnings and socialise their loses. So when a bank fails it us who pick the costs up . . . and future generations.”
Orr thinks “the fear, paranoia and confusion” will dissipate as the consultation progresses.
“I’ve publicly refuted some of the claims, that we’re going to have 120-point rises in interest rates and so on . . . garbage.
“There will be some additional cost for financial institutions . . . how that is passed on depends on the competition, the risk and return recalibration and the total security that the economy gets and how we are viewed internationally when we are borrowing money.”
Is there a risk that you can make the system so safe that it stifles growth?
“Absolutely, that is in our consultation document,” Orr says. “I hope some of them will read it. “We’ve said we can make it safer and more efficient, we’re not doing safe at the cost of efficient.
“At some point of course you can get past that tradeoff, but I know that New Zealand and most of the world are well southwest of that problem.”
The big banks — if one of those branches should fall, T¯ane Mahuta’s garden is destroyed.
The central bank and monetary policy is actually a means to an end. It’s not an end in itself.