Bollard Interview on Q&A

Sunday 5th September, 2010

Q+A's Guyon Espiner interviews Reserve Bank Governor, Alan Bollard about his new book - the first book by a central banker about the global financial crisis (pre-recorded on Thursday).

ALAN BOLLARD interviewed by GUYON ESPINER

PAUL Before this eventful weekend, the country was already rattled by the news that our largest private finance company was going into receivership. South Canterbury Finance was all the news last week when it became the latest victim of the global financial crisis that had its genesis back in 07, a crisis that's now the subject of a book of the same name by the Reserve Bank Governor, Dr Alan Bollard. It's a landmark book, it's the first book by a central banker anywhere in the world working at the time the panic began. In it Dr Bollard offers a vivid description of how the Labour government here in New Zealand set up its Deposit Guarantee Scheme on the fly, on the day of its campaign launch in 2008. So when Political Editor Guyon Espiner spoke to Alan Bollard on Thursday afternoon, Guyon started by asking whether the scheme was conceived into shambolic or hurried a fashion.

ALAN BOLLARD - Reserve Bank Governor

No that's the reality of what a real crisis is like, and that was a real crisis, it had been a crisis year, it was a terrible month, stuff was happening overseas, stuff was happening around Iceland and Ireland and Britain and we started doing a bit of background work on this. And then of course events really happened very fast with the Australian Prime Minister telling us what they were going to do.

GUYON He was on the phone to Helen Clark saying that he was going to announce a scheme. Helen Clark was only saying that we were going to consider a scheme at that stage. I mean the original scheme, only the big five banks were charged entry fees, but you'd warned about having free entry for finance companies, and you said in your book that it could be very costly and would leave the way open for entrepreneurial finance companies to undertake risky investments at taxpayers' expense. I mean that's transpired hasn't it?

ALAN Well it has in some ways but talking most recently about South Canterbury, that was a bit of a different situation. I mean that wasn't one that we had any particular reason to worry about at that stage. But you know the fact is the reality is in a nasty crisis of that sort, you haven't got much room to move, and when you have to move you've gotta move very quickly. So looking back I'm not sure that we could really have done anything really different from what happened.

GUYON Well you do say that in hindsight the entry conditions to the guarantees looked too lax?

ALAN Yeah but that's particularly relating to some of the riskier very small finance companies, some of which have gone to the wall since then. The issue was that if we hadn't let them in, that was the death knell for them, the next day. That was how long it would have taken for people to get their money out and stick it in the banks. What we wanted to do was let them in, but charge a realistic risk adjusted price for the real risky ones, that's what we didn't manage to do initially.

GUYON You wish you had achieved that? That the finance companies should have been charged some money given their risk, and that would have meant that we wouldn't have had to have paid out so much?

ALAN Yeah absolutely, but on the other hand the Minister had a very important point which was, he was worried that credit unions and building societies wouldn't have been able to afford to get in, and that could have spelt the death knell for them, and it was very important that's they shouldn't be left stranded. So you know it was a no win situation.

GUYON You do write though that by early 2009, most finance companies had entered the scheme and I'll quote your book. You say 'knowing that they were sheltered by the taxpayer, depositors were happy to leave their funds in what otherwise might have been some very shaky institutions.' I mean that created a perverse incentive, while they could have money invested in companies which were paying a high return and yet pay ....

ALAN Yeah we did manage to plug a lot of the gaps in following months by getting agreement to charge for increases in deposits in those companies, and that did happen in the sense stopped them growing any more, but there wasn't much we could do in terms of what was there. Now you've gotta remember of course we'd had finance companies failing since 2006. We had a bunch of them already hitting the wall, nothing to do with the global crisis.

GUYON But South Canterbury Finance, obviously taxpayers will be pretty focused on that at the moment, they just paid out 1.6 billion dollars. What concerns did you have about that company, given that the Reserve Bank had responsibility for regulation from 2008.

ALAN No well I can't talk about that for legal reasons, but that's not what I'm really talking about in the book, I'm talking about some of the one that were very clearly riskier earlier on.

GUYON But you talked in your book about having a death watch league table and saying it wasn't a surprise to you that Mascot had fallen over. Did you share that death watch league table with Prime Minister and the Finance Minister.

ALAN Oh well we had to be very careful about who we could talk about particular institutions to, but we could talk the broad principles of it and I mean you've gotta get real on these things. Of course there's a bunch of finance companies that are going to be a lot riskier than others. This is the sort of issue that happens when you're working to a situation that in one sense New Zealand was pushed into, once the Australians had announced they were going to do the scheme. We had to do something. If we hadn't then our banks were at risk. If we had cut the finance companies out, all the finance companies would have gone. If we'd cut specific ones out, there would have been law suits all over the place, and there would have been blood on the floor the next morning.

GUYON Where was South Canterbury Finance on that death watch league table?

ALAN No well I'm sorry I'm not gonna tell you that.

GUYON Well why not?

ALAN Because I'm not divulging information that could have been commercially sensitive, and because this matter's still alive.

GUYON But you had that information and it says in your book that the Prime Minister and the Finance Minister were surprised when Mascot had fallen over. So presumably you didn't share that death watch league table with them?

ALAN I'm telling you - we told ministers the distributions of risks in there. We worked out the probabilities of risks, that's been roughly accurate We didn't talk about individual companies for obvious reasons.

GUYON A lot of people might be confused and not understand why it is that you're sitting over there in the Reserve Bank building with that information. You know South Canterbury Finance is at risk, you have a league table of companies that are going to fall over, yet you can't tell anyone about it?

ALAN No that's not what I've said, and I haven't said that about South Canterbury.

GUYON Well where was it then?

ALAN Well I've just said, I'm not going to tell you that. But we had to do what a proper set of officials would do, and that was to try and work out the broad probabilities of default, and we probably were roughly right about those. But that's all you can do in a situation like that.

GUYON South Canterbury Finance was allowed to go into the Extended Guarantee Scheme in April.

ALAN This wasn't about South Canterbury. We were worried about the New Zealand financial system. There's some very big banks that could have caused a lot of problems by doing that.

GUYON I appreciate that, but with respect to South Canterbury Finance, which has just had a one and a half billion dollar bail out from the people, including the people, watching this programme. South Canterbury Finance in April was allowed to go into the Extended Guarantee Scheme. Should it have been?

ALAN Oh well that's a bit irrelevant, because the extended scheme hasn't actually started yet.

GUYON Yes but it allowed the depositors the confidence to keep their money in.

ALAN Well I'm not commenting on that, I'm very happy to talk about what I wrote in the book, but this is all since the book's been written.

GUYON Yeah but this is the very material that the book is based on, the crisis.

ALAN In the book I say we were very reluctant to have to get into a deposit guarantee scheme, with all the distortions and adverse incentives that it offered. But New Zealand was caught in a very nasty situation where it had to balance up the possibility of not going in, and the possibility of doing it, and the possibility of not doing it was far worse. So there's no winners in this situation, but we did stop a bank crisis, and we did stop a financial sector crisis. So ultimately that was a successful scheme, not an unsuccessful one.

GUYON Before I leave finance companies, you've had regulation oversight since 2008. Only in March 2010 have we had mandatory credit ratings for finance companies. I mean that seems a woeful lack of stewardship in that regard?

ALAN No actually the law went through in late 2008. The regulations allowing for credit rating agencies after the legally required consultation period, has taken through till early this year. That's the reason for that.

GUYON Did you wish you'd forced them to take credit ratings earlier?

ALAN Oh well the New Zealand system of regulation for finance companies in the past hasn't worked and that's why government decided to change it all. Unfortunately that's how long it takes to get regulations through with Orders in Council. If you don't do that properly then you just end up in court.

GUYON Let's change tack here. You've got a lot of focus in this book, personal reflections in some respect, but of the financial crisis, and you talk about a conference of central bankers in Switzerland in the summer of 2007. And you talk about a young American business academic, who took you through one of these new complex financial products, and asked whether anyone in the room really understood it, and it seemed the answer was no. And you write that this was a sobering experience, and 'for the first time I confronted seriously the implications of these financial instruments, and the damage they could do if they were misused.' Did you voice those concerns?

ALAN Oh well I mean on the side yeah, absolutely we have a lot of discussion about them. I mean the first thing for us though was to work out did we have any in our system, and the answer was no. We've been lucky, good, whatever, through this. The New Zealand banking system hasn't had these complex and potentially quite toxic instruments.

GUYON Sure but you've got a bunch of central bankers from around the world who at that point realise they don't even understand this financial product, and you say in your book that within months of that conference, that scale of that financial product was in the trillions of dollars.

ALAN Oh well not that particularly no. You're not reading it quite right But in terms of broader derivatives yeah there were heaps of them around.

GUYON And did anyone say anything?

ALAN Well I mean I think actually Alan Greenspan's view, probably reflected for quite a long time a general view which was they helped efficiency in the financial system, and on balance they probably helped stability. Now in that he was wrong, and so central bankers' broad view was probably wrong, regulators' view was wrong, a lot of bankers' view was wrong, and politicians' - who caused, in some cases caused some of this - views were wrong as well.

GUYON It just seems extraordinary to me that people of your own standing and other central bankers from around the world, got a very strong taste in early 2007 that there were hugely complex derivatives and instruments that you didn't even understand, that you didn't employ anyone who understood them, and yet we didn't really hear about that until things started ...

ALAN Oh this case I'm talking about is somebody talking about a new product it was thought that could be used. He's using it to make the point which is that people didn't generally understand the extent of Sub Prime and the ability of Sub Prime to go toxic. But New Zealand can be responsibility satisfied and Australia can as well, that its regulators had organised their regulation of banks in a way that those weren't taken on board. So that was a success story not a failure story.

GUYON I want to turn to another colourful description you have in your book of the Job Summit in Auckland in 2009. You write that 'the captains of industry and the leaders of the community were having a fine time coming up with headline ideas, sometimes backed by back of the envelope calculations'. You go on to say that the technical quality of the ideas was limited in some cases, but that John Key had successfully achieved his aim of creating a positive feeling of facing the future together. Was that a feel good exercise, the Job Summit?

ALAN Oh well it was partly, it wasn't entirely. It was getting a lot of agreement together from a lot of different parts of the community. So it was quite important like that. But yeah I mean I wasn't impressed by some of the business leaders' views of how to do policy. They were quite naïve about that. But as you can see, you know I've written this book in as truthful a way as I can, and I went to that Job Summit, absolutely exhausted, and feeling quite grumpy about it, so I've cast a rather caustic view on the thing.

GUYON Why were you grumpy about it?

ALAN Oh because I was exhausted, because of the late nights involved in staying up trying to work out how we were going to help protect the New Zealand economy and financial system.

GUYON And you didn't think they were achieving much?

ALAN Well you know quote me properly in there.

GUYON Well I will because you left it, you say 'I rang my assistant and asked her to book me on an earlier flight to Wellington feeling only slightly guilty I snuck away and headed for the airport. I admit to an ulterior motive, back in Wellington I headed for the stadium where I was just in time to catch the end of the New Zealand 20/20 cricket game against India'. I mean they are not the actions of a man who was taking this Job Summit serious.

ALAN Oh yes they are absolutely. This is a 24 hour 7 days a week sort of operation.

GUYON And I don't have any problem, I'm sure no New Zealander does, but you're going to the cricket, but this is a one day Job Summit and you basically were saying it was a feel good exercise and that you left early to go to a cricket game.

ALAN I haven't said that it was purely a feel good exercise. As I said it brought together a lot of people around the community, it's important you do that at the particular time, specially at time of stress. It did that I think quite successfully. What I have said is that I didn't think a lot about some of the business leaders' views of how to run policy.

GUYON And didn't think enough of it to stay for the duration.

ALAN It had broken into specific groups, the bits that I was related to were done. I arrived there at 6.00am that morning - get real.

GUYON So you participated fully in it?

ALAN Well in the parts that I was involved in, absolutely.

GUYON I just wonder though, cos that's the sort of passage in the book that National's political opponents may well seize upon. Did you think carefully about writing a book like this while you still hold the position of Govern of the Reserve Bank?

ALAN Yeah I did think carefully. I mean it is a bit unusual while you're still running an organisation like the Reserve Bank to do that. I thought people would be interested in this, and you know it's warts and all, I haven't tried to cover up any of that. Now you can get in and try and make issues about some of that, but the fact is you've gotta look at that whole period which is a most extraordinary period. New Zealand came through it not too badly considering many countries. This is just a little bit of the story of it. But yeah I had to be very careful, and some things I haven't divulged. I've said that very clearly at the beginning because there's some things I can't talk about yet.

GUYON Can I just finally ask how you see some of the future going, you've just been with central bankers from around the world in the United States, what was the mood like there?

ALAN Oh well the mood in the United States from an economic point of view is a bit sour at the moment. Somebody gave a paper there that said, if you look at 100 years of banking crises and economic crises around the world, there's some common features. One is that it takes a decade to build up the imbalances, and then it takes a decade to clear them.

GUYON Well we've got another decade of this?

ALAN No I wouldn't say it like that, but there's going to be a slow grinding recovery for some countries around the world.

GUYON Does that mean in terms of the impact on New Zealand, that you will leave the official cash rate at 3% for the remainder of the year?

ALAN And you can wait till next week till we do our monetary policy statement to hear the answer to that one.

GUYON Alright. Thank you very much for joining us, we really appreciate your time.

PANEL DISCUSSION in response to ALAN BOLLARD led by PAUL HOLMES

PAUL So the Governor's book has been very revealing. Don Brash you watched that interview very closely. What did you make of it? Should an incumbent Reserve Bank Governor be writing such a book do you think?

DON BRASH - 2025 Taskforce

Well I think it's been very enlightening. He gives a real feeling that the world was in serious crisis and New Zealand's come through it quite well. I think he also made a couple of points which Guyon Espiner did not bring out at all, namely, that these imbalances still exist, and New Zealand's one of the countries where these imbalances are a serious problem.

PAUL Can you explain those briefly?

DON Yeah, that the world has developed huge levels of debt. New Zealand particularly has a very high level of debt to the rest of the world, and that's a potential source of vulnerability.

PAUL In other words he says he didn't warn the government about potential basket case finance companies, that the Reserve Bank knew what were the basket cases, knew what the worries were and didn't tell the government. And of course the question was why the hell didn't you?

DON Well his responsibility was not to name particular companies but to warn the government that they would need to make big provisions for the possibility of loss, and he did that.

PAUL Yes, wouldn't you pass on names though?

DON Well I can't comment on that, but the reality is, the media coverage of this issue Paul has been absolutely appallingly bad. This is not gonna cost the average taxpayer 400 bucks at all. It's lucky to cost them a quarter of that. It's a total misrepresentation of the situation. Furthermore the guarantee scheme was put in place, as the Governor pointed out, in a panic situation before the last election when the Australian government put a scheme in place. He had no alternative but to do it.

PAUL No no, between a rock and a hard place wasn't it?

DON Absolutely.

PAUL If we hadn't gone then deposits would have flooded into Australia. Bob Harvey what do you make of what the Reserve Bank Governor was saying?

BOB HARVEY - Waitakere Mayor

Well he sure ain't a Tony Blair I have to say, in writing his memoirs. He says it's warts and all, but every part of that interview was safe. I mean he's so safe this guy, I guess he probably needed a ghost writer to get the guts out of it. But when you see a book as important as this you want to know what's going to be in it. Don has read it, I haven't, but the fact is I think that he had to name those companies, it's a small country. Now all of us are paying for South Canterbury. The fact is we are vitally involved in the process of the finance companies and the collapse. Why doesn't he tell us? He seen the colour of a dishonest...

PAUL Well the Prime Minister was worrying a little bit about misrepresentation of the 1.7 Don was worried about it.

BOB Don, what do you mean, he's written the book, not you.

DON He's absolutely honest. He could not name particular companies, he warned the government that if they put the guarantee in place, and of course it was the previous government...

BOB Well then don't write the book.

DON No no he wanted to get an important message across. It was not about South Canterbury, it was about the fact the world has been in crisis and we've still got major issues to deal with.

PAUL Therese what do you make of the book?

THERESE ARSENEAU - Political Analyst

Paul there is a big difference between the book was covering issues past. The questions that he had difficulty answering were things that are in the present, and he's the Governor of the Reserve Bank, and it is a tricky line. As you said Don he's the only sitting Governor that you know of who's written a book, and so it is a fine line that he has to walk, and it is an important ....

BOB Should I feel sorry for him, does he need our pity?

THERESE You've gotta put it into perspective and what was the purpose of the book, and it is because - I take it as Governor of the Reserve Bank he needs to be looking forward and protecting the future in terms of....

BOB Look I'm a writer, and he's pretending to be a writer, he should front up.

PAUL Yeah he's writing a book, he should say what he means to say, that's what Bob is saying.

DON Well he did, he did, absolutely.

PAUL No I think the fella's got too much of a propensity, it's not my opinion of the joker, he's got too much of a propensity to poetry, you can tell that by wearing the bird brooch on the lapel.

DON It was a very important book and Guyon Espiner missed an opportunity to bring out the key messages in that book.

PAUL I'm wondering something, it's quite primitive this but I'm wondering should we have an honest Reserve Bank Governor who wants to write a book and talk about the difficulties of the financial crisis and bla bla bla what we had to deal with and we haven't really seen that coming, and bla bla bla, or do we want a mandarin who is austere and lets us believe that he knows everything - as you did. You were like that.

DON Thank you. I think he does both. I think he's a very competent guy. I think the book has got some very important, messages, and unfortunately the Governor did not get a chance to bring those out in the interview.

THERESE The message is that things are broken but we can fix them.

BOB We don't know that. Hey I think he should stop writing books and get on with what he's doing.

PAUL Quick word about the Job Summit. He's tired he doesn't believe in it He thinks the big industry people are naïve, he heads off to watch the 20/20. Bad confession?

DON Well I think the book does make Alan to be a human being, and he occasionally gets tired, he occasionally gets a migraine, and he's under huge pressure and stress, and he made a judgement that the proposals from some of the business leaders were not in fact terribly useful.

PAUL They're silly.

THERESE But Paul when people come on and you ask them direct questions and we see this a lot with ministers, and they spin you complain. When somebody actually is quite honest about what happened on a day, you complain. How can they win?

PAUL Look that's too hard for me, and it's been a very difficult and long weekend of great empathy for our southern brethren.

ends

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