The reappointment of RBNZ Governor Adrian Orr went…poorly
Plus, the future of prediction markets and Australia’s Q3 wage price index
The RBNZ has released its internal Review and Assessment of the Formulation and Implementation of Monetary Policy, covering the period from 2017 to 2022. The review was peer reviewed by former BoC Deputy Governor Lawrence Schembri and former RBA Board member Warwick McKibbin. The peer reviewers largely endorse the conclusions of the internal review, while noting its limited terms of reference.
The release of the review follows the reappointment of RBNZ Governor Adrian Orr for another five-year term, which has been controversial to say the least. The opposition argued that reappointing Orr without an independent external review of monetary policy was a ‘serious mistake,’ raising questions about whether Orr can effectively co-exist with a new government after next year’s election. The opposition has criticised the internal review process as the RBNZ ‘marking its own homework.’
Bernard Hickey reviews the political context of both the internal review and Orr’s reappointment and argues that the controversy marks the end of the RBNZ’s political independence. I think that’s an overstatement, but it’s still not a great look. Michael Reddell says ‘It is hard to think of any advanced country central bank Governor who will start a new term commanding so little respect, support, and confidence. That is really bad for the institution, and the institutional arrangements.’
I disagree with most of Hickey’s analysis, particularly of the role of monetary policy in supposedly affecting a redistribution of wealth leading to a politicisation of the central bank. I do agree the RBNZ’s embrace of macro prudential controls targeting mortgage lending was a significant turning point and contributed to a politicisation of the Bank. That is an argument for having monetary policy and prudential regulation in separate institutions, as we do in Australia.
I will have more to say on the RBNZ in a forthcoming paper for the Mercatus Center on monetary policy framework reviews in the dollar bloc periphery, so I will resist the temptation to go into it here. Much of the criticism of the RBNZ’s conduct of monetary policy is misdirected, although there are still serious problems with the governance and performance of the Bank. The RBNZ is no longer the model for the rest of the world it once was, but there are still lessons the rest of the world can take from that experience.
The RBA review and prediction markets
Zac Gross has made a thoughtful submission to the RBA review, which got a write-up in the SMH by Shane Wright. He makes the case for the RBA, in conjunction with other financial system regulators, to mandate macro prediction markets. I made a similar case in my Mercatus working paper on RBA reform in respect of nominal GDP futures. He argues there is case for subsidising these markets. In practice, I don’t think the RBA acting as a market maker results in significant costs. I have proposed exempting these markets from regulatory cost recovery on public interest grounds. That cost would land on the regulated community rather than other taxpayers, but is unlikely to be substantial. My suggestion is that NGDP futures become a regulated benchmark price. As with other regulated benchmarks such as BBSW, the RBA would work closely with market participants to ensure adequate liquidity and effective price formation. These are recent Treasury forecasts for the expected path of nominal GDP growth (c/- Parliamentary Library):
Hard to believe there isn’t a potentially very active market in those forecasts.
In the run-up to the mid-term elections, the New Yorker ran an interesting profile of PredictIt and the CFTC’s action to shut it down that was mentioned in this space previously. There is a lot of interesting historical detail in the story. The CFTC’s decision is being challenged in the courts. While it is too late to join the action, you can get in touch with the plaintiffs via PredictItSuit@outlook.com. You can submit comment to the CFTC here. The CFTC has offered no explanation for its decision other than to claim PredictIt was in violation of the terms of its no-action letter. Presumably, the litigation will see the CFTC providing more justification in court. Depending on the outcome of the litigation, PredictIt now faces the difficult task of unwinding contracts on the 2024 Presidential election, among others.
The decision sits oddly with the seemingly more permissive approach to Kalshi, which we discussed in an earlier post. In particular, the CFTC sought public comment on Kalshi’s proposal to offer contracts on the outcome of the mid-term elections. The CFTC previously prevented Nadex (formerly Hedge Street) from offering similar contracts. In the case of Nadex, the CFTC claimed that political event contracts meet the federal definition of gambling.
Offering prediction markets on election outcomes seems to be a particular sticking point with US regulators, which no doubt reflects the politicisation of US securities regulation. Recent developments with Kalshi notwithstanding, the US has for the most part been a hostile regulatory environment for prediction markets. Intrade was forced by US regulators to stop accepting US clients, which was an important factor in its subsequent collapse, although probably not the only one. See this Fortune profile of founder John Delaney, who died 50 meters from the summit of Mt Everest in 2011.
Prediction markets have fallen victim to regulators outside the US too. iPredict was shuttered by being forced to comply with New Zealand’s AML laws, which imposed an impossibly costly compliance burden on the exchange. In Australia, the securities market regulator, ASIC, has banned retail OTC binary options, the main form of prediction market contract, until 2031. The ban has extra-territorial effect, precluding Australian residents from accessing offshore platforms such as Nadex. While the ban notionally does not apply to those who meet the definition of a sophisticated investor, in practice, offshore exchanges have little interest in making that distinction. The easiest way to comply with the ban is close the accounts of Australian residents and remove them from the onboarding process.
As the New Yorker piece notes, Australians can bet on the outcome of elections through bookmakers. Those bookmaker odds can be converted into election probabilities easily enough. As I noted in a previous post, bookmaker-implied prices pass standard tests for market efficiency. But ASIC, with the approval of the responsible minister, has effectively closed off Australian retail participation in prediction markets for the next decade. At the very least, ASIC should provide an explicit carve-out from its OTC binary options ban for public interest prediction markets.
From their heyday in the mid-2000s, when Chris Masse’s Midas Oracle blog reported on a thriving prediction market space, these markets have been progressively strangled by regulation in the 2010s. Midas Oracle has been dead for more than a decade now. Kalshi has been one the few bright spots, reflecting the influence of more permissive Trump-appointed Republican securities regulators, but the overall trend has been for the prediction market space to contract. The days when Intrade offered contracts on North Korean missile launches are long gone. That would have been a very active market in recent weeks. While there are some interesting developments in the blockchain space, these markets remain relatively inaccessible for those not versed in DLT technology.
Perhaps most seriously, the struggles of prediction markets reflect a regulatory rejection of the idea that private markets can mobilise socially valuable tacit knowledge. That some people lose money in the process is not a valid argument against prediction markets.
Australia’s Q3 wage price index
The Q3 wage price index has us expecting a 1.0% q/q rise and 3.1% y/y compared to 2.6% y/y in the June quarter. The model has been over-predicting wages growth in recent quarters. This is attributable to the wage setting process being caught flat-footed by the rapid acceleration in inflation, but we are comfortable with where the model lands in Q3 given what we know about wage setting over the quarter from a bottom-up perspective. The RBA’s November Statement on Monetary Policy has annual wages growth running at 3.1% by the end of the year, implying gains of averaging 0.8% for Q3 and Q4, but we won’t see the Q4 print until February next year. For its part, Westpac expects the recent wage decision for the age care sector to contribute between 0.2 and 0.4 percentage points to the WPI, although the timing is uncertain at this point.
US October non-farm payrolls
US October non-farm payrolls came in at 261k, higher than the median 200k expected, although closer to our estimate of 244k. The unemployment rate rose from 3.5% to 3.7%, higher than the market and our own expectation. Unfortunately, the labour force shrank over the month and the participation rate declined. While monthly employment growth remains above historical averages, it is also the weakest since December 2020. The US labour market hasn’t turned yet and November is shaping up positively.
A quick reader poll
Before handing you off to this week’s links, I would be grateful if you could respond to the following poll on how you access the newsletter, which will help in tracking where you are all coming from. There are at least two sources of bias in Substack’s readership stats, which go in opposing directions, so your responses will help me in understanding that bias.
ICYMI
Canada orders China to divest from country’s mining companies.
Falling population growth explains 42% of the observed decline in patent creativity, 32% of the slowdown in productivity growth, and 15% of the increase in derivative patenting.
Globalisation in retreat for the first time since the Second World War.
Supply skepticism is the biggest obstacle to affordable housing.
US federal tax collections are approaching the highest levels in U.S. history set during World War II and again during the dot-com bubble in 2000: