Saturday, November 10, 2007

Saturday Forum: SuperBank - more powerful, more responsible than a spending politician

There was an early inkling of the power-shift now well underway in Australian economic management in the lead up to the Sydney 2000 Olympic Games.

The Prime Minister John Howard wanted to open the Games himself in place of the Governor General who arguably was entitled to the job as the representative of our head of state, The Queen.

As the debate raged, a newspaper letter writer came up with a way out. The Games should be opened by neither the Prime Minister nor the Governor General, but by the most powerful person in Australia - the man that could push up and push down interest rates.

Almost a decade on the current Governor of the Reserve Bank, Glenn Stevens has demonstrated beyond doubt that he is more powerful than just about every other leading figure in the country put together.

In the lead-up to Wednesday’s historic mid-campaign rate rise the Treasurer Peter Costello was apparently so confident that Stevens wouldn’t dare move rates that he declared it as a fact to several people who asked...

The ABC broadcaster John Faine revealed this week that while Costello was sitting down in the chair for the one of their regular radio chats Faine had observed he thought that scheduling the election two weeks after the Reserve Bank was likely to push up interest rates had been a risk.

Costello’s reply, according to Faine: “He looked me in the eye. He put his thumb down as he sat there in the chair, and he said “There will not be a rate rise in November. Take it from me.”

“I said – “but you might be right, you might be wrong, but you’re prepared to punt on it?”

“And he said “There will not be a rate rise in November.”

That the Prime Minister and Treasurer should have misread the new power of the Reserve Bank and the fearlessness with which it would be used is a surprise, given that they and the Opposition daily pay tribute to the credibility of the Reserve Bank.

In an implicit acknowledgement that the Reserve Bank is more credible than he is in campaign mode the Prime Minister has been continually citing it as a source of support for his political claims.

When he wanted to claim that further winding back WorkChoices would push up rates he seized on a single nine-word sentence buried in the Reserve Bank’s 350-word statement.

“That to me is a big tick for the Government’s industrial relations policy, and a big warning sign to any change in that industrial relations policy,” he said.

“I mean, this is not John Howard speaking, this is the independent Glenn Stevens speaking,” the Prime Minister assured us.

The endorsement came from the “quintessential independent commentator, the Governor of the Reserve Bank - not John Howard, not Peter Costello, not Alexander Downer, but from Glenn Stevens, Mr Independence himself”.

Labor’s Kevin Rudd has been just as eager to put words into the mouth of an organisation far more respected than he is. He kept saying this week that the Reserve Bank agreed with him about the causes of inflation and had warned Mr Howard 16 to 20 times about the shortage of skilled labour.

During the last election Liberal Party advertising falsely cited the Reserve Bank as the source for its claim that that interest rates would always be lower under one party than under the other.

Behind the scenes the Bank wrote formal letters of complaint to the Liberal Party and the Australian Electoral Commission all the while keeping the dispute quiet.

As the then Governor Ian Macfarlane delicately put it later: “There was no way that I could speak out without effectively becoming a third force in the election, and that would not have been in the long-term interests of the Reserve Bank or Australian monetary policy at all.”

An accident of timing (another one, after decision to schedule the election campaign during the week of an interest rate rise) means that on Monday the current Reserve Bank head will have his opportunity to speak out.

Once every three months the Bank releases a 60-page guide to its thinking which it calls its Quarterly Statement.

The next one is due on Monday, at exactly the right time to enable it to gently correct some of the spin that is being sold in its name.

The Bank is not of the view that a switch to a Labor government would push up interest rates. The Governor said so when asked about it at a parliamentary hearing a few months back.

In his words: “With respect to very high rates that characterised the high inflation era, I think it would be unusual for us to anticipate that recurring if we feel we had a good inflation control mechanism in place and, obviously, I think we do”.

But does Labor’s workplace relations policy amount to a “a big warning sign” on inflation as the Prime Minister this week claimed the Governor had said?

Not according to the Governor’s own words. As he put it when asked: “I think it is obvious that two successive governments of differing political persuasions have moved things in the direction of less centralisation. I don’t think an objective observer would conclude differently to that.”

When asked what would happen if a new government moved wage fixing back towards centralization he agreed that it would be a bad thing: “I think that system would not handle the current circumstances at all well,” but then added: “The question is: is anybody actually proposing that system?”

The Bank does not think that a Labor government is the risk that the Prime Minister says it does. In polite language on Monday it will say so.

But nor does it clearly agree with Labor that if the government had paid more attention to Labor’s two pet projects - broadband and education – it would have taken pressure off inflation.

The Governor dismissed broadband with the observation that although the US had had faster connections than Australia, “for much of the past 15 years, our productivity growth was as good as theirs. Recently, though, ours has slowed and so has theirs. There are things going on which presumably relate to things other than broadband, so I cannot really give you an informed opinion on that”.

He scarcely mentioned education.

When it comes to “working families” the Governor’s position is much closer to John Howard’s than Kevin Rudd’s.

The Labor leader has claimed continually that they are “under financial pressure, not just from interest rates, not just from rising rents, but grocery and petrol prices and the cost of child care, not to mention WorkChoices”.

The Governor doesn’t see it that way because the statistics show that that is not the case. In his previous Quarterly Statement he observed that household spending was “supported by strong growth in employment and real wages along with the tax cuts announced in the federal budget and rising household wealth”.

In other words the Bank agrees with the Prime Minister that working families have never been better off - however politically unpalatable that truth might be during the election campaign.

Asked in August whether that month’s rate rise would hurt working families the Governor replied: “That’s the idea, that’s how it works. We are not pretending that there’s no pain involved. The idea is constrain spending relative to supply and dampen the pressure on prices.”

In the three months since working families have actually accelerated their spending. It is now climbing faster than at any time in the past three years.

At the same time house prices have jumped an extraordinary 3.5 per cent, hardly evidence of widespread pain.

In October an extraordinary 70,600 Australians found new full-time jobs. Nationwide last month one new fulltime job was created every working minute. The paperwork doesn’t bear thinking about.

Even the author of the last Labor campaign slogan “ease the squeeze” now thinks that we are not squeezed. Writing in the Australian Financial Review on Friday, the then Labor leader Mark Latham said it was “strange to hear people talking about a private housing affordability crisis when over the past decade Australia has experienced its greatest ever boom in private housing investment”.

“There is no crisis for the hundreds of thousands of families that have readily put themselves into debt and built large new homes, the so-called McMansions, across the country. In most cases, they are enjoying a quality of housing well beyond the expectations of their parents and grandparents before them. Many others have put their finances into housing renovations, upgrading their assets in older suburban areas. Again, this hardly constitutes a crisis,” he writes.

“Bargains are still available. In south-west Sydney, for example, home buyers can purchase a three-bedroom brick house in a decent neighbourhood for less than $250,000. If they are willing to hold down a regular job and forgo water views and boutique shopping, then home ownership can be theirs. There is no crisis in the private housing market, just the manufactured hysteria of the political class.”

This week’s interest rate hike will make things more difficult for some families who are close to the financial edge, but believable calculations suggest that it will typically take away only half of the $90 per month tax cut both sides of politics have promised them next year.

Those numbers suggest that after an extra hike, regarded as a near certainty, they will lose all of the benefit of the promised tax cuts.

But that’s the point. The rate hikes are designed to counteract the tax cuts and everything else that is pushing spending and therefore prices into dangerous territory.

The Bank is going to keep increasing interest rates until it does cause pain; until we spend more reasonably.

There is a risk that it will get things wrong - pushing rates so high that it brings on an economic collapse, as has happened before. If that does happen our unprecedented five-year run of tax cuts (with three more set in stone) will have to take some of the blame.

It is no coincidence that the Reserve Bank has pushed up interest rates for all but one of the last the five years in which tax rates have been cut. With the Australian economy enjoying its biggest income boost from abroad in 60 years, and the third-biggest in the world, it has had little choice.

On Monday the Bank will come close to saying that what’s needed right now is to douse the flames of an economy that is on fire rather than to fan them. Neither side of politics will listen, and in the process they will cede even more power to the un-elected officials who really look after us in the Reserve Bank.