Wednesday, August 20, 2008

The Reserve Bank's deepest, most primal fear

What’s driving the nine members of Australia’s Reserve Bank board? Their deepest, most primal fear. It’s that Australia will slide into a recession and that their fingerprints will be all over it.

Like Lord Voldemort in the Harry Potter novels a “recession” is something that can’t be named.

Instead the minutes of the Reserve Bank board’s August meeting refer to it as a “deeper and more persistent slowing in the economy”.

The last time the Reserve Bank slowed things too deeply and too persistently one million Australians found themselves out of work.

The members of that board will wear the opprobrium forever more.

Just this month the then Treasurer Paul Keating singled out one member of that board – Gordon Jackson, the then head of CSR - as the holdout who refused to let the Reserve Bank board cut interest rates in late 1989...

“In his view, after the property boom, Australia had to take a squeeze,” Keating said.

Gordon Jackson is no longer alive and able to defend himself and so will have his reputation forever sullied.

The damage to the reputation of the present members of the Reserve Bank board should they bring on a recession would be much worse.

The mistakes of 1989 have been documented. The present Reserve Bank Governor Glenn Stevens worked in the Bank’s research department in 1989 and saw what happened.

Working with him in the research department was Warwick McKibbin, now the independent academic on the board.

The head of the Treasury Ken Henry, now on the board as the Treasurer’s representative, was at the time a senior advisor to Keating as Treasurer and watched was happening from Parliament House.

The board members are worried that Australia’s banks made things hard for them last month by pushing up mortgage rates all on their own and they are also worried that economies worldwide are weakening. Very worried.

4 comments:

phil said...

Peter - reputations will only be sullied amongst the economic cognoscenti, the average mortgage payer in the street wouldn't have a clue who to blame.

anon said...

The RBA would be off the hook, if it pointed out that State and Federal Treasury are its nemesis. They are responsible for inflation, not RBA.

Feb 2008 $31Billion: Tax cuts will not be "carpet-bombed" onto the Australian economy, says Finance Minister Lindsay Tanner amid fears the move will increase inflation. Right.

Mar 2008 $40Billion: Margin lending and loans to buy stock now account for three-and-a-half per cent of all household debt (ABC 4 Corners Mar08 Debtland).

Apr 2008 IMF says Aust property is among the most overvalued in the developed world (25 per cent) and cannot be explained by fundamental economic factors. It appears that IMF is not aware of Aus government propensity to lavish tax concessions like a drunken sailor on the tax-breaks-r-us-brigade.

Jun 2008 $50Billion/yr: combined total of capital gains tax arrangements, land tax exemption and negative gearing arrangements (2008 Senate Housing Affordability report).

$80 Billion: Forecast spending by State governments this year.

$3.5 Billion/yr: Investment property debt (not wide screen plasma TVs as some social commentators believe) said to be at about 170 percent of our ability to repay it.

Forecast $90 Billion in home renovations this year (HIA).

Add to the mix the tripling of immigration (compared to just 10 years ago) so as to create a multitude of mini-infrastructure bottlenecks of monumental proportions and we have the perfect storm.

Treasuries have caused this mess, they should fix it.

Cheers.

excuse my research skills, you are welcome to laugh, I am)

Anonymous said...

"The RBA would be off the hook, if it pointed out that State and Federal Treasury are its nemesis. They are responsible for inflation, not RBA."

Excuse me while I laugh. That is nonsense! There are many factors which contribute to inflation. The biggest contributors at the moment are worldwide oil prices, food supply shortages and the resources boom. Nothing to do with government or the RBA.

The RBA sets monetary policy to keep inflation low AND to have sustainable growth. Inflation is their responsibility.

Al

Anonymous said...

Thanks Al, good that you could enjoy some 'oversight laughter'. I did not see much point in mentioning factors external to Australian decision making entities (State, Federal and individual) in my post. No problem.

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